It is widely believed in strategic theory that operational effectiveness is not strategy, but I started to wonder if this really applies to the nonprofit sector in practical terms. What got me thinking about this is my recent work with three different nonprofit boards and staffers who are in the midst of strategic planning. In working with these small, mission-oriented, volunteer-driven organizations, we know we are making progress when we can reach some initial consensus on 4-6 overarching goals in support of their mission and vision. While each organization has unique goals, I have found myself including at least one specific goal around the concept of “building organizational capacity” or “establishing and maintaining best practices in governance and operations.” In the business world this could be called “achieving operational effectiveness.” Even as I typed these goals that seemed to be appropriate and helpful for particular reasons, in the back of my head Harvard Business School Professor Michael Porter was saying, but “operational effectiveness is NOT strategy,” Stephanie! Anyone who has taken an introductory strategy course has probably read Michael Porter’s classic 1996 Harvard Business Review article called, “What is Strategy?” and has some familiarity with this argument.
Nagged by the inkling that I could be inflicting some atrocity on my beloved nonprofit clients by including operational excellence as a goal, I pulled out my Introduction to Strategy case binder from 2001 (yes, I still have it fellow Kelloggians). I proceeded to re-read my marked up copy of “What is Strategy?” rather than spending $8.95 to download it again from HBR online. But, this time I was reading through the lens of a mission-driven nonprofit organization rather than a brand new MBA student trying to understand productivity frontiers. I was also reading it from the perspective of a consultant who has worked closely with many nonprofits where operational excellence isn’t necessarily a given, for a variety of reasons.
Upon re-reading “What is Strategy?,” I would say that some of Porter’s arguments in this seminal article apply quite well to any organization, including the social sector, but other arguments just don’t apply to nonprofits. At the core of Porter’s framework is competitive strategy, which is fundamentally about earning and sustaining profitability over time. While nonprofits may feel some competitive pressures in terms of resources and talent, they are primarily mission-driven rather than profit-driven. (I’m not arguing that nonprofits shouldn’t earn a profit on their activities to fund their mission, by the way.) The difference is that the dynamics of firms competing fiercely within a framework of competition for customers and profits is quite different from the aims of the social sector. With nonprofit work, there are still WAY MORE societal problems that will never be solved by a single nonprofit or firm. While companies may talk about competing against rivals to succeed, nonprofits are often far more effective when they collaborate with other nonprofits, corporations, and government entities to tackle really big societal problems without easy solutions.
When Porter makes the argument that operational excellence is not strategy, it has to do with the forces particular to competitive strategy. He notes, “As rivals imitate one another’s improvements in quality, cycle times, or supplier partnerships, strategies converge and competition becomes a series of races down identical paths that no one can win.” (64) I don’t think that this idea of racing down identical paths that no one can win necessarily applies in the context of mission-based work where societal well-being is at stake rather than profits. In the social sector it’s almost always better to coordinate resources towards a common goal for the betterment of those served by an organization’s mission. I am constantly encouraging nonprofit clients to look for specific partnerships that complement and extend their reach (especially when they have limited resources) rather than encouraging them to compete.
Porter also talks about sustainable competitive advantage in depth. Another goal that I am often a proponent of including in nonprofit strategic plans is “achieving financial sustainability by doing x, y, and z.” In the chart below are 6 elements on the left that Porter argues are necessary for firms to have a sustainable competitive advantage. On the right are my thoughts on whether each one applies to nonprofits or not. The areas where I agree with Porter are in green, areas with some agreement are in orange, and the primary area where I disagree is in red.
Based on direct experience working in and with nonprofits my entire career, operational effectiveness is NOT a given for nonprofits, despite Porter’s assertion of how this applies to the corporate landscape when he was writing in 1996. There are a variety of reasons for this from overall lack of resources to misaligned incentives to prevailing attitudes that overhead (i.e. infrastructure to sustain operational effectiveness) shouldn’t be funded.
In making these observations, it’s not my intention to go toe to toe with Michael Porter in terms of academic rigor. He’s a towering figure in the strategy world. I mostly wanted to do this exercise to examine my own doubt about whether goals around operational excellence (usually in the form of “building organizational capacity”) still have a place in the strategic plans of the nonprofits I serve.
Upon an initial review, I still feel that it’s appropriate to include operational excellence as one of the 4-6 goals that should guide a 3-5 year strategic plan for many nonprofits. If you disagree and side with Michael Porter, I’d love to hear your thoughts! This is complex stuff. Always feel free to drop me a line at email@example.com. In closing I will end with one of Michael Porter’s quotes where we are completely aligned.
“The essence of strategy is choosing what not to do.” (70)
This, my friends, is the most practical and useful definition of strategy out there.