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Jul 30, 2014

Seven Strategy Questions-Nonprofit Edition

Seven Strategy Questions by Harvard b-school professor Robert Simons is a good guide to keeping boards of directors focused on strategy and planning.  This is critical because the primary value a board provides is strategic direction.  His book is understandably focused on the for-profit corporate world, so I thought it would be useful to pose his seven questions and provide my take on the nonprofit variation.

1.     Who is your primary customer?   For a for-profit this usually refers to the recipient of the good or service provided by the company.  It is not so straightforward for a nonprofit because it is often a matter of perspective and emphasis.  Sometimes the payer is a foundation or a government and the recipient is someone else, an individual or organization.  Some community foundations, for example, would say the customer is the donor even though the most visible beneficiary is the recipient of a grant.  For a nonprofit, the question becomes “what is the community need you are serving.”  Professor Simons would suggest “your firm can serve only one type of customer well.  Designate resources to that customer’s satisfaction and well-being.  minimize the money, materials, and time you spend on products or services that don’t add direct value to your primary customer.”  I would modify this to say “you must focus on those services that are most critical to your mission and minimize effort on lower mission activities that do not directly support your high  mission activities.”

2.   How do core values prioritize shareholders, employees and customers?
This question is critical to his notion “know where your loyalties lie when you make hard decisions about how to create value and for whom.”  Of course, these three roles are more difficult to identify for a nonprofit.  For nonprofits, one might decide that the recipient of the services comes ahead of the needs of the community, which is ahead of the employees, followed by the funder.  Some nonprofits’ core values will place the funder first, and some the community need first.  The key point is not that there is a right prioritization but rather to explicitly and clearly acknowledge who comes first so that, when those hard choices are confronted, the nonprofit will make choices consistent with its values.

3.  What critical performance variables are you tracking?  He notes that the biggest mistake is to track too many variables.  Strategy requires focus.  He suggests no more than seven critical measures.  For nonprofits, a clear strategy and a clear implementation plan for that strategy should be the source of the primary metrics.  There are many possible tactical measures, and your managers may have their own measures for their own units.  But for senior management and the board, the focus should be on  a small number of strategic measures.  And financial measures should be a minority.

4. What strategic boundaries have you set?  Professor Simons focuses on reputational risk and the risk of diverting attention from strategic goals.  For the former, nonprofits can create a list of “thou shalt not’s” that is similar to the IRS 990 form’s focus on conflict of interest and self-dealing or excess compensation.  For the latter, nonprofits need to protect themselves from mission creep, a common cause of weak finances and eroding fundraising success.  It is valuable to recall Michael Porter’s words:  “The essence of strategy is choosing what not to do.”

5.  How are you generating creative tension?  In the for-profit world, companies must constantly innovate if they are to survive.  This question is even more important for nonprofits to pose because there is no ready source of motivation for nonprofits to change, never mind to innovate.  Nonprofits more easily fall into the trap of “we have always done this.”  Nonprofits love to celebrate “50 years of doing the same thing.”  Few for-profit companies even have 50 years of history.  Financial pressures usually become the motivation for nonprofits to change, but sometimes that pressure comes too late.  Better for nonprofits to insist that every year their priorities include trying something new or different.

6. How committed are your employees to helping each other?  This question is prompted by the erosion of company loyalty in the for-profit world.  The nonprofit world is more fortunate because the role of mission is a better adhesive for loyalty than a profit motive.  The focus of this question for nonprofits should be on resisting the tendency for departments or programs to be stove-piped, acting independently rather than as a coordinated set of programs.  So I would amend this question for nonprofits to read “how well do your employees in one department know how they can help other departments?”

7. What strategic uncertainties keep you awake at night?  This question is based on Professor Simons’ notion”you must worry about what might happen tomorrow.”  Ironically, the problem with many nonprofits is that they worry about too many things, often because they run overly lean or have very uncertain funding.  While nonprofits are rarely in a hostile environment like many for-profits are, nonprofits always need to have a plan.  My own work has convinced me that philanthropy is at capacity such that nonprofits’ primary strategic uncertainty must be how (and whether) they can increased earned revenues.   While reducing operating costs and sharing back office services are good ways to restrain cost increases, strategically these steps are secondary to the need to grow earned revenue and enhance the self-sustainability of a nonprofit.  That reasoning is why I emphasize social enterprise so much — it is the best response to Professor Simons’ last question.

I you are in Central Ohio and want to learn more about social enterprise, sign up for one of the workshops presented by the Center for Social Enterprise Development.