(First Published in 2011)
Porter’s Five Forces are designed for traditional for-profit commerce and industry scenarios. With slight tweaking they are equally applicable to the non-profit sector; an examination of these will highlight the implicit vulnerabilities of organisations working in this sector. Where Porter’s model looks at the way the forces can affect profit, the NGO adaptation of his model is more concerned with how the forces impact an organisation’s ability to perform its mission effectively and efficiently.
Porter’s Five Forces are:
- The power of large customers
- The power of large suppliers
- The level of rivalry among organizations in an industry
- The potential for entry into the industry
- The threat of substitute products
The significance of each of these will be individually engaged in a general discussion of the NGO sector. Implicit in this discussion will be the task and general environmentof South African NGOs. This discussion will close with the presentation of an NGO adaptation of Porter’s Five Forces model.
The Power of Large Suppliers and the Power of Large Customers
For the NGO sector the activities are mainly service, and not product, based. Further, these services are social in character and based on specific skills rather than material resources. This diminishes the impact of supplier power in comparison to a production based for-profit company, as intended by Porter’s original model.
However, the donor community and corporate funders can be seen as both the supplier and customer in the NGO model. They provide the resources, in the form of funds, for the NGO to carry out its mission, and in return they can lay shared claim to the positive social impact which is achieved through the NGO’s activity. The donor organisations need this to fulfil their own mandate; and corporate funders are able to include this in their CSI portfolio and report it in their triple bottom line.
In this regard the power of large funders, be they donor organisations or corporate funders becomes a force in the NGO adaptation of the model. How this plays out in real-world situations is largely dependent on the strength of the NGO’s leadership. For lack of a better analogy it can become a carrot and stick scenario. A large funder is defined as one with influence in the donor community and the potential to contribute significantly to the NGO’s resource base. Funding is granted in one of two large catergories; project or operational. Project funding is typically directed towards a specific project with defined objectives and measures of success; while operational funding is directed towards the organisation’s operating costs. The later includes infrastructural, administrative and staff/organisational development, as well, as the name suggests, general operating costs.
The power of large funders can impact an NGO across both these areas. Through the lure of significant project funding it can draw an NGO away from its core vision and mission into activities which introduce scope-creep into every level of operation. Through the lure of significant operational funding conditionalities can be imposed upon which the funding, and any future funding, can be made contingent. It is not the presence of conditions but rather the nature of the conditions which can impact an NGO’s autonomy in determining its organisational structure and future strategy. It is important to state here that the impacts of this force are not necessarily negative. An organisation cannot exist as a static entity and project funding can provide the opportunity to evolve the organisation in a new direction to better meet the changing social development market. Scope-creep and evolution are two sides of the same coin; the strategy of the organisation determines which side is called. Similarly structural-adjustment-policy-style (Stiglitz, 2002) operational funding could be piggy-backed upon to bolster autonomous strategic directions and activities. Ultimately, to reiterate an earlier point, the threat posed by this force can be mitigated by strong leadership with a clear strategic vision – if someone else is holding the reins a gift-horse should be looked in the mouth.
What the power of large funders highlights is the tacitly accepted unequal power balance between NGOs and donors; remember this is social development and not charity (the distinction between these is a paper in itself). The donor organisations have a mandate to fulfil, in fact the sole reason most of them exist is to award grants towards social development activities. They are not service providers nor are they capable of carrying out the actual delivery of social development activities at the community level; they need NGO service providing partners. Similarly, corporate funders need CSI portfolios for their BBBEE scorecards and their triple bottom line reporting; NGOs provide a service they need at lower cost than they can do it in-house. The power balance exists not because the funders hold the money, but because money is incredibly tangible, measurable and traceable. The impact, for example, of the training of a community based crèche teacher on the life of a young child is not readily tangible, measureable or traceable over the course of that child’s life. NGOs and the theories of change that underpin their work believe they are making a positive difference; they are selling that change; but what they battle to do is demonstrate or measure that change as clearly as funders can demonstrate and measure their investment. What we have is a strange economy, where cash is traded for an intangible sense of positive social impact supported by rudimentary indicators (including: numbers reached and anecdotal evidence). In some case this economy exchanges cash for no more the “warm-fuzzies”.
There is the danger that CSI reports carry “warm-fuzzy” value and that pictures of impoverished yet smiling African children in annual reports and media have become a form of currency and are interpreted to be an indicator of development.
This recognition presents an opportunity for NGOs to leverage competitive advantage through being able to demonstrate the impact of their work to funders in a manner that is more tangible, measurable and traceable than other NGOs working in their field. Achieving this, will also lay the foundation for NGOs to educate their funders and partner organisations as to what are reasonable processes, outcomes and measurable impacts of social development activities in relation to a given sum of donor funds; effectively bench-marking.
(A note at this juncture: Not all funders need to be educated, nor do they all assume tacit domincance.)
The Level of Rivalry Among Organisations in an Industry
Local NGOs, to my understanding, have always had a tacit agreement to not work in, or encroach on each other’s area of operation. However, the social development NGO sector, broadly, is at a crossroads. South Africa is not the darling child of the international donor community that it was during apartheid or through its transition and establishment as a true democracy. International donors who were in some ways the staple providers for a range of activities have shifted their country focus, or shifted their activity focus, or both. There is a smaller pool of International Donor Funding than in times past, further to this, the remaining pool of International Donors was not impervious to the financial recession of 2009. There are fewer funding sources available to the sector. Because the funds are scarce donors are placing (and rightly so) an increasing emphasis on measurement and demonstration of the impact of their investment, this is discussed above. While the increasing scarcity of resources and changing mood of the environment does not necessarily translate to the cut-throat vistas painted by corporate rivalry, it does create a competitive environment. In terms of the well being of the broader social development sector this is not a bad thing at all. If any sector should be focussed on efficiency and effectiveness of delivery it should be the social development sector; and where slack can be cut out or better managed competitive advantage can be gained; and greater positive impacts achieved.
Potential for Entry into the Industry
Minimum barriers of entry into the non-profit sector are generally lower than the for-profit sector. While this could be argued against on a case by case basis, this means that the threat of new entrants and/or competition is heightened.
The Threat of Substitute Products
Within the NGO sector the threat of substitute products could be seen to take the form of competing funding requirements between different development focuses; for example between HIV/AIDS programmes, ECD programmes, Nutrition programmes, Psychosocial programmes etc. For the model adaptation this shall be renamed the threat of competing needs. With positive social impact being the end goal of all investments and activities there is strong debate around which areas should be key focus areas, and if more than one area is identified which area should be seen as the core set of service needs upon which the others can be attached. Again, the ability to demonstrate tangible, measurable and traceable impacts will leverage competitive advantage here. (If all NGOs were able to measure impact fully and perfectly some serious discussions would need to take place, and priorities agreed upon by the entire sector. In this event individual NGOs could not serve themselves before the bigger picture.)
It must be highlighted here that NGO’s are ultimately working towards making themselves obsolete. Fully functional government service delivery would be the ultimate substitute product. NGOs actively advocate for this as part of their operations. Perhaps this substitute, then, should rather be seen as a goal than a threat.
What Porter’s Five Forces model does not make provision for, but which is central to an NGO’s mission are beneficiaries. For individuals outside the development sector it might be assumed that all intended beneficiaries are able to, and gladly and willing engage in development initiatives. This is not the case. Individuals and communities set their own development agendas, and rightly so. Communities experiencing severe malnutrition may not be able to fully participate in and benefit from programmes that deliver ECD support. Similarly, communities faced with chronic poverty may be too pre-occupied with subsistence livelihood strategies to take advantage of a workshop or some other activity that engages a need higher up along Maslow’s Hierarchy. They may abandon your project as soon as an Expanded Public Works Project, or some similar stipend paying project enters the community. People know what they need. Therefore, the fifth force for the NGO adaptation of Porter’s Five Force model should be, the ability and willingness of beneficiaries to participate.
In summary of this sector overview one possible adaptation of Porter’s Five Force Model is presented below:
Porter’s Five Force Model – Adapted for NGOs
- The level of rivalry among organizations in an industry
- The potential for entry into the industry
- The power of large funders
- The threat of competing needs
- The ability and willingness of beneficiaries to participate