By Marcus Coetzee, 19 October 2018.
South African non-profits are struggling to generate the income they need to fulfill their purpose and sustain themselves. As such they are embarking on a mix of strategies to improve their circumstances.
However, I’ve noticed that many non-profit organizations in South Africa are confused by the differences between a “revenue strategy” or “social enterprise strategy”, an “income-generation strategy”, a “sustainability strategy”, and an “organizational strategy”. This has led to much confusion with specialists like me being asked to design one type of strategy when an organization wants and needs one of the others.
This article aims to clear up the confusion around which strategy to invest in. It will clearly explain the differences between these four strategies and indicate when each is required. It complements my social enterprise glossary which aims to improve strategic clarity through clarity of language.
Revenue Strategy
A “revenue strategy” or “social enterprise strategy” is the narrowest of the four strategies discussed in this article. I define it as follows:
A revenue strategy is focused on helping a non-profit organization to increase income from the sale of goods and services (i.e. trading activities) to customers.
When we design this strategy we first consider whether it is possible to commercialize existing services, either through charging certain groups of beneficiaries or selling to new customers.
We also consider whether new goods and services should be developed. The feasibility (i.e. can it work?) and viability (i.e. can it make money?) of any business ideas are tested. This is an iterative process. Several ideas may pass the feasibility test but fail the viability test when we do the financial calculations. Then we do a significance test and only pursue ideas that can generate more than 10% of total income within a 3-5 year period, otherwise the idea will prove too much of a distraction for the organization.
The above tests are grounded in market and competitor research, and an awareness of an organization’s capabilities, culture and values. We only consider whether new legal structures or internal business units are required once a business idea has proven both feasible and viable, and passed the significance test.
A revenue strategy is primarily required by organizations that are earning sufficient income but want to decrease their reliance on donors and investments, and expand their overall income.
Income-Generation Strategy
I define an income-generation strategy as follows:
An income-generation strategy is focused on helping a non-profit organization to increase and diversify its types and sources of income, as well as move beyond overhead recovery. This is part of cultivating financial sustainability.
Income-generation strategies are broader than revenue strategies. When we design them, we focus on the income streams of an organization as a whole. We primarily look at funding from donors, investment income and revenue from the sale of goods and services. I can think of examples where each of these has been prioritized, based on an organization’s unique position and strategic context. It is difficult to tell upfront which one presents the best opportunity.
I’ve noticed that organizations consistently overlook how they cost their proposals to donors. Sometimes using a better costing technique can quickly improve profitability.
Too often we’ve also discovered non-profit organizations that have accepted overhead caps and other unfavourable arrangements with their donors and customers. I get very frustrated every time I see an organization under-costing a project or using its financial reserves to co-fund a project for a wealthy donor.
The ability of a non-profit organization to generate a surplus/profit is also something we examine. This involves examining its cost structure and overhead absorption (i.e. how its overheads are being allocated or absorbed by its projects). When overheads are being insufficiently absorbed, then an organization is most likely using reserves and cash flow to pay for these. Such organizations either need to streamline their cost structure, improve income streams or negotiate better terms with their customers and donors.
An income-generation strategy is primarily required by organizations that are struggling to make ends meet and fund their infrastructure and programmes.
Sustainability Strategy
I define a sustainability strategy as follows:
A sustainability strategy describes how an organization can achieve a temporary state where it has identified and reduced risks that would threaten its ability to survive and thrive in the future, coupled with mitigating any harm to the people and environment around it.
You’ll notice that I used the word “temporary” in the above definition. I believe that “sustainability” is a state that needs to be actively maintained; it is never permanent.
When we design these strategies, we immerse ourselves in the risks that threaten an organization’s longevity – its ongoing existence. These risks may include a lack of financial reserves, profitability and diversity of income sources and types.
Sustainability strategies have much in common with income generation strategies, described above. However, when designing sustainability strategies, we give more attention to the trends that could disrupt the organization. This may include social innovations in the sector, new technologies, government policy, changing beneficiaries needs, imminent supply shortages, emerging competitors or new business models that are gaining ground.
Two other areas of investigation are worth highlighting. First, we look at an organization’s design and capabilities to assess whether it can survive in the future. As part of this we look at the skill-set of staff and directors and succession plans. We wouldn’t want a non-profit organization to become old-fashioned and fall behind the times.
The second area is brand, networks and market positioning. Non-profit organizations exist in a competitive market-space, where similar organizations, businesses and government can offer competing services. More importantly, they exist not only on paper, but in the minds of stakeholders such as donors, customers, beneficiaries and partners. Organizations that are unknown or perceived in an undesirable manner are unlikely to survive.
A sustainability strategy is primarily required by organizations that are worried about how changes in their market and strategic context will impact on their future survival and impact.
Organizational Strategy
I define an organizational strategy as:
The game plan that an organization uses to fulfill its purpose. Strategies are always in a state of flux and need to be updated regularly. Strategy involves identifying where an organization needs to go and how it will navigate its strategic context to get there. Strategy thinks about the long-term (e.g. in 3-5 years’ time) but acts in the present.
I have written before how I tend to prefer “lighter” or more dynamic organizational strategies. My most recent article on this topic is “strategic conversations are more important than strategic planning“. I much prefer strategies that are under 10 pages for documents or fewer than 20 PowerPoint slides. I find them more useful and engaging. Otherwise, people get lost in detail and these documents become a burden.
Whereas a sustainability strategy is focused on an organization’s ongoing existence, an organizational strategy is focused on discovering an organization’s purpose and clarifying how it can be fulfilled. Usually a broad range of stakeholders are included in developing this strategy.
After understanding an organization’s strategic context, we examine things such as its business model, theory of change, customers and beneficiaries, organization design, marketing strategy, required capabilities, and strategic partnerships.
These strategies also respond to threats or crises. Therefore, they seek to identify strategic shifts that need to be made within the next twelve months to strengthen the organization. These may be things that an organization needs to stop doing or start doing. For example, it may be decided that an organization needs to develop additional income streams, undergo a restructure or make some necessary endings.
An organizational strategy is primarily required by organizations that are searching for clarity and focus about how they should pursue their purpose and generate the resources required to get there.
Conclusion
This article has described these four strategies in the order of narrowest to broadest or most abstract. For example, an organizational strategy will include elements of the other three strategies; and the income generation strategy will consider how to generate revenue through social enterprise activities and so on.
Most times when organizations approach me for assistance, they believe they have already understood the problem and just need help to implement their chosen solution. However, when it comes to strategy, I’ve noticed a tendency to under-diagnose the problem and overstate the capabilities of one’s organization. For example, we might be asked to develop a revenue strategy when in fact an income generation strategy is needed to address the problems and unlock more immediate opportunities.
The differences between the four types of strategies are also not as clear cut as I’ve presented above. When developing one of these strategies, it’s impossible not to draw upon insights for some of the others.
I hope that this article has given you more clarity on the different types of strategies and which one your organization should be embarking on. I intend to write more about each strategy in the future.
Thanks to Andy Simpson from Imani Development and Philip Anastasiadis for their contributions to this article.