Strategic responses of non-profit organizations to the economic crisis: examining through the lenses of resource dependency and resourced-based view theories.

Author:Arik, Murat
Position::Report
 
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INTRODUCTION

Nonprofit Sector in the US

Nonprofit organizations include charitable, educational and religious organizations and have been around for thousands of years (Hall, 2010). They range vastly in terms of size, resources, influence and purpose but each has at its core some defined purpose to make a difference. In the United States, this general category of nonprofit organizations have emerged over time to fill gaps in services provided by government or business, to address problems others have not or cannot tackle or to solve the most complex and daunting of the world's challenges (Worth, 2012).

In the United States, at the time of this research, there are more than 1.41 million nonprofits recognized by the federal government as meeting the 501(c)(3) legal requirements for federal tax exemption (McKeever, 2015). However, there are more nonprofit organizations created to meet a public purpose than those that file for federal tax exemption in the U.S. For example, religious organizations with less than $50,000 in yearly revenue are exempt from registering with the federal government. Furthermore, the economic impact of this sector is significant, employing more than 9% of all workers in the U.S. and contributing more than 5% of the Gross Domestic Product (National Center for charitable Statistics, 2015). The largest nonprofits includes health and education systems such as public hospitals and universities.

Historically, nonprofits were funded by private donors and were seen as a creative vehicle for wealthy individuals to meet an obligation or duty to take care of others. Nonprofits flourished during the Industrial Revolution as some individuals' incomes burgeoned. The Industrial Revolution also generated a lot of social need due to poor worker conditions, child labor issues, and long hours. Following the Great Depression and the federal government's action to provide direct services, nonprofits often partnered with the government directly to receive federal grants to deliver services. This dependence on private support and the government were the mainstays of funding for nonprofits for many decades (Hall, 2010; Worth, 2012).

A change in government funding philosophy delivered a jolt to the nonprofit sector in the 1980s. Under the leadership of President Reagan, the federal government reduced and privatized funding for many social programs. Many nonprofits were heavily dependent on government funding to support their work (Hall, 2010). Nonprofits that were receiving government grants to deliver services could no longer count on that steady stream of income. The privatization of social programs often meant that less service were funded or provided which increased the request for services that nonprofits offered. The nonprofit sector had to adjust to compete for privatized government grants in this new landscape as well as develop new ways to rise funding (Hall, 2010).

Other changes involved a heightened demand for accountability and transparency. For many years, most nonprofits were evaluated for their mission and the good that they set out to do, rather than by their measurable impact. In the 1990s, there was a shift related to the funding source for nonprofits. The technology boom made some people wealthy, and a new donor emerged that was younger, outcome focused, and wanted to view their donation as an investment. They expected a return on that investment and required nonprofits to demonstrate their success and impact. At the same time, there were some scandals in the nonprofit sector that led to a call for accountability. The nonprofit sector was pushed, and often mandated, to adopt business operating procedures to provide evidence of results and accountability to deep pocket donors and the general public (Hall, 2010; Worth, 2012).

Most recently, there has been a growth in social innovation by for-profit companies addressing traditional "nonprofit" challenges in innovative, sustainable ways anchored around a for-profit or hybrid model. Some government and private grants are allowing these new organizations to compete with nonprofits on an even playing field. Nonprofits have to adjust to increased competition and a continuing demand for more accountability (Salamon, 2010).

This call to operate more like a business included a push to be more strategic, to conduct long-range as well as short-range planning, to diversify funding sources, and determine its unique competitive advantage (Hall, 2010). Large, established nonprofits adopted business principles more quickly, but even the medium to small nonprofits have done so. The nonprofit sector today is continuing to become more sophisticated in its use of strategy, marketing, and management tools to achieve its mission.

Economic Crisis 2008-2011

In 2008, the U.S. economy experienced a severe crisis largely attributed to the burst of a real estate bubble. Risky mortgage loans, coupled with questionable banking policies and practices, led to a large increase in foreclosures which precipitated this economic crisis (Gerardi, Lehnert, Sherlund & Willen, 2008). Mortgages were granted to individuals without the means to pay them back, bankers benefited from bonuses based on volume rather than stability of profits, and "too big to fail" was born (Acharya & Richardson, 2009). This resulted in a global recession with record stock market losses, business downsizing or shut downs, high unemployment rates, and financial uncertainty on the largest scale we have seen since the Great Depression (Bansal, Jiang & Jung, 2015). Furthermore, it is expected that the consequences from the economic decline will continue to have an effect on the nonprofit sector due to job losses, slow income growth, retirement account losses, and uncertainty in donor confidence, and continued undercurrents of anxiety and skepticism during the recovery period (Zietlow, 2010).

During the economic downturn, nonprofit organizations felt the impact perhaps more acutely than for-profit businesses because they dealt with not only shrinking resources, but with an increased demand for services. The recession came at a time when charitable giving hit an all-time high of $306 billion in 2007, up from $295 billion in 2006 (Reed & Bridgeland, 2009) then falling 3.6% in 2009 which was the steepest decline in charitable giving since tracking began in 1956 (The Center on Philanthropy at Indiana University, 2010). Individual donations decreased (Casey, 2012) and businesses reduced their corporate giving (Banasal, Jiang & Jung, 2015). Key findings from one study indicated that 83% of nonprofits reported fiscal stress with close to 40% reporting "severe" or "very severe" fiscal stress and approximately half (51%) reporting declining revenues (Salamon, Geller, & Spence, 2009). A 2011 survey reported that 85% of nonprofits have continued to expect an increase in service demand (Nonprofit Finance Fund, 2011) even as the U.S. Economy has been in a recovery stage since 2010 and nonprofits reported they were still feeling the effects of the economy's decline in 2012 (Pettijohn, Boris, & Farrell, 2014).

Yet even while the U.S. was in an economic recession and nonprofits experienced declining revenues, this sector experienced growth. This was driven partly by the Obama administration's economic stimulus package known as the American Reinvestment and Recovery Act (Casey, 2012) and other governmental policies (Salamon, Geller, & Spence, 2009). Despite the economic challenges the nonprofit sector was able to adapt and apply strategic and innovative approaches to a changing environment. More than two-thirds of nonprofits reported that they were "successful" or "very successful" in coping with the financial crisis (Salamon, Geller, & Spence, 2009).

Nonprofits handled the economic hardship and uncertainty using a host of management strategies to survive, from diversifying their revenue sources to expanding their human capacities. Human resources strategies varied and sometimes involved cuts such as reducing staff, furloughs, pay reductions, salary freezes, and postponing new hires. Conversely, strategies to expand human capacities included reassignments, shifting roles geared toward fundraising, strengthening relationships with boards and other alliances and external associations, and relying more heavily on volunteers were used (Casey, 2012; Mosley, Maronic, & Katz, 2012). Financial strategies ranged from cuts to innovative partnerships. Fiscal safeguarding often involved cutting operational expenses with downsizing or reducing waste. Yet this was also a time where nonprofits added programs to generate revenue streams, competed for grants when they would not have otherwise, created innovative fundraising efforts, collaborated or initiated joint ventures to share or expand resources, found new funding sources from governmental agencies, and created innovative marketing strategies and entrepreneurial activities (Mosley, Maronic, &Katz, 2012; Salamon, Geller, & Spence, 2009).

Strategic planning with both conventional and innovative tactics in the nonprofit sector saw positive results during the economic downturn. This study explores the impact that the use of these strategies has on nonprofit organizational performance during this time. Specifically, we aim to answer three questions:

1) What were the strategic responses of nonprofits to the economic crisis?

2) Which nonprofit factors determined a stronger level of strategic responses?

3) Which strategic responses were related to overall financial growth of the nonprofit?

To answer these questions, this paper draws on two widely used strategic management theories that complement each other in a unique way in explaining nonprofit strategies and performance. Resource Dependency Theory (RDT) and Resource-Based View (RBV) are used to understand a nonprofit's strategic responses in the face of the economic crisis.

THEORETICAL FRAMEWORK

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