Who Determines How Nonprofits Confront Uncertainty?

• Author: Matthew Shea,Robert D. Hamilton
• DOI: http://doi.org/10.1002/nml.21136
• Date: 01 June 2015
• Published date: 01 June 2015

383

N M  L, vol. 25, no. 4, Summer 2015 © 2015 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/nml.21136

Journal sponsored by the Jack, Joseph and Morton Mandel School of Applied Social Sciences, Case Western Reserve University.

Correspondence to: Matthew Shea, West Chester University of Pennsylvania, College of Business and Public Aff airs,

Management Department, 700 S. High St., Anderson Hall 333a, West Chester, PA 19380. E-mail: mshea@wcupa.edu.

Who Determines How Nonprofi ts

Confront Uncertainty?

Matthew Shea,1 Robert D. Hamilton2

1West Chester University of Pennsylvania, 2Temple University

This study examines the impact of managers, board members, beneficiaries, donors, and

government entities on nonprofit strategic decisions. Using data collected from GuideStar,

the National Center for Charitable Statistics, and surveys, we provide evidence that stra-

tegic decisions of nonprofits are shaped by the ability of the aforementioned stakeholders

to diversify their interests. Our findings offer nonprofits another means by which they can

understand and therefore manage their strategic decisions. In addition, our framework

suggests future applications of stakeholder theory conceive of stakeholder salience as a bidi-

rectional phenomenon.

Keywords: public, charity, strategic, decision making, stakeholder theory, environmental

uncertainty

THIS ARTICLE ELABORATES THE RELATIONSHIP between environmental uncertainty and

the strategic behavior of nonprofi ts. By environmental uncertainty, we mean the uncertainty

that comes from stresses external to the nonprofi t. Su ch stresses include changing economic

conditions, regulations, public policy, and customer preferences. Changes such as these cause

fl uctuations in the number of nonprofi ts (Hall 2010a; Wing, Pollak, and Blackwood 2008);

unfunded transfers of social responsibilities from government agencies to nonprofi ts (Bush

1992; Lammers 1990); and more direct competition from for-profi t rivals (Bielefeld and

Murdoch 2004; Wolff and Schlesinger 1998). Some have asserted that nonprofi t managers

will take actions to increase their organization’s stability when they perceive heightened envi-

ronmental uncertainty (Carroll and Stater 2009; Chang and Tuckman 1994; Kingma 1993).

Examples of such actions include creating new revenue streams (Besel, Williams, and Klak

2011; Bush 1992; Marwell and McInerney 2005; Wolff and Schlesinger 1998), hiring more

professionally trained managers (Bush 1992; Lammers 1990), mimicking rivals’ policies and

practices (Galaskiewicz and Wasserman 1989; Tucker and Parker 2013; Tucker,  orne, and

Gurd 2013; Wolff and Schlesinger 1998), and creating interorganizational alliances (Abzug

and Webb 1999; Biel 2002; O’Regan and Oster 2000).

 is research attempts to demonstrate that nonprofi t managers, board members, benefi ciaries,

donors, and government funders determine the type of strategic action nonprofi ts take when

they confront uncertainty. Because nonprofi ts are charged with balancing competing fi nancial

and social preferences for these constituents (Connolly, Conlon, and Deutsch 1980; Dunn

2010; Freeman 1984; Hearld et al. 2013; Mitchell, Agle, and Wood 1997), we apply stake-

Nonprofi t Management & Leadership DOI: 10.1002/nml

384 SHEA, HAMILTON

holder theory to form our predictions. Stakeholder theory suggests that nonprofi t behavior

is infl uenced by the preferences of the most salient stakeholders when salience is a function

of power, legitimacy, and urgency (Freeman 1984).  e contribution of our study to stake-

holder theory is that we also account for the motivation of stakeholders to enact their will on

nonprofi ts.  at is, we recognize the infl uence of salient stakeholders may not be observed if

the stakeholder is less dependent on the nonprofi t to fulfi ll his or her needs and interests. For

example, donors, who generally contribute to several nonprofi ts, are less reliant on any indi-

vidual nonprofi t to provide them with the intrinsic rewards of giving. Conversely, managers,

who typically work at one nonprofi t, are reliant on that nonprofi t for their economic well-

being. Hence, managers may be just as salient as donors, but managers’ increased dependence

on the nonprofi t will make their infl uence on the nonprofi t substantially diff erent.

Theoretical Framework

Environmental uncertainty, as formulated by Dess and Beard (1984), consists of munifi -

cence, dynamism, and complexity. Munificence is the environment’s capacity to sustain

growth. Munifi cent environments represent less uncertainty because sales targets are achieved

more easily, resource reserves are built faster, and rivals’ competitive actions are less signifi -

cant and frequent. Dynamism is the proportion of unpredictable change in the environment.

Unpredictable change increases uncertainty by disconnecting planning from organizing and

inhibiting consensus during strategic decision processes (Haleblian and Finkelstein 1993).

Complexity is the range of possible alternatives for organizations to arrange value chain

activities. More complex markets, in which a greater range of combinations is viable, increase

uncertainty because nonprofi ts face greater “information-processing requirements” (Dess and

Beard 1984, 56; Galbraith 1973; Sakamoto 1980). Based on the logic and fi ndings of others

(Child 1997; Dess and Beard 1984; Forbes and Milliken 1999; Fredrickson and Mitchell

1984; Iaquinto and Fredrickson 1997; Schwenk 1984; Swamidass and Newell 1987), this

study establishes an underpinning premise that nonprofi ts create more structured, incre-

mented, and rationalized strategic decision processes when confronted with environmental

uncertainty.  ese modifi cations have the intention of improving organizational stability.

Hypothesis 1. Increasing environmental uncertainty causes nonprofits to implement

strategic decisions that improve organizational stability.

However, some empirical evidence indicates the impact of environmental uncertainty on

nonprofits is inconsistent. Bielefeld (1992) found managers’ perceptions of and responses

to uncertainty varied across and within nonprofi t sectors. Alexander and Weiner (1998) did

not fi nd any indication that competition, a dimension of environmental uncertainty, causes

nonprofi ts to attract strategic resources via board membership, whereas Wolff and Schlesinger

(1998) found increasing competition caused nonprofi t hospitals to jeopardize revenue sources

by admitting more uninsured and underinsured patients. Pearce, Fritz, and Davis (2010) dis-

covered the eff ectiveness of nonprofi t entrepreneurship was not dependent upon the industry

growth rate; this suggests environmental uncertainty should not infl uence nonprofi ts’ strategic

decisions. Contrasting fi ndings such as these indicate the relationship between environmental

uncertainty and nonprofi ts’ strategic decisions is not completely identifi ed.

We investigate whether the inconsistency referenced previously can be reconciled by account-

ing for the infl uence of managers, board members, benefi ciaries, donors, and government