[fn]This is an extract from our forthcoming report „It‟s competition, but not as we know it‟; due out in early September 2010.[/fn]We are all used to the use of the term competition to describe the commercial or private sector. Competition means that companies go bust, jobs move overseas, people are made redundant and huge risks are taken – sometimes with huge rewards. So how does competition in the charity sector[fn]When we use the term „charity sector,‟ it is as shorthand for bodies including charities, voluntary organisations, community groups, CICs, pressure groups and CSOs.[/fn] differ? Here are five ways in which competition is fundamentally different in the non-profit sector.

Difference 1: The reason for existence

Companies and charities have completely different reasons for existing. Companies exist to generate revenue and hence profit. For charities, the opposite is true; the creation of profits is the means to the end of providing charitable services. Charities exist because they believe in changing the world in some way and need to generate revenue in order to do so. The consequence of these differing origins is profound. In many cases, where charities have been able to survive by providing services, without working to generate income, they have done so.

Difference 2: The nature of strategy in charities and non-profits

The difference in the reason for existence makes clear the schism at the heart of many voluntary organisations. The provision of charitable services is not directly linked to marketing or fundraising success. Conversely, the success of a fundraising or marketing strategy is not based on the quality of the services provided but on the ability to market those services to potential donors or the wider public.

This schism between service provision and marketing creates a dilemma. What is an organisational strategy for a voluntary organisation? In companies, an organisational strategy covers all of the functions of the organisation; marketing, sales, operations and manufacturing. In a charity, the provision of services and the marketing and fundraising functions operate separately. It appears there is the potential for two separate and even unconnected organisational strategies: service provision and marketing. However, compared to the commercial world, this is not the case. Service provision by charities is relatively fixed and immutable. An organisation such as Cancer Research UK can decide what kind of cancer research it should do and how it might do it, but it cannot decide to get out of cancer and into diabetes. Charities have limited strategic freedom in the provision of services because they are often restrained by their statutes, which set them up to provide particular services. In comparison, this degree of strategic flexibility is fundamental to companies.

The marketing function in charities has greater freedom than the service provision function, but it is still limited compared with companies. When it comes to issues such as competitive strategy, organisational differentiation, brand image and identity, organisational mission and vision, it is the marketing function that takes on the role of an organisational strategy.

Difference 3: Who are the customers?

For the most part, companies can have a single-minded focus: to meet customer needs and by doing so, to make a profit. Charities have a split focus: between the customers that they exist to serve (the homeless, the environment, the ill, etc.) and the supporters whose needs they have to meet if they are to raise funds successfully (individual donors, charitable trusts, government agencies, etc.) This often presents a dilemma.

For example, between raising more funds or changing the public image of a disadvantaged group. If a client group such as people with a learning disability are presented in a way that gives them dignity and focus on what they can do, a company might be more likely to create suitable jobs. But this kind of portrayal may make a donor less likely to see a person with learning difficulties as needing their donations. Is it more important to present the client group in a way that is good for the beneficiary directly, or good for the income generation that will help the beneficiary indirectly? Who is the customer that really matters?

The schism is rarely so clear cut. Fundraisers have to find ways of maximising income while portraying the beneficiaries in ways that do them justice. But does this make them a servant of two masters.

Difference 4: Limits on commercial freedom

Companies have enormous commercial freedom. Charities have far less. Companies can borrow money at commercial rates, float a share issue, sell off unprofitable business units, invest in risky ventures, take over competitors, merge with complementary companies and exit altogether from certain areas of operation. Charities rarely use these commercial options, due to a combination of charity culture and charity law.

Public opinion is also a key factor. Most customers of a company really don‟t care what the CEO or directors are paid, as long the services they get are good (though bankers have recently managed to create an exception to this rule). On the other hand, nfpSynergy‟s research shows that the public are uncomfortable with paying charity CEOs £60,000, let alone £600,000.[fn]In 2008, only 8% of respondents to our Charity Awareness Monitor saw paying a salary of this size to a charity‟s CEO as a worthwhile use of its money; 79% saw it as very, or somewhat, wasteful.[/fn]

As Dan Palotta has recently pointed out, the net result is that charities are far less likely to compete commercially in the way that companies compete. As he puts it, “the full force of capitalism is not brought to bear in some of the world greatest problems.”[fn]Palotta, D., 2008. Uncharitable: How Restraints on Non-profits Undermine their Potential. Tufts University Press.[/fn]

Difference 5: Delivering benefits

For companies, the core of the exchange between them and their customers is the exchange of benefits. The seller delivers the benefit of a product or service to a buyer who delivers the benefit of payment, usually money. Each is able to access the nature of the benefits and if both believe the benefits are sufficient, a „fair exchange‟ will take place.

No equivalent exchange takes place in voluntary organisations. A donor exchanges a payment in return for a benefit to the good of an entirely different entity (for instance, a donation to the NSPCC benefits abused children). So how does the donor measure the value of that exchange either to them or to the intended beneficiary? How can the donor be sure that a „fair exchange‟ has taken place? How does the donor know which supplier provides best value for money? How can choices between competitors take place when the donors cannot easily compare the value of the exchange that is on offer?

This is one of the reasons that donors are so fussy about wasted expenditure by charities. If a donor feels that money is being wasted (on CEO salaries, on surplus appeal mailings, on flashy headquarters and so on), then they assume that their donation is not being well spent. This is because they have no other information to go on. There is no particular logic to this. A charity can run a brilliant set of services and spend a lot on its fundraising at the same time: but in the absence of alternative evidence the public tend to feel otherwise.