The debate of the Business: Non-Profit Business Growth Potential

Trying to understand who voice is the voice of the sector can be difficult-But I admire that we have a healthy conversation of people in the field and those looking from the outside in. Here are some snippets of the dialogue...

A) The Emerging Capital Market for Nonprofits
by Robert S. Kaplan and Allen S. Grossman   October 2010


Fifty years ago, Microsoft, Wal-Mart, Intel, Apple, Cisco, Oracle, and Google didn’t even exist. Today each one has a market value exceeding $100 billion. Meanwhile, many companies that were business giants in 1960—including Bethlehem Steel, U.S. Steel, CBS, RCA, GTE, ITT, and LTV—have disappeared, shrunk, or merged into other companies. These dramatic shifts in fortune are vivid examples of the cycle of creative destruction famously described by the economist Joseph Schumpeter.

Few new nonprofit ventures, in contrast, ever reach national scale (Habitat for Humanity and Teach for America are among the exceptions), and the largest nonprofits rarely fall out of the top rankings or disappear. Apparently, Schumpeter’s cycle doesn’t operate in the social sector.

That few innovative nonprofits grow to a significant size is, at first, surprising, since each year people make massive new investments in this sector. In both 2007 and 2008, donations to nonprofits in the United States exceeded $300 billion—more than 2% of GDP. But small local organizations dominate the sector. More than 700,000 nonprofits operated in the United States in 2009. Ninety percent of them had annual budgets of less than $500,000, and 99% spent less than $10 million on their constituents. The average grant size for large foundations was only $50,000. (Cont. HERE)

B) Creative Destruction, Oversimplification, and Assessing Philanthropy 

by Phil Buchanan, October 14th, 2010

Here comes another piece that oversimplifies the nonprofit sector and sees improving it as a matter of simply importing the “dynamics” of for-profits.  This one, by Harvard Business School’s Robert S. Kaplan and Allen S. Grossman, is yet another in a long list of examples of this kind of thinking, which I have written about over the past two years (including here, here, and here).

Kaplan and Grossman open with a lament that the nonprofit sector lacks the “cycle of creative destruction famously described by the economist Joseph Schumpeter.”

Right!  That’s precisely the point.

Nonprofits take on issues that other actors in our society cannot or will not — the challenges markets haven’t solved. If market forces could solve everything, we would not need a nonprofit sector.
As Bill and Melinda Gates point out frequently (including on this recent 60 Minutes segment), if we left if to the markets to decide what diseases to do research on, we would pay attention only to the diseases affecting those with an ability to pay (even more so than we already do). Kaplan and Grossman seem not to understand — or perhaps choose not to acknowledge — that the ability to operate outside of traditional market dynamics is at the root of why the nonprofit sector matters!...(Cont. HERE)