Yes, non-profits do have business models

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Oct 13, 2011

In response to our recent article in the Harvard Magazine titled Colleges in Crisis and my coauthor Clayton Christensen’s recent book, The Innovative University, a curious counter-narrative has emerged: Our analysis is flawed because what we don’t understand is that non-profits do not have business models; they have missions.

What are we to make of this claim?

Of course non-profits have missions (and mission statements to declare those missions to the world and focus themselves). And we agree that the missions of most colleges and universities are important—to their faculty, their students, their alumni, and often society. Preserving these missions—even more to the point, the actual services that fulfill these missions—is a noble cause.

So does one of our central arguments—that the business models of most colleges and universities are fundamentally broken mean that we are guilty of cognitive dissonance? On the one hand we think that what they do is important but on the other hand by asserting that the business models are broken we disagree with that very statement and thereby fundamentally miss the boat because these entities simply do not have business models?

Quite the opposite.

To support and deliver upon their missions, colleges and universities, like all non-profits and for-profits, have business models. These two things are not opposed to each other or mutually exclusive.

A business model is made up of four components. The first part is a value proposition—what it offers customers, be they individuals or society. To deliver upon that value proposition, organizations assemble resources—people, technology, facilities, and so forth—which is the second component of a business model. As these resources work together to address recurrent tasks, processes—the third element—emerge. Processes include everything from budgeting and planning to, in the case of colleges and universities, scheduling, researching, teaching, and so forth. And over time, to support these resources and processes to deliver upon the value proposition, the fourth component, a profit or revenue model, emerges—the money that the organization needs to bring in to support these inputs.

When understood in that light, it’s obvious that colleges and universities have business models to support their missions. It’s why—depending on their structure—they charge tuition, fundraise, and collect funds from federal and state governments so that they can support their professors, buildings, research, teaching, and so forth.

That the traditional business model employed by most colleges and universities is broken and increasingly unsustainable imperils those missions. Our central argument then is that to continue to deliver upon those missions, we need to fix those business models; in the absence of doing that, a significant chunk of the nation’s university system could collapse.

Although there are certainly some thorny questions about how to best fix these business models—as well as some interesting questions about whether our nation’s colleges and universities are even realizing their missions and how we ought to think about these missions—to suggest that colleges and universities only have missions, not business models, disengages from some interesting criticisms, and its sad simplicity doesn’t achieve anyone’s mission.

Michael is a co-founder and distinguished fellow at the Clayton Christensen Institute. He currently works as a principal consultant for Entangled Solutions.