And the non-profits shall inherit the earth

The difference between a for-profit organisation and a not-for-profit organisation is simple, obvious and profound. For-profits have owners for which they generate profits, while not-for-profits have stakeholders for which they accomplish their aims. However, both can have customers that they service, both can have products they sell, and both are able to raise money. They can also compete with each other.

For example, the Guardian Media Group is owned by the Scott Trust (no relation), and runs a number of media businesses in the UK, including The Guardian newspaper. It competes against mainstream newspapers in the UK, and does reasonably well, despite not being controlled by owners or shareholders.

There is also the John Lewis Partnership, which runs a number of retail businesses in the UK, including the Waitrose chain of 187 supermarkets. And also the engineering and manufacturing company Scott Bader that operates all around the world, but is effectively owned by the employees rather than shareholders. (US based employee-owned companies are tracked here, while UK based companies are tracked here.)

Many for-profit companies, competing against such non-profits, are at a competitive disadvantage: they have to pay a proportion of their earnings to people outside of the company, rather than reinvesting it in the business or the employees. Owners are effectively an overhead that returns nothing to the business. Of course, not all businesses have owners that are leeches – many famous and successful companies never paid dividends to their shareholders.

Berkshire Hathaway, run by Warren Buffett, doesn’t pay dividends. Luckily the growth in the value of BRK shares more than makes up for that. Also, Microsoft didn’t pay dividends until 2003, after many years of stellar growth in MSFT stock.

However, most companies are not like those. Many companies pay out between a third and half their annual profits in dividends. Not-for-profits do not face this burden, giving up the potential funding source of raising money from sharemarkets, but in return enabling them to set lower prices, given the same cost base, product quality and service levels as their competitors.

This suggests that not-for-profits, while potentially more constrained in terms of the money they can raise, can outcompete the for-profits in their own markets. In Australia, not-for-profits have tended to operate charitable businesses rather than commercial ones, but I wonder if we’ll see more and more of them appear in the future, given their advantageous competitive position.