Learning, Innovation and Competitive Advantage in Not-for-Profit Aged Care Marketing: A Conceptual...

Learning, Innovationand Competitive Advantage

in Not-for-Profit Aged Care Marketing:A Conceptual Model

and Research Propositions

Jay WeerawardenaGillian Sullivan-Mort

ABSTRACT. The rapid expansion and the increased commercializationof the elderly consumers market have forced not-for-profit organizations(NFPs) to adopt a competitive posture in their operations and to pursue in-novative ways of delivering superior aged care to the target market. Thispaper attempts to model the antecedents of innovation-based competitivestrategy in NFPs. Premised on the capability-based model of sustainedcompetitive advantage and incorporating the emerging concept of socialentrepreneurship, it is argued that entrepreneurial NFP organizations, intheir mission to create social value to multiple stakeholders, build and nur-ture distinctive learning capabilities that enable them to formulate innova-tive strategies for superior aged care delivery. Key theoretical constructswithin the model are explored and research propositions are presented.[Article copies available for a fee from The Haworth Document Delivery Ser-vice: 1-800-342-9678. E-mail address: <[email protected]>Website: <http://www.HaworthPress.com> © 2001 by The Haworth Press, Inc.All rights reserved.]

Jay Weerawardena, PhD, is Lecturer, at The Graduate School of Management, Uni-versity of Queensland, St. Lucia, Qld 4072, Australia (E-mail: [email protected]).

Gillian Sullivan-Mort, PhD, is Lecturer, at The Graduate School of Management,University of Queensland, St. Lucia, Qld 4072, Australia (E-mail: [email protected]).

Journal of Nonprofit & Public Sector Marketing, Vol. 9(3) 2001� 2001 by The Haworth Press, Inc. All rights reserved. 53

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KEYWORDS. Social entrepreneurship, distinctive capabilities, innova-tion, competitive advantage

INTRODUCTION

Not for profit organizations (NFPs) in the aged care sector face twoimportant environmental changes that increase the pressure for effec-tiveness and efficiency: the general ageing of population and the “rein-venting government” initiatives. The increasing ageing population withthe accompanying need to increase the volume of services provided iscoupled with the changing character of the aged population, reflectingthe diversity of needs from the active senior, to the “growing depen-dence” of the frail aged segments. Similarly “reinventing govern-ment” initiatives have combined to produce a social and economic envi-ronment that fosters customer rather than client perspectives and userpays rather than a blanket welfare provision orientation. These initia-tives are reflected in the increased outsourcing of government servicesproviding ample opportunities to aged care service providers for expan-sion and growth of their operations. Both these changes, particularly therapidly increasing aged care market comprising consumers who typi-cally have high discretionary incomes have attracted commercial agedcare service providers to the market.

Within the increasingly complex internal and external environmentNFPs are forced to develop more complete understanding of their targetmarket and develop innovative strategies to deliver superior aged careservices to achieve competitive advantage. Although the literature onNFPs and the aged care marketing has increased in volume over the lastfew decades, the literature examining not for profit value creating strat-egies has been limited and fragmented. Particularly, the role of innova-tion in gaining sustained competitive advantage (SCA) in NFPs hasbeen limited. This paper attempts to model the antecedents of not forprofit innovation-based competitive strategy. Premised on the capabil-ity-based model of SCA and incorporating the emerging concept of so-cial entrepreneurship, we present a framework that examines the role oflearning capabilities in the innovation-based competitive strategy inNFPs. Essentially we argue that increased commercialization of agedcare market has forced NFPs to pursue competitive strategies to surviveand grow in the market. These strategies come into conflict with theirsocial mission. However, using the emerging concept of social entre-preneurship we suggest a compromise in that social entrepreneurial

54 JOURNAL OF NONPROFIT & PUBLIC SECTOR MARKETING

NFPs pursue competitive strategies and gain competitive advantage butall such strategies are aimed at creating superior social value and not su-perior profits as suggested in business strategy research. We suggestthat social entrepreneurship and learning capabilities comprise keycomponents of a theoretical model that examines the role of innovationin gaining SCA in NFPs.

Our paper proceeds as follows. First, we examine the literature on thestrategy formation activity in not for profit organizations. Second, thetheory of sustained competitive advantage is explored, specifically ex-amining the role of innovation in gaining sustained competitive advan-tage in NFPs. Third; we discuss the importance of learning processes inorganizational innovation. Fourth, we present a theoretical frameworkdescribing the key theoretical constructs of the model and the system ofrelationships. Simultaneously, the research propositions emerging throughthe model are presented. Next, issues relating to operationalising themodel are discussed. We conclude by discussing the implications of ourconceptual model for NFP competitive strategy theory and practice.

STRATEGY FORMATION CHARACTERISTICSOF NOT-FOR-PROFIT ORGANIZATIONS

The need to examine the NFP competitive strategy is justified bytheir unique operational characteristics (Parker, 1998). NFPs basicallydiffer from commercial organizations in terms of their mission that is toprovide some form of human service activity that primarily impacts onthe quality of life of the target market. The NFPs are faced with multipleservice objectives and are required to develop programs to satisfy thevarious needs of multiple sponsors. In responding to a large mix ofstakeholders that may include government, clients, members, sponsors,donors, employees and special interest groups, NFPs face a problem ofbalancing financial and operational objectives. Similar to their com-mercial counterparts they must intensely compete with other NFPs andcommercial organizations for market opportunities and funding for var-ious aged-care projects. The growing senior citizens market has at-tracted a large number of private sector aged-care providers to theindustry. These environmental changes which reflects a rising tide ofcommercialization of the aged care market have forced NFPs to pursueinnovative strategies to deliver superior aged care products and servicesto their target market. Interestingly NFPs over the last few decades havemoved from their traditional role of “donor-funded aged care service

Jay Weerawardena and Gillian Sullivan-Mort 55

provider” towards a competitive posture (Dees, 1998; Wallace, 1999).An increasing number of NFPs are raising funds through auxiliary com-mercial enterprises. More dramatically, a number of NFPs are beginningto commercialize the core programs through which they accomplish theirmissions. They are looking for ways to make these programs rely less ondonations and grants and more on fees and contracts. As observed by(Dees, 1998a, p. 56),

. . . NFPs are searching for the holy grail of financial sustainability.They view earned-income generating activities as more reliablefunding sources than donations and grants. Many of them nowconsider extensive dependency on donors as a sign of weaknessand vulnerability. Self-funding is the new mantra.

On the other hand NFPs must work with other NFPs and commercialaged-care providers in the industry for matters of common interest thatmay range from lobbying on an important issue in the industry to strate-gic alliances with other NFPs for superior aged-care delivery.

The foregoing suggests the need to investigate into the factors lead-ing to SCA in NFPs. Also it suggests that any model that examines NFPcompetitive advantage process must take cognizance of the unique op-erational characteristics of NFPs. However, the extant NFP strategy lit-erature is limited and fragmented (e.g., McGinnis & Vallopra, 1999;Parker, 1998; Wiesendanger, 1994; McLean, 1990; Joyce et al., 1985;Robinette, 1985) reflecting the need for a theoretical framework thatwill guide future research in NFP competitive strategy.

THE THEORY OF SUSTAINED COMPETITIVE ADVANTAGEAND INNOVATION

The literature on competitive advantage has primarily evolved in thecontext of commercial organizations. Competitive advantage is definedas the ability of a business to derive abnormal profits in a competitiveindustry based on a value-creating strategy not simultaneously imple-mented by any current or future competitor (Aharoni, 1993; Porter,1985). This competitive advantage is sustainable when the advantageresists erosion by competitors who are unable to duplicate the benefitsof the strategy (Barney, 1991). For the purpose of this study, we defineSCA in NFP organizations, as a superior market position that capturesthe provision of superior customer and social value and/or the achieve-


ment of lower costs, which resists imitation and which results in a mar-ket share dominance and industry leadership position.

Firms create competitive advantage by conceiving new ways to con-duct activities of the value-chain for delivering superior customervalue, which is an act of innovation (Porter, 1985). This suggests,firstly, that innovation and the competitive advantage process are inter-connected. Secondly, innovation can occur in any value-creating activ-ity of the organization. Thirdly, all types of innovations can lead toSCA. Recent research suggests that innovation leads to SCA (AMC,1995; Hyvarinen, 1990; Lengnick-Hall, 1992). Interestingly, in contrastto the literature on commercial firm innovation, which is biased to tech-nological innovation, NFP innovation literature is dominated bynon-technological innovation (e.g., Jacobson, 1999; Osborne, 1998;Shin & McClomb, 1998; Jones & Eadie, 1994). Most of the literature isof prescriptive nature (e.g., Enteen, 2000; Gryskiewicz, 2000; Wynes etal., 1999) and the role of organizational innovation in gaining SCA inNFPs has not been investigated. Recent research confirms that firms ingeneral pursue both technological and non-technological innovations andboth types of innovations lead to SCA (AMC, 1995; Weerawardena,1999). In this paper, we conceptualize organizational innovation broadlyincorporating both technological and non-technological innovations.

CAPABILITY-BASED THEORYOF SUSTAINED COMPETITIVE ADVANTAGE

During the last few decades there have been several theoretical mod-els of SCA that suggest alternative paths to competitive advantage. Thecapability-based model of SCA (Hayes et al., 1996; Prahalad & Hamel,1990; Grant, 1991) that has gained prominence in the competitive strat-egy literature over the last decade, suggests that (a) organizations pos-sessing distinctive capabilities gain SCA, (b) distinctive capabilities donot merely accrue to the organization but are built and nurtured by thestrategic leadership of the organization, and (c) sustainability of the ad-vantage depends on competitors’ inability to duplicate the capabilitieson which advantage has been founded. The capability-based model,compared to the environmental model (Bain, 1956; Porter, 1985) andthe resource-based model (Barney, 1991; Dierickx & Cool, 1989) pro-vides a more satisfactory explanation of the value-creation process andservice delivery by assigning a prominent role to the strategic leader-ship of the organization (Mahoney, 1995; Lado et al., 1992). Recent


Australian research provides support for the capability-based theory inthe context of innovation-based competitive strategy (Weerawardena,1999). The capability-based model provides a sound theoretical foun-dation for the examination of innovative strategies adopted by NFPs forthe superior aged-care delivery. In particular, it facilitates the examina-tion of the role of social entrepreneurship and other innovative capabili-ties in the creation of superior value to the target market. The theoreticalframework that will be adopted for this paper is premised on the capa-bility-based theory of SCA.

ORGANIZATIONAL LEARNING AND INNOVATION-BASEDCOMPETITIVE STRATEGY

Organizational innovation is a process in which new knowledge ac-quired by the firm is integrated into value-creating activities of the firm(Tushman & Nadler, 1986; Day, 1994; Dodgson & Bessant, 1996). Thefirm’s learning capabilities play a crucial role in generating innovations(Sinkula, Baker & Noordewier, 1997) and this view is supported by re-cent NPF literature (Harper, 1996).

Organizational learning theory suggests that there are two learninglevels that lead to organizational change: adaptive learning and genera-tive learning. In contrast to adaptive learning, generative learning oc-curs when the organization is willing to question long-held assumptionsabout its mission, customers, competitors, and strategy (Argyris, 1977;Senge, 1990). Importantly, generative learning is a potential source ofSCA (Sinkula, 1994; Slater & Narver, 1995). Generative learning in-volves changing the firm’s knowledge base, firm-specific capabilitiesand routines, and is analogous to the firm’s intellectual skills.

The degree of innovation reflects the extent of new knowledge em-bedded in an innovation (Dewar & Dutton, 1986; Ettlie, 1983). Sin-gle-loop learning is associated with incremental innovations, whereasdouble-loop learning is associated with discontinuous or radical inno-vations (McKee, 1992; Dewar & Dutton, 1986). Radical innovationsimply that a firm is engaging in generative learning levels, the highestlevel of organizational learning. The firm should fulfill several require-ments in order to scale the summit of generative learning, includinglearning from both external and internal sources (March, 1991), thepresence of entrepreneurship (Sykes & Blocks, 1989), and unlearning(Schein, 1990).


THEORETICAL MODEL AND SYSTEM OF RELATIONSHIPS

Our theoretical model for the examination of NFP competitive ad-vantage process is shown in Figure 1. The model is comprised of foursections, namely (a) NFP managerial characteristics (b) organizationallearning processes, (c) organizational innovation, and (d) competitiveadvantage. We present a novel set of theoretical relationships that ema-nate from the “duality” of the emerging NFP organization, which is topursue competitive strategies whilst retaining the social mission, a pri-mary organizational objective. The duality forces socially entrepre-neurial NFPs to engage in both social value creation activities andcommercial value creation activities. The commercial value creationactivities are primarily undertaken to generate resources to finance so-cial value creation activities. The model suggests that social entrepre-neurial firms pursue innovative strategies to create, superior socialvalue to the target market. In this process they build and nurture distinc-tive learning capabilities. The paper distinguishes between three learn-ing capabilities: market-focused learning capability, internally-focusedlearning capability and relational learning capability. The presence ofsocial entrepreneurship and learning from external and internal sourcesfulfill the requirements for reaching generative learning level which en-able NFPs to pursue highly innovative strategies to deliver superioraged care that in turn leads to SCA in the aged care markets. The modelincorporates the fewest necessary constructs that exert the greatest rela-tive impact on the phenomenon under investigation. Therefore, themodel conforms to the guidelines suggested in the strategy literature fordevelopment of robust theoretical models in social sciences (Keats &Bracker, 1988). The theoretical constructs constituting the sections ofthe model are explored in the following sections.

NFP Managerial Characteristics: Social Entrepreneurship

The capability-based theory suggests that strategic leadership is thedriving force of competitive advantage. In this paper, we conceptualize,strategic leadership in terms of social entrepreneurship. Social entrepre-neurs differ from their business counterparts in terms of their mission inthat social entrepreneurs are faced with a social mission (Dees, 1998).Social entrepreneurial organizations can be defined as organizationsthat create and manage innovative entrepreneurial organizations or ven-tures whose primary mission is the social change and development oftheir client group. The social entrepreneurial organizations may depend


on outside funding for their activities or be self-sufficient by engagingin economical activity in consonance with their core mission. Surplusmay be created through such economical activity and used for their so-cial mission.

Based on the contributions of Schumpeter (1934) and Drucker(1985), Dees (1998) argues that social entrepreneurs play the role ofchange agents in the social sector by: (a) adopting a mission to createand sustain social value (not just private value), (b) recognizing and re-lentlessly pursuing new opportunities to serve that mission, (c) engag-ing in a process of continuous innovation, adaptation, and learning, (d)acting boldly without being limited by resources currently in hand, and(e) exhibiting a heightened sense of accountability to the constituenciesserved and for the outcomes created. As Dees (1998) suggests, this isclearly an “idealized” definition and social sector leaders will exem-plify these characteristics in different ways and to different degrees. Ac-cordingly, we suggest that NFPs are driven by a social mission to createsuperior value for their stakeholders. In this process, similar to theirbusiness counterparts, they pursue innovative strategies to both financetheir operations and to deliver superior age-care products and servicesand compete with their commercial counterparts for aged-care marketopportunities emerging in the increasingly commercializing aged caremarkets.


Market-FocusedLearning Capability

SocialEntrepreneurship

Internally-FocusedLearning Capability

OrganizationalInnovation Intensity

SustainedCompetitiveAdvantage

RelationalLearning Capability

FIGURE 1. A Capability-Based Model of Aged Care Innovation and SustainedCompetitive Advantage in Not-for-Profit Organizations

Learning from Aged-Care Market:Market-Focused Learning Capability

Innovations are deemed to arise as the result of a perceived andsometimes clearly articulated customer need (Myer & Marquis,1969). During recent years, this view has strongly emerged in researchon market orientation and organizational performance (Deshpande etal., 1993; Kohli & Jaworski, 1990). For the purpose of this study, weconceptualize this capability as the capacity of the NFP organizationrelative to its competitors to continuously learn about changing con-sumer needs and preferences primarily for idea generation in the for-mulation of the innovative strategies to deliver superior value to theirtarget market. Learning from the aged-care market involves under-standing family-decision-making processes, dependency issues andpreferences with regard to models of care in later years living. Recentresearch suggests the importance of extending family life cycle modelsto explicitly include the presence of dependent elder and to model fam-ily decision-making in a broader context (Beatty & Talpade, 1994).However, the concept of dependence has remained largely unexploredin the broader context of consumer behavior research. Similarly, recentresearch suggests the need to understand consumer’s decision-makingwith regard to choice about later living (Stimson et al., 1996).

Learning from Internal Sources:Internally-Focused Learning Capability

Organizations learn by ageing or by strategic choice (Child, 1972).Internal learning reflects the capacity of the NFP organization to learnthrough strategic choice. A commonly-pursued internal learning activ-ity in a manufacturing firm is research and development (R&D), whichis primarily undertaken to enhance the technological knowledge base ofthe firm. In line with our broader definition of innovation, which coversboth technological and non-technological innovations, we conceptual-ize NFP internally-focused capability to cover all forms of learning,which may include both technical and non-technical learning. We de-fine the internally-focused learning capability as the capacity of theNFP organization, relative to its closest competitors, to enhance its in-ternal knowledge base and to disseminate, unlearn and use such knowl-edge for organizational change.


Learning Through Networking and Alliances:Relational Learning Capability

The ability to exploit external knowledge is a critical component ofinnovative capabilities (Cohen & Levinthal, 1990; Mueller, 1962). Al-though in-house learning efforts may be necessary, firms have to accessexternal knowledge sources to modify their internal knowledge base.Collaborative linkages or “net-working” improves the innovation po-tential of the organization (Mowery, 1988; Contractor & Lorange,1988). In the current study, this learning capability is conceptualized asthe capacity of the NFP organization to acquire technical and non-tech-nical knowledge through external linkages, which includes strategic al-liances. We define the relational learning capability as the capacity ofthe NFP organization, relative to its competitors, to acquire technicaland non-technical knowledge through external linkages, and to dissem-inate, unlearn and use such knowledge for organizational change.

Based on the capability-based theory of SCA, we argue that a link ex-ists between social entrepreneurship and organizational capabilities.We propose the following relationship between social entrepreneurshipand organizational learning capabilities in NFPs.

P1: Firms exhibiting a higher degree of social entrepreneurshippossess more distinctive market-focused learning capabilitiesthan firms exhibiting a lesser degree of social entrepreneurship.

P2: Firms exhibiting a higher degree of social entrepreneurshippossess more distinctive internally focused learning capabilitiesthan firms exhibiting a lesser degree of social entrepreneurship.

P3: Firms exhibiting a higher degree of social entrepreneurshippossess more distinctive relational learning capabilities thanfirms exhibiting a lesser degree of social entrepreneurship.

Organizational Innovation and Superior Aged Care Delivery

Whilst past research on business innovation has been biased towardtechnological innovation NFP innovation research is dominated bynon-technological innovation. In the current study, innovation is con-ceptualized broadly incorporating both technological and non-techno-logical innovations. Technological innovations relates to product/services and processes. Non-technological innovations relate to mana-


gerial systems (e.g., new employee rewards schemes and informationsystems) and marketing methods (new methods to reach the target mar-ket). Based on our earlier discussion on the role of organizational learn-ing levels and innovation, we advance the following propositions:

P4: NFPs possessing high levels of distinctive market-focusedlearning capabilities achieve higher degrees of organizational in-novation intensity.

P5: NFPs possessing high levels of distinctive internally focusedlearning capabilities achieve higher degrees of organizational in-novation intensity.

P6: NFPs possessing high levels of distinctive relational learningcapabilities achieve higher degrees of organizational innovationintensity.

Sustained Competitive Advantage

As noted earlier the concept of SCA has primarily evolved in thebusiness strategy context and the literature on NFP competitive advan-tage has been limited. Although there is no consensus among marketingresearchers on the term “sustained competitive advantage” (Day &Wensley, 1988), competitive advantage is generally conceptualized as asuperior “market position” that captures the provision of superior cus-tomer value and/or the achievement of lower relative costs, which re-sults in market share dominance and superior financial performance(Hunt & Morgan, 1995). Over the last few decades financial perfor-mance has been used as an indicator of competitive advantage (Aharoni1993; Porter, 1985) and SCA is believed to be simply a competitive ad-vantage that lasts a longer calendar period of time (Jacobson, 1988: Por-ter, 1985). These views have attracted criticism from recent literature(Barney, 1991; Day & Wensley, 1988) and we observe the need to con-ceptualize this construct incorporating well-founded and realistic indi-cators of SCA. Particularly the conceptualization of the NFP SCArequires a different approach particularly in view of the social missionpursued by NFPs and their obligation to serve multiple stakeholders.

SCA exists when current and potential competitors are unable to re-produce the value creation strategy adopted by the firm (Barney, 1991).A competitive advantage can only be sustained if it continues to existafter efforts to duplicate that advantage have ceased (Rumelt, 1987).


The inimitability of distinctive capabilities or the “capability differen-tial” is a key source of sustainability under the capability-based model(Grant, 1991; Hayes et al., 1996; Coyne, 1986; Hall, 1993).

As noted earlier, social entrepreneurs are driven by their social mis-sion. This is a mission of social improvement that cannot be reduced tocreating private benefits (financial returns or consumption benefits)(Dees, 1998). Based on this discussion, competitive advantage is con-ceptualized as the NFP’s ability to gain a superior market position in theaged care market through the creation of superior social value to itsmultiple stakeholders. Based on this discussion, we advance the follow-ing proposition.

P7: There is a positive relationship between NFP organizationalinnovation intensity and sustained competitive advantage.

OPERATIONALISING THE MODEL: ISSUES

As in any relatively new area of theory building, there are a numberof obstacles to surmount in the translation from theorizing to measure-ment and testing. The proposed aged care value creation model is pre-mised on the capability-based theory of SCA and draws heavily fromthe organizational learning approaches to innovation. The literature inboth these areas has grown in volume over the last decade. The capabil-ity-based theory has reached the stage where theoretical constructs needto be measured and key theoretical propositions need to be tested toprogress the competitive strategy theory. Similarly, evidence regardingthe antecedents of organizational learning is primarily anecdotal (Slater& Narver, 1995; Garvin, 1993). This paper advocates the theory-testingpath to examine the theoretical relationships proposed in the model,which will move the capability theory beyond its current fragmentedstatus. The resultant framework will facilitate future research and con-tribute towards the formation of a consistent and well-founded body ofknowledge on NFP competitive strategy.

As noted earlier, distinctive learning capabilities that enable the firm toachieve SCA are built and nurtured by the strategic leadership of the firm.In the current model, NFP strategic leadership is conceptualized in termsof social entrepreneurship. Dees’ (1988) approach to conceptualizing so-cial entrepreneurship provides valuable guidance in operationalizing thisconstruct. However, we disassociate with the view that social entrepre-neurs are “one special breed of leaders” (Dees, 1998) or social entrepre-


neurship is an individual trait (Prabu, 1998). These views take us backto the traditional view that entrepreneurs are “born.” Instead we wouldfall in line with the recent behavioral approach to entrepreneurship(Covin & Slevin, 1986; Miller, 1983; Stevenson & Jarillo, 1990). Thebehavioral approach conceptualizes entrepreneurship as a behavioralphenomenon in that entrepreneurial firms display three characteristics intheir strategic decisions, namely, innovativeness, proactiveness, andrisk-taking propensity. These characteristics form the basis of the entre-preneurship scale developed by Covin and Slevin (1986), who arguethat behaviors rather than psychological attributes give meaning to theentrepreneurial process. Behavioral manifestations of entrepreneurshipcan be reliably, verifiably, and objectively measured, enabling re-searchers to differentiate between firms with different levels of entre-preneurial intensity. The scale developed by Covin and Slevin (1986)was found to be positively related to performance and business strategy(Covin & Slevin, 1986; Schafer, 1990). This approach to operationalizingthe entrepreneurial intensity construct suggests a multi-dimensionalmeasure in which each dimension originates from a separate set of indi-cators. The entrepreneurship scale used by Covin and Slevin (1986)provides valuable guidance in the operationalization of the social entre-preneurship construct.

The model incorporates three learning capabilities: market-focusedlearning, internally focused learning, and relational learning. It is pro-posed to operationalize these constructs using the key learning pro-cesses suggested in the literature, namely information acquisition,information dissemination, unlearning and integration of learning intoorganizational change (Huber, 1991; Sinkula, 1994). In the generationof indicators for the learning capability constructs, the fourteen-itemmeasure for market-focused learning suggested by Day (1994) providesvaluable guidance. As an additional measure of the distinctiveness ofeach of the capability constructs, we propose that respondents are askedto indicate the extent to which a particular capability has been instru-mental in outperforming competitors. This approach to measuring thedistinctiveness of organizational capabilities is based on the work ofSnow and Hrebiniak (1980).

The literature suggests two criteria in conceptualizing the innovationconstruct, namely, namely, “newness” and “value-creation.” It is pro-posed to develop a composite measure of organizational innovation in-corporating the type and the degree of innovation. Such an approachwill not only capture the NFP innovation activity but also provide re-searchers with a comprehensive and realistic measure of NFP innova-


tion. The degree of innovation is a continuum ranging from incrementalto radical innovations (Dewar & Dutton, 1986; Ettlie, 1983). The typeof innovation can be operationalized in terms of technological andnon-technological value-creating activities of the firm (Porter, 1985;Schumpeter, 1934; Rothwell, 1992). Based on recent empirical evi-dence (AMC, 1995), we propose expanding the two types of innovationto include product and process (i.e., technological) and managerial andmarketing (i.e., non-technological) innovations.

Our discussion on the SCA construct revealed the weaknesses of ex-isting measures of SCA and highlighted the need for a comprehensivemeasure reflecting the recent developments in the literature. Althoughthere are inadequacies in using financial indicators to measure competi-tive advantage, the literature does totally discard using them. Instead,the literature suggests strengthening financial indicators with indicatorsof market advantages such as customer loyalty and market share (Day,1994). Interestingly, financial indicators have been widely used to as-sess NFP performance (Shukla, Pestian & Clement, 1997). With a viewto capturing the social mission pursued by NFPs it is suggested using fi-nancial indicators along with social indicators of performance. Theemerging triple bottom line approach to measure organizational perfor-mance (Whittaker, 1999) provides valuable guidance to develop suit-able indicators of social value. Accordingly, we suggest that the SCAconstruct be operationalized in terms of three elements: (1) extent towhich organizational innovation has enabled the NFP to gain marketand social equity advantages, (2) whether it is possible for competitorsto duplicate innovations, and (3) whether it is possible for competitorsto duplicate distinctive capabilities on which advantages have beenfounded.

For testing the proposed theoretical model we advocate the use ofquantitative methods including structural equation modeling (SEM)techniques. Testing such a model would involve the development ofmeasures for each theoretical construct and testing the relationships inthe theoretical model. The theoretical constructs incorporated in themodel are latent variables that cannot be observed directly. Given thenature of the constructs in the model, and the multiple interdependencerelationships that have been specified, SEM appears to be appropriatemethod for estimating the proposed model (Anderson & Gerbing,1988). In view of the relatively underdeveloped nature of the empiricalbase of the capability-based theory it is advocated to use the “two-stage” approach to SEM for the development of measures for theoreti-cal constructs and test the theoretical relationships proposed in the


model. This approach enables researchers to maximize the interpretabilityof both measurement and structural models (Anderson & Gerbing, 1988;Hair et al., 1995).

Appropriate key informants for future empirical studies in this area in-clude key decision-makers of NFPs. They are typically familiar with allaspects of the NFP’s operations, influence the strategic direction of theNFP, and play a key role in technology adoption decisions (Hambrick,1981; Miller & Toulouse, 1986). There is a clear and documented evi-dence of a consistent decline in strategic awareness towards the lowerlevels of the management hierarchy (Snow & Hrebiniak, 1980).

CONCLUSIONS

The proposed capability-based model of organizational innovationand NFP SCA incorporates key theoretical propositions from the com-petitive strategy literature. First, the model suggests that a NFP canachieve SCA through the distinctive capabilities in its possession. Sec-ond, distinctive capabilities do not merely accrue to the NFP but areconsciously and systematically developed and nurtured by the NFP’sstrategic leaders. Next, the model suggests that competitive advantagecan be gained by creating superior value for customers, and can beachieved by performing the activities of the value-chain in an innova-tive manner. Fourth, NFPs reaching higher levels of organizational in-novation intensity are likely to gain SCA. Furthermore, the manner inwhich the key theoretical constructs are conceptualized suggests theirinterrelationships have important implications for NFP competitivestrategy theory and practice. Our discussion is organized around the fol-lowing four themes: (1) strategic leadership, (2) learning capabilities,(3) organizational innovation intensity, and (4) SCA.

The capability-based theory implies that distinctive capabilities arebuilt and nurtured by the strategic leadership of the firm. As noted ear-lier the literature on NFP distinctive capabilities has been limited andfew attempts have been made in past research to conceptualize this con-struct in a testable manner. In the framework presented in this paperstrategic leadership is conceptualized in terms of social entrepreneur-ship of the firm. In contrast to traditional trait-based or psychologicalapproaches, social entrepreneurship parallels the more recently-adoptedbehavioral approach to measuring entrepreneurship (Covina & Levin,1986). According to this approach, entrepreneurship is a behavioral phe-nomenon that exists when a NFP displays high levels of innovativeness,


proactiveness, and tolerance for risk in strategic decision-making. Thisproposition, which is a key feature in the capability-based theory ofSCA, has not been tested in prior research, particularly in a NFP context.This proposition also provides new research directions for the theory ofentrepreneurship.

The manner in which entrepreneurship is conceptualized has impli-cations for practitioners. The model presented here implies that anyNFP can adopt an entrepreneurial posture by displaying innovativeness,a high tolerance for risk-taking, and proactiveness. In our theoreticalframework, entrepreneurs are not “born” as suggested in conventionaltheories; rather NFPs can be guided and educated to become entrepre-neurial in their decision-making through strategic leadership. This in-terpretation has important implications for policy planning. Forexample, NFP key decision-makers can be educated and trained to en-gage in organization-level entrepreneurship.

The model presents NFP managers practitioners with a feasible pathfor building SCA. NFPs striving to gain competitive advantage shouldpursue an innovation-based competitive strategy. NFPs pursuing inno-vation-based competitive strategy must develop and nurture distinctivelearning capabilities. However, NFPs should recognize that buildinglearning capabilities could be an expensive and tedious undertaking(Hayes et al., 1996). Hayes et al. (1996: 505) summarize the process:

Converting an ability to a real capability does not happen by acci-dent: it takes time (not just man-hours, elapsed time) and con-sumes resources. And building such a capability into somethingthat can become the basis of a competitive advantage requires adedication that approaches fanaticism; the time and resources re-quired often well exceed what one can logically justify.

These views imply that a NFP cannot be world-class in everything itdoes and strategists should recognize the implicit trade-off in buildingdistinctive capabilities. More generally, high levels of learning capabil-ities will enhance the overall knowledge base of the organization, andthis in turn will be reflected in an acceleration of organizational innova-tion intensity. The model also suggests that NFPs seeking higher de-grees of innovation must fulfill the prerequisites for higher-orderlearning, that is, an entrepreneurial posture in decision-making, learn-ing from both external and internal sources, and active unlearning.

The three learning capabilities, and the theoretical relationships be-tween these capabilities and organizational innovation intensity have


important implications for future research. Though there is a growingbody of literature that addresses organizational learning, the relation-ship between different levels of learning and their antecedent condi-tions has not been fully explored, particularly in a NFP context.Generally speaking, empirical research on organizational learning islimited and much of the evidence regarding the benefits and anteced-ents of organizational learning remains largely anecdotal (Slater &Narver, 1995). The relationships in the theoretical model and the pro-posed approach to operationalizing the organizational learning capabili-ties should guide empirical research and contribute to our understandingof NFP organizational learning.

Another important contribution of the conceptual model is the man-ner in which organizational innovation intensity is conceptualized. In aclear departure from the existing literature, which is biased towardsproduct-based technological innovation, the model implies that innova-tion can occur in any of the firm’s value-creation activities. All forms ofinnovation are potential sources of SCA. This approach encouragesNFP to explore all paths to innovation including not only new products,but also new marketing methods, employee reward schemes, and neworganizational structures.

With regard to SCA, the capability-based theory suggests that theinimitability of distinctive capabilities is a key source of sustainability(Grant, 1991; Hayes et al., 1996). An obvious implication stemming fromthis proposition is that NFP strategic leaders pursuing competitive strat-egy must invest in building and nurturing distinctive capabilities that willenable them to gain SCA. Again, the tacitness, complexity, and specific-ity of the capabilities possessed by the NFP can produce causal ambiguityregarding the NFP’s actions, which in turn create barriers to imitation.

The model provides a novel formulation of the relationship between en-trepreneurship and NFP competitive advantage. Though the literature onthe capability-based theory of competitive advantage is growing in vol-ume, most of the key theoretical constructs have not been operationalizednor have the central theoretical propositions been synthesized in a singleframework. Particularly, the literature on NFP competitive strategy hasnot been fully explored. The framework presented in this paper providesresearchers, with a realistic research path to examine the NFP strategyformation activity. The model captures the critical role of strategic deci-sion-makers in the development and selection of NFP strategies. Draw-ing attention to organizational innovation and the role strategists can playin this process is particularly important given the rapidly commercializ-ing terrain of today’s NFP competitive landscape.


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