As we discussed in the previous chapter, there are two basic types of influences on organizational performance: (1) firm and business-unit-level determinants (i.e., strategy and competitive position) and (2) environmental determinants.1 In the business world, the major locus of attention with respect to the environment has been industry characteristics.2 The emphasis on industry characteristics stems in part from the theoretical orientation of classical industrial economics (or industrial organization) toward market or industry structures.3 It also stems in part from the empirical observations that there are enduring and significant differences in the average profitability of different industries and that about 20 percent of the variance in firm profitability is explained by the industry in which a particular business competes.4 Given the effects of industry on financial performance, analysis of such is obviously important for businesses, because it can inform choices about entering new industries and exiting from existing ones. In addition, it provides a way of understanding how the conduct of firms can influence industry structure, for better or worse.
Nonprofits, however, often do not make dispassionate choices about whether to enter or exit according to the attractiveness of industry structure. Rather, these choices stem from the identification of a social need or a sense of organizational identity. We establish a theater not because it is an attractive industry—in fact, it is one of the least structurally attractive industries one can imagine—but because we are theater artists: actors, directors, playwrights, and so forth. We form an environmental advocacy organization not because there is money to be made, but because there is a need that we exist to fill.