Brickley, Smith, and Zimmerman (2009) state that “strategy is a key determinant of the success or failure of the enterprise” (p. 242). The same experts tell us that an important first step in organizational strategic development is to understand the firm’s resources and capabilities, as they relate to the external (business) environment, in order to identify opportunities to create and capture value (pp. 270-271).
This post examines whether the economic concepts of creating and capturing value can be applied to a non-profit organization, existing since May 2008. Although more recent figures are not cited, ProRepublica (2013) reported in 2012, this organization’s financial statement included 15.8 million dollars in revenue, 7.3 million dollars in expenses, a net income of 8.5 million dollars and that over 96% of its revenue was in the form of contributions. Noer (2012) reported that this organization routinely serves six million online users a month and grew from one individual in 2008 to a current staff of 80 diversely talented personnel; creating and developing online content that has been translated into more than 20 languages (para 7). The mission statement for this organization is “to provide a free world-class education for anyone, anywhere”. This non-profit has created a consistently expanding value that would be hard to capture as ‘profit’ but whose success and ‘value’ can be explained in practical economic reasoning.
The organization is Khan Academy. I referred my son to Khan Academy when he was struggling with calculus and physics homework a year ago. I was referred to Khan Academy when I was struggling with elasticity of demand two weeks ago. Khan Academy has successfully created value in the numerous ways it has differentiated itself from other online learning resources. This stems from a focused first mover perspective that has created knowledge-based market power and made rivalry or substitute competition inconsequential. One of the barriers to entry is that no other profit or non-profit firm has been able to duplicate or organize an equal or better competitive, high performance, diversified team capability – at no cost to the user/consumer. This is consistent with Brickley, et al, in that “integrating organizational architecture and internal resources with the strategy are key determinants of value” (p 272). Khan Academy has increasingly expanded a highly diverse and skilled team that maximizes elements of organizational core competencies and converts organizational knowledge into value.
Creating value is an important first step in generating profits. In the example of Khan, I argue that the value is free and accessible education for anyone, anywhere. Khan Academy has created that value so well that it’s “profits” are the sustaining revenue that continuously arrive in the form of outside monetary contribution from partners, sponsors and organizations who want to be associated with that captured goodwill value. Khan Academy has performance methods that emulate the four general ways to increase value, stated by Brickley, and others: 1. Take action to lower production costs or producer transaction costs. Khan initially produced the first 3000 You Tube videos himself. 2. Managers can implement policies to reduce consumer transaction costs. Khan Academy exercises the opportunity of an accessible worldwide internet to reach unlimited customers and offer all of its content for free. 3. Adopt strategies to increase demand. The collection of learning topics available from Khan Academy has grown from general math and science topics to almost every imaginable field of study because the knowledge and resource collective of wetware, hardware, and software result in superior factors of production. 4. Devise new products or services. Complementary to the above, Khan Academy has pursued the opportunity of access to technology (Web, Google Application Engine, You Tube) and some of the most talented personnel to create and innovate a diverse platform of learning.
Founder and Executive Director, Sal Khan, depicts the aspect of a visionary leader who is better at systematically predicting the future (or envisioning demand). Brickley, et al, also state that it “takes managerial talent to identify whether or not the firm has valuable resources and capabilities and to decide how best to use them to maximize returns” (p. 275). Much of the defense of Khan Academy as a viable example of creating and capturing value is aligned to team production capability, factors of diversification as economies of scope and internal analysis of organizational architecture and core competencies. Again, Brickley, et al, state that “to create and capture value, managers must find ways to convert the knowledge contained in employee wetware –even knowledge the employees may not realize they have – into software, formulas and recipes for creating value (p. 250).
The Internet Center of Management and Business Management (2010) points out that, at the center of Porter’s Five Forces model is the concept of rivalry. Surrounding this core are the forces of Buyer and Supplier Power, Threats of New Entrants and Substitutes, including the fifth force: Degree of Rivalry. Khan Academy does not appear to be concerned about the response of rivals, evidenced in a 2012 Forbes interview, when he expressed that he clearly was not the first to offer online educational presentations. He did admit to applying data analytics and human response theories to improve user outcomes.
As a form of summary, the following characteristics have been assigned to Khan Academy as factors that may be involved in its strategy to create, capture and sustain the value of a free and accessible education; Khan Academy: * Possesses unlimited set of opportunities to create better “instructions, formulas, recipes, and methods” for making improved products at lower cost (p. 252) * Captures value (goodwill) by exploiting their market power (online education) in numerous ways (p. 253) * Displays superior factors of production through diverse resource capacity and conversion of organizational knowledge (p. 256) * Manages business decisions using opportunity costs not accounting costs (p. 260) * Sustains and captures value by maintaining a team production advantage that competing firms cannot assemble in comparably productive teams (p. 260) * Maximizing organizational architecture as a contributing element of team capabilities (p. 261) * Inframarginal firm that cannot be imitated: based on an identifiable asset, such as a talented manager (p. 263) * Builds competent teams to develop new wetware that leads to innovative products, which satisfies customer’s demands (p. 265) * Economics of diversification that develops multiple products (courses), creating value from the sum of its parts resulting from team production capability (p. 267). * Increases value when the benefits of diversification are larger than the costs (p. 269)
This discussion post has argued that even a non-profit organization can create and capture value that differentiates from all other competition. Demonstrating that the objective of the strategy is to realize sustained profit has been the hardest to prove without question.
Brickley, et al, state that “some managers may be better at systematically predicting the future, luck plays a role in the acquisition of valuable resources” (p. 275). Khan Academy has been profoundly good at finding the resources and knowledge to convert innovation and ideas into “formulas and recipes for creating value” (p. 276).
Khan Academy partners with knowledgeable and recognized brand name institutions: The Bill and Melinda Gates Foundation, Google, and other distinguished companies. The corporate sponsors include Bank of America and Comcast. In 2014, there were 15 organizations that donated over one million dollars each. Although the Khan Academy may not be the best example to objectively demonstrate creation and capture of profit, they may be lucky enough to continue to evolve in order to create, sustain and capture the value of goodwill.
References:
Brickley, J.A., Smith, C.W., & Zimmerman, J.L. (2009). Managerial economics and organizational architecture (5th Ed.). New York, NY. McGraw-Hill Irwin.
Khan Academy (2015). About and Mission content. HTML. Retrieved 24 March 2015: https://www.khanacademy.org/about
Noer, M. (2012). One man: one computer, 10 million students: How Khan Academy is reinventing education. Forbes,12 November 2012 issue. HTML. Retrieved 25 March 2015: http://www.forbes.com/sites/michaelnoer/2012/11/02/one-man-one-computer-10-million-students-how-khan-academy-is-reinventing-education/
Porter’s Five Forces: A model for industry analysis (2010). The Internet Center for Management and Business Adminstration.HTML. Retrieved 25 March 2015: http://www.quickmba.com/strategy/porter.shtml
ProRepublica, 2013. Khan Academy Inc. Fiscal year ending 2012: Total functional expenses. HTML Retrieved 26 March 2015: https://projects.propublica.org/nonprofits/organizations/261544963