Factors of Production and Not-for-Profit Organizations

Not every organization exists to make a profit. A not-for-profit organization exists to achieve some goal other than the usual business goal of profit. Charities such as Habitat for Humanity, the United Way, and the American Cancer Society are not-for-profits, as are most hospitals, zoos, arts organizations, civic groups, and religious organizations. Government is the largest not-for-profit group, and more than 1.5 million nongovernmental ones operate in the U.S., contributing over $900 billion annually to the economy.

Like for-profit businesses, not-for-profits set goals and need resources to meet them, but their goals aren't about profit—they might be feeding the poor, preserving the environment, increasing ballet attendance, or preventing drunk driving. They don't compete directly with each other the way Ford and Honda do, but they do compete for talented employees, people's limited volunteer time, and donations. The boundaries between the sectors have blurred: for-profit businesses now address social issues, and successful not-for-profits apply business principles to operate more effectively. Not-for-profit managers worry about the same things as for-profit managers: developing strategy, budgeting carefully, measuring performance, encouraging innovation, improving productivity, demonstrating accountability, and fostering an ethical workplace.

Consider a museum. Besides pursuing artistic goals, top executives manage the administrative and business side: human resources, finance, and legal concerns. Ticket revenues cover only a fraction of operating costs, so the director spends much time seeking major donations and memberships. Boards of directors include both art patrons and business executives who want sound fiscal decision-making. A museum director must walk a fine line between the artistic mission and financial policies.

To provide goods and services—whether for-profit or not—organizations need inputs called factors of production. Four traditional factors are common to all productive activity: natural resources, labor (human resources), capital, and entrepreneurship. Many experts now add knowledge as a fifth factor. Using these factors efficiently lets a company produce more with the same resources.

Natural resources are commodities useful in their natural state—farmland, forests, mineral and oil deposits, and water. Sometimes called simply 'land,' the term means more than just land. International Paper uses wood pulp to make paper; Pacific Gas & Electric may use water, oil, or coal to produce electricity. Labor, or human resources, is the economic contribution of people working with their minds and muscles—from a restaurant cook to a nuclear physicist. Entrepreneurs combine natural resources, labor, and capital to produce goods or services, intending to make a profit or accomplish a not-for-profit goal. They make the decisions that set the course, create products and processes, and must be risk-takers because profit isn't guaranteed. Examples include Bill Gates, Sergey Brin, and Larry Page, plus thousands who start small companies that contribute to the economy.

Knowledge has become a primary driver of economic growth. Today's competitive environment places a premium on knowledge and learning over physical resources. The number of U.S. knowledge workers has doubled over the last 30 years, with an estimated 2 million knowledge job openings annually. Even though many routine jobs have been replaced by automation or outsourced, technology has actually created more jobs that require knowledge and cognitive skills.

The factors of production

Entrepreneurs are risk-takers who combine inputs to create goods or services. John Fischer of Longmont, Colorado, fits the profile. Inspired by the 2000 presidential election, he created a bumper sticker that became a top seller, then started an online retail sticker store—StickerGiant—designing and making stickers in his basement. It grew into a multimillion-dollar company, recognized by Forbes in 2017 as one of its top 25 small businesses. Fischer embraced change: in 2011 he dropped the retail store to focus on custom orders; in 2012 he introduced open-book management, sharing the company's financials with employees weekly. He invested in digital printing and laser-finishing equipment—only five other companies worldwide have it—enabling overnight production of custom stickers. By 2016, StickerGiant had nearly 40 employees, $10 million in annual sales, and even built a 232-pound Guinness World Record sticker ball.

Now apply the factors of production to StickerGiant.