Classes 15-16Classes 15-16 Development and implementation of

nonmarket strategy

St-Petersburg State University Graduate School of Management

Master of International Business Program Business-government relations

Political markets

“ political markets are characterized by imperfect information, subjective models and high transaction costs. (...) The political market has been, and continues to be, one in which the actors have an imperfect understanding of the issues affecting them and equally in which the high costs of transacting prevent the achievement of efficient solutions,” (North, 1990: 357).

Political markets

• Rivalry from competing interest groups is negatively related to the performance of a firm’s nonmarket strategy.

• Rivalry between politicians is positively related to the performance of a firm’s nonmarket strategy.

• The resource base of the relevant regulatory agency is negatively related to the performance of a firm’s nonmarket strategy.

• The firm’s experience in dealing with government policy-makers is positively related to the performance of a firm’s nonmarket strategy.

• The firm’s opportunity to learn from other firms’ interactions with government policy-makers is positively related to the performance of a firm’s nonmarket strategy.

Market and nonmarket environments and business

opportunities

Market and nonmarket strategies

Management

Integrated strategy

Market environment Nonmarket environment

Marketstrategy

Nonmarketstrategy

Market(competitive)

Analysis

NonmarketAnalysis

ImplementationPositioning

In which industries is nonmarket environment likely to most important

Firm’s opportunities are also affected by:• Private politics: actions such as

protests, boycotts, public criticism by activists, advocacy, interest groups, as well as the public climate in which the firm operates

• Moral concerns, which may call for restraint in the pursuit of some opportunities.

Nonmarket strategies and borders

• Working for free trade globally

• Building constructive working relationship with host government

• Applying universal ethic principles

• Implementing the same environmental standards in all countries

Positioning spaces

• Space of public sentiment

• Political space

• Legal space

Nonmarket analysis

for business

Structured pluralism

Pluralistic privateinterests

Public policy analysis

Nonmarket issue

Public policy

Institution

Officeholders withConstituent interests

And policy interests

Technical information about the consequences of alternatives

Nonmarket action

Polically relevant information

(policies reflect private interestsInstitutional features, information

and policy interests)

Analysis of incentives

Interests and interests groups – those individuals firms and organizations with stake in the issue

Stakes may be distributive or moral

Most issues have distributive consequences

Issues may also involve moral concerns

The amount of nonmarket action: demand an supply side

The demand side pertains to the benefits or incentives, associated with nonmarket action on an issue; Factors: aggregate benefits, benefits per capita, substitutes.

The supply side pertains to the costs of taking, or supplying, nonmarket action; Factors: costs of identifying, contacting, motivating, organizing and mobilizing those with aligned interests; free-rider problem.

The amount of nonmarket action: demand an supply side (cont)

An increase in the benefits results in more nonmarket action, and increase in costs rsults in less nonmarket action.

One of the components of nonmarket strategy is to work to increase the benefits or incentives associated with nonmarket action,

Another component is to reduce costs of nonmarket action

Effectiveness of nonmarket actions: factors Numbers Geographical distribution (coverage) Resources

Political competition: Wilson-Lowi matrix

Interest group politics

EntrepreneurialPolitics

(converse of client politics)

Client politics(converse to

EntrepreneurialPolitics)

Majoritarian politics

Concentrated Widely distributed

Benefits from enacting the nonmarket alternative

Concentrated

Widely distributed

Har

m f

rom

en

acti

ng

th

e n

on

mar

ket

alte

rnat

ive

Qualifications: 1. Magnitudes of costs and benefits 2. Costs of organizing and effectiveness of nonmarket action

Framework for the analysis of nonmarket issues

Framework for the analysis of nonmarket issues

ScreeningElimination

of alternativescontrary to:

-Law- company policy- widely shared

ethicsprinciples

AnalysisInterests

Moral motivationsInstitutions and

officeholdersInformation Predictions:

Market reactionsNonmarket reactions

ChoiceEvaluations

of ethics claims

Application of normative principle

Choice andstrategy

formulation

Policies

Refinements, reconsideration, generation of new alternatives

Gen

erat

ion

ofal

tern

ativ

esS

trategy and implem

entation

Organization of the nonmarket strategy function • Top management must support and be

involved in the effort

• Field units and relevant staff departments must be involved

• The issues management unit must fill a void in the managerial decision-making process

• Results must come from the effort

Formulating the nonmarket strategy

Approach to nonmarket strategy formulation

Nonmarket analysis

Nonmarket analysis

Interest A

Interest B

•Motivation•Demand and supply•Nature of the politics•Institutions•Institutional officeholders

•Motivation•Demand and supply•Nature of the politics•Institutions•Institutional officeholders

Strategy formulation

Strategy formulation

Implementation

Implementation

AdministrationRegulation

Institutionalarena

delegation

Nonmarketaction

Nonmarketaction

Nonmarketaction

Nonmarketaction

The approach to strategy formulation 1. Nonmarket analysis• Assessing the characteristics of the issue and where

it is in its lifecycle• Identifying the interests affected by issue• Assessing motivations and incentives• Analyzing the likely demand for and supply of

nonmarket action• Assessing the nature of the politics of the issue• Identifying the institutional arenas in which the issue

will be addressed• Assessing institutional characteristics• Identifying the relevant institutional officeholders and

their constituent and policy interests

Assessing institutional characteristics: Government’s strategic capabilities

• Target specificity

• Policy credibility

• Institutional arrangements: property rights and transactional governance

System of public/private economic interest intermediation

Mixed

Command economy

Transitional

CorporatistPrivate enterprise

PluralistPrivate enterprise

Market

Public PrivatePrivate – > 100%

Mar

ket

– >

100

%

Authoritative coordination

(planning)

Property rights allocation

Transactional governance

Examples

• Transitional: Transition economies in central Europe: Poland, Hungary, Slovakia, The Czech Republic

• Command: People’s Republic of China, Cuba

• Pluralist: U.S., U.K., Canada, Italy• Corporatist: Brazil, Argentina, Japan,

Korea, Taiwan, Tanzania, Netherlands, Austria

Tendencies that home-state strategic capabilities bring to bear on MNC’s

Export (Unaffiliated Parties)

Export(rent network)

Simple global

MultifocalMarket

Public PrivatePrivate – > 100%

Mar

ket

– >

100

%

Authoritative coordination

(planning)

Property rights allocation

Transactional governance

Generic nonmarket strategies

• Representation strategies

• Majority-building strategies

• Informational strategies

First mover advantage

concept

First mover advantage concept

• The idea of FMA suggests that pioneering businesses are able to obtain positive economic profits as the consequence of early market entry, that means, profits in excess of the cost of capital

• According to Liberman and Montgomery (1988), the key element of FMA is an initial asymmetry among competitors, enabling one firm to gain a head start over its rivals

FMA mechanisms

• Economic mechanisms (scale and experience economies and marketing cost asymmetries)

• Preemption mechanisms (cost asymmetries in factor inputs and spatial preemption)

• Technological mechanisms (product, process, organizational innovations)

• Behavioral mechanisms (differentiation advantages)

Political resources

• Political resources – any firm attributes, assets, human resources, that allow the firm to use the political process to improve its efficiency and profitability.

Ex.:• Firm’s formal corporate nationality• Experience of managers in operating in

transition economies or in paying bribes• Informal relations between the firm’s

managers and political decision-makers

FMA in political arena

• The greater the government interference in the industry, the more likely it is that political resources will lead to FMAs

• During the early formation of an industry structure, the active assistance by the home government and th host government is positively related to the likelihood that political resources will lead to FMAs

• The greater the cooperation between a firm’s home and host governments, the greater the likelihood for strong FMA

• Political resources will be less conductive to FMAs, if the political business environment is changing and/or the locus of competitive advantage is shifting

Strategic political management(SPM)

Dynamic capabilities framework inSPM

Strategic political management

• Strategic political management refers to the set o strategic actions that firms plan and enact for the purpose of maximizing economic returns from the political environment

• SPM enhances a firm’s potential to improve its performance or competitive advantage by providing “a means of competing not permitted by the pure market pursuit of objectives” (Gale & Buchholz, 1987)

Strategic political management (cont.)• Various of political tactics (lobbying,

advocacy advertising, constituency building, financial contributions, coalition formation)

• Two views on SPM:1. SPM as a costs for or an institutional

constraints on firms2. SPM as a source of value creation – set of

opportunities for leveraging firms’ strategic assets and competencies to earn economic rents.

Applying Dynamic Capabilities Framework to SPM• Dynamic capabilities refer to the ability of firms

to maintain or create firm value by deploying internal competencies that maximize congruence with the requirements of a changing environment (Teece at al., 1997)

• Value creation – invention or reconfiguration of firm assets or competencies that constitute an original or unique addition to firm rents.

• Value maintenance – preservation of those firm assets and competencies that constitute the foundation of firm rents.

Applying Dynamic Capabilities Framework to SPM• Dynamic political management

capabilities – dynamic processes by which a firm influences or complies with its political environment for the purpose of generating future value or protecting the current value of the firm from future loss or erosion.

Applying Dynamic Capabilities Framework to SPM: reasons1. DC focus on the variation in firms abilities to adapt

quickly to rapidly changing environments (Teece, 1997). Firms likely to need increasingly dynamic capabilities to cope with political change.

2. DC “affect profitability by enhancing the productivity of the other resources that the firm possesses. (Makadok, 2001)

3. DC perspective can draw attention to the crucial role of internal competencies in enabling firms to execute political strategies successfully.

4. DC perspective suggests that the costs of government influence need to be evaluated against the potential opportunities for value creation or protection.

Reasons for political actions

1. Collective action theory: political activity will be less costly in small concentrated industries where potential for free riding is lower.

2. Stakeholder management: emphasizes the importance of social and political issues to a given company as a key factors that motivate political strategy. The role of dependence.

3. Resource dependence theory: firms, that are highly dependent on government are more likely to engage in political action to shape public policy

Other reasons for political actions

• To make firms interests known to government;

• To gain collective or private benefits;• To access resources from political

institutions;• To purchase government policy or

secure government inaction;• To reduce costs;• To stop unwanted regulation; • To increase firm control and autonomy.

What kind firms are more likely to engage to political actions? Factors influencing the likelihood:At the firms level:• Material interests• Size of the firm• Issue salienceAt the industry level:• Part of industries that are strongly

affected by macro economic policies or other government decisions

• Industry concentration

So what?

Both market and political strategies represent “a concerted pattern of actions taken in the [market or nonmarket] environment to create value by improving economic performance” [Baron, 1997]

Dynamic capabilities allow a firm to leverage its internal assets not only to satisfy current environmental demands but also to influence environmental demands so that these demands correspond with the firm’s strength and requirements.

A Dynamic Capabilities model of effective political management

Firm characteristics

Dynamiccapabilities

Motives of politicalmanagement

•Value creation•Value maintenance

Industrycharacteristics

Political management

strategies

•Reactive•Anticipatory•Defensive•Proactive

Firm-leveloutcomes

•Performance•Competitive advantage

Political dynamism

Political strategies

(1) Firms can actively influence their political environments

(2) Where influence is impossible or not desired, they can actively comply with public policies or regulations with the intent of deriving as much value from such compliance as possible

Political compliance strategies are dined as firm-level actions undertaken in conformity with political requirements and expectations for the purpose of maintaining or creating value by anticipating or adapting to public policy

Political influence strategies are firm-level actions undertaken for the purpose of mobilizing support for the firm’s interests.

Alternative political management strategies

Source: Christine Oliver, Ingo Holzinger, 2008

Reactive strategies

• The effectiveness of reactive political strategies will depend on firm’s structural and process reconfiguration capabilities

• The speed, efficiency, and innovativeness of architectural reconfiguration capabilities will determine the extent of their effectiveness

• Effective reactive political strategies will result in higher efficiency and legitimacy of the firm

Ex. Barclays bank

Anticipatory strategies

• The effectiveness of anticipatory political strategies will depend on firm’s scanning and predictive capabilities

• The frequency, breadth, innovativeness and timeliness of scanning capabilities will determine the extent of their effectiveness

• Effective anticipatory political strategies will result in first mover advantage and enhanced reputation of the firm

Ex. Toshiba and Hitachi

Defensive strategies

• The effectiveness of defensive political strategies will depend on firm’s capabilities to appropriate and use political social capital

• The breadth and depth of trust and relational bonds in social contracts with government and with constituents who can influence government will determine the extent to which the deployment of political social capital is effective

• Effective defensive political strategies will result in the protection of the current assets and market position of the firm

Ex. British tobacco companies

Proactive strategies

• The effectiveness of proactive political strategies will depend on the scope of a firm’s institutional influence capabilities

• The breadth and depth of a firm’s embeddedness in its economic and political environment will determine the effectiveness of the firm’s institutional influence capabilities

• Effective proactive political strategies will result in a closer perceived fit between a firm’s actions and public policy requirements than the actions of the firm’s rivals.

Ex. British Petroleum

Political strategies and sustainable competitive advantage