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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