Classes 15-16 Development and implementation of nonmarket strategy

1. St-Petersburg State University Graduate School of Management Master of International Business Program Business-government relations Classes 15-16Development and implementation of nonmarket strategy

2. 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).

3. 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.

4. Market and nonmarket environments and business opportunities

5. Market and nonmarket strategies Market (competitive) Analysis Nonmarket Analysis Management Market strategy Nonmarket strategy Integrated strategy Implementation Positioning Market environment Nonmarket environment

6. In which industries is nonmarket environment likely to most important

7. 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.

8. 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

9. Positioning spaces • Space of public sentiment • Political space • Legal space

10. Nonmarket analysis for business

11. Structured pluralism Public policy analysis Pluralistic private interests Nonmarket action Technical information about the consequences of alternatives Polically relevant information Institution Officeholders with Constituent interests And policy interests Public policy Nonmarket issue (policies reflect private interests Institutional features, information and policy interests)

12. 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

13. 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.

14. 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

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

16. Political competition: Wilson-Lowi matrix Benefits from enacting the nonmarket alternative Concentrated Widely distributed Interest group politics Entrepreneurial Politics (converse of client politics) Concentrated Harm from enacting the nonmarket alternative Client politics (converse to Entrepreneurial Politics) Majoritarian politics Widely distributed Qualifications: 1. Magnitudes of costs and benefits 2. Costs of organizing and effectiveness of nonmarket action

17. Framework for the analysis of nonmarket issues

18. Framework for the analysis of nonmarket issues • Screening • Elimination • of alternatives • contrary to: • Law • company policy • widely shared • ethics • principles Analysis Interests Moral motivations Institutions and officeholders Information Predictions: Market reactions Nonmarket reactions Choice Evaluations of ethics claims Application of normative principle Choice and strategy formulation Generation of alternatives Strategy and implementation Policies Refinements, reconsideration, generation of new alternatives

19. 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

20. Formulating the nonmarket strategy

21. Approach to nonmarket strategy formulation Implementation Interest A Nonmarket analysis Strategy formulation Nonmarket action Nonmarket action • Motivation • Demand and supply • Nature of the politics • Institutions • Institutional officeholders delegation Institutional arena Administration Regulation Interest B Nonmarket action Nonmarket analysis Strategy formulation Nonmarket action • Motivation • Demand and supply • Nature of the politics • Institutions • Institutional officeholders Implementation

22. The approach to strategy formulation • 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

23. Assessing institutional characteristics: Government’s strategic capabilities • Target specificity • Policy credibility • Institutional arrangements: property rights and transactional governance

24. System of public/private economic interest intermediation Market Transitional Pluralist Private enterprise Transactional governance Mixed Market – > 100% Corporatist Private enterprise Command economy Authoritative coordination (planning) Public Private Private – > 100% Property rights allocation

25. 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

26. Tendencies that home-state strategic capabilities bring to bear on MNC’s Market Export (rent network) Multifocal Transactional governance Market – > 100% Simple global Export (Unaffiliated Parties) Authoritative coordination (planning) Public Private Private – > 100% Property rights allocation

27. Generic nonmarket strategies • Representation strategies • Majority-building strategies • Informational strategies

28. First mover advantage concept

29. 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

30. 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)

31. 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

32. 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

33. Strategic political management (SPM) Dynamic capabilities framework in SPM

34. 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)

35. Strategic political management (cont.) • Various of political tactics (lobbying, advocacy advertising, constituency building, financial contributions, coalition formation) • Two views on SPM: • SPM as a costs for or an institutional constraints on firms • SPM as a source of value creation – set of opportunities for leveraging firms’ strategic assets and competencies to earn economic rents.

36. 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.

37. 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.

38. Applying Dynamic Capabilities Framework to SPM: reasons • 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. • DC “affect profitability by enhancing the productivity of the other resources that the firm possesses. (Makadok, 2001) • DC perspective can draw attention to the crucial role of internal competencies in enabling firms to execute political strategies successfully. • DC perspective suggests that the costs of government influence need to be evaluated against the potential opportunities for value creation or protection.

39. Reasons for political actions • Collective action theory: political activity will be less costly in small concentrated industries where potential for free riding is lower. • 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. • Resource dependence theory: firms, that are highly dependent on government are more likely to engage in political action to shape public policy

40. 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.

41. 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 salience At the industry level: • Part of industries that are strongly affected by macro economic policies or other government decisions • Industry concentration

42. 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.

43. A Dynamic Capabilities model of effective political management Dynamic capabilities Firm characteristics Firm-level outcomes Political management strategies Motives of political management • Performance • Competitive • advantage • Reactive • Anticipatory • Defensive • Proactive • Value creation • Value maintenance Industry characteristics Political dynamism

44. Political strategies • Firms can actively influence their political environments • 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.

45. Alternative political management strategies Source: Christine Oliver, Ingo Holzinger, 2008

46. 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

47. 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

48. 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

49. 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

50. Political strategies and sustainable competitive advantage