24
Nov

Where business and politics meet – an interview on strategy

Written on November 24, 2007 by Dirk Hopfl in Academics

Strategy is an essential ingredient of business success. But a number of scholars now assert that strategic planning is, in most cases, incomplete. David Bach, Strategy Professor at IE, is one of them. He believes that companies need to give equal weight to how they are managing relationships with governments, regulators, non-government organizations (NGOs), the media and society at large. Bach has been researching nonmarket strategy for a number of years and teaches a required course on the subject at IE. Bach grew up in Germany, studied in the US and has worked with McKinsey and the Global Business Network as well as with Political Intelligence, an international lobbying consulting firm. In this interview, Bach tells how he came to believe that nonmarket strategy is essential for future corporate success.

David, you are one of a handful of people in the world studying nonmarket strategy.Why does this field interest you?
I see it as a very under-studied field. More than that, people in both academe and business seem to determine competitive advantage as a function of market matters per se â?? products, customers, market share and the like. But a number of us around the world are trying to elevate the importance of nonmarket strategy. Increasingly competitive advantage can be built or lost outside of markets. That means there are huge opportunities for companies here but also immense dangers to anyone focused purely on the market side.

Anyone?
A firm not only maintains relationships with its customers, suppliers and competitors (what we can refer to collectively as the â??market environmentâ?) but also maintains relationships with governments, regulators, non-government organizations (NGOs), the media and society at large â?? whether it wants to or not. So, yes, anyone can be affected by nonmarket forces and in very consequential ways.

Is there a good example that comes to mind?
In the 1990s, Chiquita Brands sourced most of their bananas from Latin America; Europe was their biggest market. Meanwhile, the European Union was changing its banana policies to favour non-Latin American suppliers. Chiquita completely missed this nonmarket event and suffered as a result. Dole, on the other hand, was tracking the workings of the Commission, diversified its suppliers and succeeded in improving its business as a result. When I think of examples like this, I often recall the phrase that captures the danger of not being engaged in political processes central to your business: â??If youâ??re not at the table, youâ??re on the menu.â?

Why have companies not been more savvy about this?
Nonmarket forces have always been a part of the business world, and some companies have been somewhat cognizant of their importance. But, in the main, companies have not given these matters much thought. They took the nonmarket environment for granted, as something that was given. It wasnâ??t seen as part of the playing field. Think about all the strategic plans that have been developed in the last two decades. How many had a section on the companyâ??s nonmarket strategy? My guess? Most, by far, did not focus in any serious way on this aspect of their competitive position. I believe the error here is a matter of emphasis.
Firms ought to apply the same rigour to the formulation and implementation of nonmarket strategy as they do to the formulation and implementation of their regular market strategy. But this alone is insufficient. Firms then must integrate market and nonmarket strategies to make sure they are consistent and coherent. We are increasingly seeing that firms can create â?? or lose â?? competitive advantage in the nonmarket environment.

Why is that? Whatâ??s changed?
There has been a distinct transition in the business environment. More actors are now affecting a companyâ??s destiny. Think of how comments on an Internet blog can impact a companyâ??s stock price. There are more regulatory agencies established by governments. Then, too, there are more NGOâ??s; just go to ngo.org and youâ??ll see dozens of links to organizations concerned with environment, status of women, trade-finance-transport, refugees and sustainable development â?? many of these NGOs can have an impact on your business. Iâ??d also mention that we live in a 24-hour news cycle; so, when, say, headlines emerge about potentially harmful toys made in China, companies across the world (like Mattel) have to be ready to respond immediately (which, in my opinion, Mattel in particular seems to have done quite well).

Any other reasons to pay more heed to nonmarket strategy?

Yes. But let me stress again that what Iâ??m advocating is equal respect for coherent and actionable market and nonmarket strategies. You canâ??t manage without both. That said, consider the new reality that, in more and more companies, the real field of competition is shifting to the nonmarket side. And thatâ??s because more products and services have become, in essence, commodities. Itâ??s getting harder to come up with products that are so different that no one can encroach on your market share. As the playing field in many markets has flattened, so too have the ability of one competitor to beat the others based on cost management or quality management â?? â??excellenceâ? is now a 30-year old concept. And what company has not squeezed costs to maximize profits? Thus, nonmarket matters such as oneâ??s reputation, oneâ??s ability to work with NGOs, oneâ??s capability to foresee relevant government actions (be they regulatory or legislative) and to even shape policy â?? these are all having an immense impact at a time when most companies are not even thinking about their nonmarket strategy. As I said, there are vast opportunities here but also dangers for those who miss it.

So, as complex as strategy has seemed, itâ??s now getting even more complexâ?¦
It depends what you mean by â??complexâ?. On the one hand, yes it is because we are adding more actors to the equation. But, on the other hand, the whole premise of nonmarket strategy is that firms ought to think holistically about their market and nonmarket relationships, that they ought to integrate the two pieces in crafting competitive advantage. So, in this sense, politics and social engagement are no longer afterthoughts, thus reducing complexity.

Isnâ??t nonmarket strategy the same thing as stakeholder theory or political strategy by another name?

Thatâ??s a fair question, but the answer is no. My IE colleague, David Allen, and I have looked at all the key intellectual movements that have been considered tangents to â??realâ? market strategy. We have charted the most prominent areas of thinking, including the two you mention, and have plotted the intellectual roots, foundational arguments, the unit of analysis and key literature for each of them. In sum, we have found this field to be unique from others.

How so?
Nonmarket strategy is, in essence, the intersection of microeconomics and political science. Unlike, say, corporate social responsibility or corporate citizenship that argue that companies have a special responsibility toward society, nonmarket strategy is an analytical approach, not a normative theory. It simply holds that existing approaches that now dominate companies and business schools are inadequate to fully account for the success or failure of the firm. Nonmarket strategy, moreover, embraces the realms of business ethics and crisis management and other nonmarket fields, including corporate social responsibility, and this gives it a unique thrust. We think that traditional market strategy and nonmarket strategy, combined, is your best bet to creating true competitive advantage because it helps to calibrate the impact of a firmâ??s activities outside the traditional value chain.

To begin to develop a nonmarket strategy, should companies create a new box on their organizational charts?
The next step for those of us studying this field is to find those companies doing the best job coping with nonmarket forces and determine how they are accomplishing the task. Thus, Iâ??m hesitant to recommend any org chart changes till we learn much more. There are clearly different models. Some firms run nonmarket strategy though their government affairs and public policy departments. Others appear to have brought units focused on corporate social responsibility and sustainability into the core strategy process. Still others attend to nonmarket concerns through their communications department. The critical question is when and how these units are brought in. Are they marginal to the core strategy process or are they involved in every aspect of strategy formulation? Once you bring market and nonmarket people together, they can learn from one another and find new opportunities that can only be harnessed from carefully coordinated and integrated market and nonmarket strategies. But one thing seems clear â?? without commitment from above, it is hard to really develop nonmarket strategy. If the CEO thinks politics and social concern are secondary, it wonâ??t make a dent. All successful examples of companies embracing nonmarket strategies that we have looked at featured CEOs who believed the competitive playing field extended beyond markets â?? think of GEâ??s Jeff Immelt, BPâ??s John Browne or Howard Schultz at Starbucks.

Is that what you would do as a CEO?
Absolutely. Top to bottom, I would sensitize everyone inside the company to start thinking more broadly than the traditional market strategy. Product mix, customer share, competitor stance â?? these are critical to the company. And thinkers like Michael Porter, in his numerous books, have given companies a wealth of tools by which to think about competitive positioning, the value chain and so forth. But those companies will perform best in the future if they can think beyond the market. I would create a team of enlightened people to work on developing tools to help them think in this new way. For example, consider how most companies deal with government affairs. In many cases, itâ??s a combination of lawyers and public relations people (either inside or outside the company, or both) who deal with such matters, mostly in a reactive way. Most others in the company refer to any work done in connection with regulation and politics as a â??big ugly black boxâ?. Nonmarket strategy requires a broader mix of people dealing with these forces, and they need to be both reactive and proactive. These forces are not going away. In fact, the need for a coherent, accurate and actionable nonmarket strategy will grow.

Is the academic world focusing on this?
Yes, in some places. And the field of study has made substantial progress. Nonmarket strategy essentially mirrors how we go about defining market strategy: just as the market strategy process usually begins with a careful market analysis, firms ought to carefully evaluate the firmâ??s nonmarket environment. A particular focus here is on nonmarket issues that might arise and that pose challenges or offer opportunities to the firm. So far, the best tool deployed is the â??4-Iâ? framework. By focusing on issues, interest groups, institutions and information, we can look at a companyâ??s opportunities and threats through its position in society. However, more and better tools are needed. Of course, once data is collected and analyzed, every company must actually engage in strategy formulation. Itâ??s critical that the firmâ??s market and nonmarket strategies be consistent. Finally, just as the market strategy yields a particular market positioning, a nonmarket strategy yields a particular nonmarket positioning for the firm on critical issues that matter to it.

Can you name a company that seems to have done all this well, using whatever tools it had?
Iâ??d cite BP. Sensing a change in its nonmarket environment â?? in this case, a growing concern about global warming and the future of the climate â?? BP decided to turn what would undoubtedly become a major challenge into an opportunity and a source of differentiation. Under the leadership of then-CEO, Lord John Browne, BP became the first major oil company to publicly acknowledge the reality of global warming and to take steps to curb CO2 emissions. Though the company has a new CEO, this nonmarket repositioning is now driving much of BPâ??s overall strategy as the company has become the worldâ??s largest producer of solar energy. A new slogan â?? â??beyond petroleumâ? â?? sums up the new strategy.
To BP, this repositioning is not simply a matter of corporate social responsibility. It is rather a comprehensive strategy to anticipate nonmarket change and to manage the risk and possible regulatory fallout from this change proactively. BP has turned what would have been a major political challenge into a potential source of competitive advantage. It now consciously manages relations with political and social actors and tries to strike the same chord in its market and nonmarket communication â?? the former is what we call â??advertisingâ? and the latter â??public relationsâ?.

So, are you optimistic?
Yes! And excited. More and more companies are realizing the importance of nonmarket challenges and are beginning to manage nonmarket issues proactively. In primary and consumer goods markets in particular, market competition has intensified with privatization, globalization and shortened product life cycles. Nonmarket differentiation, therefore, offers tremendous opportunities for competitive advantage. I am convinced that nonmarket management â?? the conscious exploitation of opportunities in the firmâ??s political and social environment â?? will be a defining feature of global competition over the next decades. So far, much of our research at IE Business School has focused on the nonmarket activities of firms in developed economies. But itâ??s clear that there is probably as much, or even more, potential in developing countries and emerging markets.
Many managers are uncomfortable straying into politics because they feel they donâ??t have any tools for it. Nonmarket strategy, we think, gives managers the kind of tools they need to build competitive advantage wherever they can find it â?? within markets and beyond.

Teaching nonmarket strategy
David Bach acknowledges that many colleges and B-schools teach some aspect of nonmarket strategy, but he says that the program he teaches at IE Business School is special in that it is a required course for the MBA degree there. â??My sense is that only a handful of schools around the world have such a course requirement for the advanced degree.â?

Studying the syllabus for Bachâ??s course, â??Business, Government & Society: Management Beyond Marketsâ?, is an education in itself. For anyone working in a company environment in which â??strategyâ? is the sole domain of the marketing professionals, his seven-part course structure immediately challenges the presumption that most strategic plans are as complete or thorough as companies assume.

For the core textbook, Bach uses David P. Baronâ??s Business and Its Environment (Prentice Hall, 2005). But Bach supplements the book with a wealth of materials. Per his syllabus, the following shows how Bach attacks the subject intellectually, braced, of course, by a battery of readings, videos, computer simulations, case studies, and intense discussions:

In part one, we examine the role of markets, governments, and society in a market economy. We will examine markets, market failures, the role of government in correcting market failures and government failures.
The second part begins the systematic analysis of politics as it relates to business. Students learn to analyze the motives for government intervention to better judge when and how political developments may affect business. Tools for nonmarket analysis and nonmarket strategy formulation are introduced. We then turn to business-government relations in specific regulatory domains as we analyze how to align market and nonmarket strategy in challenging political environments.
Part three extends the analysis to the international level. We examine the political risk inherent in many international investment decisions, the dynamics of trade policy making and protectionism, and the challenges â?? and opportunity â?? of â??thinâ? regulation at the global level.
The fourth part turns attention to the role of business in society and in nature. Business is often blamed for social ills, but social or environmental challenges can also provide opportunities for business. Proper corporate communication (including, where necessary, crisis communication) is often crucial for success.
Part five turns attention specifically to the debate over corporate social responsibility and considers business ethics. We will consider each individually rather than on their own and probe how they fit into the nonmarket approach to management.
The sixth part explores systematically the rise of â??private politicsâ?, which are increasingly complementing conventional â??public politicsâ?. Businesses increasingly have to deal directly with activists, civil society networks and NGOs. A profound challenge, this new plurality also opens exciting new nonmarket strategic opportunities, providing businesses with new potential allies.
The course is concluded by part seven, which features student presentations on companies and their management of nonmarket challenges and opportunities.

Comments

Yoshito Nakagawa December 13, 2007 - 12:48 pm

Dear Prof. Bach,

I am currently a civil servant working for international development in a developing country. I am an IE alumnus.

As having felt that corporate social responsibility is not enough for the business community to synergise with the citizenry and government in improving productivity and competitively of a nation, I am interested in your assertion that more attention should be paid to non-market strategy: Politics matters.

Due to a growing demand for specialised services and the limited resource mobilisation, the public sector has transformed its role to play from direct service provider to regulator and, more recently facilitator bridging the private and civil society organisations. In this context, the business community is undergoing a golden opportunity not only to enter the market of conventional public services but also to create a new market of public goods.

To this end, I trust that non-market strategy is one of the responses to such a global business trend, and therefore your research will strongly support the executives who seek to create a win-win partnership with the public sector in pursuit of privatisation and outsourcing. I look forward to seeing future advancement both in theory and practice in the area.

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