Stretch the Competitive Playing Field Beyond the Market

We live in challenging times. This is particularly so in the world of business. Financing is scarce. Competition is fierce. Uncertainty is high. Compounding all of this is the growing impact of social and political forces on the bottom line. Changing government regulation can let your business thrive or severely challenge its economic viability. Current threats by JPMorgan Chase or Goldman Sachs to relocate European investment banking operations from London to the European mainland in response to the UK government’s plan to strictly tax very large bonuses are just the most recent example occupying headlines.

Similarly, activists and nongovernmental organizations (NGOs) can have an extraordinary impact on your firm’s reputation and its ability to carry out strategic projects. Tata Motors suffered both financially and in reputational terms when its Singur project was derailed by a coalition of opposition parties, community activists, and local farmers. It is not surprising then that CEOs across a broad range of industries are dedicating considerable time to what many view as “non-business” activities – dealing with legislators and regulators, engaging social groups, and swaying both the traditional media and an increasingly powerful group of bloggers. This trend is, of course, not entirely new.

As early as the 1990s, then-CEO of Pfizer Edmund T. Pratt, Jr. remarked that “the biggest single change in management during my career has been the increase in time managers spend dealing with government.” But globalization has accelerated and complicated this dynamic in three important ways: first, it has given activists and social groups the tools to have global reach; second, it has exposed a growing number of even medium-sized companies to multiple and often conflicting political environments as their operations have begun to span the globe; and third, it has created the need to engage social and political forces on multiple levels – local, national, and global, often simultaneously.

David Bach, Co-Director of the Center for Nonmarket Strategy

How should firms and their leaders deal with the growing importance of social and political forces? One approach is to do like the ostrich – focus on your core business, let others squabble over political issues and social problems, and simply put your head in the proverbial sand. The problem with this approach is that firms and their managers become passive bystanders as other stakeholders shape the terms of market competition. And in politics, as a popular saying goes, “if you are not at the table, you are on the menu!” Leading firms are therefore taking a different approach. They try to proactively engage social and political forces in an effort to mold the formal and informal rules and regulations that directly affect who wins and who loses in the market. In other words, they are deliberately stretching the competitive playing field beyond the market. This enables them to eliminate threats to their reputation and/or bottom line before they fully materialize or to seize new opportunities for building or strengthening competitive advantage that others would miss.

Consider the case of Toyota. In order to give its hybrid car flagship, the Prius, a further competitive edge in the market, the company has worked with regulators and environmental groups around the world in multiple local initiatives to improve the environment for hybrids. In California, for example, the company secured regulation that permits Prius drivers to use car pool lanes during rush hour even under single occupancy. Prius drivers can also park for free at public meters in Los Angeles. And in Spain, to take another example, Toyota convinced the government to subsidize not just public procurement of hybrid vehicles but also their private acquisition. In fact, the subsidy covers about half of the price difference between the Prius and a comparable conventional car. How did Toyota achieve this? By working patiently with critical non-business stakeholders, raising awareness about the benefits of hybrids, and putting concrete proposals on the table that can easily be seen by all involved as win-wins.

Or consider an example from India that provides a powerful counterpoint to the experience of Tata Motors. When it proposed to build a massive steel plant in Orissa, Korean multinational POSCO encountered similar local opposition from villagers and farmers as Tata in Singur. But rather than only relying on official government support, the company has directly engaged its critics and a broad range of other stakeholders, has embarked on a sweeping communication campaign to tout the project’s benefits, and has invested considerably in health care, education, sanitation, and other essential services for the local community. It is too early to fully assess the effectiveness of these efforts because the project is still tied up. However, it seems that this deliberate community engagement has already changed sentiments on the ground and that POSCO is in a much better position than Tata was in Singur.

What do Toyota, POSCO, and other leading companies including GE, Pfizer, British Petroleum, and Spain’s Telefonica have in common? They all recognize that superior performance in the social and political environment is as important for sustained business success as superior performance in the market environment. For this reason, these firms are crafting “nonmarket strategies” – strategies aimed at the part of the business environment that lies beyond the market – that are carefully design to complement existing market strategies in a way that protects or strengthens competitive advantage. While most firms actively try to shape the market environment in which they compete, these firms have gone one step further by deliberately shaping their nonmarket environments as well. As competition within markets gets tougher and the social and political stakes outside of markets grow, the ability to systematically stretch the competitive playing field beyond the market may well become a critical determinant of business success.

David Bach, Professor of Strategic Management and Co-Director of the Center for Nonmarket Strategy, IE Business School

[This research paper has been reproduced with permission of the authors, professors of IE Business School, Spain http://www.ie.edu/]