W5: Strategy beyond markets
Non-Market Environment Introduction
McKinsey Global Survey Results (2012)
o Government/regulators are the stakeholders with the second largest effect on a
company’s economic value, only behind customers
o The government’s involvement has increased in 61% of industries
o Regulator’s involvement has increased in 64% of industries
Nonmarket = the social, legal and political arrangements that structure interactions
o Private politics, public sentiment and moral concerns affect opportunities
o Reputation is an important NM asset
Because companies create and distribute value, a plethora of actors seek to influence
them- this is the firm’s non-market environment
Baron (2012): The nonmarket environments of a firm:
o Issues- labour relations, proposed law, product liability, national security
o Interests- policymakers, companies, NGOs
o Institutions– legal, regulatory, judiciary, non-governmental, news media
o Information – media reporting, prejudices, lobbying, think tanks
Non-Market Strategies
Baron (2012): Porter’s 5 forces model ignores the non-market environment which
affects strategy
The nonmarket environment of a country influences a firms’ capabilities therefore a
non-market strategy is necessary
Bach & Allen (2010): Nonmarket strategy recognizes that businesses are social and
political beings, not just economic agents.
Market strategies are aimed at customers whereas nonmarket strategies are aimed at
shaping general public perceptions/shaping the rules of the game
Bach & Allen (2010): Smart executives engage with their social and political
environment, helping shape the rules of the game and reducing the risk of being
hemmed in by external actors.
o Gaining support from pressure groups/activists requires little financial
investment
o Bach & Blake (2015): How a social or political issue is framed shapes the
“nonmarket” context that surrounds it. Framing is critical to the evolution of
nonmarket issues – controls the public discourse
Firms can proactively frame issues in their favour to shape
perceptions/actions to their advantage
o Example of Framing: Nestlé: Tried to enforce a legal claim against the Ethiopian
government after they nationalised a firm whose parent Nestlé had acquired in
1986 and in 2002 they renewed a $6mn compensation claim
o However, Oxfam and the Guardian framed the issues negatively against Nestlé
and blasted them for rejecting the $1.5mn settlement offer, stressing Nestlé’s
$bns of annual profit and Ethiopia’s status as the world’s poorest country who
were struggling with drought and famine
,Developing a Non-market strategy
Few companies commit LT to developing an effective nonmarket strategy.
Few understand how to integrate market and nonmarket strategies to sustain
competitive advantage.
The 3AI framework:
o Issue: the unit of analysis in the nonmarket environment.
Actors, agents who care about the issue in question.
o Interests: what the actors really want.
Interests arise from distributive consequences (benefits and costs from an
alternative) and moral concerns (considerations of well-being, rights, and
social justice).
Interest give rise to a demand for nonmarket action but the incentive to
act depends on per capita benefits. If the aggregate benefits are high but
the per capita benefits are low, incentives for nonmarket action can be
weak.
o Information: the currency of the non-market, however, more context specific
and is specialised to arenas.
Assets, what actors need to prevail in a given arena e.g. reputation.
The costs of nonmarket action:
o Cost of organizing interests and joining together for collective action.
If the number of affected interests is small, the costs of organization are
likely to be small. The larger the number of affected interests, the more
likely they are to encounter the free-rider problem.
o Direct cost of implementing a nonmarket strategy.
When non-market strategies are more important
Nonmarket strategies are more important in these industries where the Government
controls opportunities e.g. telecommunications provided through a state-owned
monopoly. Government decides whether or not they want to encourage new entrants
NM strategy more important for firms that operate in multiple countries: Cannot
transfer/cross-subsidise investments cross various nonmarket issues
o Bach & Allen (2010): “recognition for having worked with a human rights group
in Nigeria will not help you get approval for a merger in Brussels”
Industry Type: Activist/pressure groups oppose some industries e.g. agricultural
biotechnology/Calgene: There was no approval process for GE foods so they accelerated
the development of the regulatory approval process, lobbied congress, cultivated the
media and participated in international forums alongside market strategies
Firms do not want to be involved in high-profile/visible controversies
Informational strategies are more effective in less politically-responsive environment
Representation strategies are more effective in politically-responsive environments
Non-Market Strategy effectiveness
Effectiveness of a given amount of nonmarket action depends on the number of people
affected, their resources, and their coverage of legislative districts.
, o Effectiveness increases with number of interests affected & with coverage of
legislative districts, BUT dispersed groups have low per capita benefits and high
costs of organization, so small nonmarket actions.
o Outcome depends on additional factors, including the characteristics of the
institutions in whose arenas the competition takes place.
Example: Boeing: Taxpayers have low per capita benefits relative to their costs of taking
nonmarket action and thus had to be represented by a political entrepreneur. Boeing
and other exporters had a high demand for nonmarket action and low costs of
organizing, but effectiveness was limited by a lack of coverage of congressional districts.
As a defence contractor, Boeing preferred a low-profile strategy to avoid compromising
its effectiveness on other issues. Boeing’s best political strategy was to lobby using the
message that sales and jobs would be lost.
Non Market Strategy as a Competitive Advantage
Nonmarket assets can create competitive advantage in relationships/reputation
Nonmarket strategy can offset competitive disadvantages in market competition
o Increase in market competition may make firms more reliant on nonmarket
strategies to achieve competitive advantage
Integrated Strategy
Baron (2013) complementing market with non-market strategies
Viewing nonmarket issues separately to market issues overlooks the interrelations and
strategic complementarities which address both issues
o Market rivals can be nonmarket allies
o Managers are in best position to understand how firm’s market activities give
rise to nonmarket issues and assess significance of issues on performance.
Pizza Hut: In 1986, US proposed to eliminate tax credits offered for hiring disadvantaged
youths Pizza Hut’s staff mainly consisted of such youths so this would have
disadvantaged them, and so they used their political connections to successful lobby
against the legislation This gave them a good image in the public eye AND helped them
to maintain their cost-leadership strategy- synergies between their market and
nonmarket strategies
Political Connections
Non-Market Environment Introduction
McKinsey Global Survey Results (2012)
o Government/regulators are the stakeholders with the second largest effect on a
company’s economic value, only behind customers
o The government’s involvement has increased in 61% of industries
o Regulator’s involvement has increased in 64% of industries
Nonmarket = the social, legal and political arrangements that structure interactions
o Private politics, public sentiment and moral concerns affect opportunities
o Reputation is an important NM asset
Because companies create and distribute value, a plethora of actors seek to influence
them- this is the firm’s non-market environment
Baron (2012): The nonmarket environments of a firm:
o Issues- labour relations, proposed law, product liability, national security
o Interests- policymakers, companies, NGOs
o Institutions– legal, regulatory, judiciary, non-governmental, news media
o Information – media reporting, prejudices, lobbying, think tanks
Non-Market Strategies
Baron (2012): Porter’s 5 forces model ignores the non-market environment which
affects strategy
The nonmarket environment of a country influences a firms’ capabilities therefore a
non-market strategy is necessary
Bach & Allen (2010): Nonmarket strategy recognizes that businesses are social and
political beings, not just economic agents.
Market strategies are aimed at customers whereas nonmarket strategies are aimed at
shaping general public perceptions/shaping the rules of the game
Bach & Allen (2010): Smart executives engage with their social and political
environment, helping shape the rules of the game and reducing the risk of being
hemmed in by external actors.
o Gaining support from pressure groups/activists requires little financial
investment
o Bach & Blake (2015): How a social or political issue is framed shapes the
“nonmarket” context that surrounds it. Framing is critical to the evolution of
nonmarket issues – controls the public discourse
Firms can proactively frame issues in their favour to shape
perceptions/actions to their advantage
o Example of Framing: Nestlé: Tried to enforce a legal claim against the Ethiopian
government after they nationalised a firm whose parent Nestlé had acquired in
1986 and in 2002 they renewed a $6mn compensation claim
o However, Oxfam and the Guardian framed the issues negatively against Nestlé
and blasted them for rejecting the $1.5mn settlement offer, stressing Nestlé’s
$bns of annual profit and Ethiopia’s status as the world’s poorest country who
were struggling with drought and famine
,Developing a Non-market strategy
Few companies commit LT to developing an effective nonmarket strategy.
Few understand how to integrate market and nonmarket strategies to sustain
competitive advantage.
The 3AI framework:
o Issue: the unit of analysis in the nonmarket environment.
Actors, agents who care about the issue in question.
o Interests: what the actors really want.
Interests arise from distributive consequences (benefits and costs from an
alternative) and moral concerns (considerations of well-being, rights, and
social justice).
Interest give rise to a demand for nonmarket action but the incentive to
act depends on per capita benefits. If the aggregate benefits are high but
the per capita benefits are low, incentives for nonmarket action can be
weak.
o Information: the currency of the non-market, however, more context specific
and is specialised to arenas.
Assets, what actors need to prevail in a given arena e.g. reputation.
The costs of nonmarket action:
o Cost of organizing interests and joining together for collective action.
If the number of affected interests is small, the costs of organization are
likely to be small. The larger the number of affected interests, the more
likely they are to encounter the free-rider problem.
o Direct cost of implementing a nonmarket strategy.
When non-market strategies are more important
Nonmarket strategies are more important in these industries where the Government
controls opportunities e.g. telecommunications provided through a state-owned
monopoly. Government decides whether or not they want to encourage new entrants
NM strategy more important for firms that operate in multiple countries: Cannot
transfer/cross-subsidise investments cross various nonmarket issues
o Bach & Allen (2010): “recognition for having worked with a human rights group
in Nigeria will not help you get approval for a merger in Brussels”
Industry Type: Activist/pressure groups oppose some industries e.g. agricultural
biotechnology/Calgene: There was no approval process for GE foods so they accelerated
the development of the regulatory approval process, lobbied congress, cultivated the
media and participated in international forums alongside market strategies
Firms do not want to be involved in high-profile/visible controversies
Informational strategies are more effective in less politically-responsive environment
Representation strategies are more effective in politically-responsive environments
Non-Market Strategy effectiveness
Effectiveness of a given amount of nonmarket action depends on the number of people
affected, their resources, and their coverage of legislative districts.
, o Effectiveness increases with number of interests affected & with coverage of
legislative districts, BUT dispersed groups have low per capita benefits and high
costs of organization, so small nonmarket actions.
o Outcome depends on additional factors, including the characteristics of the
institutions in whose arenas the competition takes place.
Example: Boeing: Taxpayers have low per capita benefits relative to their costs of taking
nonmarket action and thus had to be represented by a political entrepreneur. Boeing
and other exporters had a high demand for nonmarket action and low costs of
organizing, but effectiveness was limited by a lack of coverage of congressional districts.
As a defence contractor, Boeing preferred a low-profile strategy to avoid compromising
its effectiveness on other issues. Boeing’s best political strategy was to lobby using the
message that sales and jobs would be lost.
Non Market Strategy as a Competitive Advantage
Nonmarket assets can create competitive advantage in relationships/reputation
Nonmarket strategy can offset competitive disadvantages in market competition
o Increase in market competition may make firms more reliant on nonmarket
strategies to achieve competitive advantage
Integrated Strategy
Baron (2013) complementing market with non-market strategies
Viewing nonmarket issues separately to market issues overlooks the interrelations and
strategic complementarities which address both issues
o Market rivals can be nonmarket allies
o Managers are in best position to understand how firm’s market activities give
rise to nonmarket issues and assess significance of issues on performance.
Pizza Hut: In 1986, US proposed to eliminate tax credits offered for hiring disadvantaged
youths Pizza Hut’s staff mainly consisted of such youths so this would have
disadvantaged them, and so they used their political connections to successful lobby
against the legislation This gave them a good image in the public eye AND helped them
to maintain their cost-leadership strategy- synergies between their market and
nonmarket strategies
Political Connections
