What Every CEO Needs to Know About Nonmarket Strategy
In a global economy, sustained competitive advantage arises from tackling social, political and environmental issues as part of a corporate strategy — not just pursuing business as usual.
Image courtesy of Novartis.
Novartis AG, the world’s fourth largest pharmaceutical company, has been engaged since 2002 in a high-profile public battle with the Indian government over Glivec, a popular cancer drug. (The drug is known as Gleevac in the United States.) India has denied Novartis a patent for Glivec, alleging it does not offer “improved efficacy” over its predecessor.1 Novartis, which has obtained patents for Glivec in more than 40 countries, including China, insists that India’s stringent requirements for novelty violate international intellectual property treaties. The company is waging its campaign in courtrooms and ministries, and with the public — its Web site features videos of Indian patients extolling the drug’s benefits and Indian experts detailing the dire consequences for patients deprived of Glivec.
Novartis, however, was not content simply to fight for its intellectual property rights. In a subtle and related thrust, the company offers Glivec to needy Indian patients at dramatically reduced prices. The program is featured among the company’s “corporate citizenship” initiatives, which also provide leprosy and tuberculosis drugs to millions of patients free of charge and malaria drugs to tens of millions more at cost. Novartis proudly trumpets that its billion-dollar “access-to-medicines” program has reached more than 80 million patients worldwide, many of them in India.2 In balancing assertive property rights and pharmaceutical philanthropy, Novartis is shaping the environment in which it competes. In short, it is pursuing a nonmarket strategy.3
Nonmarket strategy recognizes that businesses are social and political beings, not just economic agents. Because companies create and distribute value, a plethora of actors seek to influence them — formally, through laws and regulation, and informally, through social pressure, activism and efforts to shape the public perception of business. Companies can’t escape this. Smart executives, therefore, 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. Yet, few companies are prepared to do the hard work and commit long term to developing an effective nonmarket strategy. Fewer still understand how to integrate market and nonmarket strategies to sustain competitive advantage.
Novartis has figured that out.
References
1. N. Mehta, “Novartis to Challenge IPAB’s Patent Decision on Glivec,” The Economic Times of India, July 20, 2009.
2. See Novartis’ corporate citizenship Web site.
3. See D. Baron, “Integrated Strategy: Market and Nonmarket Components,” California Management Review 37, no. 2 (winter 1995): 47-65; D. Baron, “The Nonmarket Strategy System,” Sloan Management Review 37, no. 1 (fall 1995): 73-85; and D. Baron, “Business and Its Environment,” 5th ed. (Upper Saddle River, New Jersey: Pearson, 2006). Our goal in this article is to provide senior executives with a managerial framework for effective nonmarket management.
4. A recent survey by Ernst & Young and Oxford Analytica among analysts across a wide range of industries confirmed that “regulation & compliance” is deemed the number one strategic risk facing companies. See Ernst & Young and Oxford Analytica, “Strategic Business Risk 2008 — the Top 10 Risks for Business.” Similarly, a survey conducted by global insurance giant Aon found that executives consider “damage to the firm’s reputation” the most significant risk they face. See Aon Corp., “Global Risk Management Survey 2007.”
5. In fact, the program was so successful that it was capped at 85,000 permits. Since each permit is attached to a specific vehicle, not its owner, it is possible to determine the value-added of Toyota’s nonmarket efforts quite accurately — a Prius with the permit sells secondhand for as much as $4,000 more than a newer model without the permit. See J.M. Scott, “How Much Would You Pay For This? HOV Sticker May Add up to $4,000 to Hybrid Cost,” Los Angeles Daily News, May 19, 2007, sec. N, p. 1.
6. K.J. O’Brien, “Cap on ‘Roaming Charges’ EU Proposal Would Limit Mobile Calling Costs,” International Herald Tribune, March 28, 2006.
7. Dick Olver as cited in F. Reinhardt, “Global Climate Change and BP Amoco” Harvard Business School case no. 9-700-106 (Boston: Harvard Business School Publishing, 2007).
8. S. Bonini, L. Mendonca and M. Rosenthal, “From Risk to Opportunity: How Global Executives View Sociopolitical Issues,” McKinsey Quarterly, October 2008.
9. After these setbacks, there is now a vibrant debate within BP about whether it makes sense to manage a conventional oil and gas business and a renewable business under the same corporate roof. Even though BP has cut back on new renewable investments, it has not changed its overall positioning, especially when it comes to climate change. See E. Crooks, “Back to Petroleum,” Financial Times, July 8, 2009.
10. A. Rodríguez de Paz, “Hasta 26.000 Restaurantes Ofrecerán Menús Saludables Con Más Verdura, Legumbres, Pescado y Frutas,” La Vanguardia, March 7, 2008.
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