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.

Novartis’ nonmarket strategy includes delivering antimalaria treatments at no cost to developing countries.

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

The Leading Question

Why should companies pursue a nonmarket strategy?

Findings
  • Companies face risk in nonmarkets, from government regulations, social campaigns and political movements.
  • A nonmarket strategy allows a company to shape the environment in which it operates, creating opportunities.
  • Managing key issues and actors is crucial to success in the nonmarket.

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.

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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.

4 Comments On: What Every CEO Needs to Know About Nonmarket Strategy

  • Bill Wu | May 23, 2010

    This was a great article and gave me insight into the field of non-market strategies.

    The examples of corporations taking the right approaches and those that make mistakes really helped to clarify the ideas.

  • Mabuse Hlalele | June 11, 2010

    I appreciated this insightful analysis especially in the light of complex social and political environmemnts modern businesses find themselves.
    The ia3 tool will be useful in many boardrooms and at executive level.

    Mabuse Hlalele
    Pretoria, South Africa

  • Ted | June 11, 2010

    I found this article to be vrey insightful. The inclusion of (ia)3 model was a great benefit.

    As I read this, and especially with the references to BP, I could help but speculate how today’s current problems in the gulf are an example of NOT recognizing and managing the nonmarket aspects- even for the current US administration.

    Good job.

  • Edward Sunkur | June 11, 2010

    I call it a great revelation in modern business, it will surely be a reference piece in my business endeavor. Thank you.

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