The Nonmarket Strategy System
For managers, the challenge of understanding nonmarket forces — government, interest groups, activists, and the public — is frequently more difficult than understanding the market environment. The author develops a strategy system of principles, frameworks, and action plans to deal with the issues, in-stitutions, interests, and information that characterize the nonmarket environment. He uses the concept of a rent chain, analogous to the value chain, to show how com-panies can participate in policy-setting processes and generate leverage to their own benefit.
Why do some well-formulated competitive strategies run into roadblocks or end up being stalled by government inaction? Why do some strategies produce unintended consequences inconsistent with a company’s core values? Why are strategies sometimes criticized by the public and threatened by government action? The causes of these problems are frequently found not in a company’s market environment but instead in forces outside its markets. Indeed, for many companies, market success depends not just on their products and services, the efficiency of their operations, their internal organization, and the organization of their supply chains, distribution channels, and alliance networks. Success also depends on how effectively they deal with governments, interest groups, activists, and the public. The forces these parties generate can foreclose entry into new markets, limit price increases, and raise the costs of competing. They can also unlock markets, reduce regulation, handicap rivals, and generate competitive advantage.
These forces are manifested outside of markets but often work in conjunction with them; I refer to them as nonmarket forces. The nonmarket environment consists of the social, political, and legal arrangements that structure interactions among companies and their public. For many companies, nonmarket forces have a major impact on performance; hence these forces warrant the same high level of attention in business strategy as do market forces. A business strategy must help a company navigate in both its market and nonmarket environments and is composed of a market or competitive component and a nonmarket or public component. Managers may understand the market environment relatively well but often see the nonmarket environment as posing different, often more difficult, challenges.
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To address nonmarket forces effectively, managers must formulate specific strategies to deal with them. Nonmarket forces and the institutional arenas in which they are manifested are sufficiently different from market forces that they require a nonmarket strategy system for effectively managing interactions with the nonmarket environment. That system, a component of a larger strategy system, consists of a process to structure analysis and strategy formulation, theories and conceptual frameworks to guide that formulation, and issue-specific strategies and action plans. The product of the system is a nonmarket strategy tailored to the company’s market and nonmarket environments and integrated with its competitive strategy, core values, and distinctive competencies.
1. Baron addresses the integration of market and nonmarket strategies. See: D.P. Baron, “Integrated Strategy: Market and Nonmarket Components,” California Management Review, Winter 1995, pp. 47–65.
2. The free-rider problem is present when a potential beneficiary from a policy alternative prefers not to work on its behalf because it knows it can free-ride on the efforts of others. See: M.J. Olson, The Logic of Collective Action (Cambridge, Massachusetts: Harvard University Press, 1965).
3. The Noerr-Pennington doctrine protects collective action of a political nature from the antitrust laws.
4. Other important factors in strategic management include organizational design and managerial processes.
5. M.E. Porter, Competitive Strategy (New York: Free Press, 1980); and M.E. Porter, Competitive Advantage (New York: Free Press, 1985). See also: S.M. Oster, Modern Competitive Analysis, 2nd ed. (Oxford: Oxford University Press, 1994).
6. Institutional officeholders are best viewed as a part of their institution rather than as interests, even though they may have personal policy preferences.
7. D. Mayhew, Congress: The Electoral Connection (New Haven, Connecticut: Yale University Press, 1974); Olson (1965); and M.P. Fiorina, Congress: Keystone of the Washington Establishment, 2nd ed. (New Haven, Connecticut: Yale University Press, 1989).
8. Baron offers an exposition of this framework and a detailed analysis of the issue of the elimination of tax credits on foreign leases used by Boeing in the sales of commercial aircraft. See: D.P. Baron, Business and Its Environment, 2nd ed. (Englewood Cliffs, New Jersey: Prentice-Hall, forthcoming).
9. See Baron (forthcoming), chapters 5–8.
10. R.W. Galvin. “International Business and the Changing Nature of Global Competition” (Oxford, Ohio: Miami University, speech, October 1992). For analyses of aspects of this strategy, see: D.B. Yoffie, “Motorola and Japan” and “Motorola and Japan: Supplements I, II, III” (Boston: Harvard Business School, 0-388-057, 0-388-058, 9-388-059, 1988); and Baron (forthcoming): 410–411, 492–493, 505–507.
11. The pyramid indicates that there are relatively few conceptual frameworks and relatively more, respectively, nonmarket strategies, policies, and issue-specific action plans.
12. For the treatment of specific conceptual principles, see: Baron (forthcoming); A. Marcus, A.M. Kaufman, and D.R. Beam, eds., Business Strategy and Public Policy (Westport, Connecticut: Quorum Books, 1987); F. Shipper and M.M. Jennings, Business Strategy for the Political Arena (Westport, Connecticut: Quorum Books, 1984); D.B. Yoffie, “Corporate Strategies for Political Action,” in Marcus et al. (1987): 43–60; and D.B. Yoffie, “How an Industry Builds Political Advantage,” Harvard Business Review, May–June 1988, pp. 82–89.
13. P.R. Vagelos, “Are Prescription Drug Prices High?,” Science, 24 May 1991, p. 1083.
14. Ibid. This policy drew praise from the Senate Special Committee on Aging, “The Drug Manufacturing Industry: A Prescription for Profits” (Washington, D.C., U.S. Senate, Staff Report, 1991), p. 15. In 1993, when the Clinton administration stepped up criticism of pharmaceutical prices and profits, Merck offered a new plan to limit price increases.
15. New York Times, 22 May 1990.
16. The Congressional Budget Office estimated that the extension of discounts to the Medicaid programs would reduce expenditures by $3.3 billion over five years.
17. Porter (1980).
18. A majority is always sufficient to defeat a bill, but enactment can require more than a majority, as in the case of overcoming a filibuster in the U.S. Senate or achieving a qualified majority in the Council of Ministers in the European Union.
19. Yoffie (1988).
20. P. Ghemawat, Commitment: The Dynamic of Strategy (New York: Free Press, 1991.