Nonmarket Strategy Frameworks

Frameworks in Nonmarket Strategy

• Session 1 introduces the core principles of nonmarket strategy, emphasizing regulatory environments, market entry, and integrated strategies.

Market vs. Nonmarket Strategy

• Market strategy focuses on competition, pricing, and consumer behavior.
• Nonmarket strategy addresses regulations, government intervention, and social elements.
• Key components of the market environment include employees, suppliers, customers, capital owners, and competitors.
• Important aspects of the nonmarket environment: government (executive, legislative, regulatory), media, and public opinion.
• Application involves understanding how government policies create opportunities and designing business strategies considering legal, political, and regulatory factors.
• Balancing lobbying, public relations, and compliance with standard market tactics is essential.
• For example, Uber invested $205M in lobbying for Prop 22 to shape legislation aligning with its business interests, instead of relying on market activity.
• Strengths include proactive risk management and leveraging policy changes, while limitations are the requirement for significant financial and political capital, with uncertain outcomes.

Regulatory Gray Zones & Policy Risk

• Regulatory gray zones emerge when laws are unclear or evolving, creating uncertainty for businesses.
• Key components include legal classification and policy uncertainty.
• Legal classification refers to how firms and activities fit into existing laws.
• Policy uncertainty refers to pending legislation or court rulings impacting strategy.
• Firm response options: lobbying, legal challenges, or self-regulation.
• Companies must anticipate and react to evolving regulations, using strategies like aggressive lobbying or market adaptation.
• Using Uber in California as the example of aggressive lobbying

Integrated Strategy Framework

• This framework helps firms synchronize market and nonmarket strategies to maximize business outcomes.
• It leverages nonmarket strategy through advocacy, coalition building, and regulatory engagement.
• Integrates complementing market strategies in pricing, operations, and competitive positioning.
• The framework ensures alignment: market success and regulatory compliance should reinforce each other.
• Firms invest in political influence and market-based tactics simultaneously.
• Uber and Moove tailored strategies fit different regulatory environments.
• Uber adjusted its strategy to Nigeria's economic and regulatory conditions.
• Moove created a financing model aligning with local credit constraints and informal labor markets.
• Strengths include the balance of market competition with policy influence for long-term success.
• Limitations include deep understanding of local regulations and economic structures.

Political Risk

• Political risk involves policy changes, local political dynamics, and interest group mobilization impacting firms.

Key Themes & Frameworks from Session 2

• The session highlights the hold-up problem (when a firm makes relationship-specific investments that expose them to expropriation or renegotiation by local actors).
• Highlight the importance of understanding local political power balances, and navigating nonmarket risks when making major investments

Political Risk & the Hold-Up Problem

• Political Risk: The risk that government policy changes will negatively impact a firm's bottom line.
• Hold-Up Problem: When a firm makes relationship-specific investments (e.g., factories, infrastructure) that expose them to expropriation or renegotiation by local actors.

Understanding Political Incentives (3 Drivers of Politician Behavior)

• Reelection: Politicians prioritize policies to appeal to their voter base to maintain power.
• Career Advancement: Politicians may build coalitions and create new constituencies to rise within their party.
• Ideology/Morality: Policies may be driven by personal or party values rather than economic logic.

The 4I's Framework for Analyzing Political Risk

• Issues: What policy or controversy is at play?
• Interests: Who benefits or loses from the issue (firms, politicians, local groups)?
• Institutions: Which government bodies will decide the outcome?
• Information: What do key stakeholders know or believe about the issue?

Case Breakdown: Tata's Failed Investment in Singur, West Bengal

• Initial advantages: proximity to Calcutta, investor-friendly reputation, major government incentives.
• Overlooked key risks: land acquisition controversy, hostile political forces, and hold-up risk.
• Consequences: 2,500+ farmers protested, supported by political figures.
• Tata faced extreme pressure, leading to its exit and relocation to Gujarat.
• Political fallout: Trinamool Congress leveraged the Singur protests to win the 2011 state elections.
• The Singur land deal was overturned, creating uncertainty for future investors.
• Singur stagnated as investors withdrew and was later declared a “wasteland”.

Key Takeaways from the Session

• Political risk is real and can be costly.
• High-profile projects often become political battlegrounds.
• Firms should factor in local political competition.
• Understanding who has the most to gain or lose from an investment can signal future instability.
• Misaligned political incentives can derail projects.

Interest Group Competition & the Pluralist Model

• Policy decisions are shaped by competition among interest groups rather than a purely public-interest perspective.
• Public Interest Theory assumes benevolent policymakers act for the greater good.
• Pluralism recognizes interest groups compete to shape policy for their own benefit.
• Policies often favor the most politically organized and well-funded groups, not necessarily the best public policy.

The Distributive Politics Spreadsheet (DPS)

• This framework helps analyze mobilize in a policy debate and who is likely to win..
• It considers who benefits from policy change, the ability to supply collective action, coalition formation, and prediction of influence.
• Larger, better-funded, and well-organized groups tend to win policy battles.

Case Breakdown: CNG Mandates in Delhi

• Policy debate was triggered by Delhi's air pollution crisis, prompting a Supreme Court ruling mandating the switch to CNG by 2001.
• Groups for CNG: Mehta (NGO) and World Bank & Environmentalists for public health backed the CNG transition.
• Groups against CNG: Transport Unions for high conversion costs and Gasoline suppliers & Oil Industry as a threat to profits.
• Commuters in position were angry over disrupted transit and weak coordination.
• Organized labor and industry giants are usually more effective than diffuse public interest groups.

The Supreme Court's Role & Policy Implementation Failure

• The Supreme Court mandated full CNG adoption by 2001.
• The Delhi government did not enforce the mandate, leading to gas and kit shortages, slow compliance, and lack of infrastructure.
• The Supreme Court banned public buses from the road, causing mass protests.
• The Supreme Court adjusted its strategy by using neutral partners and splitting the opposition.

Outcome

• By December 2002, Delhi's entire bus fleet had converted to CNG.
• Air quality improved.
• Policy implementation is smoother when the costs of compliance are lowered and benefits are distributed.
• Policy is not just about what's best for society but about who mobilizes effectively.
• Organized groups with strong incentives dominate policy battles.

Political Strategy

• Requires anticipate opposition, build coalitions, and influence institutional settings.
• Courts can drive change, but without stakeholder alignment, implementation is chaotic.

Legislative Strategy: Health Care Reform

• Legislative strategy focuses on how firms and interest groups influence policy outcomes by targeting key decision-makers.
• Pivotal Politics Theory.
• Legislative strategies like agenda-setting, vote recruitment, and persuasion.
• Applies these to the passage and repeal efforts of the Affordable Care Act (ACA).

Pivotal Politics Theory

• Not all politicians are equally important: median voter, filibuster pivot, and veto pivot.
• Predicting policy change requires identifying pivotal legislators whose votes matter the most.

Legislative GridlockWindows of Opportunity

• Most policies remain stable unless elections shift the political balance significantly.

Legislative Strategy

• Strategy:
• Agenda-Setting: Controlling which policies are debated and voted on.
• Vote Recruitment: Persuading key legislators by offering political or economic incentives; andChanging Minds, shaping how politicians and voters perceive a policy.
• The ACA's passage used agenda-setting and vote recruitment, overcoming opposition during filibuster battles and pivotal vote targeting.
• Despite Republican control, ACA repeal efforts failed due to filibuster pivots and a shift in public opinion.

Key Takeaway

• Repealing a law is often harder than passing one because of new vested interests and political realignments.
• Legislative strategy is about targeting pivotal legislators.
• Interest groups should focus lobbying efforts on pivotal legislators rather than broad ideological fights.
• Shift in gridlock, significant reform is possible.
• Groups that control what gets voted on, who votes, and how it is perceived shape policy outcomes.

Comparative Political Institutions for Carried Interest Taxation

• Differences in political institutions shape policy outcomes.
• U.S. vs. U.K.:
• Government system: Presidential (U.S.) vs. Parliamentary (U.K.).
• Legislative process: Many veto points (U.S.) vs. Few veto points (U.K.).
• Power Concentration: Decentralized (U.S.) vs. Centralized (U.K.).
• Policy Change Likelihood: Low (U.S.) vs. High (U.K.).
• Influence Strategy: Target pivotal legislators (U.S.) vs. Influence party leaders & ministers early (U.K.).

Carried Interest Taxation in the U.S

• Loophole allowing investment fund managers to classify performance fees as capital gains, taxed at a lower rate.
• U.S.
• legislative strategies failed, with Rep. Charles Rangel's bill failing in the Senate.
• In lobbying: The"Con Camp" including PE, VC, Real Estate, Oil & Gas partnerships, some Family Farmers led to annual spending by PE firms.

Successful Approach To Carried Interest Taxation in the U.K

• 2008-2010 UK Budget Law:
• Lowered capital gains tax from 40% to 18%.
• Eliminated "Taper Relief, that allowed fund managers to pay just 10% on gains
• the More centralized government structure, Stronger Party Discipline: and Interest Groups Were Weaker allowed for successful reform.
• In parliamentary systems, policy changes are easier because the executive dominates the process.
• In the U.S., groups leveraged institutional complexity to stall reform, while in the U.K., reforms were easier due to parliamentary dominance.

Political Realities Impact

• In the U.S., private equity firms stalled tax hikes by fragmentation, In the U.K., business groups had less influence due to centralized party control.

Southwest Airlines

• Case study examined how regulatory barriers, political influence, and competitive strategy intersect.

Integrated Strategy Framework for Southwest Airlines

• To balance market activity (competition, pricing, expansion) with nonmarket activity.
• integrated activity aligning both to ensure regulatory changes reinforce competitive advantages rather than undermine them.
• Strategic political engagement is crucial.

The Wright Amendment

• The Wright Amendment limited long-haul flights from Love Field to protect DFW Airport's growth.
• Delta's exit from DFW in 2004 changed the market structure, prompting Southwest to reevaluate.
• Southwest needed a nonmarket strategy to remove regulatory barriers, contrasting with adapting to them.

Political Strategy - The Fight to Repeal Wright Legislation

• It was necessary to determine the expected benefit of lobbying for repeal.
• Texas legislators were divided as were American Airlines, and it was therefore necessary to win public opinion for political battles.

Session Outcomes

• A compromise was reached (The Texas Compromise ), and the Wright Amendment was repealed with conditions by 2014.
• Achieving the goals were long hau expansion and preserving the dominant positions to Southwest Airlines.
• Regulatory battles often end in compromises.
• Regulatory Barriers can be assets or liabilities: firms must reevaluate regulations as market conditions change.

Winning requires both public and legislative support.

Considerations

• In political risk, firms should not focus on short term success but rather long term opportunity
• Local partnerships: Sharing ownership is critical.
• Reinvest profits: A reinvestment strategy may be critical to keep profits in the local economy to reduce the perception that profits are being extracted.
• Political engagement: A lobbying strategy will improve the political alliances for government action to provide protection.

Post-Expropriation Strategy

• Pursuing diplomatic pressure from US officials.
• Strategic diplomacy from the US has historically helped with negotiations.

Political Risk Takeaways

• Governments expatriate when it is good to the political benefits.

Economic Case of Trade

• Trade allows countries to specialize in goods where they have a competitive advantage, leading to high production ( Brazil Example).
• Governments distort trade through subsidies (domestic industries) and tariffs by taxing imports. Trade has winners and losers:

The session

• Explored economic gains from trade are distorted by tariffs and subsidies.
• Showed protectionist policies are political and U.S. tends to benefit from trade.
• Trade is used to exploit people
• There’s a correlation between political power, trade, and policy

Strategies in Nondemocratic Environments

• In authoritarian political systems, businesses face challenges related to political structures.
• Regulatory control, and government oversight.
• Unique to One-Party system, power is not necessarily in the official government bodies. Therefore need an integrated government, market controlled system. Need to navigate and opaque market system that uses personal networks and relationships for political and governmental affairs.

Framework

• There are key nonmarket challenges for firms like regulatory complexity, uncertainty, corruption, and political influence. Integrated Strategy required to meet nonmarket, regulatory compliances for strategic lobbying and partner relationships. Requires both, local and host markets.

Innovative Business Takes on Regulation

• This session looked at how innovative business models can create unexpected regulators.

Financial regulation

• Innovators create new markets, faster than regulators to adopt
• Used Prosper and peer-to-peer lending as case studies that highlights the risk that has potential for unexpected changes.
• The dual rule of regulations will slow adaptation (SEC action against Prosper).
• Innovators should anticipate potential responses early. A smart non marker strategy can determine success or failure.

Regulator Response

• Regulators respond to crises and are risk averse, and regulations involve political components.

How do regulators effect industry?

• Competitors will gain the upper hand if other competitors ignore rule and policy change. The best way to address change is for regulators and stakeholders to meet in the middle for change.

Intellectual Property Rights

• Rights for piracy can be difficult to receive and the government still gets involved.
• Developed or undeveloped territories may get involved.

Challenges Firms Face

• Enforcement can take time for attorneys and officials
• Copyright varies and requires long-term sustainability. Firms have to make a choice: do they engage with officials or do they go in another direction? What is the budget they are planning to use for enforcement? (Strategic Planning)

Corruption

• Firms must follow anti-bribery laws and practices
• High-risk areas require clear policies and there are a lot of legal risks
• The laws are not always clear
• In this session, the key questions to ask or what is the policy that the company will abide by

Policy Effectiveness

• How would regulators respond
• Reduce corruption by sustaining effort of government and local agencies
• Transparency through policy

What to know for corruption

• Key legal risk needs be in mind.
• FCPA applies globally
• Due diligence takes a toll, requires significant data
• Look at companies in the light of institutional concerns, not just financials
• In conclusion government takes away from being an independent enity.

Climate Change

• There are economic and regulatory challenges for the climate.
• Government makes changes to make changes to the climate through regulations. There are ways for companies to do this on a national level (through trade regulations) and on a business level

Companies Should:

• Be aware of economic and political pressure in the climate.
• Balance policy and climate in tandem (South Africa trade off)
• Must recognize the importance of both international and local needs.

Automotive Industry and Private Politics

• Regulators are constantly competing and that pressure drives private interest from political gain.
• Media and consumer pressure.
• Automakers need to engage in a variety of integrated strategies.
• Reputation plays a bigger role.
• The lesson states that firms need to integrate both strategies and can’t just focus on 1 set of dimensions

Multi National Telephone

• The MTN in nigeria and course recap.
• The telecoms need
• Regulations
• Expropriation
• Government and society responsibility

Political Risk and Engangement.

Align incentive with government and integrate political and regulatory management Government wants revenue with government and politics. Corporate responsibility can act and build a barrier. Government and legal actions can have both risk and opportunity. International and variable