THINK BEYOND THE MARKET

Its time to change

By Professor Michael Yaziji January 2011

IMD Chemin de Bellerive 23 PO Box 915, CH-1001 Lausanne Switzerland

Tel: +41 21 618 01 11 Fax: +41 21 618 07 07 info@imd.ch www.imd.org

THINK BEYOND THE MARKET I Its time to change

Take a quick mental tally of the training of the C-office executives in your organization, or at the country-head level. How many of them have technical or business training? Now how many of them have training in political science, sociology or diplomacy? Is it really any wonder then that firms and their leaders are seen as so out-of-touch with social concerns? Can we really blame Tony Hayward for being inept at dealing with broader social demands and taking a bad situation with the BP gulf disaster and making it worse?

But the failure of executives to better understand the broader environment what is sometimes called the nonmarket environment affects more than just your companys public reputation. It can impact the heart of your strategy, everything from missing trends and opportunities or walking into a regulatory morass that could have been avoided. Managers strategy formulation tools and those still promoted in most business schools are still almost exclusively concerned with the firms value proposition, its competencies, its competitors and the structure of its industry. As a consequence, political and social forces are treated as outside influences that impinge on the company, its strategy and its industry. These external forces are seen, if anything, as nuisances that should be ignored wherever possible, and grudgingly accommodated if not. But this approach sees a whole set of critical factors left out of strategy formulation and implementation.

The importance of non-market forces One of the critical points for business leaders to understand is just how much influence nonmarket players can have on the market. You can get a sense of this simply by looking at the growth in NGOs with global concerns the number has quadrupled in the past decade and by the rise in consumer demand for companies to behave in an ethical and environmentally friendly manner. The FTSE and the Dow Jones even have special indices of socially responsible companies.

So, who are these non-market stakeholders? Market stakeholders are easy to define: they are anyone who engages voluntarily in an economic transaction with the company; for example, a
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THINK BEYOND THE MARKET I Its time to change

customer, supplier, employee, shareholder or creditor. Non-market stakeholders are not involved in a direct voluntary economic exchange with the business, but who still affect or are affected by it in one way or another. Government is probably the most obvious example; others include NGOs, the media, communities and industry groups. From a companys point of view, it should be aware that everything from its patent protection policies to its labor standards will affect non-market stakeholders.

Understanding non-market dynamics Ask good managers how their market stakeholders interact and they will have no problem outlining exactly who has power over whom. Ask them to explain how non-market stakeholders interact, however, and they often get stuck in a spider web of relationships, unable to pinpoint exactly how any of it works. Without a standard economic transaction, managers rarely know how to start to grasp the dynamics involved.

The structure of the non-market means that the strategies firms need to use for this group of stakeholders are fundamentally different to those that they use with market stakeholders. If a corporation is under attack from NGOs, or there is a regulation coming down the line, managers should ask the following questions to help them identify what is going on in the nonmarket environment:

Interests. Who benefits from this course of action? What are those benefits do they want money, media attention, something else?

Ideologies. What are the norms and values driving these actions? Studies of US politicians have shown that they are more likely to be driven by ideologies than interests.

Issues. What are the key issues in contention? Do not make assumptions about goals. For example, when Oxfam went after pharmaceutical companies over the cost of AIDS drugs in South Africa, one of the NGOs obvious goals was making the drugs more

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widely available for poor patients. However, their underlying motivation was to attack the WTO in an attempt to change its rules on patent protection for drugs. Institutions. Where is the battle being waged? Non-market stakeholders will use the institution where they are most likely to win; this is often means using public opinion to reach regulators. Information. How is information being used, or misused? Influence. Who has influence over whom? What kind of influence? In the example given above, Oxfam had influence over the media (in the form of a sexy story), which in turn influences consumers. As consumers are also voters, they influence government.

Once this stage is complete, it is helpful to use a structured approach to map the dynamics between non-market stakeholders. By putting all stakeholders, their goals, resources, constraints and behavior on the grid, we can begin to look past the complexity, and see how they interact. Think about who the relevant stakeholders are; what their goals are; where the power balance (or balances) lie; and what their likely behavior will be in response to various events.

Corporations today are more integrated into society than they were 20 years ago. With this increased influence comes higher expectations. Companies today are expected to be good global citizens that earn their license to operate. Managers that recognize this and start to take non-market and other external forces into their scenario planning will be better armed to face their non-market stakeholders. They can no longer ignore the non-market that surrounds them; if they do, they run the risk of coming under attack from NGOs, and are likely also to become uncompetitive as they will not be ready for new regulations passed by government.

On the other hand, managers that grasp the new non-market dynamics will give themselves, and their businesses, a distinct competitive advantage.

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THINK BEYOND THE MARKET I Its time to change

Michael Yaziji is Professor of Strategy and Organizations at IMD. He is the Program Director of IMDs new Open Planet Leaders (OPL) program, run in conjunction with the WWF. OPL is an innovative program for driving sustainability into the core of business.

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THINK BEYOND THE MARKET I Its time to change

RELATED PROGRAMS

ORCHESTRATING WINNING PERFORMANCE - http://www.imd.ch/owp

The global business program for individuals and teams Program Directors Bettina Buechel and Dominique Turpin For individuals and teams who seek the latest management thinking and practical, innovative solutions for their business Anticipate global business trends Boost your performance, broaden your perspectives and expand your global network Design the program that suits you

ONE PLANET LEADERS PROGRAM http://www.imd.ch/opl

The applied sustainability program for business leaders and executives Program Directors Michael Yaziji (IMD) and Carolina Moeller (WWF) Develop a clear understanding of which sustainability issues are relevant and a priority for your business Establish and implement more sustainable business models Improve your ability to successfully manage change Develop clear communication strategies and measures for sustainable growth

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