Week 4 - Non-market Strategy

Question 1

Birkinshaw (2024)

Answer 1

• Source of competitive advantage for Amazon, Alphabet, Meta, etc: business model innovation – challenging existing norms and regulations
• Often aggressive approach, e.g. Google launching Street View without permission, so regulators need to act quickly to keep up
• Network effects, zero MC of production, high switching costs – winner-takes-it-all markets
• Actions of firms to avoid regulations:
  o Finessing the rules: looks for inconsistencies
  e.g. Airbnb does not have to comply with the health and safety standards hotel do, and hosts can reject guests
  e.g. Uber does not “employ” any drivers
  o Sidestepping the rules: the firm explains why the rules do not apply to it
  e.g. Google acquiring YouTube for 1.65bn USD, saying it is a different industry, but using its user information to enhance its services
  o Nullifying the rules: the firm argues it is entering a new, non-regulated market
  e.g. Google opening up the market for paid search, where business big for the right to sponsored ads
• Finessing employment law: employing people “virtually”, e.g. Fiverr, Upwork
• Sidestepping property rights: Facebook as a platform, not a publisher
• Regulatory responses:
  o No response: Airbnb, Google
  o Decisive response: Flytenow, Uber in some cities (sometimes it was allowed to restart)
  o Negotiated response: Uber drivers being categories as “workers” in the UK instead of employees or freelancers, or YouTube initially not adhering to copyright laws (anything could be published)
  Usually ends with adjustments to the initial model

Question 2

DeMello (2020)

Answer 2

• Firms try to influence policymaking in their favour in the nonmarket environment
• Governments are important because they can redistribute costs, benefits, contracts, information and provide privileged treatment - Corporate Political Activity (CPA)
• Informational strategies
  o Targets political decision-makers by providing information, e.g. lobbying, commissioned papers, expert testimony
  o Firms are in a better position to assess political outcomes – trade with the info
  o Lobbying: empirical evidence shows that “who you know” is more important
• Financial incentive strategies: Providing financial incentives like campaign financing and outside jobs to political parties
• Coalition-building strategies: Indirectly target decision-makers by targeting voters to pressure politicians
• Lobbying can be outsourced, but it can cause legitimacy problems
• Reacting to or anticipating new legislation publicly is also important

Question 3

Lawton et al (2013)

Answer 3

• Organisation engage in CPA to create or maintain profits
• Behaviours: business-government relations, corruption, political inducements and contributions and lobbying
• Benefits: reduced environmental uncertainty, reduced transaction costs, increased long-term sustainability
• Factors influencing the extent of lobbying:
  o Size of the company
  o Corporate strategy of the firm: international orientation vs niche market
  o Institutional environment

Question 4

Nyberg (2021)

Answer 4

• Corporations influence democratic processes, and these processes in turn become dependent on the corporate environment
• PCSR (Political Corporate Social Responsibility): businesses play a role in handling public problems that should be dealt with by the government, e.g. environmental issues or providing public goods
• Corporations in democratic processes excludes:
  o Citizen representation from the political sphere (direct connections)
  o Citizens’ voice from the public sphere (financing advertisements)
  o Citizens’ interest from the private sphere (communication of views)
• This can be seen as political corruption as it harms democratic processes
• CPA can be direct (financing, information) and indirect (influencing the public)
• “Circuits of power” – builds on Lukes (1974): influencing can happen on several distinct levels: CPA influences decision-making, empowers corporates, which makes governments dependent on corporations, reinforcing the circle
• Strengthening democracy is furthering the inclusion of participation – CPA works against this, weakening democracy

Question 5

Oberholzer-Gee & Yao (2018)

Answer 5

• Residual market imperfections allow firms to capture a larger fraction of the value they create
• E.g. Credit Card Accountability Responsibility Disclosure Act of 2009: banks need to warn consumers before they exceed their limits – profits of banks in the low-income customer sector decreased because they could not charge more anymore due to market imperfections
• With IP, the opposite is the case: legislation makes firms better off
• Market imperfections:
  o Production economies: differentiation and network effects allow firms to price above the competitive price
  o Information asymmetries: customers do not know about alternatives, so firms can charge more
  o Transactions costs: makes it hard to overcome failures
• Firms can use these market imperfections to charge more (e.g. Walmart or Bayer), or can leverage mitigation as their competitive edge (e.g. Uber)

Question 6

Dorobantu et al (2017)

Answer 6

• Firms look beyond the market and turn to nonmarket strategies due to high transactions costs to using institutions
• When the costs of hierarchical governance are high as well, firms opt to partner up with other firms and nonmarket actors as well

Question 7

Garud et al (2022)

Answer 7

• The case of Uber: entry to market without approval, showing their advantages through market strategy, using nonmarket strategy to gain approval

Question 8

Sutton et al (2021)

Answer 8

• Dependence and uncertainty due to CPA are not necessarily perfectly positively correlated as there are several types of uncertainties
  o Uncertainty about the actions of politicians – firms place emphasis on CPA to reduce uncertainties around historically costly actions with the help of SMEs and media
  o uncertainty about the proper way to use CPA to influence politicians (e.g. election results might cause a change in regulations) – weakens CPA as it might be disrupted
• e.g. ExxonMobil has most operations in Texas, but the state is only 6th on the list of contributions of the company to governments

Question 9

Baron (1995)

Answer 9

Nonmarket environment is important
4 I-s: issues, institutions, interests, information
e.g. government controls, challenges by activist groups, public concerns, reputation
Can create advantages if integrated into market strategy well: defence against new entrants and substitutes