BA107 Social and Political Environment of Business

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BA107 Social and Political Environment of
Business

• Spring 2004
• WEEK 2
• The Nonmarket Environment of Business

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Agenda for today

• Administrative issues
• Review of nonmarket environment concepts
• How does the nonmarket environment differ from
  the market environment?
• What are the implications of these differences
  for corporate strategies?
• In which industries is the nonmarket environment
  likely to be most important? Why?

3
Ego

• Andrea Martens
• 3nd year PhD student in Business and Public
  Policy, Haas
• From Chile/Germany
• How to find me
• F525 Haas, 642-9949
• Office hours Friday 2-4pm
• amartens_at_haas.berkeley.edu
• Find section material at Class Website
  http//faculty.haas.berkeley.edu/amartens/teaching
  /ba107spr04/ba107spr04.htm

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Overview of the Sections

• Not another lecture, but a discussion
• Your participation is crucial
• Sections will include short lectures,
  discussions, video clips, etc

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Q1 How does the nonmarket environment differ
from the market environment?
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Abercrombie Fitch
Hiring practices
T-Shirt Motives
Sweatshop
7
Nestlé
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Other examples

• Microsoft
• ATT
• Philip Morris

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Q1 How does the nonmarket environment differ
from the market environment?

• Rate of change?
• Actors?
• Relevance?
• How can each type of environment be
  shaped/influenced by the firm/industry?

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Market vs. Nonmarket Environment (Baron)

• Market Environment interactions between firms,
  suppliers, customers that are governed by
  markets or private agreements such as contracts.
  (typically voluntary economic transactions
  exchange of property)
• Nonmarket Environment social, political legal
  arrangements that structure interactions outside
  of, but in conjunction with, markets private
  agreements. (Voluntary AND involuntary economic
  transactions), RULES OF THE GAME

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Nonmarket Environment Analysis of Firm/Industry

• Issues
• Interests
• Organized Interests
• Unorganized Interests
• Activist, Advocacy, and Watchdog Groups

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Nonmarket Environment Analysis of Firm/Industry

• Institutions
• Legislative
• Regulatory Administrative Agencies
• Judicial
• International
• Nongovernmental
• Information

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Q2 What are the implications of these
differences for corporate strategies?
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Market Environment
Nonmarket Environment
Market environment determines significance of
nonmarket issues to the firm
Public Institutions
Market Strategy
Nonmarket Strategy
Manager
Private Institutions
Nonmarket environment shapes business
opportunities in the marketplace
Political Science Psychology Ethics Law
Economics
Economics
Disciplinary Base
15
Strategy Analysis Michael Porter's Five Forces
Model
16
What is Competitive Advantage?

• A business unit has a competitive advantage in
  its served market when it achieves a higher rate
  of profitability than the typical business unit
  in that served market.
• Competitive advantage is important because it
  allows the business unit to earn positive
  economic profits even when intense competition
  drives the economic profitability of typical
  units to zero.
• The imperative to make tradeoffs suggests that
  there are two broad routes to a competitive
  advantage
• Differentiation (benefit) advantage
• Cost advantage

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Sustainable Strategies/Value Drivers

• Efficient use of costly inputs
• Reduced risks
• Safety
• Reputation
• New products/services/businesses
• Enhanced reputation
• Exclusive access
• Employee relations
• Access to capital
• Brand differentiation ...

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Q3 In which industries is the nonmarket
environment likely to be most important?
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Non-Market Strategy Matrix
Offense (Value Creation)
Defense (Risk/Cost Minimization
e.g. socially responsible brands
e.g. risk management
Body Shop Patagonia Ben Jerrys BP Ford
Shell Baxter International International Paper
Individual
e.g. image campaign
e.g. self-regulation
tobacco industry Biotech industry
Entertainment industry U.S. beer industry
Collective