20 Aug 2001  Research & Ideas

Making an Ally of Uncle Sam

Most business leaders just want government out of their way. But ignorance of the political landscape can lead to unpleasant consequences. The good news: You can make government an ally. Also: Q&A with Michael Watkins.

 

Goals for influencing government should flow directly from the analytic frameworks that companies use to develop business strategies. As Michael Porter noted in Competitive Strategy, "No structural analysis is complete without a diagnosis of how present and future government policy, at all levels, will affect structural conditions." 2 Porter integrated the impact of government into strategy development by focusing on how it affected his "five-forces" analysis of rivals, potential entrants, suppliers, customers, and substitute products. More recently, however, strategy experts have deemed this approach inadequate.

As Pankaj Ghemawat notes:

The emphasis on folding non-market considerations into the analysis of market relationships tends to focus on the effects of non-market variables . . . at the expense of systematic analysis of their evolution, including efforts to influence them. More specifically, this approach steers attention away from the political processes whereby administrative policies are formed and implemented . . . . These difficulties are compounded by the typical simplifying device of ignoring the internal workings of government and treating it as a whole (albeit formless) entity. 3

Previous efforts to develop frameworks for "nonmarket strategy" have explicitly dealt with government influences on business. 4 The nonmarket approach looks at the impact of government separately from the impact of market forces and then integrates the two. Though a step in the right direction, this approach suffers because the boundary between "market" and "nonmarket" is artificial and far from clear-cut.

We find it more productive to focus on the key types of games businesses play: value-net games and public interest games, both of which could involve governments as players. We further distinguish between strategies to play the game and strategies to shape the rules. Here too, efforts to shape, interpret, and enforce the rules may or may not involve governments in their roles as rule makers and referees.

The result, as illustrated in Figure 2.1 is a framework for developing hybrid strategies: strategies both for identifying and playing key games and for shaping the rules. The term hybrid emphasizes the need for businesses to develop strategies to both (1) play varied and potentially linked games and (2) shape the creation, interpretation, and enforcement of rules. To elaborate, the model rests on five conceptual pillars:

1. Business strategy as game playing. In the new lexicon of business strategy, companies participate in ongoing games in which economic value gets created and distributed. 5 Games are a useful metaphor because outcomes (market share, profits) in business are the result of interactions among the strategies of a set of players. The games businesses play involve a mix of cooperation to create value and competition and divide up (or claim) the value that has been created. Companies make moves as they play these games and these moves interact. They also seek to shape the rules in advantageous ways, for example, by undertaking a merger, or entering a new market. 6

2. Value-net games and public interest games. We will focus on these two categories of business games, both of which may or may not involve government. Value-net games have to do with cooperation and competition among businesses. 7 Public interest games pit coalitions of businesses, and even entire industries, against nonbusiness organizations like unions, consumer groups, and environmental organizations.

3. Governments as rule makers, referees, and players. In both value-net games and public interest games, governments establish the rules by which the players operate, acting as rule makers. But governments also interpret and enforce the rules, effectively acting as referees. Governments may even participate directly as players, for example, as customers in value-net games or as initiators of policy changes in public interest games.

4. Multilevel games. Many influence games involve multiple interacting levels of government—local, state, federal, and international. Actions at one level can influence what goes on at other levels. Understanding these interactions is critical to devising good influence strategies.

5. Linked games. Many influence games also have both value-net and public interest components. A merger, for example, needs government approval; it may also elicit the opposition of environmental groups. Thus it is often essential to understand and manage linked games.

To diagnose the impact of government on your business, you will need to pinpoint the types of games in which you are involved, the roles governments play in these games, and the multiple levels of government that affect what you do. You may also need to anticipate and shape linkages between value-net games and public interest games. But first we need to digress a bit to define these types of games and to explore the roles that government can play in them.

Value-Net Games

Games that businesses play with each other in the course of their ordinary activities take place within what Barry Nalebuff and Adam Brandenburger call Value Net. 8 Companies seek to advance their goals by crafting strategies for cooperating and competing with other players in their value nets—customers, suppliers, competitors, and complementors...using as an example Intel and the microprocessor-manufacturing game...as Nalebuff and Brandenburger explain:

Along the vertical dimension of the Value Net are the company's customers and suppliers. Resources such as raw materials and labor flow from suppliers to the company, and products and services flow from the company to customers. Money flows in the reverse direction, from customers to the company and from the company to suppliers. Along the horizontal dimension are the company's competitors and complementors . . . . A player is your complementor if customers value your product more when they have the other player's product . . . . A player is your competitor if customers value your product less when they have the other player's product than when they have your product alone. 9

Intel, for example, buys raw materials and processing technology from many sources, and sells microprocessors to computer makers such as Compaq and Dell. The company competes with chipmaker Advanced Microdevices and complements Microsoft's operating system and applications software.

Ironically, the businesses that are creating emerging industries and driving the new wave of globalization are the most likely to be impacted by government legislation and regulation and the least prepared to help shape the rules.
—Watkins, Edwards, & Thakrar

Businesses cooperate to create economic value; they compete to distribute or claim the value that gets created. Consider, for example, a large manufacturer like Ford Motor Company. Ford cooperates with its suppliers to design new vehicles even as it negotiates vigorously with them over the terms on which parts will be supplied. By cooperating to develop new cars, Ford and its dealers and suppliers create a valuable pie of economic value. By negotiating over price, quality and delivery terms, they divide that pie.

Changing the game

The players in the value net continually seek to change the game to create and claim more value. While Ford and its suppliers work together to sustain their competitive advantage vis à vis competitors, they also try to transform relationships in the value net in advantageous ways. Ford carefully fosters competition among its suppliers and manufacturers critical components in-house to ensure that the company does not become too reliant on a single source for key parts. As part of its strategy to change the game, Ford announced in 1999 that it would cooperate with General Motors and Daimler Chrysler to create a huge new electronic procurement exchange to leverage electronic transfer of data and reduce procurement costs. Its suppliers were understandably uneasy.

Governments as rule makers and referees in the value net

Government rule makers and referees shape businesses' ability both to initiate and to defend against these strategies—to play offense or defense in value-net games. Specifically, the ability to make game-changing moves is constrained by laws and regulations governing competition, antitrust, intellectual property, product approval processes, and technical standards. When governments review applications for mergers and acquisitions or hear legal cases concerning intellectual-property rights or takeover disputes, they are acting as rule makers and referees in value-net games between businesses.

Book Cover

Consider, for example, the debate about Napster, the online service for sharing digital and music files. Napster triggered a firestorm of outrage in the music industry about piracy of music. The Recording Industry Association of America (RIAA)—the major label trade association—with the rapper Dr. Dre and the heavy metal band Metallica sued Napster for copyright infringement late in 1999. But is was unclear how intellectual-property law applied to such an innovation, so Napster's opponents also pursued a legislative remedy and persuaded key senators to hold hearings in the summer of 2000. A coalition of 60 artists Against Piracy—including Alanis Morissette, Hanson, and Bon Jovi—supported this effort. With financial support from RIAA, the National Association of Recording Merchandisers, Disney, Myplay.com, and the digital-rights management firm Reciprocal, Artists Against Piracy took out ads in major newspapers during the hearings. The results of the court case are still undetermined, but in November 2000, Napster took a step toward legitimacy by arranging a deal with media giant Bertelsmann AG to develop a legal version of the music-sharing service. 11

Because governments can influence the outcomes of value-net games, many companies seek to involve rule makers and referees to gain advantage. Moves to influence government are commonplace when playing defense against others' strategic initiatives.

Sometimes businesses appeal to rule makers and referees not to win but to deter weaker players by disrupting or delaying their plans or imposing burdensome penalties. Delay is often a valuable side effect of government involvement in value-net games. Global Crossing, a small player in the telecommunications industry in 1997, has recently emerged as a major force in the long-distance fiber-optic cable market. One reason for its success is its savvy use of the government's refereeing function to slow down the competition. In November 1998, a consortium of 33 companies, including AT&T, British Telecom, and MCI WorldCom, applied to the FCC for a license to run a fiber-optic cable from Japan to the United States. Such approvals normally take about two months. Global Crossing, whose own fiber link across the Pacific was scheduled to begin service at about the same time, petitioned the FCC to delay approval of the cable and to investigate whether the consortium inhibited competition. The FCC finally approved the new cable in July 1999, and also announced that it would launch a broad inquiry into the undersea-cable business. Global Crossing's carefully constructed lobbying campaign earned it a six-month lead. 12

Governments as players in the value net

Alongside their roles as rule makers and referees, governments often function as players—customers, suppliers, competitors, or complementors—in businesses' value nets. When this is the case, it is important to think through the implications for your strategy.

The government players involved can be state or federal, domestic or foreign—and all may influence matters. Procurement, for example, can be extremely political, particularly when dealing with governments in foreign markets. Consider the efforts of the Clinton administration since the mid-1990s to open up the way the Japanese government dealt out public works projects—worth more than $250 billion annually—to construction companies. Long-standing collusion between officials and the industry had discouraged competition and excluded outsiders from winning bids. Even after years of effort to open the market, U.S. companies got only 0.02 percent of this work in 1999, less than one-tenth of the Japanese share of U.S. public works projects. 13 This was the case even though Japanese construction costs were estimated to average 3.5 times more than in the United States. 14

Five Questions for Michael Watkins

Michael Watkins, coauthor of Winning the Influence Game: Effective Business Strategies for Managing Government Relations, recently participated in an e-mail interview with HBS Working Knowledge writer Andrea Schulman.

Schulman:The Bush administration appears to be more hostile to government regulation and perhaps more pro-business than was the Clinton administration. How does this affect both the need to influence policy makers or how a company should 'play the influence game?'

Watkins: On one hand the election of the Bush administration has been great news for business. On a wide range of issues, ranging from taxes to ergonomics to health care, businesses are winning the influence game against traditional adversaries. But that's not the end of the story, because many influence games—which we call value net games—are played between businesses. The interests of small and large businesses are not always aligned, for example. Or think of the fight between Internet retailers and Main Street retailers over sales taxes. These battles are being fought just as intensely as ever. In addition, as GE recently discovered, the US Government is not the only powerful player in global influence games. The GE-Honeywell merger sailed through antitrust review in the US only to hit a brick wall in Europe.

What is the best way to maintain influence, given annual turnover in elective and appointed offices?

This is a good news, bad news situation. The turnover of government officials means that hard-won relationship capital sometimes is lost. So businesses have to constantly be investing in developing and strengthening their relationships. At the same time, new people mean that you have a new opportunity to make your case. Also sometimes you can hire some of those experienced government officials to help you advance your interests. Above all you need to keep in mind that the game never ends and it doesn't stand still. So you have to be constantly investing in your base of relationships.

Entrepreneurs starting new companies are probably not thinking much about influencing government. Conversely, these new companies are probably not on the radar of most government officials. Is there an optimum stage in a company's life cycle or a minimum size that a business should attain before it makes sense to assess the impact of government rule makers and start 'laying the foundation?'

Every company has to be on the lookout for what government is doing, even the very smallest. This is because small businesses can be both helped and hurt more by government than by big businesses. Many small businesses are launched on the strength of government contracts, innovation grants, and tax breaks. At same time small business is far more vulnerable to being damaged by government than is big business, for several reasons. First they are more affected by more levels of government. An increase in municipal taxes that is a fleabite to a major corporation could be devastating for local businesses. Second, small businesses have fewer resources with which to protect themselves. They can't afford to have offices in the state capital or in DC. They therefore need to be more modest in their goals and creative in the influence strategies they devise. Third and perhaps most importantly, most people running small businesses reflexively dislike government—they think that most regulation just makes their lives harder. Having struggled so hard to build and sustain businesses, they hate to be told what to do and they see bureaucrats as slow moving and inappropriately privileged. It's a very dangerous attitude.

Some day a campaign finance reform law may be enacted. How would that affect a company's ability to influence policy makers? Can campaign finance reform effectively level the playing field? Would effective campaign finance reform change how companies should try to influence government?

Campaign finance reforms will, even if enacted, affect only unregulated "soft money" contributions to the political parties. Soft money has unquestionably helped large companies, especially in presidential politics. So restrictions would curtail their influence somewhat. But it's worth keeping in mind that the soft money game has become a kind of escalating arms race with organizations such as unions working to match business contributions. The big winners have been political consultants and media companies. Even if soft money were eliminated entirely, businesses would still have more resources to invest in political action committees (PACs) and, crucially, in lobbying. So businesses' financial resources will remain an advantage.

GE has spent millions of dollars trying to avoid a costly PCB cleanup of the Hudson. Now they will have to do the cleanup. Is part of a winning strategy choosing your battles and knowing when to bow out gracefully?

GE did fight vigorously to avoid having to pay for the cleanup. But it's wrong to suggest that the company lost the fight, for two reasons. First, the game isn't over yet. There is a still lot of room for delay (which has value) and argument over who should actually do and pay for the dredging work. Second, GE successfully modified the demands of the EPA. Dredging, which GE argued would be counterproductive, will now proceed in stages with strict monitoring to ensure that the pollutants do not get freed from the sludge. If this happens, the plan will be modified and GE will have won the war.

Footnotes:

1. P. Ghemawat, Games Businesses Play: Cases and Models (Cambridge, MA: MIT Press, 1997).

2. M. Porter, Competitive Strategy (New York: Free Press), p. 28.

3. P. Ghemawat, Notes on Non-market Strategy. Harvard Business School

Globalization Note Series, October 2000.

4. D.P. Baron, "Integrated Strategy: Market and Nonmarket Components, "California Management Review 37, 2 (Winter 1995).

5. See P. Ghemawat, Commitment: The Dynamic of Strategy (New York: Free Press, 1991); B.J. Nalbuff and A.M. Brandenburger, Co-opetition (New York: Currency/Doubleday, 1996); and P. Ghemawat, Games Businesses Play: Cases and Models (Cambridge, MA: MIT Press, 1997).

6. B.J. Nalbuff and A.M. Brandenburger. Co-opetition (New York: Currency/ Doubleday, 1996), pp. 67-68.

7. The term value net was coined by Nalebuff and Brandenburger in their seminal work on game theory and business strategy, Co-opetition (New York: Currency/Doubleday, 1996).

8. See note 6, p. 15.

9. See note 6, p. 16.

10. For an excellent synthesis of approaches to business strategy, including the work of Porter, see P. Ghemawat, Strategy and the Business Landscape (Reading, MA: Addison-Wesley, 1999).

11. "Bertelsmann, Napster Agree on Service," Wall Street Journal (1 November 2000).

12. "Global Crossing a Political Player Wins FCC Delay in Rival's Cable, Wall Street Journal (23 May 1999).

13. "U.S. Pushes Japan to Open Up Public Construction Market," Wall Street Journal (14 January 2000).

14. "Fenced Out: U.S. Contractors Find They Rarely Get Work on Projects in Japan," Wall Street Journal (10 June 1993).

Figure 2.1 Hybrid Strategies

Excerpted with permission from Winning the Influence Game: What Every Business Leader Should Know About Government, John Wiley & Sons, Inc., 2001.

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