David Bach on nonmarket strategy

David Bach's work focuses on the interface between business and politics. One of his main research interests is nonmarket strategy – the way that companies manage relationships with governments, regulators, non-government organisations (NGOs), the media and society at large.

Bach is professor of strategy and economic environment at the Instituto de Empresa, Madrid. Before moving to Spain, he taught at the University of California, Berkeley.

He has also worked with a number of consultancy firms in the US, including McKinsey, the Global Business Network, and Political Intelligence, an international lobbying consulting firm.

Bach explains the importance of the concept to Stuart Crainer, and outlines why he believes it is essential for future corporate success.

Competitive advantage is often viewed as a function of market matters per se — products, customers, market share and the like. But increasingly, competitive advantage can be built or lost outside of markets.

A firm maintains relationships with its customers, suppliers and competitors (the "market environment") but also with governments, regulators, non-government organisations (NGOs), the media and society at large — whether it wants to or not.

So there are huge opportunities for companies here, but also immense dangers for those focused purely on the market side. Anyone can be affected by nonmarket forces and in very consequential ways.

In the 1990s, Chiquita Brands sourced most of their bananas from Latin America; Europe was their biggest market. Meanwhile, the European Union changed its banana policies to favour non-Latin American suppliers.

Chiquita missed this nonmarket event and suffered as a result. Dole, on the other hand, one of the largest producers of fresh fruit and vegetables, was tracking the workings of the Commission, diversified its suppliers and improved its business as a result.

In the main, companies have not given these matters much thought. They took the nonmarket environment for granted. It wasn't seen as part of the playing field. Think about all the strategic plans developed in the last two decades. How many had a section on the company's nonmarket strategy?

Firms should apply the same rigour to the formulation and implementation of nonmarket strategy as they do their regular market strategy. Firms must integrate market and nonmarket strategies to make sure they are consistent and coherent. Increasingly, we see that firms can create — or lose — competitive advantage in the nonmarket environment.

Yes. There has been a distinct transition in the business environment. More actors now affect a company's destiny. Think how comments on an Internet blog can impact a company's stock price.

There are more regulatory agencies established by governments, more NGO's; go to ngo.org and you will see dozens of links to organisations concerned with environment, status of women, refugees, sustainable development — many of these NGOs can have an impact on your business.

We live in a 24-hour news cycle; so, when, say, headlines emerge about potentially harmful toys made in China, companies across the world must be ready to respond immediately.

More products and services have become, in essence, commodities. It is harder to come up with products that are so different no one can encroach on your market share.

As the playing field in many markets has flattened, so has the ability of one competitor to beat the others based on cost management or quality management — "excellence" is a 30-year old concept. And what company has not squeezed costs to maximise profits?

Nonmarket matters, such as reputation, the ability to work with NGOs, the capability to foresee relevant government actions and even to shape policy — these are all having an immense impact at a time when most companies are not even thinking about nonmarket strategy.

There are different models. Some firms run nonmarket strategy through government affairs and public policy departments. Others have brought units focused on corporate social responsibility and sustainability into the core strategy process. Still others attend to nonmarket concerns through the communications department.

The critical question is when and how these units are brought in. Are they marginal to the core strategy process or are they involved in every aspect of strategy formulation? Once you bring market and nonmarket people together, they can learn from one another and find new opportunities that can only be harnessed from carefully coordinated and integrated market and nonmarket strategies.

Without commitment from above, it is hard to develop nonmarket strategy. If the CEO thinks politics and social concerns are secondary, it won't make a dent.

All the successful examples, that we have looked at, of companies embracing nonmarket strategies, featured CEOs who believed the competitive playing field extended beyond markets —GE's Jeff Immelt, Howard Schultz at Starbucks.

Top to bottom, I would sensitise everyone inside the company to start thinking more broadly than the traditional market strategy.

Product mix, customer share, competitor stance — these are critical to the company. But those companies that will perform best in the future can think beyond the market. I would create a team of enlightened people to work on developing tools to help them think in this new way.

For example, consider how most companies deal with government affairs. In many cases, it's a combination of lawyers and public relations people who deal with such matters, mostly in a reactive way.

Nonmarket strategy requires a broader mix of people dealing with these forces, who are both reactive and proactive. These forces are not going away. In fact, the need for a coherent, accurate and actionable nonmarket strategy will grow.

So far, the best tool deployed is the "4-I" framework. By focusing on issues, interest groups, institutions and information, we can look at a company's opportunities and threats through its position in society.

Of course, once data is collected and analysed, the company must actually engage in strategy formulation. And the firm's market and nonmarket strategies must be consistent.

Finally, just as the market strategy yields a particular market positioning, a nonmarket strategy yields a particular nonmarket positioning for the firm on critical issues that matter to it.

I am convinced that nonmarket management — the conscious exploitation of opportunities in the firm's political and social environment — will be a defining feature of global competition over the next decades.

Nonmarket strategy, we think, gives managers the kind of tools they need to build competitive advantage wherever they can find it — within markets and beyond.

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