Strategy and Nonmarket Environment
Session 1: Introduc0on to the Strategy and Non-Market Environment
Background reading: Compe22ve Advantage, crea2ng and sustaining superior
performance chapter 1: The Core Concepts (M. Porter, 1985)
Compe((on determines the appropriateness of a firm’s ac(vi(es that can contribute to its
performance, such as innova(ons, a cohesive culture, or good implementa(on.
Compe&&ve strategy: the search for a favorable compe((ve posi(on in an industry. It aims to
establish a profitable and sustainable posi(on against the forces that determine industry
compe((on.
Two central ques(ons underlie the choice of compe((ve strategy:
- What is the aDrac(veness of the industry?
- What are the determinants of rela(ve compe((on posi(on?
Both industry aDrac(veness and compe((ve posi(on can be shaped by a firm. While industry
aDrac(veness is partly a reflec(on of factors the firm has liDle control over (5-forces). At the
same (me, a firm can clearly improve or erode its posi(on through its choice of strategy
(generic strategies).
Porter’s 5-forces à industry aDrac(veness: The five forces determine industry profitability
because they influence prices, costs, and required investments of firms in an industry (the
elements of ROI).
5-forces:
- Threat of new entrants
- Bargaining power of buyers
- Threat of subs(tute products or services
- Bargaining power of suppliers
- Rivalry among exis(ng firms
Industry structure and buyer needs: sa(sfying buyer needs may be a prerequisite for industry
profitability. The crucial ques(on in determining profitability is whether firms can capture the
value they create for buyers, or whether this value is competed away to others.
Industry structure determines who keeps what propor(on of the value a product creates for
buyers:
- If a product provides liDle value, there is liDle value to be captured by firms.
- If a product provides a lot of value, industry structure becomes crucial.
Industry structure and the supply/demand balance: profits are a func(on of the balance
between supply and demand à high demand – low supply = high profitability.
1
,Yet the long-term profitability is strongly influenced by industry structure. Even though, short-
term fluctua(ons in supply and demand can affect short-term profitability, industry structure
underlies long-term profitability.
The consequences of an imbalance between supply and demand also differs widely depending
on industry structure. Industry structure is also the profitability of excess demand. Industry
structure is fundamental to both speed of adjustment of supply to demand and the
rela(onship between capacity u(liza(on and profitability.
Posi(oning determines whether a firm’s profitability is above or below the industry average.
Generic strategies à compe((ve advantage (lower cost – differen(a(on) vs. compe((ve
scope (broad – narrow)
- Cost leadership (broad target – lower cost): the firm sets out to become the low-cost
producer in its industry. A cost leader must achieve parity or proximity in the bases of
differen(a(on rela(ve to its compe(tors.
o Parity = cost advantage translated into higher profits
o Proximity = price discount to achieve an acceptable market share
- Differen&a&on (broad target – differen&a&on): the firm seeks to be unique in its
industry. The logic of the differen(a(on strategy requires that a firm choose aDributes
in which to differen(ate itself that are different from its rivals.
- Focus strategy (narrow target):
o Cost focus: cost advantage in its target segment
o Differen5a5on focus: differen(a(on in its target segment
- Stuck in the middle: a firm that engages in each generic strategy but fails to achieve
any of them is “stuck in the middle” à no compe((ve advantage.
Cost is strongly affected by share of interrela(onships. If one firm can open up a big market
share advantage, the cost advantages of share in some ac(vi(es allow the firm to incur added
costs elsewhere and s(ll maintain net cost leadership, or share reduces the cost of
differen(a(ng rela(ve to compe(tors.
2
,Generic strategies and industry evolu(on
Changes in industry structure can affect the bases on which generic strategies are built and
thus alter the balance among them. Structural change can shit the rela(ve balance among the
generic strategies in an industry. For example, early in history the automo(ve industry focused
on differen(a(on strategies. Technological and market changes create the poten(al for Henry
Ford to change the rules of compe((on by adop(ng a classic cost leadership strategy.
Generic strategies and organiza(onal structure
Cost leadership usually implies (ght control systems, overhead minimiza(on, pursuit of scale
economies, and dedica(on to the learning curve. These could be counterproduc(ve for a firm
aDemp(ng to differen(ate itself through a constant stream of crea(ve new products.
Generic strategies and the strategic planning process
Many diversified firms categorize business units by using a system such as build, hold, or
harvest. Another common prac(ce in strategic planning is to use market share to describe a
business unit’s compe((ve posi(on.
Discussion reading: Integrated strategy: market and non-market components (Baron,
D.P., 1995)
The environment of a business is composed of market and nonmarket components, and any
approach to strategy formula(on must integrate both market and nonmarket considera(ons.
Market strategies must be tailored to the structure and dynamics of the market environment
and to the competencies of the firm, and similarly a nonmarket strategy must also be tailored
to the firm's nonmarket competencies and the characteris(cs of its market and nonmarket
environments.
Non-market environment: The non-market environment consists of the social, poli(cal, and
legal arrangements that structure the firm’s interac(ons outside of, and in conjunc(on with,
markets.
The market environment: includes those interac(ons between the firm and other par(es that
are intermediated by markets or private agreements.
Market strategy: a concerted paDern of ac(ons taken in the market environment to create
value by improving economic performance (e.g. entry mode).
The nonmarket environment: includes those interac(ons that are intermediated by the
public, stakeholders, government, the media and public ins(tu(ons.
Nonmarket strategy: a concerted paDern of ac(ons taken in the nonmarket environment to
create value by improving its overall performance. One purpose of a nonmarket strategy is to
shape the firm's market environment.
The nonmarket environment consists of the social, poli(cal, and legal arrangements that
structure the firm's interac(ons outside of, and in conjunc(on with, markets. Four I’s:
3
, - Issues: what nonmarket strategies address; open a foreign market
- Ins&tu&ons the relevant set of bodies that the firm must interact with
- Interests individuals and groups with preferences about, or a stake in, an issue
- Informa&on what the interested par(es know or believe about the rela(on between
ac(ons and consequences and about the preferences and capabili(es of the interested
par(es.
Importance of nonmarket strategies
1. Nonmarket strategies are more important the more opportuni(es are controlled by
governments (nonmarket environment) and are less important when markets control
opportuni(es.
2. Nonmarket strategies are more important the more direct challenges from interest and
ac(vist groups there are.
Since many nonmarket issues arise from market ac(vity, one approach is to view nonmarket
strategies as complements to market strategies that in some cases can be used to address
directly the five market forces Porter iden(fies:
- Threat of new entrants/compe&&ve advantage: Nonmarket strategies not only can
help realize compe((ve advantage, but they can also help offset compe((ve
disadvantage. In both ways, it helps defending against rivals.
- Current rivalry: nonmarket strategies can be used more broadly to structure the rules
of market compe((on. Consequently, some market strategies are pursued by
industries rather than by individual firms and hence do not provide a compe((ve
advantage against industry rivals.
- Subs&tutes/new entrants: Nonmarket strategies can be essen(al in crea(ng market
opportuni(es and defending against subs(tutes and new entrants.
- Bargaining power of buyers/suppliers: Nonmarket strategies can also address threats
arising from the bargaining power of buyers and suppliers.
- Drawback of using nonmarket strategies to address Porter’s five forces: ins(tu(ons in
which regulatory policies are decided are quite different from the ins(tu(on of
markets.
An alternate approach is to consider nonmarket factors as a sixth force to be defended
against. Drawback: does not sufficiently emphasize the interac(on between the five forces
and nonmarket issues. Furthermore, nonmarket ac(on can be directed at crea(ng or realizing
market opportuni(es for firms.
Most effec&ve approach: integrate nonmarket analysis and strategy formula(on into the
strategy process and focus both on specific nonmarket issues that affect the firm and on
nonmarket ac(on as complements to, or subs(tutes for, market ac(ons:
The nonmarket environment is endogenous and not exogenous (i.e., firms can influence the
nonmarket environment);
Nonmarket issues have effects at two levels:
- The firm
- The industry
4
Session 1: Introduc0on to the Strategy and Non-Market Environment
Background reading: Compe22ve Advantage, crea2ng and sustaining superior
performance chapter 1: The Core Concepts (M. Porter, 1985)
Compe((on determines the appropriateness of a firm’s ac(vi(es that can contribute to its
performance, such as innova(ons, a cohesive culture, or good implementa(on.
Compe&&ve strategy: the search for a favorable compe((ve posi(on in an industry. It aims to
establish a profitable and sustainable posi(on against the forces that determine industry
compe((on.
Two central ques(ons underlie the choice of compe((ve strategy:
- What is the aDrac(veness of the industry?
- What are the determinants of rela(ve compe((on posi(on?
Both industry aDrac(veness and compe((ve posi(on can be shaped by a firm. While industry
aDrac(veness is partly a reflec(on of factors the firm has liDle control over (5-forces). At the
same (me, a firm can clearly improve or erode its posi(on through its choice of strategy
(generic strategies).
Porter’s 5-forces à industry aDrac(veness: The five forces determine industry profitability
because they influence prices, costs, and required investments of firms in an industry (the
elements of ROI).
5-forces:
- Threat of new entrants
- Bargaining power of buyers
- Threat of subs(tute products or services
- Bargaining power of suppliers
- Rivalry among exis(ng firms
Industry structure and buyer needs: sa(sfying buyer needs may be a prerequisite for industry
profitability. The crucial ques(on in determining profitability is whether firms can capture the
value they create for buyers, or whether this value is competed away to others.
Industry structure determines who keeps what propor(on of the value a product creates for
buyers:
- If a product provides liDle value, there is liDle value to be captured by firms.
- If a product provides a lot of value, industry structure becomes crucial.
Industry structure and the supply/demand balance: profits are a func(on of the balance
between supply and demand à high demand – low supply = high profitability.
1
,Yet the long-term profitability is strongly influenced by industry structure. Even though, short-
term fluctua(ons in supply and demand can affect short-term profitability, industry structure
underlies long-term profitability.
The consequences of an imbalance between supply and demand also differs widely depending
on industry structure. Industry structure is also the profitability of excess demand. Industry
structure is fundamental to both speed of adjustment of supply to demand and the
rela(onship between capacity u(liza(on and profitability.
Posi(oning determines whether a firm’s profitability is above or below the industry average.
Generic strategies à compe((ve advantage (lower cost – differen(a(on) vs. compe((ve
scope (broad – narrow)
- Cost leadership (broad target – lower cost): the firm sets out to become the low-cost
producer in its industry. A cost leader must achieve parity or proximity in the bases of
differen(a(on rela(ve to its compe(tors.
o Parity = cost advantage translated into higher profits
o Proximity = price discount to achieve an acceptable market share
- Differen&a&on (broad target – differen&a&on): the firm seeks to be unique in its
industry. The logic of the differen(a(on strategy requires that a firm choose aDributes
in which to differen(ate itself that are different from its rivals.
- Focus strategy (narrow target):
o Cost focus: cost advantage in its target segment
o Differen5a5on focus: differen(a(on in its target segment
- Stuck in the middle: a firm that engages in each generic strategy but fails to achieve
any of them is “stuck in the middle” à no compe((ve advantage.
Cost is strongly affected by share of interrela(onships. If one firm can open up a big market
share advantage, the cost advantages of share in some ac(vi(es allow the firm to incur added
costs elsewhere and s(ll maintain net cost leadership, or share reduces the cost of
differen(a(ng rela(ve to compe(tors.
2
,Generic strategies and industry evolu(on
Changes in industry structure can affect the bases on which generic strategies are built and
thus alter the balance among them. Structural change can shit the rela(ve balance among the
generic strategies in an industry. For example, early in history the automo(ve industry focused
on differen(a(on strategies. Technological and market changes create the poten(al for Henry
Ford to change the rules of compe((on by adop(ng a classic cost leadership strategy.
Generic strategies and organiza(onal structure
Cost leadership usually implies (ght control systems, overhead minimiza(on, pursuit of scale
economies, and dedica(on to the learning curve. These could be counterproduc(ve for a firm
aDemp(ng to differen(ate itself through a constant stream of crea(ve new products.
Generic strategies and the strategic planning process
Many diversified firms categorize business units by using a system such as build, hold, or
harvest. Another common prac(ce in strategic planning is to use market share to describe a
business unit’s compe((ve posi(on.
Discussion reading: Integrated strategy: market and non-market components (Baron,
D.P., 1995)
The environment of a business is composed of market and nonmarket components, and any
approach to strategy formula(on must integrate both market and nonmarket considera(ons.
Market strategies must be tailored to the structure and dynamics of the market environment
and to the competencies of the firm, and similarly a nonmarket strategy must also be tailored
to the firm's nonmarket competencies and the characteris(cs of its market and nonmarket
environments.
Non-market environment: The non-market environment consists of the social, poli(cal, and
legal arrangements that structure the firm’s interac(ons outside of, and in conjunc(on with,
markets.
The market environment: includes those interac(ons between the firm and other par(es that
are intermediated by markets or private agreements.
Market strategy: a concerted paDern of ac(ons taken in the market environment to create
value by improving economic performance (e.g. entry mode).
The nonmarket environment: includes those interac(ons that are intermediated by the
public, stakeholders, government, the media and public ins(tu(ons.
Nonmarket strategy: a concerted paDern of ac(ons taken in the nonmarket environment to
create value by improving its overall performance. One purpose of a nonmarket strategy is to
shape the firm's market environment.
The nonmarket environment consists of the social, poli(cal, and legal arrangements that
structure the firm's interac(ons outside of, and in conjunc(on with, markets. Four I’s:
3
, - Issues: what nonmarket strategies address; open a foreign market
- Ins&tu&ons the relevant set of bodies that the firm must interact with
- Interests individuals and groups with preferences about, or a stake in, an issue
- Informa&on what the interested par(es know or believe about the rela(on between
ac(ons and consequences and about the preferences and capabili(es of the interested
par(es.
Importance of nonmarket strategies
1. Nonmarket strategies are more important the more opportuni(es are controlled by
governments (nonmarket environment) and are less important when markets control
opportuni(es.
2. Nonmarket strategies are more important the more direct challenges from interest and
ac(vist groups there are.
Since many nonmarket issues arise from market ac(vity, one approach is to view nonmarket
strategies as complements to market strategies that in some cases can be used to address
directly the five market forces Porter iden(fies:
- Threat of new entrants/compe&&ve advantage: Nonmarket strategies not only can
help realize compe((ve advantage, but they can also help offset compe((ve
disadvantage. In both ways, it helps defending against rivals.
- Current rivalry: nonmarket strategies can be used more broadly to structure the rules
of market compe((on. Consequently, some market strategies are pursued by
industries rather than by individual firms and hence do not provide a compe((ve
advantage against industry rivals.
- Subs&tutes/new entrants: Nonmarket strategies can be essen(al in crea(ng market
opportuni(es and defending against subs(tutes and new entrants.
- Bargaining power of buyers/suppliers: Nonmarket strategies can also address threats
arising from the bargaining power of buyers and suppliers.
- Drawback of using nonmarket strategies to address Porter’s five forces: ins(tu(ons in
which regulatory policies are decided are quite different from the ins(tu(on of
markets.
An alternate approach is to consider nonmarket factors as a sixth force to be defended
against. Drawback: does not sufficiently emphasize the interac(on between the five forces
and nonmarket issues. Furthermore, nonmarket ac(on can be directed at crea(ng or realizing
market opportuni(es for firms.
Most effec&ve approach: integrate nonmarket analysis and strategy formula(on into the
strategy process and focus both on specific nonmarket issues that affect the firm and on
nonmarket ac(on as complements to, or subs(tutes for, market ac(ons:
The nonmarket environment is endogenous and not exogenous (i.e., firms can influence the
nonmarket environment);
Nonmarket issues have effects at two levels:
- The firm
- The industry
4
