Integrated Strategy: Market and Nonmarket Components

Summary of: Baron, D.P. (1995) Integrated Strategy: Market and Nonmarket Components. Californian Management Review, 37(2)

INTEGRATED STRATEGY

The environment of a business is composed of market and nonmarket components, and any approach to strategy formulation must integrate both market and nonmarket considerations.

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 characteristics of its market and nonmarket environments.

Non-market: The non-market environment consists of the social, political, and legal arrangements that structure the firm’s interactions outside of, and in conjunction with, markets.

The market environment: includes those interactions between the firm and other parties that are intermediated by markets or private agreements.

Market strategy: a concerted pattern of actions taken in the market environment to create value by improving economic performance (e.g. entry mode).
 

The nonmarket environment: includes those interactions that are intermediated by the public, stakeholders, government, the media and public institutions.

Nonmarket strategy: a concerted pattern of actions 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, political, and legal arrangements that structure the firm's interactions outside of, and in conjunction with, markets.

The nonmarket environment is characterized by four I's:

1. Issues: what nonmarket strategies address; open a foreign market

2. Institutions the relevant set of bodies that the firm must interact with

3. Interests individuals and groups with preferences about, or a stake in, an issue

4. Information what the interested parties know or believe about the relation between actions and consequences and about the preferences and capabilities of the interested parties

Importance of nonmarket strategies

1. Nonmarket strategies are more important the more opportunities are controlled by governments (nonmarket environment) and are less important when markets control opportunities.

2. Nonmarket strategies are more important the more direct challenges from interest and activist groups there are.

Since many nonmarket issues arise from market activity, 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 identifies:

• Threat of new entrants/competitive advantage: Nonmarket strategies not only can help realize competitive advantage, they can also help offset competitive disadvantage. In both ways, it helps defending against rivals.

• Current rivalry: nonmarket strategies can be used more broadly to structure the rules of market competition. Consequently, some market strategies are pursued by industries rather than by individual firms and hence do not provide a competitive advantage against industry rivals.

• Substitutes/new entrants: Nonmarket strategies can be essential in creating market opportunities and defending against substitutes 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: institutions in which regulatory policies are decided are quite different from the institution of markets.

An alternate approach is to consider nonmarket factors as a sixth force to be defended against. Drawback: does not sufficiently emphasize the interaction between the five forces and nonmarket issues. Furthermore, nonmarket action can be directed at creating or realizing market opportunities for firms.

Most effective approach: integrate nonmarket analysis and strategy formulation into the strategy process and focus both on specific nonmarket issues that affect the firm and on nonmarket action as complements to, or substitutes for, market actions:

The nonmarket environment is endogenous and not exogenous (i.e. firms can influence the nonmarket environment);

Nonmarket issues have effects at two levels:

1. The firm

2. The industry

Strategies for addressing them can be undertaken at both levels. However, because of differences among the firms in an industry, however, the nonmarket strategies of most firms include individual actions as well.

Just as firms create value by developing and deploying market assets, they employ nonmarket assets to add value. They include expertise and competency in dealing with nonmarket forces, as well as reputation. To the extent that its nonmarket assets and competencies are unique or difficult to replicate, a firm has a nonmarket advantage.

This advantage cannot only be dissipated through replication by rivals, but activists and other interest groups can also damage it. The principal nonmarket capability that cannot be replicated is the knowledge, expertise, and skill of managers in addressing nonmarket issues.

A nonmarket asset can also provide market or competitive advantages (e.g. develop reputation and personal relations).

The value of a nonmarket competency also depends on the competencies of the firm's allies, and of its competitors, in dealing with nonmarket issues. On many nonmarket issues, a firm's market competitors may be its nonmarket allies.

At any instant in time, these distinctive competencies and firm-specific nonmarket assets are fixed, but over time they can be developed (or lost).
 

Strategies and borders

A comprehensive global or international nonmarket strategy seems unlikely to be successful. Nonmarket strategies are more likely than market strategies to be multi-domestic when institutions and the interests differ across countries.

• In the nonmarket environment, examples of global strategies are:

  • Supporting and working for free trade in every country;

  • Applying universal ethical principles in all its operations; and

  • Implementing environmental policies in which the same abatement standards are maintained in every country.