In 1995, the Californian Management Review published an article, “Integrated Strategy: Market and Non-market Components”, by economist and Stanford University professor David P. Baron. It argued that effective strategic management must encompass both market and non-market strategy.
The logic was compelling then – and is even more so now. There is a substantial non-market component to any business environment. Non-market means any activity that is not based on or directly driven by market forces. The non-market space provides the social and political context in which all businesses have to operate. There is and has always been a nuanced negotiation between the two spheres that legitimizes and defines any firm’s licence to operate. The patterns and actions that take place in the non-market sphere affect an organization’s ability to create value by increasing its overall performance.
Baron defines the non-market environment as including, “those interactions that are intermediated by the public, stakeholders, government, the media, and public institutions.” This is a very different environment to the market where interactions tend to be voluntary and involve economic transactions and intermediated by markets or private agreements.
In the non-market space, notes Baron, characteristics such as majority rule, due process, broad enfranchisement, and collective action, are important. Interactions may be voluntary, like a firm lobbying government departments, but are often involuntary such as government legislation and regulations, and product and service boycotts by pressure groups.
In Baron’s view, four Is characterize the non-market environment. Issues — these are what non-market strategies address, revising legislation, for example. Institutions such as the governments, government departments, and regulatory bodies deal with non-market issues. Interests are individuals and groups involved in issues. Regulation of energy markets, for example, would involve energy companies, activist groups, consumers, manufacturers and suppliers, and the media, for example. While information is what the interested parties know that is relevant to the non-market issue.
One of the difficulties with non-market strategy lies with its definition. “Any concept that is defined in terms of what it is not — i.e. non-market — is problematic,” says Warwick Business School’s Kamel Mellahi. “But alternative descriptions – such as CSR (corporate social responsibility) or lobbying — fail to capture its full scope. Alternative terms have also failed to catch on. Perhaps it should be called ‘social and political strategy’?”
Yale School of Management’s David Bach emphasizes the fact that non-market strategy is a holistic process, requiring a firm’s management to simultaneously monitor its positioning among stakeholders — including the arena of public opinion.
“Few firms are prepared to do the hard work and commit long-term to developing an effective non-market strategy. Fewer still understand how to integrate market and non-market strategies to sustain competitive advantage,” says Bach before venturing an answer to the question of what is non-market strategy and why is it important now? “Non-market strategy is simply the idea that the business environment consists of more than just markets. There are the other stakeholders who bear directly on a company’s ability to create and defend competitive advantage: governments, regulators, non-governmental organizations, the media and so forth. We can call these ‘non-market actors’ and they become increasingly important in terms of the influence that they have on the company.
Just as a firm strategically manages its market environment and comes up with a plan for creating competitive advantage, it should do the same for the non-market environment. “
According to Bach and his co-author David Allen: “Non-market strategy starts with a simple, dual premise – first, that issues and actors ‘beyond the market’ increasingly affect the bottom line, and, second, that they can be managed just as strategically as conventional ‘core business’ activities within markets. The challenge for CEOs and their leadership teams is one of simultaneous separation and integration. To successfully manage beyond the market, executives must recognize the important differences between the firm’s market and non-market environments but then take an integrated, coherent and strategic approach to both arenas. This is the key to turning perceived ‘non-business’ issues into strategic opportunities and thereby building sustainable competitive advantage.”
In their work Bach and Allen discuss a number of facets of non-market strategy. They address the role of globalization as a catalyst for non-market strategy development, for example. There are, say Bach and Allen, four factors linked to globalization that are driving non-market strategy. The first is that globalization means companies have to address multiple audiences across continents and countries, and thus navigate many non-market environments, that often reflect markedly different social and political values.
Second, as Bach and Allen point out, it is not just business that is becoming global, but also the influence of NGOs and activists. Using social media and other modern communications technologies, activists can respond quickly, reporting events wherever they occur within hours and bringing them to the attention of consumers around the world.
Third, doing business across the globe means more market opportunities, but it also means being exposed to many regulatory environments, regional, national, and international. Governments have created many more regulatory agencies. Regulatory frameworks are far from uniform.
The last factor is that greater globalization has also led to increased market competition. When organization have routinely used outsourcing to lower costs and fragmented their value chains across the world, finding a competitive edge proves ever more difficult. Understandably organizations are looking beyond market strategy to non-market strategy to capture that competitive advantage. The arena of strategy has never been bigger.
David Allen and David Bach, “What every CEO needs to understand about non-market strategy”, Sloan Management Review, Spring 2010
This was originally published in What we mean when we talk about strategy by Stuart Crainer and Des Dearlove (Infinite Ideas, 2016).