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The OCR Glossary

Nonmarket Strategy

Mary-Hunter McDonnell

Nonmarket strategy refers to the tactical repertoire that firms draw on to manage and influence uncertain or contentious institutional environments. This includes firms’ efforts to exert influence over their regulatory (formal) and social (informal) environments. Nonmarket strategy is keenly related to corporate reputation in two primary ways. First, corporate and industry reputations play a role in whether firms recognize uncertainty within their environment as a threat that warrants a strategic response. Thus, reputations predict when firms will draw on nonmarket strategies to defensively respond to institution-level threats. Second, more reputable firms are likely to be able to draw from a wider range of nonmarket strategies—and to deploy them with more success—than less reputable firms. Thus, reputations determine firms’ choices about which nonmarket strategies to deploy, as well as the likelihood that these nonmarket strategies will effectively shore up stability within a firm’s institutional environment. This entry begins with a general discussion of the importance of nonmarket strategy before turning to an overview of the tactical repertoires that firms deploy, followed by a discussion of the role that corporate reputation plays in tactical choice and effectiveness.

Why Should Firms Be Concerned About the Nonmarket Environment?

Companies and industries are embedded in their nonmarket environments, which include the social system and the formal regulatory system in which companies operate. Nonmarket environments also constrain corporate behavior by determining the “rules of the game” that define and constrain market competition. For example, social norms and expectations may pose challenges for particular products that are socially contested or deemed taboo (e.g., cigarettes or pornography). These products are often, in turn, subject to higher levels of scrutiny and regulation within the formal environment, where governments may further constrain a company’s strategic options by, for example, imposing taxes or stringent standards for the production and distribution of a product. Nonmarket forces thus play an important role in determining the long-term success and attractiveness of particular companies and industries. Companies must therefore pay close attention to signals of changing trends or rising uncertainty within their social or regulatory environments.

To illustrate the importance of nonmarket forces for the viability and performance of a product, consider the case of Bitcoin. Bitcoin is a virtual currency that exists through an online open-source payment system that was introduced to the public in 2009. The development of the currency has spawned an industry dedicated to the promotion, brokerage, and distribution of Bitcoin. The product’s purported value is its ability to provide merchants and consumers with a universal form of payment that is subject to lower transaction costs than those imposed by the trading of currency or the use of credit. While many initially saw promise in the viability of the product, the value of Bitcoin has fallen fairly steadily over the past year, primarily due to a confluence of nonmarket threats in both its formal and its informal environment that industry participants have been unable to favorably influence. First, within the social setting, scandals in early 2014 revealed that Bitcoin was being used for money laundering and black market exchanges over the Internet, leading to multiple arrests in the United States. Courts in the United States also refused to recognize Bitcoin as a currency, opting instead to classify it as a security, which allowed for greater regulatory scrutiny. This regulatory decision took a toll on Bitcoin’s attractiveness to consumers, but its regulatory fate in the United States was more favorable than in many other countries, such as Thailand (where it has been banned altogether) and China (where its use is heavily regulated). Thus, the Bitcoin industry’s faltering performance in the present day is not attributable to its competition with other substitutable products but rather, in large part, to its inability to win favor within the social and regulatory environments in which it operates.

While the Bitcoin example illustrates the challenge that uncertain or contentious social and regulatory environments can pose to an industry, companies do not have to passively acquiesce to the whims of their environments. Rather, companies draw from a compendium of tactics designed to influence and win favor within their social and regulatory environments. These tactics—collectively, the repertoire of nonmarket strategy—are described in more detail in the following section.

The Tactical Repertoire of Nonmarket Strategy

The tactical repertoire of nonmarket strategy is rich and ever evolving, as firms seek to find new ways to access and influence critical nonmarket stakeholders, such as politicians, social interest groups, and powerful activist organizations. With respect to the formal regulatory environment, nonmarket strategy is primarily made up of two classes of strategies: access strategies and advocacy strategies. Access strategies are those that firms draw on to increase the odds that they will have a voice within the regulatory process. A common access strategy is, for example, contributing funds to the campaign of particular politicians. Companies assume that a politician will be more likely to take their call and hear their opinion if they supported the politician’s campaign. Advocacy strategies, on the other hand, are designed to influence the opinions or activities of particular regulatory stakeholders. A common advocacy strategy is, for example, lobbying. By lobbying, companies or industry-level interest groups seek to affect the types of policies and regulations that politicians support. When facing particularly threatening regulatory uncertainty, companies may also attempt to wield political influence by mobilizing mass public support by, for example, hiring public relations companies to recruit members of the public to sign a political petition that advocates the company’s position.

In the informal setting, firms primarily face nonmarket threats in the form of contentious challenges from social activists. Nonmarket strategy in this setting is made up of four broad classes of strategies: (1) evasive strategies, (2) impression management strategies, (3) concessionary strategies, and (4) corporate-sponsored insurgency. A firm’s first line of defense with respect to contentious activists is to use evasive strategies that seek to avoid activist encounters entirely. Firms may do this by opting against operating in communities where activists are mobilized against them, by selectively choosing to locate in states where the regulatory system advantages the company over activists (i.e., avoiding states that are very pro-union), or by warding off a contentious attack by anticipating a potential challenge and proactively changing the company to address the activists’ concerns. For firms that cannot avoid activist encounters, a second line of defense is to use strategic impression management strategies that bolster the firm’s reputation from the disparaging claims made by activists. These strategies typically do not address activists directly but rather ramp up the firm’s external corporate social responsibility initiatives to dilute the salience of the activists’ claims. Examples include making large charitable contributions to public organizations in contentious communities or engaging in public relations campaigns to emphasize prosocial aspects of the firm. The final two classes of strategies involve those that participate directly in the activism, either by conceding to the activists’ demands or by using tactics to directly counter the activists’ challenge. Some firms that are challenged will ultimately concede in some form to the activists’ demands. Approximately 25 percent of firms targeted with boycotts that receive national press coverage will end the challenge by conceding. At times, a firm may not be willing to concede, perhaps because concession would be prohibitively expensive. Firms facing particularly intractable conflicts may also respond to the activists’ challenge by using corporate-sponsored insurgency to wage a countermovement. For example, firms may create shell organizations that look like unaffiliated nongovernmental organizations to engage in procorporate grassroots mobilization (a strategy referred to as “astroturfing”). Corporate-sponsored insurgency can also be used to co-opt potentially contentious stakeholders by, for example, sponsoring activist campaigns to win allies among activists who might otherwise be hostile.

The Role of Reputation in Nonmarket Strategy

Corporate reputation often plays a critical role in moderating the incidence and effects of nonmarket strategy. For example, a firm’s reputation is likely to determine when it recognizes a nonmarket event as a potential threat that warrants a response. Very reputable firms tend to be given the benefit of the doubt when they face activist challenges, for example, and thus may be less likely to feel that an activist challenge necessitates a drastic response. For this reason, very reputable firms may be less likely to respond to nonmarket threats than do their less reputable peers, and when they do respond, they may favor less extensive tactics, such as impression management, over direct concessions. Indeed, the extent to which an activist movement is effective at disrupting a firm’s reputation has been shown to be highly predictive of whether and how the targeted firm responds.

Corporate reputation may also determine the types of nonmarket strategic tactics that are available to a firm. For example, politicians are likely to be more willing to publicly associate with more reputable firms by allowing them to publicly participate in the policymaking process by, for example, offering testimony at committee hearings. However, politicians are likely to be less willing to publicly associate with less reputable firms. Thus, firms that are disreputable may have their campaign contributions rejected by politicians, forcing them to use alternate private influence tactics such as lobbying instead. More reputable firms may be better at mobilizing public support when they are challenged by a contentious activist, whereas less reputable firms may be more effective when engaging in covert tactics like astroturfing, where the public will not recognize the firm’s association with the countermovement.

Finally, a firm’s reputation is likely to determine whether its nonmarket strategies are effective at ameliorating threats within the nonmarket environment. For example, if a disreputable firm responds to an activist challenge with increased impression management that touts the firm’s prosocial orientation, stakeholders are unlikely to find the firm’s response authentic or compelling, which should do little to address the activist threat. If a reputable firm does the same, however, stakeholders may be more likely to believe the firm’s espoused public image over the negative image promulgated by activists. Similarly, given that political stakeholders are very protective of their own public approval, they are likely to respond more favorably to a firm’s influencing efforts if it has high levels of public approval of its own. If the public strongly disapproves of a firm, on the other hand, political stakeholders are likely to be more reticent in responding to the firm’s access or influence tactics. Corporate reputation is thus a fundamental part of nonmarket strategy. It plays a role not only when nonmarket threats occur or are recognized by industry actors but also in how nonmarket strategy is strategically deployed, as well as whether those strategies are ultimately effective in resolving nonmarket threats.

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See Also

Impression Management Theory

See Also

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