“Corporate executives need to re-frame their responsibilities to include the interests of all the stakeholders in society at large; not just shareholders, but also employees, the citizens of our communities, and those who care about the environment” – Simon Mainwaring
In my previous post I talked about popular movements and in particular their impact on consumers and investors as sources of pressure on companies, but they are not the only nonmarket forces acting on companies. What do I mean by nonmarket? David Baron defines nonmarket challenges as arising “not from the actions of competitors but instead from the public, interest groups, the legal system, and government” (Baron, 2006).
Governments and regulators can and do, of course, act in response to public pressure and opinion, and for sure being able to influence the drafting and specification of regulations can be a source of competitive advantage.
There is one more, important, source of pressure that is worth reviewing. In his book “The Second Curve”, Charles Handy laments what he characterises as the tendency for employers to view employees as opportunities for profit, rather than members of a community: “Free people do not relish being the instrument of others. The best of them will, increasingly, either refuse to join such institutions or demand a high price for the sacrifice of their rights” (Handy, 2015). And in 2021, Roger Martin writes about knowledge workers: “The primary driver of a company’s value, [they] are being asked to work for the benefit of… …shareholders, …to make sacrifices…, …to acquiesce in the firing of friends and colleagues” (Martin, 2021). Now, employees will not just reject companies who do not value them, but generational transition suggests that employees will increasingly reject companies who do not share their values. And their values will increasingly be consistent with exemplary ESG performance.
These five sets of stakeholders: employees; investors; regulators; popular movements/non-governmental organisations; and communities are very important to the future profitable growth of companies, who ignore them at their peril. In their book “Strategic Reframing”, Rafael Ramírez and Angela Wilkinson describe and distinguish between so-called “transactional” and “contextual” environments – the transactional environment comprising actors with whom the company interacts directly and the contextual environment containing environmental factors beyond the direct influence of the company (Ramírez & Wilkinson, 2016). Perhaps there was a time when many companies thought that at least the majority of the stakeholders described above were outside their direct influence and therefore within the contextual environment. Even if they ever existed, those days have gone. I’m going to offer something new to think about here, a new way of looking at stakeholders. I propose that there is now a new, parallel, set of five forces working on “non-functional” attributes of companies’ offerings in the same way as Porter’s traditional Five Forces (Porter, 2008) work on functional attributes.
I’ll call these “five nonmarket forces”:
- The disruptive influence of non-governmental organisations (NGOs) and popular movements, representing both societal needs and dominant opinions in society
- The withholding power of employees, representing their changing attitudes, values and beliefs
- The withholding power of investors, representing their rational valuation of future earnings as described previously
- The legislative power of regulators, representing indirectly the opinions of electorates or governments
- The changing attitudes of customers as they too are buffeted by these same forces.
(It’s worth remembering that these influences are not independent of each other – for example customers and employees can be strongly influenced by NGOs as in the case of flygskam described in my previous post).
You need a strategy to deal with this. Andrew Marr’s book “Elizabethans” chronicles the history of the United Kingdom since the middle of the 20th century by relating stories of remarkable individuals. Towards the end of the book, he asks a couple of questions about the key social issues impacting countries all over the world. He states that “the market, our dominant economic order, has no answer to these questions and no way of even beginning to think about them” (Marr, 2020). This suggests that a strategy based purely on markets and profits will not work, but you still need a strategy. Let’s call it a nonmarket strategy. It must be a strategy that drives value for your company from nonmarket issues, or it won’t work. Too many companies approach ESG as a fringe issue, something to be delegated to an ESG Officer make sure that they don’t get sued, or to which they can pay lip service by reducing power consumption, or water use, or similar. That misses the point. There is significant value that can be created by focusing on ESG. Your nonmarket strategy should focus on where that value can come from – once you know that it can be woven into your innovation strategy and become a significant source of both value and differentiation. Which means focusing on the outside. Work by Harvard and London Business Schools showed that ESG practices in many companies converged between 2012 and 2019 (Serafeim, 2020). It suggested that companies are all looking at the same internal sustainability and governance issues – so no differentiation. I believe that, analogous to working with market forces, value comes from looking at how you can make things better outside your own company – reducing the environmental footprint of your products, making them more recyclable, increasing the diversity of opportunities you offer potential employees and therefore by extension your local community. And so on. Imagine that your organisation really exists for the benefit of those around you and not just to meet narrow, internally defined objectives. In truth, this is exactly what it does exist for. Without meeting external needs (the needs of your customers and the needs of your nonmarket stakeholders) it will not survive in the long run. This thinking needs to be embedded in the very purpose of your organisation, at which time your innovation strategy can take up the reins.
There doesn’t have to be a tradeoff between profitable growth and corporate responsibility. In fact, responsibility can help to drive innovation. Porter and Kramer posit three pathways to achieve this, specifically focusing on societal benefits:
- reconceiving products and markets, creating more holistic benefits for customers and finding ways to operate at the “bottom of the pyramid” – I’ll write more on this in a future post
- redefining productivity in the value chain, reducing packaging, transportation costs, emissions and so on in order to make the business more efficient as well as meeting regulations and avoiding taxes
- building supportive industry clusters, where supporting partners, suppliers, adjacent industries, universities are all within striking distance of the company’s operation. I noted in an earlier post (Clegg, 2020) that clusters and ecosystems can also be an exceptionally powerful force in driving innovation.
There’s so much more to say about this, starting with thinking deeply about the nonmarket environment. There are simple models we can use to help us with this. I’d be happy to discuss further, let me know in the comments below or contact me if you want a deeper discussion about nonmarket forces and how to harness them for good.
- Companies have a tendency to ignore the environment around them, including the nonmarket environment.
- There are five key nonmarket forces acting on companies. These are:
- The disruptive influence of NGOs and popular movements
- The withholding power of employees
- The withholding power of investors
- The legislative power of regulators
- The changing attitudes of customers
- You must have a nonmarket strategy, which in turn will drive your innovation strategy.
References and Further Reading
Baron, D. (2006). Business and its Environment – 5th Edition. Upper Saddle River: Prentice Hall.
Clegg, J. (2020, November 5). Working Together. https://www.johnmclegg.com/blog/innovation/working-together/
Handy, C. (2015). The Second Curve: Thoughts on Reinventing Society. London: Random House.
Marr, A. (2020). Elizabethans: How Modern Britain Was Forged. London: William Collins.
Martin, R. (2021). It’s Time to Replace the Public Corporation. Harvard Business Review, January-February, pp. 34-42.
Porter, M. (2008). The Five Competitive Forces That Shape Strategy. Harvard Business Review, January, 25-40.
Ramírez, R., & Wilkinson, A. (2016). Strategic Reframing: The Oxford Scenario Planning Approach. Oxford: Oxford University Press.
Serafeim, G. (2020). Social Impact Efforts That Create Real Value. Harvard Business Review, September-October, 38-48.
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