Why Businesses Need "Non-Market Strategies"

Stanford's Neil Malhotra focuses on business ethics and non-market strategies. In the last two weeks, we've discussed the origin and structure of Stanford's ethics course as well as Malhotra's view that ethics needs to be viewed as an integral part of corporate strategy. Today, we'll hear about why students need more exposure to the elements of non-market strategies.

BNET: What exactly is "non-market strategy" composed of?

Malhotra: Market strategy or corporate strategy is how a firm strategically interacts with its suppliers, its customers, its competitors, the labor market, etc. Non-market is all of the interactions outside of those segments: for instance, with activist groups, legislators, government bureaucracies, courts and the media. Unlike with market strategy, you can't assume these people are trying to maximize profit. They have different objectives, so your relationships are different than those with competitors or suppliers. For instance, congressmen are interested in reelection, so what does that mean for your ability to convince them to not pass policies that harm your company or to pass policies that help your company?

BNET: What in the course are students most curious about?

Malhotra: They are most curious about as government expands its role in the economy under a democratic administration, how corporations can understand that and leverage this. A lot of students are interested in the clean tech sector. They want to know how they can change EPA standards or get government money to help incubate these companies.

The second example is with healthcare, where the government is very concerned with cost reductions. That might lead to new applications for tech in healthcare and electronic records. There are whole industries that can be based on non-market interventions. One vote in the Congress can create 20 firms.

BNET: How is the course structured? Do you study cases about a single company and how they regulated a certain regulatory regime, or do you start with the regulatory structure and how it might change in the future.

Malhotra: The class is basically half and half. We teach about how the regulation is set up by the Administrative Procedures Act, how companies lobby agencies to change regulatory requirements, the characteristics of bureaucracies and the behavior of people who work in them--that sort of thing. Then in the second half of the class we would have a case on pharmaceutical switching where an insurance company might want to force a pharma company to move a certain drug from prescription to over-the-counter and the pharmaceutical company doesn't want to do that. So, we'd study the story of the two companies fighting within the FDA. We'd look at the specific FDA rules that apply and decide why one company won and one lost. We would analyze what each company could have done better in its efforts.

BNET: You have an interesting blend of political science and business in your teaching and research. What are you working on right now?

Malhotra: We're looking at if government natural disaster management is efficient across a span of agencies like FEMA and the Department of Agriculture, as well as how the Congress allocates money relating to disasters. What we're finding is that voters reward politicians for spending money on relief after a disaster, but they don't reward them for investing in prevention. This creates really bad effects, as you can imagine. You don't build the levies in New Orleans, but you come and give relief checks out, because that helps get you elected. In other democracies, this is even more ridiculous. In India, there's an area called Bihar that suffers from flooding. There's at least anecdotal evidence that the government purposely does not deal with the floods, just so they destroy the area. Then they can go hand out food and water and have the people vote for them. We just see it in a smaller scale in the United States.

BNET: Why is it smaller scale in the United States?

Malhotra: That's a really tough question. The US has had democracy for around 200 years and India has had democracy for about 50 years. America in 1830 or 1840 would probably look very similar. The robustness of American democracy is very much a post-New Deal thing. The modern American conception of democracy dates from about 1955, really. I think it's unsurprising that in countries that have only been trying this for 50 years, it doesn't look the same.

BNET: So, how will the teaching of non-market strategies continue to develop?

Malhotra: The alumni have told us, "We wish we knew more about non-market strategies, especially in light of the current economic situation." I hope more business schools start to do what we're doing by focusing on these non-market issues; I think Stanford is one of the only schools where it's a required course. Students might not intuitively know to take it because it's not explicitly about accounting, finance or marketing, but it is very important the higher you get up in business. There's a very tight knit community of professors who teach this sort of course. We hope that it becomes more common in business schools, like finance or accounting.