Slides

04/10/23 Copyright 2009 D.Diermeier 1

Session 10 – Strategies in Regulatory Arenas

SEEK-441 Strategic Management in Non-Market Environments

Daniel Diermeier

IBM Distinguished Professor of Regulation and Competitive Practice

Director of Center for Business, Government, and Society

Kellogg School of Management (MEDS)


Perceptions about lobbying

Power over actions: persuasion/threats, coercion, cutting deals in smoke-filled rooms -- seldom

Influence over beliefs: strategic provision of politically-relevant information to and from political and public officeholders -- the principal form of lobbying

Politically-relevant information pertains to the interests of officeholders; e.g., constituents and policy interests; rent chain; emphasize jobs--not profits

Strategic in the sense of providing your side of the issue and counteracting the other side’s messages

Strategic in the sense of targeting (whom to lobby) and timing (when to lobby them)


Levels of Lobbying

Business

CEO

Member/Officeholder

Government

“Restrictions on junk bond financing will cost jobs.”

Interact withthe member and her staff atmultiple levels

Staff

Managers

technical information

political informationcommitteepersonal--administrative assistant--legislative director--legislative assistant--legislative correspondent

Linton senatormessages


Lobbying – Key Steps

Step 1. Identify the information that stakeholders possess that is decision-relevant for legislators.

Step 2. Determine how to transmit that information to legislators credibly.

Step 3. Get access to pivotal legislators and proposers.


contact--But why should I act?

Types of lobbying

QualityType of

information Remark

Irresponsible false Not only morally but alsostrategically objectionable

Superfluous true but known Politicians are busy and do not liketheir time wasted.

Good true and unknown A necessary but not sufficientcondition for a successful lobbying

Excellent true, unknown, andimportant to thepolitician’s goals

Sufficient for a contact, plus goodprospects for influence; a vote or,better yet, an ally


What Makes Information Credible?

1. Record of being truthful and accurate--reputation

2. Relationships of trust

3. Data and analysis

4. Corroboration of position and analysis by others with different interests


Principles of lobbying

Know the institutional arena--where decisions are made Know its officeholders' interests and incentives; risk averse and

don’t like uncertainty; e.g., about whether constituents will benefit or be hurt and complain or take action;

Respect the officeholder and her staff--most are smart, all are savvy

Don't just talk - Listen to officeholder and her staff for their interests and concerns strategic advice--about process, about likely votes

Explore and exploit coalition building opportunities; e.g.Calgene include sunflower growers (chapter 8) Microsoft included Excite@Home and Icast.com as part of coalition

to lobby FCC to open up AOL’s instant messenger service.

Establish (access), maintain, and use continuing relations use allies that have access: e.g. TribalVoice and the FCC.


The Interest Group-Matrix

Identifies strategy templates

Tool is best used in conjunction with Distributive Politics Spreadsheet

Depending on an issue’s location in the matrix different approaches are appropriate


Interest Group Matrix

Opponents of Policy/Law

Proponents of Policy/Law

Organized Not Organized

Org

aniz

edN

ot O

rgan

ized

Interest grouppolitics

Entrepreneurialpolitics

?Client politics

environmental protection

trade liberalization

tax breaks


Probability of Passing Bill

Entr. Politics

Interest Group Politics

Client Politics



Organized Not Organized

Organized

Not Organized ?


Opponent Strategy

Organized Not OrganizedO

rgan

ized

Not

Org

aniz

ed



?Client politics





tax breaks


Proponent Strategy


rgan

ized

Not

Org

aniz

ed



?Client politics





tax breaks


Client Politics - Overview

Proponents are organized - opponents are not Since opponents are not organized, proponents should win if

their supporters are organized, politically motivated and willing to take action

But:

1. Counteractive strategies are available e.g. information supplied by an opposing group may push

the issue towards interest group politics

2. General public distaste for client politics this may allow opposing interests to portray proponents as

“special interests”


Client Politics – Proponents

Proponent tactics usually include: Using a low profile strategy to avoid media or public

attention Providing the key decision makers with information

(credible) that points out the public benefits of a policy measure – decision makers may use this information to later justify their vote

Considering the merits of a piggy-back or legislative vehicle strategy such as omnibus bills, riders on appropriations, comprehensive reform measures (e.g. Luxury Tax)

Hurrying the matter to a resolution before media attention or opposition groups can organize

Anticipating opposition tactics (see next slide)


Client Politics - Opponents

Opponent tactics usually include:

Using a high profile strategy to expose proponents as political clients (a.k.a. “pigs feeding at the public trough”)

The Problem: incentives for collective action against proponents are low by definition and high-profile strategies are costly, so...

Leverage existing social, economic or political infrastructure to minimize organization costs and time

Search for a well-placed politician (e.g. Party Leader/Committee Chair) or political entrepreneur (i.e. Nader) to represent the otherwise inactive and dispersed cost-bearers

Create media interest in issue or the proponents tactics for special interest legislation






rgan

ized

Not

Org

aniz

ed



?Client politics



tax breaks


Entrepreneurial Politics

Entrepreneurial politics is the opposite of client politics and is one of the most difficult strategies

A political entrepreneur can be someone within the political system (e.g. Senator Kennedy of education) or outside of politics (e.g. Ralph Nader on consumer rights)

Additionally, you have to discern whether information exists that can credibly alter perceptions about costs and benefits so that the nature of politics can shift to interest group politics If so, an effective strategy may be possible but

has to be carefully implemented If not, more modest and realistic objectives must

be adopted to minimize losses (e.g. market entry)






rgan

ized

Not

Org

aniz

ed



?Client politics



tax breaks


Interest Group Politics - Overview

Interest group politics is typically highly visible (e.g. oil industry vs. environmentalists)

There may be disagreement within interest groups about the appropriate scope or resolution of the issue (e.g. obesity)

Business interests tend to have relatively high resources and low costs of organizing, and thus may help to represent unorganized interests (e.g. manufacturer organizing suppliers)

Key problem for businesses is translating money into votes!



Some common tactics by Interest Group Proponents and Opponents:

Coalition-building with other Interest Groups is critical Pharmaceutical companies and patients

Pick an objective in order to build the strongest coalition Disney

Using your rent chain Luxury Tax

Adopting arguments that emphasize the interests of otherwise unrepresented interests / constituents

Drug-Reimports – Drug safety

Seeking diverse groups to coordinate / corroborate messages

internet gambling Scrubbers (see Baron book)



Proponent Strategies Changing the status quo

is generally more difficult and requires persuasive arguments or evidence

Identify the broadest coalition by strategically defining coalition

Identify strengths and weaknesses of coalition

Opponent Strategies Focusing on doubt and risk

of new law or policy Use delay tactics to

postpone decision (e.g. “Big Five” tactic against SEC chairman’s reform to separate audit and consulting functions)

Identify strengths and weaknesses of coalition


Interests - Key Take-Aways

Constituency analysis helps predicting which interests will be active and their expected impact.

If more than one interest is active on a given issue, the distributive politics spreadsheet helps to estimate a group’s likely impact as well as coalitional alignments.

Coalitions are highly issue-specific. Which aspect of an issue is emphasized, will determine coalitional alignments.

The interest group matrix helps to identify broad strategy options for different interest group configurations.



The Solution!

Diebold’s Direct Electronic Voting Machines (DRE’s)


2002 Elections in Georgia

Senator Max Cleland (D) Governor Roy Barnes (D)


Update on Diebold

California issued a ban on one model of Diebold voting machine charging that Diebold provided false information and filed suit. Diebold settled the claim for $2.6 million and agreed to make some changes.

In 2005 Diebold’s stock is down 40%, despite 14% sales growth and 7% earnings growth in the past five years. The company experiences significant executive turnover; CEO O’Dell resigns in October 2005.

A Diebold press release cites a 2004 study by Caltech/MIT found that Diebold’s voting machines in Maryland had the lowest voter error rate in the nation.

Diebold rebrands voting division Premier Election Solutions in 2007 and sells Premier to market leader Election Systems & Software for a little over $5 Mil. Diebold takes an estimated pre-tax loss of $55 Mil.


Diebold Quote

“We probably underestimated the processes involved with purchasing decisions at the state level and the public scrutiny and polarization those decisions tend to create.” Michael Jacobsen, Diebold Spokesman. Financial Times, Jan 04, 2005.


Diebold in the News Media

Audience Interest

More coverage

3005articles

Rob-Georgia +Hacked Memos(Hint of scandal)

2002

Voting MachinesPre 2000 election

1156 articles

1999

2098articles

2001

Voting machines post 2000

2003 2004

Rob-Georgia +hacked memos+DMCA lawsuit+“deliver Ohio”(conflict of interest)

2463articles

10779articles

Threshold for Negative Adverse Business Effect has been reached


Bev Harris investigates

Bev Harris finds 40,000 GES files online and a directory named “rob-Georgia”. Puts these online.

A hacker gets access to DESI’s intranet in March 2003 and copies thousands of internal emails and memos written by employees.

A study by Avi Rubin at John’s Hopkins finds security flaws with Diebold’s software and systems.

Activist attention is an opportunity, if handled well…


Looking Back - Nonmarket Risks for Diebold

Politicians as Customers: Diebold’s customers are county and state election officials—responsive to voters and other elected officials.

Media. Typically voting technology is not of great interest to most people and therefore not a subject of extensive coverage.

The 2000 election changes that. Activists. Unlike ATM transactions, in every election

there is guaranteed to be a group of organized, committed, capable activists who care deeply about election results.

Public. In every election there is large group of people who are going to be extremely dubious about the legitimacy of the result:

the losers. Courts. Election outcomes, voting rules, redistricting etc

are often contested in the legal arena.


Key information

Stakeholders do not understand the intricacies of voting machines or their vulnerabilities.

Tradeoffs between open source software and proprietary software on dimensions.

Relative error rates of different types of machines (overvotes, undervotes, spoiled ballots etc).

Advantages of ballot layout on touchscreen and the ability to confirm vote choice.

Stakeholders do not understand the role and need for transparency e.g., the ability for the loser to have confidence that he really lost.


Regulation

Regulation is government intervention in the market place using commands, controls and incentives

Regulatory activity shapes the “rules of the game” in the market place

it can sustain competitive advantages (e.g. Disney) or erode them (e.g. Microsoft)

regulation can also affect entire industries (e.g. tobacco, fire-arms)

To successfully manage regulatory environments managers need to understand:

the motivations for government regulation the politics of regulatory implementation and change


How regulators think – Drug Approval

SocialCosts

0 Restrictions on Use

Side-effects(“Safety”)

TotalCosts

AB

social optimum

Illness(“Efficacy”)


Regulation Techniques

Technology-based prescribes specific technology e.g. seat belts, drug approval Problem: choosing efficient technology Case: Thalodomide

Incentive-based Tax incentives Entitlements (trading-based) Liability law Problem: choosing the right incentives Case: Westinghouse


Background: Celgene Corp. and Thalidomide

In 1957 the drug thalidomide was marketed as a sedative and prescribed for morning sickness

51 brand names in 46 countries (including Canada, UK, Germany) In 1962 the causal link between thalidomide and severe birth defects was

confirmed, and the drug removed from the market The drug had by then caused over 12,000 birth defects and an unknown

number of miscarriages worldwide The incident was a turning point for regulatory practice in the U.S. where the

FDA did not approve the use of the drug [only 17 incidences of thalodimide-induced birth defects in the U.S.]

New evidence showing that Thalidomide helps treat leprosy (over 30 yrs of supporting data), as well as promising results for the treatment of AIDS wasting syndrome, mouth ulcers, and graft vs. host disease (transplant patients), and solid myeloma cancers.

AIDS buyers’ clubs start importing from Brazil and Mexico What should Celgene do?


Celgene’s Marketing Options

Celgene has three options for a market strategy: “Focus on analogue”: Don’t take thalidomide to market; wait for

analogue to be developed How likely are they to come up with a suitable analogue? Will another company take thalidomide to market? What are the 1st- mover

advantages?

“Partnering”: Look for marketing partnership with big pharma Who would partner with Celgene on this product? How much value would Celgene have to surrender to the partner?

“Marketing Thalidomide”: Take it to market themselves Celgene currently has no marketing and sales infrastructure What marketing restrictions would be imposed for “off-label” prescription?

Do these matter?

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