Doing business in the political marketplace: Strategies for success

December 05, 2007

For many business people, politics is unfamiliar territory, where missteps bring unforeseen and often unfortunate consequences. But because so many issues that affect business wind up in the political arena, ignoring politics is not a good option, according to researchers at the W. P. Carey School of Business. They offer this piece of advice: Approach politics like it's a business, only with different rules.


W. P. Carey management professors Amy Hillman and Gerry Keim, and Jean-Philippe Bonardi of the University of Western Ontario's Ivey Business School present a strategic view of the political arena in an article published in the journal Academy of Management Review. They contend that politics can be accurately seen as a market -- something business people are well acquainted with -- although it doesn't conform precisely to the economic model of goods and services traded for money.


"There is quite a bit of evidence to suggest that the parallels are quite strong, that the realm in which political decisions are made can be represented quite effectively as a market," Hillman says.


Adds Keim, "We think it's important for business leaders to be thinking strategically about the public policy process. The first step is to determine how to analyze different public policy arenas."



The political marketplace: Votes for policies


As in an economic market, there are "suppliers" and "demanders" in a political market, according to the authors. The suppliers are people in government -- presidents, prime ministers, governors, legislators, judges, various appointed and elected officials, and bureaucrats. The demanders are individual voters, interest groups, firms, political parties, and sometimes other governments. And these players in the political marketplace -- like those in an economic one -- can be assumed to be motivated by self-interest.


The work of Hillman, Keim, and Bonardi draws on the groundbreaking research of James M. Buchanan Jr., who won the Nobel Prize in Economics in 1986 for what become known as the public choice school of political economy. Buchanan asserted that politics could be understood most accurately by assuming that the actors on the political stage were motivated by self-interest, rather than the general good of society.


"The notion has long been put aside in political science that politicians are altruistically out for the greater good," says Hillman. "Every government is really an aggregation of interests."


Exchange is at the heart of political markets, as it is in economic markets, according to the researchers. But instead of goods and services, the product being traded is public policy. And the medium of exchange is a range of things, including votes, information, support, and even money -- in the form of campaign contributions.



When competition is risky


In some ways, a political market works like an economic one. A firm seeking to gain from a policy matter will benefit if there is not a lot of competition from other players, the researchers note. In practical terms this usually means avoiding election issues, where competition is high and the probability of success is low.


"When you're trying to affect an election issue, that means there is going to be a lot of attention paid to the issue and a lot of potential interest groups on all sides of the issue," says Hillman. "It's going to be a much more rivalrous environment."


Keim agrees, but says that the forbidding nature of election politics should not prompt businesses to shun the political arena altogether. "The good news is there are relatively few issues decided in elections," he says. "The great majority of decisions by regulators and legislators in our country are on issues that most average voters have no idea are taking place."


Bureaucracies, indeed, are where a vast number of political issues are decided, and they also are where a key difference between political and economic markets is apparent, according to the researchers. In an economic market, competition among suppliers tends to benefit those making demands, but in a political market, may be good or bad for those on the demand side. When bureaucrats are vying among themselves for authority in a political issue, the result tends to be stalemate, according to the researchers. "When there are a lot of suppliers, you usually think that's a good thing, but when there are a lot of agencies that might have a little bit to say about the area in which you are trying to have influence, then you are likely to get infighting," Hillman says. "This is usually bad for those seeking change in existing policy," notes Keim, "but it can be good for those seeking to maintain the status quo." Thus competition on the supply side of the political market helps those who like current policy but hinders those seeking change.


Outside players -- including businesses -- will have little influence in conditions of high supply-side competition. The opposite occurs when competition on the supply side is weak, the researchers argue. In that instance, decisions can get made, and businesses can have influence.



Winning strategies


A firm pondering whether to jump into a political fray would do well first to analyze carefully market conditions, according to the authors. Whether the venture succeeds will depend on how the market is structured, they say.


An important consideration is whether the benefits and costs of a public policy are concentrated or diffuse, according to researchers. For example, in the case of subsidies to the sugar industry, benefits are concentrated in the hands of the sugar producers, while costs are spread among millions of consumers. In this case, the odds are stacked in favor of the producers, the researchers say.


"The average consumers don't care that they are paying 89-cents instead of 42-cents for their sugar, so they are not going to write their congressman about it, but the sugar producers are going to make sure the agricultural price protection does not go away," Hillman says.


She cites the example of Coke and Pepsi, firms that do care about the price of sugar, but also recognize the futility of trying to prevail in this kind of marketplace. Instead of trying to undo sugar subsidies, the soft drink makers adapt by using high fructose corn syrup or other sweeteners. "You find them doing this quite often depending on which countries they are located in," Hillman says. "When you go to Mexico or Canada, Coke and Pepsi will taste slightly different."


In cases where benefits and costs are both concentrated, competition will be fierce, and the likelihood of success for a business looking to intervene will be low, the researchers predict. Government officials will be inclined to stick with the status quo. Says Hillman, "It's much easier in that case not to make a decision than to alienate a group on one side of the issue."


By looking at politics in this way, business people can decide when initiatives are likely to succeed or fail, according to Keim. He points to firms that have capitalized on the public demand for measures to halt global warming.


"For some time we have seen that firms with the newest plants and equipment often support changes that will increase the strictness of pollution controls because it's easier for them to adjust than their rivals who may have old plants and equipment," Keim says. "This is called raising rivals' costs."


On the other hand, the researchers say there are instances where a business would be wise to stay on the sidelines even when an issue would have a big impact on the firm because the probability of success is so low.


"Every firm has scarce resources," says Hillman. "If you can decide which are the issues you have the greatest probability of affecting, you can be much more effective as a business."



Bottom Line:


  • Politics is often a difficult arena for businesses. By viewing the political environment as a market, business people can make more informed decisions about whether strategies are likely to succeed.
  • In political markets, interested parties, or "demanders," compete for policy outcomes, which are dispensed by political leaders, who are the "suppliers." Mechanisms of exchange include votes, campaign contributions, and information.
  • Political markets sometimes function differently from economic markets. High levels of competition on the demand side are unfavorable for demanders in both political and economic markets. But high levels of competition on the supply side are desirable for demanders in an economic market, but in a political market the effects depend on whether a demander is seeking change or the status quo.
  • Whether a political market is a favorable environment for a business depends on the market's structure. If conditions are favorable, a firm can find great rewards by entering a political market, but if conditions are unfavorable, the wisest move for a firm sometimes is not to compete even though the matter may be important to the business.