Strategy formulation Assignment II
Political Strategy
Submitted By:
Prasanna Rajendran
09Mba038
Sl:no Page No:
Topic
1 Introduction
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Introduction
Strategy, a word of military origin, refers to a plan of action designed to achieve
a particular goal. In military usage strategy is distinct from tactics, which are
concerned with the conduct of an engagement, while strategy is concerned with
how different engagements are linked. How a battle is fought is a matter of
tactics: the terms and conditions that it is fought on and whether it should be
fought at all is a matter of strategy, which is part of the four levels of warfare:
political goals or grand strategy, strategy, operations, and tactics.
this is a plan to improve chances of success for policy adoption and
implementation. It requires identifying and targeting policymakers,
organisations, the media, and populations; using persuasive rationales specific
to each audience; creating public debate to help “unfreeze” previously held
PURPOSES OF CORPORATE POLITICAL STRATEGY
Firms seek to use political strategy to achieve private ends. In doing so, firms
may deploy a broad range of specific political tactics, including lobbying,
providing information (such as research results and survey results), testifying at
government hearings, offering campaign contributions, forming political action
committee (PAC), extending personal service such as political network
building, appointing officials as board members, forming collective
organizations, directly participating in political processes, and constituency
building (e.g., Getz, 1993; Grier, Munger and Roberts, 1994; Hillman,
Zardkoohi and Bierman, 1999; Fisman, 2001; Schuler, Rehbein and Cramer,
2002; Johnson and Mitton, 2003). Each specific political tactic is highly
context-dependent as how it functions is shaped and constrained by the political
and legal system where it takes place. In addition, these tactics can be focused
on a variety of political objectives and end goals. We will focus on three goals
of political strategies that can involve any combination of these various tactics:
rent-seeking, reducing hazards, and setting rules or standards).
Rent-Seeking Political Strategy
The most studied purpose of political strategy is rent-seeking in nature, that is,
political strategy generates supra-normal profits by creating or sustaining
market failures, so interfering with effective market competition (Oberholzer-
Gee and Yao, 2008). Such ―rent-seeking‖ political strategies generate gains for
firms through the redistribution of wealth, and are often considered to be
inconsistent with other value-creating business strategies (e.g. Lenway, Morck
and Yeung, 1996; Morck, Strangeland and Yeung, 2000; Morck, Sepanski, and
Yeung, 2001; Johnson and Mitton, 2003; Leuz and Oberholzer-Gee, 2006).
Rent-seeking benefits are manifested in multiple forms; for instance, politically
active firms may lobby for trade protection, pursue preferential treatment by
government-owned business partners, neutralizing competition in input and
output markets, and seek government bailouts (e.g., Grier, Munger and Roberts,
1994; Lenway, Morck and Yeung, 1996; Schuler, 1996; Hillman and Hitt, 1999;
Schuler, Rehbein, and Cramer, 2002; Hillman, Keim and Schuler, 2004; Faccio,
Masulis, and McConnell, 2006).
Although current studies often deem rent-seeking political strategy as
inconsistent with other value-creating market strategies (Leuz and Oberholzer-
Gee, 2006), the management literature is not yet explicit about the relationship
between rent-seeking political strategy and market strategy, and an important
implication of this relationship, i.e., the answer to the question of which firms,
in terms of their market capabilities, are more likely to be politically active. We
will draw on the management and economic literature of political rent-seeking
and propose some important theoretical extensions.
Hazard-Reducing Political Strategy
Hazards of expropriation, the ways in which government or private parties
illegally infringe on private property, constitute important political risks of
major concerns to investors and firms in emerging economies: research has
shown that they can dramatically alter a firm’s market interactions and market
strategies such as contractual relationships, location choices and market entries
(Henisz, 2000; Henisz and Delios, 2001; Henisz and Macher, 2004; Garcia-
Canal and Guillen, 2008). Hazard-reducing political strategy achieves the aim
of mitigating such political hazards through one of three possible mechanisms
(or some combination thereof).
Procuring Information. Political strategy, by building connections with
government officials or by directly accessing the political system, allows a firm
to obtain secondhand information from its connections with government
officials or firsthand information through its direct involvement in political
processes. Superior access to timely and accurate information from the
government is important to reduce expropriation hazards for the following two
reasons.
First, staying abreast of laws and policies helps firms avoid inadvertent
violation of rules, which is particularly important in emerging economies where
policies and regulations change constantly and the general communication of
these changes to the public is inadequate. Information access also helps a firm
anticipate changes in the policy environment and reduces uncertainty in the
political domain while possibly giving the firm a chance to offer input on the
potential effects of such a change. More importantly, the unchecked power of a
government and its officials give them discretion in interpreting and
implementing laws and policies. For example, in China uniform interpretation
of laws is rare since officials have broad discretion over how to interpret and
enforce them . Similarly, in Russia the government is above the law and is
capable of influencing both the interpretation and enforcement of laws .
Therefore, under these circumstances, the legal information and interpretations
obtained from ―external‖ sources cannot substitute for sources inside the
government .
Directly Mitigating Firm-Specific Expropriation. Political strategies may also
enable firms to more effectively seek justice against public and private
expropriation through their influence on the government and/or the political
system. This is because the institutional environment in many emerging
economies allows politically powerful entities – be it firms or government
officials – to influence law enforcement in the judicial system. For instance,
Hellman, Jones and Kaufmann (2003) found that in some east European
transition economies firms with better access to public officials are better able
to ensure fair treatment against transgression by other public agencies. In China,
private entrepreneurs may directly engage in the political system by becoming
members of key political bodies and so gaining special attention and priority
treatment by the courts .The legal protection against private expropriation in
these ―special‖ cases is more active and effective than in average cases, and the
government is more willing to correct its officials’ expropriation behavior if
complaints about public expropriation come from members of these political
institutions, than from average citizens.2
Improving the Institutional Environment. Unchecked executive power and
arbitrary rule changes vary significantly across different countries (e.g. Henisz,
2000). To reduce public and private expropriation hazards, firms may seek to
reduce overall expropriation hazards in the institutional environment by
strengthening the legal protection of property rights and contracts, and/or by
increasing the constraints on government power. For instance, a firm that is
charged an illicit levy by a local government bureau may either try to avoid
paying it by altering the firm’s investment decision, or by promoting laws that
regulate government behaviors which would shield itself as well as others from
future illicit levies.3 Firms can promote reforms that would increase policy
stability, as this have been shown to promote investment and provides clearer
rules for firms to follow when competing in markets. Compared with the
previous mechanism, this is no longer a particularistic and firm-specific
approach that only affects individual firms, but it changes the rules of the game
for everyone.
LINKING POLITICAL STRATEGY TO MARKET STRATEGY
We propose a simple model to discuss how a firm’s investment in a political
strategy affects its investment in market strategy that enhances its market
capabilities, and how the political strategy varies with the firm’s existing stock
of market capabilities. Many market strategies are important sources of
competitive advantage in markets, such as innovation, market development, and
practices to enhance learning in production, all leading to increased market
capabilities which refer to the firm’s abilities to succeed in market competition
given a level playing field and distinguishes stronger firms from weaker ones. A
firm with greater market capabilities does not necessarily have to exhibit
superior current performance, but has the potential to achieve greater future
performance on a leveled playing field, especially in a market environment
without political hazards. Firms closer to the production frontier, for example,
may not exhibit superior current performance if political hazards curtail their
incentives to produce and invest, but on a level playing field effectively
supported by market institutions, productive firms would generate greater value.
Market capabilities can be thought of as an initial endowment that a firm
inherits at inception, or they may have been generated by successful previous
strategies in the market; for instance, a firm’s investment in R&D may result in
its superior technological capabilities to invent novel products and produce
higher quality products at lower costs, and thereby confer competitive
advantages to achieve leading market positions.
Enron
The Enron episode currently playing on center-stage in Washington teaches
important lessons. For most commentators (including learned academic ones),
the issues requiring Congressional scrutiny start with internal managers'
responsibility for directing their firms, and continue with external auditor
surveillance of inside management. Shortcomings traced to inside management
and outside audits then are said to require federal-government correction.
That perspective is all wrong, however. Enron does have lessons to teach, but
not those. There are five lessons, in fact, culminating with the most instructive
one of all: how supposed "crises" benefit opportunistic politicians.
Start with the first lesson: stuff happens. Firms fail all the time—our bankruptcy
laws create incentives to take more risk on the front end, with the knowledge
that courts will sort out problems created by risk-taking that proves excessive
after the fact. Albeit the most spectacular, Enron was but one of a record
number of bankruptcies last year.
True, as Enron demonstrates, failures don't just happen randomly. Directors
may direct negligently; managers may manage to benefit themselves rather than
the firm and its shareholders. Likewise, outside auditors may be negligent, or
succumb to conflicts of interest.
But (second lesson) there are laws in every state that regulate these sorts of
problems, under which shareholders have legal recourse. The legal "duty of
care" requires that directors do their jobs, for which they are well paid. When
directors fail in that duty, shareholder class actions (so-called "derivative" suits)
are available for redress. Likewise, if auditors have breached their contract to
audit competently, they are liable to the firm hiring them and to investors they
know will rely on their audits.
Were all this not so, corporate directors and auditing firms would not carry
insurance—which they do. Were this not so, Arthur Andersen would not have
offered Enron shareholder and creditor groups three quarters of a billion dollars
to settle foreseeable litigation. (Since this was an initial offer, any final
settlement predictably will cost Arthur Andersen more than that.)
Moreover, the incentive system at work among lawyers ensures that injured
shareholders will have their day. The plaintiff bar does not miss alleged
corporate or auditor misconduct, as the Enron saga has certainly demonstrated.
Lawyers have lined up, competing for the lucrative right to represent Enron
shareholders. When managers fail to perform because of conflict of interest
rather than just mistake, as was allegedly the case for some of Enron's
management, the legal rules make plaintiff recoveries relatively easy. That in
turn increases plaintiffs' incentive to sue and fans lawyers' ardor to round up
plaintiffs.
By law, further, recoveries will come from the personal wealth of those who fell
short or had conflicting interests. So, if money was improperly siphoned from
corporate coffers to personal pockets, Enron's lack of funds would not matter.
The money, or the assets purchased with the money, is still there. Enron's
directors and officers are not paupers. Also, if they or their auditors have
deliberately deceived creditors and stockholders, they have committed crimes,
and can be prosecuted and imprisoned for them.
In other words, practically nothing about the Enron episode raises new issues.
Firms fail—no one can legislate away investor risk. To the extent that failure is
due to misfeasance, malfeasance, nonfeasance or shortcomings in anything else
that shareholders had a right to expect from their management-agents,
shareholders already have legal recourse. Ditto for creditors. As The Naked
Gun's Leslie Nielsen would say, "just keep moving...nothing interesting here."
Which raises a third, crucial lesson. Not only are shareholders already protected
legally, but in the American legal system they are protected by state law. (I have
not read of any Congressional committee evaluating the laws already protecting
Enron shareholders, have you?) Although Ralph Nader and others tried hard to
federalize corporate law in the 1960s and 1970s, nothing of the sort resulted.
Just as there is no federal law of contracts, or federal law of property, there is no
national corporate law. Similarly, any criminal fraud here is covered by existing
state law. (There is a national system of securities regulation, but the Enron
story is not about securities violations other than those already illegal by
standards of traditional state-law fraud.)
So why all these klieg lights and reporters in Washington? Well, because a
newsworthy event without him in the news makes a politician shudder. You can
call Senators and Congressmen anything you want...just don't call them late for
dinner. If need be, they'll host the dinner. Washington's elected suits can always
call hearings, to which television brings its lights, flames to which reporters
then are drawn.So welcome to Congress's Enron dinner. Is there any major
problem lacking a current remedy for which Washington could plausibly offer a
solution? No. But if you stage a hearing, they will come.
Lesson Four, then: even if there is nothing constructive for Washington to do, it
strives to create the illusion of doing something, as long as somebody is paying
attention. All of this happens because of the property rights in the legislative
system. If Congressman Snort heads a committee and wants a hearing, he gets
it. Congress has lots of Snorts and plenty of committees.
At first, all this seemed more pitiable than harmful. A successful politician
needs steady publicity—videor ergo sum—and before Enron it had been a while
between fixes. The war against the Taliban wasn't cutting it—raise your hand if
you're against the Bush push into Afghanistan.—and air time for Congress was
paltry compared to that for the commander-in-chief. What's the harm in
skewering a few rich Texans who fell down on the job, maybe even criminally?
Not much perhaps, if the issue is just Enron. But that's the fifth, critical lesson.
Enron is not about Enron. Congress's real goal is saddling the political system
with new campaign finance laws, and Enron provides an excuse to re-ignite
enthusiasm for the cause. Enron is a pretext, but one that offers a great political
opportunity.
After the Bush election, recall, campaign "reform" was a headline-grabber until
September 11, after which media interest in the issue deflated. With the media
looking elsewhere, Congress lost interest also. But with the media back to cover
Enron, Congress now hopes to ratchet the good-guy/bad-guy stories about one
firm's finances and political contributions into a cry for national campaign
legislation.
The political strategy of converting past tragedies into unrelated legislation is
not new. President Kennedy's death begot Great Society programs. Ironically,
many of the supposed "soft money" campaign-finance problems now said to
need reforming arise from Congressional legislation in the wake of Watergate.
Enron is just the latest opening that a newsworthy story offers to opportunistic
politicians, even when they can't do much about the underlying events or
problems. Of course, there is no joy when investors take a bath —is anybody in
favor of a Fortune 100 company cratering? But Enron itself is yesterday's water
under the bridge. As politicians circle the Washington sky over Enron's remains,
the issue is not what they will do today for corporate shareholders. There is
nothing that needs doing nationally. The question is whether a crafty Congress
can use Enron tomorrow to snatch back the chance for campaign legislation that
seemed lost just months ago.
Reliance telecom
The competitive balance in India's telecom industry is about to be disrupted.
Reliance Industries, headed by Mukesh Ambani, its chairman and managing
director, has bought a 95% stake in a firm that won a broadband wireless
license. That deal was made possible after Mukesh and his brother Anil recently
canceled a non-compete pact. Meanwhile, market watchers predicted that
Mukesh may make further peace moves with Anil at Reliance Industries' annual
shareholder meeting on June 18, according to a Bloomberg report.
Reliance Industries bought into Infotel Broadband Services just hours after it
emerged as the sole winner of a pan-India broadband wireless spectrum (BWA)
license, paying US$1 billion (Rs4,800 crore at Rs46.46=US$1), in addition to
the US$2.8 billion Infotel will pay the government for its license. Reliance has
estimated its total investment in telecom services at US$5 billion, including
infrastructure and rollout costs. Anil Ambani's group withdrew from the auction
for the BWA license when the bids went too high. At that stage, the brothers
had agreed on withdrawing their non-compete pact, but had not yet announced
it. The Ambani group later said it said it looked forward to offering its telecom
infrastructure and content services to Reliance Industries and other BWA
licensees.
Mukesh Ambani may have bigger ambitions in telecom, according to Wharton
management professor Saikat Chaudhuri. "He may well buy into and merge
existing entities -- as he has started to do -- instead of starting yet another
network," he says. "Consolidation will happen, leaving only a set of players
anyhow in the end." The Indian telecom market is indeed "highly competitive,
with substantial pricing and hence margin pressure - hence adding another large
player seems on the surface daunting," Chaudhuri notes. However, Reliance
Industries' entry has to be viewed against the backdrop of the Indian telecom
industry's "tremendous growth and the remaining volume to be had."
The build-up to Mukesh's telecom foray had all the ingredients of family drama.
On May 7, India's Supreme Court delivered its judgment in a long-running
Ambani vs. Ambani feud. Mukesh and Anil, the two sons of the late Dhirubhai
Ambani, have been warring ever since the patriarch's demise in 2002. The
brothers formally parted ways in 2006 with a settlement mediated by K.V.
Kamath, then ICICI Bank's managing director and now non-executive
chairman. That settlement included a non-compete clause that barred the
brothers from encroaching on each other's turf. Anil's territory included
financial services and telecom, while Mukesh retained crude refining and
exploration, among other areas.
While the non-compete agreement has been respected, the battling brothers --
the richest pair in the world -- have been building roadblocks to thwart the
other's plans. In the best-known instance, Mukesh's Reliance Industries thwarted
an attempt by the Anil Dhirubhai Ambani (ADA) group's Reliance
Communications (RCom) to take over MTN of South Africa. The Supreme
Court ruling in May -- which involved the quantity and price at which natural
gas was to be supplied by RIL to Anil Ambani's power ventures -- favored elder
brother Mukesh. It came with a rider: The court asked the two brothers to go
back to the negotiating table.
On May 23, in an unexpected move, peace between the two parties was
officially declared. The non-compete arrangements were cancelled. "[This] will
provide enhanced operational and financial flexibility to both groups, and
greater ability to participate in high-growth sectors of the Indian economy, such
as oil and gas, petrochemicals, telecommunications, power and financial
services," said an RIL statement. "RIL and Reliance ADA [Anil Dhirubhai
Ambani] Group are hopeful and confident that all these steps will create an
overall environment of harmony, co-operation and collaboration between the
two groups." Added an ADA Group statement: "These developments will
eliminate room for any further disputes between the two groups, on matters
relating to the scope and interpretation of the non-compete obligations." The
two Ambani groups are reportedly also eyeing a banking license, especially
after this year's Union Budget permitted private sector entry in banking.
Mukesh had originally steered Reliance into telecom, but had to hand over
RCom over to his brother in the 2006 partition of assets. Mukesh's second
opportunity came with the recent telecom spectrum auctions in India. After the
auctions for third-generation (3G) spectrum licenses concluded in May, there
was speculation that some of the winners were willing to sell out, but they may
have been at uncomfortably high prices, given the 3G bidding frenzy. The next
opportunity was the auction for broadband wireless access (BWA) that followed
the 3G auctions, but RIL wasn't among the bidders. Besides, though labeled 4G,
BWA was considered inferior to 3G because it was an untested technology and,
according to Indian laws, did not allow voice. BWA technology has yet to prove
itself as "consistently commercially viable," according to K. Raman, head
(infocomm, media & education) at the Tata Strategic Management Group
(TSMG), a consulting firm.
The Reliance Effect
What does the entry of Reliance mean to the telecom market? Says Raman of
TSMG: "Even at present, apart from the competition in the market, the telecom
space in India is going through a lot of regulatory challenges. The entry of an
influential player like Reliance increase both competition and regulatory
complexities. Reliance will attempt to shape regulations in a way that will help
[Mukesh Ambani] get a better share of the market. Being the only pan-India
spectrum holder [in the new generation spectrum] puts Reliance in a very strong
position."
"We can certainly expect RIL's entry to create a significant disruption in the
Indian telecom industry," says Rajesh Jain, managing director of Netcore
Solutions, a mobile and messaging services company. (Jain is on the advisory
board of India Knowledge@Wharton, which partners with Netcore for its
mobile edition.) "It is going to be very unsettling for the incumbents and very
good for consumers. Reliance is known for innovations and very attractive price
points. It will certainly introduce a significant dimension of competition in the
marketplace."
Chaudhuri believes the Indian government has managed the opening up and
liberalization of the telecom industry in a "superb" way. "Instead of simply
opening up the market in one go and allowing foreign players to come in and
dominate the scene, the government, through its controlled and deliberate
liberalization process implemented in multiple phases over time, was able to
create a highly competitive market that benefited the consumer with ample
supply and low prices," he says. That facilitated the telecom industry's "massive
growth, built a strong national telecom infrastructure, and allowed home-grown
players to emerge that are competitive not only locally but have been able to
develop the capabilities to become global players," he adds. He also commends
the stability of policies over time. "[It is] perhaps most remarkable is that this
entire process has not been carried out by one government, but has been
consistently moved forward by successive governments involving transitions in
political parties and ministers."
Clearly, that policy consistency helped the industry plan for the long haul. Alok
Shende, principal analyst at marketing and consulting firm Ascentius
Consulting, feels that the Reliance plan was no overnight strategy. "This is
clearly a well-crafted entry and has been in the pipeline much before the
brothers smoked the peace pipe," he says. The Monday after the Infotel
purchase was announced, Reliance Industries moved up 1.64%. That was in line
with the market movement of 1.6%. There will be no dividends for Reliance
immediately; analysts expect operations to break even only after several years.
But ADA companies can expect an earlier payoff, even if only from the truce.
The top gainers on the Bombay Stock Exchange were Jai Corp. (17.37%),
Reliance Natural Resources (17%), Reliance Capital (6%) and Reliance Power
(5.53%). Jai Corp. is run by Anand Jain, Mukesh Ambani's school friend and
financial advisor. The other three companies belong to the ADA Group.
Reliance's Game-Changing Strategy
The Reliance deal is a game-changer. Says Jain: "Even if regulations do not
allow voice on BWA, RIL will get around it. I don't think RIL has got into this
only for data." Shende says it is typical of Reliance to have "a very strong
vertical integration strategy" in every one of its businesses. "Having control
over the complete vertical chain gives it a monopolistic power in that sector," he
adds.
But data is where Jain is putting his money. "Voice is being commoditized in
India. There is a huge potential to offer a wide range of next generation data
services through a variety of connected devices. There may not necessarily be
one killer application; the thickness of the pipe itself through which a host of
innovative data services can be delivered through devices other than PCs and
mobiles will be the key. The disruptive, blue-ocean opportunities are in high-
speed broadband wireless access."
Working out the technology choices is the first step. And there could be some
complicating factors. Take one: U.S.-based Qualcomm has won four BWA
circles, including the important Delhi and Mumbai. The obvious aim is to
promote its LTE technology. Reports morning newspaper DNA: "While
supporters of WiMAX, including Samsung, Intel and Motorola, worry about the
implications of Qualcomm's win, the Chinese equipment vendors too are very
worried. They fear that they are not in Qualcomm's good books as they cater to
both LTE and WiMAX technologies, unlike the European vendors such as
Nokia Siemens Networks and Ericsson who only support LTE. At stake is
around US$3 billion worth of 3G equipment and installation contracts, besides
around US$2 billion worth of 4G equipment contracts." Reliance has indicated
that it will opt for LTE.
As Mukesh Ambani plans his next telecom move, he might attempt to buy the
ADA Group's RCom, among other candidates, according to Shende of
Ascentius. RCom received board approval on June 6 to sell a 26% stake to a
"strategic investor." Though Abu Dhabi's Etisalat was tipped as the favorite,
RIL is now leading the pack. "It is a foregone conclusion that on the voice front
Reliance will go in for a big-bang acquisition of a 2G-3G company," says
Shende. "Three likely targets are Aircel [owned by Maxis of Malaysia], Idea
[Aditya Birla Group] and RCom."
Raman of TSMG also feels it is imminent that Reliance Industries would find a
way to enter voice-based telecom services. "I can't think of even one player
worldwide who has successfully built an entire business from only the new
generation technology," he says. "Typically telecom operators have a mix of
different technologies [2G, 3G]. But that in no way means that a new unique
model cannot emerge from India. This story has to evolve along the Indian
context and to that extent it becomes more challenging. Any telecom player
would want to offer the entire range of services. So my reading is that Reliance
would like to get into voice also at the earliest. However, while from a
technology aspect, voice is possible on BWA, it may be relatively more
expensive as the technology is still evolving and both the back-end equipment
and the customer premises equipment are more costly because of lack of scale.
There may also be regulatory issues since IP-based telephony is not allowed
within the country. I wouldn't be at all surprised if Reliance goes in for another
acquisition of a different type of a license-holder."
Indian call rates have reached one cent a minute and are still falling. The 3G
auction in May raised US$15 billion. The BWA auction netted US$8 billion.
Together, that's around three times what the Budget expected. But, despite
skeptical analysts, valuations of telecom companies are still increasing: RCom,
for one, has gained nearly 200% from its troughs during the past 52 weeks.
CONCLUSION
We believe that this paper represents an important extension to the literature on
the relationship between political and market strategies. The field of strategy
gives market capabilities and strategy center stage, and well we should, as the
market is the primary battleground for competition among firms. We believe,
however, that the role of political strategy, and its importance in shaping the
rules of the game under which markets operate, requires more theoretical and
empirical attention in order to better understand the critical interplay between
market and political strategy. A firm’s market capabilities affect its incentives to
engage in political strategy of different goals; likewise, a firm’s political
strategy will also influence its market decisions. This interplay is critical and
while it still needs more attention, this paper is an important step towards
addressing some of these issues.
