C.K. Prahalad, Michael Porter, Tom Peters and Bill Gates are some of the names at the top of the Thinkers 50 list, a bi-annual ranking that identifies the most influential thinkers in the world of business. Recently, David Bach, a professor at the Instituto de Empresa business school in Spain, was identified as a strong candidate for membership in this select group. Along with some other future gurus of international management, Bach has developed a concept known as “nonmarket strategy.” This approach stresses that companies don’t merely interact with their customers, suppliers and shareholders. Corporate success depends also on the relationships that companies maintain with other social participants, from NGOs to governments and regulatory agencies in the markets where companies operate. In this interview with Universia-Knowledge at Wharton, Bach, formerly a consultant at McKinsey, discusses some of the new trends in twenty-first century management.
Universia-Knowledge at Wharton:What does it mean for you to appear on a list that classifies you as a “future guru” of the Thinkers 50?
David Bach: Obviously it is a great honor to have your name mentioned in the same context with extraordinary management thinkers such as C.K. Prahalad or Michael Porter. It’s also a responsibility. The way I see it, the people and organizations behind the Thinkers 50 think that nonmarket strategy can have a big impact on the practice of management. They also seem to have confidence in my ability to help carry that message. Now we really need to engage in a very close dialog with companies and top executives to raise awareness about nonmarket strategy.
UKnowledge at Wharton: What does the concept of “nonmarket strategy,” which you developed, refer to?
D.B.: I am certainly not the sole originator of the concept. People like David Baron at Stanford and Daniel Diermeier at Northwestern have laid a foundation for the field. What I have done, along with my IE colleague David Allen, is apply the approach especially to the European and Latin American business environment and to enrich it with some additional thinking.
The premise of nonmarket strategy is simple: Firms maintain relationships not just with customers, suppliers, and competitors, but also with governments, regulators, NGOs and society at large. And whereas firms generally have strategies to deal with customers, suppliers, and competitors – what we call the firm’s market environment – they often lack a parallel strategy to engage their nonmarket environment. Relationships with government or NGOs are often an afterthought. We think they ought to form a core part of the strategy process. Tremendous value can be created – or destroyed – in the nonmarket environment. Managing nonmarket relations proactively will be a key for business success in the 21st century.
UKnowledge at Wharton: Is cooperation between companies and NGOs necessary? What contribution can an NGO make to corporate management?
D.B.: I am not sure that “necessary” is the word I would use. I think there are tremendous opportunities for businesses to work with NGOs. Telefonica has found, for example, that the way to provide mobile telephone service to the urban poor in Brazil is to team up with local community NGOs. This collaboration has opened an entirely new market for them. And it helps in terms of development because a phone is often a must if you want to apply for a job. So everybody wins.
The contribution of NGOs to business certainly varies across sectors. But many firms are finding that working proactively with NGOs is a form of political risk management. If you are in close contact with NGOs active in your sector, you are less likely to be surprised by social or political developments that could impact your business. You bring them onboard, listen to their concerns, and tell your side of the story. This proactive approach is much better than dealing with a group for the first time the day after they called publicly for a boycott of your products. Had Nike been in close contact with labor — and human rights NGOs — it could have saved itself a lot of trouble. And once you work with NGOs, you might learn about business opportunities that you were completely unaware of.
UKnowledge at Wharton: What are the principal demands made on companies by this new field of nonmarket strategy?
D.B.: It’s really a change of mindset. The traditional approach is to have managers focus on the market and to have lawyers and PR experts deal with the rest. What we are saying is that the business environment is not limited to the market. Firms should try to create competitive advantage wherever they can find it, inside of markets or beyond. The most successful strategies will be those that carefully combine market and nonmarket elements. If you have a new energy efficient product, for example, why not lobby for new regulation that supports the adoption of such products? That is in part what GE is now doing as part of its ecomagination initiative. So what you need are managers who are not afraid of politics, who understand that political engagement is part of their job. And you need organizations that recognize the importance of nonmarket management and that bring nonmarket experts into the core strategy and product development process.
UKnowledge at Wharton: Are companies fully aware that they need to create a network of institutional relationships with public agencies in order to compete successfully? In which countries is it more common for politicians and corporations to cooperate with each other?
D.B.: I think that consciousness is growing. But unfortunately, too often firms work with institutions and NGOs in a rather indiscriminate fashion. There is no strategy behind it. Everybody might join a certain network or program, for example, and so you do it also. But why? What’s the strategic rationale? You wouldn’t do what everybody else does on the market side, so why do it on the nonmarket side? Why not differentiate through the careful development of relations with a few key nonmarket stakeholders that really add value to your business?
Cooperation between business and government happens everywhere; it’s just the form that varies. In the United States, for example, a lot of this happens through formal lobbying of legislatures and regulatory agencies. That’s still relatively new in Europe, though it is quite developed at the EU-level in Brussels, in part because of the growing presence of U.S. firms there. Microsoft, for example, has a small army of lobbyists in Brussels. In Germany, Austria, the Netherlands and Scandinavian countries, business associations play a powerful role and serve as facilitators of business-government relations. In France and Japan, the leaders of business and government often went to school together and there is something of a “revolving door” as you move from one side to the other.
In Spain and Latin American countries, relationships are even less formal, often resting on personal bonds and networks. Globalization is increasingly leading us away from this informality and towards the more formal, Anglo-Saxon model of business-government relations. This means firms from less formal environments have to adapt.
And you are seeing that adaptation already. The European Union is considering important changes in its energy market regulation and all the big European energy companies – E.ON, Enel, EDF and Iberdrola – are there to push their agendas.
UKnowledge at Wharton: Does the new wave of nationalism in Latin America show that governments are concerned about the corporate world nowadays? Is this sort of management model something positive for companies?
D.B.: I personally see this recent wave of nationalism more as grounded in political and economic populism than in concern for the business community. That doesn’t mean that there aren’t any business opportunities in this. But the problem with populism – besides the fact that it virtually always leads to terrible mismanagement, especially of the economy – is its unpredictability. And for business this means risk. In my view, Repsol did very well when they received Evo Morales – then president-elect of Bolivia – in Madrid to discuss how to share Bolivia’s gas proceeds more equitably. But Morales expropriated them anyway. So there are certainly limits to nonmarket strategy, especially when you are dealing with not-very-predicable populists.
Having said that, the fact that we are seeing this wave of populist nationalism in Latin America shows that there is a deep resentment in parts of the world against economic globalization and its implications. And that means that Western multinationals in particular – one of the main beneficiaries of economic globalization – have to do more to ensure the benefits of liberalization trickle down. Telefonica providing mobile telephone service to the urban poor is one example. C.K. Prahalad tops the Thinkers 50 list this year because his most recent acclaimed book, The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits, focuses on exactly this.
UKnowledge at Wharton: New technologies require more and more regulation on the part of legislatures. Do you believe that this fact can be used by governments to justify more intervention in the affairs of business?
D.B.: New technologies are a perfect example of why the relationship between business and government is a two-way street. Breakthroughs in fields such as information technology or biotechnology do raise political issues and often trigger regulation. In a digital age, we need new rules to protect individual privacy, for example. And the biotechnology revolution will lead to political debates and eventually regulation about issues such as who can own genetic information, what kind of practices are permissible, and ultimately what it means to be human. But governments and regulators can’t do this on their own. They often don’t have the technical expertise to set rules for these dynamic sectors. Without this expertise, rules are ineffective at best and in the worst case destroy a nascent industry. All over Europe, for example, telecom firms such as Telefonica, Deutsche Telekom and France Telecom helped shape legislation about data retention for the purpose of law enforcement – what governments had proposed initially was literally technically impossible.
So governments need to draw on the expertise in the corporate world and business has a role in shaping regulation and making sure the regulation does what it is supposed to do. But of course you can’t let the business community write the rules by itself. Their input has to be balanced with that of citizen groups, NGOs, and scientific experts. That’s what the regulatory process in a pluralist system should look like.
UKnowledge at Wharton: As a future guru of the Thinkers 50, how far do you think management theory can evolve? What will be the great challenges for global companies?
D.B.: Management will go through an important transformation. Much of what is still taught at business schools is based explicitly or implicitly on theories of hierarchy and bureaucracy that are becoming obstacles to corporate success, not the key to it. We are seeing a whole range of new management thinking, from intra-firm networks and flexible organizations to putting people first and creating corporate cultures that promote experimentation and learning. Nonmarket strategy contributes a small piece to this new fabric. We don’t know yet what the most successful companies of the future will look like because these companies – with their practices – will help remake the future of management. But what will distinguish them is that they will look nothing like the hierarchical corporate giants that defined capitalism during the 20th century.
