Journal of Public Affairs
J. Public Affairs 10: 258–264 (2010)
Published online 10 November 2009 in Wiley Online Library
(wileyonlinelibrary.com) DOI: 10.1002/pa.346
The unloved relationship? Dynamic
capabilities and political-market
strategy: a research agenda
Paul R. Baines 1* and Howard Viney 2
1
2
Cranfield School of Management, Cranfield University, Cranfield, MK43 0AL, UK
OU Business School, Walton Hall, Milton Keynes, MK7 6AA, UK
In this developmental article, the authors outline a five-stage system to classify levels
of relationship engagement (LRE) between firms and government actors when
developing their political-market strategies (PMS) as part of a wider stakeholder
management programme. In an attempt to develop the research agenda in this
increasingly important area, the authors propose a set of hypotheses to drive forward
the research agenda. Overall, we argue that firms can develop PMS into a dynamic
capability but further research is needed to determine whether or not the capability
developed is first or second order (i.e. contributing to other sources of competitive
advantage).
Copyright # 2009 John Wiley & Sons, Ltd.
Introduction
The emergence of a stakeholder discussion
(Freeman, 1984; Mitchell et al., 1997b), particularly in the area of business–government
relations, remains relatively under researched
within the literature (Hillman et al., 2004;
Hillman and Hitt, 1999), signifying a focus upon
the motivating effect of firm profitability above
other concerns (Doyle, 2000). Nevertheless, the
importance of developing a firm’s relationship
with government in the marketing context has
long been recognized (see Morgan and Hunt,
1994, for an early consideration). Despite this
lack of general recognition in the literature, the
idea of government-as-stakeholder is recognized
*Correspondence to: Paul R. Baines, Cranfield School of
Management, Cranfield University, Cranfield, MK43 0AL,
UK.
E-mail: paul.baines@cranfield.ac.uk
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2009 John Wiley & Sons, Ltd.
by firms who are constantly testing and
reviewing their strategic decisions to ensure
that they address prevailing legal or regulatory
concerns, particularly multi-national companies
and those operating in highly regulated industries (e.g. pharmaceuticals, brewing and public
utilities).
Inevitably, in Orwellian terms, some stakeholders are more equal than others and,
correspondingly, there is now a developing
literature on the regulatory influences upon
market strategy (Harris and McDonald, 2004;
Willman et al., 2003; Parker, 2003; Ghobadian
and Viney, 2002). We argue that this activity is
often fundamentally reactive in nature, and
that the extant literature tends to study how
organizations react to changes in regulatory or
legislative actions, paying less attention to how
firms seek to control their strategic environment, particularly in terms of its interaction
Journal of Public Affairs, November 2010
DOI: 10.1002/pa
Dynamic capabilities and political-market strategy
with vital non-market stakeholders like government or regulatory authorities—i.e. studies
tend to be descriptive rather than instrumental
or prescriptive in nature. This is not to argue
that there is not a significant and growing
literature on aspects of what is usually referred
to as ‘lobbying’, ‘public affairs’ or ‘government
relations’. However, we would add our voice
to a growing demand (Hillman et al., 2004;
Hillman, 2002; Schuler, 1999) for a more
systematic understanding of how firms actively
seek to influence the governmental actor as a
critical element of firm strategy making, or as
an adjunct to the strategy implementation
process, particularly in terms of political
environmental scanning (Barrows and Morris,
1989; Keim and Hillman, 2008).
However, there are a number of issues to
contend with when examining this issue.
Firstly, firms are notoriously reticent about
discussing their relationships with government, and in particular their involvement with
lobbying activity, at least partly because of firm
concern that such information is commercially
sensitive and of competitive value. Secondly,
part of the difficulty with the discussion of
lobbying is its ever-shifting (re)definition and
semantics. There is no single understanding of
what the term ‘lobbying’ refers to, undermining attempts to quantify its importance to
the effective operation of organizations, and to
dispel the common assumption that any form
of business–government relations is essentially
corrupt and antisocial. There is also limited
interaction between discussions in the
political science literature over what does,
or does not, constitute lobbying and/or
other terms describing business–government
relations, and the growing empirical literature,
particularly focused upon US Corporate
Political Activity (CPA), reviewed in Hillman
et al. (2004). Because most organizations
engage in lobbying, public affairs, government
relations activity, etc. from the perspective of
the very top echelons of their organizations,
and because the consequences are often felt at
industry level, we propose the use of the term
‘political-market strategy’ (PMS). From a
strategic marketing perspective, it is surprising
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2009 John Wiley & Sons, Ltd.
259
that this important relationship has been
neglected. It has, in the past, generally been
felt that macro-environmental factors (i.e. the
law and politics) are uncontrollable in strategy
scanning and development activity but in fact
they are not uncontrollable (Harris and Lock,
1996). Examples of firms who have taken
advantage of political environmental changes
include: the Abbey National Building Society
who demutualized (i.e. became a bank) shortly
after the 1987 Financial Services Act and
several years before its competitors; Price
Waterhouse and Coopers & Lybrand whose
rhetoric identified the EU’s (European Union)
enlargement agenda as a point of persuasion
for allowing a merger case through the EU
merger control process (Hatcher, 1998)
and Bernie Ecclestone’s Formula 1, which
achieved an exemption on the banning of
tobacco sponsorship in November 1997 from a
European Directive due to come into force in
2003, by arguing the ban would drive the sport
and its $900 m export value to the Far East
(Abrams and Butler, 1997; Webster, 2002)—
although in that case, Ecclestone’s £1 m
donation to the Labour Party caused such a
media furore that the Labour Party was forced
to return it and the EU directive was annulled
anyway (Tempest, 2002; Osler, 2002).
Developing a research agenda
We aim to review the literature focusing on
lobbying and regulatory affairs from the
perspectives of political science, strategic
management, marketing and political marketing literatures, leading to the development of
hypotheses aimed at overcoming the extant
semantic hurdles. In so doing, we aim to
construct a rationalized classification system of
PMS, focusing not so much on labels but upon
levels of PMS. We argue that there are different
forms of PMS, but can we effectively identify
those levels based upon the specific intended
outcome of each level? We use our understanding of PMS to develop hypotheses highlighting the key variables in determining levels
of PMS: outcome, input and contextual
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Paul R. Baines and Howard Viney
variables. We argue that while not all organizations will seek to operate at the highest level
of PMS, all organizations will be concerned to
maximize the outcomes of their PMS activity,
at an appropriate level of resource expenditure, and in a fashion congruent with the
context in which they operate. PMS offers an
opportunity to seek and obtain competitive
advantage because not all firms will be
operating at an appropriate level, causing
inefficiency.
We attempt to establish an understanding of
whether firms can build or exploit their
capability and so develop market potential in
the area of developing and maintaining relationships with government through PMS, according
to a stage level typology. Why is this necessary?
In our view, there has been a long-standing
deficit in understanding the significance of how
‘lobbying’ can contribute to the successful
development and implementation of firm
level strategy. Consider the Abbey National
case discussed above, or the PriceWaterhouse
Coopers merger in 1997 or Ecclestone’s
Formula 1/tobacco sponsorship for example—
was PMS a significant factor in these decisions?
The amount of financial and time resource
expended on ‘lobbying’ by major corporations,
though often difficult to determine, would
certainly imply that the practice will have
beneficial effects (Harris and Lock, 1996), but
the extent of causality is yet to be convincingly
researched. Arguably, definitional concerns
could hide a wider failure amongst many firms
to recognize what is possible in this arena, or
what tools are at their disposal, to enable them
to shape and control their competitive environment. Many large (and certainly multi-national)
firms are engaged in PMS of some description
although the characteristics of this activity vary
in scope, range and intensity. This creates the
probability that some firms do not realize that
they are engaged in PMS, or are undertaking a
type of PMS behaviour which is inappropriate
given their needs and/or the resources at their
disposal. The paper seeks to initiate a debate as
to whether and how PMS might contribute to
strategic marketing success. To begin this
process, we explore the background to the
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PMS debate and introduce our stage model of
PMS, before introducing a future research
agenda. This considers whether an organization’s PMS should be considered a resource or
capability that firms can develop/sustain/
deploy to achieve competitive advantage? Is it
possible that PMS might be a ‘dynamic
capability’ (Helfat and Peteraf, 2003) of the
firm?
PMS: lobbying, corporate political
activity, public affairs, regulatory
affairs
As we have noted, a variety of terms are used
seemingly interchangeably to describe the
process of interaction between a company
and the governmental actor, specifically to
changing the perspective of a government
actor to one supportive of your organization.
Nownes (2001) adopts a broad definition,
suggesting that ‘lobbying’ is ‘attempting to
influence government decisions’, and lobbyists, therefore, are individuals ‘who work to
influence decisions of public officials’ (Green
et al., 1972). The key aspects to the notion
of lobbying are, therefore, the interaction
with a public official and the attempt to
influence public policy (McGrath, 2005;
Milbrath, 1963). However, possibly as a
consequence of the inherently pejorative
association of the term, and its lack of
specificity, other authors have preferred the
term ‘government relations’ (McGrath, 2005).
Mack (1997) argues a distinction can be drawn
in terms of advocacy—‘lobbying’ implies
advocacy of a point of view, while government
relations involve the ‘application of one or
more communications techniques’ to affect
government decisions in the interests of a
lobby or lobbyists, although as McGrath notes,
‘the practical distinction between them is a
little less than obvious’ (McGrath, 2005).
However, other authors have described similar
activities as ‘public affairs’ (Morris, 1997).
Various authors have ascribed to ‘public
affairs’ the status of a particular management
skill (Pedler, 2002), where capabilities in
Journal of Public Affairs, November 2010
DOI: 10.1002/pa
Dynamic capabilities and political-market strategy
understanding the environmental context and
shaping appropriate strategies are key. Consequently, there is a need for a term which
(1) connotes the process of political-market
interaction and (2) integrates this understanding with the strategic intent of the firm to
achieve (3) a defined political-market strategy.
A five stage classification system
of political-market strategy
development
We suggest it is possible to rationally analyse
the lobbying activity of organizations based
upon the intended outcome of their
engagement with government or regulatory
authorities, and offer a series of different ‘levels
of relationship engagement’ which roughly
correspond with differing strategy intentions
and relationship marketing strategies. Furthermore, we can associate a number of characteristic activities with each of these levels of
relationship engagement and equate particular
sets of behaviour to those levels of intended
outcomes, developing a generic classification
of lobbying from a strategic marketing
perspective. This opens up the possibility that
organizations can, based upon the intended
outcomes of engagement with legislative or
regulatory authorities, assess the extent of their
relationship engagement, based upon a realistic understanding of whether the resources
committed to this activity will contribute to
profitability and/or market potential. In making such an assessment, it is clear to us that
there is a strong industry effect here. Various
authors have argued (Hansen and Mitchell,
2001; Hart, 2001; Mitchell et al., 1997a;
Schuler, 1999) that the necessity of building
strong business–government relations is a
direct consequence of the extent of government/regulatory influence upon an industry.
If government either spends heavily or
imposes a strong regulatory influence upon
competition within your industry, or if there is
a history of frequent or radical regulatory or
legislative change, we would hypothesize that
the importance of developing strong PMS
increases. Industries such as defence (high
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261
government expenditure), pharmaceuticals,
food manufacture or utilities (strong regulatory
activity) would be expected to develop and
maintain strong PMS capabilities, more so than
industries where government intervention was
limited or relatively passive, since not to do so
may actually reduce the size of a particular
company’s competitive marketplace.
Table 1 proposes a five stage model of PMS,
with correlating levels of decreasing engagement with government actors (stakeholders) at
each stage and the strategic rationale underpinning the decision to engage at each level.
Underpinning our thoughts on differentiated
‘Stages’ in the activity, commonly described as
lobbying, are the following observations:
There exist organizations whose contacts
with policy makers are so strong that they
are involved in the co-creation of law. This
represents the highest level of PMS, and
arguably suggests activity beyond the scope
of a term like ‘lobbying’ because ‘lobbying’
implies active attempts to persuade.
There exist organizations who will seek to
change the law in their favour as it is developed. They cannot create the law, but will
seek to influence its detail before it is
enacted. We see the potential for organizations to attempt to assert influence either
through contributions to the legislative process during consultative periods or to challenge the interpretation of new legislation or
regulatory actions as they are being introduced, and where there is still an ability to
influence ‘precedent’ (for example, we can
anticipate such an imperative for industries
such as the nuclear industry).
Finally, there will exist organizations that
need to react to legislative or regulatory action
because of a lack of influence with legislative
or regulatory bodies. The focus of their PMS
will largely be upon managing the potential
impact of regulation or law through political
environmental scanning activities.
Not all firms undertake PMS at the same level
of relationship engagement. This is partially a
response not only to a lack of information,
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Paul R. Baines and Howard Viney
Table 1. A Five stage levels of relationship engagement (LRE) classification system
Stage
Nature of PMS
Strategic rationale
5
To influence the creation of a law or
regulation in the favour of an organization
4
To amend the characteristics or impact of
a proposed law or regulation in favour of
an organization
3
To revise or review the interpretation or
implementation of a law or regulation in
favour of an organization
2
To understand how change as a product of
a law or regulation affects an organization
1
To manage perceptions of change to create a favourable impression of your organization
Organizations, or more probably their Chairmen and
CEOs, are partners with governmental or regulatory
agencies and are part of the process by which laws or
regulations are created and developed. Stage 5 PMS
represents very high level interaction with-law makers,
and very high levels of influence (see Richardson et al.,
2007).
Organizations, or more probably their Chairmen and
CEOs, are closely involved with definition of laws or
regulations through consultative committees, providing
information or guidance that shapes the detail of laws
and regulations. Stage 4 PMS represents high level interaction with law makers, and considerable influence within
the process.
Organizations are not involved in framing laws or regulations, but through challenges (i.e. either legal or through
negotiation with regulatory authorities) to the application
of the law or regulation they seek to influence its practical
implementation in their favour, or minimize its implications. Stage 3 PMS witnesses the exercise of external
power and influence through lobbying activity.
Organizations seek dialogue with law-makers or regulatory
authorities to determine the nature of impending legal
change. Not necessarily involving privileged access, but
working ‘channels of communication’ to permit effective
responses to change that the organization has not been
involved in creating. Stage 2 PMS assumes management of
these channels rather than an attempt to exert influence.
This strategy constitutes managed reactivity through
political environmental scanning.
Organizations respond to changes produced by laws or
regulations, and attempt to manage perceptions in their
wider stakeholder community. Stage 1 PMS reflects a
desire to create a favourable impression of the organization
and its response to political environmental change. Again
managed reactivity through political environmental scanning, but aimed at image control rather than effective
management of processes.
experience or opportunity (i.e. the access
needed to pursue PMS at Stages 5 or 4 is likely
to be limited to a relatively few organizations in
any political system), but also, arguably, to a
lack of need. Obtaining access at Stages 5, 4 or
3 probably requires a high level of resource
deployment, either financial or otherwise.
Depending on the organization, this may
(not) be justified. All organizations will want
government actors to develop legislation or
regulations, which are beneficial to their organizational objectives. However, for some, this
process is critical, justifying the extra investment needed to potentially operate at Stages 4
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2009 John Wiley & Sons, Ltd.
or 5. For many, such an investment is less
critical, so they focus upon earlier stages. In
defending this perspective, we seek to understand both what factors influence strategic
resource deployment decisions, and its practical nature. The different stages identified in
Table 1 appear to suggest a number of key
variables underpinning PMS. These variables
take three forms: outcomes variables (i.e.
the strategic gains that organizations hope
to achieve by engaging in PMS); input variables
(i.e. the resources that organizations are
prepared to dedicate to their PMS activity)
and context variables (i.e. the factors underJournal of Public Affairs, November 2010
DOI: 10.1002/pa
Dynamic capabilities and political-market strategy
pinning a rationale to engage in PMS). We
hypothesize that differences in the relationship
between the three types of variable explain the
different stages in PMS. Hence we propose:
H1a: Firms seek to exert the maximum
possible level of influence over the legislative/regulatory process, and H1b: Firms seek
to enter the legislative/regulatory decisionmaking process at the earliest possible
opportunity.
H2a: Firms experiencing strong contextual
variables in their industry will seek to establish formal links with legislative/regulatory
authorities to (1) improve the performance
of resources and/or (2) to improve the effective management of these resources, and
H2b: Firm’s resource deployments reflect
the intensity of their PMS.
H3a: Firms experiencing high levels of
governmental/regulatory oversight in their
industry will be strongly motivated to
engage in high level PMS, H3b: Firms experiencing frequent governmental/regulatoryinfluenced change in their industry will be
strongly motivated to engage in high level
PMS and H3c: Firms operating in industries
with high levels of government/regulatory
investment will be strongly motivated to
engage in high level PMS.
Concluding remarks
Within the resource-based view of the firm
(Barney, 1991; Peteraf, 1993; Prahalad and
Hamel, 1990) capabilities and their link to firm
performance are critical. We explore the extent
to which PMS might be considered a capability,
or a core competence of the firm which actively
enhances its competitive position in its market
sector, and whether it may be considered a
dynamic capability (Teese et al., 1997). We
discuss whether PMS fits within this group of
routines, or it is a second-order capability that
contributes critically to other dynamic capabilities of the firm. We suggest that further
research should be undertaken with the
explicit aim of establishing whether or not
organizations use PMS as an active element of
the strategic marketing process and whether
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the relationship engagement (LRE) levels of
PMS, we identify, are congruent with different
types of corporate behaviour or characteristics
aimed at influencing legislative change and
managing government stakeholders. Future
research programmes on this relationship
marketing topic might gather data from a wide
sample of large organizations across the EU, and
determine whether they recognize PMS as a
significant element of their strategic marketing
decision-making processes. If they do, we can
then examine the extent to which PMS shapes
and directs the strategic direction of the firm, or
whether it is a second-order capability, focused
upon assisting with the implementation of the
strategy rather than shaping and directing it.
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