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  • One of the main users of Diebold's touchscreen voting systems is Georgia. After pre-election polls showed incumbent Democrats Cleland and Barnes ahead both went on to lose in close elections. Anomalies in the vote counts were noted.
  • Diebold’s missteps greatly increase its problems.
  • In 2002 Bev Harris runs an online PR firm and is, apparently, a very concerned citizen. After the results in Georgia she runs a google search and on the 12th page of the search she discovers a treasure trove of GES documents.
  • Unlike Diebold’s ATM customers, the primary customer for voting machines are elected officials. Prior to 2000 voting machines drew media coverage that was similar to the kind of dry, business coverage that ATM machines receive. But that changed with 2000.
  • Slides

    1. 1. Session 10 – Strategies in Regulatory Arenas 05/31/10 Copyright 2009 D.Diermeier 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)
    2. 2. Perceptions about lobbying <ul><li>Power over actions: persuasion/threats, coercion, cutting deals in smoke-filled rooms -- seldom </li></ul><ul><li>Influence over beliefs: strategic provision of politically-relevant information to and from political and public officeholders -- the principal form of lobbying </li></ul><ul><li>Politically-relevant information pertains to the interests of officeholders; e.g., constituents and policy interests; rent chain; emphasize jobs--not profits </li></ul><ul><li>Strategic in the sense of providing your side of the issue and counteracting the other side’s messages </li></ul><ul><li>Strategic in the sense of targeting (whom to lobby) and timing (when to lobby them) </li></ul>05/31/10 Copyright 2009 D.Diermeier
    3. 3. Levels of Lobbying 05/31/10 Copyright 2009 D.Diermeier Business CEO Member/Officeholder Government “ Restrictions on junk bond financing will cost jobs.” Interact with the member and her staff at multiple levels Staff Managers technical information political information committee personal --administrative assistant --legislative director --legislative assistant --legislative correspondent Linton senator messages
    4. 4. Lobbying – Key Steps <ul><li>Step 1. Identify the information that stakeholders possess that is decision-relevant for legislators. </li></ul><ul><li>Step 2. Determine how to transmit that information to legislators credibly . </li></ul><ul><li>Step 3. Get access to pivotal legislators and proposers. </li></ul>05/31/10 Copyright 2009 D.Diermeier
    5. 5. Types of lobbying 05/31/10 Copyright 2009 D.Diermeier contact--But why should I act? Quality Type of information Remark Irresponsible false Not only morally but also strategically objectionable Superfluous true but known Politicians are busy and do not like their time wasted. Good true and unknown A necessary but not sufficient condition for a successful lobbying Excellent true, unknown, and important to the politician’s goals Sufficient for a contact, plus good prospects for influence; a vote or, better yet, an ally
    6. 6. What Makes Information Credible? <ul><li>1. Record of being truthful and accurate--reputation </li></ul><ul><li>2. Relationships of trust </li></ul><ul><li>3. Data and analysis </li></ul><ul><li>4. Corroboration of position and analysis by others with different interests </li></ul>05/31/10 Copyright 2009 D.Diermeier
    7. 7. Principles of lobbying <ul><li>Know the institutional arena--where decisions are made </li></ul><ul><li>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; </li></ul><ul><li>Respect the officeholder and her staff--most are smart, all are savvy </li></ul><ul><li>Don't just talk - Listen to officeholder and her staff </li></ul><ul><ul><li>for their interests and concerns </li></ul></ul><ul><ul><li>strategic advice--about process, about likely votes </li></ul></ul><ul><li>Explore and exploit coalition building opportunities; </li></ul><ul><ul><li>e.g.Calgene include sunflower growers (chapter 8) </li></ul></ul><ul><ul><li>Microsoft included [email_address] and Icast.com as part of coalition to lobby FCC to open up AOL’s instant messenger service. </li></ul></ul><ul><li>Establish (access), maintain, and use continuing relations </li></ul><ul><ul><li>use allies that have access: e.g. TribalVoice and the FCC. </li></ul></ul>05/31/10 Copyright 2009 D.Diermeier
    8. 8. The Interest Group-Matrix <ul><li>Identifies strategy templates </li></ul><ul><li>Tool is best used in conjunction with Distributive Politics Spreadsheet </li></ul><ul><li>Depending on an issue’s location in the matrix different approaches are appropriate </li></ul>05/31/10 Copyright 2009 D.Diermeier
    9. 9. Interest Group Matrix 05/31/10 Copyright 2009 D.Diermeier Opponents of Policy/Law Proponents of Policy/Law Organized Not Organized Organized Not Organized Interest group politics Entrepreneurial politics ? Client politics environmental protection trade liberalization tax breaks
    10. 10. Probability of Passing Bill 05/31/10 Copyright 2009 D.Diermeier Entr. Politics Interest Group Politics Client Politics Opponents of Policy/Law Proponents of Policy/Law Organized Not Organized Organized Not Organized ?
    11. 11. Opponent Strategy 05/31/10 Copyright 2009 D.Diermeier Organized Not Organized Organized Not Organized Interest group politics Entrepreneurial politics ? Client politics Opponents of Policy/Law Proponents of Policy/Law environmental protection trade liberalization tax breaks
    12. 12. Proponent Strategy 05/31/10 Copyright 2009 D.Diermeier Organized Not Organized Organized Not Organized Interest group politics Entrepreneurial politics ? Client politics Opponents of Policy/Law Proponents of Policy/Law environmental protection trade liberalization tax breaks
    13. 13. Client Politics - Overview <ul><li>Proponents are organized - opponents are not </li></ul><ul><li>Since opponents are not organized, proponents should win if their supporters are organized, politically motivated and willing to take action </li></ul><ul><li>But: </li></ul><ul><ul><li>1. Counteractive strategies are available </li></ul></ul><ul><ul><ul><li>e.g. information supplied by an opposing group may push the issue towards interest group politics </li></ul></ul></ul><ul><ul><li>2. General public distaste for client politics </li></ul></ul><ul><ul><ul><li>this may allow opposing interests to portray proponents as “special interests” </li></ul></ul></ul>05/31/10 Copyright 2009 D.Diermeier
    14. 14. Client Politics – Proponents <ul><li>Proponent tactics usually include: </li></ul><ul><ul><li>Using a low profile strategy to avoid media or public attention </li></ul></ul><ul><ul><li>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 </li></ul></ul><ul><ul><li>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) </li></ul></ul><ul><ul><li>Hurrying the matter to a resolution before media attention or opposition groups can organize </li></ul></ul><ul><ul><li>Anticipating opposition tactics </li></ul></ul><ul><ul><ul><li>(see next slide) </li></ul></ul></ul>05/31/10 Copyright 2009 D.Diermeier
    15. 15. Client Politics - Opponents <ul><li>Opponent tactics usually include: </li></ul><ul><ul><li>Using a high profile strategy to expose proponents as political clients (a.k.a. “pigs feeding at the public trough”) </li></ul></ul><ul><li>The Problem: incentives for collective action against proponents are low by definition and high-profile strategies are costly, so... </li></ul><ul><ul><li>Leverage existing social, economic or political infrastructure to minimize organization costs and time </li></ul></ul><ul><ul><li>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 </li></ul></ul><ul><ul><li>Create media interest in issue or the proponents tactics for special interest legislation </li></ul></ul>05/31/10 Copyright 2009 D.Diermeier
    16. 16. Interest Group Matrix 05/31/10 Copyright 2009 D.Diermeier Opponents of Policy/Law Proponents of Policy/Law Organized Not Organized Organized Not Organized Interest group politics Entrepreneurial politics ? Client politics environmental protection trade liberalization tax breaks
    17. 17. Entrepreneurial Politics <ul><li>Entrepreneurial politics is the opposite of client politics and is one of the most difficult strategies </li></ul><ul><li>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) </li></ul><ul><li>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 </li></ul><ul><ul><li>If so, an effective strategy may be possible but has to be carefully implemented </li></ul></ul><ul><ul><li>If not, more modest and realistic objectives must be adopted to minimize losses (e.g. market entry) </li></ul></ul>05/31/10 Copyright 2009 D.Diermeier
    18. 18. Interest Group Matrix 05/31/10 Copyright 2009 D.Diermeier Opponents of Policy/Law Proponents of Policy/Law Organized Not Organized Organized Not Organized Interest group politics Entrepreneurial politics ? Client politics environmental protection trade liberalization tax breaks
    19. 19. Interest Group Politics - Overview <ul><li>Interest group politics is typically highly visible (e.g. oil industry vs. environmentalists) </li></ul><ul><li>There may be disagreement within interest groups about the appropriate scope or resolution of the issue (e.g. obesity) </li></ul><ul><li>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) </li></ul><ul><li>Key problem for businesses is translating money into votes! </li></ul>05/31/10 Copyright 2009 D.Diermeier
    20. 20. Interest Group Politics <ul><li>Some common tactics by Interest Group Proponents and Opponents: </li></ul><ul><ul><li>Coalition-building with other Interest Groups is critical </li></ul></ul><ul><ul><ul><li>Pharmaceutical companies and patients </li></ul></ul></ul><ul><ul><li>Pick an objective in order to build the strongest coalition </li></ul></ul><ul><ul><ul><li>Disney </li></ul></ul></ul><ul><ul><li>Using your rent chain </li></ul></ul><ul><ul><ul><li>Luxury Tax </li></ul></ul></ul><ul><ul><li>Adopting arguments that emphasize the interests of otherwise unrepresented interests / constituents </li></ul></ul><ul><ul><ul><li>Drug-Reimports – Drug safety </li></ul></ul></ul><ul><ul><li>Seeking diverse groups to coordinate / corroborate messages </li></ul></ul><ul><ul><ul><li>internet gambling </li></ul></ul></ul><ul><ul><ul><li>Scrubbers (see Baron book) </li></ul></ul></ul>05/31/10 Copyright 2009 D.Diermeier
    21. 21. Interest Group Politics <ul><li>Proponent Strategies </li></ul><ul><li>Changing the status quo is generally more difficult and requires persuasive arguments or evidence </li></ul><ul><li>Identify the broadest coalition by strategically defining coalition </li></ul><ul><li>Identify strengths and weaknesses of coalition </li></ul><ul><li>Opponent Strategies </li></ul><ul><li>Focusing on doubt and risk of new law or policy </li></ul><ul><li>Use delay tactics to postpone decision (e.g. “Big Five” tactic against SEC chairman’s reform to separate audit and consulting functions) </li></ul><ul><li>Identify strengths and weaknesses of coalition </li></ul>05/31/10 Copyright 2009 D.Diermeier
    22. 22. Interests - Key Take-Aways <ul><li>Constituency analysis helps predicting which interests will be active and their expected impact. </li></ul><ul><li>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. </li></ul><ul><li>Coalitions are highly issue-specific. Which aspect of an issue is emphasized, will determine coalitional alignments. </li></ul><ul><li>The interest group matrix helps to identify broad strategy options for different interest group configurations. </li></ul>05/31/10 Copyright 2009 D.Diermeier
    23. 23. 05/31/10 Copyright 2009 D.Diermeier
    24. 24. The Solution! 05/31/10 Copyright 2009 D.Diermeier Diebold’s Direct Electronic Voting Machines (DRE’s)
    25. 25. 2002 Elections in Georgia 05/31/10 Copyright 2005 D.Diermeier Senator Max Cleland (D) Governor Roy Barnes (D)
    26. 26. Update on Diebold <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>05/31/10 Copyright 2005 D.Diermeier
    27. 27. Diebold Quote <ul><li>“ 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. </li></ul>05/31/10 Copyright 2005 D.Diermeier
    28. 28. Diebold in the News Media 05/31/10 Copyright 2005 D.Diermeier Audience Interest More coverage Threshold for Negative Adverse Business Effect has been reached 3005 articles Rob-Georgia + Hacked Memos (Hint of scandal) 2002 Voting Machines Pre 2000 election 1156 articles 1999 2098 articles 2001 Voting machines post 2000 2003 2004 Rob-Georgia + hacked memos+ DMCA lawsuit+ “ deliver Ohio” (conflict of interest) 2463 articles 10779 articles
    29. 29. Bev Harris investigates <ul><li>Bev Harris finds 40,000 GES files online and a directory named “rob-Georgia”. Puts these online. </li></ul><ul><li>A hacker gets access to DESI’s intranet in March 2003 and copies thousands of internal emails and memos written by employees. </li></ul><ul><li>A study by Avi Rubin at John’s Hopkins finds security flaws with Diebold’s software and systems. </li></ul><ul><li>Activist attention is an opportunity, if handled well … </li></ul>05/31/10 Copyright 2005 D.Diermeier
    30. 30. Looking Back - Nonmarket Risks for Diebold <ul><li>Politicians as Customers : Diebold’s customers are county and state election officials—responsive to voters and other elected officials. </li></ul><ul><li>Media . Typically voting technology is not of great interest to most people and therefore not a subject of extensive coverage. </li></ul><ul><ul><li>The 2000 election changes that. </li></ul></ul><ul><li>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. </li></ul><ul><li>Public . In every election there is large group of people who are going to be extremely dubious about the legitimacy of the result: </li></ul><ul><ul><li>the losers. </li></ul></ul><ul><li>Courts. Election outcomes, voting rules, redistricting etc are often contested in the legal arena. </li></ul>05/31/10 Copyright 2005 D.Diermeier
    31. 31. Key information <ul><li>Stakeholders do not understand the intricacies of voting machines or their vulnerabilities. </li></ul><ul><ul><li>Tradeoffs between open source software and proprietary software on dimensions. </li></ul></ul><ul><ul><li>Relative error rates of different types of machines (overvotes, undervotes, spoiled ballots etc). </li></ul></ul><ul><ul><li>Advantages of ballot layout on touchscreen and the ability to confirm vote choice. </li></ul></ul><ul><li>Stakeholders do not understand the role and need for transparency e.g., the ability for the loser to have confidence that he really lost. </li></ul>05/31/10 Copyright 2005 D.Diermeier
    32. 32. Regulation <ul><li>Regulation is government intervention in the market place using commands, controls and incentives </li></ul><ul><li>Regulatory activity shapes the “rules of the game” in the market place </li></ul><ul><ul><li>it can sustain competitive advantages (e.g. Disney) or erode them (e.g. Microsoft) </li></ul></ul><ul><ul><li>regulation can also affect entire industries (e.g. tobacco, fire-arms) </li></ul></ul><ul><li>To successfully manage regulatory environments managers need to understand : </li></ul><ul><ul><li>the motivations for government regulation </li></ul></ul><ul><ul><li>the politics of regulatory implementation and change </li></ul></ul>05/31/10 Copyright 2005 D.Diermeier
    33. 33. How regulators think – Drug Approval 05/31/10 Copyright 2005 D.Diermeier Social Costs 0 Restrictions on Use Side-effects (“Safety”) A B social optimum Illness (“Efficacy”) Total Costs
    34. 34. Regulation Techniques <ul><li>Technology-based </li></ul><ul><ul><li>prescribes specific technology </li></ul></ul><ul><ul><li>e.g. seat belts, drug approval </li></ul></ul><ul><ul><li>Problem: choosing efficient technology </li></ul></ul><ul><ul><li>Case: Thalodomide </li></ul></ul><ul><li>Incentive-based </li></ul><ul><ul><li>Tax incentives </li></ul></ul><ul><ul><li>Entitlements (trading-based) </li></ul></ul><ul><ul><li>Liability law </li></ul></ul><ul><ul><li>Problem: choosing the right incentives </li></ul></ul><ul><ul><li>Case: Westinghouse </li></ul></ul>05/31/10 Copyright 2005 D.Diermeier
    35. 35. Background: Celgene Corp. and Thalidomide <ul><li>In 1957 the drug thalidomide was marketed as a sedative and prescribed for morning sickness </li></ul><ul><ul><li>51 brand names in 46 countries (including Canada, UK, Germany) </li></ul></ul><ul><ul><li>In 1962 the causal link between thalidomide and severe birth defects was confirmed, and the drug removed from the market </li></ul></ul><ul><ul><li>The drug had by then caused over 12,000 birth defects and an unknown number of miscarriages worldwide </li></ul></ul><ul><ul><li>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.] </li></ul></ul><ul><li>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 diseas e (transplant patients), and solid myeloma cancers. </li></ul><ul><li>AIDS buyers’ clubs start importing from Brazil and Mexico </li></ul><ul><li>What should Celgene do? </li></ul>05/31/10 Copyright 2005 D.Diermeier
    36. 36. Celgene’s Marketing Options <ul><li>Celgene has three options for a market strategy: </li></ul><ul><ul><li>“ Focus on analogue”: Don’t take thalidomide to market; wait for analogue to be developed </li></ul></ul><ul><ul><ul><li>How likely are they to come up with a suitable analogue? </li></ul></ul></ul><ul><ul><ul><li>Will another company take thalidomide to market? What are the 1 st - mover advantages? </li></ul></ul></ul><ul><ul><li>“ Partnering”: Look for marketing partnership with big pharma </li></ul></ul><ul><ul><ul><li>Who would partner with Celgene on this product? </li></ul></ul></ul><ul><ul><ul><li>How much value would Celgene have to surrender to the partner? </li></ul></ul></ul><ul><ul><li>“ Marketing Thalidomide”: Take it to market themselves </li></ul></ul><ul><ul><ul><li>Celgene currently has no marketing and sales infrastructure </li></ul></ul></ul><ul><ul><ul><li>What marketing restrictions would be imposed for “off-label” prescription? Do these matter? </li></ul></ul></ul>05/31/10 Copyright 2005 D.Diermeier

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