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  1. 1. Session 9 – Integrative Case 05/31/10 Copyright 2009 D.Diermeier SEEK-441 Strategic Management in Non-Market Environments Daniel Diermeier IBM Professor of Regulation and Competitive Practice & Director of Ford Center for Global Citizenship Kellogg School of Management (MEDS)
  2. 2. Drexel’s dilemma Variable scope of the issue. Where are the pressure points? Junk bonds may be used for: Hostile takeovers Restructuring; LBOs Mergers and friendly acquisitions S&L holdings Keeping the issue narrow cuts losses in the event that legislation passes, but. . . . . . keeping all these together complexifies the issue which can increase uncertainty. It can also bring other interests into alignment with Drexel’s interests; e.g., some investment banks, some businesses, communities, some financial institutions. Financing high-growth companies Do we want to take a bullet and survive or try to stop all the bills? moratorium on hostile takeovers H.R. 2476 restrictions on holdings by financial instit. 05/31/10 Copyright 2009 D.Diermeier
  3. 3. Drexel’s first pass <ul><li>Little coalition building </li></ul><ul><ul><li>hadn't analyzed interests affected by the broad scope of the issue </li></ul></ul><ul><li>Little institutionalism </li></ul><ul><ul><li>little political &quot;infrastructure marketing&quot; </li></ul></ul><ul><ul><li>little institutional know-how </li></ul></ul><ul><li>Economically sophisticated but politically unsophisticated messages </li></ul><ul><ul><li>&quot;Junk bonds are essential to competitiveness and economic strength.&quot; </li></ul></ul><ul><ul><li>“ the risk-adjusted yield is higher on junk bonds” </li></ul></ul><ul><ul><li>a duel of economic facts adds uncertainty but will not carry the day </li></ul></ul><ul><li>Result: Failed to slow the legislative momentum. </li></ul>05/31/10 Copyright 2009 D.Diermeier
  4. 4. 05/31/10 Copyright 2009 D.Diermeier President House SQ Senate Does Drexel have a chance? – Status Quo Bias Senate Filibuster Pivot Region of policy change Region disappears! Status Quo prevails!
  5. 5. 05/31/10 Copyright 2009 D.Diermeier Legislator Status Quo Dimension 1 Dimension 2 high low low high Does Drexel have a change? The Power of Uncertainty high Bill Outcome 1 = Outcome ? Outcome 2 Outcome 3
  6. 6. Drexel’s second pass - refined strategy <ul><li>Objective: </li></ul><ul><ul><li>kill the bills (all of them!) </li></ul></ul><ul><li>Does Drexel have a chance? Yes, because </li></ul><ul><ul><li>Drexel can serve as a catalyst for con-coalition </li></ul></ul><ul><ul><li>It is always much easier to block a bill than to pass it. </li></ul></ul><ul><ul><li>Legislators are risk-averse; the more uncertainty about consequences the better </li></ul></ul><ul><ul><ul><li>Drexel will not win on “numbers”, “coverage”, etc. but may make legislators hesitant to vote for a bill with very uncertain consequences. </li></ul></ul></ul><ul><ul><ul><li>Drexel needs to focus on “counter-active” lobbying and creating uncertainty. To do this credible testimony by allies is key! </li></ul></ul></ul><ul><ul><li>but Drexel must be very aggressive given the issue location in the life-cycle and its lack of political infrastructure. </li></ul></ul><ul><li>stop the bills as early in the process as possible (committee stage!) </li></ul><ul><li>focus on pivotal legislators -- use politically-relevant information </li></ul>05/31/10 Copyright 2009 D.Diermeier
  7. 7. Coalition Formation and Rent Chain <ul><li>Should Drexel accept Aylward’s offer? </li></ul><ul><ul><li>Yes. </li></ul></ul><ul><ul><li>What should the group be called? </li></ul></ul><ul><ul><ul><li>Yuppies for profit? </li></ul></ul></ul><ul><ul><ul><li>Junk bond junkies? </li></ul></ul></ul><ul><ul><ul><li>Alliance for Capital Access (ACA) </li></ul></ul></ul><ul><li>How to use the rent chain? </li></ul><ul><ul><li>Rely on its clients (especially companies with very good public image e.g., Kinder Care Learning Centers, Calvin Klein, Wickes, Southmark) </li></ul></ul><ul><ul><li>Educate them about the threat </li></ul></ul><ul><ul><li>Encourage them to take political action by telling them who to contact and what to do. Reduce their costs of organization by using the Alliance for Capital Access financed by Drexel. </li></ul></ul><ul><ul><li>Use at committee hearings and in lobbying efforts (credibility!) </li></ul></ul><ul><li>Should Drexel engage in public advocacy campaign? </li></ul><ul><ul><li>Low key is preferable, but some targeted ads may help (Drexel spent about $ 4 mill. on this). </li></ul></ul>05/31/10 Copyright 2009 D.Diermeier
  8. 8. Lobbying <ul><li>Lobby who? </li></ul><ul><ul><li>All key institutional actors (committee chairs, party leaders, President) because all are not well-informed about junk bonds </li></ul></ul><ul><ul><li>Senators and representatives from states not well served by established securities industry e.g., Virginia increased employment by 64,000 by firms using junk bonds, New Mexico does not have a single investment grade company </li></ul></ul><ul><li>What message should Drexel convey? </li></ul><ul><ul><li>Drexel will be put out of business or badly hurt by this legislation? </li></ul></ul><ul><ul><ul><li>NO! </li></ul></ul></ul><ul><ul><li>Junk bonds are essential for economic growth, jobs and competitiveness </li></ul></ul><ul><ul><ul><li>Few states have investment grade companies (Senate) </li></ul></ul></ul><ul><ul><ul><li>Number of companies per district that used junk bonds to expand. (32 companies in Bliley’s (R-VA) district; 64,000 jobs) </li></ul></ul></ul><ul><ul><li>Restrictions on junk bonds are unfair to states and localities who depend upon jobs provided by firms who use junk bonds </li></ul></ul><ul><ul><li>Restrictions will only help complacent managers without helping stockholders or employees. </li></ul></ul>05/31/10 Copyright 2009 D.Diermeier
  9. 9. Lobbying (con’t) <ul><li>Lobby how? </li></ul><ul><ul><li>Need access so consider contributions to D’Amato (R-NY) and Wirth (D-CO). Contribute to natural allies. D’Amato because Drexel is his constituent. Wirth because of connection to high tech startups in western states. </li></ul></ul><ul><ul><li>Hire lobbyists. Robert Strauss (Chair of Democrat Party) and John Evans (Republican former SEC official). </li></ul></ul>05/31/10 Copyright 2009 D.Diermeier
  10. 10. Long-Term Measures <ul><li>Continuing relations </li></ul><ul><ul><li>1983-84 PAC contributions $20,550 </li></ul></ul><ul><ul><li>1985-86 &quot; &quot; $177,800 </li></ul></ul><ul><ul><li>D’Amato $56,750 (PAC + individual contributions) </li></ul></ul><ul><ul><li>Wirth $23,900 (PAC + individual contributions) </li></ul></ul><ul><li>Washington presence (building a continuing political infrastructure) </li></ul><ul><ul><li>Washington office--Mary Jo Jacobi (former aide to Reagan) </li></ul></ul><ul><li>Questionable measures; e.g., “speaker’s fees” </li></ul>05/31/10 Copyright 2009 D.Diermeier
  11. 11. Drexel: outcomes and conclusions <ul><li>No legislation emerged from committee, neither in the House nor Senate. </li></ul><ul><li>Original strategy unlikely to succeed: </li></ul><ul><ul><li>information not politically useful </li></ul></ul><ul><ul><li>did not provide a politically-relevant reason to oppose the bills </li></ul></ul><ul><li>Revised strategy was consistent with: </li></ul><ul><ul><li>better understanding of interests, institutions and politically relevant information </li></ul></ul><ul><ul><li>backed by substantial resources--this was the most important issue on Drexel’s agenda </li></ul></ul><ul><li>The case illustrates the openness of the U.S. system; Drexel was able to change the outcome at a very late date; as we will see in future sessions such a strategy would probably not have worked in other political systems (such as Germany or Japan). </li></ul>05/31/10 Copyright 2009 D.Diermeier
  12. 12. Drexel – Junk Bond Update <ul><li>Drexel’s junk bonds fueled successful new ventures such as MCI and Turner Broadcasting </li></ul><ul><li>In 1989, the market for junk bonds was estimated at $28 billion </li></ul><ul><li>In 1990, Drexel went bankrupt after pleading guilty to six felony counts </li></ul><ul><ul><li>Drexel assessed $650 million in fines </li></ul></ul><ul><ul><li>Milken spent two years in jail, paid a record $1.1 billion fines, and was banned for life from securities industry </li></ul></ul><ul><li>By 1991, the default rate for junk bonds reached 10 percent and only $4 billion was issued </li></ul><ul><li>In 1996, the industry has rebounded with $73.6 billion issued and $142 billion issued in 1999 </li></ul><ul><li>Today, there are 60 players ranging from prominent Wall Street investment houses to major U.S. and foreign banks </li></ul><ul><li>Many mutual fund and pension funds hold “high yield” debt are part of their portfolio </li></ul><ul><li>In 2001, Levi Strauss raised $1.05 billion in “high yield debt” </li></ul><ul><li>No new pushes for regulation </li></ul>05/31/10 Copyright 2009 D.Diermeier
  13. 13. 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
  14. 14. 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
  15. 15. 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
  16. 16. 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
  17. 17. 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
  18. 18. 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 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
  19. 19. 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
  20. 20. 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
  21. 21. 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 ?
  22. 22. 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
  23. 23. 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
  24. 24. 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
  25. 25. 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
  26. 26. 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
  27. 27. 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
  28. 28. 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
  29. 29. 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
  30. 30. 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
  31. 31. 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
  32. 32. 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
  33. 33. 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>As the Disney case demonstrates, 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