Session 9 - Political Analysis for Business

1. Session 9 - Political Analysis for Business MGMT-450 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) Copyright 2002 D.Diermeier

2. Tools for Political Analysis • Distributive Politics Spreadsheet • Provides an estimate of the expected influence of each interest group on the institution deciding the issue • Shows coalitional strategies and weaknesses of each coalition • Interest Group Matrix • Provides overview of most effective strategies • Shows coalitional strategies and weaknesses of each coalition Copyright 2002 D.Diermeier

3. Tool #1: Distributive Politics Spreadsheet • Provides an estimate of the expected influence of each interest group on the institution deciding the issue • A high-level perspective on the range of interests, magnitude of incentives and capabilities which each interest group possesses • Provides an overview of which interest groups may be helpful or harmful to your desired outcome Copyright 2002 D.Diermeier

4. Distributive Politics Spreadsheet _______Incentives ________ _________Impact_________ ___Cost__ _______Incentives ________ ___________Impact__________ __Cost__

5. Incentives • Substitutes or opportunity cost of political action • If interests have another way of achieving the same goal (other than political means), they have a diminished incentive to take action. • Magnitude of total benefits • This is a relative measurement of the total benefits gained or lost by the interest group. • Per-capita benefits • This is a measurement of the benefit gained or lost to each individual member (the lower the benefit, the less incentive to take political action). Copyright 2002 D.Diermeier

6. Impact • Numbers • Larger groups make more appealing targets for entrepreneurial legislators • Coverage • The greater the number of legislators with constituents who are group members the more effective the group will be. (In the U.S. coverage means the number of congressional districts or states that group members reside in.) • Resources • Refers to the combined wealth of the group members. Rich groups can afford to buy more media, make more donations etc and thereby effect political outcomes. Copyright 2002 D.Diermeier

7. Costs • Costs of organizing • If a group is not organized then significant setup costs may deter action • But: businesses can organize groups Copyright 2002 D.Diermeier

8. Evaluating Expected Influence • Define the Issue and Action carefully! • A group should receive a “high impact” rating only if you project that it will have both a high incentive to take action AND a low cost of organization. • Do NOT include the relevant institution (Congress, Agency, etc.) as interest. • Predicting political outcomes is not solely based on the distributive politics story. Politicians may also act out of career, partisan or ideological/moral concerns. Copyright 2002 D.Diermeier

9. Evaluating Expected Influence - Con’t • Be careful when predicting strength of interests. Interests use threats as catalysts for mobilizing supporters. It is crucial to take into account how active interests will be after the proposal is publicized. • Interests become vested in regulations and new interests emerge that profit from the regulations making them harder to change. • The status quo is favored except when the interests in favor of change are moderate to high impact and those opposed are low impact. Copyright 2002 D.Diermeier

12. Disney’s Strategy • Action (Objective): Pass Hr2589 as soon as possible with amendment • Strategy: • Lobbying • Target: Republican leadership (Lott and Gingrich) to move legislation forward. • Message: Maintaining equity with Europe; do not focus on profits • Provide “substitutes” to reduce opposition • Provide exemptions for libraries (relatively small cost concession) • Build coalition strength by changing objective • Accept the Sensenbrenner Amendment because it brings in support of small businesses and restaurants (coverage!), but note that Disney looses the songwriters and reduces magnitude for multi-media companies (such as Time Warner). • Integrated ownership structure is critical – this would not be a good move if there were “pure” music publishers (like EMI in Britain). Remember: market structure determines non-market strategy! Copyright 2002 D.Diermeier

13. Potential Pitfalls • Will Clinton Sign the Legislation? • President may not sign if legislation is portrayed as serving special interests; however, Disney and other entertainment companies are major democratic constituencies and sources of money. • What about grassroots mobilization/media campaign? • NO! Avoid bringing the media into this. Media scrutiny will simply focus on the extent to which Disney is buying legislation that is harmful to public interests • What about Orin Hatch? • Powerful committee chair • received $50,000 from seven major movie studios, the Motion Picture Association of American and ASCAP • Second career as songwriter Copyright 2002 D.Diermeier

14. The Outcome • After concessions were made to restaurants and libraries, the Bill passed quickly through committee (adding amendment split the opposition; consumers were not organized) • October of 1998 - bill was passed through the Senate floor by unanimous consent (no members had to go on record) • Entire nation and the press were preoccupied by the Starr Report and Clinton impeachment proceedings • On October 27, 1998, President Clinton quietly signed the Bill into law (Sonny Bono Copyright Term Extension Act) • Disney chairman Michael Eisner even lobbied personally Copyright 2002 D.Diermeier

15. The Outcome • In the 1997-1998 election cycle, media companies and their political action committees contributed more than $6.5 million to members of Congress (Source: Center for Responsive Politics, www.opensecrets.org) • Eight of the bill’s 23 sponsors received contributions from Disney as did 10 of the original House Bill’s 13 sponsors • After the bill was passed into law, a lawsuit was filed (Eldred vs. Reno) challenging the Constitutionality of the Act: • Lawsuit was supported by Higginson Books, American Film Heritage Association and a prestigious law firm Hale & Dorr (pro bono); later internet law guru Lawrence Lessig joins the plaintiffs • Argued that the Act violated the requirement of providing “incentive” for the creation of original works. Lawsuit focused on retroactivity of Bill. • Lawsuit is dismissed by U.S. District Court • U.S. Appeal Court upheld dismissal of U.S. District Court • Supreme Courst agrees to hear case, but upholds the law (1/15/03) Copyright 2002 D.Diermeier

16. What Disney Did Right • Change objectives to improve coalition strength • Movie studios and restaurants • Use substitutes to reduce opposition • Exemptions for libraries! • Timing • The press and public were concerned about other matters Copyright 2002 D.Diermeier

17. Predicts the best strategy for achieving political goals Tool is used in conjunction with Distributive Politics Spreadsheet Depending on an issue’s location in the matrix different approaches are appropriate Tool # 2: The Interest Group-Matrix Copyright 2002 D.Diermeier

18. Organized Not Organized Entrepreneurial politics Interest group politics Organized environmental protection trade liberalization ? Client politics Not Organized tax breaks Interest Group Matrix Proponents of Policy/Law Opponents of Policy/Law Copyright 2002 D.Diermeier

19. Probability of Passing Bill Proponents of Policy/Law Organized Not Organized Interest Group Politics Client Politics Organized Entr. Politics Opponents of Policy/Law ? Not Organized Copyright 2002 D.Diermeier

20. Opponent Strategy Proponents of Policy/Law Organized Not Organized Entrepreneurial politics Interest group politics Organized environmental protection trade liberalization Opponents of Policy/Law ? Client politics Not Organized tax breaks Copyright 2002 D.Diermeier

21. Proponent Strategy Proponents of Policy/Law Organized Not Organized Entrepreneurial politics Interest group politics Organized environmental protection trade liberalization Opponents of Policy/Law ? Client politics Not Organized tax breaks Copyright 2002 D.Diermeier

22. Client Politics - Overview • Proponents are organized - opponents are not • Since opponents are not organized, proponents should win if their supporters are organized, politically motivated and willing to take action • But: 1. Counteractive strategies are available • e.g. information supplied by an opposing group may push the issue towards interest group politics 2. General public distaste for client politics • this may allow opposing interests to portray proponents as “special interests” Copyright 2002 D.Diermeier

23. Client Politics – Proponents • Proponent tactics usually include: • Using a low profile strategy to avoid media or public attention • 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 • 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) • Hurrying the matter to a resolution before media attention or opposition groups can organize • Anticipating opposition tactics • (see next slide) Copyright 2002 D.Diermeier

24. Client Politics - Opponents • Opponent tactics usually include: • Using a high profile strategy to expose proponents as political clients (a.k.a. “pigs feeding at the public trough”) • The Problem: incentives for collective action against proponents are low by definition and high-profile strategies are costly, so... • Leverage existing social, economic or political infrastructure to minimize organization costs and time • 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 • Create media interest in issue or the proponents tactics for special interest legislation Copyright 2002 D.Diermeier

25. Organized Not Organized Entrepreneurial politics Interest group politics Organized environmental protection trade liberalization ? Client politics Not Organized tax breaks Interest Group Matrix Proponents of Policy/Law Opponents of Policy/Law Copyright 2002 D.Diermeier

26. Entrepreneurial Politics • Entrepreneurial politics is the opposite of client politics and is one of the most difficult strategies • 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) • 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 • If so, an effective strategy may be possible but has to be carefully implemented • If not, more modest and realistic objectives must be adopted to minimize losses (e.g. market entry) Copyright 2002 D.Diermeier

27. Organized Not Organized Entrepreneurial politics Interest group politics Organized environmental protection trade liberalization ? Client politics Not Organized tax breaks Interest Group Matrix Proponents of Policy/Law Opponents of Policy/Law Copyright 2002 D.Diermeier

28. Interest Group Politics - Overview • Interest group politics is typically highly visible (e.g. oil industry vs. environmentalists) • There may be disagreement within interest groups about the appropriate scope or resolution of the issue (e.g. obesity) • 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) Key problem for businesses is translating money into votes! Copyright 2002 D.Diermeier

29. Interest Group Politics • Some common tactics by Interest Group Proponents and Opponents: • Coalition-building with other Interest Groups is critical • Pharmaceutical companies and patients • Pick an objective in order to build the strongest coalition • Disney • Using your rent chain • Luxury Tax • Adopting arguments that emphasize the interests of otherwise unrepresented interests / constituents • Drug-Reimports – Drug safety • Seeking diverse groups to coordinate / corroborate messages • internet gambling • Scrubbers (see Baron book) Copyright 2002 D.Diermeier

30. Proponent Strategies Changing the status quo is generally more difficult and requires persuasive arguments or evidence Identify the broadest coalition by strategically defining coalition Identify strengths and weaknesses of coalition Opponent Strategies Focusing on doubt and risk of new law or policy Use delay tactics to postpone decision (e.g. “Big Five” tactic against SEC chairman’s reform to separate audit and consulting functions) Identify strengths and weaknesses of coalition Interest Group Politics Copyright 2002 D.Diermeier

31. Summary Points • Collective action theory helps predicting which interests will be active and their expected impact. • 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. • As the Disney case demonstrates, coalitions are highly issue-specific. Which aspect of an issue is emphasized, will determine coalitional alignments. • The interest group matrix helps to identify broad strategy options for different interest group configurations. Copyright 2002 D.Diermeier