Herding the fashion crowd to greener pasturesÂ
30 September 2024 ⢠by StÊphane J. G. Girod in Sustainability
Smarter regulation is required to nudge luxury brands into a more sustainable future, industry experts tell StĂŠphane Girod....
Sustainability
The nonmarket sustainability advantageÂ
Could a new approach beyond a companyâs products and services be the key to improving performance on environmental, social, and governance metrics?Â
For businesses, the political, regulatory, legal, and wider social considerations that occur outside the market â but have an impact on a business â collectively fall under the heading of ânonmarketâ. Companies have traditionally dealt with these issues through philanthropy, reputation-building, or, on the political front, lobbying.
However, as regulations, public policies, activism, and social expectations increasingly affect markets, and as stakeholders influence one another in unpredictable ways, leading firms are going beyond these basic approaches and integrating their market and nonmarket strategies.
In part, this trend is driven by the realization that offering attractive products and services is no longer sufficient for businesses to succeed. Instead, they must actively shape the social and political environment to mitigate risks and secure competitive advantages. This is the domain of nonmarket management, where companies engage with stakeholders, issues, and institutions such as governments, communities, activist groups, and the media that shape the firm’s opportunities and risks.
Several factors are elevating the importance of nonmarket strategy
Stakeholder power: Activist groups, communities, and consumers use social media to address issues ranging from environmental protection to social justice. Companies that fail to engage with these stakeholders risk losing their social license to operate. For instance, the DeleteUber campaign in 2017 led to a significant drop in Uber’s market share after the company was perceived as undermining a taxi strike.
Regulatory complexity: The evolving regulatory landscape presents both challenges and opportunities. From data privacy to environmental protection, companies can actively shape the regulatory context to gain a competitive edge. Tesla’s advocacy for electric vehicle incentives shows how companies can influence regulations to their advantage.
Internationalization: Companies expanding globally must navigate diverse social, political, and cultural contexts. For example, Walmart’s initial struggles in Germany were partly due to a misalignment with local labor practices and consumer expectations, highlighting the need for robust nonmarket strategies when entering new markets.
Reputational risk: In an era of heightened scrutiny and hyper-transparency, firms face significant reputational risks that can quickly erode trust and damage their brand. The 2010 Deepwater Horizon oil spill cost BP not only billions in cleanup and legal fees but also immense reputational damage that persisted for years.
Shared value opportunities: There is growing recognition that addressing societal challenges can present immense business opportunities. For instance, Unilever’s Sustainable Living Plan has not only contributed to social and environmental goals but has also driven innovation and growth for the company.
âBusiness risks from evolving threats such as climate change directly threaten supply chains, while carbon regulations force adjustments.â
Integrating market and nonmarket strategy
Nonmarket factors profoundly shape most markets. One way they do this is by influencing market size, as regulations and social trends dramatically expand or contract markets. For example, the legalization of cannabis in various regions has created a booming industry, while taxes on sugary beverages in over 40 countries are reshaping the soft drink market.
Industry structure and competitive dynamics are also key factors. Intellectual property rules, for instance, shape the power balance between incumbents and new entrants. The pharmaceutical industry’s ability to maintain high prices through patent protection is a clear example of this dynamic.
Nonmarket influences on cost structures can result from policies such as carbon taxes, minimum wage laws, and trade tariffs, all of which have major effects on firms’ cost structures. Walmart’s advocacy for a higher minimum wage, seemingly counter to its interests, was part of a strategy to manage costs and improve its public image.
Business risks from evolving threats such as climate change directly threaten supply chains, while carbon regulations force adjustments. Large companies such as Apple and Google are investing heavily in renewable energy, not just for sustainability but also to mitigate long-term energy cost risks.
An integrated approach acknowledges how these nonmarket forces affect profitability and enables firms to create value for both shareholders and society. PepsiCo’s Performance with Purpose strategy under CEO Indra Nooyi is a prime example of this. Facing criticism over sugary beverages’ role in obesity, Nooyi reshaped the company’s product portfolio, engaged with regulators and public health advocates, and boosted PepsiCo’s reputation and market share while averting costly regulation.
Developing a nonmarket strategy
Understanding the nonmarket context starts with analysis, which involves mapping both issues and stakeholders. Companies need to assess their stage of evolution, how they interact in different arenas (legislative, regulatory, public opinion), and the power balance between stakeholders. The evolving landscape of climate change policy exemplifies the dynamic nature of nonmarket issues, with fossil fuel companies needing to adapt their strategies as stakeholder balance shifts.
The next step is to formulate a strategy: setting clear goals, building influential coalitions, identifying key influence pathways, and planning tactics. This includes setting market-related goals (shaping regulations, influencing standards), defining focal issues and geographic scope, building coalitions with partners (competitors, supply chain players, NGOs, or governments), identifying influence paths to reach decision-makers, and choosing appropriate tactics (lobbying, public campaigns, participation in standards bodies).
Companies like Comcast and Verizon exemplified this strategic approach, employing a mix of tactics such as lobbying, legal challenges, and public relations campaigns to shape the regulatory landscape in their favor in the battle over net neutrality.
Capacity checks can enable an organization to build competencies in areas such as stakeholder engagement, policy analysis, and social innovation. This involves developing human capital through hiring experts, training staff, and cultivating an externally engaged culture. Patagonia’s commitment to being “in business to save our home planet” is a good example of how it guides its nonmarket strategy and empowers employees to make value-aligned decisions.
Companies should undertake feasibility checks to assess the ethics of proposed actions, anticipate responses, evaluate resource requirements, and plan for contingencies. The backlash Google faced after firing AI ethics researcher Timnit Gebru highlights the importance of aligning nonmarket strategies with stated principles.
The final stage, implementation, involves executing the strategy with agility and adaptability. Airbnb’s quick offer of free temporary housing to Afghan refugees in 2021 demonstrates how companies can leverage their resources and stakeholder relationships to respond rapidly to evolving situations.
Nonmarket strategies can contribute to sustainability in a variety of ways.
Making the connection to sustainability
There is no doubt that to address mounting social and environmental challenges, companies need to change the way they approach nonmarket activities. Firms must actively shape the nonmarket context to align their interests with society, shifting from seeing nonmarket engagement as a defensive necessity to embracing it as a source of opportunity, innovation, and advantage.
This requires building capabilities in stakeholder collaboration, social innovation, and adaptive leadership, as well as embedding purpose and broad value creation into the core of the business. In this way, companies can help rewire the economic, political, regulatory, and social contexts that often incentivize short-term thinking and externalization of environmental and social costs. This systemic approach is crucial for addressing complex sustainability challenges that no single company can solve alone.
Nonmarket strategies can contribute to sustainability in a variety of ways. Firms can advocate for policies and regulations that internalize environmental and social costs.
Companies can also partner with NGOs and local communities to reset expectations for business. In this context, the Marine Stewardship Council, initially a partnership between Unilever and WWF, has set new standards for sustainable fishing practices.
Collaboration with peers to set norms and standards for sustainable practices is becoming more widespread in corporate settings. Cascale, formerly the Sustainable Apparel Coalition, which includes companies like Nike, Adidas, and H&M, has developed tools such as the Higg Index to measure and improve supply chain sustainability.
Another strategy is to pitch in and help create a new operating environment that prioritizes long-term value creation. BlackRock’s annual letters to CEOs, emphasizing the importance of sustainability and stakeholder capitalism, have helped shift the conversation around corporate purpose.
Firms that master the new nonmarket environment will not only outperform but also help build a world where business and society can flourish. By leveraging their resources, influence, and innovative capacity to shape the broader systems in which they operate, companies can play a pivotal role in driving the transition to a more sustainable and equitable global economy.
Stakeholder management
Effective stakeholder management is crucial for a successful nonmarket strategy. Key aspects include:
Stakeholder identification: Identify all relevant stakeholders, including those directly and indirectly affected by the company’s actions, both internal and external.
Stakeholder analysis: Assess stakeholders’ interests, influence, and potential impact on the company’s objectives, using tools like stakeholder mapping.
Prioritization: Determine which stakeholders are most critical to engage with based on their power, legitimacy, and urgency.
Engagement strategies: Develop tailored approaches for different stakeholder groups, ranging from information sharing to active collaboration.
Relationship building: Foster long-term, trust-based relationships with key stakeholders through transparent communication and consistent actions.
Conflict resolution: Develop mechanisms to address conflicts and find mutually beneficial solutions when stakeholder interests clash.
Continuous monitoring: Regularly reassess stakeholder landscapes and adjust strategies as needed.
Integration with business strategy: Ensure stakeholder management aligns with and supports overall business objectives.
When done well, management of stakeholders can help companies address complex challenges. For example, Nike addressed criticism over labor conditions in its supply chain by conducting a thorough stakeholder analysis, identifying shared interests with some critics, and engaging these stakeholders in collaborative supply chain reform. This approach improved both working conditions and Nike’s reputation.
Multi-stakeholder initiatives like the Roundtable on Sustainable Palm Oil demonstrate how companies can work with diverse stakeholders to address complex sustainability challenges. Another example of successful stakeholder management is Unilever’s Sustainable Living Plan, which involves ongoing engagement with a wide range of stakeholders to drive sustainability initiatives.
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