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04/09/23 Copyright 2009 D.Diermeier 1
Session 9 – Integrative Case
SEEK-441 Strategic Management in Non-Market Environments
Daniel Diermeier
IBM Professor of Regulation and Competitive Practice & Director of Ford Center for Global CitizenshipKellogg School of Management (MEDS)
Drexel’s dilemmaVariable scope of the issue. Where are the pressure points?
Junk bonds may be used for:
Hostile takeoversRestructuring; LBOsMergers 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.
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Drexel’s first pass
Little coalition building hadn't analyzed interests affected by the broad scope of the issue
Little institutionalism little political "infrastructure marketing" little institutional know-how
Economically sophisticated but politically unsophisticated messages
"Junk bonds are essential to competitiveness and economic strength."
“the risk-adjusted yield is higher on junk bonds” a duel of economic facts adds uncertainty but will not carry the
day
Result: Failed to slow the legislative momentum.
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President
House
SQ
Senate
Does Drexel have a chance? – Status Quo Bias
Senate Filibuster Pivot
Region of policy change
Region disappears!Status Quo prevails!
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Legislator
Status Quo
Dimension 1
Dimension 2
highlow
low
high
Does Drexel have a change? The Power of Uncertainty
high
Bill
Outcome 1
= Outcome ?
Outcome 2
Outcome 3
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Drexel’s second pass - refined strategy
Objective: kill the bills (all of them!)
Does Drexel have a chance? Yes, because Drexel can serve as a catalyst for con-coalition It is always much easier to block a bill than to pass it. Legislators are risk-averse; the more uncertainty about
consequences the better Drexel will not win on “numbers”, “coverage”, etc. but may make
legislators hesitant to vote for a bill with very uncertain consequences. Drexel needs to focus on “counter-active” lobbying and creating
uncertainty. To do this credible testimony by allies is key! but Drexel must be very aggressive given the issue location in the
life-cycle and its lack of political infrastructure. stop the bills as early in the process as possible (committee
stage!) focus on pivotal legislators -- use politically-relevant
information
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Coalition Formation and Rent Chain
Should Drexel accept Aylward’s offer? Yes. What should the group be called?
Yuppies for profit? Junk bond junkies? Alliance for Capital Access (ACA)
How to use the rent chain? Rely on its clients (especially companies with very good public
image e.g., Kinder Care Learning Centers, Calvin Klein, Wickes, Southmark)
Educate them about the threat 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.
Use at committee hearings and in lobbying efforts (credibility!) Should Drexel engage in public advocacy campaign?
Low key is preferable, but some targeted ads may help (Drexel spent about $ 4 mill. on this).
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Lobbying
Lobby who? All key institutional actors (committee chairs, party leaders, President)
because all are not well-informed about junk bonds 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
What message should Drexel convey? Drexel will be put out of business or badly hurt by this legislation?
NO! Junk bonds are essential for economic growth, jobs and competitiveness
Few states have investment grade companies (Senate) Number of companies per district that used junk bonds to expand.
(32 companies in Bliley’s (R-VA) district; 64,000 jobs) Restrictions on junk bonds are unfair to states and localities who
depend upon jobs provided by firms who use junk bonds Restrictions will only help complacent managers without helping
stockholders or employees.
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Lobbying (con’t)
Lobby how? 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.
Hire lobbyists. Robert Strauss (Chair of Democrat Party) and John Evans (Republican former SEC official).
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Long-Term Measures
Continuing relations 1983-84 PAC contributions $20,550 1985-86 " " $177,800 D’Amato $56,750 (PAC + individual contributions) Wirth $23,900 (PAC + individual contributions)
Washington presence (building a continuing political infrastructure)
Washington office--Mary Jo Jacobi (former aide to Reagan)
Questionable measures; e.g., “speaker’s fees”
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Drexel: outcomes and conclusions
No legislation emerged from committee, neither in the House nor Senate.
Original strategy unlikely to succeed: information not politically useful did not provide a politically-relevant reason to oppose the bills
Revised strategy was consistent with: better understanding of interests, institutions and politically
relevant information backed by substantial resources--this was the most important
issue on Drexel’s agenda 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).
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Drexel – Junk Bond Update
Drexel’s junk bonds fueled successful new ventures such as MCI and Turner Broadcasting
In 1989, the market for junk bonds was estimated at $28 billion In 1990, Drexel went bankrupt after pleading guilty to six felony
counts Drexel assessed $650 million in fines Milken spent two years in jail, paid a record $1.1 billion fines, and was
banned for life from securities industry By 1991, the default rate for junk bonds reached 10 percent and only
$4 billion was issued In 1996, the industry has rebounded with $73.6 billion issued and
$142 billion issued in 1999 Today, there are 60 players ranging from prominent Wall Street
investment houses to major U.S. and foreign banks Many mutual fund and pension funds hold “high yield” debt are part
of their portfolio In 2001, Levi Strauss raised $1.05 billion in “high yield debt” No new pushes for regulation
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Perceptions about lobbying
Power over actions: persuasion/threats, coercion, cutting deals in smoke-filled rooms -- seldom
Influence over beliefs: strategic provision of politically-relevant information to and from political and public officeholders -- the principal form of lobbying
Politically-relevant information pertains to the interests of officeholders; e.g., constituents and policy interests; rent chain; emphasize jobs--not profits
Strategic in the sense of providing your side of the issue and counteracting the other side’s messages
Strategic in the sense of targeting (whom to lobby) and timing (when to lobby them)
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Levels of Lobbying
Business
CEO
Member/Officeholder
Government
“Restrictions on junk bond financing will cost jobs.”
Interact withthe member and her staff atmultiple levels
Staff
Managers
technical information
political informationcommitteepersonal--administrative assistant--legislative director--legislative assistant--legislative correspondent
Linton senatormessages
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Lobbying – Key Steps
Step 1. Identify the information that stakeholders possess that is decision-relevant for legislators.
Step 2. Determine how to transmit that information to legislators credibly.
Step 3. Get access to pivotal legislators and proposers.
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contact--But why should I act?
Types of lobbying
QualityType of
information Remark
Irresponsible false Not only morally but alsostrategically objectionable
Superfluous true but known Politicians are busy and do not liketheir time wasted.
Good true and unknown A necessary but not sufficientcondition for a successful lobbying
Excellent true, unknown, andimportant to thepolitician’s goals
Sufficient for a contact, plus goodprospects for influence; a vote or,better yet, an ally
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What Makes Information Credible?
1. Record of being truthful and accurate--reputation
2. Relationships of trust
3. Data and analysis
4. Corroboration of position and analysis by others with different interests
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Principles of lobbying
Know the institutional arena--where decisions are made 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;
Respect the officeholder and her staff--most are smart, all are savvy
Don't just talk - Listen to officeholder and her staff for their interests and concerns strategic advice--about process, about likely votes
Explore and exploit coalition building opportunities; e.g.Calgene include sunflower growers (chapter 8) Microsoft included Excite@Home and Icast.com as part of coalition
to lobby FCC to open up AOL’s instant messenger service.
Establish (access), maintain, and use continuing relations use allies that have access: e.g. TribalVoice and the FCC.
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The Interest Group-Matrix
Identifies strategy templates
Tool is best used in conjunction with Distributive Politics Spreadsheet
Depending on an issue’s location in the matrix different approaches are appropriate
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Interest Group Matrix
Opponents of Policy/Law
Proponents of Policy/Law
Organized Not Organized
Org
aniz
edN
ot O
rgan
ized
Interest grouppolitics
Entrepreneurialpolitics
?Client politics
environmental protection
trade liberalization
tax breaks
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Probability of Passing Bill
Entr. Politics
Interest Group Politics
Client Politics
Opponents of Policy/Law
Proponents of Policy/Law
Organized Not Organized
Organized
Not Organized ?
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Opponent Strategy
Organized Not OrganizedO
rgan
ized
Not
Org
aniz
ed
Interest grouppolitics
Entrepreneurialpolitics
?Client politics
Opponents of Policy/Law
Proponents of Policy/Law
environmental protection
trade liberalization
tax breaks
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Proponent Strategy
Organized Not OrganizedO
rgan
ized
Not
Org
aniz
ed
Interest grouppolitics
Entrepreneurialpolitics
?Client politics
Opponents of Policy/Law
Proponents of Policy/Law
environmental protection
trade liberalization
tax breaks
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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”
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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)
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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
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Interest Group Matrix
Opponents of Policy/Law
Proponents of Policy/Law
Organized Not OrganizedO
rgan
ized
Not
Org
aniz
ed
Interest grouppolitics
Entrepreneurialpolitics
?Client politics
environmental protection
trade liberalization
tax breaks
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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)
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Interest Group Matrix
Opponents of Policy/Law
Proponents of Policy/Law
Organized Not OrganizedO
rgan
ized
Not
Org
aniz
ed
Interest grouppolitics
Entrepreneurialpolitics
?Client politics
environmental protection
trade liberalization
tax breaks
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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!
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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)
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Interest Group Politics
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
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Interests - Key Take-Aways
Constituency analysis 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.