Government Games

Few businesses do a good job of integrating government relations with business strategy. Government policy has an impact on business in so many ways — from taxes and labor laws to antitrust intervention, patent rulings, securities regulation and tax incentives — that it is easy for even the best managers to get confused. Government intervention is sometimes a threat, sometimes an opportunity. It sometimes impacts a company’s core strategies and sometimes merely imposes routine reporting requirements. A change in public policy may affect just one company, every firm in a particular industry or geographic area, or the entire international business community.

In a post-Enron world, where the role of government in regulating business is likely to increase, businesses must consider the impact of government as part of their strategy formulation and implementation processes. This means companies need to diagnose the ways that government can help or hinder business objectives. It also means crafting hybrid strategies that explicitly include a component that focuses on shaping the rules. Above all, it means having a common language for talking about the games businesses play and the roles of government in making and enforcing the rules.

Even if we limit the focus to strategic impacts, the array of ways in which governments can influence companies remains bewildering. How do you determine what is crucial and what is not? The place to start is to focus on the strategic games that businesses play and the role that government rule makers (creators of laws and regulations) and referees (interpreters and enforcers of laws and regulations) can play in those games. To illustrate, consider the high-profile antitrust lawsuit against Microsoft. How did the U.S. Department of Justice come to file suit against the company? Customers and competitors of Microsoft helped trigger government intervention by filing their own lawsuits, lodging complaints with federal and state agencies and providing key data to support the case. Customers, including such companies as Apple and IBM, came forward to complain about Microsoft’s tactics. Competitors, like the browser developer Netscape, also sought to play the government-intervention card. In 1996, Netscape lodged a formal complaint with the Justice Department, accusing Microsoft of providing subsidies to manufacturers who refused to install competing browsers and offering some customers financial incentives to replace Netscape Navigator with Internet Explorer. Microsoft called Netscape’s actions “a calculated attempt … to enlist government and media in its marketing campaigns.”1 Microsoft’s opponents subsequently formed and funded a nonprofit organization, ProComp, specifically to promote government action against the company.

The point: Efforts to influence government are often a form of business competition in disguise. Therefore, executives need to pinpoint the key games in which their companies are involved and the roles governments play in these games. There are two categories of business games, both of which may or may not involve government. Value-net games relate to cooperation and competition among businesses. Public-interest games pit coalitions of businesses and industry associations against nonbusiness organizations like unions, consumer groups and environmental organizations. Governments act as rule makers and referees in both types of games: They make the rules by which the players operate, and they interpret and enforce those rules. Effective businesses craft hybrid strategies, simultaneously working to play the game and shape the rules.

Value-Net Games

Games that businesses play with each other in the course of their ordinary activities take place within what Nalebuff and Branden-burger call the value net.2 Companies seek to advance their goals by crafting strategies for cooperating and competing with other players in their value nets — customers, suppliers, competitors and complementors. Classic strategies that businesses use to advance their positions in their value nets include imitation, combination, shut out, entry and holdup. Government rule makers and referees both constrain and enable businesses to initiate and to defend against these strategies (see “How Government Affects Strategy”). When governments review applications for mergers and acquisitions or hear legal cases concerning intellectual-property rights or takeover disputes, they are acting as rule makers and referees in value-net games between businesses.

Governments play prominent roles — as rule makers or referees — in most businesses’ value-net games. They are particularly important when an industry’s structure is changing in fundamental ways and when companies are seeking either to enter new markets or to defend themselves from strategic challenges by other businesses. Because the outcome of these games can clearly be influenced by government, companies often seek to involve it in their attempts to gain advantage or play defense.

Public-Interest Games

Businesses also play games that involve nonbusiness interest groups. Environmental advocacy groups, unions and consumer organizations often seek to persuade government to impose costs on business in the name of what they assert to be the best interests of society. These contests for influence amount to a competition to define the public interest. Environmental regulation, consumer protection, labor standards, taxation and subsidies are traditionally the focus of such competitions. Recently, issues such as privacy and intellectual property have become focal points for public-interest games.

For example, consider how DoubleClick, the Internet advertising firm, found itself at the center of a controversy over Internet privacy. The company tracks individual Web surfers’ activities by monitoring which ads they click on, but maintains anonymity by assigning each user a number. In the fourth quarter of 1999, DoubleClick completed a $1.7-billion acquisition of Abacus Direct, which marketed consumer-purchasing data to catalog firms. DoubleClick soon announced that it would sell information that combined its Web-surfing data with Abacus’ personal data. This announcement alarmed privacy advocates, who sought government intervention, and triggered more than 100,000 customer complaints. DoubleClick was hit with six private lawsuits, an inquiry by the Federal Trade Commission (FTC) and investigations by several states. Its stock price dropped 15%.3 In March 2000, the company backed away from the plan, and its CEO admitted publicly, “I made a mistake.”4 The controversy led to negotiations between the FTC and Web advertisers, culminating in a July 2000 self-regulation agreement whereby the industry would develop and publish rules on customer profiling and the FTC’s Bureau of Consumer Protection would have the power to enforce them.5

In public-interest games, nonbusiness players form coalitions and build grassroots support to influence government rule making. Because the resulting challenges often affect groups of businesses or even whole industries, ad hoc business coalitions and industry associations organize to counter the influence of nonbusiness groups. Companies that are vigorous competitors in the value net often become close allies in public-interest games.

As in value-net games, government agencies and officials are not just rule makers and referees in public-interest games: They sometimes pursue independent agendas and build coalitions to support them. In 2000, for example, the National Association of Insurance Commissioners, which represents state insurance regulators in the U.S., proposed a set of universal standards for every state to apply in regulating insurance companies. Insurance companies have long been regulated state-by-state, requiring them to get dozens of approvals for each new rate or product. This put them at a disadvantage relative to federally regulated competitors, such as banks and securities firms. State insurance regulators expected insurance companies to take advantage of legislative changes allowing them to merge with banks and securities firms, which would result in larger companies with the power to press for a single federal regulator. The state insurance regulators’ proposal was an effort to preempt this development and retain their authority to regulate. At the time, the consensus was that, without such changes, state regulation was doomed.6

How Value-Net Games and Public-Interest Games Differ

Value-net games and public-interest games both involve cooperation and competition to influence the making and interpretation of government rules. In both, governments can operate as rule makers, referees and players. But there are important differences between these two types of game. Value-net games tend to be played by individual businesses and ad hoc coalitions. As an example of the latter, consider the companies that allied to encourage the Justice Department to investigate Microsoft. Public-interest games, by contrast, tend to be played between industries, represented by their industry associations and coalitions of nonbusiness organizations. A classic example of this is the efforts of environmental groups’ to get tougher fuel-economy standards applied to sport-utility vehicles over the opposition of the auto industry.

Governments also tend to play different roles in the two types of game (see “Government Roles in Two Types of Game”). In value-net games, government functions mostly as referee: Agencies and the courts interpret and enforce antitrust regulations and intellectual-property law. In public-interest games, the role of government as rule maker — creator of new rules and regulations — tends to be more prominent than in value-net games; the legislature is usually involved and, consequently, the games are more political. The exception, of course, is when revolutionary technologies, such as telecommunications and the Internet, create the need for wide-ranging new sets of rules governing standards, intellectual property and other regulations that have direct impact on competition among firms.

Multi-Level Games

Both value-net and public-interest games are often played at multiple, interacting levels of government. In the Microsoft case, for example, attorneys general from several states were instrumental in launching the Justice Department investigation and, in mediated talks, held out against settlement in order to negotiate restrictions on the company.

Multilevel games can involve interactions between national and international levels of government, as well as between state and federal levels. In 1998 the United States and the European Union officially recognized each other’s inspection, testing and certification requirements for a number of traded products, codified in Mutual Recognition Agreements (MRAs). The MRAs affected nearly $50 billion worth of traded goods in multiple sectors, including medical devices. The U.S. medical-device industry strongly supported the MRA process through its trade group, the Health Industry Manufacturers Association (now known as the Advanced Medical Technology Association, or AdvaMed); the industry’s support of MRAs was part of a larger strategy to pressure the Food and Drug Administration to streamline its approval process for medical devices. In other words, by working at the international level, the industry made progress at the federal level. While it is rare in standards-dispute cases for a domestic industry to ally itself with a foreign government position, this example illustrates the value of thinking flexibly about how to advance a company’s or industry’s position. Clearly, it is essential to focus not just on the issue at hand, but also on the potential for action and interaction at multiple levels.

Linked Games

Value-net games and public-interest games often become linked. Mergers and acquisitions — classic moves to change the game in the value net — usually require the approval of government regulators. But they may also call for efforts to win the approval of nonbusiness groups, such as environmental watchdog organizations. If companies don’t anticipate who might take an interest in such moves, it is easy to be blindsided. Failure to understand and manage linkages can lead to big problems, as the following examples illustrate.

In 1999, the Federal Trade Commission and three western states sought to block a proposed merger between BP Amoco and Atlantic Richfield Co. (ARCO) that would have created one of the world’s largest oil companies. The FTC was alarmed that the combination of the No. 1 and No. 2 oil producers, both major landowners in the natural-resource-rich North Slope region of Alaska, would give the new company too much pricing control. The lobbying efforts of advocacy groups like Greenpeace and the U.S. Public Interest Research Group, both worried about the environmental impact of the proposed merger on the sensitive regions of Alaska, also influenced the FTC to act. This linkage seriously complicated efforts to consummate the merger. Ultimately it proceeded, but only after the FTC sued to block the deal and BP agreed that it would sell ARCO’s Alaskan oil holdings.7

Linkages between value-net games and public-interest games can either advance or threaten business interests. Companies and industries that fail early on to trace potential linkages and then to take steps to manage them proactively can easily be caught flatfooted. As an example, the U.S. and British governments proposed in early 2000 to make the human genome part of the public domain. The intent was to promote cooperation between a British group and an American company to finish mapping the genome, which could have immense public-health benefits. But this attempt to define the public interest sent tremors through the biotechnology industry, which counted on future profits from gene patents. In a single day, spooked investors withdrew tens of billions of dollars in market value from the industry. The full fallout of this government action remains to be seen, but it could have significant implications for value-net games in the biotechnology industry.

Crafting Hybrid Strategies

Government regulation influences all companies, in such forms as intellectual property laws, safety standards and taxation. But figuring out what games they need to play and what roles governments play (or could play) in these games naturally depends on the company and its industry. The starting point for diagnosis is to list the most important value-net and public-interest games the company is currently engaged in, specifying the key players, rule makers and referees (actual and potential) and to identify the key business goals in each of these games.

Once companies identify these goals, managers can craft strategies for interacting with other businesses and for influencing rule makers and referees. These should be hybrid strategies, designed to effectively play the game by existing rules and to endeavor to advantageously influence the making and interpretation of the rules. A couple of key questions should guide this strategy formulation:

Are you playing offense or defense?

Companies need to determine if they are promoting changes in the rules or seeking to prevent changes. Initiating change is a much tougher proposition than blocking a change supported by others. Generally speaking, blocking a change means preserving the status quo, and inertia is a powerful force to have on your side. Playing offense requires framing the case for change and garnering support to sustain momentum over the long haul. Historically, major changes in the rules take years to bring about, so offensive strategies must be sustainable. Companies may even find themselves playing offense and defense simultaneously on different fronts. Intel, for example, vigorously defended itself when the FTC was investigating its business practices in the late 1990s. But it simultaneously attempted to forestall future problems by giving away some of its research in order to expand the overall market, cutting back on suits against new entrants in the chip industry and loosening its patent-licensing practices. Even as it looked to head off a broader antitrust suit by the FTC, Intel was working with allies at The Computer Coalition for Responsible Exports to press the Clinton Administration to ease restrictions on the sale of powerful computers with potential military applications.8 At the state level, Intel was at the forefront of a business coalition opposing a $1 billion-a-year income-tax cut due to appear on the ballot in Oregon, where Intel was one of the largest private-sector employers.

Are you trying to block, shape or delay change?

The goal on defense is either to block changes outright, to shape the rules to be less harmful, or to at least delay the inevitable. If the change in question will seriously damage the business, then blocking change is the goal. If the rules are clearly going to change no matter what, then the goal must be to shape the change as much as possible. If, of course, support for the change is too widespread to block it and shaping efforts are pointless (because any form of the change will harm the business), then the only viable strategy is to delay the change as long as possible and plan for the inevitable.

Will evolving events create a need to shift goals? If the primary goal cannot be accomplished, the next-best option must be considered. For instance, if changes that initially seemed relatively benign begin to take a more ominous form, a strategy shift from shaping to blocking may be in order. When the Justice Department filed its antitrust suit against Microsoft in 1998, the company’s response was to publicly attack the suit and even to try to get funding for antitrust enforcement reduced. This backfired, but Microsoft stuck to protesting what it deemed to be the unjustness of the antitrust case before finally shifting to a much more effective strategy of delay. Whatever the circumstance or game being played, sticking unbendingly to one goal may preclude opportunities to minimize damage or even to gain advantage.