PART I: Strategy and the Nonmarket Environment CHAPTER

Market and Nonmarket Environments

INTRODUCTION
Some companies are successful in both their market environment and the social, political, and legal nonmarket environment in which they operate. Google, McDonald's, and Toyota have had continuing success in their markets and also have generally conducted themselves in a manner that has earned the respect of the public and the government. Other companies have had great success in their markets but stumbled before the public and government. Nike became synonymous with athletic footwear, hut public concerns about the working conditions in its suppliers' factories in Asia tarnished its image and affected its market performance. Wal-Mart, the world's largest company, was targeted by activists, unions, and politicians for its work practices, depressing wages in the labor market, driving small merchants out of business, and weakening the culture of small towns. Microsoft is one of the great successes in the history of business, but its market conduct has resulted in recurring antitrust judgments in the United States and in the European Union where it was fmed 1.7 billion for antitrust violations and failure to comply with rulings. BP had earned a reputation for its environmental programs, but in 2005-6 the company experienced a refinery explosion that killed 15 workers and resulted in criminal fines and spilled oil in Prudhoe Bay, Alaska and on the tundra. BP pleaded guilty to price fixing, paying $303 million in fines. Citigroup, the world's largest financial institution, was hit with a series of costly scandals. As a result of its $31 billion acquisition of subprime lender Associates First Capital, Citigroup faced private lawsuits for abusive practices, state legislation restricting subprime lending, and fines of $285 million imposed by the Federal Reserve and the Federal Trade Commission. Citigroup also paid $2.8 billion to settle lawsuits for its role in structuring financial instruments for Enron and WorldCom and $735 million for biased securities research. Japan ordered Citigroup to close its private banking business in the country. In addition to the fines and settlements and the damage to its reputation, Citigroup was targeted by activists for its financing of environmentally destructive projects in developing countries. Citigroup repeated its problems with subprime mortgages resulting in write-downs of $40 billion in 2007-8, the firing of its CEO, and more stringent regulations for mortgage lending. The problems encountered by Nike, Wal-Mart, BP, Microsoft, and Citigroup originated in their market environments, but the challenges to their operations came from the nonmarket environment. That is, the challenges resulted not from the actions of competitors but instead from the public, interest groups, the legal system, and government. These companies underappreciated the importance of the nonmarket environment and have paid a price for doing so. Even companies that are generally successful in managing in their nonmarket environment face challenges. Google received criticism for tolerating the government-imposed censorship on its Web site in China: McDonald's was criticized for contributing to the obesity crisis: Toyota was criticized for introducing large, fuel inefficient pickup trucks. Some companies have changed their strategies as a 211

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result of nonmarket pressure. Nike has become a leader in improving the working conditions in its suppliers' factories, and Wal-Mart has implemented an aggressive environmental program. Firms have more control over their fate in the markets in which they operate than they have in their nonmarket environment, but successful companies understand that if they do not manage their nonmarket environment, it will manage them. The long-run sustainabiity of competitive advantage requires managing effectively in the nonmarket environment. Companies like Google, McDonald's, and Toyota have learned that they can participate. both responsibly and effectively in influencing developments in their nonmarket environment. This book is about managing successfully in the nonmarket environment. The perspective taken is that of strategy- nonmarket strategy-and its implementation. That strategy is considered not in isolation but in conjunction with the firm's market or competitive strategy. This chapter introduces the environment of business, identifies the role of management in the nonmarket environment, and presents a framework for analyzing that environment. The framework is illustrated using the automobile industry as an example. The sources of change in the nonmarket environment are then considered, and a framework for assessing the development of nonmarket issues is presented.

THE ENVIRONMENT OF BUSINESS

The environment of business consists of market and nonmarket components. The market environment includes those interactions between firms, suppliers, and customers that are governed by markets and contracts. These interactions typically involve voluntary economic transactions and the exchange of property. To achieve superior performance, firms must operate effectively in their market environment. They must be efficient in production and responsive to consumer demand. They must anticipate and adapt to change, innovate through research and development, and develop new products and services. Effective management in the market environment is a necessary condition for superior performance, but it is not sufficient. The performance of a firm, and of its management, also depends on its activities in its nonmarket environment. The nonmarket environment is composed of the social, political, and legal arrangements that structure interactions outside of, but in conjunction with, markets and contracts. The nonmarket environment encompasses those interactions between the firm and individuals, interest groups, government entities, and the public that are intermediated not by markets but by public and private institutions. Public institutions differ from markets because of characteristics such as majority rule, due process, broad enfranchisement, collective action, and access by the public. Activities in the nonmarket environment may be voluntary, as when the firm cooperates with government officials or an environmental group, or involuntary, as in the case of government regulation or a boycott of a firm's product led by an activist group. Effective management in the nonmarket environment has become a necessary condition for superior performance just as has effective management in the market environment. The nonmarket environment has grown in importance and complexity over time and commands increased managerial attention. Nonmarket issues high on firms' agendas include environmental protection, health and safety, regulation and deregulation, intellectual property protection, human rights, international trade policy, antitrust, pressures from nongovernment organizations (NGOs) and social activists, media coverage of business, corporate social responsibility, and ethics. Although the saliency of particular issues ebbs and flows, nonmarket issues arise sufficiently often to have important consequences for managerial and firm performance. Nonmarket issues, the forces that influence their development, and the strategies for addressing them are the focus of the field of business and its environment. The managerial objective is to achieve superior overall performance by effectively addressing nonmarket issues and the forces associated with them. Developments in the nonmarket environment affect performance on a number of dimensions. In the automobile industry, emissions and fuel economy standards affect research and development, design, production, pricing, and marketing. Safety

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regulation and liability standards have similar broad effects. Import competition and access to international markets affect competitive strategies involving product design, pricing, and capacity planning. Each of these examples has two components-an underlying issue and its impact on performance. The fuel economy issue, for example, is related to global climate change and security and has broad implications for performance. The focus for management in the nonmarket environment is on how an automobile company can participate effectively and responsibly in the public and private processes addressing these issues. Activity in the nonmarket environment is generally organized around specific issues and is motivated by the impacts of those issues. The legislative process, for example, focuses on bills to address a specific issue, such as fuel economy standards. Managerial attention thus focuses on specific issues affecting performance. the forces driving those issues, the institutions in whose arenas the issues are addressed, and the participation of firms in shaping the resolution of those issues.

THE ROLE OF MANAGEMENT

Because of its importance for managerial and organizational performance. nonmarket strategy is the responsibility of managers. As illustrated in Figure 1-1, firms operate in both the market and the nonmarket environments. Managers are in the best position to assess the impact of their firm's market activities on its nonmarket environment and the impact of developments in the nonmarket environment on market opportunities and performance. Management thus is responsible for formulating and implementing nonmarket as well as market strategies. Firms typically deal with nonmarket issues in proportion to their potential impacts on performance. Managers are in the best position to assess those impacts and, with the assistance of specialists, to formulate strategies to address the underlying issues. The implementation of nonmarket strategies also involves the active participation of managers. They may address the public on issues, communicate with the media, testify in regulatory and congressional proceedings, lobby government, participate in coalitions and associations, serve on government advisory panels, meet with activists, negotiate with interest groups, partner with NGOs, build relationships with stakeholders, and participate in constituency programs. Successful management requires frameworks for analyzing nonmarket issues, principles for reasoning about them, and strategies for addressing them. These frameworks, principles, and strategies enable managers to address issues in a systematic manner and guide their firms successfully and responsibly in their nonmarket environments. In formulating nonmarket strategies, managers may draw on the expertise of lawyers, communications specialists, Washington representatives, and community relations specialists. Managers, however, ultimately must evaluate the quality of the advice they receive and combine it with their own knowledge of the market and nonmarket environments. Most firms have found that managers must be involved in all stages of their efforts to address nonmarket issues.

FIGURE 1-1

The Environment of BusIness

Nonmarket Environment Market environment determines significance of nonmarket ssues to the firm

Market Environment

Nonmarket environment shapes business opportunities in the marketplace

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MARKET AND NONMARKET ENVIRONMENTS

As illustrated in Figure 1-1. the market and nonmarket environments at business are interrelated. A firm's activities in its market environment can generate nonmarket issues and change in its nonmarket environment. That change may take the form of actions by government, such as legislation, regulation, antitrust lawsuits, and international trade policies. Similarly, the actions of interest groups and activists may force a firm to change its market practices. As an example of the market origins of nonmarket issues, in the 1990s lower real gasoline prices and changing consumer demand resulted in sport utility vehicles (SUVs) and light trucks capturing half the light-vehicle market. This reduced average fuel economy and, in conjunction with the global climate change and security issues, generated pressure to increase fuel economy standards. Moreover, the size and weight of SUVs raised concerns about the safety of the occupants of other vehicles in the event of a collision. Nonmarket issues and actions also shape the market environment. Higher fuel economy standards affect virtually all aspects of automobile design and manufacturing. Similarly, political action against Microsoft's alleged anticompetitive practices in the software industry put pressure on the Department of Justice and state attorneys general to file an antitrust lawsuit. Complaints by competitors led the European Union to impose antitrust fines and constraints on Microsoft for restricting the opportunities of other firms. The market environment is also shaped by the actions of interest and activist groups and the public sentiment for their causes. The Exxon Valdez oil spill increased environmental pressure on firms through liability for damages, more stringent regulations. and direct public pressure. Both the market and nonmarket environments of business are competitive. In the market environment, performance is determined by competition among firms as directed by their market or competitive strategies. In the nonmarket environment, legislation, regulation, administrative decisions, and public pressure are the result of competition involving individuals, activists, interest groups, and firms. In the market environment, strategies are intermediated by markets, whereas in the nonmarket environment, strategies are intermediated by public and private institutions, including legislatures, courts, regulatory agencies, and public sentiment. Just as the market environment of business changes and competitive advantage evolves, the nonmarket environment changes and the issues on a firm's nonmarket agenda evolve. The nonmarket environment should thus be thought of as responsive to the strategies of firms and other interested parties. Those strategies can affect market opportunities. Robert Galvin (1992), who led Motorola for over three decades, described the company's approach to its nonmarket environment as "writing the rules of the The first step in any defined strategy is writing the rules of the game honorably and fairly in a manner that gives everyone a chance with predictable rules. Our company has started industries. We have helped write standards. We have helped write trade rules. We have helped influence policies. We have helped write national laws of countries where we have engaged, always in a respectful way. We have never taken for granted that the rules of the game would just evolve in a fashion that would make for the greatest opportunity... With the right rules of the game, one's opportunity for success is enhanced. Galvin's point is not that companies dictate the rules of the game but rather that those rules are shaped by the strategies of firms and other interested parties and by the governing institutions. Companies and their leaders can shape those rules by participating responsibly in the public and private processes that address market and nonmarket issues. This participation can affect the market environment of firms and the opportunities available to them as well as the nonmarket environment and the issues firms will face in the future.
See Yotfie (tQSSa, 1988b) for ana'ysis of aspects of this strategy.

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ANALYSIS OFTHE NONMARKET ENVIRONMENT: THE FOUR I'S

The nonmarket environment of a firm is characterized by four l's: Issues Interests Institutions Information Issues are the basic unit of analysis and the focus of nonmarket action. Using the agricultural biotechnology industry as an example, the central nonmarket issues have been the formulation of regulatory policies for bioengineered foods and the public reaction to those foods. Interests include the individuals and groups with preferences about, or a stake in, the issue. The principal interests are the agricultural biotechnology companies, the interest groups and activists concerned about biotechnology issues, and the public. Institutions are defined by Douglass North (1990) as "the rules of the game in a society. . . that shape human interactions," and these institutions provide arenas in which interests seek to influence the outcomes on issues. Government institutions include entities such as legislatures and regulatory agencies. Nongovernmental institutions include those such as the media that provide information to society as well as public sentiment composed of societal expectations and norms of behavior that arise from ethics and culture. The Environmental Protection Agency, the Department of Agriculture, the Food and Drug Administration, and Congress are the principal public institutions in whose arenas agricultural biotechnology issues are addressed. The pubtic sentiment about bioengineered foods is influenced by market forces as well. As the prices of agricultural products and foods rose in the late 2000s, some consumers and firms that had shunned hioengineered foods began to change their policies in response to their lower prices resulting from higher productivity and resistance to crop damage. Information pertains to what the interests and institutional officeholders know or believe about the issues and the forces affecting their development. In the case of agricultural biotechnology, information pertains to the risks associated with individual products and with the technology itself. The public acceptance of bioengineered crops and animals is influenced by both scientific knowledge and concerns about the unknown. Information is provided by firms, activists, government institutions, and the media. The task for management is to formulate and implement strategies that effectively address the nonmarket issues in competition with the strategies of other interests in the context of institutions in which in formation plays an important role. Each firm and industry has a set of issues that it must address, and these issues constitute its nonmarket issue agenda. Associated with each issue are the institutional arenas in which the issue will be addressed, the interests likely to be involved, and the information available. Many issues on a firm's nonmarket agenda require issue-specific strategies, and the analysis of the associated interests, institutions, and information provides a foundation for strategy formulation, as considered in Chapter 2. To illustrate the four l's framework, the remainder of this chapter considers the nonmarket environment of the automobile industry and then considers the origin and development of nonmarket issues.

THE NONMARKET ENVIRONMENT OF THE AUTOMOBILE INDUSTRY

This section identifies selected issues facing the automobile industry and then examines the associated interests, institutions, and information. Issues Fuel Economy Legislation In 2007 Congress enacted and the president signed a bill increasing fuel economy standards by 40 percent. The Alliance of Automobile Manufacturers had initially opposed the legislation, but when it became apparent that higher standards were inevitable, it sought credits for vehicles that could run on ethanol and the opporturnty to buy and sell credits for meeting and exceeding the standards.

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Fuel Economy Exception In 2004 the National Highway Traffic Safety Administration (NHTSA) granted Nissan an exception from the two-fleet rule that automakers meet standards on both their domestic and imported fleets. Otherwise, Nisan said it would have to move production from its plants in Tennessee and Mississippi to its plant in Mexico, which Nissan had built as a result of the North American Free Trade Agreement (NAFTA). In 2007 Nissan supported higher fuel economy standards and lobbied for an extension of the exception with senators from Tennessee and Mississippi leading the effort. Fuel Economy Regulation (China) In 2003 the State Council of China chose a vveight-based system for fuel economy standards for automobiles, vans, and SUVs. The 2008 standards were somewhat higher than the standards in the United States. Fuel Economy Regulation (European Union) As part of its Kyoto Treaty obligations, the European Union (EU) had adopted a voluntary fuel economy standard of 140 grams of carbon dioxide per kilometer, but the industry failed to meet the standard. Under strong pressure from environmental groups, the European Commission proposed a mandatory standard of 120 grams for 2012. The European Parliament asked for a less aggressive standard to ease the burden on automakers, and the Commission relented, setting the standard at 130 grams for automobiles with an additional 10 grams to be achieved through more efficient tires, improved air conditioners, and cleaner fuels. The European Automobile Manufacturers Association warned that the requirements would "lead to a loss of jobs and relocation of production outside the EU."2 State CO2 Regulations The Clean Air Act authorized the EPA to grant California a waiver allowing it to set more stringent auto pollution standards than federal standards. In 2002 the California legislature added carbon dioxide to its list of pollutants and required by 2016 a 30 percent reduction in global-warming gases from cars and light trucks. The EPA denied the waiver application because global warming was not a localized externality and the federal government had just enacted sharply higher fuel economy standards. The Natural Resources Defense Council (NRDC) and other environniental groups strongly disagreed. In 2008 General Motors CEO Rick Waggoner urged the 10,000 members of the National Automobile Dealers Association to oppose state efforts to set their own limits on greenhouse gases emission. Waggoner explained, "Dealers are very effective in the political process because we don't have a plant in every state. We have dealers in every state."3 Automobile Access (India) Tata Motors announced its $2,500 Nano people's car in 2008 to make the automobile more broadly accessible in India. The car would have few safety features but would be far safer than a motor scooter, which many people used to transport families and goods. Emissions standards posed a risk, however, because major cities planned to adopt the Euro IV standards that required a 35-fold reduction in sulfur dioxide emissions. Battery Safety and Liability New generation hybrid and plug-in electric vehicles anticipated using lithium-ion batteries, which were quick to charge and capable of operating in all weather conditions.4 The batteries, however, posed a risk of explosion and fire in the event of manufacturing problems or damage to the battery and hence represented a liability risk for automakers. Batteries were expensive, and automakers sought tax credits for buyers of plug-in vehicles, as provided for certain hybrid vehicles. Federal FuelTaxes Since 1993 federal fuel taxes had remained fixed at 18.4 cents and 24.4 cents per gallon for gasoline and diesel, respectively. In 2008 a commission authorized by Congress recommended increasing taxes by as much as 40 cents a gallon over 5 years to fund infrastructure improvements. Taxpayer resistance was expected.
.Vew York Times. February 8,2007. San Jose Mercury News, February 10, 2008.

4The Prius used nickel-metal-hydride batteries.

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Safety Standards NHTSA had responsibility for setting mandatory safety standards for motor vehicles. A major cause of vehicle deaths was single-vehicle rollover accidents, many of which were caused when a vehicle left the roadway. Automobile manufacturers had begun to use electronic stability control (ESC) systems and planned to equip 71 percent of their model year 2011 vehicles with the systems. NHTSA issued a new federal standard requiring all model year 2012 vehicles to be equipped with ESC. Drunk Driving Safety standards did little to address drunk driving, which was estimated to result in 13,000 deaths a year. Mothers Against Drunk Driving (MADD), the Alliance of Automobile Manufacturers, and a state highway officials association launched a campaign to change state drunk driving laws to require convicted drunk drivers to have ignition interlocks triggered by alcohol detection devices. Union Representation The United Auto Workers (UAW), whose membership had fallen by 50 percent over the past 20 years as the big-three automakers had lost market share, had been unable to enlist sufficient support to hold a representation election at any Toyota plant. When a leaked document revealed that Toyota planned to reduce its North American labor costs by $300 million in the next 4 years, the UAW launched a new drive to unionize its Georgetown, Kentucky plant. Worker Safety The UAW had located its Resource Center half a mile from Toyota's Georgetown plant and used data reported to the Occupational Safety and Health Administration (OSHA) to identify 1.800 injured workers who were no longer employed by Toyota. Toyota stated that in its 22 years the Georgetown plant had only once been cited for a safety violation. Antitrust In 2007 four Canadians filed a $2 billion lawsuit in U.S. courts complaining that they were restrained by U.S. car dealers from purchasing vehicles in the United States where prices were thousands of dollars lower as a result of the appreciation of the Canadian dollar. Free Trade Agreements (Korea) In 2007 Korea and the United States approved a free trade agreement in which Korea would immediately eliminate its 8 percent tariff on automobile imports from the United States and change the nontariff barrier of taxing cars based on engine size. The United States agreed to eliminate immediately its 2.5 percent tariff on small cars and eliminate the tariff on larger vehicles over 3 years. Congress, however, had to ratify the agreement. Canada and the European Union also began negotiating free trade agreements with Korea. Tariffs (China) In 2006 the European Union (EU) and the United States filed a formal complaint with the World Trade Organization (WTO) regarding China's average 30 percent tariff on whole vehicle imports and 15 percent tariff on automobile parts. Diversity In 2006 Toyota had rejected demands that it provide statistical and regional information on the ethnicity of its U.S. dealers and executives. The demand was made by the National Minority Automotive Advocacy Coalition (NMAAC), composed of 10 minority business groups. Toyota said that of its 1,430 Toyota and Lexus dealers, 32 were African American, 26 Asian American, 25 Hispanic, and 11 Native American, or 6.6 percent compared to the national average of 4.93 percent.5 Human Rights General Motors received a perfect score for 2007 from the Human Rights Campaign, a gay rights organization. Environmental Pressure At the New York auto show protesters from the Freedom From Oil campaign unfurled a banner reading "Toyota: The Truck That's Changing the Climate." Sarah Connolly explained, "Building the Prius does not give Toyota license to mass-produce the Tundra.b The campaign included demonstrations at Toyota dealerships and full-page newspaper ads criticizing Toyota. Activists were also upset that

4iitomotive News. July 3, 200(. 'New York Times, April 7.2007.

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Toyota had opposed higher fuel economy standards, and the NRDC launched a Web site. http:!/www.truthabouttoyota.comIvideonrdc-and-priusowners..changingminds.html. Corporate Social Responsibility The criticism Toyota received led it to launch an extensive corporate advertising campaign emphasizing its support for the environment and its social responsibility, in addition to its traditional theme of highlighting the economic investment and employment it provided in the United States. One advertisement on the environment asked, "Can you have an impact by making none at all?" Capacity Constraints (China) To control the growth of auto production capacity spurred by local tax incentives, Chinas National Development and Reform Commission issued guidelines restricting new construction permits. The new guidelines required companies to sell at least 80 percent of their capacity before a new permit could be issued. Recalls General Motors recalled 1.3 million trucks in 2005, and in 2006 NHTSA detected a fire risk in a two-inch-long speed control deactivation switch on .7 million Ford vehicles with cruise control. Recalls in 2007 were the lowest in four years, and the auto industry credited their efforts to reduce defects. Recalls (China) In 2004 China issued auto recall regulations, and in 2006 22 automakers recalled 283,536 vehicles. In 2007 Honda's joint venture with Guangzhou Automobile Corporation recalled 500,000 vehicles because of possible power steering and oil pump problems, and Honda's other joint venture with Dongfeng Motor Corporation recalled 45,000 CR-V SUVs because of shock absorber problems. Recalls (Japan) In 2006 police in Japan charged that Toyota had covered up a defective steering mechanism in an SU V. The company recalled the vehicles after Mitsubishi Motors executives were arrested for covering up vehicle defects. Products Liability A products liability lawsuit against Ford for an alleged defective roof on Expeditions went to trial in a California state court. CEO Tom LaSorda of Chrysler said, "The cost of lawsuits adds at least $500 to the price of every vehicle." A study by Tillinghast-Towers Perrin estimated that the cost of tort cases in 2004 was $260 billion, which represented 2.23 percent of GDP or $886 per person in the United States. Plaintiff lawyers and their Trial Lawyers Association had consistently succeeded in stopping federal tort reform. Intellectual Properly (China) In 2007 China Automobile Deutschland began selling in Europe the Jonway UFO, an SUV built in China that was a copy of a Toyota RAV4, the best-selling SUV in Europe. Toyota had failed to patent the design of the RAV4 in Europe. Toyota filed for patent protection for its next-generation RAV4. Media Coverage An activist with the Rainforest Action Network obtained a badge of a Mercedes Benz executive and attended the media day preceding the North American auto show. The activist asked a Toyota executive hostile questions while filming with a video camera. Noticing the false badge, the executive knocked the camera to the ground. The episode including the camera falling to the ground was filmed by other media and quickly appeared on YouTube. Interests Interests include those who have a stake in an issue and the organizations they form. U.S., Asian, and European automobile companies have interests that are opposed on some issues, such as the unionization of the plants of Japanese companies, hut are aligned on others such as the state regulation of carbon dioxide emissions. Other interests with direct economic stakes in these issues are car buyers and employees. Some interests are well organized, as in the case of workers represented by the UAW, and others, such as car buyers, are unorganized. Interests include special interest, activist, and advocacy groups and other NGOs. Special interest groups pursue issues because of the benefits that accrue to their members, as in the case of the trial lawyers' association. Watchdog groups monitor the

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activities of firms and call those activities to the attention of the media, government, and public. Advocacy groups, such as the NRDC, represent the interests of individuals, such as those affected by pollution. Activist groups, such as the Rainforest Action Network, take direct action against firms to force them to change their policies. The organized and unorganized interests include:7 Organized Interests Alliance of Automobile Manufacturers European Automobile Manufacturers Mothers Against Drunk Driving National Automobile Dealers Association National Minority Automotive Advocacy Coalition Natural Resources Defense Council United Auto Workers Rainforest Action Network Trial lawyers Unorganized Interests Car buyers Citizens affected by global warming Nonunion workers (Toyota) Taxpayers Institutions The market and nonmarket environments in Figure 1-1 include activities that take place both within and outside formal institutions. The principal government institutions are legislatures, the executive branch, the judiciary, administrative agencies, regulatory agencies, and international institutions such as the World Trade Organization (WTO). These institutions both establish rules and serve as arenas in which interests compete to influence those rules. The nonmarket environment includes the set of laws, such as a fuel economy standard of 35 mpg, established by these institutions, as well as regulations, such as safety standards, established by administrative and regulatory agencies. The nonmarket environment also includes the common, or judge-made, law of torts, which governs the liability system. Institutions can also be established by private means. Such institutions include markets, the insurance system, and voluntary agreements such as those pertaining to carbon dioxide emissions in the European Union. The nonmarket environment also includes nongovernmental institutions such as the news media and public sentiment. As considered in Chapter 3, the news media plays an important role in informing those in the nonmarket environment about issues, but it also serves as an institution. That is, firms and other interests attempt to communicate to the public through the news media. The NRDC and other NGOs and activist organizations attempt to influence companies such as Toyota through public sentiment. Institutions are not unitary bodies. Congress is composed of two chambers and 535 members who represent constituencies with varied interests. Institutions also have internal structures that affect how nonmarket issues are addressed. Congress acts by majority rule, has a committee system, and follows a complex set of procedures for enacting legislation. Understanding the workings of these institutions, their procedures, and the forces that operate within them is essential for successful management in the nonmarket environment. Managers must also be familiar with the mandates, agendas. and procedures of regulatory agencies, such as NHTSA and EPA, and the standards used by the courts in rendering judgments about their actions.
Not all relevant interests are listed.

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Strategy and he Nonmarket Environment Government officeholders may be active on nonmarket issues, and their actions to some extent reflect their personal interests. Their actions, however, are usually constrained by the mandates, procedures, and policies of the institutions in which they hold office and by the preferences of their political principals. The head of the EPA, for example, is accountable to the president, Congress, and the public. Legislators not only must follow legislative procedures and respect committee jurisdictions, but they also must be attentive to the preferences of their electoral constituents. Regulators must respect the mandates in their enabling legislation and follow a complex set of administrative procedures, both of which provide bases for judicial review. In addition, regulators must he attentive to their political principals in Congress and the office of the president. For these reasons, institutional officeholders, such as members of Congress and the administrator of NHTSA, are considered part of the institution rather than as an interest.8 Some institutions are specific to an individual country, whereas others represent a set of countries. The institutions in whose arenas the nonmarket issues for the automobile industry are addressed can he categorized as follows: United States Congress Presidency NHTSA Courts - federal Courts - state OSHA California legislature EPA Torts -liability International European Commission European Parliament NAFTA Environmental regulatory agencies (India) National Development and Reform Commission (China) State Council (China) Global WTO Kyoto Treaty News media Public sentiment Information Information refers to what interests and institutional officeholders know about an issue, the consequences of alternative courses of action, and the preferences of those concerned with the issue. Issues are often contested because interests have conflicting preferences regarding their resolution, as in the case of the proponents and opponents of a CO2 emissions standard of 120 grams per kilometer in the European Union. Issues can also be contested because interests have different information. Auto companies have superior information about the preferences of car buyers for higher fuel economy, and environmentalists may have superior information about the extent of public concern about climate change. Organizations such as the National Academy of
The exception is when the jobs of officeholders, the budget, or the status of the office is at stake.

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Sciences as well as universities play an important role in providing scientific assessments of issues such as fuel economy and auto safety. Information is also frequently at the heart of strategies for addressing nonmarket issues. Lobbying, for example, involves providing information to officeholders about the likely consequences of policy alternatives as in the case of Nissan and the dual fleet exception. Information provision is also important in regulatory rule making because of the complexity of most regulatory issues and because agencies are required to develop a record supporting their actions. Information can also be an instrument of nonmarket competition. On the issue of California's law to reduce CO2 emissions, the Union of Concerned Scientists estimated that compliance would increase the cost of a Ford Explorer by $1,960, whereas the Alliance of Automobile Manufacturers estimated that the cost increase would be $4,361. Information can be important to the progress of issues. The experience with NAFTA and the impact of imports from China on jobs in the United States and Europe generated opposition to further trade liberalization and threatened the free trade agreement with Korea. Information can also lead to resolution of an issue. Mounting evidence and growing public concern about climate change led automakers in the United States to stop opposing higher fuel efficiency standards, and the environmental groups' campaigns targeting Toyota sought to mobilize the public to pressure Toyota to do all it could to reduce CO2 emissions. The chapter cases on the pharmaceutical industry, McDonald's, and Google provide opportunities to characterize the issues, interests, institutions, and information in their nonmarket environments and to consider the progress of the issues.9

CHANGE IN THE NONMARKET ENVIRONMENT

The nonmarket environment changes as issues are resolved, current issues progress, and new issues arise. This section focuses on the origins of issues and the forces that give rise to them. The following sections address the anticipation of nonmarket issues and their progression and resolution. Nonmarket issues originate from both external forces and a firm's own actions. Most changes in the tax law originate in response to ideas that capture a degree of political support. However, the issue of eliminating the investment tax credit, which had been a component of U.S. tax policy for over 20 years, arose in part because of political action by service industries that viewed the credit as a subsidy to capital-intensive industries. The issue of automobile safety regulation arose from an automobile accident and articles by two young policy activists, The issue of a possible health risk from the electromagnetic field generated by high-voltage electricity transmission lines arose from a small-scale inferential study linking power lines to leukemia in children. As the varied origins of these issues indicate, managers must be sensitive to the sources of nonmarket issues-even those such as possible health risks from the electromagnetic field generated by transmission lines-that initially seem remote or even far-fetched. Nonmarket issues have five basic sources: Scientific discovery and technological advancement New understandings Institutional change Interest group activity Moral concerns Scientific discovery and technological advancement can produce fundamental changes in both the market and nonmarket environments. In the market environment, they create opportunities for new products and processes, new applications of existing knowledge, and the foundations for future discoveries. They also give rise to nonmarket issues. Measurements suggesting that the earth was warming spawned issues ranging
The fuel economy issue in the United States is considered in the Part [I integrative cnse, Fuel Economy
Standards 2007.