Tag Archives: Non Market Environment

Land, Labor, and Climate- Nonmarket forces

When we talk about nonmarket strategy, there are many factors that impact a firm. Here we will talk about the three most important aspects that a firm needs to be thinking about are – land, labor, and climate. We already talked about the climate in the last post. We will discuss more labor and land here.

Volkswagen Emission Scandal: An important case to understand the impact of non-market forces on a company is the case of Volkswagen which came into light in 2014-15. The company used a defeat device to cheat the emission tests giving false readings while the cars were being tested for emission against CCA emission standards. Volkswagen had ambitious revenue and sales goals, but at the same time, it suffered from high labor and manufacturing cost due to the way decision-making power had a big role in labor representations. Once the scandal was highlighted, Volkswagon came up with a strong nonmarket strategy under the new CEO where they invested heavily in future-oriented electric cars.

Land: Land is an important input for any business, to open factories, offices, storage units, etc. any firm needs land. Along with being important, the land is also a very complicated input to attain. Most land is owned by private owners or households. Obtaining a big chunk of land in a developing country like India which has a high population density can be a big challenge. The difficulty factor will vary based on factors like population density, type of land (land currently used for agriculture or residential purpose), connectivity (factories want easy access to roads, airports, shipping ports, etc.), and so on.

An interesting case study for land acquisition in India is the Tata motors Singur case in West Bengal, where the organization failed to set up the factory due to opposition from landowners. Without getting into political aspects, we will look at the Land acquisition act LARR which was the result of the Singur case.

image source: https://www.downtoearth.org.in/news/agriculture/-state-govts-acquire-land-by-subverting-rights-and-bending-the-law–62463

Rather than a forceful acquisition of land, consent-based ownership transferred needs to be in place. One solution is to go for an auction-based option given to landowners, where every owner can give their expected value of the land. The firms can choose the lowest bidders and an option of giving an alternate land can be given to people who are not ready to give up land for money. Another option that is in need of the hour is to rather than going horizontally, firms need to think more of going vertically when setting up new factories to help optimized usage of land. Also, profit-sharing options should be given to landowners.

Labor Laws: Labor is a necessary requirement for any kind of business. Any firm looking to set up a business at any location needs cost-effective skilled labor. A very simple calculation is how much investment of X per hour in labor is yielding in terms of outcome. Labor laws in any country will give directions for the discharge or dismissal of workers, wages, bonuses, lay-offs, retrenchment, and work conditions. For example, minimum wages laws help ensure that firms are paying a basic minimum wage so that workers can live a decent lifestyle.

Climate Change and Sustainable Value Framework

Climate change is an important factor in recent times which has been talked about in business and non-business environments. Every degree rise in temperature is going to have a long-lasting impact on our planet. Every business is a social entity, hence has a responsibility of making sure it is looking at growth keeping future generations in mind.

Projected Impacts of Climate Change
image source: https://public.wmo.int/en/resources/bulletin/water-security-changing-climate

Sustainable development meets the needs of the present without compromising the ability of future generations to meet their own needs.

To contain global warming to a 1.5 degrees C rise, global net human-caused emission of carbon dioxide CO2 would need to fall by 45 percent from 2010 levels by 2030, reaching net zero around 2050.

Firms need to change the way they conduct business over next 2-3 years.

Business Megatrends and Sustainability

Business Megatrend refers to societal and economic shifts such as globalization, the rise of the information society, and so on.

Current Megatrends: Rapid Urbanization, climate change, and resource scarcity, shift in global economic power, demographic and social changes, technical breakthroughs, etc.

Sustainability is an important megatrend. GM’s decline can be clearly traced to its failure to understand how quality considerations would transform the auto industry. Similarly, Kodak’s dominant position in photography eroded quickly as it missed the signals in digital technologies.

The interconnection of the elements of the Triple Bottom Line concept.
image source: https://www.researchgate.net/figure/The-interconnection-of-the-elements-of-the-Triple-Bottom-Line-concept_fig1_329185478

A sustainable business model is the one when a firm can keep a balance between the three factors – Profit, People, and Planet.

A firm cannot just focus on today’s profit but also need to think of tomorrow’s growth and sustainability.

image source: https://leadingforwellness.typepad.com/betterfutures/2010/12/leading-the-way-relfections.html

For sustainable growth, a firm needs to do well in all four quadrants. Firms need to reduce material consumption, reduce pollution, reduce waste generation. This can be achieved by a greater level of transparency and responsiveness

Some of the strategies including adopting green technologies and work towards inclusive wealth creation and distribution (reduce poverty), will help firms move towards sustainable growth.

The Sustainable Value Framework  
image source: https://www.researchgate.net/figure/The-Sustainable-Value-Framework_fig2_267154244

Business, Government and Society

Normally one only considers market forces that impact business decisions. But there are some important nonmarket forces like government and society that impact business. Hence, every business needs a market strategy as well as a nonmarket strategy to be successful.

Three institutions for allocation of the resources

  • Market (Private Sector): Capitalist system operates on the basis of private property, voluntary exchange, competition, and the profit motive.
  • Government (Public Sector): Centralized mechanism in which government provides public services to citizens on the basis of criteria other than the ability to pay.
  • Community: Decentralized mechanism for allocating resources where the purpose is to meet certain categories of need rather than to make a profit.

Globalization and De-Globalization

Globalization is a concept when local markets open up for global markets. This impacts the import and export of the country. Whereas in certain cases, the government takes decisions based on National priorities over globalization, giving rise to de-globalization.

Business Environments: Internal vs External

Every business has to deal with external and internal environments. Internal factors are straightforward where the business has control over, for example, its policies, production units, etc. The external environment is the one where the business has no or little control like government policies, cultural differences between countries, laws in different countries, and so on.

Business flow: Inputs — > Production — > Outputs

Inputs can be land, labor, raw materials, etc. A lot depends on external factors in this case.

Production is the process of converting the inputs into outputs. This is the firm’s internal environment which it can control.

Outputs are the output generated by a firm in form of products and services, which it needs to supply to other firms, government, end customers, again external factors play a role.

The Market Economy

source: https://saylordotorg.github.io/text_macroeconomics-theory-through-applications/s07-03-the-circular-flow-of-income.html

The image above shows financial flow in a market economy. In this case, households are engaged with firms by working in them and earning wages, investing in the firm and earning dividends, renting land or resources and getting an income, or directly owning the firms and making profits. Households in turn buy from the firms adding to their income.

Government purchases from firms and adding to revenue. Additionally, Government gets tax from firms and households which adds to its income. The government also gives back to households in terms of various schemes like policies for people below the poverty line.

Firms and households interact with the rest of the world in terms of import and export. this also depends on various government policies.

Market and Non-Market environments in business

The Nonmarket Environment of Business
image source: https://sloanreview.mit.edu/article/what-every-ceo-needs-to-know-about-nonmarket-strategy/

Information about the nonmarket environment is important for any firm. One needs to understand what citizens are thinking about the product, what the media is talking about, what are government policies, what are issues raised by NGOs, and so on. Firms need to engage and form coalitions with these units. Firms need to deal with uncertainty around these factors.

The market environment includes direct interactions between firms, suppliers, and customers that involve voluntary economic transactions.

The nonmarket environment is composed of social, political, and legal arrangements and interactions between the firm and individuals, interest groups, government entities.

Non Market strategy

In short, senior management for any business needs to understand that business is not only economic agents but also are social and political beings. Firms are impacted by a lot many actors like laws and regulations, social pressure, activism, and public perception. So any business management needs to make sure to form a non-market strategy, along with a market strategy.