We All Stand Together

When will your trade association split on an issue?

An old story in the US goes like this:
Two hikers meet in the woods and begin to walk together. Later, as they enter a clearing, they see, a few hundred yards away, a bear. Worse, the bear has seen them.As quick as a flash, one of the hikers flips off his backpack, takes out a pair of running shoes and starts taking off his hiking boots.

The other man stares at him. “What are you doing? You’ll never outrun a bear.”

“I don’t need to,” comes the reply. “I only need to outrun you.”

A cautionary note to all those working on an issue in their trade association. Do your competitors have a dual strategy? Will your company ‘get eaten by the bear’?

When a new issue emerges, whether it is the threat of a change in the law or an attack on a business practice from the media or pressure groups, the companies concerned take the issue to their trade association. The companies can pool resources to address the issue; they are stronger if they speak as one voice; the issue is a threat that affects them all equally. Or is it?

In 99% of cases, the role of the trade association is to defend the status quo position of the industry (or the nearest possible position that is defensible). Some issues are successfully fought off. Other issues build and build, because the critics of the industry have the more resonant argument. In these latter cases, at some point companies will split off from the trade association position. This happens every time. This is because while the role of the trade association is to defend the status quo, it is the role of markets, and therefore individual companies, to adapt to and exploit change.

Here are a set of questions you can ask yourself in order to assess whether you yourself need a dual strategy for addressing your issue.

1) Are you in a trade association with larger competitors?

If your company or business unit is smaller than your competitors in the market potentially affected, a number of factors combine to make you more vulnerable.

Firstly, particularly when the threat is a change in the law through legislation, often the ‘devil is in the detail’. All companies agree on the overall principle and the direction of the lobbying, but individual clauses may emerge that help or hinder some companies more than others. The larger companies will often put more sweat equity into the lobbying effort. What is being said in the meetings where one or two members go to meet a politician? Do you have time to analyze every small detail in the legislative proposals? How many people at your competitors are poring through the details looking for opportunities, people you don’t even know are working on the issue?

Secondly, larger companies are able to deal with change better. Most changes in legislation coming out of Europe in recent years have increased the cost of operating in the sector concerned, for example through additional costs of testing before bringing to market. New legislation often closes down the market for certain ingredients or methods of manufacturing, which affects companies operating in niches more than the larger companies.

As one example, a number of officials at the European Commission have been asked whether they agreed that the new European chemical legislation, REACH, would lead to consolidation because of the increased costs. In each case, they have replied that they agree, and that the expectation of such consolidation was built into their thinking in the first place. As any good activist knows, it is easier to pressure a sector into change the greater the consolidation in that industry; likewise for the Commission, officials believe that fewer companies will mean greater protection of the environment.

2) Are any of your competitors better hedged against change?

Each issue that appears to threaten a sector’s license to operate in certain ways prima facie affects all companies equally. However, as soon as one begins to break out an issue, this is not true. We have worked on many, many issues over the years, and over half the issues moved from a paradigm of industry unity to one of competitive advantage.

For example, all airlines dislike the idea of internalizing the costs of climate change into the price of jet fuel. Yet for an average flag carrier, the percentage of its cost base represented by fuel is 13%; for ‘low-cost airlines’ that proportion is 27%. If the cost of jet fuel had risen because of climate change fifteen years ago, what would that have done to the rise of low-cost airlines? Have a look at the lobbying positions of Ryanair and Virgin. Look out for the “Coalition of Environmentally Responsible Airlines”.

Food retailers stood together on the issue of GMOs until the first was able to satisfy itself it had secured long-term supply of non-GM. Then one split, then the next, and so on.

Will restrictions in marketing of alcohol affect all companies equally? Who wins as point-of-sale becomes a bigger part of the marketing mix?

For the pharma industry, what happens as Big Pharma acquires generics companies?

In every sector, some companies are more dependent on the status quo than others. Some companies would be less affected by change than others.

Is your issue the potential demise of a particular product? What proportion of profits does that product represent for each company? Does your issue affect one region in the world but not others? How important is this region for each company?

3) Are your competitors preparing for the possibility of change?

Like the last point, but with a twist. It may be at the outset of an issue that all companies are similarly positioned. However, much of our work involves sitting down with individual companies at this early stage, and working out the potential outcome scenarios and a competitive advantage strategy. Are your competitors drawing up a hedge strategy?

4) What is the brand landscape in your sector? How will brand holders act?

If a product or business practice of an industry is under attack, it will not be the industry as a whole that is the focus of attack for long. Pressure groups attack brands and work to ‘split the pack’; it is what they learn on their first day in the job. Do you have the biggest brand in your sector? If so, you are more likely to be attacked than anyone else. This may not be ‘fair’, but it will still happen. Nike was no worse than its competitors. Neither is McDonalds. Greenpeace was struggling on the issue of PVC toys in principle; this changed overnight when it played Mattel and Hasbro against one another. Campaigners use the connection of the brand between a company and its customers against the company.

If you are not the biggest brand in the sector, who is? If you were that company and came under intense pressure, what would you do? Would you stand firm under any conditions, or would you examine the option of change? If you did, rather than capitulation, would you not work with the pressure group to find an outcome than moved you ahead of your competitors? Would the pressure group cooperate? If it needed to split the pack badly enough, yes.

Perhaps you and your competitors do not have consumer brands. Two questions. One, who does care about your brand? Your B2B customers? Governments? The financial community? Campaigners will approach any and all of these people to put pressure on you.

Look below you in the supply chain. If this is where the consumer brand holders are, beware. Many battles have been won in the sense of avoiding regulation, only for the downstream brand holders to come under pressure and deselect the product in question.

A suggestion – prepare.

Some of the above may sound cynical. It is – that is how companies operate. To borrow from Warren Buffett, “If you’ve been in the game for 30 minutes and you don’t know who the patsy is, you’re the patsy.”

To anyone for whom the content above is new, we recommend preparing. In addition to working through the trade association, convene a team inside the company itself. Identify all possible outcomes on the issue, and game play them. Don’t just look at the outside world of politicians, pressure groups and the media, look at your competitors. Conduct a thorough competitor analysis. You do this for all other commercial issues, why not here?

Then, could you be eaten by the bear? If so, what steps can you take?

Could you take commercial advantage? What are the risks and returns? How can you maximize your chances?

Is the status quo too important to you to contemplate change? If so, under what circumstances would you have to change? What would this entail? What are the signposts for that necessity? Is it worth doing anything now to mitigate against that future investment?

June 2009