POLITICAL DYNAMICS OF ECOSYSTEMS The same factors that spawn politics inside organizations also create political dynamics within and between ecosystems. Organizations have parochial interests and compete for scarce resources. Ross Johnson again provides an example. After he became CEO of RJR Nabisco, Johnson made a fateful decision to engage in a management craze of the time—a leveraged buyout (LBO). The basic idea of an LBO is to “nd an undervalued company, buy up shares with someone else’s money, “x it up or break it up, and sell it at a pro”t. It’s a high- risk venture.
Johnson’s plan was to use a leveraged buyout to take RJR Nabisco private. But once he had announced the LBO, the company was in play; it was open season for anyone to enter the bidding. Anyone in this case meant Henry Kravis and his secretive “rm, KKR, with some $45 billion in buying power. Johnson gave Kravis a cold shoulder, expecting Kravis to stay out because the deal was too big. He underestimated a dangerous adversary. What followed was one of business history’s biggest six-week poker games. Huge coalitions formed around
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both players. Millions of dollars in fees gushed into the laps of bankers, lawyers, and brokers. When the dust cleared, Henry Kravis and KKR had won by a nose. RJR Nabisco was theirs for a cool $25 billion.
The bidding war created a !uid, temporary ecosystem illustrating many of the complexities of such arrangements. Dozens of individuals, groups, and organizations were involved, but the big prize in the contest, RJR Nabisco, was largely a bystander; its board was on the sidelines for most of the game. Johnson and his allies pursued their private interests more than the corporation’s. Financial stakes were enormous, yet the game was often driven by issues of power, reputation, and personal animosity. Everyone wanted the prize, but you could win by losing and lose by winning. In the competitive frenzy, both sides bid too much, and the winner was stuck with an overpriced albatross.
The RJR Nabisco LBO ecosystem lasted only until the brutal bidding war was over. But many ecosystems, like Wintel’s and Walmart’s, are durable, lasting for decades. In such cases, an organization’s role in an ecosystem affects how it can balance pursuit of its own interests with the overall well being of the ecosystem. This may not be amajor issue for small players with only marginal in!uence, but is vital for “keystone” “rms likeWalmart that sit at the hub of an ecosystem:
Walmart is successful because it “gured out how to create, manage, and evolve� an incredibly powerful business ecosystem. Over the years Walmart took� advantage of its ability to gather consumer information to coordinate the� distributed assets of its vast network of suppliers. Walmart made a point of� tracking demand information in real time. The key was that it decided to share� this information with its supplier network. It introduced Retail Link, the� system that still delivers the most accurate, real-time sales information in� the industry to Walmart partners. Walmart was unique in the retail space in� offering this kind of service, turning Retail Link into a critical supply chain hub� (Iansiti and Levien, 2004, pp. 1–2).�
Fishman agrees aboutWalmart’s dominant role in its ecosystem, but sees less rosy results:
The ecosystem isn’t a metaphor; it is a real place in the global economy where� the very metabolism of business is set by Walmart. The fear of Walmart isn’t� just the fear of losing a big account. It’s the fear that the more business you do� with Walmart, the deeper you end up inside the Walmart ecosystem, and the� less you are actually running your own business. Walmart’s leadership virtually�
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never acknowledges this control, but the company clearly understands it, and even takes a sly pride in it (2006, p. 16).
But Walmart’s ecosystem is not a gated community. Much as it might like to, Walmart has limited ability to exclude other players—including the “rm’s many competitors and critics—who choose to spend time in its neighborhood, even if uninvited. Walmart initiatives to build new stores are routinely countered by opponents who decry the economic and environmental costs that they claim the new outlet would create. Walmart’s low wages and bene”ts create a tempting target for union organizers, though the company’s antiunion stance has mostly been successful so far in keeping unions out.
Organizational ecosystems come in many forms and sizes. Some, like Walmart’s, are huge and global. Others are small and local (like the ecosystem of laundries in Oslo or policing in Omaha). Next, we examine how ecosystem dynamics vary across sectors.
Public Policy Ecosystems In the public sector, policy arenas form around virtually every government activity. One example is the commercial aviation ecosystem, in which air carriers, airplane manufactur- ers, travelers, legislators, and regulators are all active participants. In the United States, the Federal Aviation Administration has been a troubled key player for decades. Charged with divergent goals of defending safety, promoting the economic health of the industry, and keeping its own costs down, the FAA has perennially come under heavy “re from virtually every direction. Feeble oversight sometimes permitted marginal carriers to shortcut safety but continue !ying. An air traf”c modernization plan rang up billions of dollars in bills but 20 years later had yielded few results:
When Marion C. Blakey took over at the Federal Aviation Administration in 2002, she was determined to “x an air travel system battered by terrorism, antiquated technology, and the ever-turbulent “nances of the airline industry. Five years later, as she prepares to step down on Sept. 13, 2007, it’s clear she failed. Almost everything about !ying is worse than when she arrived. Greater are the risks, the passenger headaches, and the costs in lost productivity. Almost everyone has a horror story about missed connections, lost baggage, and wasted hours on the tarmac (Palmeri and Epstein, 2007, p. 1).
Fast forward to 2016, and the story was little changed: “The Federal Aviation Adminis- tration has little to show for a decade of work on modernizing air traf”c control, and faces
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barriers and billions more in spending to realize its full bene”ts, says a report released Tuesday by a government watchdog” (Lowy, 2016).
Some of the FAA’s troubles were internal. An earlier report from what was then called the General Accounting Of”ce had faulted the agency’s lack of a “performance-oriented culture essential to establishing a culture of accountability and coordination” (Dillingham, 2001). But almost every move it made to solve one constituency’s problem created trouble for others. Much of the fault lay in its ecosystem: “Nobody is in charge. The various players in the system, including big airlines, small aircraft owners, labor unions, politicians, airplane manufacturers, and executives with their corporate jets, are locked in permanent warfare as they “ght to protect their own interests. And the FAA, a weak agency that needs Congressional approval for how it raises and spends money, seems incapable of breaking the gridlock” (Palmeri and Epstein, 2007).
In recent years, drones presented a new test of the FAA’s ability to balance con!icting interests and pressures. In August 2016, the FAA issued long-awaited drone regulations that sought to balance considerations of safety and commerce. At the time, there were about 20,000 commercial drones in operation in the United States, but the FAAwas expecting that number to increase to approximately 600,000 in another year.
Education is another illustration of a complex policy ecosystem. Everyone thinks good schools are important. Families want their children to acquire the ingredients for success. Businesses need well-trained, literate graduates. Economists and policy analysts stress the importance of human capital. Teachers want better pay and working conditions. Taxpayers want to cut frills and keep costs down. Almost no one believes that American schools are as good as they should be, but there is little agreement about how to make them better.
One popular remedy, enshrined in the federal “No Child Left Behind” Act, emphasizes tests and incentives: measure how well schools are doing, reward the winners, and penalize the losers. But high-stakes testing may have generated more political heat than educational light. Some research suggests that the testing emphasis has improved learning outcomes (Wang, Beckett, and Brown, 2006), while others see “distortion, corruption, and collateral damage” (Nichols and Berliner, 2007) as the primary impact. The strenuous opposition to No Child Left Behind led the federal Department of Education into state-by-state negotiations to modify the requirements, making it even harder to assess how well the program is working (Sunderman, 2006).
Another popular cure for educational ills is giving parents more choice about which schools their children attend. One version of school choice is vouchers, grants that families can use to send their children to private schools. Another is charter schools—publicly
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funded, quasi-independent educational enterprises. Proponents of choice argue that parents would seek the best school for their children and that the ensuing competition would have an invigorating effect on public schools. But school administrators maintain that vouchers and charter schools drain away resources and exacerbate the challenges for the neediest students. Coalitions have formed on both sides of the choice issue and have lobbied vigorously at the state and national levels. Available research suggests that, on the whole, some charter schools are very good and others are not, but, on average, student learning outcomes are neither better nor worse than conventional public schools.
Business-Government Ecosystems Government and business inevitably intersect in a multitude of ecosystems. Perrow (1986) discusses one example: pharmaceutical companies, physicians, and government. A major threat to drug companies’ pro”t margins is generic drugs, which sell at a much lower price than brand-name equivalents. In the United States, the industry trade association, an interorganization coalition, successfully lobbied many state legislatures to prohibit the sale of generic drugs, ostensibly to protect consumers. The industry also persuaded the American Medical Association (AMA) to permit drugs to be advertised by brand name in its journals. Consumers normally buy whatever the doctor prescribes, and drug companies wanted doctors to think brands rather than chemical names. As a result of the policy shift, the AMA’s advertising income tripled in seven years, and the manufacturers strengthened the position of their respective brands (Perrow, 1986).
The ecosystem shifted with the rapid rise of a newly powerful group of players: insurers and managed-care providers. The growing market dominance of a few large insurers dramatically reduced the bargaining power of physicians and drug companies. Insurers used their growing political leverage to push physicians to prescribe less expensive generic drugs. In an effort to save consumers’ money, state legislatures began to require pharmacists to offer the generic equivalent when a brand name is prescribed. Pharmaceutical companies fought back with televised ads encouraging patients to ask their doctors for brand name drugs.
Drug companies are not alone in their attention to politics. Government policy can be a powerful source of competitive advantage because it “determines the rules of commerce; the structure of markets (through barriers to entry and changes in cost structures due to regulations, subsidies, and taxation); the offerings of goods and services that are permissible; and the sizes of markets based on government subsidies and purchases. Consequently, gaining and maintaining access to those who make public policy may well be a “rm’s most important political goal” (Schuler, Rehbein, and Cramer, 2002, p. 659).
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Politically active “rms use a range of strategies for in!uencing government agencies (Schuler, Rehbein, and Cramer, 2002). FedEx illustrates the possibilities. In Chapter 7, we noted the company’s sophisticated approach to managing people. FedEx has been equally agile in managing its political environment. The New York Times described it as “one of the most formidable and successful corporate lobbies in the capital” (Lewis, 1996, p. A17). FedEx CEO Fred Smith “spends considerable time in Washington, where he is regarded as Federal Express’s chief advocate. It was Mr. Smith who hit a lobbying home run in 1977 when he persuaded Congress to allow the !edgling company to use full-sized jetliners to carry its cargo, rather than the small planes to which it had been restricted. That was the watershed event that allowed the company to grow to its present dominating position with almost $10.3 billion in business” (p. A30).