Writing Assignment
BScott
IntroducingPublicAdministration_chapter9.pdf
361
CHAPTER
9
Strategic Management and Government
Regulation
Keynote: Using Government Regulations of Business to Strategically Manage the Environment 361
What Is Strategic Management? 363
Objectives 364 The Planning Horizon 367 Capabilities 369 Game Theory 370
Strategic Management Tools 370
Best Practices 371 Benchmarking 371 Management Scorecards 372
Government Regulation for Health,
Safety, and Economic Equity 374
Independent Regulatory Agencies 375 The Rulemaking Process 377
State Government Regulation 379
Occupational Licensing 379
Local Government Regulation 380
Zoning 380 Building Codes 382 Public Health 383
A Case Study: Opportunity Lost: The Story of Bernie Madoff and the Securities and Exchange Commission 384
CHAPTER OUTLINE
KEYNOTE: Using Government Regulations of Business
to Strategically Manage the Environment
Strategic management, the achievement of long-term organizational goals, is not a tidy business. It is not that managers do not want to be neat; it is just that the mana- gerial environment, especially in the public sector, is inherently and notoriously lack- ing in neatness. It is not exactly what the Scottish poet Robert Burns (1759–1796) had in mind when he said that the “best laid schemes of mice and men” often go awry; it is rather that these plans are seldom presented in comprehensive doc- uments, if they exist at all. Often the overall strategy exists only as a campaign
362 Strategic Management and Government RegulationC H A P T E R 9
speech, a vague document, or an unwritten philosophy. The full implementation of a strategic plan usually takes many years, sometimes decades or even more. The usefulness of a strategic plan is that it provides a long-term doctrine, the overall guidance, so essential for short-term, or tactical, management decisions.
Strategic management is hardly new. For example, ancient Rome was into stra- tegic management in a big way. Of course, there was no one single document entitled “The Strategic Plan for the Roman Empire,” but all of its elements lay scattered about in various laws, policies, and proclamations. It was much like the British Constitu- tion of today, unwritten but nevertheless thoroughly understood by all those with the responsibility for its implementation. Indeed, the essence of strategic planning— the heart of strategic management—has always been done, especially in a military context, where it began. However, the Romans of old were among the first to apply strategic concepts to the large-scale nonmilitary aspects of government as well.
As with their predecessors in the Roman and British empires, Americans have incorporated strategic approaches to manage many of the largest and most per- sistent problems that have faced the nation. Since the onset of the Industrial Revolu- tion in the nineteenth century, the issue of environmental degradation has been one of the most widespread challenges for policymakers and has provided the stimulus for the development of strategic management of environmental conditions in the United States. From the beginning of the Industrial Revolution there was pollution. And it was good. Good? Yes, because it was a byproduct of all the mass-produced things that make modern life longer and more fun than it was in the pre-industrial era. The additional cost we increasingly paid for cheap food, cheap kitchen utensils, cheap clothing, and cheap transportation was environmental degradation.
The first efforts of American governments to “save” the environment were the conservation and preservation movements of the early twentieth century. As it became more and more obvious that the toll of economic prosperity was a land- scape that showed the scars of unchecked industrialization, the need for a strategy to manage the environment became obvious. However, there was not a single dominant strategy that guided government efforts to manage the nation’s natural bounty. Instead, the nation adopted two broad strategies to protect environmental resources—preservation and conservation. Under the preservationist management doctrine, government used its powers to set aside land from the waves of develop- ment and industrialization that were engulfing the nation. Under this strategy large tracts of land were placed “off limits” to industrial exploitation. Thus many of our national and state parks came into existence during this period.
In contrast to the preservationist strategy that kept lands out of the destructive hands of despoiling industrialists, the conservationist approach sought to manage land exploitation in a way that would continue to allow socially responsible indus- trialists to produce the things most desired by the citizens of the nation. Conserva- tionism stressed scientific management as the key to the efficient use of America’s forests, rivers, and farm lands. The strategy recognized the fact that if Americans wanted to continue to improve their quality of life with bigger houses and more productive farms, they could no longer think of resources as inexhaustible. Instead, conservation meant considering the long-term condition of the environment as part of the broader drive to economic prosperity.
While the conservation and preservation movements have shaped natu- ral resource policy ever since, the next major effort to strategically manage the
363What Is Strategic Management?
environment came in the 1960s when the government turned its attention to the bur- geoning problem of pollution. With city air darkened by dense smog and the nation’s rivers so clogged with chemicals and oil that some actually caught fire, the public began to clamor for greater government efforts to control pollution. As the 1970s began, the federal government embarked on a 10-year period of tremendous legis- lative and administrative efforts that targeted the environmental degradation that was enveloping the nation. The trademark of these efforts was the utilization of policies that set mandatory standards that citizens and businesses would have to meet. This command-and-control approach did enable some improvements in envi- ronmental quality. But it also drew the ire of many government officials—and even more business leaders—who saw such efforts as excessively intrusive and burden- some to the national economy—as well as to personal profits.
Now a third wave of a strategic management of the environment is at hand that uses economic incentives to encourage businesses to do right by their environ- ment. With problems such as global warming straining the capacity of government to regulate solutions, other strategic approaches have become necessary. And as is the American way, the use of financial incentives has arrived as the driving force behind the latest route to environmental salvation. If you just tell Americans they must not do something, it’s often likely they will do it anyway. Remember prohibi- tion! But if you offer them a way to save money, their natural sense of thrift may encourage them do the things you want them to do. In the area of environmental protection, incentives to buy hybrid cars, energy-efficient light bulbs, and solar water heaters have become the preferred route to a greener world. This approach is a victory for classical liberalism, for the public choice approach to public adminis- tration, and for the logic of going back to the future.
The environment is just one example of the government’s strategic approach to regulation. Similar analyses could be made for the curtailment of smoking by regulating advertising, sales locations, public education, and taxation on cigarettes. All government regulation is a combination of legal controls, advertised sanctions, taxation, education, and moral suasion. Of course, an occasional highly publicized jail sentence helps as well. Ideally it is all wrapped up in one comprehensive strate- gic plan. But more likely it is the product of the fits and starts of the policymaking process stretching over many decades. Regulation, like sausage and legislation, is often sloppy in production, but delicious in effect.
For Discussion: Government regulations are of two types- one form regulates spe- cific types of businesses (utilities) or enterprises (nursing homes)—the other regu- lates practices and processes across industries (safety, pollution, etc). Do these types pose different challenges for government? Critics charge that government is guilty of over regulation which harms economic growth. Advocates charge that unfet- tered growth results in large social costs and that government is then left with the clean up. Is there a balance—especially in a globalized economy.
WHAT IS STRATEGIC MANAGEMENT?
Strategy, the ancient art of generalship, is the employment of—the management of—overall resources (classically soldiers) to gain an objective. Tactics are the use of a subset of these resources to gain a part of the overall objective. Strategic
Tactics
The short-term immediate decisions that in their totality lead to the achievement of strategic goals.
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management is the modern application of this ancient art to contemporary business and public administration. It is the conscious selection of policies, development of capability, and interpretation of the environment by managers in order to focus organizational efforts toward the achievement of preset objectives. These objectives necessarily vary. In the private sector it could be the doubling of annual dividends to stockholders within so many years. In the nonprofit sector it could be the cre- ation of a repertory theater or a significant increase in attendance at symphony orchestra concerts. In the public sector it could be a reduction in the crime rate, an increase in the high school graduation rate, the defeat of worldwide communism, or victory in the war against terrorism.
All strategic management efforts take an essentially similar approach to plan- ning where an organization wants to be by a future target date. These are the six fea- tures that identify a strategic, as opposed to a nonstrategic, management approach:
1. The identification of objectives to be achieved in the future (these are often announced in a vision statement).
2. The adoption of a time frame (or “planning horizon”) in which these objec- tives are to be achieved.
3. A systematic analysis of the current circumstances of an organization, espe- cially its capabilities.
4. An assessment of the environment surrounding the organization—both now and within the planning horizon.
5. The selection of a strategy for the achievement of desired objectives by a future date, often comparing various alternatives.
6. The integration of organizational efforts around this strategy.
The overall strategy chosen is in essence the package of actions selected after analyzing alternatives, assessing the outside environment, and determining the internal capabilities of an organization to achieve specified future objectives through the integration of organizational effort. The strategic management process is often conducted by a strategic planning unit within the organization. Eventually, its findings are presented in a detailed document known as the strategic plan. Many of the core elements of strategic management just listed have unique considerations when they are applied to public sector organizations.
Objectives
Objectives-based thinking in management has become so pervasive that it is as hard to think of management without objectives as living rooms without television sets. Originally, objectives were part of military thinking. The Swiss-born Napoléonic era general Henri Jomini, in his 1838 book The Art of War, taught how battles should be conducted, with soldiers’ moves being planned either for strategic benefit (a qualitative improvement in the long-term position, particularly vis-à-vis the enemy) or tactical benefit (that is, a shorter-term move designed to win the problems— the fighting—of the day and create a better position for the next day’s battle).
In this context, we can think of a tactical objective such as “Hill 45”—a specific location that must be taken from the enemy to further the purpose of the overall
365What is Strategic Management?
Define the organizational process and announce it in a mission statement.
Identify organizational objectives and announce them in a vision statement.
Establish planning horizon, a time frame, for the achievement of objectives.
Review organizational capabilities via a SWOT analysis (see Figure 9.4).
Assess organizational environment both now and in future.
Identify strategic alternatives, select a strategy, and promulgate it in a strategic plan.
Implement strategy by marshaling organizational resources.
Create control and evaluation system for continuing feedback.
FIGURE 9.1
The strategic management process
plan of battle. A strategic objective might be victory on the whole of a battlefront or theater of war. This military vocabulary is now commonly applied to business. For example, when Honda, the Japanese company, started selling motorcycles in the United States in the early 1960s, it secured a tactical objective. When it forced Brit- ish motorcycles out of the American market, however, it secured a strategic victory.
The public sector was slower than the private sector in embracing strategic management notions. This is because, traditionally, public administrators were expected to focus not on their objectives—what they were trying to achieve—but on their functions and responsibilities—that is, the duties assigned to them by law. Indeed, public administration was traditionally defined as the enforcement or implementation of public policy—that is, the law. This emphasis on the responsibil- ity to discharge ongoing functions set down by law has been the focus of traditional public administration. The seniority principle in promotions often accompanied
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this attitude. After all, if detailed knowledge of how to administer the laws in a certain functional area were critical, it logically followed that it must be better to have a more senior—and therefore more knowledgeable—employee than to hire someone fresh, who might take years to acquire a parallel level of knowledge. Job descriptions even emphasized knowledge of laws and regulations as a key selection criterion.
In contrast, today’s most sophisticated selection officers tend to look for a record of achievement, as opposed to highly specific knowledge of this kind. A world in which public administrators take responsibility for unchanging functions still exists in some corners of the public sector in most countries, but it is increasingly being replaced by a focus on objectives. No longer do we begin by asking a public administrator, “What do you do?” (i.e., “What is your function?”) Today the ques- tion is more likely to be “What are you trying to achieve?” (i.e., “What are your objectives?”) While there are many reasons for this change in perspective, three are paramount.
The first is the popularization of the concept of management by objectives (MBO) by Peter Drucker through his pioneering 1954 work The Practice of Management. MBO as espoused by Drucker and, by now, countless others, is an approach to managing whose hallmark is the mutual—by both organizational sub- ordinate and superior—establishment of measurable goals to be accomplished by an individual or team over a set period of time. The widespread adoption of the MBO concept across the world has aided in the distinction between a function and an objective. It is now widely understood that an emphasis on the latter can stimu- late a focus on performance and effort as opposed to the more traditional custodial focus toward one’s organizational obligations.
Second, the ever more rapid pace of change in the communities served by the public sector is such that there are now few functions that can go on unchanged from year to year and decade to decade. The public organizations of today must generally fight and compete in a less-sheltered environment—where the luxury of just “administering” timeless functions rarely exists. The objectives of public sec- tor organizations have become moving targets—and public sector managers must move with them.
Third, the ideas of strategic management and the use of objectives are perva- sive in the private sector. Since there is no Berlin Wall dividing the sectors, and staff
Berlin Wall
The concrete and barbed-wire wall built by East Germany in 1961 to divide East and West Berlin. The wall became the symbol of the division of Eastern and Western Europe. It was dismantled in 1989.
Establishing measurable objectives
to be met over a set time
Assessing performance: to what extent have
goals and objectives been met?
Reaching mutual agreement
on ultimate goals
FIGURE 9.2
The management-by-objectives process
367What is Strategic Management?
move increasingly in and out of each sector, there is an ever-increasing unification of language, concepts, and standards between the sectors.
Nonetheless, many public sector organizations still produce separate statements of their functions (or responsibilities) and objectives. You can broadly distinguish the language of each. Since a statement of functions is about what an organization is responsible for under law, it broadly answers the question “What do we do?” The answer is normally a static description, timeless and without directionality. A statement of objectives (often called a mission statement), however, answers the question, “What are we trying to achieve?” Instead of a static description, this normally implies a direction being pursued, along with specific measures so that we will know when we get there. A statement of functions might say, “We are in charge of child care”; a statement of objectives might say, “We intend to provide a preschool place for every child in the community by 2020.” A statement of objec- tives should be the following:
1. Succinct, and limited to the organization’s sphere of influence. 2. Directional, with specific future states to be achieved. 3. Time limited, with indications of when each objective is to be achieved. 4. Measurable, so that achievement or progress can be evaluated.
The Planning Horizon
Sometimes when you apply for a job, the recruitment officer or selection committee may ask you, “Where do you see yourself in ten years’ time?” This is often per- ceived to be a silly question, and, with respect to the structure of women’s careers, it is possibly a discriminatory one. But in asking this question, a selection commit- tee is trying to see whether the applicant for the job has a personal career strategy or is drifting in an opportunistic way without a strategy, without personal objec- tives, and without a career plan.
The same question is most decidedly not silly when addressed to public sector organizations. It is of the utmost importance to assess whether or not they have strategic intent—that is, the will to shape their future, rather than merely reacting to changes driven by others. Any organization’s planning horizon, the time limit of organizational planning beyond which the future is considered too uncertain or unimportant to waste time on, is an important factor in assessing its short- as well as long-term viability (see Figure 9.3). While private corporations have the luxury of determining their own planning horizons, severe obstacles are put in the path of those who advocate the most rational possible planning in the public sector. The inherently political nature of public administration can place a premium on short-term thinking. It was the late British Prime Minister Harold Wilson who said, “A week is a long time in politics.” By this he was drawing attention to the fickle nature of the public’s awareness, to the fact that an issue of premier significance one week may be forgotten the next. Political leaders may lose power—and even office—in a very short time, often unexpectedly. “Today a rooster, tomorrow a feather duster” sums up the uncertain job prospects of those who would lead the political barnyard. Thus the reigning administrations in developed democracies feel they must be very sensitive to the results of very short-term opinion polling. These
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factors and all others that bring a short-term focus to bear on public policymaking work—and work very hard—against strategic management efforts.
Public budgeting procedures, because of their annual nature, reinforce this ten- dency toward short-term thinking. National, state, and local legislators are accus- tomed to exercising oversight authority during the annual rituals of the budget formulation and review process. To them, biennial and multiyear budgeting repre- sent immediate threats to their political powers and patronage prerogatives. Aaron Wildavsky discussed this problem in a famous 1978 article, “A Budget for All Sea- sons: Why the Traditional Budget Lasts.” It lasts because it is the basis of the polit- ical power of so many legislators. Otherwise, rational reforms leading to multiyear budgets are simply not in their personal political interests. Despite the many efforts that have been made over the years to introduce longer budget cycles, success has been limited. Thus short-term budgeting continues to reinforce short-term policy- making and inhibit the inherently long-term nature of strategic planning.
Despite the preceding constraints, long-term planning is inescapable in some areas of public sector activity. Some endeavors clearly require long-term plan- ning horizons because they need both gradual development and enormous capital investment. Publicly owned power, water, and transit utilities must operate in this way. They must have long forward plans and multiyear lead times to complete a new transit system, power station, or water purification plant. Here, the constraints of traditional short-term government planning cannot apply. Often, such utilities, if they are not already in the private sector, are placed in semiautonomous public cor- porations or commissions. There they have more freedom to think, plan, and oper- ate within a longer-term time horizon than if they were to operate as traditional government departments. Government-owned utilities, with their heavy investment and long lead times, illustrate areas of the public sector where long-term strategy and concomitant long-term planning are inescapable.
When strategic management is adopted in a corporation, municipality, or bureau, or in a presidential initiative, a choice is made for rational decision making. In this sense, there is now a greater commitment to rational planning in American institutions than ever before. For example, the Government Performance Results Act of 1993 requires that “federal agencies must prepare and submit strategic plans to the Office of Management and Budget and Congress.” The states are increasingly passing similar legislation. For example, according to House Bill 2009, passed by the Texas State Legislature in 1991, all state agencies must use strategic plans as the basis for developing their “requests for legislative appropriations, and measure agency effectiveness by the outcomes and outputs they achieve.”
Assessing the present situation
Deciding what the future situation
should be
Determining what must be done to
get there
FIGURE 9.3
The essence of planning
369What is Strategic Management?
Capabilities
Strategic management has been described, most notably by strategic analyst H. Igor Ansoff (1965), as “a matching process” in which the variables of strategy, capability, and environment are matched as the organization seeks to manage change through strategy. As the environment moves from stable to turbulent, Ansoff argues, the required capability moves from “custodial” toward “entrepreneurial.” In a stable environment, a custodial, unchanging capability may suffice. But as the environ- ment becomes surprising and turbulent, a more entrepreneurial and risk-taking capability is needed.
When mismatch exists between environment and capability, management must take action to better match its human resources capability with the emerging envi- ronment. The actions required may include hiring new employees who are better oriented by disposition or training to a new entrepreneurial environment. Existing employees could be given additional training. Unfortunately, it is often the case that some employees may no longer be suited to what the present environment requires. For example, a juvenile correctional institution moving toward a counseling and support model may find difficulties if its staff capability exclusively consists of tough custodial officers. Similarly, many organizations in the public sector whose strengths have traditionally been in technical or professional excellence may find that new requirements for customer orientation require, at the very least, extra training programs, but more likely the hiring of some new staff with new attitudes and skills.
What is true of human resources capability is also likely to be the case with sys- tems capability, or financial capability—indeed, capability in whatever dimension is critical to the organization’s ability to adapt to an emerging environment. For example, years ago, the task of servicing lighthouses—traditionally a public sector function—was viewed as requiring a capability to maintain a fleet of tough little ships that could reach remote areas. This capability later gave way to a capability
Strengths Delivery network that reaches virtually all possible customers Established branch office in every significant locality An ongoing capability to complete its core mission (deliver the mail) every day
• • •
Opportunities Every citizen is a potential customer Expand services into new technologies Alliances with private deliverers
• • •
Weaknesses Combative labor unions Poorly motivated and alienated workforce Large organization with difficulties sustaining both urban and rural services Public perception of delays and long waits
• • • •
Threats Forced privatization by Congress Competition from private sector (Federal Express, United Parcel Service, etc.) Decrease of first class mail due to internet
• • •
for service
FIGURE 9.4
SWOT analysis for the US postal service
370 Strategic Management and Government RegulationC H A P T E R 9
to service remote locations by helicopter. Eventually, as global positioning systems developed, that capability in turn became obsolete.
The SWOT analysis—a review of an organization’s strengths, weaknesses, opportunities, and threats—is a technique widely used to provide another test of strategic viability. SWOT analysis is often conducted by consultants or senior man- agement groups in an interactive, brainstorming mode, in which the group turns its attention sequentially to each aspect of the organization’s position. Analysis of strengths and weaknesses highlights capability issues, while attention to oppor- tunities and threats turns attention to the opportunistic as well as the predatory aspects of organizational survival. A SWOT analysis is often undertaken as part of a situation audit, an assessment of an organization’s performance in absolute terms or in comparison to a competing or parallel organization.
Game Theory
In recent years public administrators have begun to embrace game theory as a key component of strategic management. Game theory has been a major tool for schol- ars for many decades, with applications in fields such as international relations, business management, and economics. At its core, game theory deals with coop- eration and conflict in the context of decision making. It assumes that individuals who behave rationally will seek to maximize their benefits whenever they make a decision. Thus if one can identify the goals of the other players in the game, he or she can strategically adapt his or her decisions.
For managers in public agencies and organizations, this approach to decision making may have many applications. One area where a public manager may apply game theory is in budget negotiations with elected officials. By recognizing that the primary goal of most politicians is to be reelected to political office, a public admin- istrator can craft budget requests in a way that puts pressure on the elected officials. For example, through framing of a budget request in an “all-or-nothing” form, a manager may place the members of Congress in a difficult situation. If Congress supports full funding of a program, government resources will be strained. How- ever, no funding of a program (i.e., Amtrak rail service) may cause anger among constituents depending on a service. By making the decision an all-or-nothing proposition, the public manager is structuring the “game” between him- or herself and Congress in a manner that seeks to optimize the probability of full funding.
STRATEGIC MANAGEMENT TOOLS
The level of analysis is one of the classic issues in the study of politics because it poses an eternal question: should the focus of political analysis be the individual political actor, a local government, a national government, or the international political system as a whole? The forces at play and the linkages that are made within and between these levels make single-level analysis problematic at best. Thus there is no point in undertaking a political analysis of a political actor in isolation—because that actor is never in isolation. He or she is always a citizen of a state and/or a member of other large groups. Thus there are always a large number
371Strategic Management Tools
of linkages and interactions among the various levels of government and other social groupings.
Strategy presents a similar level-of-analysis problem. It is inherently hierarchical (see Figure 9.5). The most general notions come down from the top to be imple- mented at various stages leading to the bottom. When the president orders “justice” for America’s enemies, that order travels down the chain of command until a soldier pulls the trigger on his rifle and administers a full measure of such justice to an actual per- son. Strategy sets into action the ways and means by which people are ultimately shot dead, or given food stamps, or provided health care. Whether the end result is bullets or bedpans, the strategy involved will travel a similar route toward implementation— from the grand strategic (the national policymaking) level to the strategic (the highest organizational level) to the operational (the planning or administrative) level to the tactical (the service delivery) level. Each level accepts strategy from above but uses dis- cretion to create substrategies or level-specific strategies that facilitate implementation. At the same time, each level develops measurement and reporting techniques to assess how well the overall strategy is being implemented. Three of these tools for measuring effectiveness are best practices, benchmarking, and management scorecards.
Best Practices
This may be the oldest idea in war and management—look at what your competi- tors are doing and imitate their successful innovations. Long before the age of pat- ents and copyrights, organizations—whether military or industrial—would simply steal, borrow, or copy the best ideas of others. Remember that the whole thrust of the scientific management movement was to find the “one best way.” But “best” is inherently temporary. A successful innovation by reformers is followed by a period of increased effectiveness—at least until competing organizations adopt similar reforms. But over time advancing technologies and changing environments allow the innovation to deteriorate relative to other arrangements, first to become less competent and then to become incompetent. Thus installing and maintaining best practices is quite literally a matter of organizational life or death.
Benchmarking
This critical question must always be asked: is this organization efficient by indus- try standards? For public sector managers, the challenge to maximize operational efficiency is critical because public organizations may lose their credibility or even their right to exist if their managers cannot operate them in such a way as to demonstrate acceptable standards of competence. In past years, managers could sometimes obfuscate discussion of the efficiency of public sector organizations by references to unique characteristics, measurement difficulties, and the complexity of public sector life. While there is a measure of truth in all of these as reasons for why assessing the efficiency of public sector organizations is difficult, it is also true that we now have, through benchmarking and studies of comparative performance, a good deal more data to consider—especially in those parts of the public sector where measurements and comparisons are easiest—that is, where “hard,” measur- able outputs exist.
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Despite the problems and subtleties of measuring performance and produc- tivity in the public sector, an objective baseline is indispensable if any manager or government wishes to bring about better performance. Almost as indispensable is a systematic way of comparing how you are doing with the efforts of others working in the same sphere. This latter problem is not unique to public sector manage- ment; it is a problem all managers face. This technique of comparison, known as benchmarking, was developed in the private sector just for this purpose. It has now spread around the world and is widely used in the public sector.
Management Scorecards
In essence, a management scorecard is a tally sheet, just as are scorecards in golf or bowling. However, what is being tallied is the performance not of individual players, but of the individual units or functions of a large organization. This allows the managers at the top to get an overview of how well their tactical managers are playing the “game.” The whole point of the scorecard approach is to allow executives to instantly scan, by looking at the scores, the status of their organization units.
In the early 1990s “balanced scorecards” first became fashionable in the pri- vate sector as a means to evaluate a company’s performances from several perspec- tives simultaneously. Traditionally the emphasis had been on financial performance (the bottom line), but a balanced scorecard complemented financial performance with data on customer satisfaction, internal processes, and ability to learn—among other measures. While report cards of this nature are as old as school, the score- card approach suddenly became “hot” in government once it was introduced in 2002 as part of the president’s management agenda. All of the major federal agen- cies (more than 50 in all) change to were graded on their progress in these five government-wide management initiatives:
1. Strategic management of human capital. 2. Competitive sourcing.
Increasing generality
Increasing specificity
Big-idea stage
How-to-do-it stage
Detail-planning stage
Implementation stage
Grand strategic level
Strategic level
Operational level
Tactical level
FIGURE 9.5
The hierarchy of strategy
373Strategic Management Tools
3. Improving financial performance. 4. Expanded electronic government. 5. Budget and performance integration.
The grades were color coded so each department is rated red, yellow, or green for the level of success in implementing each of the preceding initiatives. The first scorecard, the 2001 Baseline Evaluation, gave out mostly red circles. As the Office of Management and Budget explained, “The initial scorecard shows a lot of poor scores, reflecting the state of government this Administration inherited.” Every six months, acting for the president, OMB issued new grades. At the end of March 2007 the OMB report showed that only the Departments of Labor and State met the standards for all five management initiatives. Meanwhile, the Departments of Defense (DoD) and Veterans Affairs (VA) ranked at the low end of federal perfor- mance, with the DoD possessing unsatisfactory scores in three areas and the VA failing to meet standards in four of five rating categories. Given the problems in Iraq and at VA facilities throughout the nation during that time period, these poor ratings do not seem very surprising.
With the arrival of Barack Obama in the White House in 2009, management scorecards took on a different format. A priority interest for the Obama administra- tion was sustainability and renewable energy development. The president had the OMB enact a scorecard system that rated federal agencies in several sustainability areas, including: energy intensity; water intensity; fleet petroleum use; greenhouse gas pollution; green building practices; and renewable energy use. The scorecard employs a simple evaluation system: green for success, yellow for mixed results, and red for unsatisfactory.
So what’s the point of these exercises in score keeping that have been employed by the Bush and Obama administrations? It is mainly a way of artificially creat- ing the competitive forces inherent in the private sector. To a large degree this is management by shame—no organization wants to be shamed by its rankings. Not surprisingly, the scores have been going up. OMB has also introduced directional arrows within the circles. Thus a yellow circle with an upward-pointing arrow is like a B-plus. While the red, yellow, and green circles may seem silly on the surface, underneath they facilitate three key objectives:
1. To focus attention on what top management considers its key priorities. 2. To motivate organizational units to improve. 3. To provide timely assessments of progress.
It would be hard to argue against the any administration’s government-wide initiatives. They are the part of the President’s managment agenda. But will they be achieved with a management scorecard system that focus on improving a grade or just getting to passing. Or will managers, like students, work mainly for the grade at the expense of real learning or real reform? Only two things were certain: (1) nothing would be ‘reinvented’, as that was the goal of the previous admin- istration, and (2) the (Obama) administration will have a new set of strategic
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management goals and techniques. Early in his tenure as the nation’s chief execu- tive Obama indeed signaled that he would have a focus on performance manage- ment that would include a number of specific initiatives:
1. The creation of a new Chief Performance Officer who reports directly to the president.
2. Reconfiguration of the OMB’s Program Assessment Review Tool (PART) to make it more accessible to the public which in fact was realigned as part of a new management agenda announced at the start of his second term.
3. Implementation of consequences for success or failure in meeting objectives.
GOVERNMENT REGULATION FOR HEALTH,
SAFETY, AND ECONOMIC EQUITY
Among the most important roles of government is its ability to regulate society in order to preserve and enhance the public welfare. As the protector of the pub- lic interest, public administrators maintain substantial power to set and enforce rules that govern many aspects of life within America. To bring this point home, just think about the way government regulation affects each and every day of your life.
Consider the simple act of going to McDonald’s to buy a hamburger or a salad. You leave your house or apartment, which has been built according to local building codes—regulation. You get into your car, which has many safety features required by the federal government—regulation. You drive to an intersection and stop at a red light—regulation. Once at McDonald’s, you notice a sticker on the door from the local public health agency indicating that the establishment has been inspected and found free of insect and rodent infestation—regulation. On the wall is a framed certificate from the local municipality indicating that the property is licensed to operate as a business—regulation. Then you give your order to a per- son whose minimum wages and maximum working hours are set by legislation— regulation—and whose supervisor is required by guidelines issued by the Equal Employment Opportunity Commission to maintain a workplace free of sexual harassment—regulation—and whose wages are reduced by mandatory deductions for income tax and Social Security—regulation. If after your meal you feel the need to visit one of the restrooms, you will find one oversized toilet stall designed for the physically handicapped—regulation.
As the above scenario demonstrates, regulation is everywhere in your life, whether you notice it or not. This should not come as a surprise. To facilitate the strategic management of government objectives (e.g., clean air, safe roads), regu- lation stands as one of the most potent tools available to public administrators and as a cornerstone of contemporary public policy in the United States. But when regulation fails, as it did when Minnesota’s Interstate 35 Bridge collapsed in 2007, the public quickly takes notice and demands answers for why regulations did not perform. Perhaps it is most useful to think of regulation in the same way you think about a baseball umpire. During a game you rarely notice the ump until a call is
375Government Regulation for Health, Safety, and Economic Equity
blown and your team pays the price on the field. Similarly, we rarely think of regu- lations until they fail to do their job.
While we tend to see regulation in its myriad details from restaurant inspection to zoning enforcement, it is always part of a larger strategic effort such as improv- ing public health. Figure 9.7 illustrates how the various aspects of regulation reflect the strategic management process discussed previously in this chapter. Note that a regulation does not exist for its own sake; it is always part of a larger strategic goal.
In the remainder of this chapter we explore some of the key players, processes, and tools that form regulatory efforts at the federal, state, and local levels. This necessarily entails an examination of the strategies and weaknesses of varied regu- latory approaches employed by the different levels of government.
Independent Regulatory Agencies
Modern-day regulation is so pervasive and so commonplace that we see it every day and accept it without thinking. As a general rule of thumb, the more crowded and economically developed a place is, the more regulations it has. Society needs rules so that people don’t inadvertently bump into each other’s cars, live in houses that fall down because they are structurally unsound, or get food poisoning from con- taminated meat. Such catastrophes were common before government regulations— at least in the developed world—made them relatively rare.
Consider that in December 2003 both central California and southern Iran had earthquakes of similar magnitude. Yet, while just two people died in Califor- nia, tens of thousands died in Iran. Erik Kirschbaum quotes Iranian officials as reporting that “poor design, primitive materials, and widely ignored building codes were prime causes of the high death rate.” Government regulations in California requiring architectural approval, strict adherence to building codes, and building inspections saved lives.
Regulation has its origin in legislation. But since legislation can never be totally comprehensive on any subject, rules are typically needed to address the details that have not been specified in the written law. Thus rulemaking authority is necessarily exercised by administrative agencies; it is a power that has the full force of law. Agencies begin with some form of legislative mandate and trans- late their interpretation of that mandate into policy decisions, specifications of regulations, and statements of penalties and enforcement provisions. The exact process to be followed in formulating regulations is only briefly described in the federal Administrative Procedure Act (APA). The APA does distinguish between rulemaking that requires a hearing and rulemaking that requires only notice and the opportunity for public comment. Whether the formal or informal procedure is to be used is determined by the enabling statute: the Supreme Court’s decision in United States v. Florida East Coast Railway (1973) held that formal rulemaking need only be followed when the enabling statute expressly requires an agency hearing prior to rule formulation. The APA also requires that rules be published 30 days before their effective date and that agencies afford any interested party the right to petition for issuance, amendment, or repeal of a rule. In effect, while the APA establishes a process of notice and time for comment, it accords administra- tive rule makers the same prerogatives as legislatures in enacting statutes. There is,
376 Strategic Management and Government RegulationC H A P T E R 9
of course, the additional requirement that the rule enacted be consistent with the enabling statute directing the rulemaking.
All new federal rules must be published in the Federal Register, the daily pub- lication (begun in 1935) that is the medium for making available to the public the forthcoming rules and regulations of federal agencies—as well as other legal documents of the executive branch, such as presidential proclamations and exec- utive orders. Of course, any controversial proposed rules will quickly find their way into the mainstream press, especially since the Register began issuing online publications in 1992. All the states have similar rulemaking procedures involving the publication of proposed rules, mechanisms for receiving comments, and final action.
An agency creates proposed rules to implement the initial intent of the legislation or in response to a new situation (such as a technology not
anticipated by the earlier rules).
A legislature passes a law stating objectives to be met and authorizing an agency to act.
Advance notice of proposed rulemaking or proposed rule is published (in the Federal
Register if a federal agency).
After consideration of comments, the final rule is adopted and published.
Comments on the proposed rule are received by the agency.
The rule becomes part of the legal code of the jurisdiction; for example, all federal rules become
part of the Code of Federal Regulations. (www.ecfr.gov)
FIGURE 9.6
The rulemaking process
377Government Regulation for Health, Safety, and Economic Equity
The Rulemaking Process
A large share of regulatory work in the United States is completed by the many agencies that form the federal bureaucracy. While all federal level agencies play some role in regulating the nation, there have also been numerous governmen- tal organizations established primarily for the purpose of regulating many aspects of American society. These organizations are categorized as independent regula- tory commissions, and include prominent government entities such as the Federal Communication Commission (FCC) and the Securities and Exchange Commission (SEC). Independent regulatory commissions are headed by several commissioners, directors, or governors who are also appointed by the president and confirmed by the Senate. But unlike administrators of independent executive agencies, they serve for fixed terms and cannot be removed at the pleasure of the president. When Franklin Roosevelt sought to dismiss commissioners of the Federal Trade Commis- sion (FTC) for disagreements over policy, the Supreme Court ruled in Humphrey’s Executor v. United States (1935) that the FTC “occupies no place in the executive department.” Thus all such commissioners can serve to the end of their fixed terms unless impeached by Congress. This independence from direct executive control can serve as a source of considerable strength for individuals serving on regulatory
BOX 9.1 President Roosevelt smells the meat scandal
Contemporary cartoon from the Utica, New York, Saturday Globe , of President Theodore Roosevelt taking hold of the investigating muckrake while holding his nose. The original caption read, “A nauseating job, but it must be done.” The stink of the meat scandal originated with the muckraking novel, The Jungle (1906), by Upton Sinclair. The book exposed the meatpacking industry’s tendency to put rotten, putrefying meat, along with rats who had died from poisoning, into the sausage that was sold to the public. For flavoring, large globs of rat dung, filthy water and the occasional human finger, sometimes a whole arm, were added to the mix. This exposé caused such a sensation that within months the national government was forced into passing the Pure Food and Drug Act of 1906 that initiated federal government inspection of America’s food. President Roosevelt can be said to be holding his nose for two reasons: (1) to cope with the stench of the foul meat and (2) to express his disapproval of the muckrakers. After all, he gave them that name in the first place in an effort to discourage their investigations. How ironic that circumstances then forced him to start raking with them!
Source: Corbis PG 15943
378 Strategic Management and Government RegulationC H A P T E R 9
boards and commissions. Nowhere is this power more evident than with the Fed- eral Reserve Board and its panel of governors. The “Fed,” as it’s commonly known, has the authority to regulate monetary policy in the United States, and therefore can directly impact the performance of the nation’s economy. Not surprisingly, the chair of the Fed’s Board of Governors, currently held by Janet Yellin, is generally considered one of the nation’s most powerful government officials.
Note that many regulatory functions are also performed by traditional cabinet departments. For example, the Food and Drug Administration (FDA) is located within the Department of Health and Human Services, and regulates such things as the approval of new pharmaceutical products. Once again the public rarely thinks
Grand Strategy
Strategic Level
Operational Level
Tactical Level
(Wholesale)
Tactical Level
(Retail)
Safe food for
consumers.
Laws requiring food
providers to maintain
minimal standards of
safety.
The creation of agencies
to inspect food from
farms, processing plants,
and retail outlets.
Government inspectors
seek to prevent bad beef,
fading fish, and foul fowl
from entering the
distribution chain.
Government inspectors
can close food stores
and restaurants that fail
to meet minimal
standards of cleanliness.
Cockroaches beware!
FIGURE 9.7
The strategic approach to government regulation of food
379State Government Regulation
about the work of the FDA until it approves a new drug that turns out to cause more health problems than it cures. The well-publicized dangers from major drugs such as Vioxx and Celebrex exposed significant problems within the FDA’s regu- latory system and increased public unease about the safety of the pharmaceuticals they rely on to make their lives better.
STATE GOVERNMENT REGULATION
Although public attention is often focused upward to the federal level, state govern- ments should not be ignored in terms of their regulatory functions. With the Tenth Amendment reserving powers to the states, there are many policy areas where state governments play preeminent roles. From transportation to education, the states have primary responsibility for many areas of regulatory policy, including many of the standards that govern the provision of services to the public from professionals such as doctors, dentists, teachers, and accountants.
Occupational Licensing
Do you trust your doctor? How about your dentist or pharmacist? Because of your personal experiences over years of contact with these individuals, you probably have built up a relationship. But who certifies the credibility of these professionals for the
There was never the least attention paid to what was cut up for sausage. . . . There would be meat that had tumbled out on the floor, in the dirt and sawdust, where the workers had tramped and spit uncounted billions of consumption germs. There would be meat stored in great piles in rooms; and the water from leaky roofs would drip over it, and thousands of rats would race about on it. It was too dark in these storage places to see well, but a man could run his hand over these piles of meat and sweep off handfuls of the dried dung of rats. These rats were nuisances, and the packers would put poisoned bread out for them, they would die, and then rats, bread, and meat would go into the hoppers together. This is no fairy story and no joke; the meat would be shoveled into carts and the man who did the shoveling would not trouble to lift out a rat even when he saw one—there were things that went into the sausage in comparison with which a poisoned rat was a tidbit. There was no place for the men to wash their hands before they ate their dinner, and so they made a practice of washing them in the water that was to be ladled into the sausage.
There were the butt-ends of smoked meat, and the scraps of corned beef, and all the odds and ends of the waste of the plants, that would be dumped into old barrels in the cellar and left there. Under the system of rigid economy which the packers enforced, there were some jobs that it only paid to do once in a long time, and among these was the cleaning out of the waste barrels. Every spring they did it; and in the barrels would be dirt and rust and old nails and stale water— and cart load after cart load of it would be taken up and dumped into the hoppers with fresh meat, and sent out to the public’s breakfast.
Source: Sinclair (1906) The Jungle
Upton Sinclair’s 1906 novel The Jungle caused such a sensation that President Theodore Roosevelt authorized an investigation of the meatpackers. This led to the Pure Food and Drug Act of 1906, which provided for federal inspection.
BOX 9.2 Why Regulation Came to the Meatpacking Industry
380 Strategic Management and Government RegulationC H A P T E R 9
public at large? In most cases it’s the state government that provides the licensing and regulations that govern most professionals. Remember that a certified public accoun- tant (CPA) is “certified” by a state only after the accountant has demonstrated spec- ified educational and experience requirements and then passed a state examination.
As with the US Constitution, almost every state constitution makes some explicit mention of the government’s role in protecting the public welfare. While you may immediately think that protecting the public welfare involves police offi- cers rounding up criminals, it also includes measures that protect the public from the very people that are hired to help them. Through their regulatory powers, states set the standards under which individuals can be granted licenses to practice select professions—from big-rig truck drivers to brain surgeons.
And though you may not be surprised to discover that states grant licenses to doctors, nurses, and accountants, there are many more occupations that are also overseen by the states. For example, such professions as athletic trainer, interior designer, and massage therapist may not be the type of careers you would expect to find on a list of regulated professions, but in many states you will find just such a rich array of occupations under government watch.
Regulation of professionals does not end at their licensing; it continues through- out their careers. To protect the public, state regulators establish the conditions under which services can be rendered. From requiring massage therapists to keep records of transactions to mandating that pharmacists transfer prescriptions at a customer’s request, states set the operating procedures for many professions. When those providing services noticeably fail to abide by the rules of business, they come under the regulatory wrath of administrative agencies. Now you may be wondering what kind of wrath a government agency can bring down on a massage therapist for failure to abide by the rules. It can be a revoked or suspended license, a man- datory continuing education course, or a monetary fine. And before the massage therapist lays hands on another patient, the controlling hand of public administra- tion must give the okay for the therapist to continue with his or her ministrations.
LOCAL GOVERNMENT REGULATION
As we noted in Chapter 4, local governments play a major role in providing many of the most obvious forms of government services. From plowing roads after a snowstorm to teaching children calculus, local governments deliver key public ser- vices on a daily basis. But not only do county and municipal governments provide services, they also regulate many aspects of the lives of their citizens. On an ordi- nary day local governments regulate the size of the pool in your backyard, the food that you eat at the Chinese restaurant down the street, and the speed of your car as you drive back from work. While there are hundreds of different ways that local government regulates your life, we have selected three areas of particular interest to examine more deeply in the remainder of the section.
Zoning
One of the most prized rights of an American citizen is his or her ability to own and develop land. Since the first land claims on the continent nearly five centuries
381Local Government Regulation
ago, individuals have taken ownership of land and shaped their property in ways that they desire. While prized, the right to own and develop land is one of the most regulated aspects of life in the United States. Over the last century, states and municipalities have increasingly used their powers to limit the way private land is used. In particular, through the process of zoning, governments tell landowners what they can use their land for, when they are permitted to build structures, and what type of buildings can occupy a piece of property. Given the importance of land regulation, it’s not surprising that it has been one of the most controversial aspects of government regulation.
When land was plentiful and population density was low, the need to regu- late land use was not a major priority for policymakers. But as the nation grew and Americans were brought closer together, the need for government regulation of land use became clear. Imagine buying a beautiful house on a pretty piece of land and settling your family down to enjoy the “American Dream,” only to discover that the owner of an adjacent property has decided to use his land to house a meat packing plant. Or picture your beautiful view of a sunrise over the mountains blocked by a 20-story apartment building that was built right next to the century-old farmhouse that you inherited from your parents. Such scenar- ios became more and more prominent by the end of the nineteenth century and pushed governments deep into the realm of land regulation and zoning beginning in the early twentieth century.
Not surprisingly, the first major zoning ordinance was passed in the nation’s most populous and densely packed metropolis—New York City. As the city grew both outward and upward, conflicts between landowners became more and more common. Finally, the construction of the mammoth (for its day) Equitable Build- ing on Broadway triggered city action on the matter. The Equitable Building cov- ered every square inch of the property that it sat on and rose 36 stories into the sky. Its height and placement blocked windows of adjacent buildings and pre- vented sunlight from ever reaching many nearby properties. In reaction, in 1916 the city government developed a set of regulations that restricted the types of con- struction that can take place in New York, limiting such aspects of development as building size and placement on lots. And as is often the case, what starts in New York quickly spreads to all reaches of the nation. By the 1920s the use of zoning was widespread throughout the United States, with the number and specificity of land-use regulations increasing annually. However, the growth of zoning was by no means universally accepted or embraced. If there is one thing about Americans that is universally accepted, it is that they do not want to be told what they can and can’t do with their lives or property. Thus the expanding role of government land regulation was challenged in many ways, which included the introduction of legal suits.
In the most important zoning case in history, the US Supreme Court was asked to decide if zoning laws conflicted with the individual protections of the US Con- stitution. When Euclid, Ohio, introduced a zoning plan that segregated land uses into specialized districts (e.g., residential, commercial), a local developer challenged the law on the grounds it violated the Fourteenth Amendment’s protection of due process and equal protection under the law. In the case of Village of Euclid, Ohio vs Ambler Reality Co. (1926) the Supreme Court upheld the legality of zoning, with the
Zoning
The process by which local government can designate the types of structures and activities for a particular area. Zoning began in the 1920s to protect neighborhoods from the encroachments of business and industry and to preserve their economic and social integrity. It involves a highly complex legal process, which is often impacted by local politics.
382 Strategic Management and Government RegulationC H A P T E R 9
majority opinion holding that “regulations, the wisdom, necessity and validity of which are so apparent that they are now uniformly sustained, under the complex conditions of the day.” In essence the Ambler decision gave the Court’s stamp of approval to land regulation, recognizing that the realities of the modern world require such government intervention. To be sure there have been many cases since Ambler that have helped define what can and can’t be regulated, but Euclidian zoning has become an established part of American life.
Building Codes
A man’s home may be his castle, but the castle better meet code if he wants to live in it. Just like zoning can tell us what we can and can’t do with our property, building codes establish what the inside of our homes and buildings must look like. As the realities of an increasingly congested society pushed municipalities into zoning, the development of taller and bigger buildings led to the creation of building codes. A building code or control is a set of regulations that establish the minimum accepted level of safety for a constructed object. The use of building codes has a long history, dating back as far as 1760 bc and the Code of Hammurabi. Under Hammurabi’s Code, the following rules were established:
If a builder builds a house for someone, and does not construct it properly, and the house which he built falls in and kills its owner, then that builder shall be put to death.
If it ruins goods, he shall make compensation for all that has been ruined, and in as much as he did not construct properly this house which he built and it fell, he shall re-erect the house from his own means.
If a builder built a house for someone—even though he has not yet completed it: if then the walls seem toppling, the builder must make the walls solid from his own means.
While good enough for Hammurabi, building codes were not quickly embraced in the United States. Even though both Washington and Jefferson encouraged the adoption of building codes to protect health and property, there were few codified standards for buildings until the early twentieth century. A number of noteworthy disasters helped push municipalities to adopt building standards. Most notably, the 1911 Triangle Shirtwaist Factory fire in New York City called attention to danger- ous building conditions in the United States. In this horrific fire, 146 workers died when a fire trapped them on the ninth floor, forcing many women to make fatal jumps to the city streets below. The outrage in the aftermath of the Triangle fire led to increased efforts to establish better building safety standards. In 1915, code enforcement officials from throughout the country met to develop standard safety codes for buildings. Out of these meetings came the formation of the Building Officials and Code Administrators (BOCA) building regulations, which became the standard for many municipalities throughout North America. Through the years the formulation of standards has continued to increase, with the International Code Council now serving as the primary governing body for building regulations in the United States and beyond. In addition to requiring basic safety features such
Euclidian zoning
A zoning policy that keeps apartments and businesses out of single-home residential areas. This kind of zoning was adopted by Euclid, Ohio, and the subject of the Supreme Court case of Village of Euclid, Ohio v. Ambler Realty Company, 272 US 365 (1926), which asserted that zoning was a valid exercise of local government powers.
Code of
Hammurabi
The Code of Hammurabi was created in approximately 1760 BC in Mesopotamia and is one of the earliest sets of laws to govern a society. The code contains an enumeration of crimes and their various punishments as well as settlements for common disputes and guidelines for citizens’ conduct.
International Code
Council
An association dedicated to building safety and fi re prevention that develops the codes used to construct residential and commercial buildings, including homes and schools. Most US cities, counties, and states that adopt codes choose the International Codes developed by the International Code Council.
383Local Government Regulation
as fire escapes and sprinkler systems, building codes now include standards for energy efficiency and accessibility for individuals with special needs.
Public Health
Perhaps no area of government regulation is more indicative of the age that we live in than public health policies. In a world where threats to our health are broadcast into our homes on a daily basis, the issue of public health inhabits a prominent place in American society. From the spread of the avian flu to hamburgers laced with E. coli, there are no shortages of public health concerns facing the nation. Sometimes the need for government intervention in public health is obvious to everyone, as when roach-invested restaurants are shut down or in instances of pre- venting contaminated food products from reaching consumers. But in other areas the role of government regulation is less clear and far more controversial. Let’s look at an example to clarify the point.
The issue of obesity has become one of the greatest threats to the health of Americans over the past quarter century. According to the Centers for Disease Control (CDC), about 33 percent of individuals living in the United States are clinically obese. This level of obesity is more than double the mark of 13 percent reached in 1960. The high prevalence of obesity has an enormous impact on many aspects of life in the United States. The CDC estimates that obesity is responsible for more than 112,000 excess deaths per year in the United States and nearly $100 billion a year in additional health care expenses. While it’s clear that obesity is a major threat to the nation’s health, regulating the problem is quite difficult. With other health risks—such as tobacco and alcohol—the government has regulated the products through means such as restricted access and sin taxes. However, such regulatory tools are not easily applied to the root causes of obesity—overeating and lethargic lifestyles. Could you imagine an age requirement for buying a Whopper at Burger King or a tax of one dollar on every sale of McDonald’s French fries? Such options are politically infeasible, forcing public health officials to be more creative in their approaches to the problem.
One approach to regulating obesity is to require restaurants to post nutrition information next to prices on menus. For example, in July of 2007 the King County, Washington, board of health created a regulation that requires any restaurant with ten or more locations to put nutritional information next to the menu item’s name and price in the same font and size as the price. And while it may be politically dif- ficult to ban the sale of French fries and deep-dish pizza in restaurants, city govern- ments have begun to regulate the unhealthiest items that are used in fast foods. In cities such as New York and Seattle, local governments have banned the use of trans fats at restaurants in order to limit consumption of one of the greatest contributors to obesity and heart problems. These bans have drawn the ire of restaurants and some citizens who feel such regulations are an assault on personal freedoms and choice. New York Mayor Michael Bloomberg countered criticisms by arguing that “Nobody wants to take away your French fries and hamburgers, but if you can make them with something that is less damaging to your health, we should do that.” Not everyone appreciates the mayor’s attitude; many believe that it is an example of the “nanny state” getting too much in our faces—or, more specifically, in our mouths.
Sin taxes
A tax specifi cally levied on certain behaviors that are deemed to be contrary to the societal good. Primary examples of sin taxes include levies on smoking, alcohol consumption, and gambling.
384 Strategic Management and Government RegulationC H A P T E R 9
A CASE STUDY
Opportunity Lost: The Story of Bernie Madoff and the Securities and Exchange Commission
Independent regulatory agencies may not be in the everyday thoughts of most Americans, but when such agencies fail to do their job, they can quickly draw the ire of an angry public. Such was the scenario in 2008 when the nation was introduced to Bernie Madoff and his elaborate multibillion-dollar scheme to defraud thousands of investors.
As is always the case, Madoff’s fall was preceded by his ascendancy. For decades, he was considered a star in the investment world. He regularly provided his clients with returns on their investments that surpassed market averages, and he was known throughout New York City as a philanthropist and community leader. What wasn’t well known was that Madoff was conducting one of the largest Ponzi schemes in the history of the United States. In other words, Madoff was using money from new investors to pay old investors, a process that gives the appearance of providing high rates of return when, in fact, the schemer isn’t investing any money at all. Like any Ponzi scheme, Madoff’s scam was eventually exposed when it became impossible for him to pay all the investors he owed. However, before his scheme was found out, Madoff had defrauded investors of an estimated $65 billion. Among those defrauded by Madoff were many charities, colleges, and nonprofit organizations—many of which lost their entire investment portfolios.
At this point, you may be asking, “Wasn’t anybody from government watching Madoff as he perpetrated this elaborate scheme?” The answer, unfortunately, is no. The investment activities of Madoff were under the regulatory jurisdiction of the Securities and Exchange Commission (SEC). The SEC is charged with ensuring that investments are legitimate through enforcing the regulations that govern markets in the United States. In essence, the SEC is designed to make sure that fund managers such as Madoff are playing by the rules of the game. The Madoff case, therefore, exposed the many weaknesses in how the SEC oversees and manages the investment world. These weaknesses became all too apparent during 2009 congressional hearings that examined the conditions that allowed Madoff to perpetrate his crime.
During the February 2009 hearings before the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, witnesses brought forth strong evidence that the SEC was tipped off about Madoff’s activities on numerous occasions, but for various reasons failed to act on the information. Harry Markopolis, an independent financial fraud investigator, told the subcommittee that he “gift wrapped and delivered the largest Ponzi scheme in history to them and somehow they couldn’t be bothered to conduct a thorough and proper investigation because they were too busy on matters of higher priority.” Indeed, Markopolis had sent
385Local Government Regulation
detailed letters to the SEC listing numerous red flags in Madoff’s actions and establishing a route by which the agency could completely expose Madoff’s scam. So, why didn’t the SEC act on this information?
The answer is multifaceted and demonstrates the importance of organizational design and personnel. First, the SEC’s relationship with the firms that it is supposed to regulate has proven problematic. During the subcommittee hearings, claims were made that the SEC is too “chummy” with prominent Wall Street investment houses and that the agency was reluctant to take on the well-known players in the financial world. This phenomenon is commonly referred to as agency capture. Under agency capture, regulators are hesitant to challenge some of the “celebrity” names in the financial world. Individuals such as Bernie Madoff, with their incredible wealth and social prominence, are imposing figures for agency officials who may have to bring charges against these “stars.”
Consider, for example, Meghan Cheung, the branch chief of the SEC’s enforcement division in New York City. Cheung was the SEC official who signed the commission’s 2006 investigation that cleared Madoff to continue doing business. In 2006, she was a 34-year-old public administrator who had to decide whether she wanted to challenge one of the most well-known and powerful names in New York’s financial community. Despite the compelling evidence provided by Markopolis, Cheung never brought charges against Madoff and effectively allowed him to continue his Ponzi scheme. While Cheung claimed that Madoff’s stature did not affect her decision in the case, her comments on the matter suggest this may not be the case. In 2009, she asked a New York Post reporter who was interviewing her, “Why are you taking a mid-level staff person and making me responsible for the failure of the American economy?” Cheung’s description of herself as a mere “mid-level staff person” demonstrates some of the disadvantages that the SEC faces when it decides whether or not to take on investment “giants” such as Madoff. In Cheung’s case, it’s reasonable to believe that a mid-level bureaucrat didn’t relish going head to head with one of the biggest players in the game.
In addition to issues of agency capture, the SEC’s failure to stop Madoff appears to be the product of interagency rivalries. During Markopolis’s testimony to Congress regarding the Madoff scandal, he noted that when he first approached the SEC’s Boston office with his allegations against Madoff, he received a warm reception from the Bureau Chief, Edward Manion. However, the SEC’s New York City office, which supervises the Boston branch, made the decision to block further investigation into the matter. Why didn’t the New York branch take the lead from Boston and vigorously pursue Madoff? One answer to this question is that the Boston and New York branches don’t like each other. According to Markopolis, Manion felt the relationship between the New York and Boston regional offices “was about as warm and friendly as the Yankees-Red Sox rivalry and that New York does not like to receive tips from Boston.”
(continued)
386 Strategic Management and Government RegulationC H A P T E R 9
A CASE STUDY Continued
Finally, the failure of the SEC to stop Madoff raised questions about the agency’s personnel. It’s often said that you need a fox to catch a fox: in other words, if you’re trying to discover fraud on Wall Street, you need the assistance of individuals who’ve spent many years in the investment game. Seasoned Wall Street veterans should be able to recognize scandals because they know how things work. Unfortunately, the SEC hasn’t brought experienced Wall Street players into its ranks. Instead, the SEC has relied more on a group of young attorneys and lifelong government employees to do its business. This situation becomes even worse when some of its best employees are hired away by the very investment houses the agency is monitoring.
Under most circumstances, the work of the SEC may not interest the average American. But after Bernie Madoff stole millions from many average citizens, most citizens were outraged by the agency’s failure to do its job. The outrage brought increased public pressure on Congress to make changes in the SEC to prevent this type of crime from occurring again. If such changes aren’t made, Bernie Madoff may someday have a rival for the unofficial title as America’s most notorious con artist.
On a positive note, however, the American legal system has forced some changes in Bernie Madoff’s lifestyle. He’s been ordered to repay billions, yes billions—to investors and to spend 150 years in prison. He will probably not be able to repay the billions he owes; but he is currently spending the rest of his life in prison.
For Discussion: Why did the SEC respond so slowly to tips about Bernie Madoff’s Ponzi scheme? Will the failure to stop Bernie Madoff lead to major changes in the way SEC officials do their job?
SUMMARY
Strategy is the employment of resources to gain an objective. Tactics are the use of a subset of these resources to gain a part of the overall objective. Strategic man- agement is the application of this ancient art to contemporary business and public administration. Strategic planning should not be equated with strategic manage- ment because strategic management often occurs without formal strategic plan- ning. Strategic planning, however, is meaningless without strategic management.
All strategic management efforts entail all the following:
1. The identification of objectives to be achieved. 2. The adoption of a time frame. 3. An assessment of the organization’s capabilities. 4. An assessment of the organization’s environment. 5. The selection of a strategy from among alternatives.
387Key Concepts
Overall, strategic management approaches in the public sector can more read- ily be adopted (1) the further a public organization is from the heart of its polit- ical leadership, (2) the more the organization undertaking strategic management is self-contained and autonomous, (3) the smaller it is (providing that it has the minimum critical mass), and (4) the more its results are consistently measurable.
Strategic management has become an indispensable perspective for many pub- lic sector managers. Such perspectives do not displace traditional management con- cerns but rather add a new dimension. And to facilitate the strategic management of government objectives (e.g., clean air, safe roads), regulation stands as one of the most potent tools available to public administrators, and as a cornerstone of contemporary public policy in the United States. Regulation allows public admin- istrators the ability to take broad legislative directives and create specific rules that are designed to deliver desirable societal conditions.
REVIEW QUESTIONS
1. What are the differences between strategy and tactics for an overall national govern- ment or for an individual government agency?
2. Why must strategic planning be fully integrated with strategic management? 3. Is management by objectives more of a planning technique or more of a management
control technique, or is it both? 4. Select any major government agency and explain how a SWOT analysis of it would
usefully contribute to its strategic planning processes. 5. What are the key limitations that public administrators face when developing
regulations?
KEY CONCEPTS
Drucker, Peter (1909–2005) The preeminent philosopher of management during the post- World War II era. Objective A short-term goal; something that must be achieved on the way to a larger over- all achievement. Planning horizon The time frame during which the objectives of a strategic plan are to be achieved. Strategic management A philosophy of management that links strategic planning with day- to-day decision making. Strategic management seeks a fit between an organization’s external and internal environments. Strategic plan The formal document that presents the ways and means by which a strategic goal will be achieved. Strategic planning The set of processes used by an organization to assess the strategic situ- ation and develop strategy for the future. Strategy The overall conduct of a major enterprise to achieve long-term goals; the pattern to be found in a series of organizational decisions. SWOT analysis A review of an organization’s strengths, weaknesses, opportunities, and threats. This technique is widely used to examine the viability of strategic plans. Vision A view of an organization’s future. The purpose of strategic management is to make such a vision a reality. Vision statement The identification of objectives to be achieved in the future.
388 Strategic Management and Government RegulationC H A P T E R 9
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389Recommended Books
RECOMMENDED BOOKS
Bryson, John M. (2012) Strategic Planning for Public and Nonprofit Organizations, 4th ed. San Francisco: Jossey-Bass. A comprehensive guide to all aspects of strategic leadership, with an emphasis on planning, implementation, and strategy evaluation.
Crowley, Steven (2007) Regulation and Public Interests. Princeton, NJ: Princeton University Press. The book defends regulation in an era of deregulation through the use of both theory and examples.
Dixit, Avinash, and Barry Nalebuff (1993) Thinking Strategically. New York: W. W. Norton. An accessible introduction to game theoretical approaches to decision making.
Moore, Mark, H. (1995) Creating Public Value: Strategic Management in Government. Cambridge, MA: Harvard University Press. A call for public managers to go beyond being competent bureaucratic technicians; they must retool as strategic managers who “search for public value”—that is, great return on investment, better quality or quantities for each dollar spent.
