Business and Politics in Europe

The Effectiveness of Strategic Political Management: A Dynamic Capabilities Framework Author(s): Christine Oliver and Ingo Holzinger Source: The Academy of Management Review, Vol. 33, No. 2 (Apr., 2008), pp. 496-520 Published by: Academy of Management Stable URL: http://www.jstor.org/stable/20159410 Accessed: 16-09-2016 12:43 UTC

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? Academy of Management Review 2008, Vol. 33, No. 2, 496-520.

THE EFFECTIVENESS OF STRATEGIC POLITICAL MANAGEMENT: A DYNAMIC

CAPABILITIES FRAMEWORK

CHRISTINE OLIVER INGO HOLZINGER York University

We present a dynamic capabilities framework to explain the effective strategic man agement of the political environment. We argue that the effectiveness of political strategies will be a function of firms' dynamic political management capabilities and propose four firm-level strategies?proactive, defensive, anticipatory, and reactive? for managing the political environment effectively. We develop propositions to ex plain how particular dynamic capabilities are associated with the effectiveness of alternative political strategies and conclude with suggestions for future research into effective strategic political management.

Strategie political management refers to the set of strategic actions that firms plan and enact for the purpose of maximizing economic returns from the political environment. Strategic politi cal management enhances a firm's potential to improve its performance or competitive advan tage by providing "a means of competing not permitted by the pure market pursuit of objec tives" (Gale & Buchholz, 1987: 39). For this rea son, strategic political management may be an important component of overall firm strategy. The increasingly pervasive influence of gov

ernment on firm activities and outcomes (Len way & Rehbein, 1991), as well as rapidly grow ing business involvement in public policy

making (Blau & Harris, 1992; Keim & Bay singer, 1988), has led to a growing academic interest in the reasons firms engage in political activities (Bonardi, Hillman, & Keim, 2005; Getz, 1997; Hill

man & Keim, 1995; Shaffer, 1995). The literature on corporate political action has also led to a relatively comprehensive inventory of the vari ous political tactics, such as lobbying, advocacy advertising, constituency building, financial contributions, and coalition formation, that firms undertake to manage their political envi ronment (Bonardi et al., 2005; Hillman & Hitt, 1999; Hillman, Keim, & Schuler, 2004). However, in spite of growing interest in the reasons and

motivations that impel firms to formulate corpo

rate political actions, the organizational litera ture and strategic management literature have paid limited attention to strategic political man agement as a source of value creation. Firm relations to government have been viewed pri marily as a cost for or an institutional constraint on firms (DiMaggio & Powell, 1983; Pfeffer & Salancik, 1978; Scott, 2001), rather than a set of opportunities for leveraging firms' strategic as sets and competencies to earn economic rents. The broader literature on corporate political ac tion and business-government relations has also paid less attention to the effectiveness of firm-level strategies and outcomes than to the reasons firms engage in political activity and the macroinfluences of public policy on indus tries, communities, and societies (Shaffer, 1995). Heeding the call for "research into firm re

sources and capabilities that aid political activ ities" (Hillman et al., 2004: 851), we adopt a firm level dynamic capabilities approach (Teece, Pisano, & Shuen, 1997) to corporate political ac tivity to explain the strategies firms use to influ ence the political environment and the condi tions under which these strategies are likely to be effective. The dynamic capabilities perspec tive is a rapidly expanding area of strategy the ory and research (Blyler & Coff, 2003; Eisenhardt & Martin, 2000; Helfat & Peteraf, 2003; Helfat & Raubitschek, 2000; Teece et al., 1997; Zott, 2003). Dynamic capabilities refer to the ability of firms to maintain or create firm value by developing and deploying internal competencies that max imize congruence with the requirements of a

We thank guest editor Julio De Castro, Rumina Dhalla, Jean-Paul Roy, and three anonymous reviewers for their valuable and insightful comments on this paper.

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2008 Oliver and Holzinger 497

changing environment (Teece et al., 1997). Value refers to the economic rents that a firm accrues in political or market environments (Makadok, 2001). We define value creation as the invention or reconfiguration of firm assets or competen cies that constitute an original or unique addi tion to firm rents.We define value maintenance as the preservation of those firm assets and competencies that constitute the foundation of firm rents.

We apply a dynamic capabilities framework to strategic political management to address two questions: What are the alternative strate gies that are likely to be effective in influencing public policy? Under what conditions will these strategies be most effective in leading to higher performance and competitive advantage? Thus, in this paper we attempt to contribute to the literature on political activity and strategic

management by examining the strategies firms undertake to create or maintain value in politi cal environments and the dynamic capabilities that contribute to their effectiveness. By explor ing predictors of effective strategic political

management from the perspective of value cre ation, we also add new insights into the causes of competitive and market advantages that emerge from nonmarket rather than market sources (Boddewyn, 2003).

Although Yoffie (1987) has observed that a ma jority of firms adopt a free-rider strategy and never become politically active, recent evidence suggests that corporate political action is in creasing significantly (Getz, 1997; Hillman et al., 2004). Consistent with Hillman and Hitt (1999), we argue that as political environments become more complex and influential, firms that engage in political strategies may be more likely to strengthen their competitive advantage than firms that are passive or politically inactive. Our theoretical premise is that successful firms will tend to view political environments as opportu nity sets within which they face choices about what objectives to pursue and how to pursue them in a way that best serves the firm. Framing political strategy as an opportunity set, rather than a set of constraints, suggests that firms

may actively seek value from government inter action or seek to protect the value they possess, as opposed to accepting the inevitability and potential disadvantages or costs of government influence.

Based on the assumption that leveraging dy namic capabilities is crucial to successful polit ical strategies in changing political environ

ments, we propose a four-quadrant typology of dynamic capabilities in which firms choose be tween compliance and influence strategies and in which objectives in political environments differentiate between maintaining or protecting firm value (e.g., lobbying to maintain existing entry barriers that favor the firm) and increasing firm value (e.g., influencing public agencies to obtain government contracts). Dynamic political management capabilities therefore are defined here as the dynamic processes by which a firm influences or complies with its political environ

ment for the purpose of generating future value or protecting the current value of the firm from future loss or erosion.

The concept of dynamic capabilities is partic ularly relevant to the management of political environments for several reasons. First, dy namic capabilities focus on the variation in firms' abilities to adapt quickly to rapidly changing environments (Teece et al., 1997). Evi dence suggests that political changes, whether in terms of public policy changes, privatization and deregulation (De Castro & Uhlenbruck, 1997; Uhlenbruck & De Castro, 2000), the pace of reg ulatory amendments, or competitors' speed of response to regulatory changes, are accelerat ing (McWilliams, Fleet, & Cory, 2002). Therefore, firms are likely to need increasingly dynamic capabilities to cope with political change.

Second, dynamic capabilities "affect profit ability by enhancing the productivity of the other resources that the firm possesses" (Maka dok, 2001: 317). Oberman has defined political activities as "the attempted transformation of political resources, the ultimate aim of which being an increase (or prevention of a decrease) in the actor's stock of formal institutional re sources" (1993: 216). Political activity as a dynamic capability thus resonates with approaches to po litical activity that emphasize its transforma tional or facilitative contribution to the current or future value of a firm's resources.

Third, although the literature on corporate po litical behavior provides important insights into the ways in which firm and environmental char acteristics lead firms to engage in political ac tion, it has tended to neglect the firm-specific internal processes and capabilities that relate to the effectiveness of political strategies (Hill

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498 Academy of Management Review April

man et al., 2004). In this way, a dynamic capa bilities perspective can draw attention to the crucial role of internal competencies in en abling firms to execute political strategies suc cessfully.

Finally, contrary to the view that government intervention is inevitably costly to individual firms (Hahn & Hird, 1991), a dynamic capabilities perspective suggests that the costs of govern ment influence need to be evaluated against the potential opportunities for value creation or pro tection. Favorable subsidies, the reduced threat of market entry, greater firm legitimacy, the re duced threat of product substitutes, and the po tential for increased market share (Caeldries, 1996; Dean & Brown, 1995; Sch?ler, 1996; Shaffer, 1995; Shaffer, Quasney, & Grimm, 2000) are all potential outcomes of managing one's political environment effectively. Therefore, an under standing of variation in firms' political strate gies as a set of opportunities for creating value may contribute new insights into the heteroge neity of firm performance and competitive ad vantage (Barney, 1991, 2001; Oliver, 1997).

The paper begins with a review of the litera ture on the antecedents of political activity. We then propose a dynamic capabilities framework that identifies four alternative strategies for

managing political environments effectively and the dynamic capabilities that we predict will determine their effectiveness. We discuss the positive outcomes associated with each strategy as a means of illuminating the extent to which dynamic political management bestows a competitive advantage on firms. We conclude with some suggestions for future research.

LITERATURE REVIEW

Strategic Political Management

Four theoretical perspectives have addressed the topic of strategic political management. These include scholarly work in the areas of public policy, the economics of political and col lective action, stakeholder management, and corporate political behavior. As explained be low, although all of these approaches offer unique and highly insightful explanations of how and why firms opt to manage their political environment, none of them consider the man agement of political environments from the per

spective of internal capabilities or value cre ation.

Although in prior work in the public policy, economic, and stakeholder management litera ture researchers have examined important as pects of firms' relations to their political envi ronment, much of their work has focused more on broad issues of public interest than on firms' strategic alternatives in managing their politi cal environments. Public interest theorists sug gest that public policy is the outcome of interest group competition and that business tends to undermine public interests and democratic pro cesses (Lowi, 1969). From this perspective, busi ness works collectively as a common social class to secure its own interests, often to the exclusion of competing interest groups that are not a part of the corporatist framework (Epstein, 1980; Francis, 1993; Getz, 1997). Business is viewed as a monolithic interest group, uniformly affecting, and affected by, its political environ ment. By focusing on a collective level of anal ysis, public interest theorists have drawn valu able attention to business as an influential player in the political arena. Because of the ag gregate level of analysis, these theorists have not addressed public policy from the perspec tive of individual firms or the opportunities and options available to firms for increasing profit ability or gaining an advantage over rivals (Shaffer, 1995; Useem, 1980). Economic theorists have proposed that politi

cal activity is acquired or captured by industry and used for its benefit through direct subsidies and control over entry, prices, and the rules that determine substitutes (Stigler, 1971). According to these theorists, corporations and policy mak ers exchange inducements, such as votes and political contributions, for favorable public pol icy in order to maximize respective self-interests (Shaffer, 1995). Like public interest theory, this perspective has tended to treat business as a single coalition (Oster, 1982), but the intent of public policy is not to correct market failures but, rather, to transfer favors that are supplied by policy makers and demanded by industry (Caeldries, 1996). According to Stigler (1971), public policy is designed for industry's benefit, and all industries with sufficient political power will seek to manipulate the state and obtain governmental favors.

At a collective level, the key challenge that firms confront in political environments is the

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2008 Oliver and Holzinger 499

threat of free riding during collective action. In sofar as the benefits obtained from influencing public policy are collective goods, free riding will be problematic (Olson, 1965). Although re search results concerning the link between in dustry size and evidence of free riding are mixed (Cook & Fox, 2000; Getz, 1997), collective action theory suggests that political activity will be less costly in small, concentrated industries where the potential for free riding is lower (Ol son, 1965). Overall, the economic perspective ex plains the influence of firms on policy makers and the challenges firms face in acting collec tively and in exchanging inducements for favors in a political context. It does not tend to focus on the potential for political benefits to be rivalrous or for firms to seek differential value or compet itive advantages through political strategies (Hersch & McDougall, 2000). The literature on stakeholder management

has examined the broad set of environmental and interest group pressures exerted on firms by the media, public opinion, consumers, advocacy groups, employees, shareholders, and govern ment, as well as the ways in which firms are structured to identify, analyze, and address per tinent external issues (Donaldson & Preston, 1995; Greening, 1992; McWilliams & Siegel, 2001). This approach emphasizes the importance of so cial and political issues to a given company as key factors that motivate political strategy (Mitchell, Agle, & Wood, 1997; Vogel, 1996). As emphasized in stakeholder theory (Freeman, 1984; Frooman, 1999; Hillman & Keim, 2001;

Mitchell, Agle, & Wood 1997; Rowley & Mold oveanu, 2003; Wood, 1991), the importance of a political issue to a constituent is largely a func tion of the constituent's dependence on the stakeholder. Beginning with Stigler (1971) and Pfeffer and Salancik (1978), numerous research ers have emphasized the role of dependence in motivating political action (Blumentritt, 2003; Getz, 1997; Griffin & Dunn, 2004; Hillman et al., 2004). According to resource dependence theory, firms that are highly dependent on government, such as firms with a high proportion of sales to or contracts with the federal government (e.g., defense contracts), or with heavy cost burdens imposed from public policy (Hillman et al., 2004), are more likely to engage in political action to shape public policy (Hansen & Mitchell, 2000; Hart, 2001; Sch?ler, 1999; Schuler, Rehbein, & Cramer, 2002). Stakeholder management and re

source dependence perspectives focus more on predicting the conditions under which firms will be motivated to engage in political influence (e.g., for reasons of dependency, stakeholder pressures), rather than on the conditions under which different political strategies will be effec tive in improving firm performance. The most developed area of relevance to stra

tegic political management is the growing work on corporate political behavior (Baron, 1995; Bo nardi et al., 2005; Getz, 1993, 1997; Hillman & Hitt, 1999; Hillman et al., 2004; Shaffer, 1995). The pre dominant focus in this literature pertains to the reasons for and conditions under which firms will choose to engage in corporate political ac tion (Getz, 1997; Hillman & Hitt, 1999). Different scholars have hypothesized that firms formulate political strategy to make their interests known to government (Keim & Baysinger, 1988), to gain collective or private benefits (Olson, 1965), to access resources from political institutions (Hill man, 2003), to purchase government policy or secure government inaction (Keim & Zeithaml, 1986), to reduce costs (Kaufman, Englander, &

Marcus, 1993), to stop unwanted regulation (Yoffie, 1987), and to increase firm control and autonomy (Getz, 1993).

Recent reviews of the corporate political be havior perspective reveal developing consensus around some of the particular factors at the or ganizational and industry levels of analysis that cause firms to engage in political action (Getz, 1997; Hillman et al., 2004; Shaffer, 1995). At the firm level, firms' material interest, size, and is sue salience have been shown to increase the likelihood that they will participate in political actions. Boies (1989) demonstrated that differ ences among firms in their material interests affected the level of their political activity sig nificantly. Firm size has also been shown to predict political strategy formation, because large firms are more likely to possess the nec essary resources to commit to political activity (Epstein, 1980; Meznar & Nigh, 1995; Yoffie, 1987). Firm size has been shown to correlate with cor porate political influence and activity in the wood products, electronics, steel, and petroleum industries (Salomon & Siegfried, 1977; Sch?ler, 1996; Ungson, James, & Spicer, 1985). Sch?ler and Rehbein (1997) have argued that firms will also decide whether to engage in political activity by estimating a political issue's salience?that is, its estimated net impact on their competitive

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500 Academy of Management Review April

performance and strategy (Hillman et al., 2004). Several studies support this proposition (Cook & Barry, 1995; Magee, 2002).

At the industry level, firms that engage in corporate political activity tend to be "part of industries that are . . . strongly affected by

macro economic policies or other government decisions (Epstein, 1969; Yoffie, 1987)" (Getz, 1993: 249). Thus, the scope or stringency of polit ical pressures imposed on the industry tends to determine whether firms engage in political strategies. Industry concentration has also been shown to increase the likelihood of political ac tion (Zardkoohi, 1985). While firms in concen trated industries would be expected to exhibit less political action insofar as their uncertainty is also relatively low (Munger, 1988), studies show that firms in concentrated industries tend to be more politically active because the costs of organizing concentrated industries are low rel ative to organizing fragmented industries (Len way & Rehbein, 1991; Olson, 1965), opportunities to free ride are more limited, and the dominant firms have the potential to obtain a dispropor tionately larger benefit from collective political outcomes. Pittman (1988), for example, in a study of 600 U.S. firms across multiple industries, found that federal government purchases and regulation were positively related to the level of firm political contributions in concentrated in dustries. Sch?ler and colleagues (2002) also found that firms in concentrated industries were more likely to engage in lobbying and cam paign contributions than those in fragmented industries.

To summarize, previous theory and research on business-government relations have focused primarily on macrolevel public policy effects on industry and on the propensity of business as a unified class or industry to shape or undermine political objectives. Scholarship in the area of corporate political action has also contributed important insights into the causes of political behavior and the competitive nature of political action. Table 1 summarizes prior research on the determinants of corporate political behavior.

In contrast, we still know very little about (1) the capabilities that relate to the strategic man agement of firms' political environments and (2) firm-level outcomes of strategic political behav ior (Hillman et al., 2004; Zott, 2003). In addition, research on political strategies has generated more industry-specific lists of political tactics,

such as lobbying or campaign contributions, than generic typologies of strategic political ac tivities (Baysinger, 1984; Boddewyn & Brewer, 1994) that might be generalizable across a broad range of industries and contexts. Moreover, by focusing on the risks and costs of political strat egies (e.g., the burdens of compliance to public policy, the problem of free riders, the costs of organizational adaptation to changing political demands), previous literature has tended to ne glect the potential for strategic political man agement to serve as an important source of value creation (Keim & Bay singer, 1988; Shaffer, 1995).

Toward a Dynamic Capabilities Perspective: The Resource-Based View

The resource-based view of the firm has re ceived a great deal of attention in the strategic management literature (Deephouse, 2000; Han sen, Perry, & Reese, 2004; Powell, 2001). This per spective suggests that firms that are able to develop and deploy unique, inimitable, and valuable capabilities will earn above-average returns and gain a competitive advantage (Bar ney, 1991, 2001; Moran & Ghoshal, 1999; Werner felt, 1984). Recent developments of the resource based view have emphasized the importance of dynamic capabilities to organizational perfor mance in complex or changing environments (Blyler & Coff, 2003; D'Aveni, 1994; Nelson, 1991; Teece et al., 1997; Thomas, 1996; Verona & Ravasi, 2003). Although the resource-based dy namic capabilities perspective has not been ap plied directly to the topic of corporate political strategy, we argue below that this perspective can help to explain both the motives of political strategy?value creation and maintenance? and the effects of political strategy on firm per formance and competitive advantage Value creation and maintenance. According

to the resource-based view, firms seek to gen erate value or protect the value they possess as a way to gain or maintain a competitive advan tage (Anand & Khanna, 2000; Makadok, 2001; Priem & Butler, 2001). Value refers to economic rents that arise from internal resources or re source combinations that exploit opportunities and/or neutralize threats in a firm's environ ment (Barney, 1991). In the strategy literature, value seeking as a motivation for firm action has been examined in competitive environ

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2008 Oliver and Holzinger 501

TABLE 1 Summary of Research on the Determinants of Corporate Political Behavior, 1985-2005

Authors Purpose Findings

Blau & Harris (1992)

Blumentritt (2003)

Boies (1989)

Burris (2001)

Buysse & Verbeke (2003)

Cook & Fox (2000)

Greening (1992)

Grier, Munger, & Roberts (1991)

Hersch & McDougall (2000)

Examination of the strategic uses of regulation to influence line-of business restrictions in the U.S. telecommunications industry

Examination of factors that influence foreign subsidiaries' political corporate activity

Examination of factors (availability of resources, free-rider problems, material interests, previous activity, industry membership) that predict a firm's engagement in political action committees

Comparison of campaign contributions of corporate political action committees and individual capitalists

Evaluation of the relationship among the level of proactive political activity, regulation, and the level of importance of issues to a firm's stakeholders

Comparison of the political activity of small- and medium-size firms

Investigation of the impact of environmental and organizational factors on firms' structure and processes, including issue management

Analysis of the relationship between industry concentration and the level of corporate political activity

Examination of the relationship between the level of a firm's political activity and the level of political activity of its rivals

Forces of competition explain both the economic and political strategies of firms; authors conclude that, if cost effective, firms will engage in political activity to gain comparative advantage

Subsidiary top managers' orientation toward political activities influences level of subsidiary political activity

Material interest, when associated with an ongoing relationship with the state, was found to be a consistent and important determinant of engagement in political action committees

Individual capitalists are more interested in bolstering the election prospects of favored candidates, whereas firms are more concerned with buying influence with incumbents

Firms pursuing proactive political strategies attach more importance to regulatory pressures than those

with a reactive political strategy; level of proactiveness increases

with broader and deeper stakeholder coverage

Medium-size firms have a lower frequency of political activity than smaller firms, a higher success rate, and more political influence when they are politically active; small-size firms are more likely to participate in collective political activity

Interest group pressures are related to firm resource allocation strategies and internal structures; top management involvement is an important predictor of successful

management of external dependencies and issues and design of firm structures

The relation between concentration and political activity is polynomial: the level of concentration has an increasing then a decreasing effect on political activity

Support for the rival effect?a firm's level of activity is influenced by the political activity of its competitors; free-rider argument not supported

(Continued)

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502 Academy of Management Review April

TABLE 1 (Continued)

Authors Purpose Findings

Hillman (2003)

Koza (1988)

Lenway & Rehbein (1991)

Masters & Keim (1985)

Meznar & Nigh (1995)

Mitchell, Hansen, & Jepsen (1997)

Mizruchi & Koenig (1986)

Munger (1988)

Pittman (1988)

Rehbein & Lenway (1994)

Examination of the determinants of political strategies used by U.S. multinationals in Europe; use of institutional theory and the resource-based view of the firm to examine institutional-, firm-, and industry-level determinants of the choice of corporate political strategies

Exploration of the relationship between regulation and the orga nizational environment, structure, and processes

Identification of firm-specific determinants of corporate political activity and their relationship to the choice of a firm's strategy

Exploration of the determinants of political action committee participation

Examination of the antecedents of public affairs buffering and bridging strategies, including environmental uncertainty, firm size, visibility, and resource importance

Test of the antecedents of political action committee formation and the magnitude of committee contribution

Examination of the link between interindustry political consensus and campaign contributions of political action committees

Investigation of the impact of various industry and firm characteristics on political action committee contributions

Test of the argument that market concentration leads to a higher level of political activity

Examination of the importance of external signals as determinants and predictors of success of an industry's political action strategies

Institutional variables explain the choice of corporate political activity strategy (approach, participation level, and strategy)

Regulation, as an attribute of an organization's environment niche, produces incentives that motivate organizations to respond by adapting their structures and processes

Organizational slack is identified as an important determinant of political activity; firm profit influences the choice of political strategy; findings do not support market concentration or strategic dependence arguments

A firm's resource base, employment base, magnitude of assets, unionization, and the size of its industry are significantly related to political action committee participation

Environmental uncertainty, size, and the importance of a resource are identified as important antecedents of political activity

Visibility, countervailing power, and the impact of government involvement in firms play a significant role in political action committee formation

Negative relationships between strong ties and consensus and between volume of transactions and consensus are identified

Some firm characteristics (e.g., government contracts, number of employees) positively affect political action committee contributions, whereas industry concentration does not

The level of potential rents in the environment evokes rent-seeking behavior from firms, but only in concentrated industries

An industry's choice of external signals and appropriate selection of political tactics and actions influence the industry's political action strategies

(Continued)

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2008 Oliver and Holzinger 503

TABLE 1 (Continued)

Authors Purpose Findings

Sch?ler (1996)

Schuler, Rehbein, & Cramer (2002)

Shaffer (1992)

Shaffer & Hillman (2000)

Ungson, James, & Spicer (1985)

Zardkoohi (1985)

Examination of the political strategies of U.S. steel firms lobbying for trade protection

Identification of factors and conditions that predict a firm's choice of multiple political tactics during the initial decision to become politically active

Analysis of the impact of regulation on the evolution of a firm's political position

Use of grounded theory to explore conflicts in political strategies among units of diversified firms

Exploration of the performance effects of organizations' ability to modify and adapt internal structures and processes in response to regulation

Identification of the economic determinants of firms' political activity

The steel industry's largest firms dominated political influence efforts to protect the industry from foreign competition

Firms making the initial decision to become politically active are more likely to adopt a multiple-tactic strategy; politically active firms' choices to employ a multiple-tactic strategy are driven by industry concentration, industry political activism, the existence of an industry congressional caucus, firm size, and material interests; no support for effects of industry unionization or availability of free cash flow resources on political activity was found

A firm's strategic response to regulation includes political action integrated with and complemented by the firm's overall strategy for sustained competitive advantage

Several different distinct types of conflict exist within firms over the

formulation of political strategies Government regulatory agencies

differ from other task environment

factors in how they influence organi zational goal-setting and planning activities and are perceived to be the least controllable and predictable; organizational adjustments vary depending on the type of task environment sectors

Regulation, dependence on government contracts, market share, industrial diversification, rate of return on contributions, and employment influence a firm's political activity; market concentration argument not supported

ments, whereby firms engage in a relentless search for new ways to create and realize value as a way to fend off competitors or to provide unique products or services in rapidly changing environments (Ghoshal & Moran, 1999). We ad vance the proposition that firms may also be motivated to create value in political environ ments; in other words, value seeking may be a determinant of firms' decisions to engage in po litical strategies.

For example, in undertaking political strate gies, a firm might influence legislators to re strict the use of a resource by competitors in the hopes of raising the value of its own resources. In this way, the anticipation of greater firm value motivates the firm's decision to take polit ical action. Firms may also be motivated to lobby government as a means of increasing value. Lockheed Martin, for example, spent $55 million on political lobbying between 1999 and

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504 Academy of Management Review April

2006, during which time it won defense contracts valued at $90 billion (Miller, 2006).

The argument that firms in political environ ments are motivated to create value overlooks those situations, however, in which value main tenance rather than value creation serves a use ful strategic purpose. Where firms have already established a significant value base, in the form of distinctive or inimitable resources or compe tencies, they may be motivated to protect the value they already possess from loss or compet itive erosion. Microsoft, for example, acted ag gressively to protect its value base against gov ernment efforts to erode its extraordinary market advantage in computer software. Simi larly, Harley-Davidson successfully lobbied the U.S. government to implement trade protection in the 1980s to protect and maintain the firm's value base built on its dominance in the U.S. motorcycle market (Fortune, 1989).

Therefore, from a resource-based perspective, value creation and value maintenance are both potential drivers of strategic action. This is con sistent with Bay singer's (1984) distinction be tween domain management and domain de fense, and with the assumption in the recent political strategy literature (Bonardi et al., 2005; Hillman & Hitt, 1999; Shaffer et al., 2000) that both political and market strategies represent "a concerted pattern of actions taken in the [market or nonmarket] environment to create value by improving economic performance" (Baron, 1997: 47). Dynamic capabilities. In addition to their fo

cus on value creation, proponents of a resource based view also propose that heterogeneity in firms' performance is caused by the internal re sources firms possess and the processes by which they deploy those resources. The dynamic capabilities view elaborates the resource-based view by introducing evolutionary arguments. According to the dynamic capabilities view, it is not sufficient for firms to simply possess re sources; they must be able to develop, recom bine, and deploy internal competencies that maximize congruence with the requirements of changing environments (Bowman & Ambrosini, 2003; Eisenhardt & Martin, 2000). Dynamic capa bilities allow a firm to leverage its internal as sets, not only to satisfy current environmental demands but also to influence environmental demands so that these demands correspond with the firm's strengths or requirements.

While much of the literature on dynamic ca pabilities remains directed toward theory devel opment, a number of studies support the impor tance of dynamic capabilities in product development and knowledge management and their role in enhancing firm performance. For example, in their in-depth case study of Oticon A/S, a leading hearing aid manufacturer, Ver ona and Ravasi (2003) showed that dynamic ca pabilities related to knowledge management led to superior product innovation. More specif ically, the authors demonstrated how the com pany used capabilities embedded in actors, structures and systems, physical resources, and the organization's culture to remain innovative over time. Furthermore, Oticon was able to in fluence the state of knowledge in the field by actively exchanging research results with the outside environment. In another study Adner and Helfat (2003) found that the dynamic capabil ities of managers in the petroleum industry had a positive effect on business profitability over time. Firms that developed and deployed dynamic managerial capabilities, including human capi tal, social capital, and managerial cognition, were better able to effectively respond to changes in the external environment. Taken together, growing theory and evidence indicate that dynamic capa bilities may play an important role in contributing to firm effectiveness, particularly in changing environments. We argued earlier that the political environ

ment has become more complex and dynamic over time owing to increased political action by constituents. Hence, a dynamic capabilities view may shed light on the ability of firms to effectively develop strategies to manage the po litical environment. In the next section we de velop a model of effective political strategy that is based on firms' motivation to create or main tain value and in which the extent of effective ness is expected to depend on the firms' dy namic capabilities.

THE EFFECTIVENESS OF POLITICAL STRATEGIES

Antecedents of Political Strategy

We argued in the previous section that value creation or maintenance may be motives that drive the decision to undertake strategic politi cal management. These motives are depicted in

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2008 Oliver and Holzinger 505

the model in Figure 1. In addition, as the above review of the literature on corporate political strategy demonstrates, firm and industry char acteristics also play an important role in strat egy formation (Getz, 1997; Hillman et al., 2004; Shaffer, 1995). Accordingly, the model in Figure 1 suggests that firms choose to engage in political strategies to create or maintain their value and that these firms are significantly more likely to do so when they possess particular firm charac teristics?specifically, when they are large, are dependent on the political environment, possess material interest in the public policy in ques tion, and view a political issue as particularly salient. In terms of environmental characteris tics, the literature review shows that firms are

more likely to engage in political action when they operate in industries that are concentrated and impose significant political pressures on them. (These previously investigated relation ships that are not the focus of this paper are represented by dotted-line arrows in Figure 1.) The framework in Figure 1 adopts an individual firm-level perspective rather than a collective industry-level perspective because the intent of the framework is to explain firm-level differ ences in the effectiveness of strategic political management.

A Typology of Political Strategies

Proponents of the resource-based perspective view strategy as a set of opportunities for creating value and deploying dynamic capabilities to ob tain a competitive advantage. When firms are mo

tivated to create or maintain their value in politi cal environments, there are two means by which they can take advantage of political opportunities: (1) they can actively influence their political envi ronments, or (2) where influence is impossible or not desired, they can actively comply with public policies or regulations with the intent of deriving as much value from such compliance as possible. A resource-based view of political environments suggests, therefore, that a firm's political strategy is likely to be grounded in both its value perspec tive (whether to maintain or create value) and its strategic orientation (whether to influence or com ply with public policies and regulations).

Political compliance strategies are defined here as firm-level actions undertaken in conformity with political requirements and expectations for the purpose of maintaining or creating value by anticipating or adapting to public policy. Political influence strategies are firm-level actions under taken for the purpose of mobilizing support for the firm's interests. This distinction between compli ance and influence is consistent with a stake holder management perspective (Freeman, 1984; Mitchell, Agle, & Wood, 1997; Rowley & Mold oveanu, 2003), with Boddewyn and Brewer's (1994) emphasis on compliance as a distinct form of po litical behavior from influence, and with the grow ing body of literature on responses to sustainable development regulation (Gladwin, Kennelly, & Krause, 1995; Shrivastava, 1995), which has in creasingly stressed the "distinction between firms that are compliance-driven ... and those that adopt more proactive environmental strategies" (Buysse & Verbeke, 2003: 453). Figure 2 provides a 2 X 2 matrix that demon

strates the typology's grounding in the distinc tions among value creation, value maintenance, influence strategies, and compliance strategies. This typology suggests that firms motivated to maintain or create firm value will be likely to engage in one or more of four strategies to man age their political environment: reactive, antic ipatory, defensive, or proactive strategies. Next, we suggest that the effectiveness of

these strategies will depend on firm-specific dy namic capabilities.

Dynamic Capabilities and Effective Political Management

Proponents of a dynamic capabilities view ar gue that firms' dynamic capabilities, such as

FIGURE 1 A Dynamic Capabilities Model of Effective

Political Management

Firm characteristics

Motives of political

management Value creation Value maintenance

Industry characteristics

Dynamic capabilities

Political management

strategies Reactive Anticipatory Defensive Proactive

Political dynamism

Firm-level outcomes

Performance Competitive advantage

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506 Academy of Management Review April

FIGURE 2 Alternative Political Management Strategies

Value perspective Value maintenance Value creation

Compliance

Strategic orientation

Influence

Reactive strategy

Focus: Internal capabilities

Examples:

Developing efficent pollution control processes to meet standards Rapidly realigning structures

Defensive strategy

Focus: External capabilities

Examples: Lobbying to increase entry barriers Actively advocating the status quo

Anticipatory strategy

Focus: Internal capabilities

Examples:

Establishing best practices in anticipation of public policy change Hiring government experts

Proactive strategy

Focus: External capabilities

Examples:

Redefining constituents' norms Establishing standards that redefine current legislation

continually evolving technical literacy, continu ous updates to their knowledge base, and ongoing environmental scanning, can create value by al lowing the firms to match and even create change in market environments (Eisenhardt & Martin, 2000; Verona & Ravasi, 2003; Zott, 2003). Similarly, as political environments become more complex and dynamic, the theoretical rationale for the im portance of dynamic capabilities in political envi ronments is that dynamic capabilities may allow firms to capitalize quickly on political opportuni ties and to generate unique sources of economic rent as opportunities arise from changes in public policy or regulations. The firm that is most rapid in implementing an innovative process capability that meets new environmental regulations, for ex ample, may not only set the standard for environ mental responsiveness to which other firms must eventually comply but may also create barriers to entry for future competition if the cost of imitating the firm's unique capabilities is prohibitive. In this

way, a firm's dynamic political capabilities may be inextricably linked to firm performance (Shaf fer et al., 2000) and competitive advantage (McWil liams et al., 2002). Therefore, as Figure 1 shows, we predict that a firm's dynamic capabilities will play an important role in determining whether political strategies are effective?that is, whether they im prove the firm's performance or competitive ad vantage.

Table 2 outlines the four alternative political strategies and how they differ in terms of dy namic capabilities, sources of effectiveness, and the nature of the effectiveness achieved. This table suggests that firm capabilities affect per formance and competitive advantage by allo cating priority to organizational resources that improve the firm's ability to adapt to the politi cal environment. Compliance-oriented political strategies use internal capabilities to achieve or anticipate an optimum fit with political require ments. Influence-oriented political strategies use externally oriented capabilities to achieve maximum control in shaping public policy re quirements to fit organizational needs and in terests. We also argue later in the paper that these strategies will tend to vary in the extent to which they are a source of sustainable compet itive advantage for the firm. We propose that performance will be en

hanced or sustained by dynamic capabilities that operate to improve the efficiency, position ing, or credibility of the firm. Specifically, dy namic capabilities that increase efficiency and legitimacy, enhance first mover advantages and firm reputation, protect current assets and mar ket position, or redefine the institutional defini tions of political demands and policies to match firms' interests will predominate in explaining the effectiveness of reactive, anticipatory, de

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2008 Oliver and Holzinger 507

TABLE 2 Typology of Political Management Strategies

Type of Political Management Strategy

Compliance Strategies Influence Strategies Dimensions of Dynamic Capabilities

Reactive Political Strategy

Anticipatory Political Strategy

Defensive Political Strategy

Proactive Political Strategy

Nature of political strategy

Source of effectiveness

Dynamic capability

Underlying process of capability effectiveness

Nature of effectiveness achieved

Firm competitive advantage

Examples of political action

Actions undertaken to efficiently align one's internal processes with political demands

Internal capabilities

Flexible organiza tional architecture

Continual structural and process realignment to match political changes

Efficiency and legitimacy

Short-term duration

Rapid, low-cost reconfiguration of internal processes to meet political demands; investment in training, resource, and skill innovations to accelerate and improve compliance with public policy

Actions undertaken to gain a first mover advantage by anticipating future public policy

Internal capabilities

Scanning and predictive capabilities

Timely and continuous scanning of political environment to anticipate changes

First mover advantages and enhanced reputation

Short- to medium term duration

Continuous investment in environmental scanning; hiring ex-government experts; training and investment in knowledge of impending public policy changes

Actions undertaken to thwart unwanted political changes and protect the status quo

External capabilities

Political social capital deployment

Continuous cultivation of social ties to influence government to maintain current policies

Protection of current assets and market position

No change

Advocacy of entry restrictions; activating social networks to defend current public policies; lobbying to reduce the threat of substitutes; lobbying to maintain protective pricing structures

Actions undertaken to shape and control the way that norms and public policies are defined

External capabilities

Institutional influence capabilities

Influencing the norms and beliefs of stakeholders to shape how political standards are defined

Redefinition of public policy to fit firm's strengths or interests

Medium- to long term duration

Aggressive constituency building to create shared norms; cooperation with governments to create new rules; alliance formation to change the rules of political compliance

tensive, and proactive political strategies, re spectively. In the next section we outline each of the four proposed strategies and the dynamic capabilities associated with each that might be expected to improve their effectiveness.

The Effectiveness of Alternative Political Strategies

Reactive strategies. From a dynamic capabil ities perspective, firms motivated to protect or

increase the value of their strategic assets (see Figure 1) will not be passively resigned to im pending political changes but, rather, con sciously purposive in their efforts to maximize value from compliance by aligning their inter nal processes efficiently and effectively with public policy demands. For value-driven reac tive strategists, the overall cost of compliance is less the focus of firm effort than the active as sessment of the most efficient and low-cost means of accommodating the firm's internal

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508 Academy of Management Review April

processes to public policy to maximize return on investment. For example, firms in a number of highly regulated industries, such as pharma ceuticals, aerospace, and financial services, are seeking compliance leadership in developing verifiable processes, data integrity, and rapid information access and retrieval in response to political demands. We propose that reactive strategies will

depend, for their effectiveness, on internal dy namic capabilities in realigning or reconfigur ing structural and technical process architec ture (Henderson & Cockburn, 1994), such as efficient data processing systems for assessing a firm's compliance with regulatory standards, timely production of compliance information for regulators, and improvements in structures and processes that directly reduce the costs of com pliance. Research indicates that decision speed and efficiency determine how effective realign ment capabilities will be in the face of pressures to change (Baum & Wally, 2003; Eisenhardt, 1989). The speed and efficiency of these capabil ities, as determinants of effectiveness, can be

measured, for example, by a firm's timeliness and flexibility in investing in training and re source and skill acquisition to meet compliance standards or by the introduction of incentive systems that accelerate the speed and quality with which public policy demands are imple mented.

Dynamic capabilities that lead to effective re active compliance might also be measured by the depth of investment or innovation in effi cient or accelerated information control systems that respond quickly and cost effectively to data requests from political agencies. The effective ness of architectural reconfiguration as a dy namic process is also measurable by firms' on going product and process innovations to develop the most sophisticated and cost effective methods of installing technologies or procedures to meet public policy demands. Bar clays, for example, has taken the lead in devel oping information technology to manage and retrieve data required for compliance with Basel 2 and Sarbanes-Oxley regulation, which, in turn, has led to substantial savings for the bank (Nicolle, 2004). These reconfiguration capabilities are ex

pected to generate not only efficiency benefits but legitimacy benefits as well, thus further en hancing the potential for higher firm perfor

manee. Institutional theorists have demon strated that compliance or conformity with institutional pressures, such as social and polit ical standards, confers performance or survival advantages on organizations by increasing their legitimacy and social support (Bansal & Roth, 2000; Baum & Oliver, 1991; Deephouse, 1996; Suchman, 1995). The social legitimacy con ferred on compliant firms that respond quickly and efficiently to political changes or amend ments may pay off in terms of increased con sumer approval and product demand, enhanced access to resources, or more favorable relations with policy makers in the future. In their study of public affairs departments, Griffin and Dunn (2004) observed that proficiency in bringing in ternal departmental practices into line with ex ternal rules and regulations helped firms gain legitimacy. Heugens, Van Den Bosch, and Van Riel (2002) found that Dutch food processing or ganizations that exhibited willing compliance with informal government influence over their biotechnology practices acquired significant so ciopolitical legitimacy with a range of stake holders. Architectural reconfiguration capabili ties as the operational mechanism of effective compliance are therefore likely to be important to firm legitimacy in political environments. Thus, we suggest the following.

Proposition Ja: The effectiveness of re active political strategies will depend on a firm's structural and process re configuration capabilities.

Proposition lb: The speed, efficiency, and innovativeness of architectural reconfiguration capabilities will de termine the extent of their effective ness.

Proposition lc: Effective reactive polit ical strategies will result in higher ef ficiency and legitimacy for the firm.

Anticipatory strategies. Like reactive strate gies, anticipatory political strategies involve compliance with public policy, but unlike reac tive strategies, which rely on more inward focused processes, anticipatory capabilities combine and reconfigure internal and external resources to enhance external scanning and timely knowledge acquisition. Anticipatory strategies are efforts to anticipate imminent pol icy changes and gain first mover advantages in

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2008 Oliver and Holzinger 509

adopting innovative operational routines by possessing superior knowledge of future changes.

The dynamic capabilities that we predict will determine the effectiveness of this strategy are scanning and predictive capabilities that give firms early knowledge of impending or potential legislative or public policy changes, as well as the ability to respond appropriately before those changes are implemented. Research has shown that frequency, innovativeness, timeliness, and breadth of scanning are linked to higher orga nizational performance in scanning and antici patory knowledge acquisition (Garg, Walters, & Priem, 2003; Thomas, Clark, & Gioia, 1993; Yasai Ardekani & Nystrom, 1996). In a study of success ful environmental management initiatives, Andersson and Bateman (2000) found that fre quent scanning was significantly related to suc cessful environmental championing episodes.

Dynamic scanning and predictive capabilities can be operationalized in a number of ways?for example, ongoing investment in scanning pro cesses or employee training to increase scan ning and knowledge acquisition capabilities, periodic hiring of ex-government officials with the most current knowledge of impending policy changes, continual development and refinement of management systems for ongoing assess ment of the implications of public policy devel opments, proactive attendance at industry and environmental conferences, and early invest ments in technologies to gain a first mover ad vantage in adjusting to regulatory revisions. Both Toshiba and Hitachi, for example, gained first mover advantages in anticipating regula tory changes in the worldwide battery industry by acquiring and deploying early designs in acid-free and renewable batteries. These antic ipatory moves resulted in batteries that were

more economical and reduced the firms' compli ance costs (Shrivastava, 1995).

In addition to the economic advantages of be ing a first mover, we hypothesize that firms mak ing use of anticipatory strategies may also ben efit from reputational effects (Fombrun, 1996; Mahon, 2002). Much of the compliance literature has focused on the negative reputational effects of noncompliance (Fombrun, 1996; Raymond, 2004). In this literature, researchers consider complying with public policy the norm and therefore as having no reputation effects. Antic ipatory compliance, however, can have direct

and indirect positive effects on a firm's reputa tion. In terms of direct effects, a firm that antic ipates public policy changes may be perceived as highly responsive, alert, or a trendsetter by its customers, suppliers, competitors, govern

ment, or the public at large. Indirect reputa tional effects are created through the actions of stakeholders who are in a position to influence the firm's relationship with its key stakeholders, such as the government, the media, and public interest groups. In the case of anticipatory polit ical management, the government and media, for example, may publicly praise a firm that anticipates forthcoming changes in the political environment and complies more rapidly than its competitors. This provides information about the firm's reputation to stakeholders lacking di rect experience with the firm, thereby further enhancing the firm's reputation with that group of stakeholders (Mahon, 2002). The foregoing ar guments suggest the following.

Proposition 2a: The effectiveness of anticipatory political strategies will depend on a firm's scanning and pre dictive capabilities.

Proposition 2b: The frequency, breadth, innovativeness, and timeli ness of scanning capabilities will de termine the extent of their effective ness.

Proposition 2c: Effective anticipatory political strategies will result in first mover advantages and enhanced rep utation for the firm.

Defensive strategies. In contrast to the forego ing compliance strategies, defensive political strategies are influence strategies that firms adopt to thwart unwanted changes in the polit ical environment and to protect what they view as a favorable status quo. British tobacco com panies, for example, stepped up the legal back lash against tobacco regulations with a chal lenge to regulatory restrictions in the Republic of Ireland on the grounds that smoking restric tions were contrary to EU law and potentially unconstitutional (Marketing Week, 2004). When political change is perceived as a threat or an institutional constraint on firms' ability to sus tain their competitive advantage, they may ex hibit vigorous influence efforts to protect the future value of their current strategic assets and

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510 Academy of Management Review April

competencies (Amit & Schoemaker, 1993; Bod dewyn, 2003). Such firms may reject evolving public policy frameworks as acceptable bench marks for firm conduct and may work instead to maintain current regulations and policies, often because they possess core rigidities that con strain their ability to exploit change (Leonard Barton, 1992) or because current assets and com petencies under threat from potential future legislation are considered rare and valuable as a current source of competitive advantage. The New York Stock Exchange, for example, was slow to discard its defensive strategy of protect ing floor traders and specialist services against electronic communication networks on the grounds that these specialist services were seen, rightly or wrongly, as providing rare and nonsubstitutable value to the Exchange (Tully, 2005).

The strategic orientation of defensive political strategies is to exert influence on policy makers or those who might persuade government to sustain current regulations (Shaffer et al,, 2000). Effective defensive strategies reflect the devel opment of dynamic capabilities, not in reconfig uring internal processes (reactive political strat egies) or environmental scanning competencies (anticipatory political strategies), but in cultivat ing and utilizing relations to government and/or indirect ties to or networks with those who in fluence policy makers for the purpose of protect ing the organization's interests. The literature on social ties and networks provides compelling evidence that such ties serve as important con duits of influence and can be a critical source of social capital (Burt, 1992; Gulati, 1998; Gulati & Gargiulo, 1999; Koka & Prescott, 2002; Nahapiet & Ghoshal, 1998; Tsai & Ghoshal, 1998). Social capital, which refers to "the ability of actors to secure benefits by virtue of membership in so cial networks" (Portes, 1998: 6), enhances an ac tor's ability to gain the trust of the other actor(s) in a social network, to exert influence over other network actors, and to secure favors or rewards. We define political social capital as benefits that firms secure through direct or indirect so cial ties to policy agents that facilitate govern ment lobbying in favor of current firm interests.

We therefore propose that social capital ap propriation is a crucial dynamic capability in establishing influence with external actors in order to defend a firm's current market position or strategic assets (Blyler & Coff, 2003). Social

capital appropriation and utilization as dy namic capabilities can be defined as fluctuating arrangements in the social structure of influ ence or bargaining power with government for the productive use by firms in maintaining and protecting their current interests (Coleman, 1990; Sandefur & Laumann, 1998). These capabilities are reflected in the development of common un derstandings between a firm and political agents about the necessity of enforcing and sus taining agreed-upon rules and accepted proce dures that are mutually beneficial to both public and private interests. Firms that are able to build trust and relational associations (Dyer & Singh, 1998; Hillman & Hitt, 1999) with political agencies will be most likely to succeed in using social capital effectively, because trust reduces the cost of ascertaining and using reliable infor

mation (Gulati, 1998; Gulati & Gargiulo, 1999). As Hillman and Hitt's (1999) distinction between transaction and relational political strategies

makes clear, these external relationships are more likely to be effective as sources of influ ence if they are relational in nature?that is, characterized by a degree of trust and openness (Adler & Kwon, 2002; Inkpen & Tsang, 2005). Defensive strategy examples include advocat

ing entry restrictions, influencing policy makers to retain rules favorable to the firm, advocating a reduction in the threat of substitutes, and lob bying to maintain protective pricing structures. As Boddewyn and Brewer have observed with respect to foreign market entry, firms operating in foreign markets may also exit a particular foreign political environment or attempt to cir cumvent it through illegal means as part of a defensive strategy, if "the benefits of such be havior exceed the legitimacy costs" (1994: 128). Exit or circumvention behaviors will be less likely to occur to the extent that firms already possess political social capital (e.g., previous ties to government officials) in the markets in

which they are operating. Firms adopting defen sive strategies are also likely to be more com mon in industries where exit costs are high. Overall, the greater a firm's social capital with policy makers and the greater the firm's capa bility in utilizing this capital through the devel opment of trust-based and relational ties with government and those who influence govern ment, the more effective the firm will be in de fending and protecting its current assets and

market position.

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2008 Oliver and Holzinger 511

Proposition 3a: The effectiveness of defensive political strategies will de pend on a firm's capabilities to appro priate and use political social capital.

Proposition 3b: The breadth and depth of trust and relational bonds in social contacts with government and with constituents who can influence gov ernment will determine the extent to which the deployment of political so cial capital is effective.

Proposition 3c: Effective defensive po litical strategies will result in the pro tection of the current assets and mar ket position of the firm.

Proactive strategies. Proactive political strat egies are strategies that shape the fundamental nature of how public policies are defined or de veloped. Institutional theory suggests that power flows to those organizations with the greatest capacity to shape and manipulate the underlying values and beliefs of important con stituents in their institutional environment (Di Maggio & Powell, 1983; Oliver, 1991, 1997; Scott, 2001). From this perspective, organizations can serve as sources of cognitive or normative in fluence by creating practices that others are mo tivated to imitate or by actively engaging in professional associations, public media activi ties, or coalition and constituency building for the purpose of redefining the legitimacy of ex tant institutional rules, norms, or practices (Di

Maggio & Powell, 1983). The dynamic capability to exert institutional

influence involves the ability to define or shape the norms, standards, and beliefs of an industry or to reframe public perceptions about the social acceptability of a firm's practices. A firm's abil ity to exert institutional influence is critically dependent on its social legitimacy. As Suchman argues, legitimacy may allow firms to manipu late environments and to "actively promulgate new explanations of social reality" (1995: 591). Several authors have noted how social legiti macy may increase a firm's competitive advan tage by elevating its capacity to influence im portant stakeholders, including government, and to obtain greater access to resources and information (Aldrich & Fiol, 1994; Oliver, 1991, 1997; Pfeffer & Salancik, 1978).

Researchers have pointed out that the institu tional context shapes political activity (Bod dewyn & Brewer, 1994; Hillman & Hitt, 1999; Murtha & Lenway, 1994). Firms capable of appro priating or shaping the institutional framework of an industry are able to acquire more favor able rulings or opinions. Clougherty's (2003) analysis of the determinants of successful anti trust reviews, for example, suggests that a firm's ability to shape policy makers' opinions about the positive international competitive effects of a proposed domestic merger is an important de terminant of the firm's ability to gain positive antitrust reviews. Similarly, Yoffie and Kwak (2001) have described how Intel responded adroitly to the threat of increased antitrust scru tiny through strong institutional influence. The success of this strategy has its source in the capacity of a firm to persuade institutional con stituents that its practices and interests are an optimal or ideal match with public policy stan dards and expectations.

An additional example is British Petroleum (BP), which exhibited a proactive political man agement strategy in the late 1990s when it ag gressively moved to actively shape industries' and public policy makers' beliefs about what constitutes an acceptable regulatory standard for pollution. By departing from shared industry rules and beliefs and going well beyond regu latory requirements to establish more laudable and stringent guidelines and practices, BP rede fined the norms of acceptable standards in such a way as to place it in the most advantageous position to meet the very regulations it had sought to define. Furthermore, by raising insti tutional expectations for the entire industry, BP created significant costs for its rivals, who were unprepared for compliance with the newly es tablished norms (McWilliams et al., 2002).

The dynamic capability to exert institutional influence over the norms and standards of pub lic policy can be measured by intense firm in volvement in industry associations to shape po litical expectations, the proactive influence of the media and a proportionately intense invest

ment in lobbying or public relations, aggressive coalition- and constituency-building efforts to shape stakeholder beliefs about socially appro priate business behavior, the development of best practice solutions to policy problems that redefine industry standards, or the judicious for mation of selective strategic alliances for the

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512 Academy of Management Review April

purpose of demonstrating innovative political actions. For example, in forming an alliance with Greenpeace to identify sustainable sources of timber supply, IKEA was able to reshape in stitutional definitions of acceptable sourcing practices in its industry (Buysse & Verbeke, 2003).

The institutional power to influence the be liefs of those affecting or affected by public pol icy is therefore a core dynamic capability that is likely to lead to a competitive advantage for firms. The range or breadth of a firm's embed dedness in its economic and institutional envi ronments (Uzzi, 1997; Uzzi & Gillespie, 2002; Uzzi & Lancaster, 2004) also determines the potential reach of the firm's influence and, thus, the prob ability that proactive influence attempts will be successful. In a review of firms' success in ob taining corporate welfare?that is, benefits such as grants or tax breaks?Dawkins (2002) noted that firms such as General Electric were among the most successful in gaining special govern

ment subsidies because of their ability to mobi lize a wide range of institutional connections and to broadly influence the debate on issues that affected them. The relational competence of firms reflects their ability to embed themselves in networks of relations that they can mobilize or influence to shape public opinion and public policy.

Proposition 4a: The effectiveness of proactive political strategies will de pend on the scope of a firm's institu tional influence capabilities.

Proposition 4b: The breadth and depth of a firm's embeddedness in its eco nomic and political environment will determine the effectiveness of the firm's institutional influence capabili ties.

Proposition 4c: Effective proactive po litical strategies will result in a closer

perceived fit between a firm's actions and public policy requirements than the actions of the firm's rivals.

Dynamic Capabilities and Sustainable Competitive Advantage

Several theorists have argued that dynamic capabilities are a source of competitive advan

tage (Makadok, 2001; Teece et al., 1997; Verona & Ravasi, 2003), whereas others have suggested that such capabilities may not be a source of sustainable competitive advantage (Eisenhardt & Martin, 2000) because, though often valuable, they may be equifinal and, hence, neither inim itable nor immobile (Zott, 2003). Our argument

with respect to political environments combines these positions on the basis that different firms undertake political management for different reasons. Firms do not always take political ac tion to gain a competitive advantage, and among those firms that do, the length of time before such an advantage is likely to be com peted away will vary depending on whether the firms' goals are to comply with public policy, to gain first mover advantages in anticipation of changes in the political environment, or to influ ence the nature of the public policies them selves. We argue, therefore, that while all four strat

egies will tend to sustain or enhance a firm's economic performance, the duration of a firm's competitive advantage from strategic political management will vary depending on the extent to which the strategy generates unique firm re sources and competencies that are valuable, in imitable, and imperfectly mobile across firms (Amit & Schoemaker, 1993; Barney, 1991). A de fensive strategy may sustain a firm's perfor

mance, but it is likely to generate little or no sustainable competitive advantage because the firm's dynamic capabilities reside not in seek ing new economic rents but in retaining and employing the strategic assets and competen cies it already possesses, thereby protecting the firm's current position but not necessarily im proving it. As the political environment changes over time, through the influence of various stakeholders, including creative actions by challengers, the advantage derived through the use of defensive strategies will inevitably be competed away in a process of creative destruc tion (Schumpeter, 1950). Hence, any competitive advantage gained through a defensive strategy will be minimal and short-lived.

A reactive strategy is likely to confer only a short-term advantage on firms relative to rivals. The competitive advantage achieved through a reactive strategy stems from the higher effi ciency and legitimacy of swift compliance and will largely be competed away once all compet itors in the industry have achieved compliance

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2008 Oliver and Holzinger 513

with the public policy in question. An anticipa tory strategy has the capacity to confer a longer competitive advantage on firms than a reactive strategy because it gives firms a distinct first mover advantage in adapting to the political environment relative to rivals (Lieberman & Montgomery, 1988). Research has demonstrated a moderate sustainability of first mover and early mover advantages (Makadok, 1998), but such advantages will be eroded by eventual increases in compliance among rivals. Given the increasingly dynamic nature of the political environment, the competitive advantage attain able from anticipatory strategies is therefore likely to be of only short to medium duration. Proactive political strategies are likely to be

the most promising of the four strategies for generating more sustainable economic rents, because proactive political strategies help to define what constitutes successful public policy in the first place, and, thus, they are able to shape public policy to fit a firm's own unique advantages and interests. Proactive political strategies also give firms the greatest opportu nities to craft resources and competencies that are unique, intangible, or difficult to imitate, because such firms define the nature of the re source or competency needed to qualify as ac ceptable in political terms. Dean and Brown (1995) have cited the example of Henkel, the Ger

man detergent manufacturer, which developed a detergent ingredient that reduced phosphates by 50 percent, leading the government to require phosphate reductions of that amount across the industry and rendering Henkel the sole pos sessor of a valued innovation that gave it a competitive advantage over rivals for several years.

The following proposition summarizes the foregoing arguments. Figure 3 also illustrates this proposed relationship between the alterna tive political strategies and competitive advan tage.

Proposition 5: Political strategies will tend to differ systematically in the du ration of their competitive advantage: defensive, reactive, anticipatory, and proactive strategies, respectively, will generate an increasingly sustainable competitive advantage.

Political dynamism?that is, the number and pace of business-relevant public policy changes

FIGURE 3 Political Strategies and Sustainable

Competitive Advantage

Reactive strategy Short-term competitive advantage through efficiency and legitimacy effects

Anticipatory strategy Short- to medium-term competitive advantage through first mover advantage and enhanced reputation

Defensive strategy No or little sustainable competitive advantage because of focus on protection of current strategic assets and market position

Proactive strategy Medium- to long-term competitive advantage through redefinition of public policy to fit firm's strengths and interests

and political amendments passed each year by federal and state or provincial governments? creates the need for strategic political manage ment (as illustrated by the vertical arrow in Fig ure 1). This dynamism is also likely to influence effectiveness of the political strategies (as indi cated by the moderating effect shown in Figure 1). Reactive and defensive political strategies should be more effective in slower-moving po litical environments than in more dynamic po litical environments. Less asset intensive or costly than anticipatory or proactive political strategies, these strategies will generate higher economic returns owing to their lower execution costs. In highly dynamic political environments, the risk of failure will be higher if anticipatory or proactive strategies are not implemented.

With respect to anticipatory and proactive strat egies, Gavetti and Levinthal (2000) have argued that in slower-moving environments firms can look more to past experience to remain compet itive, but in highly dynamic environments firms gain significantly more from forward-looking and proactive explorations. Hence, the higher costs associated with these more asset-inten sive strategies may be offset by the potential for higher returns and lower risk of failure in dy namic environments.

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514 Academy of Management Review April

Proposition 6a: The differential effec tiveness of defensive, reactive, antici patory, and proactive strategies will depend on the rate of change in a firm's political environment.

Proposition 6b: Reactive and defen sive strategies will be less effective than anticipatory and proactive strat egies in dynamic political environ ments.

DISCUSSION AND CONCLUSIONS

The dynamic capabilities perspective has ex tended the resource-based view to the realm of evolving capabilities that vary in competitive value depending on the pace of environmental change (Miller, 2003). We have argued that, in view of the evidence that political and compet itive environments are becoming more dynamic, firms operating in changing political environ

ments may need to develop capability trajecto ries in managing political action that reflect the pace and complexity of contemporary political and competitive environments. It has been hy pothesized that the effectiveness of political strategies will be a function of firms' internally and externally oriented dynamic capabilities, that these capabilities are grounded in knowl edge and influence acquisition and use, and that their effectiveness will vary with the rate of environmental change. Based on the assump tion that the point of departure for effective po litical strategies is a firm's motive to enhance or protect the value of its strategic assets and com petencies, we developed a typology of political strategies that identifies the dynamic capabili ties that firms develop and deploy to leverage political advantage for economic or competitive gain.

Consistent with Keim and Baysinger's obser vation that "serious students of business politi cal activity still know very little about the effec tiveness of various business efforts to affect political decision-making" (1988: 164), we have sought to initiate an examination of the relation ships that link political strategies, dynamic ca pabilities, and firm effectiveness, based on the premise that a firm's internal capabilities may provide a partial explanation of firm heteroge neity in their strategic ability to improve firm performance or to gain a competitive advantage

through political action. To this end, we pro posed that firm-specific dynamic capabilities? specifically, capabilities in structural and pro cess reconfiguration, scanning and anticipatory knowledge acquisition, social capital deploy ment, and institutional influence processes? are likely to serve as the key drivers of effective political management in undertaking reactive, anticipatory, defensive, and proactive strate gies, respectively. We also proposed the factors most likely to determine the effectiveness of these dynamic capabilities (i.e., decision speed, frequency of scanning, breadth of social con tacts, degree of embeddedness), as well as the firm-level outcomes expected to result from their implementation (legitimacy, first mover advan tages, protection of market position, congruence

with firm interests). Political influence theorists have argued that

the most neglected area of study pertains "to those efforts to better understand internal pro cedures and routines related to effective imple mentation of CPA [corporate political activity]" (Hillman et al., 2004: 846). We have suggested that firms' internal dynamic capabilities offer a promising line of future inquiry into such inter nal procedures and routines. One area of future research might be to link the functionality of dynamic capabilities to firms' specific day-to day processes and routines to understand how firms overcome inertial tendencies and core ri gidities that limit their capacity to continually acquire new knowledge regarding the political environment or to seek new means of political influence (Hannan & Freeman, 1984; Leonard Barton, 1992). To gain a better understanding of dynamic capabilities, it might also be useful to conduct case studies of effective firms in highly political environments in order to determine how they embed their knowledge of coping with political change into ongoing operating routines so as to guide future continuous learning and organizational flexibility.

A second area of future research might be to compare the influence of different political strat egies on rivals' costs. In contrast to the conven tional economic wisdom that firms outcompete rivals by offering higher-quality or lower-priced products, a dynamic capabilities resource based perspective would suggest that firms may also outcompete rivals by employing strategies that shift the supply curve of rivals upward (Mc

Williams et al., 2002). Proactive lobbying efforts

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2008 Oliver and Holzinger 515

that result in public policies preventing rivals from using substitute resources for those valued resources possessed by the lobbying firm (e.g., a new pollution control production technology) constitute a shift in the industry's supply curve that can raise rivals' costs or erode their com petitive advantage. Therefore, research on the impact of different political strategies on prod uct or process substitutability may contribute to resource-based theory and generate new insight into the role of process innovation in shaping public policy changes that create differential economic rents among competitors.

A third area of future research concerns the breadth of a firm's strategic repertoire. We have suggested four distinct types of political strate gies. However, firms may elect to use more than one type of strategy concurrently, depending on the costs of allocating resources to multiple strategies simultaneously and the extent to which unique capabilities are incompatible or redundant. For example, Hewlett-Packard's re cent investment in its e-waste recycling infra structure?an anticipatory strategy?has pre cluded its need to join other computer and television manufacturers in lobbying to main tain the status quo?a defensive strategy (Woel lert, 2006). At the same time, however, combining

multiple dynamic political strategies simulta neously may enhance firms' effectiveness by in creasing the flexibility with which they adapt to changes in the political environment and ren dering it more difficult for rivals to imitate them.

In addition, combinatory deployment of mul tiple capabilities can create synergies that mag nify the effectiveness of any single capability. Returning to the example above, Hewlett Packard combined its investment in e-waste re cycling infrastructure?an anticipatory strate gy?with successful lobbying to force other computer manufacturers to recycle their elec tronic refuse?a proactive strategy (Woellert, 2006). As a second example, several brand name pharmaceutical companies in the 1980s lobbied intensely against proposed generic substitution laws?a defensive strategy?but simulta neously began moving aggressively into the ge neric market?an anticipatory strategy?as a way to respond dynamically and flexibly to po tential changes in their political environment (Oster, 1990). Furthermore, a number of research ers have noted that the use of dynamic capabil ities in combination facilitates rent creation and

competitive advantage (Blyler & Coff, 2003; Eisenhardt & Martin, 2000; Makadok, 2001; Miller, 2003; Teece et al., 1997). Therefore, future research on the nature and advisability of using a combination of strategies simultaneously may help to explain the conditions under which po litical strategies are most likely to be effective. Fourth, "the pattern of effective dynamic ca

pabilities depends upon market dynamism"; in stable markets, "effective dynamic capabilities rely heavily on existing knowledge" (Eisenhardt & Martin, 2000: 1110). In this paper we have pro posed that the four strategies will be heteroge neous with respect to their effectiveness in cre ating a competitive advantage for firms and that this effectiveness will depend on the pace of environmental change. However, one issue spe cific to political environments is the speed with which competitive advantage can be eroded by the potential for collective or industry-level po litical action through leveling the competitive playing field and distributing benefits evenly across a range of firms in an industry. While we have focused on firm-level strategies in dy namic environments, future researchers might also investigate the extent to which collective industry-level political action slows the rate of change in political environments or undermines the efficacy of firm-level strategies. Studies of the degree to which collective action marginal izes the capacity of any single firm to obtain a competitive advantage through political strate gies might help strategic decision makers to understand the trade-offs between the benefits of industry-wide political action and political entrepreneurship. By studying this trade-off, firms may gain new insights into the conditions under which firm-level strategies are likely to be more profitable than conformity to the will of the industry as a whole. The application of a dynamic capabilities

framework to a collective level of analysis also has implications for the classic argument that the greater the number of firms in an industry, the more likely it is firms will free ride (Olson, 1965). Some evidence suggests that industries

with many members are more likely to free ride, whereas other research results have found no such effect for free riding (Getz, 1997). Here we suggest that the likelihood of free riding may depend less on industry size or concentration than on industry dynamism. Where competitive and political environments are highly dynamic,

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516 Academy of Management Review April

free riding may not be a viable option, because a given firm will not have the luxury of waiting for other industry players to shape the political environment to its own particular advantage. Instead, firms will be forced to leverage some of their own capabilities to keep pace with the demands of their environment. Thus, the passiv ity of a free-riding strategy may be inappropri ate when political or competitive environments are dynamic or unpredictable.

The political environment of firms can be viewed as a political marketplace in which firms engage with policy makers to execute po litical strategies that exploit valued dynamic capabilities most likely to generate firm advan tages that are costly for competitors to imitate or avoid. The identification of firm-specific strate gic assets and capabilities that best predict the likelihood of political management effective ness encourages a more long-term focus and commitment to building appropriate political approaches. Further investigation into the dy namic capabilities that optimize firms' future value may help firms to develop competitive and political strategies that serve both public and private interests.

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Christine Oliver ([email protected]) is the Henry J. Knowles Chair of Organi zational Strategy in the Schulich School of Business at York University. She received her Ph.D. from the University of Toronto. Her research interests include institutional theory and interorganizational relations.

Ingo Holzinger ([email protected]) is an assistant professor of organiza tional behavior at the Schulich School of Business at York University. He received his Ph.D. in management from the University of Wisconsin-Madison. His current research interests include shared mental models of competition, collaboration and community in niche industries, and culturally patterned cognition in organizations.

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