Economics – the engine of Scientific Strategy
24 April 2015
Grant Saggers, Strategy Consultant of the Year, MCA Awards 2015
I was delighted, as a competition economist, to win the ‘Strategy Consultant of the Year’ category at the UK’s MCA Awards last night(1). It was based on the kind feedback of previous clients, for which I am humbled and grateful – many of my great colleagues and clients deserve the credit far more.
For me, the award pleasingly recognised two things: (i) economics is at the heart of strategy; and, (ii) regulatory processes, handled well, offer great strategic opportunity for companies.
The first point is no surprise. Strategy is the art of choice; economics is the science of choice. So the two fields have long been close. For example, Michael Porter, the strategy doyen, is a Professor of Economics and credits much of his thinking on competitive strategy to the economics field of industrial organisation (which studies how markets function and firms compete)(2).
But as the world becomes more data rich, and resource constrained, so good strategy will draw more and more on the economics toolkit. Techniques from micro-econometrics distil cause-and-effect out of the confusion of big (and small) data; behavioural economics trials shape product design and employee incentives; and, auction theory underpins internet business models. And economics, a discipline born out of understanding the allocation of scarce resources, is increasingly in demand by citizens, companies and policy-makers to produce the robust evidence underpinning hard trade-offs and choices.
In a world rich in data, demanding of precision (to avoid wasting precisions resources) and full of hard choices, we’ill have to be more scientific in our choices – scientific in our strategy. The tools and mind-set of economists will underpin that evolution.
The second point is something I’ve seen first-hand over the ten years I’ve been advising clients through inquiries by competition (antitrust) authorities, regulators and in court cases.
Regulation is very much a part of how markets work, and becoming more so. Indeed, this year’s PwC Global CEO Survey found 78% of respondents cited ‘over-regulation’ as the top threat to business growth prospects, up 6 percentage points from last year(3). But firms have choices on how to engage with regulators.
Investigations by competition authorities, in particular, can have game-changing effects on the companies and markets involved. If an authority finds a market is not working well for consumers, or that a firm is abusing its power, it may impose onerous new rules, massive fines, or even break up companies. In the last two years, for example, the Competition and Markets Authority (formerly the OFT and Competition Commission) has ordered the breakup of a major cement group and a major hospital group. The Competition Commission launched the campaign on Payment Protection Insurance (PPI) that led to the UK banks paying back billions of pounds. And just last week, the European Commission began investigations into Google’s activities in Europe, with the potential of multi-billion dollar fines if the alleged complaints were ultimately proven(4).
Given the transformational outcomes, there is clear strategic risk from these investigations, but also strategic opportunity.
Companies can use the process to break into new markets, unseat lazy incumbents, or fight back against unfair trading practices. The ability to influence the debate depends critically on the quality of economic evidence you put together. But it depends also on strategic choices about when and how to use your evidence, choices about which battles to fight, and the ability to paint a vivid, real pictures for the regulator (and often the company itself) on how a market could work differently, and better. Again it draws together the best of strategy and economics.
Having a strategic view in regulatory inquiries is critical, and I’ve had the pleasure of seeing it succeed for many clients.
So the bond between economics and strategy is strong, and becoming stronger. ‘Scientific strategy’ demands the best of both disciplines(5). Scientific strategy will accelerate, and economics will be its engine. So I expect that many more economists will win this MCA award in future.
To meet more of my winning MCA colleagues, please click here.
By Grant Saggers
(2) The Preface to M. Porter seminal book, “Competitive Strategy: Techniques for Analyzing Industries and Competitors”, explains that the insight drew on his research and teaching in the economics of industrial organisation.
(3) PwC 18th Annual Global CEO Survey interviewed 1,322 CEOs in 77 countries, http://www.pwc.com/gx/en/ceo-survey/2015/assets/pwc-18th-annual-global-ceo-survey-jan-2015.pdf
(4) See, for example, the Wall Street Journal: http://www.wsj.com/articles/eu-to-file-antitrust-charges-against-google-1429039881
(5) See, for example, R Litan (2014), “What an Economist brings to a Business Strategy”, Harvard Business Review, or A. Lafley et al (2013), “Bringing Science to the Art of Strategy”, Harvard Business Review.