Defensive Regulation

A defensive strategy where an incumbent company uses government regulation and lobbying to create barriers to entry and hinder competitors.

"Using Government's to create protection for your market and slow down competitors."

• Simon Wardley

🤔 Explanation

What is Defensive Regulation?

Defensive Regulation is the strategic use of government power to protect a company's market position. It involves actively lobbying policymakers and engaging with regulatory agencies to shape laws in a way that benefits the incumbent and creates significant hurdles for competitors. This can include advocating for complex licensing requirements, stringent compliance standards, or other rules that are costly and difficult for new entrants to navigate. The goal is to use the force of law to create a moat around the business, making it harder for rivals to compete.

Why use this strategy?

This is a powerful, albeit controversial, defensive strategy for established players. The key benefits are:

• Creating High Barriers to Entry: Complex regulations can make it prohibitively expensive and time-consuming for new companies to enter the market.
• Slowing Down Competitors: It can tie up competitors in red tape, slowing their ability to innovate and grow.
• Protecting Existing Business Models: It can be used to protect legacy business models from disruption by new technologies or more efficient competitors.
• Leveraging Incumbent Strengths: Large, established companies often have the resources and expertise to navigate complex regulatory environments more effectively than smaller rivals.

🗺️ Real-World Examples

The Taxi Medallion System

For decades, the taxi industry in many cities was protected by a system of medallions – a limited number of licenses that were required to operate a taxi. This was a form of defensive regulation that created an artificial scarcity, driving up the price of medallions and creating a massive barrier to entry for new taxi drivers. This system was eventually disrupted by ride-sharing companies like Uber and Lyft, who used technology to bypass the medallion system.

The Pharmaceutical Industry

The pharmaceutical industry benefits from a highly regulated environment. The lengthy and expensive process of getting a new drug approved by the FDA creates a significant barrier to entry for smaller companies. Large pharmaceutical companies have extensive experience and dedicated teams for navigating this process, and they actively lobby to maintain these high standards, which protects their blockbuster drugs from competition.

The US Auto Dealership Laws

In many US states, it is illegal for a car manufacturer to sell directly to consumers; they must go through a network of independent dealerships. These laws were originally put in place to protect small dealership owners, but they now function as a form of defensive regulation that protects the dealership model from disintermediation by companies like Tesla, who have had to fight legal battles in many states to be allowed to sell their cars directly.

🚦 When to Use / When to Avoid

🚦 Defensive Regulation Strategy Self-Assessment Tool

Find out the strategic fit and organisational readiness by marking each statement as Yes/Maybe/No based on your context. Strategy Assessment Guide.

Landscape and Climate

How well does the strategy fit your context?

• Your industry is already heavily regulated, or is likely to become so.
• A new technology or business model is emerging that threatens to bypass existing regulations.
• Competitors are smaller and have fewer resources to deal with complex compliance requirements.
• Public sentiment can be swayed to support regulations in the name of safety, privacy, or fairness.

Organisational Readiness (Doctrine)

How capable is your organisation to execute the strategy?

• We have a sophisticated government relations or lobbying team.
• We have the financial resources to engage in a long-term lobbying effort.
• Our leadership has a high tolerance for the ethical and reputational risks associated with this strategy.
• We can craft a narrative that frames our desired regulations as being in the public interest.

Assessment and Recommendation

Strategic Fit: Weak. Ability to Execute: Weak.

RECOMMENDATION
Consider alternative strategies or address significant gaps before proceeding.

Use when

• You are a large, established player in a regulated industry.
• You have the resources and political connections to influence the regulatory process.
• You are facing a disruptive threat that could be slowed or stopped by regulation.

Avoid when

• You are a startup or a small company with limited resources.
• The political and regulatory environment is hostile to your interests.
• The ethical and reputational risks are too high.
• Over-reliance on regulation would cause you to stop innovating and become complacent.

🎯 Leadership

Core challenge

The core leadership challenge is to navigate the significant ethical and reputational risks of this strategy. It is a fine line between responsible corporate citizenship and self-serving "rent-seeking" that harms competition and consumers. Leaders must be prepared for public scrutiny and be able to defend their actions. They must also avoid the trap of becoming so focused on regulatory defense that they neglect to innovate and compete in the marketplace.

Key leadership skills required

• Political Acumen: A deep understanding of the political process and how to influence it.
• Ethical Judgment: A strong moral compass to navigate the grey areas of lobbying and regulatory influence.
• Strategic Communication: The ability to frame your arguments in a way that is persuasive to both policymakers and the public.
• Risk Management: The skill to assess and mitigate the potential for legal and reputational backlash.

Ethical considerations

This strategy is fraught with ethical issues. It can be seen as an attempt to use government power to stifle competition, which can lead to higher prices, less choice, and slower innovation for consumers. The process of lobbying can also create the perception (or the reality) of corruption and undue influence. This is a strategy that should be approached with extreme caution and a strong ethical framework.

📋 How to Execute

1. Identify the Regulatory Threat or Opportunity: Analyze the regulatory landscape to identify areas where you can influence the rules to your advantage.
2. Develop a Lobbying Strategy: Define your key messages, identify your target policymakers, and build a coalition of support.
3. Engage with Regulators and Policymakers: Actively participate in the regulatory process through lobbying, public comments, and providing "expert" testimony.
4. Shape Public Opinion: Use public relations and media campaigns to build support for your position.
5. Leverage Compliance: Once the regulations are in place, use your expertise in compliance to your advantage and ensure that they are enforced against your competitors.

📈 Measuring Success

• Favorable Regulations: Have you successfully influenced the passage of regulations that benefit your business?
• Competitor Impact: Have the new regulations made it more difficult for your competitors to operate or enter the market?
• Market Share Protection: Have you been able to protect your market share from new entrants?
• Profitability: Has the regulatory moat protected your profitability?

⚠️ Common Pitfalls and Warning Signs

Reputational Damage

Being seen as a company that uses its power to crush competition can lead to significant public backlash and brand damage.

Regulatory Backfire

Your lobbying efforts could backfire, leading to unintended consequences or even more stringent regulations that harm your business.

Complacency

Over-reliance on regulatory protection can lead to a culture of complacency and a failure to innovate.

Disruption

A disruptive new technology or business model can sometimes make the regulations you fought for irrelevant.

🧠 Strategic Insights

Rent-Seeking vs. Innovation

This strategy is a classic example of "rent-seeking," which is the practice of seeking to increase one's share of existing wealth without creating new wealth. It is the opposite of a strategy based on innovation and creating value for customers. While it can be effective in the short term, it is often a sign of a company that is no longer able to compete on the merits of its products.

The Power of Incumbency

Defensive Regulation is a strategy that is primarily available to large, powerful incumbents. It is one of the key ways that established players can use their power to maintain their position and fend off challenges from smaller, more innovative rivals.

❓ Key Questions to Ask

• The Goal: What specific competitive threat are we trying to neutralize with this regulation?
• The Narrative: How can we frame this regulation as being in the public interest, rather than just our own self-interest?
• The Risk: What is the worst-case scenario if this strategy backfires?
• The Long Game: Are we becoming a company that relies on lawyers and lobbyists instead of engineers and innovators?

🔀 Related Strategies

• Raising Barriers to Entry: Defensive Regulation is one of the most powerful ways to raise barriers to entry.

• Limitation of Competition: This is often the goal of defensive regulation.

• Standards Game: This strategy can be used to get your proprietary standard enshrined in law, creating a powerful and legally-enforced moat.

• Patents & Intellectual Property Rights - leveraging IP frameworks to support regulatory measures and enforce legal constraints on competitors.

• Lobbying - influencing policymakers and public opinion to enact regulations that entrench your position and disadvantage rivals.

⛅ Relevant Climatic Patterns

• Competitors' actions will change the game – trigger: regulation is often introduced when challengers threaten the status quo.
• Past success breeds inertia – influence: incumbents rely on regulation when existing models make them resistant to change.

📚 Further Reading & References

• The Business of America is Lobbying by Lee Drutman, Oxford University Press, 2015. An overview of the role of lobbying in the American economy.
• Rent-Seeking, Investopedia. A good definition of the economic concept that underpins this strategy.