Tuesday, 17 March 2015

Three different regulatory responses and their impact on industry

An item on the TV news a few mornings ago caught my attention and reminded me just how much regulatory action can affect an industry and the firms which compete within it. The regulatory environment, and the possibility of regulatory changes falls in the "P - Political" quadrant of a traditional PEST analysis, and it is vital to understand it in order to form a clear view of the competitive environment in which you operate.

The news item concerned the new laws being proposed for plain cigarette packaging. But what it got me thinking about is the widely differing regulatory response to the tobacco, automotive and pensions industries.

In each of these industries, government would like to influence, if not control our behaviour.

  1. In the automotive industry, government would like us to drive safely, which often means more slowly. This is to reduce the burden on emergency and healthcare services, as well as to limit the potential dangers to other road users with whom you might collide.
  2. In the tobacco industry, the government wants to reduce the number of people who smoke or start smoking. This is to reduce the long-term burden on the health services, as well as the risks to other people that come from passive smoking.
  3. In the retirement savings industry, government wants to increase the amount of money that people save while they are working. This is to reduce the number of people who fall back on state benefits during retirement.

In all three cases, the government's reasons are similar:

  1. the behaviours have social consequences if individuals get it wrong (think about passive smoking, innocent people being killed on the roads, etc.), and
  2. it costs the government money to clean up behind us (whether in the form of higher NHS or social welfare bills).

But the regulatory responses to these three situations is significantly different, as is the impact on the industries that serve them:

  1. In the case of speeding, it is simply against the law. Speed limits are entrenched in the highways code, and there are financial and other criminal penalties for exceeding them. However, with a few exceptions (think about rules about including seatbelts in cars, etc.) the automobile industry has managed to stay out of the fray. Certainly, if a driver exceeds the speed limit and is involved in an accident, nobody blames the car manufacturer for building a car capable of going too fast. And as far as I am aware, there are no laws governing how fast manufacturers are allowed to allow cars to go.
  2. In the case of smoking, governments actively campaign against it, limit where you can do it, and control advertising of cigarettes. However, they seem reluctant to go as far as to ban it outright. Is it more of a civil liberty than speeding, or is it just backed by a powerful tobacco lobby? Could the tobacco lobby have avoided all of this had it taken a different approach? Clearly, the risk to the tobacco industry is huge: it could be excluded from the UK market entirely!
  3. In the case of retirement savings, the government appears to be moving in the exact opposite direction by lifting the existing restrictions on what people can do with their accumulated retirement savings, despite warnings from numerous quarters of the potential dangers to individuals in doing so. Is it purely an electoral ploy and revenue raising activity? (Pensioners will get access to the cash before the next general election, but probably won't have to pay the tax on it until after the next general election.) It is not yet clear whether these changes are beneficial to the industry from a long-term financial perspective. However, what is clear is that costs of implementing these change is immense, and the probability of unplanned for and large scale customer withdrawals is significant.

These three examples demonstrate just how widely different regulatory responses can be, and therefore how important it is for a strategist to understand what they currently are, to anticipate how they might change, and to consider how the firm might influence them in its favour (or against its competitors).

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photo credit: IMG_4576 via photopin (license)