Abstract
Legal and regulatory regimes are often perceived as constraints to improved business performance. However, the article reviewed in this paper, reveals how firms capitalize on the law to develop effective diversification strategies. Five legal strategies are identified in the article, namely, avoidance, prevention, compliance, transformative, and value-creation. This paper summarises and reviews the article based on strategic management theories and concepts.
Summary
The article examines the legal strategies that firms can use to create value and stay ahead of the competition. A right legal strategy helps firms overcome regulation constraints, operate in multiple jurisdictions, protect intellectual property rights, avoid lawsuits, and improve performance. Increased recognition of the importance of internal legal capabilities has led to a rise in the number of directors with a legal background in U.S. companies. The article, based on the analysis of legal functions in firms like Nokia, Disney, and Microsoft, suggests a framework for developing the right legal strategy for a company. The framework entails factors like the counsel’s expertise, the top management attitudes, and the level of collaboration between the legal department and the top executives.
Based on this framework, the article establishes that the legal pathways used by firms fall into five categories. First, some firms use avoidance whereby they ignore legal counsel in their actions or use it to exploit lax policies. It is characteristic of firms where managers lack legal knowledge or awareness. It helps firms to capitalize on regulatory loopholes. Second, compliant firms perceive the law as a constraint to corporate decision-making. The managers have a limited background in law with the legal function providing central oversight. Such firms face fewer noncompliance-related cases.
Some firms use a preventive pathway to cushion themselves from future risks. In this approach, the executives understand corporate law and collaborate with the legal counsel to address business risks. This approach can give a firm a competitive advantage. The fourth pathway is value creation and it involves managers knowledgeable in patent law. The fifth pathway is transformation, whereby company strategies are aligned with the law with regard to R&D and patenting. It involves high-level partnerships in decision-making and the creation of core competencies. Firms can use this framework to evaluate their legal strategies.
The efficacy of any legal strategy depends on a firm’s organizational culture, workforce, and structure, and level of competition. In choosing a legal strategy from the five options, managers should understand the risks involved and not be driven by the opportunities presented. In general, internal legal functions can help create value and generate a strategic advantage for the firm.
Article Review/Critique
The article describes the diversification strategies used by different companies to gain a competitive advantage. The writer finds the article informative and insightful with regard to the use of law to develop an effective diversification strategy. Each firm described in the article uses a unique legal strategy. Walt Disney transferred its property to other firms as new trademarks to avoid losing its copyrights to rivals. Disney acquired a competitive advantage through related diversification, i.e., using industry linkages to enhance its market power. In the writer’s opinion, Disney, a global leader in media innovation, also enhanced its capabilities to exploit the economies of scale by licensing its trademarks to other firms. Diversified activities are better exploited externally because of increased efficiency and reduced costs.
Another example of a legal strategy in the article is that involving the acquisition of Nokia mobile by Microsoft. Firms use acquisitions and mergers to pursue a competitive strategy in their industry. An acquisition occurs when a large firm buys a small one or division from another. In Microsoft’s case, the acquisition strengthened its competitive capability against Google and helped it overcome legal hurdles.
In contrast, Nokia used a divestiture strategy to become less diversified and raise more capital. The article also explains how some companies utilize the law to gain a competitive advantage through joint ventures. In the article, Qualcomm, a wireless technology company, relies on its joint ventures with vendors to generate funds for research and development. A joint venture, as a competitive strategy, involves partnerships geared towards capitalizing on a particular opportunity, which is Qualcomm’s case was an exclusive patent for its wireless technology.
The article’s five legal strategies relate to the concept of management by objectives. In the writer’s opinion, ‘avoidant’ managers manage by extrapolation. The managers adhere to conservative actions as long as they are working. The article characterizes ‘avoidant’ managers as those who believe that legal counsel cannot create value and therefore, make no effort to change internal controls or policies.
On the other hand, noncompliant directors manage by crisis. According to the article, managers can become noncompliant if the benefits of their activities outweigh the risks or costs. In the writer’s view, managing by hope is evident in avoidant, preventive, and compliant legal strategies because they center on risk mitigation.
The article details how firms can develop a sustainable competitive advantage by capitalizing on various legal strategies. It offers a deep analysis with real-life examples of firms that have utilized legal counsel to improve their performance. Another major strength of the article is its use of research statistics on the managers’ attitudes and collaboration with the legal counsel as a basis for its framework. However, the methodology used to assess their attitudes is not provided. In addition, the article is more descriptive than analytical and does not provide a clear guideline for developing an effective legal strategy.