When Do Regulators Become More Important than Customers? 02-09

When Do Regulators Become More Important than Customers?

While working with a huge Russian hydrocarbon company in Texas last year, our innovation conversation quickly zeroed in on customers. Who was the energy giant’s most important customer? Which customer had the biggest impact on new value creation? What customer would matter most in five years?

The wide-ranging English/Russian debate raged for 20 minutes. Then one of the engineering executives, a fracking enthusiast and unconventional extraction technologies champion, spoke up. The answer, he declared, was now obvious. The company’s most important customer — by far — was Russia’s government. Strategic success required pleasing Vladimir Putin’s Kremlin.

The room went quiet. That single comment rebooted the entire discussion. No one disagreed. The innovation roadmap was hauled out and reviewed less in the spotlight of global opportunities than the cold reflection of domestic politics. State satisfaction mattered more than market disruption.

The unhappy innovation inference? Your most important customers may not be the people who buy your products but the ones who regulate your company and industry. With apologies toTed Levitt, a new “Marketing Myopia 2.0” has emerged. Instead of rethinking “What Business Are We In?,” the better question may be “What Will Our Regulators Do?.” That’s not cynicism; that’s savvy risk management.

Uber didn’t hire former White House advisor David Plouffe by accident. The regulatory handwriting was on the wall and not just in the United States. The app-enabled car service faces resistanceand even protests worldwide. But its miseries enjoy great and growing company. 

Wherever disruptive innovations have captured mind-or marketshare, regulators — not users and consumers — quickly become the customer most worthy of woo.Incumbents and competitors petition for relief and restraint. Twenty-first century market competition in disruptive business environments quickly becomes regulatory lawfare. Upstart innovators are seen as insurgents; they may not have to be crushed, but can’t be allowed to flourish. May the best lawyers and lobbyists win.

For an Uber, Airbnb, Weibo, Google, 23andMe and most strategically-situated post-industrial disruptors, managing regulatory combat quickly assumes primacy over managing either innovation investment or customer satisfaction. Their managements increasingly have to play the odds: What is more likely to get a better and safer return on investment — a really talented software development team in Bangalore, Bogata, or Cambridge? Or a really good lobbyist or ”fixer”—in Brussels, Beijing, or Washington D.C.?

These questions, of course, aren’t hypothetical.

All companies — innovative or not — must respect and observe the rule of law wherever they compete. But that creates perverse incentives. The more important laws and regulations become, the more incentive there may be to create more of them. Finding innovative ways to change regulations may prove faster, better, and cheaper than innovatively improving products and services. This is the essence of the Nobel Prize-winning work in Public Choice economics — that lawmakers and regulators have incentives to preserve, protect, and extend their influence and reach. The late James Buchanan, the Nobelist father of Public Choice, described this as “politics without romance.”

George Stigler, another Nobel economist, identified and described the concept of regulatory capture — a sort of economicsStockholm Syndrome  where regulators supposedly empowered to protect the public good end up protecting the individuals and organizations they are supposed to regulate.

Needless to say, these behavioral pathologies lead directly to crony capitalism — where favors, waivers, and selective enforcement of the rules matter as much, or more, to marketplace success as innovative genius. These phenomena are global. And as disruptive innovators in fields from digital self-expression, health care, retail, tourism, and transportation seek to scale globally, they’ll find regulators scaling right along side them.

As a rule, innovators are interested in creative destruction; regulators are not. As a rule, regulators make the rules. The rise of disruptive innovation guarantees a rise of restrictive rules. Those rules assure that regulators become more important, not less. Will regulators become more important to innovators than customers? Follow the money: if legal and lobbying budgets are growing faster than innovation and research budgets, we’ll know the answer.

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