Chapter 1 – Seize Competitive Advantage
Achieving competitive advantage is critical to the success and even the survival of companies that cross a
variety of industries and cultures. Companies need to strike a balance between surviving immediate
market conditions and making certain their companies endure and succeed over the long term (see
exhibit 1.1, page 2).
Concern over the impact of the law in general has emerged as one of the most important factors in the
external environment in which business operates. Because most companies don’t want to get tangled
up with lawyers, lobbyists, and bureaucrats, they keep their distance from legal matters. It is just this
aversion that makes legal knowledge such a rick source of competitive advantage for those who take the
time to understand how legal systems really work.
THE ESSENCE OF COMPETITIVE ADVANTAGE
The definition of competitive advantage is: your goal in business is to gain an advantage over your
competitors in a way that satisfies your customers yet produces profit for the firm’s owners.
A company seeking competitive advantage must create value for its customers that is superior to the
value offered by its competitors. Superior value stems from offering lower prices than competitors for
equivalent benefits or providing unique benefits that more than offset a higher price. The amount that
buyers are willing to pay for this value must exceed the company’s costs in order for the firm to be
profitable.
In order to create value in today’s economy, companies can no longer rely on merely internal
resources; they must use external resources as well. New technologies have enabled networking,
outsourcing, and alliances across borders. Competitive advantage can no longer be built on the position
of individual companies within one industry or country: the ability to leverage external resources and the
creation of value in collaboration with other companies has become a key source of competitive
advantage. Companies don’t compete, supply chains and business networks compete.
When considering competitive advantage, we thus must take into account not only individual
companies and their resources but also those of the companies they work with, as well as the
relationships between them. And we need to have expertise in the rules that apply, whether those rules
are made by regulators or by private actors through their contracts.
In today’s business environment companies must take god care of their relationships. They must
detect and strengthen weak links in their supply chains and manage their projects and transactions as
well. Contracts and contracting practices can help them in this enterprise. They can be used proactively
for business success and problem prevention.
Business, law and contracts are intertwined, and the latter two can increase or decrease business
costs, liabilities, and risks.
THE CHALLENGE: THE CONVENTIONAL, REACTIVE APPROACH TO LAW – “FLIGHT OR FIGHT”
Some managers seem to think about law only when approached or threatened by lawyers. They then
want their lawyers to get them out of legal trouble. Such a reactive approach to legal matters contains
many pitfalls. It may lead you to start with a mindset that separates legal issues from the normal
strategic and operational aspects of the business. Too often, legal concerns are treated as problems to
be resolved as quickly as possible so that attention can be focused on business goals. This attitude
overlooks the fundamental point that, even if legal matters are viewed as problems, they affect the
business goals of both you and your competitors. The companies and managers that can resolve these
problems create an opportunity to seize competitive advantage.
,Given the current approach that too often separates legal and business concerns, managers typically
engage in a two-step process when addressing their legal concerns. The first step is to meet with an
attorney to discuss their rights and obligations. During the course of your conversation, the attorney
would explain the issues involved and would also discuss whether the claimant might win in court, the
potential dangers and the cost of the litigation.
The second step is to activate the flight-or-fight response. In a legal sense, there are two basic flight
options for your company. First, flight might involve settlement of the case. Second, if certain types of
cases are so common that they prevent your company from achieving this objectives, then flight might
involve, for instance, ceasing certain operations or moving to another country (see figure 1.1, page 5).
The fight response also includes two basic options. One option is to fight individual claims in court on
a case-by-case basis. The other option is to take the fight to a different level and fight to reform laws that
have a detrimental impact on the business.
Difficulties with the “Flight” Response
Both of the characteristic flight responses can lead to problems in the current environment. Sometimes,
neither settlement of a specific case nor movement of your business makes sense.
The strategy of settling specific cases
Flight from litigation through settlement of a specific case often appears to be a logical course of action.
This may be the case even when it is likely that your company will win if the case goes to trial. The total
cost of settlement might be much higher than litigation costs when, by settling the case, you signal to
potential plaintiffs that you are willing to settle future cases in order to avoid a trial even when you have
a winning case.
The strategy of ceasing or moving certain operations of the company
When certain types of liability (tax, labor or environmental regulations) become burdensome, it is
tempting to consider the flight option of ceasing certain operations or moving them to another country.
Certain companies have a comparative advantage over others as a result of cost advantages, including
legal costs. But in a global economy, countries face difficulty in achieving comparative legal advantage
for two reasons:
1. The cross border movement of goods, services and investments
The movement of goods, services, and investments across borders means that you can be
subject to regulation and liability in other countries regardless of where the goods and services
are produced. This can even be the case if you did not export the goods yourself. In today’s
global economy companies choose to develop a world-wide-market. As a result, they must be
prepared to defend lawsuits in other countries, even those that they eventually win. In many
cases, their products must meet the regulatory requirements of other countries. So in a global
business world, the option to flight to a country with minimal legal requirements might no longer
be available.
2. The increasing convergence of legal rules and regulations
Laws increasingly move across borders, resulting in convergence of the legal rules that govern
business practice. The European Union (EU) has harmonized many of the laws of its member
states. In many cases, US rules and regulations have spread to other countries.
Law can be divided into two broad categories The first, substantive law, deals with the substance of the
law – the legal rules and regulations that govern business operations and management decisions making.
The second, procedural law, is the body of law relating to the enforcement of substantive law.
,Procedural law deals with the enforcement of substantive law. Historically, six features of the legal
process distinguished the US from the rest of the world. In recent years, convergence has had an impact
on these features in two ways. First, the impact of some features has been diminished by law reform in
the US. Second, other features have been exported to other countries.
1. Jury Trials – Unlike most countries, the US still allows litigants the option of a jury trial in civil
lawsuits. However, the right to jury trial has diminished as a result of a combination of factors.
2. Punitive damages – the US is unusual in allowing plaintiffs to recover punitive damages when
defendants have engaged in egregious behavior. However, Supreme Court and state legislation
have limited punitive damages in the last couple of years.
3. Legal expenses – unlike other countries, in the US the winning party must pay most of its own
legal costs. This rule is begin eroded as new legislation frequently provides that the loser must
pay the winner’s full legal costs.
4. Contingency fees – in the US, contingency fee agreements – whereby the payments to a lawyer
is contingent on the outcome of the case – are legal. Other countries have joined the US in
allowing contingency fees.
5. Discovery – discovery is the process used by attorneys to locate evidence and witnesses for use
at trial. In recent years, other countries have moved closer to US-style discovery.
6. Class actions – class actions means a lawsuit filed on behalf of multiple people. These lawsuits on
its own wouldn’t stand, yet together they make a strong case. Class actions are now allowed in a
number of other countries.
Difficulties with the “Fight” Response
There are two legal contexts for legal battles, each representing a different form of regulation of
business: specific cases, in which court decisions represent a form of business regulation, and larger
legislative and regulatory arenas in which law reform battles are fought.
At first glance, law reform would seem to offer an opportunity to secure competitive advantage by
lowering a company’s legal costs. However, the outcome of law reform often benefits all companies,
whether or not they invested their time and money in the reform effort. Even when all companies in a
particular industry contribute equally to law reform that benefits only their industry, the reform might
provide little or no competitive advantage to your company.
Efforts to improve the legal system are often noble and necessary to improve the national economy.
In some cases a change in the law may provide your company with direct competitive advantage. But in
other situations, where there are no specific benefits, it is easy for companies to become so enthusiastic
about a cause that they overlook the fact that the benefits do not provide competitive advantage.
The four conventional approaches to legal problems are flawed:
Settling of specific cases can encourage litigation
Ceasing or moving your company’s operations is often not helpful, given the global convergence
of law
Fighting specific cases is often not cost-effective
Investing in law reform might benefit your industry or the country in general without creating
competitive advantage for your company
,A WAY TO MEET CHALLENGES: THE PROACTIVE APPROACH
Being proactive is the opposite of being reactive or passive. The word proactive implies acting in
anticipation, taking control, and self-initiation. These elements are all part of the proactive approach to
law, which includes two further aspects of proactivity: a promotive dimension (promoting what is
desirable; encouraging good behavior) and a preventive dimension (preventing what is not desirable;
keeping legal risks form materializing). Instead of focusing on the past, the proactive approach focuses
on the future. It is focused on success rather than failure and it is about taking initiative to promote and
strengthen factors that drive success.
Today, a growing number of legal professionals have begun to adopt the proactive approach. They are
concerned about how to promote better performance and sound business practices. They want to aid in
the prevention and prompt resolution of issues that can adversely impact relationships. They care about
commercially justifiable allocation of risks. In contracting, they seek to secure success through incentives
for good performance and arrangements where rights, responsibilities, risks and remedies are effectively
identified and realistically assessed, shared, and managed.
In traditional litigation, it is essential for the lawyer to predict what a court will do. In preventive and
promotive law, it is essential to predict what people will do. Here, the core is not about applying the
rules to facts that happened in the past, but about applying sound legal practices to create future facts
and to plan a future course of conduct.
The immediate purpose of preventing disputes is to reduce the staggering burden of wasted time and
money caused by conflict, and to avoid the fracturing of carefully created business relationships. At the
same time, the proactive/preventive approach to law can produce the additional benefit of improving
business efficiency and creating competitive advantage.
THE MANAGER’S LEGAL PLAN
Managers faced with myriad business concerns frequently take a reactive approach to the law. Given
their reactive stance, it is not surprising that managers often view law as an obstacle rather than an
enabler and that they tend to mentally separate the law from the issues that are considered more
central to competitive advantage.
A good leader does not need a perfect legal or strategic plan to calm employees and get them moving
in the right direction. When a manager is faced with a confusing situation, simply having a plan is often
enough to inspire action that can lead to positive result.
The following four-step Manager’s Legal Plan is intended to enable managers to move from a reactive
approach to an ability to actively and proactively use the law to uncover and develop new forms of
competitive advantage.
Step 1: Understand The Law
This step starts with an interest in and a basic understanding of the legal dimensions of business. it goes
beyond having legal resources available when an issue labeled “legal” arises. It involves recognizing the
legal aspects of business, exercising informed judgment when managing them, and knowing when
professional legal help is required.
The fields of law you will need to understand will of course depend on your company and your
industry. In highly regulated industries you will need to master the core regulations that have an impact
on your business. Understanding the law and acquiring legal capabilities involve both gaining your own
legal knowledge and learning how to manage and work with legal professionals. One of the most
important resources is a lawyer who has the ability to guide and coach you.
, Step 2: Know how to cope with Legal Problems and learn from them
If you do face a legal problem, you have the choices of “fight of flight”: fighting or settling cases, ceasing
or moving operations, or possibly seeking legal reforms. While resort to one of these solutions is often
inevitable, you should keep in mind their limitations and the global economy. Once you have resolved
your legal problems, you do not want to leave it at that: the third step reminds you that you will want to
learn from your experience in the future.
Step 3: Develop Business Strategies and Solutions to prevent Future Problems
The third step goes beyond the traditional approaches by searching for business strategies and solutions
to prevent legal problems. Often it is possible to plan on three different levels of prevention before
things go wrong: first, how to prevent the cause from arising; second how to prevent the cause from
doing harm; and third, if harm occurs, how to limit the damage.
The third step prompts you to apply sound business judgment when faced with legal decisions. Even
when addressing a litigation decision, you do not want to become so focused on the legal issues that you
forget to use a financial analysis in making settlement decisions. You should review the company’s hiring
practices, revise company documents, and provide employees with training that will prevent them from
making statements that could result in liability.
Step 4: Climb to the Balcony to see the Big Picture and become more Proactive
Mental frames that help us simplify and organize the complexity in our world are necessary for rational
decision making. But simplification often comes at a cost. in viewing the world through a particular
window, such as the window provided by a legal problem, we see only part of the landscape. In
narrowing the scope of our vision, we risk frame blindness. By failing to take into account the entire
picture when making decisions, we often overlook the best options.
The challenge of a manager, when dealing with a problem that appears to relate narrowly to a
particular function is to step back from the details of the problem in an attempt to broaden the frame.
This broader perspective may enable you to reframe what you originally thought was a legal problem as
a business opportunity. Or it may enable you to reframe the way in which you approach your next new
deal of contract. This, in turn, will allow you to generate new options for discovering new value with and
for your customers to gain competitive advantage. Though you may be unable to reframe every legal
problem that you face, the attempt should at least encourage you and others in your organization to
think about where you are and where you want to be.
This step starts with changing the belief that “the law” relates only to legal problems. This step
encourages you to focus not only on preventing what is not desirable, but also on promoting what is
desirable to enhance future opportunities.
Achieving competitive advantage is critical to the success and even the survival of companies that cross a
variety of industries and cultures. Companies need to strike a balance between surviving immediate
market conditions and making certain their companies endure and succeed over the long term (see
exhibit 1.1, page 2).
Concern over the impact of the law in general has emerged as one of the most important factors in the
external environment in which business operates. Because most companies don’t want to get tangled
up with lawyers, lobbyists, and bureaucrats, they keep their distance from legal matters. It is just this
aversion that makes legal knowledge such a rick source of competitive advantage for those who take the
time to understand how legal systems really work.
THE ESSENCE OF COMPETITIVE ADVANTAGE
The definition of competitive advantage is: your goal in business is to gain an advantage over your
competitors in a way that satisfies your customers yet produces profit for the firm’s owners.
A company seeking competitive advantage must create value for its customers that is superior to the
value offered by its competitors. Superior value stems from offering lower prices than competitors for
equivalent benefits or providing unique benefits that more than offset a higher price. The amount that
buyers are willing to pay for this value must exceed the company’s costs in order for the firm to be
profitable.
In order to create value in today’s economy, companies can no longer rely on merely internal
resources; they must use external resources as well. New technologies have enabled networking,
outsourcing, and alliances across borders. Competitive advantage can no longer be built on the position
of individual companies within one industry or country: the ability to leverage external resources and the
creation of value in collaboration with other companies has become a key source of competitive
advantage. Companies don’t compete, supply chains and business networks compete.
When considering competitive advantage, we thus must take into account not only individual
companies and their resources but also those of the companies they work with, as well as the
relationships between them. And we need to have expertise in the rules that apply, whether those rules
are made by regulators or by private actors through their contracts.
In today’s business environment companies must take god care of their relationships. They must
detect and strengthen weak links in their supply chains and manage their projects and transactions as
well. Contracts and contracting practices can help them in this enterprise. They can be used proactively
for business success and problem prevention.
Business, law and contracts are intertwined, and the latter two can increase or decrease business
costs, liabilities, and risks.
THE CHALLENGE: THE CONVENTIONAL, REACTIVE APPROACH TO LAW – “FLIGHT OR FIGHT”
Some managers seem to think about law only when approached or threatened by lawyers. They then
want their lawyers to get them out of legal trouble. Such a reactive approach to legal matters contains
many pitfalls. It may lead you to start with a mindset that separates legal issues from the normal
strategic and operational aspects of the business. Too often, legal concerns are treated as problems to
be resolved as quickly as possible so that attention can be focused on business goals. This attitude
overlooks the fundamental point that, even if legal matters are viewed as problems, they affect the
business goals of both you and your competitors. The companies and managers that can resolve these
problems create an opportunity to seize competitive advantage.
,Given the current approach that too often separates legal and business concerns, managers typically
engage in a two-step process when addressing their legal concerns. The first step is to meet with an
attorney to discuss their rights and obligations. During the course of your conversation, the attorney
would explain the issues involved and would also discuss whether the claimant might win in court, the
potential dangers and the cost of the litigation.
The second step is to activate the flight-or-fight response. In a legal sense, there are two basic flight
options for your company. First, flight might involve settlement of the case. Second, if certain types of
cases are so common that they prevent your company from achieving this objectives, then flight might
involve, for instance, ceasing certain operations or moving to another country (see figure 1.1, page 5).
The fight response also includes two basic options. One option is to fight individual claims in court on
a case-by-case basis. The other option is to take the fight to a different level and fight to reform laws that
have a detrimental impact on the business.
Difficulties with the “Flight” Response
Both of the characteristic flight responses can lead to problems in the current environment. Sometimes,
neither settlement of a specific case nor movement of your business makes sense.
The strategy of settling specific cases
Flight from litigation through settlement of a specific case often appears to be a logical course of action.
This may be the case even when it is likely that your company will win if the case goes to trial. The total
cost of settlement might be much higher than litigation costs when, by settling the case, you signal to
potential plaintiffs that you are willing to settle future cases in order to avoid a trial even when you have
a winning case.
The strategy of ceasing or moving certain operations of the company
When certain types of liability (tax, labor or environmental regulations) become burdensome, it is
tempting to consider the flight option of ceasing certain operations or moving them to another country.
Certain companies have a comparative advantage over others as a result of cost advantages, including
legal costs. But in a global economy, countries face difficulty in achieving comparative legal advantage
for two reasons:
1. The cross border movement of goods, services and investments
The movement of goods, services, and investments across borders means that you can be
subject to regulation and liability in other countries regardless of where the goods and services
are produced. This can even be the case if you did not export the goods yourself. In today’s
global economy companies choose to develop a world-wide-market. As a result, they must be
prepared to defend lawsuits in other countries, even those that they eventually win. In many
cases, their products must meet the regulatory requirements of other countries. So in a global
business world, the option to flight to a country with minimal legal requirements might no longer
be available.
2. The increasing convergence of legal rules and regulations
Laws increasingly move across borders, resulting in convergence of the legal rules that govern
business practice. The European Union (EU) has harmonized many of the laws of its member
states. In many cases, US rules and regulations have spread to other countries.
Law can be divided into two broad categories The first, substantive law, deals with the substance of the
law – the legal rules and regulations that govern business operations and management decisions making.
The second, procedural law, is the body of law relating to the enforcement of substantive law.
,Procedural law deals with the enforcement of substantive law. Historically, six features of the legal
process distinguished the US from the rest of the world. In recent years, convergence has had an impact
on these features in two ways. First, the impact of some features has been diminished by law reform in
the US. Second, other features have been exported to other countries.
1. Jury Trials – Unlike most countries, the US still allows litigants the option of a jury trial in civil
lawsuits. However, the right to jury trial has diminished as a result of a combination of factors.
2. Punitive damages – the US is unusual in allowing plaintiffs to recover punitive damages when
defendants have engaged in egregious behavior. However, Supreme Court and state legislation
have limited punitive damages in the last couple of years.
3. Legal expenses – unlike other countries, in the US the winning party must pay most of its own
legal costs. This rule is begin eroded as new legislation frequently provides that the loser must
pay the winner’s full legal costs.
4. Contingency fees – in the US, contingency fee agreements – whereby the payments to a lawyer
is contingent on the outcome of the case – are legal. Other countries have joined the US in
allowing contingency fees.
5. Discovery – discovery is the process used by attorneys to locate evidence and witnesses for use
at trial. In recent years, other countries have moved closer to US-style discovery.
6. Class actions – class actions means a lawsuit filed on behalf of multiple people. These lawsuits on
its own wouldn’t stand, yet together they make a strong case. Class actions are now allowed in a
number of other countries.
Difficulties with the “Fight” Response
There are two legal contexts for legal battles, each representing a different form of regulation of
business: specific cases, in which court decisions represent a form of business regulation, and larger
legislative and regulatory arenas in which law reform battles are fought.
At first glance, law reform would seem to offer an opportunity to secure competitive advantage by
lowering a company’s legal costs. However, the outcome of law reform often benefits all companies,
whether or not they invested their time and money in the reform effort. Even when all companies in a
particular industry contribute equally to law reform that benefits only their industry, the reform might
provide little or no competitive advantage to your company.
Efforts to improve the legal system are often noble and necessary to improve the national economy.
In some cases a change in the law may provide your company with direct competitive advantage. But in
other situations, where there are no specific benefits, it is easy for companies to become so enthusiastic
about a cause that they overlook the fact that the benefits do not provide competitive advantage.
The four conventional approaches to legal problems are flawed:
Settling of specific cases can encourage litigation
Ceasing or moving your company’s operations is often not helpful, given the global convergence
of law
Fighting specific cases is often not cost-effective
Investing in law reform might benefit your industry or the country in general without creating
competitive advantage for your company
,A WAY TO MEET CHALLENGES: THE PROACTIVE APPROACH
Being proactive is the opposite of being reactive or passive. The word proactive implies acting in
anticipation, taking control, and self-initiation. These elements are all part of the proactive approach to
law, which includes two further aspects of proactivity: a promotive dimension (promoting what is
desirable; encouraging good behavior) and a preventive dimension (preventing what is not desirable;
keeping legal risks form materializing). Instead of focusing on the past, the proactive approach focuses
on the future. It is focused on success rather than failure and it is about taking initiative to promote and
strengthen factors that drive success.
Today, a growing number of legal professionals have begun to adopt the proactive approach. They are
concerned about how to promote better performance and sound business practices. They want to aid in
the prevention and prompt resolution of issues that can adversely impact relationships. They care about
commercially justifiable allocation of risks. In contracting, they seek to secure success through incentives
for good performance and arrangements where rights, responsibilities, risks and remedies are effectively
identified and realistically assessed, shared, and managed.
In traditional litigation, it is essential for the lawyer to predict what a court will do. In preventive and
promotive law, it is essential to predict what people will do. Here, the core is not about applying the
rules to facts that happened in the past, but about applying sound legal practices to create future facts
and to plan a future course of conduct.
The immediate purpose of preventing disputes is to reduce the staggering burden of wasted time and
money caused by conflict, and to avoid the fracturing of carefully created business relationships. At the
same time, the proactive/preventive approach to law can produce the additional benefit of improving
business efficiency and creating competitive advantage.
THE MANAGER’S LEGAL PLAN
Managers faced with myriad business concerns frequently take a reactive approach to the law. Given
their reactive stance, it is not surprising that managers often view law as an obstacle rather than an
enabler and that they tend to mentally separate the law from the issues that are considered more
central to competitive advantage.
A good leader does not need a perfect legal or strategic plan to calm employees and get them moving
in the right direction. When a manager is faced with a confusing situation, simply having a plan is often
enough to inspire action that can lead to positive result.
The following four-step Manager’s Legal Plan is intended to enable managers to move from a reactive
approach to an ability to actively and proactively use the law to uncover and develop new forms of
competitive advantage.
Step 1: Understand The Law
This step starts with an interest in and a basic understanding of the legal dimensions of business. it goes
beyond having legal resources available when an issue labeled “legal” arises. It involves recognizing the
legal aspects of business, exercising informed judgment when managing them, and knowing when
professional legal help is required.
The fields of law you will need to understand will of course depend on your company and your
industry. In highly regulated industries you will need to master the core regulations that have an impact
on your business. Understanding the law and acquiring legal capabilities involve both gaining your own
legal knowledge and learning how to manage and work with legal professionals. One of the most
important resources is a lawyer who has the ability to guide and coach you.
, Step 2: Know how to cope with Legal Problems and learn from them
If you do face a legal problem, you have the choices of “fight of flight”: fighting or settling cases, ceasing
or moving operations, or possibly seeking legal reforms. While resort to one of these solutions is often
inevitable, you should keep in mind their limitations and the global economy. Once you have resolved
your legal problems, you do not want to leave it at that: the third step reminds you that you will want to
learn from your experience in the future.
Step 3: Develop Business Strategies and Solutions to prevent Future Problems
The third step goes beyond the traditional approaches by searching for business strategies and solutions
to prevent legal problems. Often it is possible to plan on three different levels of prevention before
things go wrong: first, how to prevent the cause from arising; second how to prevent the cause from
doing harm; and third, if harm occurs, how to limit the damage.
The third step prompts you to apply sound business judgment when faced with legal decisions. Even
when addressing a litigation decision, you do not want to become so focused on the legal issues that you
forget to use a financial analysis in making settlement decisions. You should review the company’s hiring
practices, revise company documents, and provide employees with training that will prevent them from
making statements that could result in liability.
Step 4: Climb to the Balcony to see the Big Picture and become more Proactive
Mental frames that help us simplify and organize the complexity in our world are necessary for rational
decision making. But simplification often comes at a cost. in viewing the world through a particular
window, such as the window provided by a legal problem, we see only part of the landscape. In
narrowing the scope of our vision, we risk frame blindness. By failing to take into account the entire
picture when making decisions, we often overlook the best options.
The challenge of a manager, when dealing with a problem that appears to relate narrowly to a
particular function is to step back from the details of the problem in an attempt to broaden the frame.
This broader perspective may enable you to reframe what you originally thought was a legal problem as
a business opportunity. Or it may enable you to reframe the way in which you approach your next new
deal of contract. This, in turn, will allow you to generate new options for discovering new value with and
for your customers to gain competitive advantage. Though you may be unable to reframe every legal
problem that you face, the attempt should at least encourage you and others in your organization to
think about where you are and where you want to be.
This step starts with changing the belief that “the law” relates only to legal problems. This step
encourages you to focus not only on preventing what is not desirable, but also on promoting what is
desirable to enhance future opportunities.
