Bringing Legal into Strategy Development: A New Blue Ocean?

Let’s return to the knowledge gap. Innovation typically arises in the gaps between well established fields. Can it be that there is still room for innovation in the relationship between lawyers and business?

Bringing legal expertise into the strategy development process is the natural result of lawyers becoming more nuanced and practical business advisors. These lawyers give high value, and value-creating, strategic advice about the direction of a business. They have transcended Richard Susskind’s metaphor of lawyers either building a fence at the top of a cliff, or delivering ambulance services at the bottom.

Lets say you are sitting in a strategy meeting at Apple, and you are considering options for the company’s next big strategic move. Sitting at the confluence of the telecoms, media, entertainment, and internet sectors, there are a lot of good ones to consider. Someone is giving a report that recommends option 1 because it promises the largest long term revenue stream.

Seems to make sense, says the strategy lawyer, but look at option 2. Option 2 has a significantly smaller revenue stream, but because of its competition law implications… or intellectual property rules, or… the specific sector regulation regime, it has a good chance of locking out competitors or locking in further options for still further new product launches in yet another sector…. In the long run option 2 looks better because it further delays commoditization and creates better opportunities for further investment….

Of course this is a fanciful and incomplete example, but it illustrates an important point. The management consulting industry—firms like McKinsey, Bain, and Accenture—are the keepers of the business strategy profession. Most of these firms developed out of the accounting profession, and over time moved up the value chain into the high-level advisory businesses that they are today.

However, in the world of modern management consulting the legal environment is merely part of the tableau upon which a business strategy is built. This approach misses important opportunities because there are many situations in which the legal environment for a business is not static but variable, and wherever this is true then legal is a variable that can be managed just like any other business variable. For example, in any case where a firm is involved in litigation which is significant relative to the size of the firm (“bet-the-company” litigation), or in absolute terms, such as Microsoft’s battles with the EU Competition Tribunal, then the legal environment should be considered as part of a business’ overall strategy—how could such a firm development its strategy without talking about the elephant in the room?

Furthermore, there are many fields of law in which the legal environment is fundamental to the business environment of a company:
• Tax
• Contracts
• Intellectual Property
• Competition (Anti-Trust in the United States)
• Securities
• Bankruptcy and restructuring
• Product Liability
• Sector-specific regulation—e.g. food, medical & drug, energy, telecoms, transportation, professional services

This means that no business strategy development process can be complete without incorporating legal strategy. However, business schools generally teach very little about the law, and for reasons that we will try to explore in later articles, legal as a function in a company is mostly left out of the strategy development process; the McKinsey Quarterly for example studies neither legal as a function nor professional services as an industry, and a search for “legal strategy” reveals almost nothing.

This is a blue ocean topic that has the potential to create significant competitive advantage. In the world of business academia, it falls into the larger class of “non—market strategies”, and some business schools do now touch on legal strategy in this larger context. However there are very few references or studies available which are focused on the relationship between legal and business strategy. The only text which takes on the topic squarely is Wharton professor Richard Shell’s 2004 Make the Rules or Your Rivals Will, which is full of cases where legal strategy made an impact on business strategy, from the foundation of the Ford Motor Company to Bill Gates’ battles with American anti-trust regulators.

The book is somewhat litigation-centric and begins by attempting to roughly recast Michael Porter’s famous Five Forces model of the competitive environment of business into a model that attempts to predict the result of major litigation. This is fine for what it is, and Shell then goes on and organizes a wide array of the relevant stories he has collected into classes of business strategy moves such as blocking new entrants or locking in customers.

A key goal of this Journal is to develop an analytical framework for this topic which will help to identify which fields are most likely to reveal opportunities for business strategy innovation, when and why.