A monthly research publication by the Ivey Business School 

Starting in the 1980s, many large industries that were considered as natural monopolies – telecommunications and electrical companies, airlines and railways among others – began to be deregulated. Suddenly, companies that had never dealt with competition were faced with new market entrants, often with lower costs and sharper marketing approaches.

Professor Jean-Philippe Bonardi is interested in how these former monopolies adjust to new market conditions by developing their economic and political capabilities. His research is based both on quantitative analysis of telecommunication companies throughout the 1980s and 1990s, and case studies of several individual firms.

Bonardi divides economic capabilities into two groups. Traditional capabilities allow a firm to increase productivity, cut costs and improve service. Innovation capabilities are structures that help a company create new products and services in a timely fashion. “This is the hardest task that former monopolies face,” Bonardi says. “There is a real innovation gap between former monopolies and new entrants that is very hard to fill.”

While they may lack some of the economic capabilities to compete, these firms have important knowledge and skills in other areas. They are skilled at dealing with regulatory authorities and political institutions, something that they did on a daily basis as monopolies. Bonardi has found that some former monopolies use their political capabilities to slow the deregulation process, winning time to improve their economic capabilities. His research results suggest that this strategy works for traditional economic capabilities, such as improving productivity and service, but doesn’t help to fill the innovation gap. “The former monopolies that are efficient at impeding the deregulation process are not the ones that are able to transform themselves and become truly innovative and competitive players in the market,” he says. “Basically, it’s a short term policy.”

Bonardi has also found that the political capabilities of former monopolies, while they are powerful weapons, must be transformed to address the needs of the new marketplace. They must become more flexible and better adapted to the new institutional environment of a deregulated industry. British Telecom (BT), which began to be deregulated in 1983, is a good case in point. Where the company once had one large department responsible for government relations it now has a number of smaller departments, each responsible for working with different authorities. For example, one deals with the Merger and Monopoly Commission, the British anti-trust authority, while another deals with the Office of Telecommunication. BT has also created offices in Europe and elsewhere to handle regulatory issues in international markets. Says Bonardi: “They’re both more flexible than they were before and they have also adapted to the new kind of institutional environment, which has become much more international in this sector.”

In related research, Bonardi is collaborating with two former Ivey professors to take a broader perspective on the relationship between firms and their political environment. “We’re trying to understand the nature of political capabilities, how they differ from economic capabilities, and how they might create a competitive advantage,” he explains. Among those capabilities, the ability to manage constituency building – the mobilization of a large group of supporters, such as stakeholders – can for instance be a source of competitive advantage because it is hard for competitors to imitate this capability.