The Relevance of Internal Stakeholders to the Success or Failure of Corporate Strategies. Which Option Can a Firm Pursue?

Table of Contents

1. Introduction

2. Theoretical Framework

3. Model and Hypothesis

4. Analysis

5. Summary and Implications

1. Introduction

In the 21st century, only the call for short-term success prevails. There is necessity of flexible reactions to changes of the economic environment on the part of companies that are standing in the bright light of public under pressure to perform^[1]. This is termed public exposure^[2] or business exposure^[3]. Depending on the point of view of stakeholders to a company, the understanding of corporate success varies strongly from maximal EPS^[4], the ability to guarantee lifetime jobs or maximal tax proceeds – just to name some main objectives of different stakeholders.

Since there are numerous stakeholders claiming interest towards a company, there is great tension between Shareholder Value and the Stakeholder Approach to strategic management, sometimes called the “Stakeholder Value” concept, and thus there are different leadership views. Further, the question which stakeholder(s) a company should focus on has not been answered consistently. However, there is empiric evidence of correlation between social engagement, or fulfillment of Corporate Social Responsibility and great financial Performance^[5]. Despite this empiric correlation, the equation correlation ¹ causality applies. The open questions are: to what extent do internal stakeholders influence the success of a corporate strategy? How can we assess whether actions taken by a company to fulfill the stakeholders´ interests were successful or not?

2. Theoretical Framework

According to Freeman/Reed (1983), the term “stakeholder” first emerged in a memorandum of the Stanford Research Institute (SRI) – “those groups without whose support the organization would cease to exist”.^[6] Freeman/Reed (1983) recognized the definition specified by the SRI as too general and deduced two differentiated definitions:

First, the term “stakeholders” in the broader sense includes all groups and individuals able to exert influence on the objectives of an organization and are affected by the organization´s target achievement (e.g. interest groups, protest groups, public authorities, competitors, trade unions, employees, customers, shareholders inter alia). Second, in the narrow sense Freeman specifies all groups and individuals as stakeholders who secure the continuance of a company (such as employees, customers, certain suppliers, shareholders, certain financial institutes etc.).^[7]

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Illustration 1: Stakeholder-Map according to Freeman’s (1997) stakeholder definition in the narrow sense^[8]

Pursuing Freeman´s Stakeholder definition in this strict sense (Illustration 1), the internal stakeholders are represented by three groups: shareholders, management and employees^[9]. In order to understand the different perceptions of corporate success, the contributions and the claimed rewards of the internal stakeholder groups are mentioned below.

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Illustration 2: Internal stakeholders, their contributions to the firm and claimed rewards from the firm^[10]

A company that strives to balance the interests of all its stakeholders is in accordance with the principle of sustainable development. Even in the area of banking, which is considered immoral to some extent, voices are raised for a sustainable economy, that “investors should be made to understand that financing sustainable development increases long-term competitiveness and profitability”^[11]. Establishing an organization that is socially responsible and effective within a turbulent global economy is a "wicked problem" with no clear solution. System theories try to solve it by focusing on the connections created by organizations' resource dependencies. Like many aspects of management, stakeholder management is sometimes assumed to be commonsensical or intuitively obvious. Yet in practice, stakeholder management focuses on overseeing relationships that are critical to an organization's success.^[12]

3. Model and Hypothesis

In the late 20th century, the internal equilibrium is starting to move. “The days when CEOs could neglect their big institutional owners and other corporate stakeholders are coming to an end”^[13], thus managers would have to consider and learn from the claims of internal stakeholders who “assert their claims” in operating the company. Today, internal stakeholders are exerting significant influence on companies^[14] and “organizational strategists must consider how to manage the stakeholder”^[15]. When stakeholders attain more activity towards, more knowledge of and more independency within a company, managers use to become precarious. Assessing the uprising power of stakeholders within a corporation is named a Stakeholder Management Approach^[16] or, when especially addressing strategic management, the Stakeholder Approach ^[17]. Understanding the stakeholders´ influence, a Stakeholder Approach means for a company to act socially responsible so as to satisfy the stakeholders in order to avoid adverse activities. A study conducted by McGuire et al. (1988) showed that companies with low social responsibility face higher financial risks than socially responsible firms^[18]. The literature has focused on identifying primary and secondary stakeholders^[19] – or crystallizing “core stakeholders”^[20]. Basic variables for classifying stakeholder groups are the potential for cooperation with the company and the potential for threat to the company. The characteristics of these two key variables are influenced by the following variables: the control of key resources needed by the company, the underlying power of the stakeholder, the degree of how likely the stakeholder will take action (supportive / nonsupportive / any action) and how likely the stakeholder will form coalition with other stakeholders.^[21]

Classifying stakeholders into four types of stakeholders results in the following matrix (Illustration 3):

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Illustration 3: Stakeholder Typology based on Savage et al. (1991)^[22]

Which option can a firm pursue?

In general, the more the company depends on a stakeholder, the more powerful is this stakeholder. The hostility or threat variable matters most for managing relationships with external stakeholders – a worst case scenario can be elaborated protecting managers from shocking astonishments, mostly from nonsupportive stakeholders.

On the other side, companies often leave out diagnosing the stakeholder's potential for cooperation as well as managing supportive stakeholders since they overemphasize the potential of threat. A best case scenario can be drawn to estimate the potential for cooperation. Generally, the more dependent the stakeholder on the company, the more the stakeholder is willing to cooperate.

Among others, various alternatives for collaborating with and involving stakeholders are:

- a stakeholder buy-in,
- incentivizing the management and employees and thus align the individuals’ objectives to those of the firm,
- “proper” corporate communications,
- and effective risk management as well as evaluating business models based on stakeholder environments.^[23]

Other possibilities and measures to realize the strategies for managing different types of stakeholders are pointed out in the following Illustration 4:

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Illustration 4: Alternative strategies of managing different types of stakeholders^[24]

Having carved out these dimensions of stakeholder relevance and stakeholder management, the following hypothesis stands to reason: the internal stakeholders have a strong influence on the success or failure of corporate strategies, but the success or failure of Stakeholder Management cannot be measured by only analyzing quantitative data. Qualitative data has to be evaluated.

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^[1] cf. Oertel (2000) p. 1

^[2] cf. Dyllick (1989) p. 15

^[3] Miles (1987) p. 2

^[4] EPS = Earnings per share. Calculated by dividing a company´s after-tax earnings by the number of outstanding shares.

^[5] cf. Pöschl (2013) p. 131 f.

^[6] cf. Freeman/Reed (1983) p. 89

^[7] cf. Freeman/Reed (1983) p. 91

^[8] Own illustration based on Freeman (1997)

^[9] cf. Oertel (2000) p. XVI and cf. Harrison/St. John (1994) p. 12

^[10] Freeman (1997) and Oertel (2000) p. XVII

^[11] cf. Shen-Li (1998)

^[12] cf. Savage et al. (1991) p. 62

^[13] Nussbaum/Dobrzynski (1987)

^[14] Mitroff (1983); Freeman (2010); MacMillan/Jones (1986)

^[15] Mason/Mitroff (1981)

^[16] cf. Savage et al. (1991) p. 62

^[17] Freeman (1997)

^[18] cf. McGuire et al. (1988)

^[19] cf. Savage et al. (1991) p. 62; Primary stakeholders are those who have formal, official, or contractual relationships and have a direct and necessary economic impact on the organization. Secondary stakeholders are diverse and include those who are not directly engaged in the organization's economic activities but are able to exert influence or are affected by the organization. (definitions from Ansoff (1965) and Carroll (1989))

^[20] analogously from Oertel (2000)

^[21] cf. Savage et al. (1991) p. 64

^[22] Own illustration based on Savage et al. (1991) p. 62 ff.

^[23] cf. Oracle (2009) – understanding Risk Management as „a key business process within both the private and public sectors around the world“

^[24] cf. Savage et al. (1991) p. 65-71