A Stakeholder Approach To Strategic Management

R. Edward Freeman
University of Virginia – Darden School of Business

John McVea
University of Virginia – Darden School of Business

2001

Darden Business School Working Paper No. 01-02

Abstract:

The purpose of this chapter is to outline the development of the idea of “stakeholder management” as it has come to be applied in strategic management. We begin by developing a brief history of the concept. We then suggest that traditionally the stakeholder approach to strategic management has several related characteristics that serve as distinguishing features. We review recent work on stakeholder theory and suggest how stakeholder management has affected the practice of management. We end by suggesting further research questions.

A History Of A Stakeholder Approach To Strategic Management

A stakeholder approach to strategy emerged in the mid-1980’s. One focal point in this movement was the publication of R. Edward Freeman’s Strategic Management- A Stakeholder Approach in 1984. Building on the process work of Ian Mitroff and Richard Mason, and James Emshoff [ For statements of these views see Mason and Mitroff,(1982) and Emshoff (1978)]. The impetus behind stakeholder management was to try and build a framework that was responsive to the concerns of managers who were being buffeted by unprecedented levels of environmental turbulence and change. Traditional strategy frameworks were neither helping managers develop new strategic directions nor were they helping them understand how to create new opportunities in the midst of so much change. As Freeman observed “[O]ur current theories are inconsistent with both the quantity and kinds of change that are occurring in the business environment of the 1980’s…A new conceptual framework is needed.”[Freeman, 1984, pg. 5] A stakeholder approach was a response to this challenge. An obvious play on the word “stockholder”, the approach sought to broaden the concept of strategic management beyond its traditional economic roots, by defining stakeholders as “any group or individual who is affected by or can affect the achievement of an organization’s objectives”. The purpose of stakeholder management was to devise methods to manage the myriad groups and relationships that resulted in a strategic fashion. While the stakeholder framework had roots in a number of academic fields, its heart lay in the clinical studies of management practitioners that were carried out over ten years through the Busch Center, the Wharton Applied Research Center, and the Managerial and Behavioral Science Center, all at The Wharton School, University of Pennsylvania by a host of researchers.

While the 1980’s provided an environment that demonstrated the power of a stakeholder approach, the idea was not entirely new. The use of the term stakeholder grew out of the pioneering work at Stanford Research Institute (now SRI International) in the 1960’s. SRI’s work, in turn, was heavily influenced by concepts that were developed in the planning department of Lockheed and these ideas were further developed through the work of Igor Ansoff and Robert Stewart. From the start the stakeholder approach grew out of management practice.

SRI argued that managers needed to understand the concerns of shareholders, employees, customers, suppliers, lenders and society, in order to develop objectives that stakeholders would support. This support was necessary for long term success. Therefore, management should actively explore its relationships with all stakeholders in order to develop business strategies.

For the most part these developments had a relatively small impact on the management theories of the time. However, fragments of the stakeholder concept survived and developed within four distinct management research streams over the next twenty years. Indeed, it was by pulling together these related stakeholder concepts from the corporate planning, systems theory, corporate social responsibility and organizational theory that the stakeholder approach crystallized as a framework for strategic management in the 1980’s. What follows is a brief summary of these building blocks of stakeholder theory.

The Corporate Planning Literature

The corporate planning literature incorporated a limited role for stakeholders in the development of corporate strategy. Ansoff’s classic book Corporate Strategy (1965)  illustrated the importance of identifying critical stakeholders. However, stakeholders were viewed as constraints on the main objective of the firm and Ansoff actually rejects the usefulness of the idea. Here there is a fundamental difference between the SRI approach and corporate planning. Corporate planning simply recognized that stakeholders might place limits on the action of the firm. Thus, management should understand the needs of stakeholders in order to set the bounds of operation. However, within these bounds management should develop strategies that maximize the benefits to a single stakeholder group, the shareholders. In contrast SRI saw the support of all stakeholders as central to the sucess of the firm. Therefore, successful strategies are those that integrate the interests of all stakeholders, rather than maximize the position of one group within limitations provided by the others.

The process of strategy development is also entirely different under these two approaches. Corporate planning has two main elements: prediction and adaptation. First, management carries out an environmental scan to identify trends that help predict the future business environment. Second, management identifies the best way for the firm to adapt to the future environment in order to maximize its position. Within corporate planning stakeholder analysis is carried out as part of the environmental scan. As such stakeholders can defined by their roles rather than as complex and multifaceted individuals. Therefore, corporate planners could carry out stakeholder analysis at a generic level, without having to develop a detailed knowledge of the actual stakeholders in the specific firm under question. This level of abstraction led to many analytical breakthroughs in strategy formulation. Both Mason and Mitroff (1982) and Emshoff (1978) produced a method called Strategic Assumptions  Analysis to address these issues.

A Stakeholder Approach To Strategic Management

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