STAKEHOLDER MANAGEMENT: A SOURCE OF SUSTAINABLE COMPETITIVE ADVANTAGE
Introduction
Sustainable competitive advantage is a firm’s position wherein it creates and implements a value-creating strategy and competitors are unable to duplicate or find it costly to imitate. On the other hand, stakeholder management consists of activities such as planning, organizing, controlling and evaluating individuals and groups who can affect or are affected by firm’s strategies with enforceable claims over its results. Although stockholders or the investors in a firm serve as the key stakeholders for United States and United Kingdom corporations, there are times that other stakeholders are prioritized because of there impacts in the firm’s operations and strategy such as banks (capital market stakeholders), customers, major and minor suppliers, host communities, unions (product market stakeholders), employees, managers and non managers (organizational stakeholders).
The intricacy of managing these stakeholders (like the trade-off between shareholders’ retained earnings against customers’ satisfaction through affordable quality products) towards the attainment of sustainable competitive advantage placed great challenge to top level management particularly the Chief Executive Officer (CEO). In relation to this, this paper will cite specific firm cases and position a critical analysis to such in order to explain how stakeholder management can assist in sustaining an organization’s competitive advantage. It also aspires to provide an answer why managers are too busy to interrupt, too serious to be joked and too formal to converse in a street talk. Is the additional duty on stakeholder relations too crucial for the firm’s success that it can make or break the career of a manager, more generally, the life of the organization?
Excite@Home: How it fell and why stakeholders pulled it down?
The firm is formed in 1999 as a merger between an internet service provider and an internet portal. The short business life of the firm emphasizes stakeholders’ role not only how to sustain competitive advantage, but most importantly, how to survive. With questionable business plan the firm competed head-to-head against Yahoo! This abrupt strategy and lack of direction resulted into customer dissatisfaction, conflicts among directors, executive turn-over and demoralized workforce. As early as 2001, the CEO was replaced. This should be a sign of hope for the sake of stakeholders, however, the root cause of problems in the planning and positioning stages was so vigorous that the firm’s stock value had fallen to 47 cents. Aggravated this condition was its lender’s demand for the $50 million payment and withdrawal of its two largest distributors that ultimately throw the firm into bankruptcy in 2001.
The inability of the managers to impress stakeholders and provide them the direction in the start-up stages of the firm installed an environment where the latter is positioned in an ambiguous state. As a result, the unpredictability of the firm’s performance caused its lenders and suppliers to withdraw support at the time the firm needed them most. Even the directors that used to be calm and focused in the organizational long-term goals were unable to curb the fall nor helped the new CEO to shift the organizational inertia. This could be the effect of the absence of benchmark. Planning and positioning served as signals whenever a firm is on the verge of trouble. Without them, stakeholders’ apprehension and signal of dissatisfaction or optimal risk-absorption cannot be identified. There is lack of financial and business goals were such signals can be quantified and solved when they occur. Thus, this resulted in a vicious turmoil within the organization that the only tool that can cut it is resorting to bankruptcy filing. If on the other hand the firm has a clear intention, its resources can be more manageable and leveraged against the amount of stakeholders’ insertion or withdrawal of their firm support. It can be more flexible because it has a road map (short- and long-term strategy) that even the firm detours or drives in a slippery road, it knows that it has the tools box (contingency plans) or better mechanical bystanders (lenders) to give a hand (capital to recover).
The minimal analysis, as showed by its business plan, in the internal and external environment conducted by Excite@Home was unable to provide sufficient and useful information to create strategic intent particularly on how it will handle its stakeholders. As illustrated, the lenders and major distributors had the potential to save it from bankruptcy as shareholders have to hoard their investment by selling their stocks and employees are downsized to relax financial burden. However, there was absence of impressive business plans that even the change of leadership and its promising upheavals did not materialize because these stakeholders feared the firm cannot fight the competition. This was aggravated by what and founded financial doubt in the firm’s records. The lack of stakeholder measurement, at least to the lenders and distributors, was the result of undermining the importance of planning before positioning or acting without contingency plans and alternatives at hand.
Corporate Governance: Focus on the CEO’s Pay and Actions
Even though, net income at Walt Disney dropped by almost $1 billion in 2000 after 1997 $1.9 billion level, CEO salary was increased including an award of 2 million stock option stock option shares. On the other hand, Dana Corporations’ CEO salary was deducted by 63% in 2000 year-on-year after poor firm’s performance wherein sales dropped by 6%, profits fell 44% and its stock has lost its value. Since there is an executive compensation committee through the initiative of the Board of Directors for every company, such salary discrepancy in relation to firm’s financial performance are evaluated and decided upon. On the other hand, Standard and Poor reported that 96% of 500 stock index used competitor salary level to benchmark their executive pay. This report then provides the blurred lens the firm’s compensation committee used to arrive at an efficient executive pay, that is, effective but low cost for the firm particularly its shareholders.
This is a rare but major situation wherein the strategic leader, the CEO, is not in the position to decide his own motivation rather the official-shareholders represented by the directors. In this case, stakeholder (CEO) management is placed at the shoulders of the directors. This process is also related to corporate governance that determines and controls the firm’s strategic direction, which in turn, Excite@Home failed to formulate and manage that caused its collapse. Since corporate governance builds the relationship structures between stakeholders, this aspect of a company requires deep contemplation, sound implementation and control. In this veil, executive monetary rewards, aside from intangible ones like prestige or personal gratification, is the primary concern of the directors since competitors may lure the former executives with higher income or more stock ownership. Besides, it is quantifiable and can be measured unlike intangible, subjective assessment in other motivational yardstick.
It is assumed that the highest returns to firm’s owners should be produced when there is separation of ownership and managerial control. However, the case of Walt Disney giving the CEO stock option to claim ownership over the company beleaguers this concept. As a result, the decision-making of the CEO may be disrupted by the risk bearing responsibility of the shareholders in which it is apparent that the former is serving. The question here is whether the CEO is able to prevent his concentration to dwell in risk leveraging rather in firm’s operations. Worst, this could be the avenue where the CEO enters a new career in investment management.
In the same manner, the case of the CEO of Dana could induce rebellion from the former against the directors that in effect make resignation or low motivation an easy way to run into. Long-term plans of the firm might be overlooked or other stakeholders like customers demand greater quality that situates the operations to increase costs or suppliers lift transportation premium because of a recession. This stakeholder conflict that necessitates financial pressure from the shareholders is a common trade-off happening to every organization. In order to satisfy customers, quality must be an indispensable feature of a product. However, this would not be attained if the firm will focus on cost leadership strategy and undermine differentiation strategy. Thus, CEO are torn between short-term financial loss over long-term business gains and stronger stakeholders linkages. On the other hand, shareholders who are unwilling to give a shot to the firm to implement such strategies could cause them to penalize the CEO that in fact doing the long-run road to success.
Evaluation and planning the CEO’s performance is necessary to avoid overpaying, underpaying or diverting their decision-making duties to other investment interests. To implement such activities, continuous monitoring is required to the directors that should not be limited to bi-annual meetings rather a personal visit to firm’s site and offices. Lack of which can lead to opportunistic behavior from managers wherein their decisions are vested with self-interest that according to studies hard to figure out until they actually occurred.
The lack of shareholders’ knowledge on Tyco’s successive 700 acquisitions from 1998 to 2001 in its strategy of growth through diversification resulted to uncontrolled $11 billion debt spur. In 2002, its performance suffered due to too much diversification and required the firm to publicly trade its stock and split it into four companies. Diversification can provide the managers with lower employment risk as subsidiaries and department broaden including the opportunity to increase their pay due to increased responsibilities. When shareholders could not detect this untraceable behavior and separate it against the bright prospect of such plan attached with long-term shareholder gains, increased monitoring costs is inevitable. Because of this, there is a need to control the actions of the managers from the stance of a shareholder. And this could only be maximized and optimal decision can be established if monitoring of the firm’s operations can be held by them not just simply black and white report.
Culture, Ethics and Reputation as the Platform of Stakeholder Management
Back to the assumption that top-management is responsible in managing stakeholder structures, relationships and conflicting goals. They are the strategic leaders who install and maintain organizational culture which can be the source of innovation on one hand or inertia on the other depending how they lead the organization. Since organizational culture is complex, it is an ideal intangible resource to smoothly reach an organizational goal set by the leaders including the competitors’ difficulty to discover such competitive advantage that makes its sustainable. It serves as the driver and social energy of the firm.
Southwest Airlines became a successful firm because its culture fostered respect to both employees and customers while the former is encouraged to work hard and provide premium service while enjoying at the same time. Because of instilling these values into the mainstream of firm intangible features, productivity and motivation exceeded the expectations of the management and customers alike producing higher returns for the shareholders. There are many promises of an effective and compatible organizational culture, however, it takes time especially for a new firm to adapt one and becomes a potential source of competitive advantage. In addition to this, strategic leaders are faced with different alternatives including the innovative type of culture which fosters change. Whatever the planned or unplanned culture that was built, leaders should be consistent with the strategic mission to prevent blunder from introducing one-time radical change and they should be equipped with managerial prowess and charisma to align an existing culture to the new line of firm strategies.
Using ethics in the analysis of managerial opportunism immaturely explained above, injecting this element in the culture of the firm could minimize, if not erase, self-vested interests wrapped in a managerial decision. It can also address the problem of monetary claims attached to diversification endeavors also satisfying the manager that serves as detrimental to shareholder’s value. With ethical practices fostered in the firm, managers and employees alike increases the value of performing organizational duties outside monetary rewards. In this state, managerial monitoring and employee turn-over can be kept at low levels because they are not only motivated but also are inspired in their work which results to shareholders’ savings. On the other hand, the same intensity, only on the extreme case, is applicable when a firm practices unethical behavior which can become a chronic organizational ailment.
The one’s US energy giant, Enron, collapse due to this cause. Employee performance is based on results and they are phased to be terminated when failed to achieve the desired outcome exclusively formulated by a Division Manager Skilling. He replaced the relatively (according to his assumptions) unproductive employee with the cream-of-the-crop in the business. This strategy sparked the dark tone in the internal culture of the company partly because the non-quantifiable feature of employee dedication is basically diluted. Aggravated this situation is Enron’s Auditor Andersen and other executives’ unethical accounting practice of preparing non-transparent reports. Another, as the list continues, the Financial Officer placed Enron’s stock as investment into business partnerships concealing them through off-balance sheet and harvesting for him and other colluding employees. These practices resulted into ethical failure, thus, transforming the organization into hungry money-makers that seemingly possessed by evils while other shareholders served as victims.
Another intangible source of competitive advantage, firm’s reputation is an evaluation tool used by stakeholders to communicate the company its attributes in relation to them such as respect, knowledge, awareness, emotional and affective regard. Southwest Airlines has emotional appeal and unique approach to airline business that prevented it to loose money in a year sine 1978 and saved from fare wars, oil crises and other economic disasters. Dupont invested heavily to be flawless in its products’ environmental impact giving it the formidable position in social responsibility. Merck and Company had emphasized innovative employees by selectively hiring better-skilled people to contribute in building intellectual capital in the company enhancing its workplace environment attribute. The brand name of Coca-cola and Microsoft are the world’s famous and most valuable brands due to superior products and service.
As firm’s reputation takes years to built, just like any other intangible resource, it could be lost in an instant. This is what Exxon experienced when Valdez oil tanker happened including poor product quality of Coca-cola in Europe and Microsoft’s antitrust case of its complex technology. During these times, the CEO should take the front stage to develop and maintain his firm’s reputation. Jack Welch of General Electric, for example, gave years of prosperity in the firm due to its exemplary financial performance due to his visionary outlook and leadership. On the other hand, Cisco CEO stick in his conviction to obtain existing business model despite 78% dropped in the value of its stock. These leaders are the key to obtain and retain billions and billions of global companies’ valuation of reputation. They serve as the mirror of how the firm would look like in the future.
Effective stakeholder management is primarily an outcome of top-level managers’ ability to build, maintain and rebuild culture, ethics and reputation within the firm. These activities, as a prerequisite, should be in line with organizational intent and mission that ultimately serve the purposes of stakeholders in general and shareholders in particular. Installing sound stakeholder platforms will give managers the required flexibility and leverage to minimize the adverse impacts of trade-offs between two stakeholders. For example, when the firm is known to be a good debtor as it perpetually pays its due obligation on time, banks and other capital markets will place the firm into more relaxed contracts that in turn aids the firm to easily finance projects. The culture will mount the chain of behavior, ethics will polish it and reputation will keep it shining to lure stakeholders in reaching organizational objectives.
Conclusion
With these illustrations, the firm can extend the effective life of its competitive advantage when it is able to manage its specific relationships with individual stakeholders. Since each of them can be used as means or aspired as ends in firm’s operations, stakeholder management is an indispensable duty of top-level managers. The process involves allocating priorities to capital markets, product markets and organizational markets that frequently result into trade-offs or win-loss situation. Due to this fact, an ideal condition for a firm is to have the combination of strategic leaders and accompanying management platforms. Having this tools, organizational objectives will remain on course despite external disruptions from government regulations and other stakeholders’ appeal to address their individual concern that can be observed when unions want wage increase, shareholders want cost-savings, customers want additional employees in a certain branch and suppliers’ demand for advance order transfer.
Stakeholder management involves several activities such as planning where Excite@Home overlooked that ultimately permanently amputating the firm’s ability to bounce back despite new leadership. This case showed not how a firm sustains its advantage but how can it initially build it. This is useful not only to start-up company but also to a company changing strategy. At the core of every strategy is planning that undermining its significance could also damage the importance given to essential stakeholders. As a result, even though Excite@Home has potential to win or fairly survive over the stiff competition, the inability of managers to provide a clear strategic intent to stimulate confidence among lenders and distributors inhibit it to prosper farther. These stakeholders wanted their investment to create value in the future, however, the blueprint of the firm’s strategies in the long-run are not reliable as a source of wealth.
Perhaps the most crucial in sustaining competitive advantage and little behind shareholders’ significance in stakeholder management, retaining and motivating top-level managers particularly the CEO’s pay is the job every member of the BOD are carefully examining. As CEOs are the most prominent and influential authority in the firm’s operations, they frame and direct the firm’s resources and organize capabilities to arrive at core competencies wherein competitive advantage is derived. Due to huge amount of shareholders’ delegation of decision-making powers to them, their pay can speak the only quantifiable measurement to influence the level of their motivation. This serves as shareholders’ way to minimize the risk of CEO turn-over or low performance. However, as in the case of Tyco, additional effort to monitor major CEO decision on diversification could be an ideal move for shareholders’ to personally protecting their interests in the firm. In an opposite view, managers may view this as cost-inefficiencies due to monitoring costs, and worse, create lower morale and rebellion on their part because of shareholders’ implied lack of trust.
Crucial to the scenario of either Excite@Home or Tyco, building and maintaining the platforms of stakeholder management through culture, ethics and reputation can give the firm the needed shield as resistance to unethical practices of managers leading to distorted firm reputation that can be clasps in organizational culture causing its gradual but costly demise. When these platforms are installed and kept in the organization for a long time, its value increases along its complexity wherein only organizational members and stakeholders with direct contact to the firm are able to understand. As such, competitive advantage created in firm’s activities, where monetary rewards are not the main source of motivation rather goodwill contributions, are difficult and costly to be copied by a rival firm making the firm’s advantage a sustainable one. This competitor’s attempt excludes the common business knowledge that solutions and its impacts to the firm varies from company-to-company. So, even though it successfully duplicates the size, facilities and compensation structures of the rival firm, it would cost it too much without assurance of same rival results.
Finally, stakeholder management towards sustained competitive advantage is the task of both top-level management and directors. The CEO is highlighted in this veil because shareholders positioned him to function as the manager of the entire firm activities. A new product in the market, a new supplier policy, allocation of funds to minimize environmental hazards and transparency of financial and business performance are engaged because of his decision-making latitude. However, managerial opportunism lurks around the corner, which in turn, undermines sustainable competitive advantage in favor of self-vested interests. Thus, directors, the trusted representatives of shareholders to oversee firm operations for them, are given the budget and authority to control the emergence of such. Without these two groups involve in stakeholders’ supervision, stakeholders’ value will result to unnecessary and unintended grievance to another in favor of an isolated interest of few.
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