Strategic Management: A Stakeholder Approach

Some things are just obvious. They are just the way that things have always been – except that they’re not. To me, the idea that you’d manage to your stakeholders seems like it should be the thing that has always been done, but I realized that it hasn’t always been that way. So it was time to take a look back at when the idea of managing to stakeholders was new and different. That meant reading Strategic Management: A Stakeholder Approach.

Serving More Than One Master

We’ve been told that we can’t serve more than one master, but in reality, we all must do it every day. We’ve got different stakeholders in our lives. We’ve got people who want to see us succeed – parents, mentors, teachers, and coaches for instance. We’ve got people whom we want to help be successful themselves, like our children. It used to be that organizations didn’t see themselves as having more than one master. Executive management worked for themselves. Employees, stockholders, customers, vendors, and others really didn’t matter.

However, that changed. Stockholders, instead of selling stock when they didn’t like the management, bought more of it – enough to develop a controlling interest. The result was the ability for stockholders to fire management – and that meant management had to start paying attention to the stockholder demands – and, in some cases, whims.

At the same time, consumers became able to choose alternatives, meaning that they, too, needed to be a group of people that management and the organization had to cater to. Don’t forget the quote attributed to Henry Ford: “They can have a Model T in any color they like as long as it’s black.” Whether he said it or not, it’s clear that he didn’t care what the customer wanted, he was working on efficiency.

More recently, employees could choose to work elsewhere, and that means employees, too, have to be considered. The abundance of groups eventually converted the term “stockholder” as someone literally holding stock in the organization to “stakeholder” – which more figuratively means that they had a stake in the organization.

Serving Stakeholders

Organizations survive and thrive to the extent that they serve their stakeholders. If they serve their stakeholders well, they’re rewarded with growth. If they fail to serve their stakeholders well, they’re faced with extinction. While true, this hides the deeper truth that not all stakeholders are created equal. Some stakeholders – for example, customers – may be more important than other stakeholders, like vendors. In business, you’re faced with inevitable tradeoffs, and sometimes the needs of one stakeholder must be prioritized over another.

The key to strategic management is in identifying what an acceptable minimal level of stakeholder service is. That is, what can you make investments in, and what stakeholders can you hold your existing commitments to serving their needs – or even lower them? How do you find the balance when there are so many stakeholders? It may be that this is what separates the excellent companies from the “also ran.”

Customer Service

If you want to be a premium brand, you don’t have to have a great product. It helps, to be sure, but it’s not required. What’s required is exemplary customer service. Years ago, when I was working for Woods Wire, we developed a brand called Yellow Jacket. If you ever had a problem with one of those extension cords, you could send it back and we would send you a replacement. It didn’t matter if you ran over it with a lawn mower or used it to tow a truck, we’d send you a replacement. The economics of it worked, because the margins on the product were much higher than standard commodity margins, and a very small number of people actually got replacements.

Craftsman tools were legendary with the public because they had a lifetime replacement guarantee for hand tools. (This has become the standard for most premium hand tools.) The truth is that few people ever returned a hand tool for a replacement, but those who did became raving fans of the brand. The investment in a small percentage of people in one stakeholder group paid off enormous dividends for the brand.

This is played out in hundreds of premium brands that differentiate themselves on customer service, even though, at first glance, they’re differentiating on product. The reason that we don’t see through the smoke screen is because they are addressing any product issue with a wealth of customer service.

Negotiation and Escalation

Strategic Management advocates the idea that we should negotiate rather than escalate. In general, this is a sound principle. Decisions can be made through command (dictatorship), consultation (benevolent dictatorship), vote (democracy), or consensus (agreement). What happens when you can’t reach a decision? One answer is “petition the king.” This strategy turns over the decision to a higher authority. It makes the problem the higher authority’s problem. On the surface, this sounds like a great plan.

The plan falls apart when you realize that the higher authority may not side in your favor, or they might create solutions that are – intentionally or not – worse than what the parties might have come up with on their own. Consider King Solomon and the two prostitutes who were fighting over one of the prostitute’s children (who both claimed was theirs). The solution was to cut the living child in half and give each a half (1 Kings 3:16-28). The story has a happy ending in that the mother who could not bear to see her child killed offered to give up the child, and the King ultimately sorted things – but the initial solution would have served neither party.

Having been in life and business for many years, I recognize this isn’t a binary situation. There are absolutely times when escalation is the right answer – but the number of times is very, very small.

Understanding Irrationality

When one is tempted to exclaim that a stakeholder group is responding irrationally, I’m reminded that we don’t live in a world of absolute rationality. We live in a world of bounded rationality. We do what’s rational to us based on our beliefs and perspectives. We live in a world where our decisions may lead us individually to greater good but collectively to ruin. If we were to exploit natural resources to the point of exhaustion or extinction, we serve no one. However, these extinction/exhaustion events don’t happen through a single individual actor. They happen as many people apply behaviors that are rational to them and their well-being.

If you ever think that a stakeholder group is being irrational, it just means that you don’t understand them.

Short and Long Term

Perhaps the hardest thing to do in business is managing the balance between short-term and long-term investments. If you don’t survive, your long-term investments are wasted. However, if you don’t make long-term investments, you’ll always be stuck in a world of constant struggle. Others will become more efficient than you through their long-term investments, and the result will be that you’ll enter a spiral of short-term decisions that are you never able to avoid as you spend all of your resources just surviving day to day. Maybe the first long-term investment you should make is a small one – in reading Strategic Management.