BB835 The dynamics of strategy

4.2: Who is a stakeholder?

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4.2: Who is a stakeholder?

Contents
Introduction 2
Activity 2.1 2
Identifying stakeholders 2
Activity 2.2 3
Activity 2.3 4
Questioning our assumptions 6
Why understanding stakeholders is important 7
Stop and think 7
Shareholders or stakeholders? 8
Shareholder theory 8
Stop and think 9
Stakeholder theory 10
Stop and think 10
Glossary 11
References 11
4.2: Who is a stakeholder?
Introduction

Introduction
Previous: 4.1: Introduction to Unit 4.
Why is the role of stakeholders important? In Activity 2.1 we shall hear the views of a
practitioner on the subject and explore why it’s important to think of stakeholders when
considering an organisation’s strategy process.

Activity 2.1
Timing: Allow 10 minutes for this activity.
Purpose: To explore the reasons why stakeholders are an important consideration in any
organisation’s strategy process.

Task: Understanding the interests of your stakeholders

Watch the
video of the late Nigel Doughty, former Chairman of Doughty Hanson and Company
which is one of the largest independent private equity firms in Europe. As you watch
the video think about the key opinions that Doughty is sharing.
Feedback
Doughty suggests that an organisation that focuses purely on its own interests will
potentially lose out to organisations that are more aware of the interests of a wider
range of stakeholders. He makes it clear that in an ever more connected world it is
difficult, even unwise, for organisations to ignore the interests of their stakeholders.
There is potential self-interest in acknowledging stakeholders’ interests, even if that
acknowledgement is part of a process of managing the various risks involved with
running an organisation. He makes a valuable point on our behalf – that the theme of
stakeholder management is in no small measure about addressing one of our central
themes: risk.
Furthermore, he suggests that there has been a fundamental change in the way that
business is looked at by society and the way that business looks at society, although
this change is incomplete. By this he implies that this process has some way to go and
the future is therefore uncertain. Doughty therefore also helpfully relates the
stakeholder discussion to another of our themes: ethics and responsibility.

Identifying stakeholders
Before going any further we need to establish a common understanding of what we mean
when we talk about the idea of the stakeholder. In this section therefore we focus on two
fundamental questions before we return to address analysing and managing stakeholders
later in the unit:

1 Who are an organisation’s stakeholders?

2 Why are stakeholders important to the organisation?

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4.2: Who is a stakeholder?
Identifying stakeholders

Much of the stakeholder debate is focused on organisations’ recognising their

responsibility to their stakeholders even if it potentially incurs a cost. However, there is
also an argument that there are benefits in working more closely with stakeholders, and
indeed understanding and managing for stakeholders may provide real potential to
develop competitive advantage. These are all issues we shall be returning to shortly.
The concept of a stakeholder may appear to be deceptively simple, but in reality it is not.
Freeman’s formal definition of a stakeholder as ‘any group or individual who can affect or
is affected by the achievement of the firm’s objectives’ (Freeman, 1984, p. 25) is a very
broad definition that could conceivably include everyone on the planet, so the need to be
discriminating is clearly important, but there are definitions which are even broader. Let us
explore some of the different definitions of the concept which have emerged.
The concept of the ‘stakeholder’, like the concept of ‘globalisation’ that we discussed in
Unit 2, is widely used and can have different meanings depending on who you are talking
to. In strategic management, the concept of the stakeholder and stakeholder theory
emerges from the writing of Edward Freeman. Freeman’s work defined the concept in the
management literature (1984) and began the discussion of whether and how managers
should account for the interests of stakeholders in their organisational strategy making.
Let’s explore the evolution of this debate by moving on to Activity 2.2.

Activity 2.2
Timing: Allow 30 minutes for this activity.
Purpose: To explore the differences that exists in academic definitions of the concept of
the stakeholder.

Task: Defining ‘Stakeholders’

Read the extract adapted from Stakeholders: Theory and Practice (Friedman and
Miles, 2006). As you read make a note of what you consider to be:

(a) A broad definition of the concept of the stakeholder

(b) A narrow definition of the concept of the stakeholder.

Which of these two definitions makes more sense to you?

There is no feedback for this activity.

This is a very important issue, especially when we come to discuss in more detail the
question of legitimacy in Session 4.4 – which stakeholders have a legitimate claim over
the activities of an organisation. A broader definition of who or what is a stakeholder
means that the answer to the question ‘Who has a legitimate claim?’ may be very wide
indeed. For now, however, our focus is on introducing a simple method to map an
organisation’s stakeholders as a necessary first step in the process before exploring the
more complicated question of what stakeholder analysis can tell us in Session 4.4.
We shall undertake a brief analysis of a well-known and much-discussed organisation that
you are probably familiar with: McDonald’s, the US-based but globally active chain of fast-
food restaurants.

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4.2: Who is a stakeholder?
Identifying stakeholders

Activity 2.3
Timing: Allow 30 minutes for this activity.
Purpose: To use stakeholder mapping as a means of determining who an organisation’s
stakeholders are.

Task: Mapping McDonald’s stakeholders

The McDonald’s restaurant chain is a presence in towns and cities across the world. In
fact there are over 32,000 of these food outlets in more than 117 countries
(McDonald’s, 2011). McDonald’s specialises in ‘fast food’: food prepared and served
quickly, which can be eaten while on the move and which is usually competitively
priced. As you will see later in this unit, McDonald’s is a controversial company which
has been at the heart of many public debates in recent years. But who do you think are
its stakeholders? Who can affect, or is affected by, McDonald’s objectives? Take a few
minutes to map McDonald’s stakeholders, using a simple stakeholder map like the one
below and referring back to Freeman’s definition for guidance on who to include. In
populating this map, think about the various stakeholder groups that might interact with
McDonald’s (both inside and outside the company).

Figure 2.1: McDonald’s Stakeholder Mapping Template McDonald’s Stakeholder

Mapping Template

Feedback

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4.2: Who is a stakeholder?
Identifying stakeholders

Developing an understanding of who might be considered a stakeholder is more

complex than simply creating a stakeholder map, but it is possible that in your answer
to this activity you came up with something that looks like Figure 2.2. There are a
number of key points to note before we move on. First, stakeholders can be found
outside the organisation (in local, national or supranational governments, or in the
local communities in which the organisation is based) as well as inside the
organisation (managers and employees). Second, while some stakeholders are
involved in the delivery of McDonald’s business (e.g., you will recognise buyers (i.e.,
McDonald’s customers) and suppliers from a five forces analysis), others are not
(e.g., campaigning bodies do not help McDonald’s to make or sell its products). Finally,
while McDonald’s will accept that some stakeholders have a legitimate expectation
from their relationship with the company (customers will expect edible food, managers
and employees will expect pay and conditions as outlined in their contracts,
shareholders and franchisers will expect dividends and profits from the company’s
successful operation, etc.), others may make demands that McDonald’s may not
necessarily agree with (e.g., demands that the company does not harm the
environment, that its food products are healthy, or that it does not exploit its workers).
We return to these issues in Activity 4.1.

Figure 2.2: A map of McDonald’s stakeholders

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4.2: Who is a stakeholder?
Identifying stakeholders

Questioning our assumptions

It should be clear from the mapping of the McDonald’s stakeholder network in Figure 2.2
that almost anyone can be considered to be a stakeholder of a company the size of
McDonald’s, operating in as many markets as it does. Some stakeholders may fall into
several categories – for example, a customer may simultaneously also be an employee, a
member of a community, a campaigner and a shareholder. This leads to a series of
observations about the practicalities of stakeholder analysis:

l We should not assume that each stakeholder group is homogeneous – there may be
considerable differences within stakeholder groups. For example, not all suppliers
are alike. A potato farmer or a beef farmer has quite different expectations of their
relationship with McDonald’s compared with a major Hollywood film studio that
provides film tie-in materials used in joint promotional campaigns. Vegetarian
customers have different expectations from meat-eaters. Indian and Chinese
customers have different expectations from US customers. In a stakeholder analysis,
it is therefore hard to generalise about what a specific stakeholder group will expect.
There may be several sub-groups within any stakeholder group.
l We should not assume that stakeholders hold consistent expectations of their
relationship with an organisation. Customers of McDonald’s may expect their
purchases to be healthy if campaigners raise the issue and question the nutritious
value of the food, but when such a campaign ends customers may simply require
their purchases to be relatively cheap and to taste the same as they always do. It is
hard to generalise about expectations because they may change. Furthermore, they
may change very quickly and, due to new social media, a small individual discontent
can become an extremely serious issue with the potential to damage an
organisation’s reputation.
l We should not assume that stakeholders will necessarily share either the values of
an organisation or the organisation’s interpretation of any given situation. Senior
managers in McDonald’s may believe that it is acceptable to use beef and chicken
produced by factory-farming methods, because that enables them to sell at a
particular price, but some customers may have different expectations of the ethical or
socially responsible practices that the company should pursue and may therefore
oppose the use of factory-farmed products. (Of course, this situation may also be
reversed, with managers concerned for animal welfare and customers more
concerned for the price that they pay for the product.) Consider also the role of trade
unions: they exist to represent the collective interests of one set of stakeholders
(employees) which are occasionally in conflict with those of other stakeholder groups
(such as owners).

A complex process or an oversimplification?

Part of the difficulty of stakeholder management, therefore, is that it runs the risk of being
enormously complex and, at the same time, of developing an oversimplified view. This
does not, however, imply that attempting such management is pointless. An organisation
that spends all its time exploring the possible contingencies from interpretations of what
any given group (or sub-group) of stakeholders might or might not do will not make any
decisions – it will be too busy hypothesising. Conversely, any organisation that does not
spend time on establishing a general understanding of the demands and expectations of

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4.2: Who is a stakeholder?
Why understanding stakeholders is important

key stakeholders runs the risk of unexpected circumstances threatening to derail its
strategy altogether.
You now have an approach to identify an organisation’s stakeholders but we have not
addressed the fundamental question: why should an organisation care who its
stakeholders are?

Why understanding stakeholders is

important
So why are we concerned who an organisation’s stakeholders are? To begin addressing
this question let us first ask ourselves two rather philosophical questions, the answers to
which will have a profound impact on how we come to answer our initial question. These
questions are:

l What is the purpose of the organisation?

l In whose interest does the organisation exist?

These questions are closely interrelated. For instance, your view on why an organisation
exists may depend on whose interests you believe it serves and your view may differ from
the views of others. This is very important for managers. As we discussed in Unit 1, clear
and consistent goals are important in the strategy process but if there is disagreement
about what the purpose of the organisation is, or even in whose interests it is acting, how
feasible is the task of establishing clear and consistent goals, let alone making strategy to
pursue those goals?

Stop and think

Think about two organisations that you know well (one a for-profit commercial
organisation, one a not-for-profit, public service or voluntary organisation) and ask
yourself the questions ‘What are the purposes of these organisations?’ and ‘In whose
interest do they operate?’ and make brief notes.

In the next session we explore the purpose organisations seek to serve and highlight
differences between organisations as a consequence of their fundamental purpose. It will
provide an opportunity to think about a range of concepts that are familiar to you – such as
mission, values, risk and reward – and consider their role and significance in identifying
and understanding an organisation’s purpose as well as their relationship to the wider
strategy process.
However, before we discuss these themes we need to acknowledge the existence of
different perspectives on the question ‘In whose interests does the organisation exist’,
because these different perspectives provide different lenses through which all the
themes we discuss in Unit 4 can be viewed. This involves a consideration of the
shareholder values perspective and the stakeholder values perspective.

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4.2: Who is a stakeholder?
Why understanding stakeholders is important

Shareholders or stakeholders?
This section is important because it sets the context for the rest of this unit by addressing
an extremely controversial question: whether managers should craft strategy to create
value specifically for the owners of an organisation (shareholders in a for-profit context,
government in a public sector context, boards of governors in a voluntary context, and so
on) or more generally for a wider body of stakeholders. This is not a new debate, but it has
grown in significance in recent times as high-profile corporate failures and the great global
contraction that started in 2008 have led to criticism of narrower perceptions of whose
interests organisations should serve. We shall explore the arguments for and against
each perspective during the unit but let us begin by considering some different
perspectives from two influential management thinkers:

The strategic aim of a business is to earn a return on capital, and if in any

particular case the return in the long run is not satisfactory, then the deficiency
should be corrected or the activity abandoned for a more favourable one.
(Sloan, 1967, p. 49)

So we should think through what management should be accountable for; and

how and through whom its accountability can be discharged. The stockholders’
interest, both short- and long-term, is one of the areas. But it is only one.
(Drucker, 1988, p. 74)

The quotes above capture the essence of the ongoing debate about in whose interests
organisations should be run. On the one hand, there are many supporters of Sloan’s
perspective that an organisation should be run solely for its owners; it reflects the attitude
of Friedman that you encountered at the beginning of this session. On the other hand, an
increasingly strong body of opinion supports the view expressed by Drucker – while
owners are important, an organisation should adopt a wider focus. Your perception of the
validity of either argument will have a profound impact on your view of organisational
purpose as it will reflect your ideas about in whose interests the organisation operates and
what strategy is developed. Let us find out more about the alternative perspectives by
highlighting the basic arguments.

Shareholder theory
Many people argue in favour of shareholder theory, which holds that organisations create
value for a wide range of parties by focusing specifically on maximising value for their
owners. Consequently, Sloan’s view of the organisation’s purpose is as unambiguous as
Friedman’s: the business of business is to operate profitably and make money for its
owners. If this is achieved, the theory suggests, others – employees, lenders, customers,
government, etc. – will also benefit in a variety of ways. Other writers have gone so far as
to argue that a manager’s responsibility to earn profits for its shareholders is morally
grounded (Minford, 1998; Marcoux, 2003), because owners assume risks and deserve
rewards as a consequence. The purpose of the commercial organisation is therefore
straightforward: to seek profit maximisation (Porter, 1980) with strategic management’s
role being simply to lead this quest for profit maximisation (Grant, 2010, pp. 36–7).
Grant provides four basic arguments to support this theory:

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Why understanding stakeholders is important

If you would like to find out more about the idea of maximising shareholder value read
Section 3 of the article ‘Contemporary capitalism’ by William Lazonick, in Durlauf, S. N.
and Blume, L. E. (2008) The New Palgrave Dictionary of Economics, 2nd edn, available
through the Open University Library.

1 Competition – Grant suggests that, in an increasingly competitive world, any

organisation not seeking profit maximisation as its reason for existence will lose its
existence. This view associates profit maximisation with a Darwinian view of the
business environment – that survival depends on a single-minded pursuit of
profitability. Grant argues that few organisations have the luxury of not focusing on
profit maximisation, because the dangers of losing this focus could undermine the
attractiveness of the organisation to providers of capital.
2 The market for corporate control – if managers do not single-mindedly pursue profits,
the owners of the organisation will replace them with managers who will. This reflects
again the dominance of the owners of organisations and of their principal
motivations. We should note that this argument makes a number of assumptions
about the behaviour of shareholders and their implied emphasis on the return of
short-term value; this is an Anglo-American model of behaviour which may not be the
case in all national economies.
3 Convergence of stakeholder interests – Grant suggests that the interests of a wider
community of stakeholders will be better served by an emphasis on profit
maximisation. He argues that a company that is working well and making money is
consequently more likely to treat its employees well, and the communities it serves
more responsibly, than an organisation that is failing or underperforming.
4 Simplicity – diluting an organisation’s purpose with other considerations makes the
process more complex and undermines the possibility of success. Practically,
therefore, Grant argues the case for the ‘simplicity’ of the pursuit of profit
maximisation.

Minford (1998) suggests other positive arguments in favour of a shareholder approach,

among which is the availability of knowledge. He argues, for example, that governments
may seek to impose other responsibilities on organisations but they do not possess the
same degree of market knowledge as the managers of the organisations, and hence may
make poor or misguided decisions.
There are different shareholder perspectives; for example, long-term shareholders,
institutional shareholders and short-term opportunist shareholders, to name but three.
Short-term opportunist stakeholders are closely linked with the concept of maximising
shareholder value associated with the ‘Anglo-Saxon’ model which we discuss in the box
‘The Anglo-Saxon model and the Rhine model’ in Session 4.3.

Stop and think

When Grant talks about profit maximisation he is identifying one measure of purpose
for a for-profit organisation. What measures might be used to describe the purpose of a
not-for-profit organisation? We return to this theme in Session 4.3.

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Why understanding stakeholders is important

Stakeholder theory
Stakeholder theory has often been regarded as a response to the claimed limitations of
shareholder theory (although Freeman disagrees). These limitations, it is argued, simply
reflect the reality that in ever more complex and dynamic environments ‘organisations can
survive only if they attend to the interests of multiple parties, rather than simply those of
shareholders’ (Eden and Ackermann, 1998, p. 115). Put simply, in a dynamic and complex
operating environment, merely paying attention to the interests of your owners (however
effectively) is no guarantee of success. However, as you will see ‘paying attention to’ does
not inevitably mean ‘taking actions in the interests of’; there are many different
perspectives on stakeholder theory but they all acknowledge that it is impossible for a
manager to satisfy all interests simultaneously. At this stage the simple distinction offered
by stakeholder theory is that managers should be aware that achieving an organisation’s
purpose may not simply involve keeping owners happy. It may also involve identifying,
acknowledging, understanding and/or responding to the interests of a much wider range
of stakeholder groups.
In this unit, we use Freeman’s definition of the stakeholder as ‘any group or individual
who can affect or is affected by the achievement of the organisation’s objectives’ (1984,
p. 25). This is a wider definition than that, for example, offered by Hitt et al. who suggest
that the stakeholder should have ‘enforceable claims upon the organisation’s
performance’ (2003, p. 25).

Stop and think

How convincing do you find Grant’s arguments? In particular, do you agree with his
view that profit maximisation brings with it a variety of benefits for all an organisation’s
stakeholders? Using the for-profit organisation you thought about earlier, try to identify
ways in which the pursuit of profit maximisation has directly benefited stakeholders
who were not owners of the organisation. For the same organisation, can you identify
examples where stakeholder interests are addressed in ways that do not contribute
directly to profit maximisation?

The differences between these two perspectives are summarised in the following table.

Table 2.1 Shareholder values perspective versus stakeholder values

perspective
Shareholder values perspective
Emphasis on Profitability over responsibility
Organisations seen as Instruments
Organisational purpose To serve owner
Measures of success Share price and dividends
(shareholder value)
Major difficulty Getting agent to pursue
principal’s interests
Stakeholder values perspective
Responsibility over profitability
Joint ventures
To serve all parties Involved
Satisfaction among stakeholders
Balancing interests of various
stakeholders

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4.2: Who is a stakeholder?
Glossary

Corporate governance Independent outside directors Stakeholder representation

through with shares
Stakeholder Means Ends and means
management
Social responsibility Individual, not organisational Both individual and
matter organisational
Society best served by Pursuing self-interest (economic Pursuing joint interests
efficiency) (economic symbiosis)

(Source: De Wit and Meyer, 2004, p. 607)

This table introduces a number of themes that we shall address throughout this unit, in
particular the emphasis of the organisation (i.e., whose interests are served) and its
purpose, measures of success, how the organisation is governed, and the organisation’s
responsibility to society for its actions.

When you are ready, please move on to 4.3: Organisational purpose.

Glossary
Convergence
The notion that public sector organisations will become more businesslike as they
become more exposed to private sector organisations and practices.

References
De Wit, B. and Meyer, R. (2004) Strategy: Process, Content, Context, Minneapolis/St.
Paul: West Pub. Co.
Drucker, P. (1988) ‘Management and the world’s work’, Harvard Business Review, vol. 66,
no. 5, pp. 65–76.
Eden, C. and Ackermann, F. (1998) Making Strategy: The Journey of Strategic
Management, London, Sage.
Freeman, R. E. (1984) Strategic Management: A Stakeholder Approach, Boston, MA,
HarperCollins.
Friedman, A. and Miles, S. (2006) Stakeholders: Theory and Practice, Oxford, Oxford
University Press.
Grant, R. M. (2010) Contemporary Strategy Analysis, 7th edn, Chichester, John Wiley &
Sons Ltd.
Hitt, M. A., Ireland, R. D. and Hoskisson, R. E. (2003) Strategic Management:
Competitiveness and Globalization, 5th edn, Mason, OH, Thomson.
Marcoux, A. M. (2003) ‘A fiduciary argument against stakeholder theory’, Business Ethics
Quarterly, vol. 13, no. 1, pp. 1–24.
McDonald’s (2011) Getting to Know Us [online], http://
www.aboutmcdonalds.com/ mcd/ our_company.html (Accessed 21 June 2011).

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4.2: Who is a stakeholder?
References

Minford, P. (1998) Markets Not Stakes: The Triumph of Capitalism and the Stakeholder
Fallacy, London, Orion Business.
Porter, M. E. (1980) Competitive Strategy, New York, The Free Press.
Sloan, A. (1967) My Years at General Motors, London, Pan.

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