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Contents
Lecture 1. ..................................................................................................................................... 2
Bridging Practice and Theory: A Design Science Approach – Holmstrom et al. (2009) ....... 2
“I’ve Got a Theory Paper – Do You?”: Conceptual, Empirical, and Theoretical
Contributions to Knowledge in the Organizational Sciences – Shapira (2011)...................... 8
What Constitutes a Theoretical Contribution? – Whetten (1989) ......................................... 12
Lecture 2. ................................................................................................................................... 15
Why would corporations behave in socially responsible ways? An institutional theory of
corporate social responsibility – Campbell (2007) ............................................................... 15
The stakeholder theory of the corporation: Concepts, evidence, and implications............... 20
Toward a theory of stakeholder identification and salience: Defining the principle of who
and what really counts – Mitchell et al. (1997) ..................................................................... 27
Lecture 3 .................................................................................................................................... 34
The cross-national diversity of corporate governance: dimensions & determinants ............ 34
Corporate governance: Decades of dialogue and data .......................................................... 39
Lecture 4 .................................................................................................................................... 43
Firm resources and sustained competitive advantage. Journal of Management ................... 43
Barney (2001). Is the resource-based view a useful perspective for strategic management
research? Yes......................................................................................................................... 48
Integrating insights from the resource-based view of the firm into the new stakeholder
theory..................................................................................................................................... 53
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Lecture 1.
Bridging Practice and Theory: A Design Science Approach – Holmstrom et al. (2009)

The goal of making academic research relevant to the practitioner remains elusive: theoretical
and academic research interests do not seem to coincide with the interests of managerial
practice.
- In OM is the practitioner and not the academic scientist who engages in basic research.

In OM recognizing and building on the complementarity of problem-solving research and

theory academic research on one another is important.
- Why? Because problem solving oriented research produces the artifacts that OM research
subsequently evaluates in an attempt to build explanatory theory.

• Design Science is fundamentally different from both theory-building and theory

testing approaches
• Exploratory research - Design Science: Solution Incubation and Solution Refinement
• Explanatory research – Theoretical science: Substantive Theory and Formal Theory

Introduction
Operations management research is driven by a desire to create knowledge and to expand our
understanding by explaining various empirical phenomena.
- OM methodology is based on the premise that empirical research should be used to
develop and test theoretical hypotheses.

Goal of the article? To examine the methodological basis where scientist assume an active
role in shaping phenomena and to establish its link to the more conventional theoretically-
oriented explanatory research used in OM.
- Should an OM scientist extend beyond theoretical explanation to actual problem solving?

Design science as the basis of problem-solving research

Questions at both managerial and theoretical level can be relatively ill-structured.

Ill structured means decision situations where the decision maker may not know or agree on
the goals of the decision, and even if the goals are known, the means by which these goals are
achieved are not known and requisite solution designs (e.g., technologies) to solve the
problem may not even exist.

Design science focuses on tackling ill-defined problems in a systematic manner.

- It is different from theory building and testing approaches as they seek explanation based
on observation and design science emphasizes the process of exploration through design.

Design science is research that seeks;

(1) to explore new solution alternatives to solve problems
(2) to explain this explorative process
(3) to improve the problem-solving process
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The goal of a researcher using this method is to develop “a means to an end”: an artifact to
solve a problem.

- Action research on the other hand focuses on problem-solving processes or group

dynamics in a specific problem situation.
- Action research must focus on the design and implementation of a means to an end to be
considered design science.
- The idea that scientists should be as much active problem-solvers and designers as
observer and theorists is well established.

The most familiar example of design science to the OM audience is activity-based costing.
- Labeled as action innovation research by Kaplan. Design science is however rarely used
in OM.

Contrasting exploration and explanation research

The fundamental philosophical difference between exploratory and explanatory research is
ontological.

• Explanatory research
(theoretical cognitive
research): phenomenon to be
studied already exists and the
goal is to understand it.
• Exploratory research (design
science): the phenomenon must be created before it can be evaluated.

The design scientist must first create the artificial phenomenon so that data to be analyzed can
be obtained.
- Those doing interviews do not have to do this as they start with the premise that the data is
already out there to be collected.
- The goals and end product are different in both researches and indicate different interests.

The majority of OM research is more cognitive than pragmatic.

- Primary goal of research articles is to advance theory and publish, not to improve practice.

Corbett and Van Wassenhove (1993) argued that managerial interest in operations research
has declined, because of a lack of connection between management consulting and
management engineering.

Exploration and explanation research as complements

Exploration and explanation are not mutually exclusive; rather, they are both essential and
highly complementary.
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Exploration research Complements explanation research by producing artifacts that can be

used as raw material for evaluation research.
- Artifacts developed here are tested in evaluative research

Evaluative research: complements exploration by evaluating the merits of various artifacts in

different contexts. What are the limitations of applicability of Sigma, JIT etc.

From exploration to explanation: four phases of research

Four phases describe the process of moving from new ideas to tested ideas to mid-range
theory to formal theory. The first two phases provide a practical solution, the last two are
labelled theoretical science (The last 2 dominate contemporary OM research).

Means-end analysis is the central method through which goal-directed scientific research can
be conducted. Means-ends analysis is based on representations of present states, desired
states, the differences between the two states, as well as the actions that change the present
situation.
- The goal of the means-end analysis is ultimately to move toward the desired state. Design
science provides the details on how this can happen.

Phase 1: Solution Incubation

Attempts to solve problems start with constructing an understanding of the problem, but it is
important to acknowledge that we do not discover problems as much as we construct them:
we may discover a symptom, but symptom does not equal problem.
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Solution incubation is framing the problem and developing the fundamentals of a potential
solution design. Solution incubation is a subjective phase, problem solvers tend to frame
problems from the point of view of their own background expertise (ill structured problems).

- Solution designs are technical specifications for solutions that are incomplete but detailed
enough to be implemented at least in a test environment.
- Design science is multidisciplinary as it calls for developing a synthesis from multiple
disciplines – it is thus multidisciplinary.
- The incubation phase involves abductive reasoning which is the ability to connect
different knowledge domains and see commonalities between them.
o This type of reasoning is less familiar to OM researchers

Means-end analysis in the first phase of design science research involves problem solving
(solve a problem by adapting existing tools or by using existing tools in novel ways: search
for means for given ends) and solution spotting (maintain the means but change the ends).

- It highlights an important aspect of design science: it is both a process of developing new

solutions to existing problems as well as matching existing solutions with new problems:

Phase 2: Solution Refinement

In the second phase of exploration research, the elementary solution design is subjected to
empirical testing. It is a repeated trial-and-error type process and refinement through iterations
is required to determine what works and what does not.

The refinement phase is a combination of design improvements, implementation and

evaluation.

Reasoning has become more intersubjective and methods in this phase can be very similar to
experimental designs. Solving the problem will be the driving force, even if that means that
disciplines need to be changed.
- Initially ill-structured problems are constructed and solved in an iterative research
process; design science is not hypothetico-deductive.

In this second phase, means-end analysis includes design patterns and technological frames:
• Design patterns are solution designs where the required number of intended
consequences have been confirmed and a satisfactory number of unintended
consequences co-opted.
• Technological frames place the solution design into the context of the objectives and
understanding of the proposed solution held by different stakeholders in the
implementation. It is important to identify potential problems arising from different
parties having different interests and to realize that their objectives are not identical.
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Phase 3: Explanation I – Substantive Theory

Problem solvers in the industry will likely stop at Phase 2 once the solution is refined and a
satisfaction number of unintended consequences co-opted. The solution has met its goal.

In phase 3, the theoretical relevance of the solution design is established. This phase makes
the results of the design scientist theoretically relevant, so phase 2 and 3 should be explicitly
linked.

In the explanation I phase, researchers focus on the development of substantive theory of the
mid-range variety.

• Substantive theory is a context-dependent theory that is developed for a narrowly

defined context and empirical application. Here, contextual boundaries and arguments
are important.
• Mid-range theories are theories with limited scope of applicability; their aim is to
develop a deeper understanding of a theory in a specific context of application.

The first phase of explanation contributes to the generalizability of the design scientist’s
results in the theoretical sense. (It does not offer results that are generalizable across contexts;
that is the goal of phase 4)

In phase 3, means-end analysis converges toward design theory and grounded management
theory”:

• grounded theory: empirical examination of solution designs in multiple contexts turns

the solution design into mid-range theory of practice
• Grounded management theory is used to explicate the situations in which a given
means-end proposition is relevant.

Phase 4: Explanation II – Formal Theory

The majority of empirical OM research seeks to develop formal theory.

- Formal theory: formal theoretical propositions of which the applicability is not limited to
the empirical context under study. Empirical examples can be used to illustrate the theory,
but the theory in itself can stand on its own feet.
- Transaction cost economics and structural contingency theory are perhaps the two best-
known formal theories: they can be understood and theoretical propositions can be
formulated without any references to an empirical context of application.

Formal theories often develop from substantive theories as time progresses, effectively
linking Phases 3 and 4.

- While both substantive and formal theory can be considered to be middle-range, the aim
of formal theories is to get a broader generalizability, both in terms of theoretical
abstraction and statistical generalizability.

In this final phase, means-end propositions take the form of formal theoretical propositions:
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- These formal propositions are theoretical abstractions that express the relationship
between two or more theoretical constructs.
- In contrast with substantive theory, formal theoretical propositions do not require an
empirical context; instead their meaning is embedded in the logic of the theory itself.
Design science as part of OM research
The success of a design science approach in OM hinges on its ability to integrate itself with
the predominantly explanatory and theory-oriented mainstream research.
- The link between phases 2 and 3 should be strengthened so that the managerial relevance
of explanatory research can be improved.

Current emphasis in OM research is clearly on means-ends propositions as part of explanatory

theory. At the same time, emphasis on both presents an opportunity systematically to link
exploratory and explanatory phases of research.

- Research in the industry focuses on solving practical problems so phases 1 & 2. Academic
researchers, in turn, focus on development and testing of explanatory theory (Phases 3 and
4

Linking phase 2 and 3 in OM is uncommon but there could probe highly valuable, both from
the point of view of theory development and managerial relevance.

Conclusion
Managerial relevance still remains an elusive goal in OM research.
- Why? Non practitioners teach it and research it

How to narrow the theory-practice gap?

- Start by acknowledging the possibility that theory and practice may be distinct forms of
knowledge and that the gap between theory and practice is not one of knowledge transfer;
it is more fundamental.
- Taking the managerial relevance seriously means considering it at he outset of the
research.

Successful bridging of managerial relevance and theoretical contribution lies in the ability to
bridge phase and 3 types of research.
- To date OM has focused on evaluative and explanatory research whole leaving
exploratory to the practitioner
- Practitioners do not use the results of academic OM research in their development efforts;
instead academics rely on the work of practitioners.
The aim of design science is to solve a problem and not create knowledge.
- In explanatory research, the research starts by scanning existing knowledge and
identifying gaps which provides insurance against reinventing the wheel.

Involving theoretical inclined researchers in the early phases of design science research can
produce three kinds of benefits:
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(1) theoretical expertise can prove to be useful in the process of improving the solution design
(2) theoretical expertise can also steer the design scientists’ efforts toward fruitful theoretical
insight
(3) the theoretically oriented scientist can benefit from the possibility of actually taking part
in the iterative innovation process.

Explanatory research evolves around the construction and demonstration of an explicit and
novel theoretical contribution.
- Exploratory research it has more to do with the improvement of the solution design and
demonstration of its practical utility

Relevance of design science research is not contested as its impetus is practical. However,
explanatory research is always contestable but can be improved by linking exploratory
research.

In design science, the notion of subjectivism is one of the driving forces. If we would all look
objectively to the world, it is not possible to create something new.

“I’ve Got a Theory Paper – Do You?”: Conceptual, Empirical, and Theoretical

Contributions to Knowledge in the Organizational Sciences – Shapira (2011)

Language plays an important role in scientific research. 2 languages used in research

management that appear to be the farthest apart are: Mathematics and narratives.
- These 2 languages and the 3 modes of research formulation (Theories, Models,
Conceptual Frameworks) are needed for knowledge contribution which should be the
goal of research in organization science.
o Based on a combination of conceptual, theoretical, and empirical work.

Theory signifies the highest level of inquiry in science. It is a formulation of the relationships
among the core elements of a system of variables that is arrived after overcoming multiple
hurdles and several stages of refinement and empirical testing.
- The word theory appears to be misused in the management field.
Why? many journals rejecting manuscripts that otherwise would not be rejected.

The second part focuses on two major languages that are often used in management research:
mathematics and narratives:

• Mathematics is a language that describes ideas in a very precise way but at times at the
expense of the richness of a domain.
• Narrative is a research language that provides rich descriptions but often at the
expense of precision.
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Theories, models and conceptual frameworks

A theory is an analytic structure or system that attempts to explain a particular set of empirical
phenomena. Theories differ in depth and scope. A few general aspects of theory:

1. A theory is constructed to provide an explanation of a set of observed phenomena;

2. Theories make assumptions and base on them; it draws logical derivations. Those
derivations lead to specific predictions regarding the subject matter with which the
theory deals.
3. A theory should be formulated in a way that makes it clear how it can be refuted or
falsified.
4. The ultimate test of a theory is achieved by comparing its predictions to reality; a
theory’s predictions are subject to a false/true test.

A model implies a formulation that:

(1) derives predictions based on clearly specified assumptions
(2) is precise and falsifiable

Model vs theory
The major differences between a theory and model are the first and fourth points described
previously as the criteria for theory. A test of a model is not one of a “true/false” type, but
rather a kind of a “usefulness” test.

Model vs. framework

Models are precise, especially if they are formulated in mathematical terms. However,
sometimes researchers try to build conceptual frameworks, which may be not as specific as
models, but can provide a general system of organizing the observations. (e.g. Organizational
change)

Framework
Theories and models differ from frameworks in that they make testable predictions.
- Work of this type may not be possible at an initial stage of scientific inquiry. At this stage
scientists may seek to develop coherent and meaningful frameworks.

The criteria for a conceptual framework are that it:

(1) provides a structure to organize observations
(2) describes the structure in a clear and precise manner.

Predictions may not be directly testable as in theories and models but can help organizing
empirical observations.

A conceptual framework does not necessarily make strong assumptions the way a theory
does, and it may not be as tightly structured as a mathematical or computational model. Yet a
good conceptual framework may lead to new insights and may open new avenues of thinking
on particular phenomena.
- Ultimate test? Does it lead to better organization of major issues in a domain of inquiry?
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The role of language in scientific progress and theory development

There are different languages that can be differentiated by the degree to which they are
precise on one hand and rich on another. Usually, the richer a description, the less precise it is,
and vice versa.

• Mathematical expressions are tighter and provide a better fit with Popper’s (1959)
criteria for scientific expressions.
• Narrative/ verbal theories are much more ambiguous than mathematically formulated
theories, but in some situations richness may be a better way to describe the research
context than a more precise language.

A theory has to be parsimonious; if two theories explain the same phenomenon, with a similar
degree of success, the one that is more concise and shorter should dominate the other.

Researchers should use a language that matches the stage of the problem they are studying;
descriptive narratives should be used in the first stage of a study, while models can be
developed using formal language in later stages.

Mathematics: the language of precision in scientific inquiry

The process of knowledge accumulation in management research is interrupted at times when
multiple theories and models within the same or related domains coexist.

How to know which theory is correct or how to test and advance both?
The author discusses how to compare the 2 theories by testing hypotheses in two ways:
• Comparing the two theories’ predictions
• Comparing the two theories using point predictions

Mathematics as a language can help in cumulative development of a scientific domain by

sorting out the better theories and providing them with increasingly difficult hurdles to
surmount. However, several areas in management are not developed to the degree that they
can be subject to such a process.

Narratives: the rich language of scientific inquiry

The richness of narrative-based investigations plays an important role in knowledge
accumulation in situations where the relevant data can be expressed only in a verbal format.

- Narrative analysis means a very orderly and precise analysis of the use of words, a process
whose intent is to extract meaning from text.
Discussion
This paper raised two thoughts:
(1) research formulation can take the forms of conceptual frameworks, models and theories.
(2) there are different languages of research.
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The 2 languages of research presented: mathematics and narratives, vary in their precision
and richness. These ideas can help resolve part of the problems Hambrick identified. How?

1. In organization science knowledge is seen as progressing in a cumulative manner.

2. Scientific theories improve by being subjected to falsification and disproof. In this
respect, using mathematics is beneficial, because embedded in it is proof (or disproof) by
negation.
3. It is not possible to prove theory with empirical findings. Proofs are only possible in a
tightly structured system of rules, such as in logic or mathematics.
• Corroboration does not equal to proof. This can lead to confirmation bias: Looking for
positive evidence in support of our claims.
4. Theory construction should not be confused with quantitative methods for data analysis.
o Sophisticated data analysis does not substitute for poor model building.
The important goal of theory development is finding meaningfulness, not merely
significance.
5. Even though this paper emphasizes the use of mathematical tools in theory construction,
the importance of other languages is emphasized as well. Not every research idea or
finding can be expressed in mathematical tools, and insisting on this can lead to an
increased loss of meaning.

Theory construction is perceived as the highest level of scientific inquiry.

• Organization science needs more rigorous empirical research, newer conceptual
frameworks, models and better theories as it progresses in a cumulative manner.
• Requiring contribution to theory from every submitted paper hinders progress.
▪ This arises from the misunderstanding of the term theory
• Research should use appropriate language and provide high-quality empirical studies,
conceptual frameworks, models and theories, as long as it contributes to knowledge in
the organization field.
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What Constitutes a Theoretical Contribution? – Whetten (1989)

Building blocks of a proper theoretical contribution (what, how, why) and Generalizability
(when, where , when)”

The experience of Whetten (1989) has been that available frameworks that communicate the
necessary ingredients of a theoretical contribution are as likely to obfuscate, as they are to
clarify meaning. The intent of this article is not to create a new conceptualization of theory,
but rather to propose several simple concepts for discussing the theory development process.

This article is organized around three key questions:

(1) what are the building blocks of theory development?
(2) What is a legitimate value-added contribution to theory development?
(3) What factors are considered when judging conceptual papers?

What are the building blocks of theory development?

A complete theory must contain four essential elements:

What. Which factors should be considered as part of the explanation of the social or
individual phenomena of interest?
Two criteria exist for judging if the “right” factors have been included: comprehensiveness
(i.e., are all relevant factors included?) and parsimony (i.e., should some factors be deleted
because they add little additional value to our understanding?).
How. How are the set of factors related? Operationally this involves using “arrows” to
connect the “boxes”. In addition, causality is introduced.
- The more complex the relationships, the more useful it is to depict them. Formal models
help asses the balance between parsimony and completeness:
o The what and how elements constitute the domain or subject of the theory
o Combining them both produces the typical models from which testable proposition
can be derived.
Why. What are the underlying psychological, economic or social dynamics that justify the
selection of factors and the proposed causal relationships?

- Central question here is: why should colleagues give credence to this phenomenon? The
answer lies in the logic of the model.
- Theorists must convince others that their propositions make sense if they want to have an
impact on the practice of research.

Summary thus far: What and how describe, only why explains.

- Together they provide the ingredients of a simple theory: description and explanation.
- The mission of theory development journal is to challenge and extend existing knowledge,
not rewrite it.
- The why of research has important implication for the link between theory and empirical
research.
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- Difference between propositions and hypotheses? Propositions involve concepts and

hypotheses require measures.
- A is caused by B can be tested without understanding the Why’s of the model. However,
it leads to empirically rather than theoretical discussions of the implication of a study.

- If the purpose of a paper is to present a new theoretical position or refute a existing theory,
researchable proposition are very useful
- Who, where, when. These conditions place limitations on the propositions generated from
a theoretical model and set the boundaries of generalizability. As such, they constitute the
range of the theory.
- Although it is important for theorists to be sensitive to context, the who, where and when
of a theory are typically discovered through tests of the initial theoretical statement (what,
how, why).

What is a legitimate, value-added contribution to theory development?

To get a publication in theory journal, a set of criteria should be fulfilled:

What and how. Although it is possible to make an important theoretical contribution by

simply adding or subtracting factors (whats) from an existing model, this seldom satisfies
reviewers. The value of a proposed change in a list of factors can be demonstrated by
describing how this change affects the accepted relationships between the variables (hows).

- A list of variables does not constitute theory. Relationships, not lists, are the domain of
theory.
- Important changes in a theory’s what and how are frequently stimulated by surprising
research results.

Why. Probably the most fruitful, but also the most difficult of theory development. It
commonly involves borrowing a perspective from other fields, which challenges the
underlying rationales supporting accepted theories.

Who, when, where. Generally, it is insufficient to point out limitations in current conceptions
of a theory’s range of application.

- Conversely, applying an old model to a new setting and showing that it works as expected
is not instructive by itself and has no theoretical merit, only if something about the new
setting suggests that the theory shouldn’t work under those conditions.

Theorists need to learn something new about the theory itself as a result of working with it
under different conditions. There is a need for a theoretical feedback loop.

Three broad themes underlie this section:

(1) proposed improvements addressing only a single element of an existing theory are seldom
judged to be sufficient.
a Focus on multiple elements of the theory- it makes theory complete & thorough.
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(2) theoretical critiques should marshal compelling evidence (either logical, empirical or
epistemological
(3) Theoretical critiques should propose remedies or alternatives.

What factors are considered in judging conceptual papers?

These seven key questions summarize the concerns raised most frequently by our reviewers.
Together they constitute an answer to the question ‘what constitutes a publishable theory
paper?’

1. What’s new? Does the paper make a significant, value-added contribution to current
thinking? Scope reflects the level of theorizing (how much of the field is impacted),
degree reflects the radicalness of the proposal (how different is this from current
thinking). (In general, scope is less important than degree in determining the
theoretical contribution)

2. So what? Will the theory likely change the practice of organizational science in this
area?

3. Why so? Theory development papers should be built on a foundation of convincing

argumentation and grounded in reasonable, explicit views of human nature and
organizational practice.

4. Well done? The paper should reflect seasoned thinking, conveying completeness and
thoroughness, and have a high quality.

5. Done well? Is the paper well written, easily and enjoyable to read?

6. Why now? Papers should not be redundant, unconnected or antiquated on the moment
of submitting.

7. Who cares? In general, even highly specialized papers should be linked to core
management or organizational concepts and problems, otherwise they are more
appropriate for a discipline-based journal.

Papers written on topics with narrow appeal are held to higher standards for criteria 1&2.
- They are expected to make significant contribution to current thinking and practice.

In conclusion, the theory-development process and criteria for judging theoretical

contributions need to be broadly understood and accepted so that editors and contributors can
communicate effectively.
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Lecture 2.
Why would corporations behave in socially responsible ways? An institutional theory of
corporate social responsibility – Campbell (2007)

Abstract
This article offers an institutional theory of corporate social responsibility consisting of a
series of propositions specifying the conditions under which corporations are likely to behave
in socially responsible ways.
The article assumes that the relationship between basic economic conditions and corporate
behavior is mediated by several institutional conditions. These institutional conditions are:

• Public and private regulation;

• The presence of nongovernmental and other independent organizations that monitor
corporate behaviour;
• Institutionalized norms regarding appropriate corporate behaviour;
• Associate behaviour among corporations themselves;
• Organized dialogues among corporations and their stakeholders.

Introduction
Concerns about corporate social responsibility have grown over the last 2 decades. Until now,
theoretical attention paid to understanding why corporations act or do not in social responsible
ways has been little.
- Paper goal? Fill the theoretical void by exploring institutional condition under which
CSR behavior is likely to take place.

Many firms have shown socially (ir)responsible corporate behavior such as: deceiving
customers, swindling investors, exploiting and even brutalizing employees, putting customers
at risk, poisoning the environment, cheating the government.
- However, many others have done the opposite by, giving to charities, supporting
activities, abiding by the law and maintaining standards of integrity and honesty.

The question is here to investigate under what conditions are corporations more likely to act
in socially responsible ways than not? The author wants to answer this question with help of
two types of literature:

1. Institutional analysis in sociology →useful because institutionalists understand that

institutions beyond the market are often necessary to ensure that corporations are
responsive to the interests of social actors beside themselves, particularly in today’s
increasingly global economy.
2. comparative political economy in political science → long tradition examining how
political and economic institutions vary cross-nationally and affect economic activity.
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Institution and literature on corporate responsibility

Most of the literature on corporate social responsibility does not explore whether institutional
conditions affect the tendency for firms to behave in socially responsible ways.
- Most studies of the determinants of CSR have examined the effects of various aspects of
corporate financial performance but not much else.

However, there are a few exceptions.

1. Research on corporate suggests that property rights and, by implication, other forms of
state regulation may affect the degree to which corporations behave in socially
responsible ways.
2. Galaskiewicz (1991) shows that corporations tend to act in socially responsible ways if
normative or cultural institutions are in place that create the proper set of incentives for
such behaviour.
3. Research on CSR in a comparative cross-national context that has important
institutional implications found that firms reported three motivations for behaving in
socially responsible ways:
o Managers valued such behaviour in its own right.
o Managers believed that this behaviour enhanced the firm’s financial performance.
o Stakeholders (community groups, customers, regulators) pressured firms to behave
in socially responsible ways.

Systematic differences in responses across the four countries suggests that nationally specific
political, cultural and other institutions may have been responsible.

4. several scholars have developed what has become known as stakeholder theory, which
examines whether and why corporations attend to the interests of stakeholders along
their own immediate corporate interests. Stakeholder theory is closely related to the
issue of corporate social responsibility to the extent that stakeholder theorists define
appropriate and inappropriate corporate behaviour in terms of how corporations act
vis-à-vis their stakeholders.

In fact, most of the stakeholder literature focuses on four other issues:

- It argues that stakeholders have legitimate interests in corporate activity;
- It recommends attitudes, structures and practices that constitute stakeholder management;
- It identifies the relationship between stakeholder management and the achievement of
various corporate performance goals, such as profitability, stability, and growth.

What is socially responsible corporate behavior?

Socially responsible behavior can be defined as:
- That which provides the corporation’s employees with a decent living wage relative to
local costs of living as determined by some independent organizations, such as the United
Nations.
- That which does not ruin the local environment and jeopardize the community’s health as
measured against internationally accepted standards of environmental quality or health.
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Defining CSR is not straightforward as there are several issues at stake and its meaning may
can different based on the place, time, people.

The author views corporations as acting in socially responsible ways if they do two things
first:
• They must not knowingly do anything that could harm their stakeholders;
• If corporations do cause harm to their stakeholders, they must then rectify it whenever
the harm is discovered and brought to their attention.

How does it differ to the conventional view: CSR is view by others as actions taken by a firm
that are intended to further social welfare beyond the direct economic, technical, and legal
interests of the firm.

Under what conditions do firms act in socially responsible ways?

The author’s overriding argument is that variation in socially responsible corporate behavior
is probably associated with variation in institutions and the sticks and carrots they provide to
constrain and enable behavior. In a nutshell, the argument is that economic conditions affect
the degree to which corporations act in socially responsible ways but that this relationship is
mediated by a variety of institutional factors.

Economic conditions
The author assumes that maximizing profit and shareholder value is the root cause that may
prevent corporations from acting in socially responsible ways.
- This view is widely held by students of economic regulation transaction cost analysis, and
comparative political economy but take an even stronger position regarding its
implications.
o They argue that the imperative of profit and shareholder value maximization
may cause corporations to act in ways that do not even meet the minimum
threshold of socially responsible.
2 arguments flow from this:
1. Extant literature on CSR suggests that firms whose financial performance is weak are less
likely to engage in socially CSR than those who are financially strong.
Why? less profitable firms have fewer resources to spare for socially responsible activities

2. If the above is true, then it follows that the odds that firms will act in socially responsible
ways will also be associated the level of competition they face.
a. High competition =pressure on margins = cutting corners = acting irresponsible
b. In normal competition where surviving is not at stake, firms are less likely to
behave in an irresponsible CSR manner.
i. Why? Managers become more concern with preserving the reputation of
the firm.
However, firms can also seek to deprive their rivals of competitive advantage in other ways.
- When faced with low costs imports, firms may try to have regulatory obstacles created
that improve their competitive position relative to foreign producers, such as tariffs,
import surcharges, and product safety or environmental requirements.
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Institutional conditions
Factors that moderate the relationship between economic conditions, such as corporate
financial performance, and socially responsible corporate behavior.

The most obvious institutional explanation of socially responsible corporate behavior:

- One that focuses on the state’s regulatory sanctions.
- Regulations have improved workplace safety. However, an important concern mitigating
the enforcement of more stringent corporate regulations is the threat of capital
disinvestment.

It is not just the presence of regulations per se that matters but also the capacity of the state
to monitor corporate behavior and enforce these regulations when necessary.
- Research suggests that government statutes are most effective in facilitating socially
responsible corporate environmental behavior if they afford citizens access to information
about toxic emissions, legal standing in court to sue suspected polluters, and sufficient
resources to support both of these activities.

It is important to known that regulation is not always the responsibility of the state.
- Sometimes the most effective means of facilitating increased corporate social
responsibility is through corporate peer pressure (Self-regulatory industries).
- The relationship between industrial self-regulation and the state is important.
Why? Without enough support from the state, self-regulation often fails.

The important lesson? Much of how self-regulation is organized, depends on the balance of
political forces involved, and how self-regulation intersects with the state and its legal
institutions.

The effectiveness of state regulation and industrial self-regulation may be affected by

stakeholder monitoring.
- When necessary, NGOs pressure corporations to behave in more socially responsible
ways (through demonstrations, pressure to governments, media campaigns).
- The press also plays an important role by subjecting them corporations to the constant
threat of public exposure.

This is consistent with research that shows that ensuring responsible corporate behaviour
requires that outsiders (not just state agencies) are sufficiently strong and well organized to
provide a counterbalance to corporate power.
- Institutionalized norms may affect the degree to which firms operate in socially
responsible ways.

Researchers argue that when firms belong to trade or employer associations and interact on a
more systematic and frequent basis with their peers, they are more likely to develop a
relatively long-term view of their interests that may supercede their short-term views.
- They are more likely to behave socially responsible.
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When communication extends beyond corporations themselves to encompass workers, local

community leaders, government, and others, it appears that corporations begin to better
appreciate the concerns of these other actors and, in turn, take their concerns into account
when it comes to making corporate policy.
- Legal institutions have facilitated deliberation, and dialogue between corporations and
community stakeholders in ways that improve corporate social responsibility.
o This is particularly evident in the area of industrial regulation.
Conclusion
Corporations will be less likely to act in socially responsible ways if:

1. They experience relatively weak financial performance and when they are
operating in a relatively unhealthy economic environment where the possibility for
near-term profitability is limited.
2. Either too much or too little competition exists. That is, the relationship between
competition and socially responsible corporate behavior will be curvilinear.

Corporations will be more likely to act in socially responsible ways if there are:

3. There are strong and well enforced state regulations in place to ensure such
behavior.
o Particularly if they were developed was based on negotiation and consensus
building among corporations, government, and the other relevant stakeholders.

4. There is a system of well organized and effective industrial self-regulation in place

to ensure such behavior.
o Particularly if it is based on the perceived threat of state intervention.

5. There are private, independent organizations, including NGOs, social movement

organizations, institutional investors, and the press, in their environment who
monitor their behavior and, when necessary, mobilize to change it.
6. They operate in an environment where normative calls for such behavior are
institutionalized in, for example, important business publications, business school
curricula, and other educational venues in which corporate managers participate.
7. they belong to trade or employer associations, but only if these associations are
organized in ways that promote socially responsible behavior.
8. they are engaged in institutionalized dialogue with unions, employees, community
groups, investors, and other stakeholders.

Remaining issues:
1. Dynamic pressures (globalization) may change institutions and, therefore, the tendency
for corporations to act in socially responsible ways or not.
2. Some suggest that the best way to get firms to behave in socially responsible ways is to
convince their managers that it is either the right to do or in their self-interest.
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The stakeholder theory of the corporation: Concepts, evidence, and implications.

– Donaldson & Preston (1995)

Introduction
Many studies exist about stakeholder model/management/theory but the concepts are
explained and supported using diverse and often contradictory evidence and arguments.

Article goal? To point out some of the more important distinctions, problems, and
implications associated with the stakeholder concept, as well as to clarify and justify its
essential content and significance.

3 aspects of stake-holder theory -descriptive/empirical, instrumental, and normative found in

the literature and clarify the critical differences among them.

Conclusion: that the three approaches to stakeholder theory, although quite different, are
mutually supportive and that the normative base serves as the critical underpinning for the
theory in all its forms.

The central thesis / propositions

Thesis 1: The stakeholder theory is unarguably descriptive. It presents a model describing
what the corporation is. It describes the corporation as a constellation of co-operative and
competitive interests possessing intrinsic value.

Thesis 2: The stakeholder theory is also instrumental. It establishes a framework for

examining the connections, if any, between the practice of stakeholder management and the
achievement of various corporate performance goals.

Thesis 3: Although Theses 1 and 2 are significant aspects of the stakeholder theory, its
fundamental basis is normative and involves acceptance of the following ideas:

• A) Stakeholders are persons or groups with legitimate interests in procedural and/or

substantive aspects of corporate activity.
• (b) The interests of all stakeholders are of intrinsic value (all stakeholders merits
consideration whether they are able to further the interests of other groups or not).

Thesis 4: The stakeholder theory is managerial in the broad sense of that term.
- It does not simply describe existing situations or predict cause-effect relationships; it also
recommends attitudes, structures, and practices that, taken together, constitute stakeholder
management.

Stakeholder management requires simultaneous attention to the legitimate interests of all

appropriate stakeholders, both in the establishment of organizational structures and general
policies and in case-by-case decision making.
- The theory does not necessarily presume that managers are the only rightful locus of
corporate control and governance.
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- Nor does the requirement of simultaneous attention to stakeholder interests resolve the
long-standing problem of identifying stakeholders and evaluating their legitimate "stakes"
in the corporation. T
- he theory does not imply that all stakeholders (however they may be identified) should be
equally involved in all processes and decisions.

The distinction between a stakeholder conception of the corporation and a conventional

input-output

Figure 1 Contrasting Models of the Corporation: Figure 2 The stakeholder model

Input-Output Model

Figure 1: "Adam Smith" interpretation, of this model in long-run equilibrium is that input
contributors, at the margin, receive only "normal" or "market competitive" benefits (i.e., the
benefits that they would obtain from some alternative use of their resources and time).

Figure 2 (The stakeholder model) here all persons or groups with legitimate interests
participating in an enterprise do so to obtain benefits and that there is no prima facie priority
of one set of interests and benefits over another.
- All stakeholder relationships are depicted in the same size and shape and are equidistant
from the "black box" of the firm in the center.

Alternative aspects of stakeholder theory: descriptive/empirical, instrumental and

normative
One of the central problems in the evolution of stakeholder theory has been confusion about
its nature and purpose. e.g. stakeholder theory has been used, either explicitly or implicitly,
for descriptive purposes.

Stakeholder theory
The stakeholder theory differs from these and other "theories of the firm" in fundamental
ways.
- The stakeholder theory is intended both to explain and to guide the structure and
operation of the established corporation.
Here the corporation as an organizational entity through which numerous and diverse
participants accomplish multiple, and not always entirely congruent, purposes
A reason explaining why stakeholder theory has not attracted attention:
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- Stakeholder literature is implicit rather than explicit.

3 types of uses of stakeholder theory: descriptive, instrumental & normative

Descriptive/ empirical
The theory is used to describe, and sometimes to explain, specific corporate characteristics
and behaviours. For example, stakeholder theory has been used to describe
• the nature of the firm
• the way managers think about managing
• how board members think about the interests of corporate constituencies
• how some corporations are actually managed

Instrumental
In conjunction with descriptive/empirical data where available, is used to identify the
connections, or lack of connections, between stakeholder management and the achievement of
traditional corporate objectives (e.g., profitability, growth).

Normative
The theory is used to interpret the function of the corporation, including the identification of
moral or philosophical guidelines for the operation and management of corporations.

Contrasting / combining the approaches

Each of these uses of stakeholder theory is of some value, but the values differ in each use.

• The descriptive aspect of stakeholder theory reflects and explains past, present, and
future states of affairs of corporations and their stakeholders. Simple description is
common and desirable in the exploration of new areas and usually expands to generate
explanatory and predictive propositions. (All such activities shall be called descriptive
for our purposes.)
• Instrumental uses of stakeholder theory make a connection between stakeholder
approaches and commonly desired objectives such as profitability. Instrumental uses
usually stop short of exploring specific links between cause (i.e., stakeholder
management) and effect (i.e., corporate performance) in detail, but such linkage is
certainly implicit.
• In normative uses it attempts to interpret the function of, and offer guidance about, the
investor-owned corporation on the basis of some underlying moral or philosophical
principles.

Difference between normative vs. instrumental

• An instrumental approach is essentially hypothetical; it says, in effect, "If you want to
achieve (avoid) results X, Y, or Z, then adopt (don't adopt) principles and practices A,
B, or C
• The normative approach, in contrast, is not hypothetical but categorical; "Do (Don't
do) this because it is the right (wrong) thing to do."
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A striking characteristic of the stakeholder literature is that diverse theoretical approaches are
often combined without acknowledgement. Indeed, the temptation to seek a three-in-one
theory.

The problem of justification

The stakeholder theory is justified in the literature, explicitly or implicitly, in ways that
correspond directly to the three approaches to the theory set out in the previous section:
descriptive, instrumental, and normative.

• Descriptive justifications attempt to show that the concepts embedded in the theory
correspond to observed reality.
• Instrumental justifications point to evidence of the connection between stakeholder
management and corporate performance.
• Normative justifications appeal to underlying concepts such as individual or group
"rights," "social contract," or utilitarianism.

The three aspects of the stakeholder theory are nested within each
other, as suggested by Figure 3.
The external shell of the theory is its descriptive aspect; the theory
presents and explains relation-ships that are observed in the external
world.
The theory's descriptive accuracy is supported, at the second level,
by its instrumental and predictive value; if certain practices are
carried out, then certain results will be obtained.
The central core of the theory is, however, normative. The
descriptive accuracy of the theory presumes the truth of the core
normative conception.

Descriptive justifications
The hazards of using purely descriptive data as justification for a broad theory are well
known.
- There is the problem of the so-called "naturalistic fallacy," moving from is to ought or
from describe to evaluate, without the necessary intervening analysis and explanation.

Descriptive support for the stakeholder theory, as well as the critiques of this support to be
found in the literature, are of limited significance and that the most important issues for
stakeholder theory lie elsewhere.

Instrumental justifications
Because the descriptive approach to grounding a stakeholder theory is inadequate,
justifications based on a connection between stakeholder strategies and organizational
performance should be examined.
- The satisfaction of multiple stakeholders need not be a zero-sum game (benefits to one
stakeholder group need not come entirely at the expense of another.
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Analytical arguments

Even without empirical verification, however, stakeholder management can be linked to

conventional concepts of organizational success through analytical argument. Agency theory
and firm-as-contract theory, although arising from different sources, are closely related and
share a common emphasis: efficiency.

• Agency theorists argue that corporations are structured to minimize the costs of getting
some participants (the agents) to do what other participants (the principals) desire.
• Firm-as-contract theorists argue that participants agree to cooperate with each other
within organizations (i.e., through contracts), rather than simply deal with each other
through the market, to minimize the costs of search, coordination, insecurity, etc.

The standard principal-agent paradigm of financial economics, which emphasizes the

relationship between shareowners and managers, to create "stakeholder-agency theory,"
which constitutes, in their view, "a generalized theory of agency."
- Perception? managers " as the agents of [all] other stakeholders." And stakeholders
differ among themselves with respect to:

(a) the importance (to them) of their stake in the firm

(b) their power vis-a-vis the managers.

The process, direction, and speed of adaptation in stakeholder-agent relationships, rather than
the equilibrium set of contributions and rewards, should be the primary focus of analysis.

- Here is being able to satisfy multiple stakeholders the ultimate test of corporate
performance.

How to ensure that the interests of multiple stakeholders are being coordinated to achieve the
most favorable possible result? Through:

- Monitoring devices to reduce the information asymmetry (e.g., public reporting

requirements)
- Enforcement mechanisms, including law, "exit" (the possibility, or credible threat, of
withdrawal from the relationship), and "voice."

Weaknesses of Instrumental Justifications

The most important similarity between these two independent attempts to justify the
stakeholder model lies in the fact that:

- Although they draw initially on the conceptual apparatus of instrumental or efficiency-

based theories they ultimately rely upon non/instrumental or normative arguments.

The ultimate success of stakeholder-agency theory would require a fundamental shift in

managerial objectives away from shareowners and toward the interests of all stakeholders;
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such a shift would necessarily involve normative, rather than purely instrumental,
considerations.

The stakeholder theory cannot be fully justified by instrumental considerations.

- Why? The empirical evidence is inadequate, and the analytical arguments, although of
considerable sub-stance, ultimately rest on more than purely instrumental grounds.

Normative justification

The two normative propositions, stated at the beginning:

- Stakeholders are identified by their interest in the affairs of the corporation.
- the interests of all stakeholders have intrinsic value.

Can be viewed as principles that require no further justification. Unfortunately, this approach
provides no basis for responding to critics who reject these propositions out of hand.

One way to construct a normative foundation for the stakeholder model is to examine its
principal competitor, the model of management control in the interests of shareowners, as
represented by the business judgment rule (Highly criticized on descriptive grounds).

- However, the management serving the shareowners model (i.e., the principal-agent model
in its standard financial economics form) is not only descriptively inaccurate; but
normatively unacceptable as well.

Formal analysis: theory of property

Formal normative justifications of stakeholder theory might be based either on broad theories
of philosophical ethics, such as utilitarianism, or on narrower "middle-level" theories derived
from the notion that a "social contract" exists between corporations and society.

- Article argument: the stakeholder theory can be normatively based on the evolving theory
of property.
- However ironical as the traditional view has been that a focus on property rights justifies
the dominance of shareowners' interests

Property rights are relations between individuals" and thus "it is wrong to separate human
rights from property rights".
- The important point, however, is that the contemporary theoretical concept of private
property clearly does not ascribe unlimited rights to owners and hence does not support
that the responsibility of managers is to act solely as agents for the share-owners.

The normative principles that underlie the contemporary pluralistic theory of property rights
also provide the foundation for the stakeholder theory as well.
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Managerial implications
2 main points have been emphasized (both intimately intertwined):
(a) the recognition of specific stakeholders and their stakes by managers and other
stakeholders and
(b) the role of managers and the management function, as distinct from the persons
involved, within the stakeholder model.

The firm-as-contract view holds that legitimate stakeholders are identified by the existence of
a contract, expressed or implied, between them and the firm.
- The firm-as-contract perspective, although correct, is incomplete as a description of the
corporation. For example, many business relationships with "communities" are so vague
as to pass beyond even the broadest conception of "contract."
- Stakeholders are identified through the actual or potential harms and benefits that they
experience or anticipate experiencing as a result of the firm's actions or inactions.

Excessive breadth in the identification of stakeholders has arisen from a tendency to adopt
definitions such as "anything influencing or influenced by" the firm.

- This definition opens the stakeholder set to actors that stand to gain no particular benefit
from the firm's successful operation.

The two types of interests that have cropped up most frequently in this connection are:
(a) competitors and (b) the media.
- Competitors were introduced as factors that have "an influence on managerial autonomy"

A clear distinction between influencers and stakeholders is essential: some may be both.

Article most important proposition: The stakeholder theory is fundamentally normative.

- The instrumental case for stake- holder management cannot be satisfactorily proved.
- Managers should acknowledge the validity of diverse stakeholder interests and should
attempt to respond to them within a mutually supportive framework.

Conclusion
The stakeholder theory is "managerial" and recommends the attitudes, structures, and
practices that, taken together, constitute a stakeholder management philosophy.

- The theory goes beyond the purely descriptive observation that "organizations have
stakeholders," which, although true, carries no direct managerial implications.
- The notion that stakeholder management contributes to successful economic
performance, although widely believed (and not patently inaccurate), is insufficient to
stand alone as a basis for the stake-holder theory.
- The ultimate justification for the stakeholder theory is to be found in its normative base.
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Toward a theory of stakeholder identification and salience: Defining the principle of

who and what really counts – Mitchell et al. (1997)

Article aim: contribute to a theory of stakeholder identification and salience based on

stakeholders possessing one or more of three relationship attributes: power, legitimacy, and
urgency.
Introduction
The concept of "stakeholders" has become embedded in management scholarship and in
managers' thinking. There is no agreement on what Freeman calls "The Principle of Who or
What Really Counts." Two main questions arises:

1. who (or what) are the stakeholders of the firm?

- Calls for a normative theory of stakeholder identification, to explain logically why
managers should consider certain classes of entities as stakeholders.

2. to whom (or what) do managers pay attention?

- calls for a descriptive theory of stake-holder salience, to explain the conditions under
which managers do consider certain classes of entities as stakeholders.

Stakeholders can be: primary or secondary stakeholders; owners and nonowners of the firm,
owners of capital or owners of less tangible assets, actors or those acted upon, those existing
in a voluntary or an involuntary relationship with the firm etc.

- What is needed in literature is a theory that can help separate stakeholders from non-
stakeholders.

The question of stakeholder salience (the degree to which managers give priority to
competing stakeholder claims) goes beyond the question of stakeholder identification.

- Why? because the dynamics inherent in each relationship involve complex

considerations not readily explained by the stakeholder framework as it currently stands.
- A theory explaining to whom and what managers actually pay attention is needed.

Proposition: classes of stakeholders can be identified by their pos- session or attributed

possession of one, two, or all three of the following attributes:

1. the stakeholder's power to influence the firm

2. the legitimacy of the stakeholder's relationship with the firm
3. the urgency of the stakeholder's claim on the firm.

Stakeholder salience theory argument: to achieve certain ends, or because of perceptual

factors, managers do pay certain kinds of attention to certain kinds of stakeholders.

- It helps specify how and under what circumstance managers can and should respond to
various stakeholder types.
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Theory of stakeholder salience:

Stakeholder theory attempts to articulate a fundamental question in a systematic way: which
groups are stake- holders deserving or requiring management attention, and which are not?

- Salience: the degree to which managers give priority to competing stakeholder claims.

Broad or narrow view?

Broad: Stakeholder as an individual or group who "can affect the achievement of an
organization's objectives or who is affected by the achievement of an organization's
objectives" (Windsor, 1983)

Now-classic definition: "A stakeholder in an organization is (by definition) any group or

individual who can affect or is affected by the achievement of the organization's objectives"
(Freeman, 1984)

This is certainly one of the broadest definitions in the literature, for it leaves the notion of
stake and the field of possible stakeholders open to include virtually anyone.

Narrow: Narrow defining of stakeholders as those groups "on which the organization is
dependent for its continued survival" (Stanford Research Institute, 1963)

- The narrower definitions of stakeholders as voluntary or involuntary risk-bearers:

"Voluntary stakeholders bear some form of risk as a result of having invested some form
of capital, human or financial, something of value, in a firm.

Involuntary stakeholders are placed at risk as a result of a firm's activities. But without the
element of risk there is no stake" (Clarkson, 1994)

Major differences between broad and narrow views:

• Narrow views of stakeholders are based on the practical reality of limited resources,
limited time and attention, and limited patience of managers for dealing with external
constraints.
• Narrow views of stakeholders attempt to define relevant groups in terms of their direct
relevance to the firm's core economic interests.
• Broad view of stakeholders is based on the empirical reality that companies can
indeed be vitally affected by, or they can vitally affect, almost anyone.
• Broad view is bewilderingly complex for managers to apply.

The idea of identifying stakeholder types is to equip managers with the ability to recognize
and respond to a set of entities who may or not have legitimate claims but who may affect the
interest of others who do have legitimate claims.
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The aim of stakeholder management may have 2 views:

- Firm centered: managers wanting to know everything about the stakeholder for firm-
centered purposes
- System centered: managers wanting an exhaustive list of all stakeholder to participate in
a fair balancing of various clams and interest withing the firm’s social system.

Claimants versus influencers:

2 attributes necessary to identify a stakeholder: a claim and the ability to influence a firm.
- Influencers have power over the firm – with or without valid claims
- Claimants: may or not have legitimate claims and may or not have power over the firm.

Actual versus potential relationship

- The article proposes a theory of stakeholder identification that accounts for latent
stakeholders. Why? It can help organization avoid problems and enhance effectiveness.

Overall claims:
- The broad concept of stakeholder management has to be better defined in order to serve
the narrow interest of legitimate stakeholders.
o If not, influencing groups can disrupt the operations so much that legitimate
claims cannot be met anymore and the firm dies.
- It is also important to recognize the legitimacy of some claims over the others.
o Ehen evaluating power and legitimacy in light of urgency, a dynamic model is
the result.

What Added Value Does a Theory of Stakeholder Identification Offer?

No individual organizational theory offers systematic answers to questions about stakeholder

identification and salience.
- They have much to tell about the role of power or legitimacy but not both.
- Urgency is not a main focus of any organizational theory but is however critical.

Stakeholder-manager relationships have to be evaluated in terms of the relative

presence/absence of the attributes: power, legitimacy and or urgency.

1. Power
A relationship among social actors in which one social actor, A, can get another social actor,
B, to do something that B would not have otherwise done.
- The ability of those who posses power to bring about the outcomes they desire
Power is transitory -> it can be acquired as well as lost

Categorization of power:
- Coercive: force/threat
- Utilitarian: material/incentives
- Normative: symbolic influences
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2. Legitimacy
Legitimate standing is not enough if there is no power or urgency claim to enforce it.
- Wrong assumption: legitimate stakeholders are powerful and powerful stakeholders
are legitimate.
- A stakeholder salience theory requires attention to be paid to legitimacy as an attribute
of stakeholder-manager relations.

Legitimacy: A generalized perception or assumption that the actions of an entity are desirable
or appropriate within some socially constructed system of norms, values, beliefs, definitions.

- Attained at a multiple level of analysis: individual, organizational & societal.

3. Urgency
The degree to which stakeholder claims call for immediate attention (from static to dynamic).
- Time sensitivity: the degree to which managerial delay in attending to the claim or
relationship is unacceptable to the stakeholder
- Criticality: the importance of the claim or the relationship to the stakeholder

Additional feature of stakeholder attributes

Three features are important to the theory's dynamism; they provide
a preliminary framework for understanding how stakeholders can
gain or lose salience to a firm's managers.

1. Stakeholder attributes are variable, not steady state.

2. Stakeholder attributes are socially constructed, not objective,
reality.
3. Consciousness and willful exercise may or may not be
present.

Important aspects to take into account for power, urgency and legitimacy.

Power: It can be acquired as well as lost, it does not imply use or consciousness.
- Use of stakeholder power is triggered by legitimacy and urgency.
Power gains authority through legitimacy and exercise through urgency.
Legitimacy: also a variable and its contribution to stakeholder salience depends upon
interaction with the other two attributes: power and urgency. Legitimacy gains rights through
power and voice through urgency.

Urgency: is in itself not sufficient to guarantee high salience in the stakeholder-manager

relationship. However, when it is combined with at least one of the other attributes, urgency
will change the relationship and cause it to increase in salience to the firm's managers.
• Legitimacy + urgency promotes access to decision-making channels
• Legitimacy + power encourages one-sided stakeholder action.
• In combination with both, urgency triggers reciprocal acknowledgment and action
between stakeholders and managers.
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Managers role in the theory

The idea that the organization is an environmentally dependent coalition of divergent interests,
which depends upon gaining the attention of (making claims upon) managers at the center of
the nexus to effect reconciliations among stakeholders, suggests that the perspective of
managers might be vital.

• It is the firm's managers who determine which stakeholders are salient and therefore will
receive management attention.
Managerial characteristics as an important moderator of the
stakeholder-manager relationship.

Stakeholder classes
"The Principle of Who or What Really Counts" rests upon the
assumptions:
1. Managers who want to achieve certain ends pay particular
kinds of attention to various classes of stakeholders.
2. Managers' perceptions dictate stakeholder salience.
3. The various classes of stakeholders might be identified based
upon the possession, of one, two, or all three of the attributes:
power, legitimacy, and urgency.

Latent Stakeholders – areas 1,2 and 3

identified by their possession or attributed possession of only one of the attributes
1.Dormant stakeholders
The relevant attribute of a dormant stakeholder is power. Dormant stakeholders possess power
to impose their will on a firm, but by not having a legitimate relationship or an urgent claim,
their power remains unused.

2.Discretionary stakeholders
Discretionary stakeholders possess the attribute of legitimacy, but they have no power to
influence the firm and no urgent claims.
The key point regarding discretionary stakeholders is that, absent power and urgent claims,
there is absolutely no pressure on managers to engage in an active relationship with such a
stakeholder, although managers can choose to do so.

3.Demanding stakeholders
Demanding stakeholders, those with urgent claims but having neither power nor legitimacy,
are the "mosquitoes buzzing in the ears" of managers: irksome but not dangerous, bothersome
but not warranting more than passing management attention, if any at all.

Action? With limited time, energy, and other resources to track stakeholder behavior and to
manage relationships, managers may well do nothing about stakeholders they believe possess
only one of the identifying attributes, and managers may not even go so far as to recognize
those stakeholders' existence.
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Expectant Stakeholders – areas 4,5,6

Identified by their possession or attributed possession of two of the attributes.
4.Dominant stakeholders
In the situation where stakeholders are both powerful and legitimate, their influence in the
firm is assured, since by possessing power with legitimacy, they form the "dominant coalition"
in the enterprise.

5.Dangerous stakeholders
Where urgency and power characterize a stakeholder who lacks legitimacy, that stakeholder
will be coercive and possibly violent, making the stakeholder
"dangerous," literally, to the firm.
• "Coercion" is suggested as a descriptor because the use of coercive power often
accompanies illegitimate status.

6.Dependent stakeholders
Stakeholders who lack power but who have urgent legitimate claims as "dependent," because
these stakeholders depend upon others (other stakeholders or the firm's managers) for the
power necessary to carry out their will.
• Because power in this relationship is not reciprocal, its exercise is governed either through
the advocacy or guardianship of other stakeholders, or through the guidance of internal
management values.

7.Definitive Stakeholders – combination of all 3 attributes

A stakeholder exhibiting both power and legitimacy already will be a member of a
firm's dominant coalition. When such a stakeholder's claim is urgent, managers have a clear
and immediate mandate to attend to and give priority to that stakeholder's claim.
• The most common occurrence is likely to be the movement of a dominant stakeholder into
the "definitive" category. Any expectant stakeholder can become a definitive stakeholder
by acquiring the missing attribute.

8.Non-stakeholders

This can be implemented in the framework presented before leading to the model of
stakeholder typology:

Research and management consequences of a dynamic theory of stakeholder

identification

Proposition: stakeholders possess some combination of three critical attributes: power,

legitimacy, and urgency.
• Salience of a particular stakeholder to the firm's management is low if only one attribute is
present, moderate if two attributes are present, and high if all three attributes are present.
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Dynamism in Stakeholder-Manager Relations

Latent stakeholders can increase their salience to managers and move into the "expectant
stakeholder" category by acquiring just one of the missing attributes.
If the stakeholder is gaining another attribute the stakeholder can move into the "definitive
stakeholder" category (characterized by high salience to managers).

Managers should be aware that stakeholders change in salience and require different degrees
of attention depending on their attributed possession of power, legitimacy, and/or urgency.

• The levels of these attributes (and thereby salience) can vary from issue to issue and from
time to time.

Management implications
Management techniques that can be used to deal with stakeholder relationships are:
• Identification of stakeholder roles (employees owners, suppliers etc)
• Analysis of their interest and evaluation of their stakeholder power

According to the paper, stakeholder theory holds the key to more effective management and
provides a more comprehensive theory of the role of the firm in the society.

Conclusion: The Search for Legitimacy in Stakeholder Theory

When scholars argue that stakeholder theory must articulate a normative core. They are
looking for reasons as to why some claims and relationships are legitimate and worthy of
management attention and why others are not.
• They discount the importance of power by saying that what is important is whether the
claim is legitimate.

The theory of stakeholder identification and salience developed in this article in no way
discredits the search for a legitimate normative core for stakeholder theory.
• Aim? To expand scholarly and management understanding beyond legitimacy to
incorporate stakeholder power and urgency of a claim,
• Why? because these attributes of entities in a firm's environment -and their dynamism over
periods of time or variation in issues- will make a critical difference in managers' ability to
meet legitimate claims and protect legitimate interests.

Main Summary: Stakeholder theory must account for power and urgency as well as
legitimacy, no matter how distasteful or unsettling the results. Managers must know about
entities in their environment that hold power and have the intent to impose their will upon the
firm.
• Power and urgency must be attended to if managers are to serve the legal and moral
interests of legitimate stakeholders.
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Lecture 3
The cross-national diversity of corporate governance: dimensions & determinants
This paper describes and explains variations in Corporate Governance among advanced
capitalist economies. Corporate governance concerns “the structure of rights and
responsibilities among the parties with a stake in the firm”.

Two dichotomous models of Anglo-American and Continental European CG Comparison:

• Anglo-American = financing through equity, dispersed ownership, active market for

corporate control and flexible labor markets.
• Continental-European = long-term debt finance, ownership by large block holders, weak
markets for corporate control, and rigid labor markets.

Goal: To develop a theoretical model to identify and explain the diversity of CG across
advanced capitalist economies by examining CG in terms of 3 stakeholder groups:
• Capital, Labor and Management

The article’s approach is inspired by actor-centered institutionalism by stressing the interplay of

institutions and firm-level actors.

- The Model bridges the gap between under socialized agency theory approach and over
socialized views of institutional theory.
- Argument? Agency theory fails to explore how CG is shaped by its institutional
embeddedness.
- By embodying an institutional logic, institutional theory leans towards over socialized
views too abstract from conflicts and coalitions of stakeholders at the firm-level.

Shifting paradigms: From agency to embeddedness

Agency costs arise because shareholders face problems monitoring management: due to
imperfect information (information asymmetry), difficulties enforcing contracts and free-
riders.
- This reducing the individual incentives to exercise rights and create preference for exit.

Comparative governance is usually conceived of in terms of the mechanisms available to

minimize agency problems.
• Agency problems are addresses in different ways as left unqualified, agency theory fails to
account for key differences across countries.

This deficit reflects an undersocialized view of CG that leaves 3 related gaps

1. Assumptions within agency theory overlook diverse identities of stakeholders, & scholars
give no serious attention to varied interests of managers across countries
o Comparative research must address this social construction.
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2. Agency theory overlooks important independencies among stakeholders because of its

exclusive focus on bilateral contracts between principal & agents -> dyadic reductionism.

3. Agency theory retains a thin view of the institutional environment influencing CG.
a. Shareholder rights do not capture the entire complexity of institutional domains by
limiting actor’s financial behavior to the effects of law.

Comparative institutional analysis

Institutional theory complements undersocialized views of CG by addressing the
embeddedness of corporations of a connection of formal and informal rules.

• National diversity reflects various institutional constraints stemming from political

regulation.
• Researchers now assert that national diversity reflects various institutional constraints.
• The approach to institutional analysis is therefore: actor centered.
• Institutions shape the social & political processes of how stakeholders’ interests are
defined, aggregated, & represented with respect to the firm

Actor-centered model: specifies the role of each stakeholder towards the firm is shaped by
different institutional domains and how it leads to conflicts and coalition in CG.
• The focus is on 3 critical stakeholders o Capital, labor, management.

Capital is the stakeholder group that holds property rights, such as shareholders, or that
otherwise makes financial investments in the firms, such as creditors.

3 dimensions in which the relation of capital to the firm varies:

Financial vs. strategic interests:
• Financial interests: when investment is
motivated by the prospect of financial return on
investment (like maximize market value shares).
• Strategic interests: prevalent when investment is
motivated by nonfinancial goals, such as control
rights.

Degree of commitments vs. liquidity of capital’s stakes

• Liquidity: refers to the ability of owners to exit
by selling their stakes without a loss of price.
• Commitment: involves dependence on firm-
specific assets to generate returns, as well as the
liability to control appropriation of those
returns.
Exercise of control through debt vs. equity:
• Debt: creditors have few rights of control until the point of solvency.
• Equity: owners face large residual risks and possess greater control rights but lose
control during bankruptcy.
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Three institutional domains of capital:

1. Property rights: mechanisms through which shareholders (capital) exert control, such
as voting or information exchange.
Countries can have strong vs. weak shareholder rights.
• Countries favoring large shareholders -> capital tends to pursue strategic interest
toward the firm & exercise control via commitment.
• Countries favoring minority shareholders -> capital tends to pursue financial interest
toward to firm and exercise control via liquidity.

2. Financial systems: influence the relation of capital by shaping the supply-side capacity
to provide diverse sources of finance and thereby generate different patterns of control
o Bank based: entails close capital monitoring thus inducing long-term commitment.
o Market based: encourage equity finance (shareholders) and high liquidity.

3. Interfirm networks: structure of interfirm networks influence firm’s behavior through

access to critical resources and information. Network multiplex vs. much looser
networks.

Labor in the corporate governance equation

Labor: Conceptualizes the employee’s role in CG in terms of their ability to influence
corporate decision making and to control the firm’s resources.

Two critical dimensions defining employees’ relationship to corporate decision making:

1. Strategies of internal participation vs. external control

Comparative industrial relations distinguish between employee strategies of external
control versus internal participation.
• External control is when employees use collective actions (use labor unions) and
internal is democratizing decisions.
2. Portable vs firm specific skills are two critical dimensions.
• When employee skills are portable across firms or investments in skills are low,
employees may favor exit over voice in response to grievances.
• Conversely when their skills are firm specific, their greater dependence on the firm
makes the option to exit more difficult.

Argument? the degree of internal participation/external control and portable/firm specific

skills within the firm is shaped by three sets of institutions:
(1) the representation rights given to workers, (2) the organization of unions, and (3) the
institutions of skill formation

Three institutional domains of labor (PL):

1. Firm-level representation rights: the “right to organize” gives employees individual rights
to voluntarily elect their own representation and compelling management to bargain over a
prescribed range of issues.
o Weak representation rights (US) o Strong representation rights (Germany).
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Representation rights will influence labor’s control over the firm’s decisions.
• Dominant strong rights -> labor tends to pursue strategies of internal participation.
• Weak rights -> labor tends to pursue strategies of external control.

2. Union organization: define employee interests in relation to their individual and collective
identities.
Three ideal types: Class, Occupation, Enterprise models.

Strategies of external control are favored by class (political) and craft (qualifications) based
unions.
Enterprise based models (one enterprise) tend to favor internal participation because long-
term employment contracts and internal promotion prospects.
• Class-based (political) & crat-based (external control) unionism -> pursue strategies of
external participation.
• Enterprise-based forms of unionism -> internal participation

3. Skill formation: influences CG because of the portability of the firm-specific nature of

skill investments influence the relation of employees to the firm.
Five main skill formation institutions: State provision, Free markets, Institutional companies,
Firm networks, Corporatist associations.
- Firms may become free riders in appropriating skills that they have not helped
generate, thus leading to a high potential for market failure.

• Market & state based skill formation -> acquire portable skills & strategies of external
control
• Skill formation outside the firm will make the firm less dependent on employees
which means that employees have less capacity to influence firm decision through
internal participation.
• Firm-based skill formation -> strategies of internal participation

Management in the corporate governance equation

Management: two dimensions of managers’ identities and interest in relation to the firm:
1.Autonomy (independence and hierarchy) vs. commitment (dependent on firm-specific
relationships to pursue interests) from stewardship theory.
2.Financial (strong separation of strategic and operational management and the
execution of control via financial mechanisms) vs. functional orientation (greater
integration of op. functions trough leadership)

Two institutional domains of management (PM):

1. Ideology: The major beliefs and values expressed by top managers that provide
organizational members with a frame of reference for action.

Ideologies impact the financial or functional orientation of managers by legitimating

views or shaping degree of hierarchy or consensus in routine decision making.
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US: financial and autonomous management (hierarchy) o German: functional and

commitment management
• Where managerial ideologies legitimate generalist knowledge / hierarchical decision
making -> greater autonomy in relation to firm & financial orientation.
• Where managerial ideologies legitimate scientific specialization / consensual decision
making -> greater commitment to the firm & functional orientation.

2. Career patterns: reflect the complex incentives and opportunities for top managers’
mobility. Distinguish between: closed (Japan) and open (US) labor markets.

• Closed managerial labor markets (vacancies filled through internal promotion) ->
greater commitment to firm & functional orientation.
- Managers see their careers taking place in one firm or network.

• Open managerial labor markets (vacancies more likely to be filled through external
market, hiring from outside the firm)-> greater autonomy & financial orientation.
- Managers expect to be employed by several firm over the careers.

Discussion:
Corporate governance differs across countries through variation in three key stakeholders’
relationships to the firm and the institutional domains shaping these relationships.

National institutional configuration

Institutional complementarities: situations in which the viability of a certain institution
increases in the presence of another institution.
- Complementarities may help generate comparative institutional advantages but
may also lead to inefficient lock-in effects for change.
- Interdependence may create institutional tensions related to conflicting principles
of rationality.

Stakeholder interactions
Although the model focuses primarily on how institutions influence each stakeholder
respectively, institutions also shape corporate governance by structuring stakeholder
interactions.

Diversity of institutionally structured interactions:

1. Class conflicts: interest of capital and management oppose the interest of labor, particular
regarding distributional issue.

2. Insider-outsider conflicts: interests of labor and management (insiders) oppose the

interests of capital (outsiders).

3. Accountability conflicts: common interests of capital and labor vis-à-vis management

(shareholders and employees may for a coalition to remove poorly preforming managers
or to demand higher corp. transparency)
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Corporate governance: Decades of dialogue and data

Governance: the determination of the broad uses to which organizational resources will be
deployed and the resolution of conflicts among the myriad participants in organizations.
- Somewhat in contrast with what research has focused on: the control of the executive
self and mechanisms to protect stakeholders’ interest.

Theory
The overwhelmingly dominant theoretical perspective applied in corporate governance studies
is agency theory.
- Agency theory is proposed as an explanation of how the public corporation could exist,
given the assumption that managers are self-interested, and a context in which those
managers do not bear the full wealth effects of their decisions.
-
Popularity of agency theory due to 2 factors:

1. it is an extremely simply theory, in which large corporations are reduced to two

participants – managers and shareholders – and the interests of each are assumed to be
both clear and consistent.
2. The notion of humans as self-interested and generally unwilling to sacrifice personal
interests for the interests of others is both age old and widespread.

Shareholders have available both internal and external governance mechanisms to help bring
the interests of managers in line with their own.
- Internal mechanisms include an effectively structured board, compensation contracts
that encourage a shareholder orientation, and concentrated ownership holdings that lead
to active monitoring of executives.
- The market for corporate control serves as an external mechanism that is typically
activated when internal mechanisms for controlling managerial opportunism have failed.

The resource dependence theory provides a theoretical foundation for directors’ resource role.
- Agency theory helps monitor directors, but other theories are needed to explain the
director’s resource service and strategy roles.
- In this role, outside directors provide access to resources needed by the firm.

For example, outside directors who are also executives of financial institutions may assist in
securing favorable lines of credit; or in the case of a legal firm, secure legal advice that may
otherwise be more costly for the firm to secure.

Agency vs stewardship theories

Agency theorists: define executives and directors as self-serving and opportunistic.
Stewardship theorists: describe them as frequently having interests that are similar with those
of shareholders.
- Stewardship recognizes that there are many situations in which executives conclude
that serving shareholders’ interests also serves their own interests.
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Executives and directors are inclined to operate the firm in a manner that maximizes financial
performance indicators, including shareholder returns.
- The firm’s performance directly impact the perception of their individual performance.

The power perspective, as applied to corporate governance studies, addresses the potential
conflict of interests among executives, directors and shareholders.

- While agency theorists clearly would prescribe boards composed of outside,

independent directors and the separation of CEO and board chair positions, neither of
these board configurations is associated with firm financial performance.
- Importantly, this conclusion holds across the many ways in which financial
performance has been measured in the literature.

Practice
Shareholder activism is designed to encourage executives and directors to adopt practices that
insulate share- holders from managerial self-interest by providing incentives for executives to
manage firms in shareholders' long-term interests.

Corporate governance reforms: boards formed largely by independent outside directors;

imposing age and term limits for directors; include contingent forms of pay.
- Organizations have also issued guidelines designed to create independent boards and
ensure that boards are composed of individuals able to effectively discharge their duties.

Considering the evidence

Conclusion from focus on conflict interest between managers and stakeholders: more
independent oversight is better than less.

Agency theorists clearly would prescribe boards composed of outside, independent directors
and the separation of CEO and board chair positions.
- However, neither of these board configurations is associated with firm financial
performance.
- Similarly, in the second metanalysis, Dalton found no support for the agency theory-
prescribed relationship between equity ownership and firm performance.

Another instructive stream of research, also dominated by agency theory, is addressing

executive compensation. 2 important changes:
1. SEC regulation requiring exchange-listed firms to report executive compensation in a
manner that clearly and concisely identifies the compensation packages for the five
most highly paid officers, including the CEO.
Also (1) comparative performance graphs relying on industry benchmarks, (2)
estimates of the value of executive stock options granted, and (3) the criteria by which
executives are evaluated.
2. A change in the way executive compensation is taxed.
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However, while issues of control over executives and independence of oversight have
dominated research and practice, there is scant evidence that these approaches have been
productive from a shareholder-oriented perspective.
- Alternative theories are needed to remedy this.

Promising themes – board oversight, shareholder activism & governing firms in crisis]

Board oversight
A central element of agency theory and fully consistent with the view that the separation of
ownership from control creates a situation conducive to managerial opportunism.
Independent boards of directors are widely believed to result in improved firm financial
performance, whether measured as accounting returns or market returns.
- Extant empirical research, however, provides virtually no support for this belief.

Why?1. Too much focused placed on the director’s oversight role 2.directors do not only
oversee but also fulfill resource, service and strategy roles.

Current literature limitations

1. Other theoretical foundations than agency theory have to be considered. Like resource
dependency, institutional theory, stewardship theory.
2. Universal focus on a direct relationship between corporate governance mechanisms and
firm financial performance (no direct evidence has been found).

Shareholder activism
Shareholders with significant ownership positions (institutional investors) have both the
incentive to monitor executives and the influence to bring about changes they feel will be
beneficial.
- However, not all institutional investors have demonstrated an inclination toward
actively challenging firm’s executives.
- While some have been effective in persuading directors to change, these changes have
not necessarily lead to improved financial performance.
- Only those institutional investors not subject to actual or potential influence from
corporate management are likely to engage in activism.

Institutional investors’ increasing reliance on indexing (Investing in a group of firms

simultaneously) investment strategies is also a factor in funds’ propensity to engage in
activism.
- Institutional investor activism can be nine times as costly as pure reliance on indexing
strategies.

Limitations of stakeholder activism

1. Shareholder’s influence is largely grounded in the legal system. This system is too blunt.
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Governing firms in crisis – little focused paid in literature

More recent research has supported the importance of governance structures in explaining the
likelihood that a firm will file for bankruptcy.
- In contrast to governance research, studies have shown that board independence is
related to firm performance, as measured by the incidence of bankruptcy filing.

A central task of effectively functioning boards is the removal of poorly performing

executives.
- Structural Independent boards are more willing to remove ineffective executives prior
to a crisis reaching the point of corporate bankruptcy.

Interestingly, among firms in crisis, the tight governance prescribed by agency theory may
actually be harmful to firm survival and shareholder interests.
- Executive teams are replaced so quickly and frequently that they have no time to
devise and implement strategies that might, in fact, save the organization.
- Agency theory assumes there are willing and able executives ready to step in for those
who are removed (why would good managers leave and take over a bankrupt firm?)

Findings suggest the need for a greater understanding of the role of institutional investors as a
governance mechanism in the firm in crisis.
- Little is known about governance structures that enable a firm to successfully emerge
from financial crisis.

Dismantling fortresses
Potential barriers to moving corporate governance research forward that deserve attention.

1. Gaining access to the types of process-oriented data to enhance understanding of the

effectiveness of governance mechanisms.
However, has been limited as increase in shareholder activism has been accompanied
by an increase in shareholder lawsuits in recent years (directors fear being sued)
2. Exclusive reliance on agency theory in extant research. It is important to consider
alternative theoretical perspectives.
a. Research suggest that directors need a high discretion in allocating corporate
resources which further emphasizes the importance of alternative theories.

3. There is a barrier referred to as “empirical dogmatism”. That is, researchers too often
embrace a research paradigm that fits a rather narrow conceptualization of the entirety
of corporate governance to the exclusion of alternative paradigms.
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Lecture 4
Firm resources and sustained competitive advantage. Journal of Management

Abstract
• Study the link between firm resources and sustained competitive advantages (SCA)
The RBV builds on the assumption that strategic resources are heterogeneously distributed
across firms and that these differences are stable over time.

4 empirical indicators of the potential of firms resources to generate sustained competitive

advantage:
1. Value
2. Rareness
3. Imitability
4. Substitutability

Main idea? Firms obtain sustained competitive

advantage by implementing strategies that exploit their
internal strengths through responding to environmental
opportunities, while neutralizing external threats and
avoiding internal weaknesses.

Literature focus:
Porter: little emphasis on the impact of idiosyncratic firm attributes in a firm’s competitive
position.

Article’s assumptions:
1. firms within an industry are identical in terms of the strategically relevant resources
they control and the strategies they pursue.
2. If resource heterogeneity develops in an industry or group this heterogeneity will be
very short lived because the resources that firms use to implement their strategies are
highly mobile (they can be bought/sold & transferred)

RBV cannot build on these same assumptions are it focuses on the link between a firm’s
internal characteristics and performance.
- The above assumptions eliminate firm resource heterogeneity and immobility as
sources of competitive advantage.

The RBV assumptions:

1. firms within an industry may be heterogeneous based on the strategic resources they
control.
2. Resources may not be perfectly mobile across firms: so advantage can be long lasting.
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Key concepts definition

Firm resources: all assets, capabilities, organizational processes, firm attributes, information,
knowledge etc. controlled by a firm to enable the firm to conceive and implement strategies
that improve its efficiency and effectiveness.
- Three categories: physical capital, human capital and organizational capital resources.

Physical: technology, equipment, access to raw materials.

Human: training, experience, judgement, intelligence, relationships and insight of individual
managers and workers in a firm.
Organizational: Firm’s formal reporting structure, in/formal planning, controlling and
coordinating systems.

Competitive advantage: when a firm implements a value creating strategy not simultaneously
being implemented by any current or potential competitors.
- It is sustained when the other firms are unable to duplicate the benefits of this strategy.
-
Discussion: A firm enjoys competitive advantage if its strategy is not simultaneously being
implemented by current or potential competitors.
- Sustained advantage is only if it continues to exist after efforts of imitation have
ceased.
- Sustained advantage does not imply it will last forever, just that it will not be competed
away through duplication efforts (sustained advantage can disappear through industrial
revolutions).

Competition with homogeneous and perfectly mobile resources

Argument: companies cannot expect to obtain sustained competitive advantage when

strategic resources are evenly distributed across all competing firms and highly mobile.

Resource homogeneity and mobility and first-mover advantage

First objection might be first mover advantage as the first to implement it can gain access to
distribution channels and develop a good reputation.
- However, if firms have identical resource, it is not possible for a firm to obtain a
competitive advantage from first moving: because it must have an insight that the other
firms do not have.

Resource homogeneity and mobility and entry/mobility barriers

Second objection, barriers to entry/mobility are not possible.
The firms can only prevent new entries by creating mobility barriers and barriers to entry, the
firms can do this by controlling strategically relevant resources.
- Firm resources need to be immobile as they can be otherwise acquired by firms seeking
to enter the market.

These barriers only become sources of sustained competitive advantage when:

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- Firm resources are not homogeneously distributed across competing firms and when
these resources are not perfectly mobile.
Firms resources and sustained competitive advantage

Four attributes for sustained competitive advantage:

a. Valuable (exploit opportunities/ neutralizes threats)
b. Rare (firm’s current and potential competitors)
c. Imperfectly imitable
d. Non-substitutable (that are valuable but neither rare or imperfectly imitable) in a
heterogeneous, immobile market.

Valuable resources: enable a firm to conceive or implement strategies that improve its
efficiency and effectiveness.
- SWOT suggest that firms are able to improve their performance only when their
strategies exploit opportunities or neutralized threats.
Attributes only become resources when they exploit opportunities or neutralize threats. This
implies a complementarity between environmental models of competitive advantage and the
resource-based model.
- Environmental models: isolate exploiting opportunities/ threat neutralizing resources,
the resource-based model suggests what characteristics the resources must possess to
generated a sustained competitive advantage.

Rare resources: a firm should implement a value-creating strategy, not simultaneously

implemented by large numbers.
- As long as the number of firms that possess a particular valuable resource, or a bundle,
is less than the number of firms needed to generate perfect competition dynamics in an
industry, that resource has the potential of generating a competitive advantage

Imperfectly imitable resources: other firms cannot obtain them. Three reasons:
a. unique historical conditions (firm attributes)
- Firm performance not only depending on their structure but also on the path
followed through history to arrive where it is.

b. link between the firm’s resources and a firm’s sustained competitive advantage is
causally ambiguous (impact of resources is not understood perfectly by competitors).
- Facility location turning out to be more valuable than what was anticipated &
competitors not knowing which resources to imitate.
Competitive advantage would however not be sustained if other firms learn about the link
between the resources being controlled and the competitive advantage. Why? Because other
firms can easily obtain them.
- For casual ambiguity to be a source of sustained competitive advantage, all competing
firms must have an imperfect understanding of the link between the resources controlled
by a firm and the firm’s competitive advantage.
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c. socially complex (relationships, reputation, customers, culture) to generate the

advantage and to imitate it.
- IT is not included as it can be imitated or acquired by other firms.

Substitutability: there are no strategically equivalent valuable resources that are not rare or
imitable. Two valuable firm resources are strategically equivalent when they can each be
exploited separately to implement the same strategies.
- Similar resources can substitute when firms are not able to imitate the resource.
Different firm resources can also be strategic substitutes.
- Others can use alternative resources to implement the same strategies, and if these
alternative resources are not rare of imitable, many others can have the same.

Substitutability can take at least 2 forms:

1. Although resources cannot be imitated, they might be substitutes with equivalent/similar
resources to implement the same strategies.
a. Despite being different they can be strategically equivalent and be substituted for
one another.
2. Very different firm resources can also be strategic substitutes (clear and defined visions).
If enough firms have valuable substitutable resources or they can be acquired by enough firms.
None of the firms can expect to obtain a sustained competitive advantage.

The framework: relationship between resource heterogeneity

and immobility; value, rareness, imitability and substitutability;
and competitive advantage.
- The framework can be used to analyze the potential of
firm resources to be sources of sustained competitive
advantage but also what needs to be addressed before the
relationship between a firm resource and a sustained advantage can be understood.

Strategic planning and sustained competitve advanatage

Formal strategic planning systems help firms to choose a strategy that generates a competitive
advantage.
- In itself a planning mechanism is not sources of sustained competitive advantage as
they are highly applied by many firms.
- Emergent processes by which firms choose their strategies can be also thought as firm
resources and the likelihood to generate sustained advantages evaluated by considering
how rare, imperfectly imitable and substitutable they are.

Some authors suggest that formal planning mechanisms are substitutes for informal emergent
processes.
- If true, the informal strategy is not a sustained advantage due to being a highly imitable
substitute.
Some others have suggested that formal processes are more effective where informal are not
and vicerversa.
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- If the processes are not substitutes for one another and the conditions of rareness and
imperfect imitability hold, then informal processes are a form of sustained advantage.

Information processing systems and sustained competitive advantage

Whether a source of sustained advantage depends on the type of processing system being
analyzed.
- When deeply embedded in the organization, information processing systems, positive
reputations of firms among customers and supplies are sources of sustained advantage.

Positive reputations and sustained competitive advantage

In literature, positive reputations of firms among customers and suppliers have been cited as
sources of competitive advantage.
- They can be rare if just a few firms have them, they can be imperfectly imitable,
socially complex and thus imperfectly imitable.
- Can be it be substituted? Some suggest to use guarantees in term of contracts but if
reputation and guarantees are substitutes why do firms invest in both?
- If they are not substitutes then reputation may be a sustained competitive advantage.

Conclusion:
Questions that need to be addressed to understand if a resource can be a sustained advantage:
- Is the resource valuable, rare, imperfectly imitable, are there substitutes?

Sustained competitive advantage and social welfare

RBV model suggest that strategic management can be consistent with social welfare concerns:
- The assumption that firm resources are heterogeneous and immobile, follows that a
firm exploits their resource advantages to behave in an efficient and effective manner.
- Not exploiting them is inefficient and does not maximize welfare.

Sustained competitive advantage and organization theory and behavior

RBV: sources of sustained competitive advantage are firm resources tat are valuable, rare,
imperfectly imitable, and non-substitutable.
- RBV suggest that OTD may be a rich source of these type of resources and it thus not
contradictory to the model of organization based on organizational theory & behavior.

Firm endowment and sustained competitive advantage

Assumption: Managers are limited in their ability to manipulate all the attributes and
characteristics of their firms.
- This limitation make firm resources imperfectly imitable and thus potential sources of
sustained advantage ( so it depends on the resource endowments controlled by a firm).

Importance of managers in the model to understand and describe the economic performance
potential in order to obtain a competitive advantage.
- Firms cannot purchase a sustained competitive advantage on open markets, this must
be found in the rare, imperfectly imitable and non-substitutable resources already
controlled by a firm.
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Barney (2001). Is the resource-based view a useful perspective for strategic management
research? Yes

Priem and Butler's criticisms fall into four broad categories:

1. That the resource-based theory developed in the 1991 paper is tautological.

2. The main argument fails to acknowledge that many different resource configurations could
generate the same value for firms and, would not be sources of competitive advantage.
3. That the role of product markets is underdeveloped in the argument.
4. The theory developed in the article has limited prescriptive implications.

The tautology critique

The most important critique of the 1991 article is that the RBV presented is tautological that
its primary assertions are true by definition and, thus, not subject to empirical test.

However, the fact that Priem and Butler are able to restate parts of the 1991 argument in ways
that make it tautological is not the same thing as demonstrating that the argument is.
- They focused on “only valuable and rare resources can be sources of competitive
advantage”
What is the real theoretical challenge presented? Not if the RBV presented in the paper could
be restated in a way that makes it tautological?" but rather, "Are some aspects of this
resource-based theory parameterized in ways that can generate testable hypotheses?"

Parameterizing value
The determination of the value of a firm's resources is exogenous to the resource-based theory.
- It would be inappropriate to suggest that the 1991 article fails to give at least some
guidance as to how the value of a resource can be determined as the article suggest it to
be measured through model of the competitive environment in which the firm competes.

Although the value variable in Barney (1991) is not fully parameterized, in the article there is
recognition of the importance of doing this and even a suggestion on how it can be done.
- Main critique applies to theorist examining the implications of RBV theory without
considering the market conditions in which the resources will and will not be valuable.

Parameterizing rarity
Priem and Butter suggested the term rare was not parameterized. However, Barny
parameterizes it as follows:

- As long as the number of firms that possess a particular valuable resource is less than
the number of firms needed to generate perfect competition dynamics in an industry.
That resource has the potential of generating a competitive advantage.

Main argument from Priem and Buttler is not that the assertions made above are difficult to
test bur rather that they are not testable.
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Literature on rarity has focused on:

• The competitive implications of valuable and unique resources
• Have been imprecise in specifying how rare a resource must be among competing firms to
still generate competitive advantages

Parameterizing imitability
Tautolgy questions are never consequently raised concerning the imitability variable.
- This is clearly because the imitability concept has been parameterized.

The fact that empirical assertions can be derived from the 1991 article's analysis of imitability
and sustained competitive advantage undermines their general assertion that the RBV
developed in the 1991 article is tautological.
- If at east a few concepts are parameterized, then it is possible to deduce testable
assertions from the theories.

Why imitability was given more attention? What was most new about RBV was the ability to
specify conditions under which firms would possess competitive advantages.
- Why a firm’s resources can be costly to imitate became very important in the article.
- Critique made by Priem and Butler is unfounded.

Empirical test of the RBV

There is empirical work that constitutes direct tests of the resource-based theory developed in
the 1991 paper (Henderson and Cockburn example).
- Contrary empirical results found in other studies about RBV would certainly not be
possible, if the RBV theory was in fact purely tautological.

Equifinality in the RBV

Not labeled as a limitation but as a weakness of the RBV theory is the problem of equifinality.
- Many resource configurations could generate the same value for firms and would not
be a source of competitive advantage.
Solution?: Adopting a traditional view in which it is not the value and rarity of a resource than
generates competitive advantage but the relative value of different resources and capabilities.
- However, this s the reason why substitutability was introduced in the article.

If strategic substitutes do not exist, then strategic equifinality does not exist, and competitive
advantages are possible.
- In the definition of competitive advantage adopted by Priem and Butler, a firm’s
performance is compared with the performance of other firms in that industry.

The reasons why Barney did not include the firm’s industry in the definition is because:
1. Determining the appropriate boundaries of a firm can be difficult
2. Defining these boundaries assumes a level of technology stability and competition that is
inappropriate (Competition comes from different sources).
3. RBV takes the firm as the unit of analysis
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2 ways to define competitive advantage

1. It can be defined with respect to the actions of other firms-either cur- rent or potential
competitor
2. It can be defined with respect to return expectations of that firm's owners.
a. If higher than expected, the firm is thought to have competitive advantage.

The definitions are not mutually exclusive and can be related. However, it does not mean they
will always be.
- It is time to abandon the term as different definitions exists. Instead, it should be made
clear that the researchers are referring to: above industry profits, or improving efficiency
and effectiveness in ways competing firms are not.

What the RBV logic suggests: if the relative value of a firm's competitive actions
are effects, then resource-based logic indicates that attributes of firm resources-their
value, rarity, imitability, and substitutability- are the causes.

The product market critique

Following critique states that the 1991 articles focuses on the underdeveloped role of product
markets in the RBV.
- Acknowledgement that a complete model of strategic advantage would require the full
integration of models of competitive environment with firm resources is made by Barney

In fact, the model presented by Priem and Butler fails to recognize the role of :
- "entrepreneurial insights concerning future demand shifts in product or factor markets"
and "first mover advantage [that] would result, because follow-on competitors could
only acquire ... factors [of production] at higher cost"
- However, all these points had already been address in a previous article.

The inapplicability critique

Priem and Butler cite four aspects of RBV theory that limit its applicability:

1. The attributes of resources that can generate strategic advantages and sustained
strategic advantages are not amenable to managerial manipulation.

This however does not imply that RBV logic has no managerial implications. It
implies that it is different from what they expected.

Some implications. RBV can help:

- Managers gain strategic parity through identifying value and rare resource the firm
does not possess and how they can be imitated or substituted.

- Managers understand the type of resource that can generate sustained strategic
advantages and exploit the resources they have to achieve sustained advantage.

- Manager nurture the resources that are source of competitive advantage.

- Managers identify organizational culture to be a source of sustained advantage so
they don’t make decisions that can destroy it.
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Limitations of RBV

• Managers in that firm cannot know, with certainty, which of their resources
actually generate that strategic advantage.
• Resource-based logic cannot be used to create sustained strategic advantages
when the potential for these advantages does not already exist.
Why? Otherwise everyone would do it and no sustained advantage could be
possible.

2. The context within which the theory applies is not specified

Determination of the value of a firm's re-sources is exogenous to the RBV. Already
addressed

3. The definition of resources is all inclusive

The definition of resources presented in these two papers is, in fact, very inclusive.
- That inclusiveness, however, actually enhances rather than reduces the
prescriptive implications of the RBV.

Theorists cannot provide a list of critical resources as they are market specific
however the characteristics these resources must possess. was described.

4. The theory is static and not dynamic

Whether it is through equilibrium or evolutionary analysis, Priem and Butler are

correct to emphasize the importance of dynamic analysis of sustained strategic
advantage.
- Is important to be able to understand the full implications of RBV logic for
the sustained strategic advantages.

Discussion
Criticisms of the 1991 article are unfounded as:
- The article’s suggestions have turned out to be fruitful approaches in further
developing the RBV.
- Some of the critics focus on the subsequent work and not the article per se.

Some important elements to take into account:

1. the value of a firm's resources must be understood in the specific market context within
which a firm is operating.
a. Parameterizing rarity has received to litte attention after 1991
2. Efforts to develop theories that, when applied, will always generate sustained strategic
advantages clearly are foolish.
3. A list of potential sources of sustained strategic advantage for firms cannot be derived
from resource-based logic. (These are market specific)
4. to avoid tautology problems, authors of empirical resource-based work must usually adopt
time series or some other form of dynamic analysis.
a. Equilibrium or evolutionary analysis can be applied.
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Some important questions not raised

1. Where do a firm’s strategic alternatives come from?
The link between resources and the strategies a firm should pursue is not always obvious.
- Sometimes choosing a strategy consistent with the resources a firm controls is a
creative and even entrepreneurial act
2. How are the rents created through strategies appropriated?
It might be that implementing a particular strategy generates real economic rents for a firm
but that those rents are fully appropriated by a firm's employees, its customers, or even its
suppliers.
3. How are these strategies to be implemented? Which one more fruitful? We don’t know.
2 approaches to addressing strategy implementation in the context of RBV”
• The ability to implement strategies is, itself, a resource that can be a source of sustained
strategic advantage.
• implementation depends on resources that are not themselves sources of sustained
advantage but, rather, are strategic complements to the other valuable, rare, costly to
imitate, and non-substitutable resources controlled by a firm.

Conclusion
Some changes to the article if it were re-written today:
- How to parameterize value and how value is related to market structure
- Adoption of a simpler definition of resources ( tangible and intangible).
- Raising the issue of tautology, suggest how this issue could be avoided, and strongly
argue for the importance of temporal empirical tests of the argument.
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Integrating insights from the resource-based view of the firm into the new stakeholder
theory
Main conclusion: because stakeholders bind resources to organizations, neither the resource-
based view nor the new stakeholder view is complete without the other.

A new stakeholder theory (NST) of strategic management is emerging to address questions

about stakeholder involvement in value creation, enfranchisement, uniqueness, rights, claims,
governance, trade-offs, co-specialization & human development.
- NST main arguments: stakeholders will sustain their connection to an organization
only if they expect and ultimately receive appropriate returns on their contributions.
Article purpose? o encourage development of the NST through integration of ideas from the
resource-based view of the firm.

Organizational formation
NST foundational idea: organizations form to enable teams of stakeholders to create more
value jointly than the stakeholders can create independently.
- success in organizing a firm to deploy complementary, cospecialized assets controlled
by stakeholders requires enough potential upside to make participation a better choice
for stakeholders than outside opportunities.
o This a view aligned with the RBV logic.

One aspects exists under the NST that has not yet been fully integrated with RBV:
- The idea that resources cannot be combined in a firm without some form of contractual
commitment by a controlling entity.

Entrepreneurship under the NST can be conceptualized as the early accumulation of property
rights over resources and capabilities which are exercised by actors to deploy the controlled
resources and capabilities creatively.
- Role of humans? Value creating opportunities may follow the people rather than the
resources.

Resource development within the organization

NST view focuses on 2 perspectives:
1. Human capital development
2. Interactions between the organization and external constituents, including communities,
government, supply-chain partners, investors and customers.

Human capital
Focus on the evolution, structure, and consequences of worker capabilities over time.
• The most salient stream of research in this category deals with worker investment in skills
and capabilities that are cospecialized to the organization
• Second stream of research: emphasizes the degree to which workers are tied to
organizations through mechanisms other than cospecializatio.
- loyalty, reputation, reciprocity, and the absence of outside alternatives.
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• Third stream investigates: the perpetuation and amplification of inequalities among

stakeholders as organizations develop and the consequences of asymmetries for both
workers and organizations.

Core team within NST: experiences of workers and other human stakeholders in interactions
with organizations carry profound implications for both human development and the
organization’s capacity to create value.

Sustainability
Driven by the insight that the evolution of organizations favors the accumulation of resources
and capabilities that strengthen the organization’s ability to create and capture value, often by
taking control of resources and capabilities for which structured stakeholder representation is
weak.
Core team within NST: causal ambiguity, tacitness, and complementarities that develop
within organizations may powerfully overwhelm the capacity of external stakeholders to
develop coherent positions in negotiating to protect external resources and capabilities of
value to the firm.

How can the resource-based view advance the NST’s conceptualization of organizational
formation? 3 areas of opportunity:
1. The NST would benefit by considering the complementarities between the acquisition by
an organization of access to strategically important resources and the development within
an organization of an approach—a strategy—for combining them.

2. Considering how organizations— especially firms operating under a legal limitation on

liability—manage risk differently from other stakeholders.
- Asymmetries between stakeholders in ability to bear risk is of central importance to an
organization’s strategy for obtaining access to valuable resources.

3. To consider relationships between organization structure, human-capital development, and

sustainability
- Emerging technologies around advanced analytics, AI, and machine learning are giving
rise to new types of relationships between organizations and human stakeholders, such
as extended contract work, regularized temporary work, and work from anywhere.

Why do this? By revisiting critical ideas from the RBV, scholars in the NST can deepen
understanding of the evolution of societal resources that accumulate within organizations.

Claims on value
The NST focuses centrally on stakeholder appropriation of the value that stakeholders create
in concert with organizations.
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Following the stakeholder argument, Barney argues that stakeholders would not contribute
valuable resources to an organization without the potential to claim at least some of the value
created through the joint deployment.
- What shapes how value is jointly created? the order and timing of acquisition of
strategically valuable resources and of the development of internally generated assets.

The RBV suggests that employees may overcommit initially to test an organization’s
willingness to share value. Alternatively, others may act opportunistically.
- At the beginning many overcommit so they can get to know the organization and base
their decisions whether to stay or quit.

Prahalad and Hamel identified that some resources developed within organizations are “core
competences.”
- Research on RBV suggests that the ongoing coherence of an organization depends on
the abilities of stakeholders to capture enough value through their continued engagement
with the firm than from other alternatives.

Governance
Governance of an organization is decision making about how resources are acquired, created,
and deployed over time.
- These activities within an organization have defined the discipline of general
management itself.

The NST raises questions about this function in several streams: comparative governance,
governance adaptation, and mechanisms of governance.

Comparative governance: envisions that various forms of organization, such as private, public,
and nonprofit, are substitutable tools for accomplishing general management functions.
- Comparative governance literature investigates the benefits, costs, and risks of
different ways to manage stakeholders that come together to create organization value.

Governance adaptation: views governance arrangements as a negotiated settlement among

stakeholders and asks how change in governance arrangements occur as conditions and
opportunities create gaps between standing arrangements and those needed for the future.

- Emerging literature on adaptive governance currently emphasizes the costs imposed on

organizations as changes in general-management principles are contemplated and
implemented

Governance mechanisms: the tools through which organizations influence and shape the
acquisition, creation, and deployment of resources by stakeholders.
- Stakeholders play a central role by mediating access of the organization to resources
after the enfranchisement of stakeholders in governance.
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Insights from the resource-based view carry significant potential to inform the NST on
governance in four major ways:

1. studies RBV traditions offer insights on how stakeholder contributions to joint value
contribution can be assessed and even measured.

2. By considering the tradeoffs illuminated in the literature on alliances and acquisitions, the
governance literature will find insights on how stakeholders innovate in the construction
of commitments to deploy resources through various governance arrangements

3. Closer examination of the contracting literature will lead us to better understand variation
in the ties that link stakeholders together in organizations.
a. there is potential to cultivate understanding of comparative and adaptive
governance through integration.

4. The governance stream in the NST would benefit from greater treatment of heterogeneity
in the positions and interrelationships between stakeholders to organizations.
- It would offer a better understanding of governance adaptation.

Performance
One of the most powerful features of the NST is that it considers the appropriation of value by
organizations as determined by both the value created through stakeholder engagement and
the arrangements negotiated by the organization to disburse value to stakeholders after it is
realized.

Central to the NST is the idea that organizations can be sustained only if they create enough
value through team production to compensate stakeholders sufficiently to retain their
participation in the enterprise.

2 major streams within NST deal are important:

1. Organizational purpose, and aspiration
examines how statements of mission and purpose guide stakeholders in understanding the
organization’s plan for value creation.

2. Grand challenge stream: compelling ecosystem-level opportunities to create value.

It conceptualizes value-creation opportunities as emerging essentially from system failures at
a scale beyond the scope of any single organization.
- Climate change, health inequities, privacy loss, social isolation, exclusion, and erosions
of trust are examples.
- NST in this stream consider how organizations must respond to find solution to
pressing global problems.

The resource-based view has not brought the same attention to questions of value creation.
- Historically, it was focused on profitability.
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Opportunities for developing the NST through integration of ideas from the RBV do not relate
directly to conceptualizations of performance per se but, rather, relate to emergent constructs
and relationships that carry the potential to inform an agenda on understanding multiple,
complex goals. 3 categories:

1. The source of competitive advantage for organizations was in making commitments to

courses of action that would withstand the buffeting of future, temporary setbacks.
a. Central here is that strategy can be sometime out of sync due to short term
pressures on the organization’s performance.

2. Stakeholders who join organizations in pursuit of purpose and grand challenges may bring
liabilities as well as assets to new organizations.
3. RBV has a deep tradition of scholarship on the relationships between scientific
achievements and their instantiation in commercially relevant assets.

The technological trajectory that shapes organizational capabilities and gives life to
innovation within the organization may involve a complex series of stakeholders,
enfranchised in different ways over time, who interact with the organization and its
antecedents in consequential way.

Conclusion
The NST is on the precipice of breakthroughs in five major areas that together would lead to a
new stakeholder theory.

1. On organizational formation, the resource-based view compels us to understand how and

why particular stakeholders get control over strategically valuable resources, including
human capital.
2. On resource deployment, the NST faces an important opportunity to understand evolution
in the ties that bind resources through stakeholders to organizations, especially in
technologically sophisticated business models, such as online platforms.

Claims on the value created by organizations are complicated by issues such as: the strength
of stakeholder control, asymmetries in the bargaining power of stakeholders and firms,
structural uncertainties etc.
- Core opportunity for integration across domains? rests on the idea that it is people
representing both themselves and organizations who commit resources to joint value
creation, and it is the creativity, humanity, morality, and vulnerabilities of people that
give rise to stakeholder control over valuable resources

3. Organizational performance is conceptualized in the NST as value creation defined in part

by purpose and grand challenges.

- The ways in which an organization is embedded in an ecosystem defined by

technological trajectories, scientific development, resource creation, resource exchange,
commercialization, and stakeholder legitimacy are critical to the progress in the NST
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RBV VS NST
• RBV: considers the durable resources that are combined within organizations to create value

• NST: considers how individuals—acting either on their own behalf or on behalf of outside
organizations—interact with the focal organization.

Article findings: Both the NST and resource-based view are necessary for understanding
organizational effectiveness and performance.
Through integration of both insights the NST can fulfill its promise to illuminate how
stakeholders draw on rare, inimitable, and hard-to-trade resources to create socially valuable
outcomes through organizations.