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Stakeholder Networks Value Positioning

 

According to traditional economic and strategy theories, the firm is mostly seen as a purely economic institution and its actors as driven by self-interest, with society a constraining factor. A firm’s total economic value creation, by combining and allocating factors of production in the competitive environment, is oriented to a utility function that focuses on one objective, namely value maximization for the owner of capital (e.g. shareholder value).

As an extension to the traditional management approaches focusing on market participants, social and political stakeholders are considered integral parts of the above stakeholder networks. These stakeholders also have value creation potential and thus are active in a firm’s value creation . By including social and political stakeholders into a firm’s stakeholder network, society is not seen as a constraint or an external factor, but as an indispensable contributor to mutual value creation in order to improve quality of life for society itself and for the sustainability of the natural world.
The “too big to fail” phenomenon in the banking industry provides an impressive example of the meaning of the firm as an integral part of society, and social and political stakeholders being important for firms. In the financial crisis it became clear that some banks were systemically relevant for the economy and society as a whole.
The decision of the US government not to support Lehman Brothers and indirectly withdraw its license to operate led to severe effects in its global stakeholder network. Not only other banks but also other companies in different industries and even social institutions were heavily affected by this decision. And because the whole economic and social systems were in danger, citizens were in the end obliged to support other affected banks with their tax money, even though these banks were not state but private banks. It became clear that, in such situations, neither a single nation state alone nor the market can provide the solutions or the necessary constraints. A whole variety of social and political stakeholders became relevant: in addition to shareholders and customers, citizens, nation states, political parties, national banks and international finance organizations were heavily involved. And these stakeholders in the end had to define to what extent the affected banks are systemically relevant and whether to support them or not.

The firms and the stakeholders are interrelated by mutuality in networks, which implies various forms of positioning and cooperation between the firm and its stakeholders. The environment is consequently represented by stakeholder networks.
Environmental interactions are not seen as a fight between firms to reap economic rents from market participants, to threaten the actors in the industry and to strive for a quasi-monopoly in a zero-sum game. Instead they are understood as a constant search to improve value creation for the firm and the stakeholders. Competition is considered as a source of active motivation not as threatening of competitors.

The nature of stakeholder networks
The focal firm aims to find imperfect markets in an economically attractive industry, where competition is low and the chance of a monopolistic rent high. Five forces characterize such industries , representing the threats of four types of stakeholders (new entrants, suppliers, customers,  incumbents)  and a more technical relationship, namely the substitution of products and services. The focus is on rivalry. These five forces challenge firms to reduce the bargaining power of suppliers and customers, hinder new entrants and oppose existing rivals from securing their own rents, and thus reflect a threat and reap mentality. Society is seen as a constraining factor on competition.

Porter and Kramer make a claim for a more comprehensive view and are searching for interdependencies between firms and the society. But they still focus on trying to reduce constraints on competition in order to gain additional competitive advantages against rivals. From a similar perspective, other authors suggest cooperation as a source of competitive advantage. However, the central argument of all these positions remains the same: the most important thing a corporation can do for society is to contribute to a prosperous economy by outperforming rivals.

With regard to the environment, we extend this view in two ways :
• First, we focus not only on the attractiveness of industries but on the attractiveness of stakeholder networks.
• Second, we assess the attractiveness of networks from the firm’s as well as the stakeholders’ perspective.

Thus, a firm may influence its network but the stakeholders in the network may also influence the firm. These interactions are the essence of mutuality and an important strategic asset for firms and stakeholders.

The interactions may open benefit and risk potentials that can be included in a value creation between firm and stakeholders. Examples for benefit potentials are access to high quality information, identification and use of complementary benefits, risk reduction, differentiation potentials, economies of scale, access to competencies, cost reduction, loss prevention, innovation, trust enhancement, stimulation of motivation, etc. Risks in a network configuration can be cultural differences, opportunistic partners, different strategic interests, knowledge leakage, disproportional advantages, structural differences, barriers to exit, etc. Benefiting from the advantages of the stakeholder network includes the consideration of these risks.

The attractiveness of stakeholder networks
The firms and stakeholders are challenged to build and to sustain an attractive network together. Sometimes they can choose with whom they want to interact, and which interactions and potentials they aim to base mutual value creation on. Sometimes the choices are inevitable, such as with local community or government agencies. In our case analysis in the telecommunication industry, we saw that the firms could not in fact build their antennas for the mobile phone network without cooperation with local citizen organizations and representatives of the environmental protection movement .
Thus, the attractiveness of a network is shaped by two aspects: first, the stakeholders, who the firm or any stakeholder can choose or who they have to accept; and second, the kind of relationships that can be built by positioning in of the network.

An example for this is the pharmaceutical firm Pfizer . As the pharmaceutical industry is highly regulated, the firm has “compulsory” stakeholders, such as the regulator or the agency for authorizing and reviewing therapeutic products. On the other hand, the firm has interactions with such stakeholders as physicians, patients, organizations or experts, which it is mostly free to choose. In order to better position itself in its stakeholder network, the pharmaceutical firm aimed to intensify the cooperation with some specific groups of physicians .
As a firm normally belongs to a certain industry, its stakeholders typically act in or around this industry. However, the focus is not the industry but the network, which can include other industries or segments of society beyond the industry. The healthcare insurer Suva, as an example, attempted to build a comprehensive network for its patients. It included not only physicians and rehabilitation specialists but also lawyers, the employer and the patient’s family in the recovery and reintegration process . Thus, stakeholder networks are often complex, .

The following characteristics might influence the attractiveness of a network for a firm or a stakeholder and are important for building it up and extending it:
• Size of the network
Large networks usually contain more differentiated value creation activities than small ones. In large networks, there are also more indirect interactions among stakeholders, which can again contribute to value creation. However, there are possibly also more risk potentials. As an interview partner in the pharmaceutical industry confirmed:
From the perspective of our firm, an area of conflict is that on the one hand, cooperation with network partners promises reducing risks, but on the other hand, important stakeholders have reservations regarding the pharmaceutical companies as true cooperation partners.

• Importance of the stakeholder network

Stakeholder networks can achieve varying degrees of acceptance, legitimacy, power and influence in the industry. The newcomer Orange was part of a large international network in the liberalized Swiss telecom market. Thanks to its embeddedness in this network, Orange was able to be innovative and to quickly bring new products to the market.
• Form of interactions
Networks have different forms of interaction among stakeholders such as communication, consultation, dialogue, partnership, etc.
Applying such highly differentiated forms of interaction influences the value creation of a firm and its stakeholders.

• Embeddedness and match quality
Embeddedness in a network can be based on various types of exchanges, such as information, material, experiences, emotions, etc.
Network participants may complement each other in these respects by sharing skills and activities. The better the expectations and potentials of the actors match and the better they know each other, the closer the ties between them are. However, relations that are too close can lead to “network rigidities”.

• Configuration of the network
A network may be strongly oriented to a dominant participant or may be composed of equal stakeholders. This impacts also the question of leadership . In cases in which value creation is intense and heavily exposed to public view, it is necessary that the firm and the stakeholders regard each other as equal partners.

• Value creating capability of individual firm and stakeholders
Participants in a network fulfill a specific function in connection to each other. Those with specific value creation capability can increase the worth of the network for the others; weak ones can decrease it.

• Stability and durability
Long lasting relationships with positive past experiences can enhance the network ties among the constituencies, and therefore lead to economic and social advantages. However, such ties can also suffer from fast and frequent changes in the stakeholder network. For example, the frequent entering and exiting of stakeholders in networks causes uncertainty, and is especially worrying for employees and investors of specific interest groups. Such unstable social contracts might negatively influence mutual value creation.

Continuous reinforcement of the network ties becomes an important task for participants.

• Threat or support
In a stakeholder network, the different members can be more or less willing to make contributions and enhance mutual value creation. Accordingly, different emotional forces, such as trust, mistrust, enthusiasm, etc., impact the mutual value creation of the stakeholders.

Dynamics of stakeholder networks
stakeholder networks are not static and stable structures. Stakeholder relations come about, evolve and sometimes disappear over time.
The beginning and evolution of stakeholder networks can be described along three distinguishable phases: “Negotiations to create the network, enforcement and enlargement.” The network continuously evolves when stakeholders enter or exit the network. In addition, changes can occur regarding the ties, and the intensity and the type of stakeholder contributions. Both the membership and boundaries of stakeholder networks are accordingly dynamic.
By analogy and concluding from successful mergers and acquisitions, we expect that firms and stakeholders that have positive experiences in building, adapting and handling networks are in a better position to pursue mutual value creation with others than those who have no such experience and knowledge or have experienced risk in such networks.

Mutual value creation  among stakeholder networks

Forms of positioning
The environment seen as stakeholder network implies a more comprehensive understanding of positioning than is understood in traditional strategy theory. two basic positions a firm or a stakeholder has to consider:

• Position in a stakeholder network
The firm or stakeholder can have different and changing positions and relations to other network participants. In large networks where complex direct and indirect relations exist, neither the firm nor any other stakeholder is by definition always the center of the stakeholder network. The position in a network can change over time. Firms and also stakeholders need to interact in order to clarify their positions and the changes in the networks.

Firms and also stakeholders sometimes have to position themselves vis-à-vis stakeholders who are part of a competing stakeholder network. Two pharmaceutical companies may have relationships to the same physicians. In this case, it is important that the focal firms can motivate the physicians to contribute to product development.  Thus, the goal is the motivation of mutual value creation for a better quality of life and not the fight to reap rents.

• Positioning between the stakeholder networks
This relates to the comparison of similar value creation processes among the participating stakeholder networks , namely benchmarking between networks. The goal of this benchmarking is different from pure competition. First of all, it should stimulate motivation for improving the value creation of the networks; rent reaping should not be the center of attention. Further, this benchmarking is not focused only on monetary value, but rather includes all the benefits and risks of the participants. In this way a high degree of transparency is achieved regarding the quality of value creation for the participating networks. On this basis, firm and stakeholders can decide which network they prefer, where they can best actualize their potential and in which network they are better able to follow their goals. Networks that fail to attract, or lose, important stakeholders due to a lack of quality must massively improve their attractiveness or they will be eliminated sooner or later. Their contribution to the quality of life is judged to be insufficient.

The financial crisis has shown, dramatically, how complete and primarily transparent benchmarking between banks and their networks occurs. When, during the crisis, more complete and transparent information on the partly unfriendly behavior toward stakeholders became apparent, the stakeholders drastically changed their priorities regarding the various banks. For example, on the basis of its mistakes, which were suddenly transparent for the stakeholder, UBS experienced a large drain of capital as well as employees. In addition, investors pulled back so that its stock sank to one-fifth of its previous value. Important shareholders changed to other, less negatively regarded banks. UBS would have even gone bankrupt, had the Swiss government not made the decision to support it, as it was considered too big to fail . Only the intervention of the state gave the UBS network the opportunity to improve the quality of its value creation and thus continue to exist.
Making comparisons between different stakeholder networks is undoubtedly demanding, and thus far we do not have much experience. However, such comparisons are necessary in order to avoid one-sidedness, mistakes and bias.

Benefit and risk potentials in stakeholder networks
From the point of view of a specific firm or stakeholder, the value creation contribution of individual network members can be evaluated by an analysis of the benefits and risks that stakeholders can potentially contribute.
The prominent benefit potential lies in the opportunity for better cooperation with the partners in the stakeholder network. But the gap between the possible and previous cooperation potential is still conspicuously large.

Network participants can contribute directly to each other, or indirect effects can occur. A network participant can, for example, (positively or negatively) motivate another stakeholder, and therefore can indirectly affect a firm. When Shell wanted to dispose of Brent Spar in the North Atlantic, Greenpeace stepped in and prevented the sinking of the storage buoy . Based on this intervention other stakeholders (e.g. customers and even governments) reacted negatively, which in turn affected Shell.
Moreover, benefits and risks result not only from the interactions among the stakeholders, but also from the characteristics mentioned above of the network as a whole . For example, if the size of a network increased, then this could lead to changes in the benefits and risks of the individual members of the network.

Network connections therefore have many positive and negative effects on mutual value creation. It is important for the firm and its stakeholders to clarify the benefit and risk potentials connected with direct and indirect interactions, and to consider them when developing strategies.

Stakeholders Multiple roles
The complexity of a stakeholder network is particularly increased, if individual network participants carry out more than one role in the network.  Multifunctionality leads to multiple positioning. In such cases, the important question is how multifunctional stakeholders organize and use their multiple and partly contradicting roles in the network to reduce complexity and contradictions. Other questions that may arise are how these stakeholders avoid conflicts of interests and contradictions in their behavior, and how these multiple roles are coordinated by the stakeholders or the firm. And finally, it is also important to assess how other strategically important stakeholders perceive the multifunctional stakeholder’s potential to impact the network. As an example in the case of Swisscom, the national government plays three different roles for the newly privatized telecom firm. At the same time, it is the major shareholder, the regulator and one of the most important customers, so that the perspective of all three licenses is relevant. The firm was well aware of this fact but did not consider it to be a problem as the relationships were institutionalized through different units, tools and processes. For some time, this multifunctionality did not pose any problems as the government did not interfere with the firm’s business decisions. However, it turned out that the firm had underestimated this multifunctionality: a few years later, the tables turned as the government vetoed the
firm’s plans to acquire another telecom firm and to expand abroad. The government based its decision not only on its role as the major shareholder, but also enforced by its power as key customer and as regulator.

Cooperation and competition Positioning
Within the continuum between total confrontation and complete cooperation, among firm and stakeholders there are zones of common interests. Within them many moderate forms of cooperation are possible, which promise a superior value than the extremes. In any given situation, firms and stakeholders have to identify these zones, to expand them and encourage interactions with each other in these zones. They must find a balance between total confrontation and total cooperation in their interactions. The necessity of such a balance was confirmed by an interview partner who was faced with a powerful competitor:

It is a fact that one cannot act without taking one’s biggest competitor into consideration. This means finding a fine balance between the competitive challenge and how one can get along with a very powerful partner in a somewhat friendly atmosphere … This means that one cannot drive the competition beyond reasonable limits.

The degree of cooperation that best suits value creation not only depends on the interest of the firm but also on its stakeholders. Cooperation may not only lead to benefits but may also be connected with risks; therefore cooperation partners are not only benefit, but also risk providers. Possible risks include opportunistic behavior at the expense of others, cultural differences, knowledge and core competence leakage, heterogeneous priorities, etc. Uzzi even believes that network relations that become too close will decrease the diversity of the network partners and therefore its value. Too close relations can lead to “network rigidities.” “Network rigidities” can appear if some network partners oppose necessary adaptations; for instance, if they hinder stakeholders with new ideas from entering the network, or if they oppose the exclusion of network participants.

From the different aspects and examples with regard to positioning between confrontation and cooperation in stakeholder networks, different solutions represent varying degrees of cooperation. They represent the different positions and outcomes, from which management must choose in developing strategy.

Value distribution to stakeholders
Following the stakeholder paradigm, the value creation of a firm impacts the value distribution for engaged stakeholders. the value distribution aspect can be exemplified by looking at how in the traditional strategies the values of the most important stakeholders, such as customers, employees and investors, can be affected differently:

• From the point of view of investors, positioning for example as a cost leader can be attractive, if it leads to an improved profit margin and finally to an improved residual profit. For employees, positioning as a cost leader may result in stressful performance pressure and low pay.

• Positioning as a differentiator can open attractive professional development opportunities for employees. However it can be unattractive for investors, when instead of paying out dividends the firm has high research and development expenditures, in order to achieve a level of differentiation that is attractive for employees and customers.

As to the residual profit, the economic theory of the firm considers exclusively owners (shareholders) as receivers. a first step is being made in the direction of broader value distribution so that society can benefit from the firms’ potentials. Thus, the relations between firms and society not merely prevent harm but improve social conditions. But despite the acceptance of the community as a benefit receiver, value distribution to all stakeholders in the firm’s network has not yet been considered in these newer publications.

In contrast to this rather narrow understanding of value distribution, other kinds of value distribution to stakeholders in the firm’s network exist. As an example, since their founding, state or partially state-owned firms have at times, and due to their specific position, implemented value distribution to a wide range of stakeholders. As a result of high profits, the accident insurer Suva, one of the firms we analyzed with a public mandate, reduced the premiums of its clients by 5 percent, with the clear intention of letting them participate in its annual profit. But there are also private insurance corporations that grant their customers a premium bonus as the result of a good business year. Value in the form of a loyalty bonus is sometimes also given to long-term customers. the portion a participant receives in value dissemination is based on the contribution made, based on the position in the network.

Generic strategies
It is assumed that the strategic success of a firm, aside from the attractiveness of the industry, also depends on the trade-off decisions of the management, which are expressed in the choice of activities in the generic strategies of cost leadership, differentiation or focus on market niches . These three strategic options refer exclusively to the customer perspective. “At the heart of any strategy is a unique value proposition; a set of needs a company can meet for its chosen customers that others cannot.” Strategies bring the customer either the lowest prices, the functionally best product or serve niches that had previously been neglected. For each case, the customer is the decisive factor for the type of strategy ; therefore this perspective addresses one specific stakeholder.

Extending these three generic strategies one can develop the following strategies for mutual value creation:

• Risk reducing strategy
The firm and stakeholders can keep the sum of the risks as small as possible. Costs for the firm are not the only criteria, as was the case in the original cost leadership strategy , but rather all the categories of risks of the relevant stakeholders in the network. Orange, one of the telecom firms we analyzed, discussed the strategy of locating new antennas together with the residents, thus trying to find solutions that were acceptable for both parties. Such a solution reduced the risk of the residents to suffer from negative effects, and on the other hand, reduced the costs for the firm that would have resulted from a legal battle and the ensuing image loss .

• Benefit enhancing strategy
Extending the original differentiation strategy , the strategy is characterized not only by the specific characteristics of products or services from the perspective of the customer, but by the total benefits for the firm and all its relevant stakeholders. Suva insurance company implemented so-called New Case Management. When customers have an accident, in addition to receiving the best medical care, their families, their employers, the physicians and hospitals, and the case manager are all involved in the recovery process. Thanks to this approach, accident victims are able to retain their jobs and to be re-integrated into the work process more quickly and comprehensively than before, benefiting not only the patient but also the firms and society.

• Focusing on specific stakeholder categories
The original niche strategy can be extended in that it increases benefits or reduces risk for specific segments of stakeholders. These stakeholders previously received little notice, but are of special importance for a network or are related to a specific issue.
An example of a focus strategy for a specific segment in the financial sector, are institutions that provide microfinance (MFIs) in poor areas of the world. Through this kind of focused financing, new stakeholder groups can be bound into mutual value creation, and thereby open largely neglected market niches. Thanks to MFIs, people can develop financial literacy, a livelihood, and organizational and technical skills for professional services.

When the values of certain strategies or types of strategy are to be judged, the mutually agreed components of values for all contributing stakeholders in the network are to be considered.

The same type of evaluation counts also for the appraisal of the output of specific strategic issues in a firm, such as cost reduction programs involving laying-off employees, outsourcing or mergers and acquisitions. Monetary benefits for a single or for a few stakeholders (e.g. managers or investors) are not the focus, but rather the broad value creation effects in the whole network.
For example, when GM in the United States decided to close some plants of its subsidiary Opel in Germany at the beginning of 2010, the criteria of success for doing so could not just be reducing costs for the benefit of the owner, in this case for the parent company GM . This case rather shows that such strategic measures must also include the loss of manifold know-
how potentials, the breaking of social contracts, image damage to GM, and even the disadvantages of a political conflict between the United States and Germany. Such aspects must also be part of an accurate appraisal of the situation.

Positioning in the environment is no longer a fight against rivals in the industry to eliminate competitors and reach monopolistic advantages. It is characterized by mutuality and the striving for benefits with and for stakeholders, improving the quality of life of human beings and the sustainability of the natural world.

 

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