Business Strategy Skills
Bridoux, F., & Stoelhorst, J.W. (2014) Microfoundations for stakeholder theory:
Managing stakeholders with heterogeneous motives. Strategic management journal,
35(1), 107-125.
- This article centres around the idea that while a fairness approach is more effective in
attracting, retaining, and motivating reciprocal stakeholders to create value, an arms-
length approach is more effective in motivating self-regarding stakeholders and in
attracting and retaining self-regarding stakeholders with high bargaining power.
- Primary stakeholders (i.e. investors, employees, customers, and suppliers) create
value by performing productive activities or providing important resources.
- Although managers are technically primary stakeholders, they are at the center of the
nexus of relationships among stakeholders and make the vast majority of the
decisions that shape the nature of these relationships.
- Two approaches to stakeholder management:
1. A fairness approach: the firm’s interactions with stakeholders are based on fairness
considerations. This is manifested in three ways:
i. Fairness drives the process to divide the value created by the nexus of stakeholders
among the different parties, as well as the outcome of this process and the
interpersonal treatment stakeholders receive.
ii. The formal contracts linking the firm to its stakeholders tend not to be very detailed
because parties rely to a large extent on trust and self-enforcement in the form of
social sanctions, rather than legal enforcement.
iii. Relationships with stakeholders tend to be long lasting.
2. An arms-length approach: interactions with stakeholders are based on bargaining
power. Three differences with the fairness approach:
i. Stakeholders’ relative bargaining power drives the process to divide the value
created by the nexus of stakeholders among the different stakeholders, as well as the
outcome of this process and the interpersonal treatment stakeholders receive.
ii. The approach is manifested in organizational practices such as the use of secrecy
and information asymmetries in the firm’s favor, resolving problems through
confrontation, and playing stakeholders off against each other to weaken their
bargaining position
iii. The approach is characterized by a reliance on economic and legal sanctions to
enforce obligations specified in elaborate formal contracts that typically include
detailed performance standards and requirements.
1
, Business Strategy Skills
- Firms face a population of potential stakeholders that consists of reciprocal and self-
regarding individuals.
- Reciprocal stakeholders contribute more to value creation with a fairness approach
than with an arms-length approach, but the reverse is true for self-regarding
stakeholders.
- A firm’s stakeholder management approach affects the motivation to create value of
the stakeholders currently associated with the firm; e.g., how hard employees work or
whether customers spend time on providing feedback on the firm’s products.
- Research shows that the positive relationship between a fair treatment of stakeholders
and value creation only holds for reciprocators: reciprocal stakeholders will create
more value for firms that adopt a fairness approach than for firms that adopt an arms-
length approach.
- Given that reciprocators value fairness per se, a fair treatment motivates reciprocal
stakeholders to create more value, even if their contribution is not fully compensated
in the form of a personal economic benefit.
- Reciprocators are likely to infer hostile intentions from the choice of an arms-length
approach and to respond to these perceived hostile intentions by contributing less to
value creation than if the firm chooses a fairness approach.
- Self-regarding stakeholders are motivated to create value from a purely self-serving
concern. These stakeholders are driven by personal monetary benefits and costs.
- Self-regarding stakeholders will create value when a firm applies an arms-length
approach to stakeholder management, as this approach uses strong economic
incentives to tie stakeholders’ contributions closely to stakeholders’ personal payoffs.
- Both approaches to managing stakeholders have specific costs and benefits and that
both can be a source of sustained value creation when supported by an appropriate
set of organizational practices. An arms-length approach comes at the cost of
undermining the contributions to value creation by reciprocators, it has the benefit of
enabling the firm to motivate self-regarding stakeholders, to attract and retain self-
regarding stakeholders with high bargaining power, and to pursue valuable strategic
actions that are not compatible with maintaining fair relationships with reciprocators.
- Disadvantages of a fairness approach:
1. Neither the most attractive nor the most motivating for self-regarding stakeholders
with high bargaining power.
2. Maintaining a fairness approach may make it difficult to respond to external
2
, Business Strategy Skills
changes because actions that reciprocal stakeholders perceive as a breach of fairness
can unleash negative reactions from these stakeholders.
3. A fairness approach comes with opportunity costs that decrease economic value
creation.
- To maintain reciprocator stakeholders' feelings of fairness, managers must put in
place systems that ensure distributive, procedural, and interactional fairness across
stakeholders and that enable the firm to select out stakeholders who exhibit self-
regarding behaviors.
- Acknowledging heterogeneity of stakeholder motives helps explain that some firms
can be successful by ignoring fairness considerations and adopting an arms-length
approach to stakeholder management that is strictly based on relative bargaining
power.
Powell, T. C., Lovallo, D., & Fox, C. R. (2011) Behavioural strategy. Strategic
Management Journal, 32(12), 1369-1386.
- Three schools of behavioural strategy:
3
, Business Strategy Skills
- Behavioural strategy aims to aims to strengthen the empirical integrity and practical
usefulness of strategy theory by grounding strategic management in realistic
assumptions about human cognition, emotion, and social interaction.
4
Bridoux, F., & Stoelhorst, J.W. (2014) Microfoundations for stakeholder theory:
Managing stakeholders with heterogeneous motives. Strategic management journal,
35(1), 107-125.
- This article centres around the idea that while a fairness approach is more effective in
attracting, retaining, and motivating reciprocal stakeholders to create value, an arms-
length approach is more effective in motivating self-regarding stakeholders and in
attracting and retaining self-regarding stakeholders with high bargaining power.
- Primary stakeholders (i.e. investors, employees, customers, and suppliers) create
value by performing productive activities or providing important resources.
- Although managers are technically primary stakeholders, they are at the center of the
nexus of relationships among stakeholders and make the vast majority of the
decisions that shape the nature of these relationships.
- Two approaches to stakeholder management:
1. A fairness approach: the firm’s interactions with stakeholders are based on fairness
considerations. This is manifested in three ways:
i. Fairness drives the process to divide the value created by the nexus of stakeholders
among the different parties, as well as the outcome of this process and the
interpersonal treatment stakeholders receive.
ii. The formal contracts linking the firm to its stakeholders tend not to be very detailed
because parties rely to a large extent on trust and self-enforcement in the form of
social sanctions, rather than legal enforcement.
iii. Relationships with stakeholders tend to be long lasting.
2. An arms-length approach: interactions with stakeholders are based on bargaining
power. Three differences with the fairness approach:
i. Stakeholders’ relative bargaining power drives the process to divide the value
created by the nexus of stakeholders among the different stakeholders, as well as the
outcome of this process and the interpersonal treatment stakeholders receive.
ii. The approach is manifested in organizational practices such as the use of secrecy
and information asymmetries in the firm’s favor, resolving problems through
confrontation, and playing stakeholders off against each other to weaken their
bargaining position
iii. The approach is characterized by a reliance on economic and legal sanctions to
enforce obligations specified in elaborate formal contracts that typically include
detailed performance standards and requirements.
1
, Business Strategy Skills
- Firms face a population of potential stakeholders that consists of reciprocal and self-
regarding individuals.
- Reciprocal stakeholders contribute more to value creation with a fairness approach
than with an arms-length approach, but the reverse is true for self-regarding
stakeholders.
- A firm’s stakeholder management approach affects the motivation to create value of
the stakeholders currently associated with the firm; e.g., how hard employees work or
whether customers spend time on providing feedback on the firm’s products.
- Research shows that the positive relationship between a fair treatment of stakeholders
and value creation only holds for reciprocators: reciprocal stakeholders will create
more value for firms that adopt a fairness approach than for firms that adopt an arms-
length approach.
- Given that reciprocators value fairness per se, a fair treatment motivates reciprocal
stakeholders to create more value, even if their contribution is not fully compensated
in the form of a personal economic benefit.
- Reciprocators are likely to infer hostile intentions from the choice of an arms-length
approach and to respond to these perceived hostile intentions by contributing less to
value creation than if the firm chooses a fairness approach.
- Self-regarding stakeholders are motivated to create value from a purely self-serving
concern. These stakeholders are driven by personal monetary benefits and costs.
- Self-regarding stakeholders will create value when a firm applies an arms-length
approach to stakeholder management, as this approach uses strong economic
incentives to tie stakeholders’ contributions closely to stakeholders’ personal payoffs.
- Both approaches to managing stakeholders have specific costs and benefits and that
both can be a source of sustained value creation when supported by an appropriate
set of organizational practices. An arms-length approach comes at the cost of
undermining the contributions to value creation by reciprocators, it has the benefit of
enabling the firm to motivate self-regarding stakeholders, to attract and retain self-
regarding stakeholders with high bargaining power, and to pursue valuable strategic
actions that are not compatible with maintaining fair relationships with reciprocators.
- Disadvantages of a fairness approach:
1. Neither the most attractive nor the most motivating for self-regarding stakeholders
with high bargaining power.
2. Maintaining a fairness approach may make it difficult to respond to external
2
, Business Strategy Skills
changes because actions that reciprocal stakeholders perceive as a breach of fairness
can unleash negative reactions from these stakeholders.
3. A fairness approach comes with opportunity costs that decrease economic value
creation.
- To maintain reciprocator stakeholders' feelings of fairness, managers must put in
place systems that ensure distributive, procedural, and interactional fairness across
stakeholders and that enable the firm to select out stakeholders who exhibit self-
regarding behaviors.
- Acknowledging heterogeneity of stakeholder motives helps explain that some firms
can be successful by ignoring fairness considerations and adopting an arms-length
approach to stakeholder management that is strictly based on relative bargaining
power.
Powell, T. C., Lovallo, D., & Fox, C. R. (2011) Behavioural strategy. Strategic
Management Journal, 32(12), 1369-1386.
- Three schools of behavioural strategy:
3
, Business Strategy Skills
- Behavioural strategy aims to aims to strengthen the empirical integrity and practical
usefulness of strategy theory by grounding strategic management in realistic
assumptions about human cognition, emotion, and social interaction.
4
