Oliver Thylmann

(Originally published on the OUBS Blog)

• Establish and prioritise the organisations’ purposes and objectives
• Understand the relationship between and the power of stakeholders
• Set up negotiation and conflict mechanisms to reconcile stakeholder differences
• purpose and objectives which constrain organisational structures and control

It is very important to understand the true purpose of an organisation as it highly influences its actions and therefor the competitive landscape.

The books ads a few things to what strategy is about, being the need to balance stakeholder relationships, producing above average returns, politics and power as well as culture and meaning.

The purpose of an organisation reflects it’s “raison d’etre” [sorry, missing all the accents here for those who speak / write french ] and might be written down in a vision statement. This is normally not something that is measurable. Objectives are the things that are more specific than a vision and also more short term and measurable. Policies then are something like decision rusles for recurring contingencies, bringing a little bit consistency to strategy.

Public mission statements (or purpose statements) of big companies will reveal their pupose (and long-term objectives) to shareholders. They should help to give a sense of direction.

Purpose Statements will normally take into account social responsibility, depending on the extent they matter to key stakeholders and the importance of that stakeholder group.

The mission needs to match strategy, purpose, values and behaviour standards to really have a good effect. Personal and organisational vlaues need to match. They are unique to each organisation.

Eccles and Nohria (1992) suggest that an organisations language has a direct effect on both it’s strategic actions and it’s identity. It can therefor said to be a tool to develop a strategy and identity.

Managing the purposes and objectives

It is impossible to determine the purpose and objective without understanding the various stakeholder positions. A stakeholder analysis might be called a “contributor and claimant” analysis. Etzioni (1971) categorised the reasons for participation in a company as follows:
- coercion (you have to)
- mutual benefition exchange
- identification with the values, norms and beliefs of the company

As simplification, one can concentrate on economic goals for sahreholders and other stakeholders with a monetary insterest. The problem here is that you need to agree on what kind of profitability you mean for you company:
- accounting returns
- cash returns
- economic profit and rents (where rents are returns above general market profit)

In the stockmarket, shareholder values or EPV (Economic Value Added) does not directly link to the share price either:
- the amoutn of shares traded each da are only a % of the total
- discounts will be attached to the stock for multiple reasons
- market imperfections

This only works if you have shareholders. In a public or charitable organisation everything is a lot more about a fulfilment of purpose while taking into account the potential wishes of important stakeholders (donors want to know that they did good and you need to tell them that they did and what they did)

In the end, an adequate return to the resource provider is what you need. You can do a cost-benefit analysis or look at efficiency and effectiveness. Opportunity Costs in relation to alternatives should be taken into account though.

The course book states that managers are agents to the owners. Their purpose might be:
- Baumol (1966): prestige from high market share
- Marris (1964): Power and reward by growing assets
- Williamsen (1974): status and empire building via salary and perks
- Galbraith (1967): growth, independence, challange

I would like to differ. The purpose of individuals is individual. Should be clear via the word alone. Some might really fit into the above scheme though.

What needs to be done though, is the alignement of managerial and ownership interests. This could be done through monitoring, incentive, sanctions, auditing and encouraging takeovers [that last one is a tough one but interesting point ]

Personal Rant: They give Berkshire Hathaway as an example but my personal opinion is that what makes Berkshire Hathaway so special is expertise and honesty. Monitoring, Auditing and encouraging takeovers are none existent. Incentives and sanctions are there but then again, the man that calls the shots has something like 30 Billion USDs in personal wealth. It’s not like it would really really hurt if the stock drops 50%. Based on 50% of his net worth being in BH, he would then have about 22 Billion USD. Great company though and especially great man/investor that Warren Buffet is. — End Personal Rant

Stakeholders are more and more getting important in relation to shareholders. In a knowledge society, that carriers of knowledge become more important than the carriers of capital, as capital becomes more replaceable than knowledge. Takeovers are not easy and customer relationships are of prime importance for lasting success.

Companies are “non-zero-sum” games though, meaning that collaboration increases the value for all. By attending to all stakeholder needs management can make a bigger cake (Baden-Full).

Contract theory can be used to look at stakeholder collaboration. Kay (1993) found three different “contracts”:
- spot contracts: short, standard terms ala “I sell, you buy and that is that.” There is no long-term commitment.
- classical contracts: brings certainty for longer commitments; in case of switching costs, the parties want to make sure that there is no termination of the relationship; investments need to be secured.
- relational contracts: long-term; less formal; expectations go beyond legal contract; trust; dependence

Which contract is best comes down to:
- classical contracts are needed to make things binding while relational contracts are more about co-operation. Relational contracts also need flexibility and free flow of information. You acknowledge that you are both important for each other.

Returns on resources and to stakeholders should also look at market imperfections. In a perfect market, resources lead to a normal rate of return for veryone. Imperfections can, if exploited, lead to above average returns as some organisations will have a distinct or unique advantage. Bad performance will lead to shareholders moving elsewhere. Competition will be there for scarce resources.

Morgan (1986) identified 12 sources of stakeholder power:
- Formal authority
- Control over scarce resources
- Organisational structures and procedures
- Control of decision process
- Control of knowledge and information
- Boundary management
- Ability to manage uncertainty
- Control of technology
- Alliances and informal networks
- Countervailing power
- Symbolism and management of meaning
- Gender power