Stakeholder management.

University Degree Business and Administrative studies

Definitions

A stakeholder of an organisation is ‘any group or individual who can affect or is affected by the achievements of the organisation’s objectives’ (Freeman, 1984: 46). In the changing business world, a wide range of stakeholders may have an involvement with an organisation, such as shareholders, customers, investors, employees, the media, government and non-government organisations. Clearly, they have varying degree of influences on the operation and growth of the organisation. To seek sustainable development, therefore, the organisation needs to well manage its stakeholders.

Stakeholder management refers to ‘the development and implementation of organisational policies and practices that take into account the goals and concerns of relevant stakeholders’ (Post, et al., 2002: 9). Since stakeholder management gain its first recognition in 1963 (Freeman, 1984), a great number of models (Preffer and Salancik 1978, Freeman 1984, Eden and Ackermann 1998) have been developed to facilitate organisations to manage their stakeholders. In recent years, two useful models — the Power/Interest Matrix (Mendelow cited in Johnson and Scholes, 2002:208) and Power/Urgency/Legitimacy Model (Mitchell, et al., 1997) — have become popular and it is the aim of this paper to analyse their advantages and disadvantages in order to achieve excellence in stakeholder management.

Brief Introduction of the Two Models

To assist the analysis, the introduction of the two models is briefly explained in this section. The Power/Interest Matrix (shown as Figure 1) implies the political priorities for managing stakeholder relationships by assessing the level of interest and power for each stakeholder (Johnson and Scholes, 2002: 208).

It can be seen from Figure 1, the stakeholders in Segment D have the most important role among other stakeholders in the success of the strategy. Due to their high power, organisations should give adequate emphasis on the stakeholders in Segment C and attempt to meet their expectations. As for stakeholders in Segment B, organisations need to provide enough information to satisfy their high interest in the strategies or issues. Under some circumstances, some stakeholders (Segment A) neither have power nor interest, so it is unnecessary to invest too much in this group.

The Power/Urgency/Legitimacy Model, illustrated as Figure 2, divides stakeholders into seven types and uses them to reflect a different degree of stakeholders’ salience which is related to the three basic attributes — power, legitimacy and urgency — perceived by organisational managers (Mitchell, et al., 1997).

Mitchell, et al (1997) made detailed explanations for the three attributes. Power means the possibility for a stakeholder to influence the outcome, originating from coercive, legitimate, expert, referent and reward. Urgency indicates time sensitivity and criticality of the situation. Regarding Legitimacy, it refers to the desire of stakeholders to judge the properness of the issue, based on norms, values and beliefs.

According to the concept, the stakeholder saliency will be enhanced with the increase of the attributes. Dormant, discretionary and demanding stakeholders, generally called Latent stakeholders, have only one of the three attributes with low stakeholder saliency. As to Expectant stakeholders, including dangerous, dependent and dominant stakeholders, they present moderate saliency for possessing two of the attributes. As a result of all the three attributes involved, definitive stakeholders are perceived to have high stakeholder saliency by managers.

Both two models are helpful to managers in pursuing success in stakeholder management. However, it is important to realise the limitations that each ...

This is a preview of the whole essay

Both two models are helpful to managers in pursuing success in stakeholder management. However, it is important to realise the limitations that each model might have in order for effective utilisation of them. Therefore, the following discussion will use two relevant examples to examine these two models.

Discussion

The advantages and disadvantages of the two models will be discussed in this part through analysing the cases of Nokia (Nokia, 2002), the world leader in mobile phone industry in terms of the health problem, and Shell (Post, et al., 2002), one of the largest companies in the world with regard to oil facility disposal crisis.

The Power/Interest Matrix

Case Background

The health concern for using mobile phones has ever been a great threat to the whole industry. Since the research on possible effects of radio waves on human health were reported by the media, it has drawn huge attention from the government agencies, health organisations and other scientific bodies. Subsequently, it aroused customers' concerns, which would become an obstacle for sales in mobile phones. Under such a circumstance, establishing appropriate relationships with these stakeholders is vital not only for Nokia to gain more customers than other competitors, but also for its sustainable development.

Nokia Stakeholder Analysis

Base on the Power/Interest Matrix described in the previous section and the understanding of different level of the power and interest of Nokia stakeholders, they can be categorized into the four quadrants shown as Figure 3.

As the Mapping indicates that Nokia only need make minimal efforts to deal with the stakeholders in A — the public, whose power and interest did not appears high at the stage before the health issue spread out.

The stakeholders in Sector B show their high interest in but limited influence on the issue. However, their power might increase as the issue proceeds. Therefore, as the Matrix suggested, Nokia should keep them informed about the progress of the issue through education, communication or cooperation.

Concerning the stakeholders in C, they could have an enormous impact on the organisation although they have not expressed their strong interest in the issue at this moment. Therefore, Nokia needs to try to satisfy them by regularly declaring its responsibilities and the commitment to related standards to government agencies and meanwhile seeking inclusion of its share in indexes based on various criteria of sustainable operations.

The key stakeholders with high interests and high power can be found in sector D. In order to maintain successful sales, Nokia needs to carry out direct survey on customer satisfaction, other than the indirect activities to reduce customer’s concerns. Undoubtedly, the managers in Nokia have been playing a vital role in making strategies and decisions with respect to the issue.

Advantages and Disadvantages

Advantages

Firstly, the Matrix can facilitate organisations in analysing different stakeholders’ expectations and values. From the case of Nokia’s stakeholders, it can be seen that the stakeholders have been segmented into four quadrants. Though the segmentation, the organization can have a clear understanding of power and interest from each stakeholder in a particular situational context, and subsequently make specific analyses on the potential influences that the distinguished stakeholder would generate on the organisation.

Secondly, the Matrix provides organisations with general principles for stakeholder management strategies. For different groups in the four quadrants, four types of principles are suggested in the Matrix. It would be better to say that the Matrix helps to direct the organisation with priorities in managing stakeholders involved in a particular situation.

Thirdly, the Matrix can be modified in a time basis to help organisations reposition their stakeholders so as to prevent the deterioration of issues and accelerate organisational growth. As in the case of Nokia, it could help Nokia establish allies with scientific bodies and health organisations, consequently raise the two stakeholders from low power in Sector B to high power in Section D. This strategy would not only reduce the customers’ concerns, but also supports its sustainable development.

Disadvantages

Nevertheless, this model still has its disadvantages.

In the first place, the Matrix can only categorize an organisation’s stakeholders into four groups. In fact, the stakeholders in each group may hold different degrees of power and interst. However, this model cannot show the priority stakeholders in the same group so that managers tend to neglect the differential priorities among stakeholers in the same group when making strategies. As a consequent, once the conflict arises among the stakeholders in the same group, the strategies may not work.

Furthermore, the Mapping cannot dynamically reflect the situational changes. The health concern for using mobile phones is a relatively long-term issue for Nokia and therefore the statuses of its stakeholders can be relatively static. Hence, the model is useful to analyse such kind of cases. With the rapid changing environment, however, most cases are likely to vary day to day and the model may not be as useful and effective as the case shows.

In addition, the model does not give a clear definition of power and interest. In some situations, therefore, it is difficult to distinguish low or high power and interest the stakeholders have. Thus, the resulting Power/Interest Matrix may not be able to accurately reflect the situation and might lead to inefficient management of stakeholders.

The Power/Urgency/Legitimacy Model

Case Background

In 1995, the Shell’s plan of disposing the Brent Spar oil platform in the North Sea encountered many criticisms from Greenpeace, environmental activists and the public. Soon, consumer boycotts hit Shell’s retail business and the media widely reported these incidents. Subsequently, almost every EU government turned against the company and some senior politicians began to intervene in it.

A dialogue process designed by the Environment Council (EC), involving environmental organisations, academics, consumers, regulators and members of the oil industry, allowed Shell to acquire a wide range of information of its stakeholders’ values and views. In 1998, Shell made a recommendation to the UK Government for re-using parts of the Spar and recycling the rest. Since then, Shell past the crisis gradually.

Shell Stakeholder Analysis

In terms of the seven types of stakeholders discussed above, Shell’s stakeholders during the crisis can be categorized as follows (see Figure 4)

Nevertheless, Shell took the corresponding strategies to deal with the adverse circumstance, such as the cooperation with EC and the alliance relationship with other oil companies. As a consequence, the attributes of the stakeholders changed after the efforts Shell made (see Figure 5). All the changes can be presented in the Power/Urgency/Legitimacy Model shown as Figure 6.

Advantages and Disadvantages

Advantages

First of all, the three attributes of this model help managers make more comprehensive analysis or evaluation of the values and the impact of the relevant stakeholders. Thus, the strategies that managers make can be effective in both satisfying the expectations of the stakeholders and supporing the organisation’s development.

Besides, since stakeholder salience is positively related to the cumulative number of stakeholders’ attributes (Mitchell, et all., 1997), managers can make appropriate strategies to achieve its goals by adjusting the number of attributes the stakeholders hold. For example, Shell empowered EC to participate in its environment decision-making. On the other hand, it reduced reducing the power of consumers and the media through establishing alliances with other oil companies and reached agreement with national government.

More positively, as a dynamic model, it can reflect varying status of stakeholders with situational changes. This allows managers to keep continuous attentions to the key stakeholders in different circumstances, and to duly adjust their strategies to the changes.

Disadvantages

Above all, without any suggestion on how to overcome opposition or crisis, this model appears to be more complicated for using in reality. It tends to confuse the managers in understanding the real situation of stakeholders, especially when they have a large number of stakeholders or the changes happen frequently.

Additionally, although the three attributes of stakeholders — power, legitimacy and urgency have been defined in the model, in practice, the identification of the three attributes ultimately depends on managers’ perceptions. Hence, the salience of the same stakeholder may differ due to the different managers’ judgements and some potentially important stakeholders are possibly neglected.

Conclusion

Stakeholders are worthy of great attention owing to their potential influences on the fulfillment of organisational goals. Therefore, stakeholder management is vital to the success or failure of organisational strategies and even to the existence and development.

The Power/Interest Matrix and the Power/Urgency/Legitimacy Model are the two useful tools of stakeholder management. They offer frameworks to assist the understanding of the relationships between the organisation and the stakeholders, and sequentially are helpful for the organistion to make appropriate strategies to sustain its development.

Nevertheless, the two modes have own disadvantages in stakeholder management. The former one can be deemed as a relatively static model regardless of situational changes. Yet, as a dynamic model, the later one seems to be too complicated in practice and without any suggestion on decision-making. In addition, based on both models, the identification of the importance of stakeholders is subjective rather than objective.

To sum up, the characteristics of stakeholder change over time. Therefore, stakeholder management should be concerned with long-term strategic decisions. Despite of the limitations of the two models, they can be also used by organisations with cautions to help them establish favorable stakeholder relationships to ensure their sustainable development.

References

Eden, C. and Ackermann, F. (1998). Making Strategy: The Journey of Strategic Management. London: Sage.

Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Boston: Pitman.

Johnson, G and Scholes, K. (2002). Exploring Corporate Strategy (6th Edition), London: Prentice Hall.

Mitchell, R. K., Agle, B. R. and Wood, D. J. (1997). Toward a Theory of Stakeholder Identification and Salience: Defining the Principle of Who and What Really Counts. Academy of Management Review, 22 (4), 853-886

Nokia Environment Report. (2002) http:www.nokia.com/aboutnokia/downloads/archive/pdf/eng/env_report_2002.pdf - - Nokia.com

Pfeffer, J, and Salancik, G. R. (1978). The External Control of Organisations: A Resource Dependence Perspective. New York: Harper and Row.

Post, J. E., Preston,L. E. and Sachs, S. (2002). Managing the Extended Enterprise: The New Stakeholder View. California Management Review, 45(1), 6-28.