international journal of information technology & decision making · pdf...

November 24, 2005 10:20 WSPC/173-IJITDM 00171

International Journal of Information Technology & Decision MakingVol. 4, No. 4 (2005) 541–566c© World Scientific Publishing Company

FORMULATING BUSINESS STRATEGIES FROMA STAKEHOLDER’S PERSPECTIVE: KOREAN

HEALTHCARE IT BUSINESS CASES

GEUNCHAN LIM and HEESEOK LEE∗

Corporate Information System LaboratoryDepartment of Management Information Systems

Graduate School of ManagementKorea Advanced Institute of Science and Technology207-43, Cheongryang, Seoul, South Korea 130-012

∗[email protected]

TAEHUN KIM

Department of Management Information SystemCollege of Commerce & Economics

Kyungsung University, 110-1, Daeyeon-dongNam-gu, Pusan, South Korea 608-736

[email protected]

The management of competing stakeholders has emerged as an important topic for for-mulating business strategies. This is especially the case in the complicated business envi-ronment like the healthcare IT (Information Technology) industries. This paper proposesa methodology to formulate business strategies based on stakeholders’ demands. Ourmethodology begins with the understanding of stakeholders’ demands. This understand-ing is particularly useful for businesses with conflicting stakeholders. Our methodologyconsists of four phases: current business analysis, strategy development, strategy evalu-ation, and strategy implementation. Power, legitimacy, urgency, interdependence, coop-eration, and conflict are used as stakeholders related variables. Strategic alternatives arederived on the basis of stakeholders’ demands. Resolution, replacement, integration, reag-gregation, and balance guidelines are employed for this derivation. Strategic alternativesare then evaluated according to a business social performance index. In order to demon-strate the practical usefulness of our methodology, three business cases for the Koreanhealthcare IT industry are illustrated. The case results imply that our methodology isuseful for strategy formulation, especially in the case of competing business stakeholders.

Keywords: Business performance; business strategies; formulation methodology; health-care; medical EDI business; stakeholder theory; strategy evaluation.

1. Introduction

Corporate management evolves depending on new requirements and challenges.Business strategies need to be in perfect alignment with ever-changing corporate

∗Corresponding author.

541


542 G. Lim, H. Lee & T. Kim

goals. These goals are increasingly dependent on business environments. Once abusiness has reconceived its own contours, it is ready to face up to a new kind ofenvironment. The challenges in formulating the strategies are readily apparent.

Freeman9 initiated a stakeholder theory and thus enabled corporations to under-stand their environments; stakeholders were defined as groups or individuals whocan affect or be affected by organizations with their managerial behaviors. Organiza-tion theorists have explored the role of the stakeholders in corporate managementsince Freeman’s original work. Recently, they have shifted the goal of corpora-tions from shareholder’s wealth creation to stakeholder’s balance which pursuesmultiple objectives with different interests.17 They compared shareholder corpo-rations with stakeholder corporations in terms of their attributes such as goal,governance structures and key processes, performance metrics, and stakeholders’salience/influence. Wheeler and Sillanpaa26 illustrated the business cases of suc-cessful stakeholders’ corporations such as Wal-Mart (US), Tesco (UK), IBM (US),and The Body Shop (UK).

It is not a trivial task to formulate business strategies from the stakeholders’perspectives. Typically, stakeholders show diverse business interests. The goals ofthe stakeholders may be in conflict with each other; they may threaten businessorganizations. The conflicts arising among the stakeholders, if well managed, can actas a synergy factor leading to a better cooperation and participation of the stake-holders. It is thus important to deal with stakeholders’ demands. It is important tonote that stakeholders’ demands are considered for strategy formulation. Doing soincreases the corporate collective strength and everyone’s chance of winning.

The healthcare IT (Information Technology) industry shows typical examplesof conflicting interests and complicated interactions among stakeholders. In Korea,this industry’s businesses can be categorized into five groups; (i) hospital (clinic)information systems (HIS) including electronic medical records (EMR), order com-munication systems (OCS), and pharmacy information systems (PIS), (ii) pic-ture archiving and communication systems (PACS), (iii) medical data connectivityincluding medical EDI (electronic data interchange) and electronic prescriptions,(iv) healthcare EC (electronic commerce) (e.g. business to business (B2B), busi-ness to customer (B2C), cyber hospital, and drug electronic procurements), and(v) medical electronic equipments. This industry finds a variety of conflicting inter-ests among stakeholders such as patients, physicians, general hospitals, hospitals,clinics, dental clinics, pharmacies, the government, and medical insurance corpora-tions. Managers face significant regulations by the government and medical insur-ance corporations. In this highly competitive healthcare environment, the survivalof businesses may depend on how well they manage heterogeneous stakeholders.20

The primary objectives of this paper are to propose a methodology for formulat-ing business strategies on the basis of stakeholders’ demands and to demonstrate itsusefulness through the case of a real-life healthcare IT business. This stakeholders’approach will be able to enhance both business performance and business ethicalgoals. Furthermore, we develop a method for evaluating strategic alternatives using


Formulating Business Strategies 543

a business social performance (BSP) index. Stakeholders related variables such aspower, legitimacy, urgency,21 interdependence,11 cooperation,10 and conflict34 areemployed for building this index.

This paper is organized as follows. First, the research background for stakehold-ers’ theory is provided in terms of the identification of key stakeholders, stakeholdersrelated variables, stakeholders’ demands, and business performance. Next, we dis-cuss the methodology. The cases for the Korean healthcare IT industry illustrate ourmethodology in detail. Our methodology is compared with others to demonstrateits feasibility. Lastly, we conclude this paper.

2. Stakeholders Related Literature Reviews

Since Freeman’s definition of the stakeholder, many researchers have exploredthe stakeholder’s theory.8 Past studies have investigated how to identify keystakeholders,5,31 how to define and use stakeholders related variables,11,21 how tobalance the competing demands of various stakeholders,29 and how to measurebusiness performance with stakeholders related variables.1,4,24 The following is thereview for the studies in the above main research areas.

Identification of key stakeholders: Freeman10 identified the stakeholders suchas the government, political groups, shareholders, the financial community, activistgroups, consumers, consumer advocacy groups, unions, employees, trade associ-ations, competitors, and suppliers. Morgan and Hunter23 noted four basic typesof organizational stakeholders: internal, buyers, suppliers, and lateral. Donaldsonand Preston8 classified major stakeholder group categories: governments, investors,political groups, suppliers, customers, trade associations, employees, and commu-nities. Interestingly, Clarkson5 addressed two stakeholders groups: primary andsecondary. The primary stakeholder group includes one without whose continu-ing participation the corporation cannot survive. Typical examples are sharehold-ers, employees, customers, suppliers, and the government. The secondary stake-holder group, on the other hand, includes those who influence or are influencedby the corporation; yet, they are not engaged in transactions with this corpora-tion. Secondary groups are not essential for its survival, but could cause significantdamage to a corporation. Examples include communities, trading associations, andthe media.

Sirgy31 categorizes stakeholders into three groups: internal, external, and dis-tal. Internal stakeholders include the various departments, divisions, and functionalunits of an organization including the CEO (chief executive officer), board of direc-tors, strategic business units, R & D (research and development), engineering, pro-duction, and other organizational units. External stakeholders influence the survivalof business directly; they include customers, shareholders, distributors, suppliers,creditors, employees, local community, and the mass media. Distal stakeholders’influence is indirect. Examples of distal stakeholders are environmental advocacygroups, government agencies, labor unions, auditors, industry leaders, professional



and trade associations, and higher education (e.g. professors, college students, andlibraries).

Stakeholders related variables: Researchers distinguish the stakeholders’attributes from the stakeholders’ relationships. The most comprehensive study forstakeholders’ attributes is Mitchell et al.21 Their attributes include power, legiti-macy, and urgency. Power is defined as a capability of one stakeholder to get anotherstakeholder to do something. Legitimacy is a generalized perception or assumptionthat the actions of a stakeholder are desirable, or appropriate within some sociallyconstructed system of norms, and beliefs. Urgency is the degree to which stakeholderclaims call for immediate attention. Another stakeholders’ variable, stakeholders’salience, is the degree to which managers give priority to competing stakeholders’claims. They propose that stakeholders’ salience would be positively related withthe other three attributes. Agle et al.1 developed Mitchell et al.21 attributes by theuse of statistics perceived by the CEOs.

In order to investigate the stakeholders’ relationship, Pfeffer and Salancik27

defined the interdependence when there is symmetry in the exchange relationship.Frooman11 suggested that this interdependence should determine the stakeholders’management approach. Freeman and Liedtka10 suggested the relationship variablessuch as cooperative potential and competitive threat. Wall and Callister34 defineda conflict variable as a process in which one party perceives that its interests arebeing opposed or negatively affected by another party. Lampe18 highlighted theimportance of the minimization of the negative impact from such conflicts amongstakeholders. Rowley29 found that the existence of relationship between stakehold-ers could affect their behaviors by using an example of Macdonald Douglas’s DC-10business.

Stakeholders’ demands: Corporations need to satisfy stakeholders’ demands asan unavoidable cost of doing business.30 Rowley29 continued that the survival of thecorporation depends on how well it satisfies its stakeholders. Langtry19 identifiedthe rationale for stakeholders’ claims by arguing that the corporation operates forits well-being. Clarkson5 noted that such claimed rights or interests are the resultof transaction with, or actions taken by, the corporation. Scholes and Clutterbuck38

proposed three criteria for prioritizing stakeholders’ demands: potential to influencebusiness fortunes, impact of activities, and alignment for sharing values.

Business performance: From a stakeholders’ perspective, corporate performancecan be assessed by the use of social or financial measures. Wood27 defined a corpo-rate social performance (CSP) as an organization’s configuration of social respon-sibility. Many studies have adopted the Fortune reputation survey and the Kinder,Lydenberg, Domini (KLD) index as CSP measurements. Agle et al.1 and Ruf et al.30

selected five dimensions for the CSP measurement — employee relations, prod-ucts, community relations, environmental stewardship, and treatment of womenand minorities — out of the eight dimensions of the KLD index. Recently, Sirgy31



proposed a model for measuring CSP according to three relationship qualities: (i)an internal service quality among the various organizational departments (internalstakeholders), (ii) an external service quality between internal and external stake-holders, and (iii) a corporate image between internal and distal stakeholders. To helpmeasure this performance, he introduced the concept of stakeholders’ importance.

A corporate financial performance (CFP) measures a firm’s value as a func-tion of growth and profitability.26 Return on equity (ROE) and return on assets(ROA) are widely used. Berman et al.4 used ROA to examine a strategic stakeholdermanagement model. Ogden and Watson24 adopted relative profits and shareholderrelative return as profitability measures. Ruf et al.30 used return on sales (ROS)and ROE as profitability measures and the growth in sales as a growth measure.

Previous studies confirmed the positive relationship between financial and socialperformance.22 Similarly, Ruf et al.30 proposed that improvements in CSP haveboth immediate and continuing financial impacts. Ogden and Watson24 noted thepositive effects of the improvements in CSP on the improvements in profitabil-ity. Berman et al.4 highlighted that stakeholders’ relationships have direct effectson CFP.

Typically, corporations may have several strategic business units (SBUs). Forexample, a telecommunication corporation has SBUs such as local calls, domesticcalls, international calls, mobiles, leased lines, super highway speed Internet lines,wireless Internets, and e-businesses. Business performance in each SBU is relatedwith the capability to satisfy the demands of the major stakeholders. It is simplerthan corporate performance. Return on capital employed (ROCE) and two-yeargrowth rate in sales,32 net sales, productivity, and market growth28 may be usedfor business financial performance (BFP) measures.

In sum, the findings from the above studies can be categorized as follows.First, business performance may include both BFP and business social performance(BSP). Second, stakeholder’s relationship affects business performance. Third,improving the relationship between SBU and its stakeholders can enhance BSP.

3. Business Strategy Formulation Methodology

Strategies may be categorized according to three distinct levels: corporate strat-egy, business strategy, and functional strategy. Some SBUs have homogeneous ser-vices or products that are independent from the other SBUs. Business strategy, asubset of corporate strategy, is defined as the basis upon which an organizationachieves a competitive advantage; it has a direct and significant effect on businessperformance.32 Business strategy can help business leaders achieve business goals.Various researchers have proposed methodologies for formulating business strategiesas follows.

Grant12 adopted a resource-based approach and provided a five-stage proce-dure: (i) to identify a firm’s resources, appraise its strengths and weaknesses, andexplore opportunities for better utilization of resources; (ii) to appraise the firm’s



capabilities; (iii) to analyze the profit-earning potential of the firm’s resourcesand capabilities; (iv) to select a strategy which best exploits the firm’s resourcesand capabilities relative to external opportunities; and (v) to upgrade the firm’spool of resources and capabilities by identifying resource gaps. By contrast, themethodology by Hackbarth and Kettinger13 follows four logical stages: initiation,diagnosis, breakout, and transition. In the breakout stage, in particular, currentstrategies were evaluated with SWOT (strengths, weaknesses, opportunities, andthreats) assessment matrices. After this evaluation, they brainstormed businessstrategies. Quezada et al.28 suggested a similar seven–stage procedure. Tapscottet al.33 suggested a six-stage procedure especially for business web (b-web) strategy.Julta et al.15 employed an e-business stakeholder’s model to strengthen customers’value. The external stakeholders (e.g. strategic partners, operational partners, cus-tomers, community, and governance) and internal stakeholders (e.g. employees) playcentral roles in their model.

The above previous methodologies highlight that business strategies can beformulated considering key factors such as resources or capabilities, SWOT assess-ments, new values, and stakeholders. Here, like Julta et al.5 we adopt a stakeholder’sperspective. Stakeholder demands play a vital role because nowadays most busi-nesses are confronted with powerful stakeholders having different goals. For exam-ple, B2B sites may be confronted with obstinate resistance from existing off-linechannel suppliers. However, buyers and suppliers can reduce their cost via elec-tronic procurements. Therefore, these sites need to formulate business strategiesbased on the conflicting demands of different stakeholders.

As depicted in Fig. 1, our methodology consists of four major phases: currentbusiness analysis, strategy development, strategy evaluation, and strategy imple-mentation. The current business analysis phase defines and analyzes SBUs andrelated stakeholders. The emphasis is on the analysis of stakeholders’ demands. Thestrategy development phase offers strategic alternatives according to five guide-lines: resolution, replacement, integration, reaggregation, and balance. Then, itfilters these alternatives through core competences and weaknesses. In the strat-egy evaluation phase, the alternatives are evaluated by the stakeholder relation-ship improvement index (SRII). SRII estimates how the strategy can improvethe relationships between a business organization and its stakeholders. The strat-egy implementation phase makes a detailed action plan for a final strategyand implements it. The performance of this new strategy can be monitoredcontinuously after implementation; the strategy may be adjusted if it is notsatisfactory.

4. Korean Healthcare IT Business Cases

To demonstrate its practical applicability, our methodology has been applied tothree Korean healthcare IT cases such as medical EDI business in 2000, electronicprescription business, and tax receipt for cash business. For a clear presentation,



- 5 guidelines (resolution, replacement,

-Strategic problem, BFP (ROS, growth

- Action plan

-BFP report

- Performance gap

-BFP

Not satisfactory

StrategyImple-mentation

-Strategyevaluation report

-SRII

StrategyEvaluation

-Strategicalternatives report

-SH demand group (primary only,primary & secondary), SH demandcriticality

integration, reaggregation, balance)

-Core competence and weakness in resource

StrategyDevelop-ment

- Current businessanalysis report

-SH analysis report

-SBU, SH

in sales), Core competence and weakness in resource

-SH classification, SH variables (power,legitimacy,urgency, interdependence,cooperation, conflict), Demand criticality

CurrentBusinessAnalysis

OutputDocuments

Key VariablesSubphasePhase

Define SBU and SH

Analyze SBU

Analyze SHs andtheir demands

Implement the new strategy

Make a action plan

Selecta final strategy

Evaluate strategic alternatives

Filter strategic alternatives

Build strategic alternatives

Categorize SH demandsinto two groups

Monitor the strategy

Fig. 1. A shakeholder approach to business strategy formulation: a practical framework.Note: SH = Stakeholder

the application to the medical EDI business will be illustrated in details further.Brief introductions to the other two cases are summarized in Appendix 1.

The medical EDI business highlights very competitive and conflicting stake-holders like those in the medical professions, medical insurance industry, and phar-maceutical industry. In particular, because of the enforcement of the rule on theseparation of medical practices and drug dispensation in July 2000, the conflictamong these groups caused tremendous disorder in the Korean society.



Medical EDI service enables the electronic interchange and delivery of medicalinsurance documents (e.g. medical insurance claims including treatments, screen-ing results of claims, and financial results) between medical groups (e.g. hospitals,clinics, dental clinics, and oriental clinics) and pharmacies, and medical insurancecorporations (e.g. health insurance corporations, industrial accident compensationinsurance corporations, and automobile insurance corporations). Before this EDIservice, papers and diskettes were the primary delivery methods.

The following is the market scale of the medical EDI business in 1999: (i) about240 million medical documents (e.g. papers, diskettes, and EDI) were exchangedper year, (ii) about 57 thousand institutions were candidates for subscribing EDIservice, and (iii) the total amount of market was about 30 billion Won (Koreanmonetary standard unit). K Corporation is the largest and the most sophisticatedcommunication network company in Korea. It leads the nation’s telecommunicationindustry for over 100 years. It puts forward a new vision of “The Value NetworkingCompany” in order to emerge as one of the world’s leading telecommunicationcompanies in the 21st century. It has provided high-speed Internet services such asasymmetric digital subscriber line (ADSL), very high data rate digital subscriberline (VDSL), and wireless Internet.

In particular, since 1996, K Corporation have had exclusive rights to provideEDI service for 10 years in the medical insurance fields and began an example ofproviding EDI service to 100 customers (clinics) in the Metropolitan area. Standarddocument format and medical code were necessary to convert complex paper datato standard EDI data. In 1997, the Korean Government officially announced thedetailed rules on how to use the medical EDI. Accordingly, K Corporation couldextend service areas to the whole country; the service domain ranged from clinicsto hospitals, dental clinics, pharmacies, and oriental clinics.

The Korean medical EDI business’ circumstances during 1999–2000 were as fol-lows. First, although Korean society would decide to enforce the new healthcarerule for the separation of medical practice and drug dispensation since July 2000,the conflicts among government, medical groups, pharmaceutical groups, insur-ance corporation groups, and society organizations caused serious debate on howto enforce the rule. Medical and pharmaceutical processes changed significantly;their EDI formats and application software (S/W) for HIS was also unavoid-ably changed and this change caused serious confusion. Stakeholders, in partic-ular, required different EDI standard format and this format changed many timesuntil July 2000. If the rule was enforced, the volume of EDI data would increasedramatically; accordingly, the market volume of EDI business would increasesignificantly.

Second, the number of subscribing institutions and the corresponding businesssales were not satisfactory to K Corporation. Despite of the convenience and speed,most institutions were reluctant to change their delivery methods to EDI servicebecause they feared the exposure of detailed treatment data to medical insurancecorporations or government. Third, the EDI services needed to be enhanced into



web-based service. K Corporation began to provide ADSL service for the institu-tions. Thus, they required web-based EDI interfaces.

In view of this EDI circumstance, three strategic problems are noted: (i) the lackof balance in the management of stakeholders, (ii) insufficient marketing results, and(iii) the lack of counterplan to the enforcement of the new rule. Our methodology hasbeen applied to formulate strategies for this EDI business in 2000 for K Corporation.For this application, we interviewed one director and 10 managers who formulatedEDI business strategies or managed this business for K Corporation in 2000. Thisapplication will be illustrated in detail from now on.

5. Current Business Analysis

The purpose of this phase is to analyze the current business environment and relatedkey stakeholders. First, we define the SBU and related stakeholders. Our SBU isthus the medical EDI business in K Corporation. Business-related key stakehold-ers are identified as shown in Table 1. Here, we adopt Donaldson and Preston’s8

major stakeholder group categories. Next, the SBU is analyzed, i.e. it searches forbusiness-related strategic problems, BFP, and core competences and weaknesses ofthe corporate resources. The objective of the current business strategic problemanalysis is to find the critical strategic problems for the success of the businessand to find how much their results are affected by related stakeholders. In order tomeasure BFP, we employ ROS (net income before taxes/sales) and growth in sales(i.e. rate of increase compared to last year’s sales).

Grant12 classified corporate resources into six major categories: financial, physi-cal, human, technological, reputation, and organizational. By using these categories,we can find the corresponding core competences and weaknesses. In sum, the resultsof strategic problem, BFP, core competence and weakness can be presented in thecurrent business analysis report, as shown in Table 2.

The next step is to analyze significant stakeholders through stakeholders’ clas-sification. For this classification, we adopt Clarkson’s5 primary and secondary cat-egorization method. For example, the government and shareholders are primarystakeholders (highlighted as boldfaced in Appendix 2).

For evaluating stakeholders, we employ six criteria. These criteria includeMitchell et al.’s21 three attribute variables (power, legitimacy, and urgency) andrelationship variables such as interdependence,11,27 cooperation,10 and conflict.34

Next, stakeholders’ demands are identified for each stakeholder. Managers need tolook at these demands from a long-term perspective and endeavor to negotiate ormediate them. The importance of these demands (i.e. demand criticality) is alsodetermined. Demand criticality is defined as the degree to the urgency and man-agerial sensitivity of the demand.

All variables are measured via a 5 point Likert’s scale ranging from “stronglydisagree (+1)” to “strongly agree (+5)”. We refer Agle et al.1 and Barki andHartwick’s2 questionnaire for the stakeholders related variables. We adopt the



Table 1. Key stakeholders in medical EDI business.

Stakeholder Stakeholder Major Role for Medical EDIGroup Business in K Corporation

Government Government Enact the law and detailed rule of(Ministry of Health and Welfare) insurance claim delivery methods

including EDI

Investor Shareholder K Corporation shareholder

Communities Hospital agency group A pressure group for hospitalMedical association group A pressure group for clinic and dental clinicPharmaceutical association

groupA pressure group for pharmacy

Customer Hospital (including generalhospital)

Large size EDI service user for deliveringmedical insurance claims

Clinic (including dental clinic) EDI service user for delivering medicalinsurance claims

Pharmacy EDI service user for delivering medicalinsurance claims

Health insurance corporation Large-size EDI service user; process healthinsurance claims from medical groupsand pharmacies

Industrial accidentcompensation insurancecorporation

Large-size EDI service user; processindustrial accident compensationinsurance claims from medical groupsand pharmacies

Automobile insurancecorporation

Large-size EDI service user; processautomobile insurance claims frommedical groups and pharmacies

Tradeassociations

Medical S/W firm Medical S/W (HIS) provider for hospital,clinic, dental clinic, and pharmacy

Other EDI providers EDI service providers in other industriesOther delivery firms (paper,

diskette)Deliver claim papers or re-input paper’s

data

average value of each variable. This result is summarized as shown in Appendix 2.For detailed survey items, readers are referred to Appendix 3.

6. Strategy Development

The aim of this phase is to find new strategic alternatives in the light of stakeholders’demands. Typically, it is complex to find strategic alternatives in the considerationof all demands. It would be helpful to select more critical demands and use them forgenerating strategic alternatives. Although primary stakeholders’ demands are morecritical if business organizations ignore them, secondary stakeholders’ demands cansometimes also cause significant damage to businesses.5 Therefore, these demandsare considered as a two-step approach (first, primary stakeholders in isolation, andthen both primary and secondary stakeholders).



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Accordingly, we need to rank stakeholders’ demands according to their impor-tance and demand criticality. Important demands may be selected as follows.

If Rank(φ(i, j)) ≤ k, then Select;

φ(i, j) = IM(i) × DC(i, j);

IM(i) = w1PW (i) + w2LG(i) + w3UG(i);

where

Rank(φ(i, j)): ranking in descending order of φ value;

φ(i, j): stakeholder consideration value for demand j of stakeholder i;

IM(i): stakeholder importance of stakeholder i;

DC(i, j): demand criticality for demand j of stakeholder i;

PW (i): power of stakeholder i;

LG(i): legitimacy value of stakeholder i;

UG(i): urgency value of stakeholder i;

w1, w2, w3: weighting factors (w1 + w2 + w3 = 1);

k: number of important demands which strategy managers may decide.

In our case, managers decided on ten important demands (k = 10). Equal weightswere assumed for the sake of simplicity (w1 = w2 = w3 = 1

3 ). These weights maybe determined by the experts.

Next, we can formulate strategies for the above chosen 10 demands. Two alterna-tives are possible. The first (Alternative 1) is generated in view of primary demands;the second (Alternative 2) is generated in view of both primary and secondarydemands. Referring to the literature of organizational responses to stakeholders’demands,3,25,29 we employ five guidelines (i.e. resolution, replacement, integration,reaggregation, and balance) for generating strategic alternatives. Table 3 comparesthese guidelines.

Table 3. Five guidelines for strategy development.

Guideline Description Reference

Resolution Resolve stakeholder demands or the conflictsamong stakeholder demands

Rowley,29 Lampe,18

Andrew,3

Replacement Replace stakeholder demands from businessorganization viewpoints

N/A

Integration Integrate some similar stakeholder demandswith new alternative for representing all ofthem

Daboub and Calton,7

Heugen et al.14

Reaggregation Reaggregate stakeholder demands in newbusiness value viewpoints

Tapscott et al.33

Balance Trade-offs and organizational attempt tostrike balance among stakeholder demands

Oliver,25 Wallace,35



The resolution guideline applies for demands which cause conflicts with otherdemands; it may provide the business opportunities when conflicts are resolved.Negotiations and mediations are effective for resolving conflicts.3,18 For example,for the S/W firms’ demand to ally strategically with K Corporation for joint S/Wupgrade and marketing and the government’s demand to manage the conflictsbetween medical institutions and S/W firms, we may consider a strategic alter-native to ally with S/W firms to establish an executive team for S/W upgradingand marketing with EDI service and HIS. This alternative resolves the conflictsamong their demands because K Corporation can control S/W firms through ajoint team.a

The replacement guideline improves the contents of stakeholders’ demands inorder to better accommodate the business prosperity. For example, let us considerthe government’s demand to prepare a new EDI S/W version suitable for the rulebefore July 2000. Because the rule will be changed many times according to thenegotiation among related stakeholders, the better alternative would be to delaynew S/W version until the rule is settled.

The integration guideline integrates similar demands. We may adopt stakeholderlearning dialogues7 or four types of stakeholder integration typology14 for this inte-gration. The reaggregation guideline attempts to generate new kind of businessvalues. This involves assessing stakeholders’ demands in terms of new contributionvalues, identifying new values to enhance business performances, and reaggregat-ing and establishing new strategic alternatives. For example, let us consider theS/W firm’s demand to share the benefits for EDI fare. K Corporation can utilizethese S/W firms as EDI marketing channel and share the financial benefits for EDIfare.

Finally, stakeholders need to strike a balance among their demands. For example,let us consider the health insurance corporation’s demand that new EDI standardformat for insurance claim should include prescription details for cross-checkingfrom hospitals to pharmacies. This option could be biased for the benefit of theinsurance corporations in isolation. It would be a good alternative to establish thecommittee for EDI standard format decision including the government, insurancegroups, medical groups, and pharmacies.

The resulting two alternatives (Alternatives 1 and 2) can be filtered in view ofthe core competences and weaknesses. If they are to exploit core competences ofcorporate resources or strengthen competitive advantages for future resources, thealternatives are sharpened toward this direction. In contrast, if they tend to weaken

aBefore the year 2000, EDI service had spreaded through the medical S/W firm’s HIS in parallelwith K Corporation’s HIS for clinic because EDI S/W module was embedded in HIS. Therefore,medical S/W firms began passively to adopt EDI service marketing because they had some doubtsthat K Corporation would have strategies to branch out its HIS market in the future. Thus, KCorporation changed its perspectives of medical S/W firms by converting obstacles of its businessto a win–win situation and being an essential partner.



the corporate resources, the opposite is the case. Appendix 4 summarizes the finalstrategic alternatives after this filtering.

7. Strategy Evaluation

This phase evaluates strategic alternatives. Business performance measures areeither financial (e.g. BFP) or social (e.g. BSP). Financial measures do not seemto be applicable for stakeholders. It is difficult to predict future financial perfor-mance in the case of new strategy. Unlike financial measures, social measures appearto be relatively convenient. Here, we propose a particular social measure called SRI(stakeholder relationship index).

SRI consists of two major components: stakeholder’s importance and stake-holder’s relationship. Typically, the stakeholder importance has been determined interms of power6,11,15 or salience.21 The stakeholder importance may be the combi-nation of power, legitimacy, and urgency. Behind this measurement lies the implicitassumption that any stakeholder’s importance does not change; i.e. it does notdepend upon our business strategy.

Stakeholder’s relationship was measured in terms of interdependence,11,27 coop-eration and threat,10 the relationship qualities among internal, external, and dis-tal stakeholders,31 or the KLD index.4 The stakeholder’s relationship can consistof absolute magnitude and stakeholder potential. We employ interdependence forabsolute magnitude, and cooperation and conflict for stakeholder’s potential.b

Now, we can calculate SRII which measures how a new strategy can improveSRI. SRII may be computed as SRII = SRI (new) − SRI (current). SRI (t) denotesthe SRI when a particular strategy t is adopted. SRI (t) can be computed as follows.

SRI(t) =n∑

i=1

IM(i) × RL(i, t)/ n∑

i=1

IM(i);

RL(i, t) = ID(i, t) × {wcpCP (i, t) − wcfCF (i, t)

};

where

RL(i, t): stakeholder relationship between stakeholder i and SBU for strategy t;ID(i, t): interdependence between stakeholder i and SBU for strategy t;CP(i, t): cooperation value between stakeholder i and SBU for strategy t;CF (i, t): conflict value between stakeholder i and SBU for strategy t;n: total numbers of key stakeholders;wcp, wcf : weighting factors (wcp + wcf = 1).

The weights like wcp and wcf can be determined as perceived by managers.A more palatable alternative would be the use of the industry wide survey.31 Ifthe SRII values for both strategic alternatives are negative, managers can conclude

bThese relationship variables are easily changed depending upon strategic circumstances. A profileof cooperation and conflict has generally the opposite and but not just.



that the current strategy is better and continue to employ it. Otherwise, they canchoose the alternative whose SRII is greater. In our case, it is found that the secondstrategic alternative is better. Appendix 5 illustrates how this decision is made.

8. Strategy Implementation

This phase makes a detailed action plan, implements it, and gathers feedback for itsnew strategy. For making the action plan, the gap between the current capabilityand that of enacting a new strategy is analyzed.13 Because of this gap, detailedaction plans are prepared with appropriate milestones. This action plan in medicalEDI business is depicted in Appendix 6. Clearly, corporations need to monitor thefinancial results according to the new strategy. If the results are not satisfactory, itis desirable to formulate the business strategy again.

The actual strategy adopted by medical EDI business is shown in Table 4.Comparing this actual strategy with Alternatives 1 and 2, Alternative 2 is moresimilar in that medical S/W firms are major joint marketing partners. Interestingly,despite being secondary stakeholders, medical S/W firms were shown to be thekey stakeholders for the success of this business. This similarity confirms that ourproposed methodology is suitable for formulating business strategy for medical EDIbusiness in 2000.

9. Discussion

Here, we highlight the business results of three cases adopted by our methodology.Table 5 summarizes BFP results during the 3 years after adopting new strategies.

In the first case, it is noted that the medical EDI business has reaped muchbenefit from adopting new strategies. The year 2000 was the turning point for

Table 4. Actual strategy in medical EDI business.

Strategy Description

1. The counterplan according to the rule

— Establish a committee including government, health insurance corporations, medicalgroups, pharmaceutical groups, and K Corporation

— Establish an executive team including K Corporation and S/W firms (independent of thecommittee)

2. The suggestion to the government

— Enact the law for financial merits when the institutions use EDI service

3. Marketing for new subscribers

— Change joint marketing partner from medical insurance corporations to S/W firms

• Discard K Corporation’s own HIS S/W• Build new package service: ADSL, EDI, and HIS• Share the benefit for EDI fare (10% ∼ 15%)

— Execute joint marketing with HAG, MAG, and PAG— Develop web-based EDI service



Table 5. BFP results of three business cases.

Business Case Year Number of Sales Net Income ROS Growth in SalesSubscribers (million Won) Before Taxes

(million Won)

Medical EDI 2000 31,389 (47%) 14,050 3,082 0.22 1.11(case 1) 2001 40,468 (61%) 17,205 5,527 0.32 0.22

2002 48,164 (72%) 27,795 7,423 0.27 0.62

Electronic 2002 17 (40%) 1,319 −762 −0.57 —Prescription 2003 26 (61%) 2,085 −911 −0.43 0.58(case 2) 2004 35 (83%) 2,431 −450 −0.18 0.16

Tax receipt 2004 500 (1%) 140 −1,127 −112.7 —for cash 2005 (E) 30,250 (45%) 5,082 −721 −0.14 507.20business 2006 (E) 55,500 (83%) 9,252 224 0.02 0.825(case 3)

1. In December 2002, possible subscribers are 66,767 (total medical institutions) for cases 1 and 3,and 42 general hospitals for case 2.2. ( ) denotes the ratio compared with total possible subscribers.3. (E) is the estimated data in the future.

positive ROS. In 2002, sales volume increased four times compared with that in1999. Therefore, it would appear that the actual strategy from our methodologyis satisfactory. Strategy managers tend to believe that the challenges to formulatebetter strategies are responded well. For the second case, it is noted that the elec-tronic prescription has extended to about 35 hospitals. F Corporation market shareincreased over 80%. Furthermore, the result in the tax receipt for cash business caseshows a rather surprising result. All of the medical S/W firms except for hospitalscollaborated with F Corporation and their market ratio was found to be over 90%.Therefore, F Corporation would be able to extend the service area to most med-ical institutions via the medical S/W firms. In sum, our methodology is likely toproduce more robust strategies.

10. Comparison of Methodologies

Methodologies for formulating business strategies may be compared as shown inTable 6. Comparison criteria include strategic focus, analysis method, key factors,performance variable, application area, strength, and case. Our methodology differsas follows.

First, our methodology focuses on the external environment of SBU such asstakeholder demands and relationships. By contrast, Grant’s12 methodology empha-sized the corporate internal resources and capabilities. Currently, our perspectiveis more widely accepted because understanding the external environment is likelyto offer an immense opportunity. Second, past methodologies gave little researchfor comparing strategies in a systemic fashion. We introduce the concept of stake-holder’s relationship improvement for this comparison (e.g. SRII). Improving therelationship between business organization and stakeholders may create a ladder of



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mutual benefits. Third, our methodology can be applicable to various businesses.There remains vast potential to create new businesses and reshape stakeholders inimmature industries. Business leaders will be often faced with the need for system-atic strategy formulating methodologies like ours.

Conclusion

The implementation of great strategies is an art. Yet, the description of strate-gies can be a science. Helping people describe strategies in a more disciplinedway will increase the likelihood of their successful implementation.16 For thispurpose, this paper proposes a methodology for formulating business strategiesfrom a stakeholders’ perspective. A business tends to have strong attachmentsfor its stakeholders. They represent an important component of a corporate iden-tity. Our methodology can help business leaders recognize the significance of thestakeholders’ influence on their businesses, make practical use of stakeholders’ het-erogeneous demands, and find a better business strategy in financial and ethicalaspects.

Our methodology has the following unique features. First, it is particularly usefulfor businesses having complicated and conflicting stakeholders. Second, formulat-ing business strategies begins with stakeholders’ demands. Third, business socialperformance is employed for evaluating strategies. The following future researchmay sharpen our current study. First, applying our methodology to other indus-try sectors may be of interest. By applying the lessons from these experiences, ourmethodology will be able to make the transition to a more systematic approach.Second, estimating stakeholders’ variables is arguably one of the most difficult tasks.Fending off these difficulties must be at the top of every strategic manager’s agenda.Building a decision support system with related knowledge repository may relievethese difficulties. We are in the process of implementing this system by employ-ing CBR (case-based reasoning) technique and will report the result in the nearfuture.

Appendix 1: Electronic prescription business (F Corporation)and tax receipt for cash business (K Corporation)

A case for electronic prescription business in F Corporation: Electronicprescription service enables the electronic delivery of prescription from medical doc-tor to pharmacist through the internet. In Korea, this service can be practical dueto the enforcement of the rule on the separation of medical practices and drugdispensation in July 2000 and the widespread use of ADSL in hospitals and phar-macies. This service provide several merits; (i) no need to re-enter the prescriptioncontents in pharmacy for medical claims, (ii) reduction in the patient’s waiting timeduring compounding of medicine in pharmacy, and (iii) reduction in the number ofprescription copies.



F Corporation was founded for this business. Although this business had goodprospect in the future, it had several critical strategic problems due to compli-cated stakeholders’ conflicts (government, hospitals, pharmacies, pharmacy asso-ciation groups, patients). Major significant conflicts among stakeholders can beillustrated by the service charge between hospitals and pharmacies, the deliverymethod of electronic prescription among pharmacies, the illegal collusion betweenhospital and pharmacy, and the government’s penalty for unfair transaction amongpharmacies.

In order to make this business successful, F Corporation is confronted withstrategic problems: (i) the lack of balance in the management of stakeholders,(ii) the subject of service charge, and (iii) the resolution of conflicting stakeholders.

A case of tax receipt for cash business in K Corporation: In Korea, thegovernment enacts the law of tax receipt for cash; the receipt with a tax acknowl-edgement number is issued to the cash transaction over 5,000 Won from the begin-ning of year 2005. The purpose of this law is to have transparent cash transactionto the retailers and independent businesses; it is similar to the law of tax receipt forcredit card enacted several years ago. Deduction of the earned income tax to theamount of credit card transaction has resulted in the surprising increase in creditcard transactions. Despite the increases in VAT (value-added tax) and income tax,the excessive transactions of credit cards have resulted in the bankruptcy of about3 million people and caused serious social problems. Therefore, the governmentenacts the law of tax receipt for cash. To activate this law, the Tax AdministrationAgency raised the execution corporation of tax receipt (ECTR) for cash businesswhich is to install issuing receipt systems in the shops of retailers and independentbusinesses.

Although it has business experience in the medical field, K Corporation isconfronted with strategic problems due to complicated stakeholders (government,hospitals, clinics, pharmacies, hospital agency groups, medical association groups,pharmaceutical association groups, patients). First, the organizational resistanceto this law enlarges in medical institutions. Although government has enforced thelaw through the bill receipt of medical treatment several years ago, only the hospi-tals actively participated because the deduction rate to the small amount of moneyin clinics and pharmacies is small. Second, the competition of this service amongECTRs in the medical field is probably intense. Most medical institutions and phar-macies already installed the device for credit card via VAN (value-added network)corporations using telephone network. This device can be used for ECTR servicewith easy maintenance and competition with VAN corporations is inevitable. Third,the implementation of this law enforcement in medical institutions and pharmaciesis not ready because of the shortage of exclusive printers for this service.

In summary, several strategic problems are noted: (i) the lack of balance inthe management of stakeholders, (ii) the lack of counterplan to the competingenterprises, and (iii) insufficient business circumstances.



Appendix 2: Stakeholder analysis report

Stakeholder Stakeholder Variables Stakeholder Demands DemandCriticality

PW LG UG ID CP CF

GOV 5 4 5 3 3 2 (1) Keep S/W upgraded and stableand spread it rapidly when therules are changed 5

(2) Prepare new EDI S/W versionsuitable for the rules beforeJuly, 2000 2

(3) Manage the conflicts betweenmedical institutions and S/Wfirms 3

HOS,CLN, DCL

5 4 5 4 3 4 (1) Speed up the data exchangeand change fare rule (fixed fare) 3

(2) Keep S/W upgraded and stableand spread it rapidly when therules are changed 5

(3) Need more detailed screeningresults and rapid return ofinsurance money from medicalinsurance corporations than theother delivery methods 5

PHA 4 4 5 4 3 4 (1) Keep S/W upgraded and stableand spread it rapidly when therules are changed 5

(2) Need more detailed screening

results and rapid return ofinsurance money from medicalinsurance corporations than theother delivery methods 5

HIC 4 5 4 5 4 4 (1) Assist the screening S/Wupgrade for the rule 4

(2) Assist the extension of serversand networks 3

(3) New EDI standard format ofinsurance claims must includethe prescription details 4

SHH 5 5 5 5 5 1 Return rapidly to the investmentand accomplish the profit 5

MSW 2 3 5 4 2 1 (1) Ally strategically with KCorporation for joint S/Wupgrade and marketing 5

(2) Share the benefits for EDI fare 5(3) Be assisted in initial marketing

and S/W upgrading costs 4(4) Discard to spread K

corporation’s HIS S/W forclinic EDI service 4

IAI, AIC 2 3 3 4 4 2 Assist the screening S/Wupgrade for the rule 3



Appendix 2. (Continued)

Stakeholder Stakeholder Variables Stakeholder Demands DemandCriticality

PW LG UG ID CP CF

OCL 3 3 3 4 3 2 Need more detailed screeningresults and rapid return ofinsurance money from medicalinsurance corporations than theother delivery methods 5

HAG, MAG,PAG

4 3 3 1 2 3 Lower EDI fare (at least 20%) 3

OEP 1 1 3 2 1 3 — —

ODM 3 4 2 5 1 4 — —

GOV: Government, HOS: Hospital, CLN: Clinic, DCL: Dental Clinic, PHA: Pharmacy, HIC:Health Insurance Corporation, SHH: Shareholder, MSW: Medical S/W firm, IAI: Industrial Acci-dent Compensation Insurance Corporation, AIC: Automobile Insurance Corporation, OCL: Orien-tal Clinic, HAG: Hospital Association Group, MAG: Medical Association Group, PAG: PharmacyAssociation Group, OEP: Other EDI Provider, ODM: Other Delivery Method Related Firm, PW:Power, LG: Legitimacy, UG: Urgency, ID: Interdependence, CP: Cooperation, CF: Conflict.

Appendix 3: Questionnaire items for evaluating stakeholder variables

Variable Item

Power Definition: a capability of stakeholder to get our business done

(1) This stakeholder has power, whether used or not

(2) This stakeholder has access to, influence on, or the ability to impact ourbusiness whether used or not

(3) This stakeholder has the power to enforce its demands

Legitimacy Definition: a generalized perception that the actions of a stakeholder aredesirable, or appropriate within some socially constructed system of norms, andbeliefs

(1) The demands of this particular stakeholder are viewed by our managementteam as legitimate

(2) Our management team believes that the demands of this stakeholder areappropriate

(3) The demands of this stakeholder are legitimate

Urgency Definition: the degree to which stakeholder demands call for immediateattention

(1) Its relationship with our business is urgent

(2) This stakeholder actively seeks the attention of our management team

(3) This stakeholder urgently communicates its demands to our business

Interdependence Definition: the occurrence when there is symmetry in exchange relationship

(1) Our business success depends the joint collaboration of this stakeholder

(2) Our business organization encourages the joint collaboration with thisstakeholder

(3) This stakeholder depends on our business in order to accomplish its projectwork

(4) Our business depends on this stakeholder in order to accomplish ourbusiness success



Appendix 3. (Continued)

Variable Item

Cooperation Definition: the stakeholder practice of cooperating with business organizationfor success

(1) This stakeholder has the willingness to cooperative with the businessorganization

(2) This stakeholder is likely to supportive of the business organization

(3) This stakeholder has likely to form coalition with business organization

Conflict Definition: a process in which a stakeholder perceives that its interests arebeing opposed or negatively affected by business organization

(1) When we disagree with this stakeholder, we do not try to bring bothparties’ concerns out

(2) In situation where this stakeholder disagrees with us, it stands firm inexpressing its viewpoint

(3) This stakeholder avoids discussions with us when confrontations are likelyto occur

(4) When this stakeholder disagrees with us, it does not compromises to reachan acceptable solution

(5) When this stakeholder disagrees with us, it does not follow our suggestions

Appendix 4: Strategic alternatives report

Alternative Description

Alternative 1 (1) The counterplan according to the rule

— Establish the committee including related primary stakeholders and KCorporation

(2) The suggestion to government


(3) New marketing for subscribers

— Develop Web-based EDI service— Build new package service: ADSL and EDI— Consider to reduce EDI fare or free EDI fare in some period for new

subscribers— Decrease assistance to health insurance corporations

Alternative 2 (1) The counterplan according to the rule

— Establish a committee including related to stakeholders and KCorporation

— Establish the executive team including K Corporation and S/W Firms

(2) The suggestion to the government


(3) New marketing for subscribers with S/W Firms

— Develop Web-based EDI service— Build new package services (ADSL, EDI, and HIS) and discard K corpo-

ration’s HIS S/W— Ally for joint marketing, benefit shares, capital investment, and new busi-

ness collaboration (e.g. electronic prescription)



Appen

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OS

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OC

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W5

55

54

45

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1LM

44

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54

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33

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31

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55

55

54

52

53

33

33

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IM14/3

14/3

14/3

14/3

13/3

14/3

53

10/3

8/3

8/3

310/3

10/3

10/3

5/3

Curr

ent

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ID3

44

44

55

54

44

41

11

2C

P3

33

33

45

12

44

32

22

1C

F2

44

44

41

41

22

23

33

3R

L3/2

−2−2

−2−2

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24

42

−1/2

−1/2

−1/2

2IM

∗RL

21/3

−28/3

−28/3

−28/3

−13/6

050

−45/2

20/3

32/3

32/3

6−5

/3

−5/3

−5/3

10/3

Alt

ernati

ve

1ID

44

44

45

54

44

44

11

12

CP

44

44

44

51

24

43

33

31

CF

33

33

34

15

12

22

33

33

RL

22

22

20

10

−82

44

20

00

2IM

∗RL

28/3

28/3

28/3

28/3

26/3

050

−24

20/3

32/3

32/3

60

00

10/3

Alt

ernati

ve

2ID

44

44

45

54

44

44

11

12

CP

44

44

44

41

54

43

33

31

CF

33

33

23

15

12

22

33

33

RL

22

22

45/2

15/2

−88

44

20

00

2IM

*R

L28/3

28/3

28/3

28/3

52/3

35/3

75/2

−24

80/3

32/3

32/3

60

00

10/3

Str

ate

gy

Alt

ernati

ve

1A

lter

nati

ve

2C

urr

ent

Fin

alStr

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gy

SR

I656/354

823/354

181/354

Alt

ernati

ve

2SR

II475/354

642/354

—



Appendix 6: A partial action plan for medical EDI business

Strategy Gap Analysis Action Item

DevelopWeb-based

(1) Need additional budgets forpurchasing Web

2000.1: Survey S/W specificationrequirements

EDI service EDI engine S/W package 2000.2: Supplement additional budgets

(2) Need additional systems andoperators for operating

2000.3 ∼ 2000.6: Purchase Web EDIengine S/W

and maintaining the existingvalue added network

2000.7: Install Web-based EDI engineS/W

(VAN) EDI engine S/W andthe Web-based EDIengine S/W

2000.3 ∼ 2000.7:Develop EDI clientS/W and application programinterface (API)

2000.8 ∼ 2000.9: Test the integrationof S/W modules

2000.10: Start Web-based EDI service

Ally for jointmarketing,benefit shares,and capitalinvestment inmajor S/Wfirms

(1) Need additional budgets forbenefit share

(2) Associate existing marketingmanagers with jointmarketing team

(3) Check legal issuees in orderto invest in the stocksof S/W firms

2000.1: Analyze relationships betweenbenefit share and marketingsynergy

2000.2: Supplement additional budgets2000.3: Ally with major S/W firms2000.4: Organize the joint marketing

team with major S/W firms2000.5 ∼ 2000.7: Develop package S/W

(EDI + HIS)2000.5 ∼ 2000.9: Build package service

Web-based EDI + HIS +ADSL

2000.10: Provide package service2000.10 ∼ 2000.12 : Negotiate S/W

firms stock price2001.1: Take S/W firm stocks in

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