Business-Society Relations in Retail Value Chain (23E54000, 6cr)

12.9.2012Introduction to nonmarket environment and

stakeholder management

Mika SkippariAalto University School of Economics

External and internal environments of a firm (Steiner & Steiner 2009)

Economic- Economic system, economic fluctuations

Technological- Innovations, R&D

CulturalValues, norms, customs

Political-Political system, role of government

Judicial- legislation,regulation, legal system

Ecological-Natural resources,state of nature,the effects of economic activityto the nature

FIRM

Corporate culture

ManagementOwners

Employees Board

Market and nonmarket environment (1)

• Basic tenet: firms interact with various market and nonmarket actors

• Market environment: interactions between the firm and other actors intermediated by markets or private agreements– Interactions are voluntary– Exchanges determined by price mechanism– Collaboration between competitors is restricted (e.g.

cartels)

Market and nonmarket environment (2)

• Nonmarket environment: interactions intermediated by various institutional actors, such as the public, stakeholders, and media– Interactions can be voluntary (proactive lobbying) or involuntary

(government regulation, consumer activism)– Exhanges determined by information– Collaboration between private actors is allowed (e.g., Toys R’

Us and McDonalds in Japan)

• Interactions in both environments are guided by demand and supply– Market environment: demand and supply of goods and services– Nonmarket environment: demand and supply of political

decisions (public goods)

Special characteristics of nonmarket environment• Majority rule• Due process• Broad enfranchisement• Collective action• Publicness

Market strategy

• Concerted pattern of actions taken by a firm in market environment to improve economic performance

• Actions taken by (direct or indirect) competing firms (e.g., retailer vs. retailer, or retailer vs. suppliers)

• Objective is to exploit the existing opportunities in market environment

Nonmarket strategy• Concerted pattern of actions taken by a firm in nonmarket

environment to improve overall (not just market) performance (e.g., reputation, legitimacy within society)

• Attempts of a firm to manage its business-society relations

• Can take a form of government lobbying, or taking part in public discussion on societal norms and values (e.g., by societal marketing: fair trade products), or responding to stakeholder pressures (e.g., by cause-related marketing)

• Objective is to maintain the existing or explore new opportunities in the nonmarket environment– Defensive vs. proactive nonmarket strategy

Integrated strategy: linkages btw market and nonmarket strategy

• Nonmarket strategy is an essential part of corporate strategy that should be intergrated with market strategy

• Responsibiliity of TMT in managing integrated strategy

• The target of integrated strategy is to establish a fit between internal activities of a firm (market and nonmarket strategies) and external conditions (characteristics of market and nonmarket environment)– Nonmarket assets: Firm competencies, bargaining power, reputation,

managerial skills– Control vs. freedom of opportunities: resource dependency on

nonmarket artors

Integrated strategy Baron, D. (1995). "Integrated strategy: market and nonmarket components." California Management Review 37(2): 47-65

MANAGEMENT

Integrated strategy

Market environment Nonmarket environment

implementationcoordination

market(competitive)analysis

marketstrategyprocess

nonmarketanalysis

nonmarketstrategyprocess

Four I’s of nonmarket environment

• Issues (what nonmarket strategies address)• Institutions (set of regulative institutions)• Interest (individuals and groups with preferences of

stake in an issue: stakeholders) • Information (what interested parties know about the

issues and preferences and capabilities of other interested parties)

Institutional constraints in nonmarket environment

• The nonmarket environment of a firm is shaped by formal and informal institutional contraints

• Formal constraints: laws and rules– E.g. labour laws, tax laws; environment laws – Coercive factors, determine how firms have to behave: ”rules of

the game”– Noncompliance leads to legal sanctions (fine, jail)

• Informal constraints: norms, culture, habits, customs– Generally accepted ways of conduct– Do not lead to sanctions, even if not complied – However, noncompliance can affect on short (and even long)

term performance of a firm– CSR activities try to tackle these constraints!

Institutional pressures affecting firm activities

• Why certain firm activities and structures are established and why do firms seem to mimic each others, although it might not be the most efficient solution?– C.f. QWERTY

• Traditional institutional theory explains this by external, institutional pressures that force and guide firms to adapt certain behavior

• Regulative, normative and cognitive pressures that lead to institutional isomorfosis

• A firms seeks to achieve and maintain a legitimate position within its institutional environment; this is why it seeks adaptation

Institutional pressures and nonmarket strategy

• Firms and organizations are not independent rational actors; instead they are social systems, that are being affected by various institutional (social, cultural, economic, political) pressures

• These pressures are created by both competitors and societal stakeholders

• Firms inherently attempt to adapt to their external environment in order to survive – Obeying the law and norms, thus seeking for institutional

legitimacy: conformity to institutional rules or expectations– The aim of the nonmarket strategy is to minimize and reduce

the problems caused by uncertainty in nonmarket environment

Dynamics of formal and informal institutional contraints

• Informal constraints do not change as fast as formal rules– They are difficult to change, because they are deeply-rooted,

established mental models

– Informal constraints shape and guide human and corporate activities stronger than written rules of conduct (e.g.. Economic depressions affects consumer behavior over long term

– In addition, when formal rules change (e.g. change in political system, legislation), informal ways of conduct may prevail, even though the new legislation would forbid it (e.g., cartels in Finland)

Dynamics of integrated strategy

• Market and nonmarket environments change over time• Variable degree of market and nonmarket pressures• Evolving importance of nonmarket strategy• How nonmarket issues arise and how various

stakeholders are affected is important for a firm to understand– Significance of a stakeholder group– The more stakeholder groups are affected the more challenging

the situation

Strategic choice vs. institutional pressures

• Alternative responses to institutional pressures: responsive adaptation, proactive shaping, resistance, non-activity

• Management of a firm interprets and perceives differently the institutional pressures emerging from the environment (e.g. stakeholder demands)

• Thus, firms react in a different ways to these pressures– E.g. the level of CSR activities varies across firms

• Firms’ earlier experiences, managerial mindsets, industry characteristics and development phase affects on how firms react – E.g. emergence of payday loan markets

Institutional environment and nonmarket strategies

Firm- TMT perceptions

Industry (e.g. retailing)

Institutional environment- Institutional setting - Institutional stakeholders- ”Rules of the game”

nonmarketstrategies

Competitive pressures

Constraints andopportunities

Constraints and opportunities

nonmarketstrategies

Key characteristics of institutional environments

• Each country has a specific institutional structures (due to social, political and cultural traditions)

• Each industry has its specific institutional structures– Industry-specific regulation (e.g. opening hours in grocery retailing)

• Each company perceives the environment from their own perspective

• Institutional environments change over time (although relatively slowly)– E.g.,Toys R’ Us in Japan: Large-Scale Retail Store Law– Change can be brought about by company (or group of

companies), legislators, consumers, or a combination of them (e.g., fuel-efficient cars)

Institutional environment and economic growth

• External environment is the source of either stability or instability to firms, depending on the stability and predictability of the institutional setting

• Effective institutional environment guarantees the basic rights (civil rights, property right etc)

• Stable institutional structure of a society is associated with long-term economic growth

• In general, developed, democratic countries are stable environments, whereas non-democratic developing countries are the most unsecure and unstable

Global business environments: combination of market and nonmarket environments

Attarctivemarkets

Non-attractivemarkets

Unstableinstitutionalenvironment

Stable institutionalenvironment

NigeriaIraqIran

China

Scandinavian countries,Germany, Netherlands

USA

Russia Japan

Greece, Italy

Stakeholders: what they are and what they mean to a company?

• Definition: homogenous, clearly identifiable individual or a group of individual that have a stake over a firm’s actions

– Individual, group, organization, institution, society, environment

• Internal vs. external stakeholders

• Primary vs. secondary stakeholders

• Mutual dependence and interaction relationship

– A stakeholder of an organization is any group or individual who can affect or is affected by the achievement of the organization’s objectives.

Stakeholder approach to business-society relations

Firm

Government Employees

Community Owners

Minorities

Unions

Activist groups

Local

National

International

Citizens

NGOsCustomers Competitors

Private

Institutionalinvestors

Board membersEconomic environment

Technological environment

Social environmentPolitical environment

Sourcee: adapted from Carroll & Buchholtz, Business and Society, 2006, p. 70

Media

Evolution of stakeholder thinking in Finland• The power relations of stakeholder groups vary over time

• Owners and financiers dominated in the turn of 20th century (internal stakeholders)

• The importance of employees increased during the early 20th century (emergence of unions)

• The central role of government during the regulated economy after the world war (total regulation)

• The importance of external stakeholders, such as consumers and activist groups is relative recent phenomenon (late 20th century)

• At the same time, due to neoliberal economic policies, the power of stockholders and financiers has increased…leading to a debate between shareholder and stakeholder thinking…and growth vs. degrowth debate

Key issues in stakeholder management

• What are the stakeholders of a firm?• How many stakeholders’ interests a firm has to take into account

simultaneously?• Which stakeholders are the most crucial and important? • How a firm can find a balance between opposing stakeholder

demands? • How much resources should a firm allocate to the management of

stakeholder relations?

Further tips for term paper

• Analyse your case company from integrated strategy perspective

• Identify recent important nonmarket issue(s) that have affected your case company, and how the company has responded to these issues