Wednesday, November 16, 2011

Considering all relevant stakeholders: A question of will

New and modern strategic management approaches which also consider societal demands still aren’t the norm in many corporations. This becomes clear one sees that even technically highly innovative corporations sometimes follow old strategic approaches.

Last month Apple launched the new iPhone 5 to the market. As its precursor, it was assembled in factories like Foxconn in China. Foxconn won notoriety when 13 workers committed suicide because of working conditions. Some improvements were subsequently made but the situation is still far from satisfactory. From the selling price for an iPhone 4 of $ 560, material costs of $ 187 and the assembly in China comes to just $ 7 (according to isuppli and the German ZDF television broadcast “Frontal 21”). Hence, Apple has a gross margin of $ 366 or 65%, respectively per one sold iPhone. Experts have calculated that if the production would be in the USA, the costs would be ten times higher, but the gross margin for Apple would still be about 50%.

This simple calculation reveals that – although being a technically highly innovative company – the strategic approach of Apple is still guided by the old, short-term profit-maximization strategy for owners and managers, at the expense of other stakeholders. According to such a conception of corporate strategy, society (and with it all stakeholders) gets compensated for the risks that result from the corporation’s activities by means of dividends for the stockholders. This is, however, a very narrow understanding of compensating society.

A broader and more modern strategic view recognizes that besides the stockholders there are also stakeholders like employees, suppliers, clients, communities having relevant and legitimate stakes in a corporation. The reason is that they all contribute to the value-creating process of a corporation and are likely to also carry risks. This gives them the right to be considered in the distribution of the created value.

In the case of the iPhone, this would mean that workers in the factories in China get compensated more appropriately: not only concerning wages but also concerning conditions at the workplace itself, company sponsored accommodations etc. This would result in a shift away from a short-term financial profit-maximization strategy towards a socially more sustainable strategy, fully acknowledging the stakeholder worker’s participation in the value creation chain.

In the long run, it can be assumed that a more appropriate consideration of all relevant stakeholders would lead to a larger and more sustainable value of the corporation (as long as innovation is still provided for): The clients would have no reason to boycott the product because there would be no horrifying pictures in the media following non-compliance with worker rights, no potentially costly juridical process would be menacing, institutional investors had nothing to complain about and the stockholders would have titles with potentially more sustainable values. The figures above show that this would be possible. Lastly it is a question of will and insight of the management to adopt an innovative management approach that considers relevant stakeholders more strongly.

Claude Meier

Links and literature:

Frontal 21 (ZDF):


Friedman, Milton (1962): Capitalism and Freedom. Chicago, IL: University of Chicago Press.

Hill, Ch. W. L., Hones, Th. M. (1992): Stakeholder-Agency Theory. Journal of Management Studies 29(2): 131-154.

Shankman, N. A. (1999): Refraiming the Debate Between Agency and Stakeholder Theories of the Firm. Journal of Business Ethics 19: 319-334.

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