As business has developed over the years so has the management theory underpinning it. The classic definition of management as an activity is held by Henri Fayol, “To manage is to forecast and plan, to organise, to command, to coordinate and to control”.
Management Theory has evolved from being viewed in isolation where a mangers social responsibility solely relied on increasing profits, to a more modern view of how a decision will affect others.
The modern manager asks themselves what the flow on effect of decisions will be and will it be viewed by stakeholders in a positive or negative way. The effect of evolving managing theories has had the consequence of closing the gulf between the business and the ethical world.
A key challenge for modern management theory is to reform economic thinking so that it can include ethical challenges. It can be argued that the work of Milton Friedman, Michael Jenson, Michael Porter and Oliver Williamson all added important building blocks to the development of stakeholder theory.
There are four pivotal management theories that need to be explored further in order to gain a better understanding of the evolution of management theory.
Success Equals Profit maximisation
Milton Friedman was an American economist who received the Nobel Prize in Economic Sciences in 1976. He is most well-known for his work with the Chicago school of Economics and his rejection of Keynesianism in favour of monetarism.
Friedman posited that the purpose of business is to “use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud”.
His work suggests that business should be viewed in the context of maximising profit. Friedman’s management theory is held as a classic dichotomy between maximising profits and stakeholder theory.
Essentially Friedman believed that as long as actions of the firm were legal then they could do whatever was necessary to maximise profits. He was one of the earliest exponents of the “Greed is Good” mantra.
Friedman did suggest in 1970 that the long-term interest of a large corporation in a small town was to develop public amenities or improve government. Although argued by Friedman that it is entirely justified and is not a form of social responsibility it is an early indication that business or stakeholder decisions cannot be made in a vacuum.
Michael C. Jensen is also an American economist who has focused on the areas of the capital asset pricing model, stock options policy and corporate governance. In the year 2000 he did some further work on the relation between value maximisation and stakeholder theory
In it he posits the relationship as enlightened value maximisation and believes that when managers make decisions it should be the with the view of keeping the long-term profit maximisation of the firm as the central theme. However, he also speculated that managers should think creatively on how an organisation can engage all constituencies of the firm.
Essentially, he identifies one of the first steps towards stakeholder theory. That value maximisation comes from engaging all parts of the firm.
Business as Competitive Strategy Michael Porter is a Harvard Business School academic and is best known for the development of his Porter’s Five Forces analysis, which is frequently used in business as part of its strategic development.
The tenet behind the work of Michael Porter is that organisations search for sustainable competitive advantage in order to be successful. Competitive advantages can take two forms: cost advantage and differentiation.
Porter extended the work of competitive advantage by developing a description of five forces that focused on the nature and level of competitive forces and appeal of an industry in terms of profitability.
The five forces include;
- The threat of new entrants
- Bargaining power of customers
- Bargaining power of suppliers
- Threat of substitute products or services
- Threat of new entry
The work of Porter focuses on the organisation’s struggle to gain advantage. The organisation therefore must find strategies that will create advantage for the long term. These sustainable strategies may include environmental and corporate responsibility that will require interaction with external stakeholders. Porter’s strategy therefore is another step in the evolution of stakeholder management theory.
Porter recognised that in order to continue to have a competitive advantage that the firm needs to engage with its stakeholders.
Stakeholder Theory Consolidation
The development of stakeholder theory gained momentum through the 1980s and 1990s. The focus moved beyond stakeholders within the organisation to parties either interested or able to influence the organisation in the external environment.
Further work examined methods for identifying and analysing individuals and groups that have influence or are influenced by the organisation. Within this framework developed a method for galvanising an approach that takes place across three levels;
- Identification of stakeholders
- Develop processes that recognise needs and interests
- Establish relationships in accordance with objectives
Robert E Freeman is an American philosopher and professor of Business Administration at eh University of Virginia. He is held in high regard due to his work on stakeholder theory. In particular his seminal work, Strategic Management: a stakeholder approach which was printed in 1984.
The work of Freeman (1984) was instrumental in positioning external stakeholders with similar interests into groups. Freeman also identified stakeholders that have influence over the organisation or are influenced by the organisation.
The stakeholder salience model took stakeholder theory to the next level by focusing on the priority that managers give to competing stakeholders and their claims when making decisions. The key criteria proposed were;
- Powers of negotiation
- Legitimacy within the organisation
- Urgency in attending to stakeholders’ requirements
Stakeholder theory was developed even further by focusing on the prioritisation of the strength of the stakeholder’s influence. This is a dynamic model as the importance of stakeholder influence changes over time. It also represented a model for the organisation to focus on developing relationships in line with the influence or impact the stakeholder has on the organisation.
A key tool for the modern manager is to categorise stakeholders. in terms of their power and interest. By defining those categories, a stakeholder communication plan can be developed that will focus on their stakeholder’s power and interest.
The evolution of stakeholder management has changed considerably over time and is now regarded as a fundamental part of any organisation. For projects in particular the engagement with stakeholders throughout its life cycle can dramatically increase the chances of project success.
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