In management, a stakeholder approach is the practice that managers formulate and implement processes that satisfy stakeholders' needs to ensure long-term success. According to the degree of participation of the different groups, the company can take advantage of market imperfections to create valuable opportunities. It emphasizes active management of the business environment, relationships and the promotion of shared interests. This approach is based on stakeholder theory, which arises as a counterpart to business practices and management that focus on shareholders satisfaction. The implementation of this approach can reinforce the firm values and create competitive advantage. However, it has been criticized for overvaluing stakeholders and its difficulty to reach consensus.
Utility
Competitive advantage
This approach may create competitive advantage because it links the firm and stakeholders. The latter perceive the coherent application of the organizational values and relate to those. In that way, the company has the information about stakeholders it needs to treat them well and develop important initiatives. This reinforces the firm’s reputation and loyalty among customers and other stakeholders, creates stronger brand recognition and increases trust in the firm. Even if there are limits in loyalty and reputation can be damaged, those two key elements can make a big difference creating barriers to other companies that may want to have information about stakeholder utility functions. Proponents maintain that a firm that follows the stakeholder approach gets the information it needs to satisfy the stakeholders’ needs, making it easier to develop expertise. Those acquired skills can be transmitted, promoted and reinforced across the business operation of the firm creating core competencies. Over time, this approach can become an indispensable issue in the organizational culture.
Value creating through innovation
Firms that manage for stakeholders are more able to attract a higher-quality workforce. Employees’ job satisfaction has an impact on the firm’s ability to foster innovation. Workers who are satisfied with their jobs are more likely to engage in long-term thinking and generate potentially valuable ideas. Those firms can use information about stakeholder to devise new ways of satisfying them. Reciprocity is a key aspect in this approach: when stakeholders stand to benefit, they are more likely to reveal information about their utility function. That is why firms and firm managers can better meet consumers' needs by understanding their own customers and suppliers and using this information strategically and flexibly.
Limits
Divergent interests
The implication of all the stakeholders may produce divergent views making it difficult to reach consensus. Each stakeholder may care mostly about its own benefits or self-interests. Trying to satisfy a large number of players complicates governance. It can result in time consuming in engaging all the parties. Moreover, in this approach, an equality of stakeholders and business is implied in negotiating issues of mutual interest. That assumption has been critiqued in terms of an inequality of resources, negotiating power and time required. The identification of prices and opportunity costs for the different stakeholders difficult and reduce the operability of this approach.
Overvaluing stakeholders
It has been suggested that obtaining information about stakeholders' utility functions may produce costs that can exceed the benefits. Therefore, in its intention to create value, managing for stakeholders can end up allocating too many resources to stakeholders. Also, having into account that the power among stakeholders is not equal, some powerful actors can get much of the firm’s profitability. And with that distribution of value, shareholders cannot expect a maximization of returns.
