Societal Strategy for the Business Firm

Beginning in the 1950s, firms in the USA and Europe have come under increasing pressures from government, consumers, and environmental protection groups. In the USA, which remained firmly committed to the capitalist free market ideology, some firms responded to the challenge by embracing social causes and engaging in social audits aimed at establishing the firm as a responsible member of society. The majority of firms, though, made determined efforts to defeat legislation which curtailed managerial freedoms. But pressures to constrain profit-making activities continued.

The causes of the assault on the firm in a capitalist society have been variously interpreted. Many managers shared the view that society no longer understands how the free enterprise system works and the benefits it provides.

In this chapter, we explore the reasons which led the firm to its present social predicament and suggest a procedure by which each firm can formulate its own response strategy. As in the preceding two chapters, we shall find that the additional dimension of societal response requires development of significant additional and novel capabilities within the firm.

Introduction

Until recently in the USA, the approach of business managers to relating the firm to society was based on three fundamental propositions:

1.
The first, enunciated in the USA by Charles Wilson, the president of General Motors from 1941 to 1953, was that ‘what was good for GM is good for the country,’ implying that the business firm is a faithful and responsive servant of its customers.
2.
The second proposition was that ‘the business of business is business,’ or, to paraphrase Milton Friedman, to ask the firm to engage in an activity other than single-minded pursuit of profit, is a fundamentally subversive social doctrine.
3.
The third proposition, based on the theory of Adam Smith, was that the public is best served when the pursuit of profit is conducted under minimum possible constraints from society—a condition known as ‘free enterprise ’ in the USA.

Until the middle of the twentieth century, the principle of free enterprise was also accepted by the society surrounding the business firm. In part, it was accepted because entrepreneurial freedom was seen as an essential part of democratic freedoms and because free competition appeared as the optimal way to achieve the goals of fast economic growth.

From the early days of the Industrial Revolution, it became progressively evident that unrestrained behavior by the business firm produced grave social injustices. In response, society imposed a progression of restraints against such injustices: child labor laws, industrial safety, minimum wages, collusion, antitrust laws, etc. The cumulative effect of these restraints was such that, by the mid-twentieth century, it became increasingly difficult to define the meaning of the residual free enterprise .

From mid-century on, the attack on the firm accelerated, not only by governments, but also by consumers who became vociferous and critical. Confidence in business leadership progressively decreased, and the basic role of the firm in society was increasingly challenged. Today, many critics of the firm no longer accept free enterprise as an essential part of democracy, and/or challenge its relentless commitment to growth, and/or demand that the socially and physically polluting behavior of the firm be brought under control.

Business firms have responded on two fronts. The first was a defense against the proliferation of constraints on business behavior. These constraints were treated as a violation of the self-evident doctrine of free enterprise and were resisted and defeated whenever possible. As the hostile social climate continued to develop, the loss of public confidence in the firm was interpreted as an act of forgetfulness, a loss of public understanding of ‘how free enterprise works.’ Business firms, jointly and singly, mounted a vigorous educational campaign through public media, established chairs of free enterprise in business schools, encouraged teaching of microeconomics in secondary schools, etc.

On the second front, business responded to charges of physical and social pollution through ‘social responsibility’ programs: social audits, elements in conditions of working life, contribution to the welfare of the community, concern with business ethics.

During the past century of experience, the following appears to be evident:

1.
Whatever the merits of the free enterprise doctrine, its defense has been ineffective. Since the beginning of the century, and at an accelerating rate since World War II, society has imposed controls on virtually every aspect of the firm (we illustrate these controls in detail later).
2.
The claim typically advanced by business lobbies in public hearings—that all controls destroy the effectiveness of free enterprise —had been discredited. In fact, the business firm in capitalist countries has shown an amazing resiliency to proliferating constraints and continued to grow and prosper.
3.
It is clear, however, that this resilience is not infinite; that at some point accumulated controls can ‘break the camel’s back.’
4.
It appears that a reactive defense of the free enterprise doctrine is both impractical and dangerous. Impractical, because it is unlikely to arrest the accumulation of pressures on the firm: dangerous because, if the trend continues, the firm, like the proverbial baby, may be thrown out with the bathwater, its economic effectiveness drastically reduced by the surrounding constraints.
5.
It is becoming increasingly clear that neither the ‘explanation’ of free enterprise nor social responsibility programs address the basic predicament of the firm, because, on both sides of the Atlantic, the real issue is not a return to idealized free enterprise but in determining the degrees of freedom that will permit the firm to optimize its contribution to society.

If the firm is to play a more effective role in the shaping of its future, it is necessary to set aside the historical assumption that the trouble stems from a loss of understanding of the free enterprise system and to inquire into the basic reasons for the present predicament. The results of such inquiry will suggest alternative response strategies.

Evolution of the Social Predicament

In a historical perspective, it is easy to understand both the virtuous posture and the sense of hurt and puzzlement which businessmen have felt under the recent societal onslaught. For over a hundred years, the firm has been the principal and successful instrument of social progress. Like most other social institutions, the firm is the result of an evolutionary trial and error process. No single mind conceived it and no single hand created it, but the evolution occurred in a congenial social environment whose basic values were the sanctity of private property and individual freedom, and whose key objective was economic progress. The firm gained its legitimacy from the laissez-faire theory of Adam Smith which asserts that the freedom of every man to pursue his selfish economic interest results, through the ‘invisible hand ,’ in the maximum economic welfare for the society.

In this supportive environment, the firm evolved as one of the most impressive inventions made by man, it was in fact, a breeder of wealth with several impressive features as Fig. 13.1 shows:

../images/435756_3_En_13_Chapter/435756_3_En_13_Fig1_HTML.gif — Fig. 13.1
Wealth-breeding reactor

1.
It generates both goods and the buying power for the goods.
2.
It supports the expansion of the social infrastructure and provides a return to the investors.
3.
It creates jobs in three ways: in the firm itself; in the suppliers to the firm; and in the public sector.
4.
It creates intricate interconnections between itself and its environment, making its success highly dependent on how and by whom the interconnections are controlled and regulated.
5.
But the most impressive feature of this breeder reactor is that, while doing all of the above, it generates enough wealth for its own growth.

The ‘invisible hand ’ doctrine states that, for optimal performance, the regulation must be left entirely to the management of the firm. History has provided us an example with the Soviet Union that an over-controlled firm becomes inefficient and wasteful. On the other hand, capitalist experience shows that, under minimal controls, the firm has generated more economic wealth than was generated in the prior history of man. Nevertheless, as the aggregate national wealth continued to grow, its distribution remained unequal. The growth was accompanied by ecological, social, and political pollution, as well as frequent fluctuations between prosperity and recessions. Further, when left unregulated, the business firm appeared to ‘bite the hand that feeds it’ by eliminating competition, creating monopolies, and thus destroying the ‘invisible hand ’ which was the original justification for competitive freedom,

Over the years, the negative by-products of ‘free enterprise ’ continued to cumulate. We have summarized these in Table 13.1 which gives examples of unresponsiveness to customer needs, imperfections and destruction of competition, violation of social norms, pollution, political interference, and failure to serve high-priority social needs. So long as society’s primary concern was with economic growth, these negative by-products were tolerated in the name of progress.

Table 13.1

What went wrong

	Examples
A. Negative by-products
1. Poor response to customer needs	Monopoly pricing ‘product misrepresentation’, shoddy goods, ‘buyer beware’ behavior
2. Competition does not work as advertised	Very little genuine pram maximization ‘oligopolistic’ concentration, destruction of competition, growth for growth’s sake, status quo seeking, resistance to innovation, collusion
3. Firm violates rules of social behavior	Prioe collusion, elimination of competition, bribes, political influence, dishonesty, discrimination
4. Harmful and undesirable social by-products	Inhuman work conditions, unequal distribution of wealth, environmental pollution, ecological imbalance, exhaustion of natural resources
5. Interference with national policy	Business interests vs. foreign policy, multinational vs. nation state, mililaiy-industrial complex vs. defense policy
6. Firm does not serve high priority social needs	Low cost housing, public transportation, health services, urban blight
B. Shift in societal values	Value shift from quality to quality of life, challenge to economic growth, disappearance of work ethic, suspicion and disapproval of business, emphasis on social infrastructure, social welfare, saturation of consumer demands
1. Economic growth no longer central national priority
C. Change in ideology	Rejection of private ownership, rejection of the ‘invisable hand’ doctrine, national planning, demand for income redistrbution, nationalization of industry, participation by outsiders
1. Regection of capitalism as a social philosophy

Only where an excess became blatant and intolerable did society restrain it. But, shortly after World War II, capitalist countries arrived at a standard of living which saturated the economic needs of their influential citizens. For a substantial proportion of the population, the ‘two chickens in every pot and two cars in every garage,’ promised by Franklin D. Roosevelt in the 1930s, became a reality by the 1960s. The newly affluent society no longer had to tolerate business excesses and the firm’s environment turned from benign to hostile. Attention shifted from the firm’s economic contribution to its shortcomings. The firm ceased to be the sacred cow of economic progress and became, instead, a favorite target of control and criticism. Governments and the public united in actions to curb the negative by-products of the firm.

In the process, as Peter Drucker pointed out, the firm became a victim of its own success. Despite protestations against early constraints, it continued to grow and prosper as the constraints piled up. Thus, defense of free enterprise lost its credibility, society began to take it for granted that the firm will continue to grow and make money under any controls which may be imposed upon it.

In summary, the preceding discussion of the firm’s predicament suggests that society’s behavior is due to causes which are more fundamental than a misunderstanding of the workings and benefits of free enterprise. The negative reactions are threefold:

1.
Firstly, there is an unwillingness to continue accepting the polluting by-products of laissez-faire.
2.
Secondly, there is a refusal to accord an exclusive priority to economic progress.
3.
Thirdly, there is either a rejection of capitalism as a societal ideology or a call for ‘modernizing’ capitalism in a way which purges it of its polluting aspects.

Because of different strengths of these three reactions in different parts of the world, business response strategies must be adjusted accordingly. In light of the trend ‘toward modern capitalism,’ US business is well advised to construct its defense on the capitalist ideology. But, instead of ‘explaining’ free enterprise it needs to join in defining a modern and viable meaning of capitalism. In Europe, where capitalism is not a universally accepted doctrine, the firm must negotiate its future raison d’etre through political processes which involve parties basically opposed to both free enterprise and private ownership.

In developing countries, where a promise of economic growth offered by free enterprise would, at first glance, appear attractive, private enterprise has to contend with alternative models of economic development offered by socialism. Further, the virtues of private ownership and competition must be made compatible with national pride and the desire for economic self-sufficiency.

The problem of positioning the firm in modern society is made difficult by the fact that the competing solutions which have been proposed are based on extreme doctrines. The free enterprise , capitalist doctrine asserts that a society’s welfare is optimized if the firm is given total freedom to pursue its profit-seeking activities. The preceding remarks have shown that, historically, uncontrolled profit seeking leads to what Theodore Roosevelt called ‘smash and grab imperialism.’

The opposing communist doctrine claims that society’s welfare is to be attained through total central planning and control of the economic activity of a nation. Past events in Eastern Europe provide conclusive evidence that the application of the communist doctrine has produced a disastrous level of economic welfare in countries which have practiced the doctrine for more than three-quarters of a century.

The question for the countries operating under the respective doctrines, which are now moving in the direction of free enterprise , is how far can a society deregulate behavior of business firms without creating the conditions described in Table 13.1. Put somewhat differently, the two extreme doctrines have been shown by history to produce socially unacceptable consequences. A solution to this problem is to identify and articulate a doctrine which is not extreme and which is based on a balance between individual freedoms and public control. This type of doctrine has been given the name of a ‘mixed economy’ and has been discussed in detail by John Kenneth Galbraith in his book The New Industrial State.

Whatever mixed economy doctrine is formulated, it will of necessity be more complex than either of the historical extremal doctrines. The difficulty of gaining society’s acceptance of a complex doctrine has been historically recorded by the demise of the Social Democratic Party in the UK, which advocated a mixed economy as a part of its platform and was not able to attract sufficient public support to permit the party to survive.

Alternative Scenarios

As in all planning efforts, the choice of business response to the societal predicament must be made in the perspective of future events. The following lists are four possible scenarios for the future of the firm:

1.
Society will come to its senses.
2.
Society will throw the baby out with the bathwater.
3.
The firm will become a socioeconomic institution.
4.
The firm will be replaced by new institutions.

Scenario 1 assumes that the negative impact of overregulation of business efficiency will become increasingly evident, and that society will arrest, and indeed reverse, the current regulatory trends before major damage is done. Proponents of this scenario can find support in the recent deregulation of the banking industry and net neutrality in the USA, and the blocking of a Euroskeptic government by Italy’s President Sergio Mattarella.

Scenario 2 holds that, if the current trends continue, relief will not come until too late, after excessive constraints have caused major damage to the effectiveness of the business sector. When this occurs, business freedoms will be restored, but the recovery process will be prolonged and painful. Examples of firms in many European countries which are losing their competitive position as a result of excessive ‘social overhead’ costs illustrate how this scenario might develop. Another example is the growing pressure for employment maintenance which robs the firm of the essential control over its labor costs.

Scenario 3 holds that most of the present restrictions will not be removed, that further controls will be imposed, but that an equilibrium point will be reached at which economic efficiency will be balanced against other social imperatives. The firm will stop being a polluter, will become a responsive servant of the market, but it will remain an essentially economic instrument of society. This scenario is in line with the neo-capitalist approach advocated by writers such as John Kenneth Galbraith. Inevitably, it results in a large degree of central government planning.

Under scenario 3, the current trends are seen as a part of an irreversible process of repositioning the firm in the affluent postindustrial society . The profit-seeking objectives will be supplemented with noneconomic objectives, such as maintenance of employment, personally fulfilling work, non-managerial participation in decision making, provision of goods and services to inherently non-profitable areas of the economy, maintaining the welfare of the community, etc. This scenario sees the firm transformed from a purely economic to a socioeconomic instrument of society. Interestingly enough, institutionalization of the new values within the firm may reduce the need for centralized government planning and control. Thus, a new kind of invisible hand may come into existence. Proponents of this scenario can find support in the socio-audits and social responsibility programs already used by many leading firms.

Scenario 4, the most drastic one, draws on historical precedents. It assumes that the transition from the industrial to the postindustrial era is similar to prior turbulent transformations of society, such as the Fall of the Soviet Union, the Industrial Revolution, and the American Revolution. During such transitions, organizations which had served the needs of the prior era disappeared, and new ones ‘arose from the ashes’ to take their place. Under this scenario, the institution which will emerge in place of the firm will bear little resemblance to its predecessor.

Of the four scenarios, the optimistic scenario 1 and the apocalyptic scenario 4 call for a minimal managerial response. The historical reactive defense of free enterprise appears best designed for both hastening the good news and for retarding the apocalypse. Scenario 3 calls for a vigorous defense of the free enterprise system by responsible managers. Scenario 3 presents management with a basic choice: (1) to take Milton Fried man’s advice, focus on the ‘business of business,’ and let others occupy themselves with shaping the role of the firm in society; (2) to take Geoffrey Barraclough’s advice and join the government and the public in determining the future raison d’etre of the firm.

Historical behavior by management favors the former role; so, does the danger of loss of competitive edge as a result of undue preoccupation with sociopolitical questions; so, does business unfamiliarity with political processes .

In favor of involvement is the fact that the firm’s behavior is now being shaped by people who have little understanding of what makes a firm work, what are its unique strengths and limitations, and what are its fragilities. By refusing to join the process, management increases the chances that both the economic and the social effectiveness of the firm will be severely impaired in the future.

It is not a purpose of this chapter to examine in detail the likelihood of the respective scenarios. However, it is important to underline the fact that commitment and response to one or more of the scenarios is one of the key strategic choices made by management. For this, choice may have as much influence on the future prosperity and survival of the firm as the choices of future markets and of technologies.

If the ‘Barraclough’ choice is made, the firm is confronted with the problem of formulating what it considers a viable alternative to the historical, and now very vague, doctrine of free enterprise . The procedure for formulating such a doctrine is significantly different from procedures involved in making business decisions. In the remainder of this chapter, we shall develop such a procedure.

Elements of the Legitimacy Strategy

The moment that management departs from insistence on exclusive focus on profitability and an uncompromising position against all constraints, it is no longer clear what should be the preferred objectives nor what the rules of the game (constraints and enablement’s) are under which the firm can best attain them, nor what should be the process by which the firm should seek to legitimize the preferred objectives and rules.

It should be recognized that management has a limited influence over the final choice of objectives and the rules of the game. These are determined through a political process in which representatives of different ideologies negotiate, bargain, and use other available means of influence to make their respective viewpoints prevail. Thus, the analysis of the legitimacy strategy for the firm must bring together three key ‘ingredients’: (1) an analysis of the objectives; (2) an analysis of constraints; and (3) an analysis of the power field within which the firm must act.

These ingredients can be brought together to determine the preferred objectives and rules of the game (we shall call the combination the preferred raison d’etre ), as well as the probable rules and objectives which will be the likely outcome of the political process after the firm has exerted its best efforts to make its viewpoint prevail.

In bargaining processes, which involve mutual give-and-take, it is inadvisable to announce the preferred position, unless its proponent has decisive power for making it accepted. Therefore, the firm further needs to formulate a bargaining strategy which also specifies the way it discloses its intentions, the types of action to be taken, the timing, and the coalition to be sought.

Aspirations Analysis

In Table 13.2, we show an approach to choosing the preferred objectives. Since the firm is an instrument of society, these objectives should reflect the aspirations of the constituencies whose interests the firm undertakes to serve. At the left of the figure, we show several constituencies which are directly affected by the behavior of the firm. In the second column, we illustrate the principal aspirations which each constituency expects the firm to fulfill. Two points should be noted:

Table 13.2

Models for the firm’s Raison d’etre

Alternative models
Constituency	Aspirations	Free enterprise	Prudent Capitalist	Philanthropic	Populist	Socialist	Preferred
Society	Economic growth	1	1	1
	Tax income					1
	Power equalization					1
	Income equalization					1
	Preservation of the environment		2			1
	Resource conservation					1
Community	Community welfare			2		1
Share owners	Earnings growth	1	1	1
Share owners	Share appreciation	1	1	1
Lenders	Earnings stability		2
Customers	Price quality
	Choice		2
	Stability
Managers	Earnings growth	1	1	1
Managers	Challenge	1	1	1
Employees	Employment
	Wages				1	2
	Leisure
	Working conditions
	Satisfying work				1	2

The first is that society is no longer content, as in the past, with the aspiration of economic growth, and now has other aspirations which frequently conflict with growth.
Secondly, while managers are shown to share the owners’ aspirations for profits and appreciation of equity, ample experience has shown that they frequently have other aspirations (e.g. for power, gambler’s risk, security, recognition) which can run contrary to the profit drive. (In extreme cases, powerful managers have been known to play conglomerate ‘chess games’ with companies with very little apparent regard for profitability.)

It is for this reason that, in the body of the figure, we construct the ‘entrepreneurial model’ of the firm in which management ‘challenges’ are recognized, in addition to earnings growth and appreciation, as the first priority aspirations. The entrepreneurial model is of course the free enterprise Friedmanian model. It is to be noted that it does not concern itself explicitly with the aspirations of the customers (the assumption is that the invisible hand takes care of customer needs).

In the next column, we show a ‘prudent capitalist’ model which responds to society’s pressures for preservation of the environment and is secondarily responsive to the aspirations of the lenders and of the customers.

In the third column is the ‘philanthropic’ model, frequently observed in the USA, in which, after the profit is made entrepreneurially, a part of it is dispensed for community welfare.

The first three models are observable in business behavior. The fourth ‘populist’ model reflects the typical historical strategy of American labor unions which have focused on maximizing the aspirations of the employees but also, for practical reasons, place high priority on the growth of earnings.

The ‘socialist’ model, shown last, is intended to reflect the model preferred by governments rooted in socialist ideologies. Frequently, the prime focus is on the aggregate societal welfare, with employees’ individual welfare being secondary.

The last column is left open for determination of the preferred aspirations to be served by the firm. These preferred aspirations are the objectives of the firm which guide its behavior. Since managers themselves are members of society, the ambient social pressures act to induce the firm to serve everybody. And, indeed, in public relations pronouncements some firms proclaim their intention to be equally responsive to all relevant stakeholders. Whether such announcements are made in good faith is a matter which does not concern us here, but, for practical purposes, it must be recognized that the respective aspirations are in conflict and cannot all be served equally. An example is the conflict between profitability and employment maintenance which is now a major issue in Europe. Hence, the choice of objectives should be limited to those aspirations which management believes the firm must serve (to respond to the most influential stakeholders) and is best qualified to serve.

Secondarily, the chosen objectives must be assigned priorities. The fulfillment of noneconomic priorities depends in the final analysis on the firm’s solvency. Thus, whatever noneconomic objectives are added to the list, unless the firm makes an adequate profit, its survival will be imperiled and none of the other objectives can be served. This centrality of the profit objective is clearly understood by management and frequently missed by outsiders. It is reasonable to suggest, therefore, that the priorities should vary as a function of the profit level of the firm. In Fig. 13.2, we have shown an example of how priorities can be made to change with the profitability level.

../images/435756_3_En_13_Chapter/435756_3_En_13_Fig2_HTML.gif — Fig. 13.2
Stages of priorities in a societally responsive firm

*Impact of Constraints

In the defense of free enterprise , it is assumed that all restraints on managerial behavior are equally damaging and are to be resisted. Experience has shown, though, that some constraints are less objectionable than others, and that some actually improve the profitability of the firm. For example, when foreign competition threatens, firms seek import protection from the government.

However, because of the historical rejection of all constraints, little is known today about the differential impact of different constraints on the firm’s performance; research is badly needed in this area. Meanwhile, management will have to make its own evaluations.

One approach to such evaluation is to group the objectives chosen through aspirations analysis into three categories: profitability/growth objectives, objectives of responsiveness to the needs of the market, and objectives of social (nonprofit) responsiveness.

Figure 13.3 illustrates that the attainment of the respective group of objectives will be differently affected by different constraints. The three curves, without any claim at accuracy or universality, demonstrate how different controls can have opposing effects. For example, while the current restrictions on automotive performance in the USA may have a depressing effect on profitability, they can make a substantial contribution to the objective of environmental cleanliness.

../images/435756_3_En_13_Chapter/435756_3_En_13_Fig3_HTML.gif — Fig. 13.3
Impact of controls/incentives on business performance

Therefore, it is important for each firm to assess the real or potential impact of different constraints on the firm and to take a position on each constraint. A simple format for estimating the impact of the controls on a particular firm is shown in Table 13.3.

Table 13.3

Estimating the importance of constraints

../images/435756_3_En_13_Chapter/435756_3_En_13_Tab3_HTML.gif

The purpose of the exercise is to establish the firm’s position vis-à-vis the leverage controls.

1.
In the left-hand column of Table 13.3 enter from the column labeled ‘points of leverage’ controls which now exist or are likely to be ‘imposed’ on the firm by the government, or exerted by society.
2.
Across the top of Table 13.3 enter the firm’s objectives from the column labeled ‘preferred’ in Table 13.2.
3.
In the second column estimate the impact which the respective constraints will have, if imposed on the firm’s attainment of its objectives. Use + 10 for constraints which would greatly improve the performance of the firm, 0 for no impact, and 10 for destructive impacts.
4.
In the third column multiply the impact by the priority of the objective to produce the weighted impact.
5.
Add the positive weighted impacts for each constraint and enter the overall impact into the third-to-last column.
6.
Repeat the above steps for the negative impact. It is not unlikely that the overall impact will turn out to have both positive and negative effects.
7.
The final and the important step is to choose the firm’s attitude toward the respective constraints in dealing with regulatory bodies and social pressures. Four alternative positions are suggested at the bottom of the figure.

*Power Field Analysis

The firm’s success in promoting its preferred legitimacy strategy will be determined through a political bargaining process with other groups which have the interest and the power to impose constraints on the firm. Therefore, the next step is to estimate the preferences which other influential constituencies are likely to advance during the bargaining process. The procedure is illustrated in Table 13.4 where the raison d’etre preferred by each constituency is estimated, followed by an estimate of the likely thrust behind the preferences. It is advisable to estimate the relative potential power of a constituency separately from the likely aggressiveness in the exercise of this power. For example, in the USA, the shareholders have enormous potential power, but their historical aggressiveness in asserting this power has been very low. Such high power, low aggressiveness groups are attractive potential partners in formation of coalitions. Political processes typically produce coalitions of constituencies whenever common objectives can be identified. In Table 13.5, we have shown mutual support and opposition to be found among constituencies. The diagonal entries indicate the aggressiveness exhibited by the respective constituencies in support of their interests. As our previous remarks indicate, there are substantial differences between the European and the American scenes. The entries in the table are for the observable American practice.

Table 13.4

Power field analysis

Constituency

Objectives of the firm

Rules of the game

Relative power

Aggressiveness

Influence mechanisms

Probable thrusts

Strength of thrust

Most preferred

Least preferred

Most preferred

Least preferred

Management

Employees

Unions

Shareholders

Local government

Central government Customers

Others

Table 13.5

Power field balance

Respondent Constituency	(1) Management	(2) Employees	(3) Unions	(4) Shareholders	(5) Local government	(6) Central government	(7) Other	Probable Coalitions
Proponent Constituency	(1) Management	(2) Employees	(3) Unions	(4) Shareholders	(5) Local government	(6) Central government	(7) Other	For Proponent	Against
Management								1,4,2	2,3,5,6
Employees				0	0			2,3,6
Unions				0	0			2,3,5,6	1,4
Shareholders				0	0			1,4	2,5,6
Local government			0	0				1,2,5,6
Central government				0				2,3,5,6	1,4
Other

In any case, the entries are illustrative and each firm will have to make an evaluation of its own political setting. Once this is accomplished, the likely coalitions for and against the preferences of the respective constituencies can be determined as shown at the right of the figure.

Analysis of Legitimacy Strategy

In Fig. 13.4, we illustrate the manner in which the three preceding steps, the aspirations analysis , the impact of constraints , and the power field analysis, can be combined into the legitimacy strategy of the firm.

../images/435756_3_En_13_Chapter/435756_3_En_13_Fig4_HTML.gif — Fig. 13.4
Analysis of legitimacy strategy

The power field analysis makes it possible to construct one or more scenarios which will describe the way the role of the firm is likely, in fact, to evolve. The selected objectives, together with the preferred rules of the game, define the preferred raison d’etre which the management would like to see emerge.

The probability is high that the preferred and the probable raison d’etre will differ, because of the influence of other constituencies which have distinctive sets of expectations for the firm. The task of management is to influence the evolution of events to bring the eventual raison d’etre as close as possible to the preferred position.

To accomplish this, the firm needs to follow a skillfully executed bargaining strategy : using the most effective means of influence at its disposal, engage in give-and-take bargaining with representatives of conflicting interests.

Thus, we can define the legitimacy strategy to consist of three components: (1) the preferred raison d’etre ; (2) the forecasts of the probable raison d’etre; and (3) the bargaining strategy aimed at narrowing the gap between the probable and the preferred.

Impact on Business and Social Responsibility Strategies

A firm can either choose to pursue an active legitimacy strategy by seeking to contribute to the process of defining its own future role in society, or it can remain a passive observer of the changes of its own role. In either case, an understanding of the scenarios of the probable raison d’etre is essential for the conduct of the traditional ‘business of business’—the profit- and sales-seeking activities of the firm.

Today, there is hardly a business decision which is not seriously affected by sociopolitical considerations. For instance, after the accounting scandals of the early twenty-first century, the US Securities and Exchange Commission became more focused on corporate compliance and the government introduced the Sarbanes–Oxley compliance regulations of 2002. This was a response to the social environment that called for such change to make public companies more accountable.

Managerial decisions must now be made within the framework of some sort of control. The decisions on what product to make, where to sell it, how to sell it, how to price it, how to manufacture it, how to finance, and how to support it after sales are all subject to a variety of restraints and constraints. But beyond formal constraints, management must be increasingly aware of social reactions and consequences to its commercially inspired actions.

Numerous other instances are observable today on both sides of the Atlantic which show that the firm’s business strategy can no longer be built only on ‘dollars and cents’ considerations and that, in the future, it will have to include political and social considerations along with the commercial ones.

Thus, dealing with the firm’s societal predicament docs not stop with the legitimacy strategy . In the future, firms will increasingly need to develop three related strategies:

1.
A legitimacy strategy . This is the strategy which the firm pursues in seeking to influence the rules of the game. The principal steps in its formulation are enclosed by the dashed line rectangle in Fig. 13.5.
Fig. 13.5
Sociopolitical response analysis

This strategy, if successful, has a direct and important impact on the firm through creating rules of the game which make it easier to optimize its profit-seeking activity.

2.
A social responsibility strategy . An important part of this strategy is commonly called the firm’s code of ethics which describes voluntary constraints which the firm undertakes to respect both in its intrafirm and environmental behavior (e.g., giving to employees 90 days’ notice of permanent closure of the firm’s plants or other facilities).

But a social responsibility strategy includes not only constraints but proactive behavior which the firm undertakes beyond its concern with growth and profit optimization (e.g., charitable contributions of money to social causes, or to building of the social infrastructure, or donation of management time to helping solve information management problems in a public school system).

Formulation of the social responsibility strategy is straightforward. It starts with a social audit, which is a diagnosis of the firm’s present social responsibility strategy. This is followed by selection of social causes which management wishes to support, and then development of modalities which will be used to support those causes.

Pursuit of social responsibility may have an indirect impact on the firm’s profit-seeking behavior. This impact is usually in the long term and is caused by the influence which the firm’s behavior as a good and caring citizen has on customers’ preferences for the firm’s products.

A social responsibility strategy which is designed to maximize such influence has been called an enlightened self-interest strategy. But not all social responsibility strategies are undertaken in the spirit of enlightened self-interest. Some firms undertake social responsibility projects without an expectation that the costs incurred will eventually lead to higher profits.

3.
The third strategy which reflects a firm’s concern with societal forces is the sociopolitico-commercial strategy which is shown at the lower right of Fig. 13.5. As the figure shows, this strategy integrates the probable rules of the game (raison d’etre) with the firm’s commercial business strategy .

As the two-way arrow on the right-hand side of Fig. 13.5 emphasizes, there is a two-way influence between the commercial business strategy and the sociopolitico-commercial strategy . As a result, the strategy formulation process is an integrated one in which sociopolitical variables are integrated into the stages of competitive and portfolio analysis. (An example of such inclusion is shown in Fig. 12.4 where the influences of sociopolitical groups are a factor in determination of future success postures .)

While the legitimacy strategy seeks to change the rules of the game, the sociopolitico-commercial strategy seeks to take the best advantage of the existing rules of the game under which the firm has to do business.

Need for New Management Capabilities

Generations of experience have prepared managers to believe that, on the one hand, the ‘business of business is business’ and, on the other, that the free enterprise ideology is superior to all other social ideologies. The knowledge and leadership skills of managers have been focused on making profit and their influence skills either on securing a consensus within a mutually acceptable ideology within the firm or ‘explaining’ the superiority of free enterprise to outsiders.

The information system which serves today’s managers informs them about economic trends, technology, competition, customer preferences, and profitability performance. It is not equipped to provide an understanding of other ideologies, their perceptions of business, their strategies, the political process by which these strategies are implemented, nor is it equipped to track sociopolitical trends which impact on the firm. Some firms, which have become aware of this deficiency, have recently begun to use the issue management system (see Chapter 19) to develop a responsiveness to societal issues. Other firms, such as Shell, developed sociopolitical scenarios (see Chapter 10). Still others (such as General Electric) developed political risk assessment techniques for foreign investments.

However, experience shows that managers who receive sociopolitical information are both unwilling to recognize its relevance and incapable of using it effectively. Thus, when a firm decides to confront its societal challenges, it needs to develop a societal response capability . This includes the following:

1.
An ideological reorientation . Managers need to understand ideologies other than free enterprise , recognize their legitimacy, and be prepared to change from a traditional dogmatic belief that free enterprise is the only truth to a more open ecumenical position which accepts the legitimacy of other ideological truths.
2.
An enlarged information-communication system is needed which observes the social and political as well as the commercial world, learns the language of other constituencies , and translates business communications into other languages. Such a system also needs to be open to the environment, actively communicating with the constituencies both inside and outside the firm.
3.
Understanding of political processes and skills in political behavior . Managers need to understand the differences between the consensual, uni-ideological , decision processes historically used within the firm, and multi-ideological decision processes in which no party holds deciding power. They need to acquire skills in preparation of political decisions, lobbying, coalition formation, bargaining, and the use of propaganda.
4.
A political action infrastructure . Firms will need to build relationships and frameworks in which political action takes place; they need to define their political marketplace, just as in the early days of the industrial era they have defined the commercial marketplace.
5.
The reward and incentive systems need to be changed to encourage effective and timely response to societal problems and opportunities.
6.
Changes in the firm’s systems and structure need to be made which provide the competence and the capacity for dealing with societal challenges .

The preceding remarks suggest that unless a firm attends to the task of building its societal action capability at an early stage, its societal response is likely to be ineffective and unproductive. (For further discussion of organizational capabilities , see Chapters 9 and 10.)

Summary

The societal predicament of the business firm has passed the stage at which it can be resolved by the dual strategy of resisting efforts to limit business freedoms, on the one hand, and educating the public about free enterprise , on the other.

The societal predicament is complex and multifaceted, and requires appropriately complex, multifaceted, and aggressive response strategies if private capitalism is to continue to play an effective role in future society. Management must approach its societal challenges with the same foresight, and in the same methodical and deliberate way in which it approaches its commercial challenges.

An essential input to a constructive legitimacy strategy is an understanding of both social and economic costs and benefits resulting from different controls and control mechanisms which society imposes on the firm.

Dealing with societal problems is very different from dealing with business opportunities. On the level of understanding, this requires a recognition of the many different perceptions, points of view, and different ideologies which different influential groups bring to their interactions with the firm. On the level of response, the firm needs managers who, by and large, are not found in firms today but who are capable of sensitive and unbiased analysis of political situations and skilled in the use of realities of power. Above all, management needs to take the role of constructive leadership in positioning the firm’s role in the future society.

Exercises

1.
1. a.
  Taking account of the latest sociopolitical developments, describe in detail the ‘alternative scenarios’ section. If necessary, add and describe in detail additional scenarios.
2. b.
  Assign probabilities to the respective scenarios. Give reasons for your assignment.
3. c.
  Identify the principle milestone events over the next five years which will help sharpen and revise the probability estimates.
2.
For each scenario, develop and justify appropriate responses by firms. What should be done by each firm alone and what by groups of firms?
3.
Select a firm well known to you, or use a case assigned by your tutor, to determine the ‘elasticity’ of the firm to different types of constraint and enablement. Use Table 13.3 as a worksheet.
4.
1. a.
  Using Table 13.2, develop the appropriate raison d’etre for the above firm.
2. b.
  Perform a power field analysis for the firm analyzed in exercise 3 above, employing Table 13.4.
3. c.
  Following the format of Table 13.5, perform a power field analysis and identify the coalitions which the firm should form, and coalitions which are likely to oppose the firm.
5.
1. a.
  What will be the problems and sources of resistance in developing the sociopolitical management capabilities? How can the resistance be minimized and maximum support assured for the capability development?
2. b.
  Outline a related series of programs and actions which can be used to develop the capability?

13. Societal Strategy for the Business Firm