STRATEGY JOURNAL OF SMALL BUSINESS STAKEHOLDER THEORY AND THE ENTREPRENEURIAL FIRM Ronald K. Mitchell Texas Tech University firstname.lastname@example.org Boyd Cohen Simon Fraser University email@example.com ABSTRACTThis paper offers a typology suggesting a stakeholder theory of the entrepreneurial firm toprovide a new lens for entrepreneurial management. To accomplish our task we: (1)generate from the literature a list of purported “theories of the firm”; (2) apply qualifyingcriteria; (3) analyze the list according to two dimensions – stakeholder inclusion andstakeholder equilibration strength – to categorize these theories of the firm into a typologythat reveals the gaps in the theory-of-the-firm literature ; and (4) identify researchquestions for a stakeholder theory of the entrepreneurial firm that raise entrepreneurialmanagement issues. stakeholders that enact revolutionary verses INTRODUCTION evolutionary change.The purpose of this paper is to offer a We proceed to accomplish our objectives intypology that suggests the need for and the following manner. First, we brieflysituates a stakeholder theory of the present the theoretical background that givesentrepreneurial firm such that a new lens for rise to the opportunity for the introduction ofentrepreneurial management emerges. This a stakeholder theory of the entrepreneurialtask is necessary because there is reason to firm. Second, we identify a representative setsuppose that: (1) the distinctive nature of the of theories of the firm that emerges from ourentrepreneurial firm (Venkataraman, 1997) is review of the literature. Third, we furtherdirectly impacted by stakeholder relation- examine two key dimensions that we suggestships (Mitchell, 2002a; Stinchcombe, 1965); will distinguish a stakeholder theory of the(2) the contribution of stakeholders to firm entrepreneurial firm: extent of stakeholdervalue is connected to the entrepreneurial inclusion (from broad to narrow); and levelprocess (Venkataraman, 2002); and that of stakeholder equilibration strength (fromaccordingly (3) the individual-directed weak to strong). Fourth, we review thenature of early-stage companies makes various implicit and explicit positions ofentrepreneurs particularly likely to create each theory according to both dimensionsmore broadly inclusive stakeholder-based and the extent of stakeholder inclusion andfirms instead of more narrowly inclusive stakeholder equilibration strength, situatingstockholder-based firms; and (4) the these theories in a typology implied by thesetendency of new firms, through a higher two constructs. Finally, we set forth some ofpropensity to contain disruptive technologies the research questions and evaluate the ever-(Christensen, 1997), will be to mobilize present “so what” question.
BACKGROUND pleasant surprise; and (4) exists in starkFor the past several years, the distinctive contrast to the neoclassical conception ofdomain of entrepreneurship research has transacting among instantaneouslyincreasingly centered on investigation of the optimizing actors who are exceptionallyquestion: “How, in the absence of current well-informed, never commit an error, and,markets for future goods and service, (do) thereby, operate in instantly clearing marketsthese goods and services manage to come (Venkataraman, 2002, p.55).into existence?” (Venkataraman, 1997,p.120). An entrepreneurial theory of the firm This entrepreneurial process is well-is, therefore, expected to explain how the characterized by Schumpeterian notions ofentrepreneur, as an individual, recognizes creative destruction (Schumpeter, 1934) thatopportunity in an uncertain environment and, is accomplished by the forces of both weakby persuading relevant stakeholders to equilibration, and strong equilibration. Weaksupply their resources, creates a firm to equilibration forces are those that result in aexploit such opportunity (Dew, Velamuri, & more evolutionary – or incremental – processVenkataraman, 2003). It follows that the of developing new goods and services (akinsuccess of new firms in overcoming their to “rebuilding a stakeholder ship plank byliabilities of newness is strongly associated plank while it still remains afloat”), whilewith the extent and quality of stakeholder strong equilibration forces of “stakeholderrelationships (Stinchcombe, 1965). innovation” result in the more revolutionaryRecognition of the importance of variations processes of creative destruction (sinkingin extent of stakeholder inclusion suggests “the unfair and inefficient corporate ship“recasting the central purpose of the firm as while evacuating all stakeholders to theserving the interest of stockholders to one safety of a new vessel that is better than thewhere it serves the stakeholders” old”) (Venkataraman, 2002, p.54).(Venkataraman, 2002, p.54). According to According to this logic, variations in thethis argument variations in the extent of strength of stakeholder equilibration are alsoinclusion (narrowness verses breadth) of likely to be useful in the suggestion andstakeholder relationships are therefore likely situation of a stakeholder theory of theto be of interest in the suggestion and entrepreneurial firm.situation of a stakeholder theory of theentrepreneurial firm. Finally, by the very act of creating a firm, entrepreneurs occupy the unique position ofFurthermore, gathering and aligning the being most at liberty to shape stakeholdercontributions of all stakeholders to increase relationships with respect to both stakeholderoverall firm value (Venkataraman, 2002, inclusion and stakeholder equilibrationp.51; Vesper, 1996, p.4) is a critical part of strength. The latitude to create a firm isthe entrepreneurial process. As distinct from essential to the entrepreneur “because it ismainstream conceptions of the perfectly through the firm that the opportunity-competitive “market process,” the term pursuing entrepreneur can coalesce and keep“entrepreneurial process” has come to be the myriad stakeholders together”deliberately used by theory-of-the-firm (Venkataraman, 2002, p.55). Thus, it is atscholars to denote a transacting process that: firm inception that entrepreneurs identify(1) is at best tending toward equilibrium, but their stakeholders and assess the relativenever really in equilibrium; (2) is populated salience of each (Agle, Mitchell, &by economic actors who make errors, are Sonnenfeld, 1999; Mitchell, Agle, & Wood,sometimes ignorant, sometimes ignorant 1997), because successful founding isabout their ignorance, sometimes brilliant dependent upon stakeholder supportbut mostly prosaic, sometimes knowingly (Stinchcombe, 1965). Furthermore, it is at ordeceitful but mostly well-intentioned, and near inception that start-up firms are lessboundedly rational; (3) has scope for genuine bound by the institutional constraints of thediscovery, genuine disappointment, or financing and the regulatory establishment 2
(for example, venture capitalist growth management and entrepreneurship questionsnorms or security regulations) or by from diverse lenses and has resulted in thetechnological constraints (such as a application of many theoretical frameworksdependence on existing technologies). within management and entrepreneurshipAdditionally, because near the time of research. However, while perhaps hundredsstartup entrepreneurs and their firms are of theories have been used in managementinextricably linked, it appears likely to be and entrepreneurship research, relatively fewmore difficult for them to avoid the impacts theories are proffered as theories of the firm.of their firm on their stakeholders and,therefore, to be more likely to take In the task of reliably identifying justifiablestakeholder relationships into full account theories of the firm, we accept and utilize theduring the process of firm formation. Thus, it logic developed by Dew, Velamuri, &is not surprising that entrepreneurs have, for Venkataraman (2003) who suggest threeexample, been found to be significantly less criteria. According to these authors, a theorylikely than managers to sacrifice personal of the firm must be capable of addressingethics to attain business objectives (Bucar & three central questions: Why do firms exist?Hisrich, 2001) or to be more likely to take What are the determinants of their scale andstakeholders into account to overcome scope? Why do certain firms persist overliabilities of newness (Stinchcombe, 1965). It time while others do not? Under this logic,might, therefore, be expected that due to: (1) theories that do not address all threethe centrality of stakeholder relationships in questions would not be considered to beentrepreneurial firms; (2) the unique theories of the firm (Dew, Velamuri, &contribution to value creation of stakeholder Venkataraman, 2003).equilibration in the entrepreneurial process;and (3) the distinctive position of the Utilizing ABI Inform, we reviewed 255 peer-entrepreneurial firm in the organizing life reviewed articles published between Januarycycle, that the suggestion of a stakeholder 1986 and February 2003 that containedtheory of the entrepreneurial firm and its theory-of-the-firm language. We identifiedsituation within the theory-of-the-firm within that group of articles, 27 theories thatliterature is warranted. are presented as theories of the firm (Table 1). We then examined each theory to assess REPRESENTATIVE THEORIES OF the extent to which the theory as presented THE FIRM successfully answers the three central qualifying questions noted above. However,The literature presently lacks a systematic we did not assess the extent to which thesummary of representative theories of the proposed theories of the firm have beenfirm. A more comprehensive analysis would: received or thoroughly tested and developed(1) sift out from the many articles using (Grandstrand, 1998) but only theirtheory-of-the-firm language, those that comportment with the three foregoingactually present a theory of the firm that criteria. As reported in Table 1 (andcontains a threshold level of specification; organized according to the analytical(2) identify relative strength among dimensions articulated in the next section),representative theories; (3) facilitate we found 17 of the 27 theories tocomparison and contrast; and (4) identify satisfactorily address all three questions,gaps wherein the literature might further thereby qualifying them for membership in adevelop. Management and entrepreneurship set of representative theories of the firm.research has utilized theories from decisionsciences, economics, management, socio- ANALYTICAL DIMENSIONSlogy, and psychology (Amit, Glosten, &Muller, 1993). This broad range of In this section, we briefly summarize thetheoretical foundations enables management analytical dimensions (extent of stakeholderand entrepreneurship researchers to explore inclusion; stakeholder equilibration strength) 3
TABLE 1 Representative Theories of the FirmTheory Purpose of Theory — The Reason for Existence (⇒ I v. R) — Scale & Scope (⇒ B v. N) — Scale Persistence (⇒ I v. R) — Firms purpose of this theory is to: Firms exist: & Scope are determined by: persist because:A-Narrow/IncrementalAgency Develop a theory of the ownership As a nexus for contracting The point at which the gross Given strong incentives for structure of the firm (Jensen & relationships, which is also increment in (firm) value is just individuals to minimize agency(Jensen & Meckling, 1976: 305). characterized by the existence of offset by the incremental loss costs, given many competing Meckling, 1976) divisible residual claims on the involved in the consumption of alternatives, and given its assets and cash flows of the additional fringe benefits due to shortcomings, the corporate form organization which can generally (managers’) declining fractional has survived the market test be sold without permission of the interest in the firm (1976: 323) against potential alternatives other contracting individuals (1976: 357). (1976: 311)Customer Value Suggest that firms’ customer value To satisfy the customer (1997: 164; The customer value strategy which They possess a customer value- (Slater, 1997) should be the focus of business and Drucker, 1973) dictates the size of the target based organizational culture activities and to propose a market and the value proposition (organized around customer value marketing based view of the (1997: 164) delivery) complemented with a theory of the firm (Slater:, 1997: skill to learn about customers 162) changing needs (1997: 164)Evolutionary Expand our understanding of Because a set of capabilities and The joint action of search and They are “selected for” within a (Nelson & economic change (Nelson & decision rules combine and evolve selection “routines” (Nelson & market environment, through a Winter, 1982) Winter, 1982) based on the inheritance of Winter, 1982) process of economic natural acquired characteristics and the selection of routines (Nelson & timely appearance of variation Winter, 1982) under the stimulus of adversity (Nelson & Winter, 1982).Exchange Construct a classical type of To both exchange (where existing The personal income distribution The combination of money flows (Boulding, macroeconomic distribution assets including money are (PID), where PID as a key and production processes provides 1950) theory to distinguish between circulated among various owners), determinant of output is effected leveraged financial incentives exchange process contributions to and to produce (where assets are by potentially volatile financial (Boulding, 1950; 1994: 1227) wealth creation and the processes created, destroyed, and transfers item (T) (Boulding, of production (Boulding, 1950; accumulated) (1994: 1227) 1950; 1994: 1227) Canterbery, 1994, p. 1227)Industrial To explain how competitive forces Because they are portfolios of Market structure: “ . . . certain stable They compete effectively within an Organization within an industry shape the activities (Porter, 1984: 423) attributes of the market that industry (Porter, 1980) (Caves, 1980: specific responses of firms within composed of the tangible or influence the firm’s conduct in the 88; Porter, 1980; that industry to the small numbers intangible semi-fixed assets or marketplace” including size Porter, 1984) bargaining power of rivals, skills necessary for the conduct of (Caves 1980: 64) suppliers, buyers, imitators, and these activities in the marketplace substitutes (Porter, 1980) (Caves, 1980: 64).
Theory Purpose of Theory — The purpose Reason for Existence (⇒ I v. R) — Scale & Scope (⇒ B v. N) — Scale Persistence (⇒ I v. R) — Firms of this theory is to: Firms exist: & Scope are determined by: persist because:Institutional Explain how institutional forces Because they are isomorphic with The extent of coercive, memetic, They are legitimate organizations (DiMaggio & shape organizations (DiMaggio & institutions and are therefore and/ or normative isomorphism (DiMaggio & Powell, 1983; Powell, 1983; Powell, 1983; Meyer & Rowan, legitimate organizations (DiMaggio & Powell, 1983) Meyer & Rowan, 1977) Meyer & 1977) (DiMaggio & Powell, 1983) Rowan, 1977)Population Explain the forces that shape the To produce and distribute resources Inertial nature of firms, and the They are “selected for” in the Ecology structures of organizations over (Hannan & Freeman, 1989: 5) nature of the resource space, ecology of a population due to long time spans, including how including the level of resource variations in their inertial(Hannan & populations of firms forms arise scarcity and the tightness of niche characteristics that are retained Freeman, 1989) and decline. Population ecology packing (Carroll & Hannan, 1989: despite selection pressures related theory has specific implications 411) to legitimation and competition for the nature of firms (Hannan & within the resource space (Carroll Freeman, 1989; Carroll & & Hannan, 1989: 411) Hannan, 1989)Real Entity To compare and contrast firms with To represent the moral authority of The outcome of its organization and Of the existence of a moral (Metzger & humans in an attempt to depict its members. Firms, however, are management and activities (2001: authority; and because of the Dalton, 1996) legal and philosophical firm seen as naturally occurring beings 496) collective result of decisions made models (2001: 494) with characteristics beyond those by individual persons relative to of its members. (2001: 496) that authority (Werhane, 1985: 46.)Resource-based Analyze firms from the resource side Because the creation of new The indivisibility of the resource Resources are rare and non- (Barney, 1991; rather than from the product side productive services requires the bundles that must be collected to substitutable; and due to unique Penrose, 1959; (Wernerfelt, 1984: 171) collection of resources that results satisfy relevant demand for historical conditions, causal Wernerfelt, in a firm (Penrose, 1959: 77, 85) heterogeneous productive services ambiguity and/ or social 1984) (1959: 67, 68, 75, 77, 83) complexity, are also imperfectly imitable (Barney, 1991: 105-112)Strategic To extend transaction-cost theory of To create isolating mechanisms The relative importance of Of the differential prevention of (Liebeskind, the firm to incorporate knowledge (1996: 94). Firms are more knowledge components to a expropriation of knowledge, and 1996) in explaining the relationship capable of isolating and protecting firm’s strategy. If particular the differential protection of between organization and knowledge (at lower transaction knowledge is critical, firms will imitation, through limiting competitive advantage costs) than are markets. expand their scope to bring the observability of knowledge (1996: (Liebeskind: 1996: 93). knowledge inside the firm, 94). assuming the benefits exceed the costs (1996: 103). 5
Theory Purpose of Theory — The purpose Reason for Existence (⇒ I v. R) — Scale & Scope (⇒ B v. N) — Scale Persistence (⇒ I v. R) — Firms of this theory is to: Firms exist: & Scope are determined by: persist because:B-Broad/ IncrementalBehavioral Develop an empirically relevant, To form coalitions of individuals in Temporal or functional coalitions of Because they are an adaptively process-oriented, theory of order to attain collective objectives participants formed to make rational system: successful(Cyert & March, economic decision making (Cyert (p.28) through decision-making decisions (1963: 27) adaptations to firm behavior and 1963) & March, 1963: 3) which predicts processes (1963: 290) resource allocation by coalitions firm behavior (1963: 19) (1963: 99)Game Theory To provide an alternative theory of To reduce the costs of Qualitative changes in the reservoir Through the recombination of (Kogut & the firm which accounts for communication and coordination of of social knowledge available to knowledge. Firms evolve through Zander, 1996) ownership, incentives, and self- embedded social knowledge (1996: economic agents (1996: 503). the opportunities and influences interest (Kogut & Zander, 1996: 503) of the external environment 502). (1996: 503).Resource Include the role of external control Because bridging and buffering The effectiveness of bridging and They effectively manage resource- dependence of organizations in organization mechanisms around a technological buffering mechanisms (Scott, dependent power relationships (Pfeffer & theory (Pfeffer & Salancik, 1978) core create organization (Pfeffer & 1987) (Pfeffer & Salancik, 1978) Salancik, 1978) Salancik, 1978: 106, 108; Scott, 1987: 182-198).Stakeholder Describe how organizations operate To fulfill some set of their various The structuring and choice They effectively manage the (Brenner & and to help predict organizational stakeholders’ needs (Brenner & processes of the firm’s stakeholder value matrix of the Cochran, 1991) behavior (Brenner & Cochran, Cochran, 1991: 453) management (Brenner & Cochran, firm (Brenner & Cochran, 1991: 1991: 452) 1991: 455) 455, 465)Transaction Generalize and extend transaction Because they are bundles of The size of the cumulated value They economize on multi-level Cognition cost economic theory to transactions which aggregate networks that must be assembled transaction costs: Lower-level (Mitchell, 2001) demonstrate how entrepreneurial because together they minimize to serve stakeholders at minimum markets fail (thus firms form per cognitions (planning, promise, transaction costs (2001: 83) transaction cost (2001: 88) Coase, 1937); and higher-level and competition) create new value aggregations (hierarchies) do not at multiple levels of analysis, yet form (Mitchell, 2001) through the reduction of cross- level transaction costs (Mitchell, 2001)Transaction Cost Explain why firms form as an To economize on transaction costs First-order economizing They are relatively more efficient Economics alternative to the market (Coase, through substitution at the margin (Williamson, 1991) than markets (firms form when (Coase, 1937) 1937) (Coase, 1937; Williamson, 1985) markets fail) (Coase, 1937) 6
Theory Purpose of Theory — The purpose Reason for Existence (⇒ I v. R) — Scale & Scope (⇒ B v. N) — Scale Persistence (⇒ I v. R) — Firms of this theory is to: Firms exist: & Scope are determined by: persist because:C-Narrow/ RevolutionaryEntrepreneurial Set out a general framework within To improve coordination by Factors supporting entrepreneurial Entrepreneurs monitor the (Casson, 1996; which all the key questions in the structuring information flow, insight, e.g., level of information environment and effect changes to Witt, 1998) theory of the firm can be brought which requires that it be endowed synthesis (to make price and respond to change as dictated by together at once (Casson, 1996: with legal privileges, including production decisions), necessary the environment (Casson, 1996) 55) indefinite life (1996: 56) sunk costs to permit necessary customization, level of desire to appropriate the value of profit opportunities (Casson, 1996)D-Broad/ NONE NONE NONE NONE RevolutionaryNon-Theories of the FirmCompetence-based Set out a general form alternative to N/A N/A N/A (Hodgson, 1998) contractarian (e.g., Coase) theories of the firm (Hodgeson, 1998: 25). Competence-based theories are an omnibus grouping rather than a specific theory (Hodgeson, 1998)Computational Present a framework for analyzing N/A: This theory assumes the A collection of information Repetition of successful activities (Barr & the information processing existence of firms. processing units (2002: 345). and recognition patterns through Saraceno, 2002) (learning) behavior of firms, Optimal firm size changes as the learning algorithms (2002: 351). where firms are viewed as environment changes (2002: 346). artificial neural networks (Barr, 2002: 345).Economic Use business history, in particular To bring together producers and The attainment of sustained They provide protection from Development the contractual choices made by investors in response to incomplete capabilities (1998: 70) economic holdup (1998: 70) (Lamoreaux, 19th-century entrepreneurs to contracts and market power (1998: 1998) organize their businesses, to 70) reflect on the nature of the firm (1998: 66) 7
Theory Purpose of Theory — The purpose Reason for Existence (⇒ I v. R) — Scale & Scope (⇒ B v. N) —Scale Persistence (⇒ I v. R) — Firms of this theory is to: Firms exist: & Scope are determined by: persist because:Knowledge-Based Explain knowledge creation, sharing Knowledge-based view does not What the firm makes and what it Combinative capabilities in the (Kogut & and transfer within a firm (Kogut explain why firms exist in lieu of buys (1992: 385) creation of difficult to codify and Zander, 1992) & Zander, 1992: 383) opportunism or moral hazard (Foss, highly complex embedded 1996) knowledge (1992: 385-388).Managerial Describe a “new” organizational N/A: This theory assumes the The clustering of roles amongst They successfully decentralize (Bartlett & form characterized by radical existence of firms. three distinct organizational decision making and renew Ghoshal, 1993) decentralization in the creation of groups (front-line, middle continuously while establishing self-contained units and frontline management, and top stabilizing mechanisms which entrepreneurship (Bartlett & management) which work across reduce complexity and guide Ghoshal, 1993). decentralized units (1993: 41) action (1993: 36)Neoinstitutional To provide an explanation of To attain constrained profit N/A: Does not address firm The use of alternative decision (Furubotn, 2001) management decision making maximization (2001: 151). boundaries. making (without knowledge of where profit maximization is not optimal solutions) to attain profits cost-effective given transaction through efficiency relative to costs and bounded rationality industry competitors (2001: 144). (Furubotn, 2001: 143)Neoclassical Justify laissez-faire economics It is only for the sake of profit that N/A: Neoclassical economics has no They are important actors in (Smith, 1937) (Lerner, 1937: viii) with respect to any man employs capital in the positive theory to determine the markets (1976: 306) firm activity that is motivated by support of industry (Smith, 1937: bounds of the firm (Coase, 1937; profit seeking and is guided by an 423). However, this is a theory of 1963: 15) invisible hand (Smith, 1937: 423). markets in which firms are important actors (Jensen & Meckling, 1976: 306); profit maximization is one of many goals or not a goal at all (Cyert & March, 1963: 8)Political (Muller & To define the role of outside N/A: This theory assumes the N/A: Inside versus outside They reduce rent-seeking costs Warneryd, 2001) ownership in minimizing the risk existence of firms (2001: 527) ownership is not associated with through optimal level of outside of opportunistic behavior arising scale and scope. ownership (2001: 529) from imperfect formal enforcement (Muller & Warneryd, 2001: 527)Property Rights To predict the acquisition of assets N/A: This theory assumes the The assets owned by the firm (1986: They identify the optimal ownership (Grossman & by one firm from another and to existence of firms (1986: 692) 692) structure to minimize loss due to Hart, 1986) explain the costs and benefits of investment distortions (1986: integration (1986: 695). 710).Resource-learning To suggest a theory that integrates N/A: This theory assumes the Bundles of unique resources Of the accumulation of unique and (Mahoney, constructs from resource-based, existence of firms. (Mahoney, 1995) valuable resources through the 1995) dynamic capabilities, and learning development of competitive theory (1995: 91). mental models (1995: 97). 8
Journal of Small Business Strategy Vol. 17, No. 1 Spring/Summer 2006that we have utilized to create a typology holders (Quadrant D). Could this analysis(Figure 1) that situates identified theories of presage recognition of the emergence of athe firm relative to the foregoing dimensions. new type of entrepreneurial firm? Extent of Stakeholder InclusionInterestingly, in our analysis we noticed thatthe scale and scope theory-of-the-firm The scale and scope theory-of-the-firmcriterion (Table 1 – column 4) speaks to the criterion in the definition of a firm definesextent of inclusion or exclusion of the extent of inclusion or exclusion ofstakeholders; and we also noticed that the stakeholders. Extent of stakeholder inclusionexistence and persistence theory-of-the-firm can be conceptualized as being broad (tocriteria (Table 1 – columns 3 and 5) speak to include a great many stakeholders) or asequilibration strength. An examination of the being narrow (to exclude most potentialmap created using these criteria (Figure 1) stakeholders, leaving a very limited set ofsuggests that a stakeholder theory of the actual stakeholders). In the stakeholderentrepreneurial firm might fill in an under- literature, the broad definitions attempt toresearched area of theory development, specify the empirical reality that virtuallythereby, fulfilling a needed function in the anyone can affect or be affected by antheory-of-the-firm literature which, as more organization’s actions, while the narrowfully explained in the final section, would definitions attempt to specify the pragmaticexplain firms with broadly inclusive/ reality that firms simply cannot attend to allrevolutionary (strong equilibration) stake- Figure 1 - A Theory of the firm Typology Stakeholder Inclusion NARROW BROAD C D Stakeholder REVOLUTIONARY Narrow/Revolutionary: 1 Broad/Revolutionary: 0 Equilibration Strength A B INCREMENTAL Narrow/Incremental: 10 Broad/Incremental: 6actual or potential claims and must,therefore, Stakeholder Equilibration Strengthemploy some prioritizing system to limit theextent of inclusion in the firm (Mitchell et Both the existence and persistence theory-of-al., 1997, p.854). As anchor points in our the-firm criteria may be used to define theanalysis we have used, at the broad end of strength of stakeholder equilibration in thethe spectrum, Freeman’s (1984) definition of definition of a firm. Accordingly, stake-stakeholders, which includes “any group or holder equilibration strength is defined to beindividual who can affect or is affected by the degree of impact that stakeholder actionsthe achievement of the organization’s have upon the existence and persistence of aobjectives” (Freeman, 1984, p.46). As an firm. The level of stakeholder equilibrationanchor point for the narrow end, we have strength is relevant to an examination ofused Clarkson’s (1995) definition of primary theories of the firm that seeks to situate astakeholders: those without whose contin- stakeholder theory of the entrepreneurialuing participation the firm cannot survive as firm, because the role of the entrepreneur ina going concern (Clarkson, 1995, p.106). relationship to stakeholders is catalytic: 9
Journal of Small Business Strategy Vol. 17, No. 1 Spring/Summer 2006entrepreneurs recruit stakeholders to create interpretation. Discussion continued until wenew combinations of resources to produce were able to reach agreement for how tonew value (Schumpeter, 1934). Weak situate each of the 17 theories of the firmequilibration entrepreneurial processes occur within the 2 x 2 framework suggested by theall the time in a market economy, where analytical dimensions utilized. The results ofentrepreneurs merely realize or conjecture this analysis are presented as the first four(either through genuine insight and sections 1 in Table 1, and are also reported inknowledge, or through mere luck) that some Figure 1. Based on the foregoing tworesources are underutilized in their current dimensions, we identified the four distinctoccupation (i.e., there is disequilibrium) and theory-of-the-firm quadrants shown. A briefrecombine them – through incremental description of each quadrant follows, whichadjustments to existing stakeholder relation- presents a sample theory from eachships – into a potentially more useful and quadrant. 2fruitful combination (Venkataraman, 2002).Strong stakeholder equilibration Quadrant Aentrepreneurial processes take place wherethe distribution of value to its creators Theories considered to be both narrow inbecomes so inequitable under normal market their orientation towards stakeholderconditions that a change is necessary in the inclusion, and incremental with respect toeconomic order – through the revolution of stakeholder equilibration strength appear increative destruction (Schumpeter, 1934) quadrant A. As Figure 1 indicates, theengineered by entrepreneurs who effectuate, majority of the theories of the firm underin reality, (Sarasvathy, 2001) the unfailing consideration (10 of 17) fall into thispower of innovations in goods and services category, and include (in alphabetical order):to produce among relevant stakeholders the agency, customer value, evolutionary,insistence upon change (Venkataraman, exchange, industrial organization,2002). In either case (weak or strong), the institutional, population ecology, real entity,nature of the entrepreneur/stakeholder resource-based, and strategic theories of theinterface affects the existence and firm. Theories in this quadrant tend to bepersistence of the firm. focused on the most constricted set of conditions, by which we mean exclusiveImplied Typology verses inclusive, and constrained to explain only incremental change.In our analysis, we sought to gain a seminalview of each of the theories of the firm For example, agency theory appears toincluded therein by reviewing the first belong in this quadrant because, with respectintroduction or an influential publication of to stakeholder inclusion, agency theory isthe theory, as well as (where helpful) primarily concerned with principal/ownersubsequently published research utilizing or and agent relationships that are manifest in acritiquing the respective theories. We, as firm boundary (for purposes of the theory)authors, then engaged in a series of that is tightly focused. As reported in Tableanalytical discussions regarding the 1, Jensen and Meckling (1976, p.323)“plotting” of each of the theories of the firm suggest that firm scale and scope, asacross the two foregoing analyticaldimensions (Figure 1). Each author 1 The fifth section of Table 1 contains thepresented his own interpretation of the ten theories that did not qualify in our analysistheory’s relationship to the dimensions based under all three criteria.on the review of the relevant publications for 2 The reader is invited to further utilizeeach theory. When a disagreement arose, the Table 1 as a means to more fully elaborate eachauthors redoubled their dialog, each quadrant.explaining the rationale for their 10
Journal of Small Business Strategy Vol. 17, No. 1 Spring/Summer 2006considered by agency theory, is bounded by boundaries but efficiency (Williamson 1985)firm ownership: “set at the point at which the and is, therefore, applicable to thegross increment in (firm) value is just offset coordination and alignment of activitiesby the incremental loss involved in the amongst a wide range of stakeholders in theconsumption of additional fringe benefits economic system. Nevertheless, TCEdue to (managers’) declining fractional specifies only incremental stakeholderinterest in the firm,” which we take to imply equilibration strength because, according toa narrow set of firm stakeholders. With TCE, stakeholders exert relatively littlerespect to stakeholder equilibration strength, direct influence on the firm but, instead, haveagency theory describes how agents of a firm incremental impacts as various stakeholdersact on behalf of the owner depending upon influence the costs of transactions that arethe proper alignment of incentives. Incentive manifest in substitutions at the marginalignments are fundamentally incremental in (Coase, 1937). According to TCE theory,their equilibration strength because they are a substitution at the margin consists of thenexus for contracting relationships that is transaction-by-transaction replacement ofcharacterized by the existence of divisible hierarchy for market that occurs “at theresidual claims on the assets and cash flows margin” (in an incremental manner basedof the organization that can generally be sold upon the most miniscule efficiencywithout permission of the other contracting advantages), such that society becomes “notindividuals (p.311). Furthermore, given an organization, but an organism” (Coase,strong incentives for individuals to minimize p.387) - by its organic nature destroyed byagency costs, the many competing verses nourished by a strong equilibrationalternatives and the shortcomings of the process.corporate form, the corporate form hassurvived the market test against potential Quadrant Calternatives (p.357), indicating a lowsusceptibility to strong stakeholder Theories focused on only a narrow set ofequilibrating forces, and a greater likelihood stakeholders but with a revolutionary view ofthat a weak-equilibration characterization is stakeholder equilibration strength fall intomost apt. Quadrant C. We were only able to identify one theory of the firm that appears to belongQuadrant B in this quadrant. This theory, the entrepreneurial theory of the firm, claims toTheories of the firm which are broad in their set out a general framework within which allinclusion of stakeholders but remain the key questions in the theory of the firmincremental in their stakeholder equilibration can be integrated (Casson, 1996; Witt, 1998).strength, appear in quadrant B (Figure 1).Six theories of the firm appear to fit into this However, somewhat surprisingly, we werequadrant and include: behavioral, game, constrained to assess the entrepreneurialresource dependence, stakeholder, theory of the firm to be narrow in itstransaction cognition, and transaction cost stakeholder inclusion because – as suggestedeconomic theories of the firm. Transaction in Table 1 – it appears to only be focused oncost economics (TCE) provides an example a narrow set of environmental actors that canof theories of the firm that reside in quadrant have a direct impact on the firm: thoseB. stakeholders implicated in generating and informing entrepreneurial insight (Casson,As noted in Table 1, TCE is broad in its 1996). This is in contrast to theories whichinclusion of stakeholders due to the nature of consider a broader set of internal andthe first-order economizing process external stakeholders, such as stakeholdermotivating transaction cost economizing theory (and other such theories appearing in(Williamson, 1991) which knows few Quadrant B). Yet the entrepreneurial theory 11
Journal of Small Business Strategy Vol. 17, No. 1 Spring/Summer 2006of the firm does have a revolutionary In our present assessment, we observe thatorientation towards stakeholder equilibration presently extant theories mainly explainstrength, suggesting that stakeholders firms that form to manage incrementalexternal to the firm (e.g., environmental changes in the value creation process, whichforces that dictate responses to change) bring occur over some continuum of a relativelyto bear the full power of the environment on narrow to somewhat broad level ofa firm that is reflexively adaptable: to stakeholder inclusion. Stakeholder theoryreformulate itself to achieve indefinite life, (Brenner & Cochran, 1991; Freeman, 1984;thus, being subject to and responsive to Mitchell et al. 1997) has developed tostrong equilibrating forces. manage the inclusiveness dimension. What is missing within the stakeholder theory-of-the-Quadrant D firm literature is theory that explains broadly inclusive firm formation that is alsoTheories of the firm which have a broad revolutionary in nature. Such phenomena doview of stakeholder inclusion and a exist, such as firms that produce so-calledrevolutionary orientation towards disruptive technologies (Christensen, 1997).stakeholder equilibration would be included The intended purpose of a stakeholder theoryin Quadrant D. However, as indicated in of the entrepreneurial firm then would be toFigure 1, we found no theories of the firm advance theory that addresses the threethat appeared to be likely inhabitants of this requisite dimensions in our analysis: thequadrant. Accordingly, we observe that emergence, growth/size, and persistence ofgiven the lack of theoretical development broadly inclusive, revolutionary firmsassociated with a combined orientation (Figure 1, Quadrant D).toward revolutionary equilibration strengthand a broad view of stakeholder inclusion, Reason for Firm Existencethere appears to be a need for such a theory.In the following section we inquire about the A stakeholder theory of the entrepreneurialoutlines of a potential theory that would fill firm would explain why broadly inclusivethis gap in the literature – what we term a revolutionary firms might be expected tostakeholder theory of the entrepreneurial exist in the first place. Theoreticalfirm – which we hope will address the justification abounds for firms that aredeficiency in the extant theories of the firm. incremental in their equilibration strength (Table 1; Figure 1, Quadrants A & B). We wonder at the paucity of theories of the firmTOWARD A STAKEHOLDER THEORY that possess revolutionary equilibration OF THE ENTREPRENEURIAL FIRM strength. We are hopeful, in highlighting this paucity, that we will draw research attentionPurpose of a Stakeholder Theory of the to the investigation of such questions as: AreEntrepreneurial Firm the forces in play so powerful that firms, as we know them, are simply inadequate toAs illustrated in Figure 1 (which plots the contain the socioeconomic energy generated?typology suggested by our analysis in Table Are all entrepreneurial firms to be considered1), the theory-of-the-firm literature is to be revolutionary or are there bothmissing broad/revolutionary theories of the incremental and revolutionary types of firms,firm (Figure 1, Quadrant D). In this section necessitating theory that explains each andof the paper, we suggest that a stakeholder the distinction between them? Are there,theory of the entrepreneurial firm might fill within the coordination, bridging/buffering,this void. We therefore inquire: What decision-making, economizing, and otherpurposes would such a theory serve that reasons for firm existence, those theoriesextant theories do not serve? with a logic sufficiently compelling to explain the reasons for broad/revolutionary 12
Journal of Small Business Strategy Vol. 17, No. 1 Spring/Summer 2006firms? Attention to these questions will persistence of the phenomenon, is there acontribute to a better understanding of place in the theory-of-the-firm literature forreasons for these firms’ existence. such broadly inclusive, revolutionary but provisional systems (BIRPS)?Scale & Scope DISCUSSIONA stakeholder theory of the entrepreneurialfirm would also explain the scale and scope Stakeholder thinking is essential in business.of a broadly inclusive revolutionary firm. And knowing who or what really countsThis is an issue at present because, in its (Mitchell, et al., 1997) does matter. In thisinitial conceptualization, Schumpeterian paper, we use two dimensions of counting:entrepreneurship (the notion that new (1) making a stakeholder mistake that cancombinations follow processes of creative tear apart a business – the equilibrationdestruction) is applied to entrepreneurs as problem; and (2) making a stakeholderindividuals, not to firms/organizations mistake that can impair a business for lack of(Schumpeter, 1934). Progress toward the support – the inclusion problem.specification of a broad/revolutionary theoryof the firm should explicitly lay out why and The “so what?” implications of this type ofhow organizations might become implicated analysis indicates that we can use these twoin processes of revolutionary creative dimensions to create a means to interpret adestruction, especially since it is commonly great many proposals for: (1) why firmsexpected that most organizations will do just come into existence in the first place; (2)the opposite in the face of the emergence of how big they grow; and (3) when theydisruptive technologies (Christensen, 1997). become obsolete and fail to persist.Scale and scope dynamics are also an issuebecause the motivation for stockholders As practitioners in the arena of small(narrow) verses stakeholders (broad) has business and entrepreneurship, having thistraditionally been financial. Thus, a credible analytical framework available to us wouldreason for broad inclusion and the motive make it possible to see ourselves frompurpose for such inclusion must be identified multiple viewpoints and, thereby, betterand has only recently begun to be explored understand the kinds of decisions that are(Mitchell, 2002b). truly important. So-called “theories of the firm” have been a topic of discussion amongPersistence thoughtful practitioners for many decades for just this reason: to answer the why, how, andLastly, a stakeholder theory of the when questions noted in the previousentrepreneurial firm would explain the paragraph. While not every theory applies topersistence of a broadly inclusive every business, it is not unreasonable forrevolutionary firm. Even should we accept as low-change businesses in narrowly definedgiven the reasons for existence and for the niches to utilize the theory-lenses in Figure 1bounding of scale and scope, we would not – Block A and for lower-change businesseshave answered the question: Why couldn’t in broadly defined niches to view themselvesthe broadly inclusive/revolutionary firm through the theory-lenses in Figure 1 – Blocksimply be a transitory form that regularly B. Perhaps of greater import is for people inprecedes or is commonly attendant to the businesses who are in high-change, broadlyentrepreneurial event? If so, is such an inclusive settings to be aware that there isexplanation, no matter how ably it explains very little research and documentedexistence, scale, and scope, really never is understanding of this situation and to see thisdestined to be a theory of the firm because it as a potential opportunity to explore thedoes not explain persistence? Furthermore, ways to incorporate stakeholders moreeven if an argument can be made for the 13
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