Chapter 1: Strategic Management and Strategic Competitiveness 23Trade-off decisions are made in light of
how important the support of each stake-
holder group is to the firm. For example,
environmental groups may be very import-
ant to firms in the energy industry but less
important to professional service firms.
A firm earning below-average returns does
not have the capacity to minimally satisfy
all stakeholders. The managerial challenge
in this case is to make trade-offs that min-
imize the amount of support lost from
stakeholders. Societal values also influence
the general weightings allocated among
the three stakeholder groups shown in
Figure 1.4. Although all three groups are
served by and, in turn, influence firms deci-
sions in the major industrialized nations,
the priorities in their service and influence
vary because of cultural and institutional
differences. Next, we present additional
details about each of the three major stake-
holder groups.
Capital Market Stakeholders
Shareholders and lenders both expect a firm to preserve and enhance the wealth they
have entrusted to it. The returns they expect are commensurate with the degree of
risk they accept with those investments (i.e., lower returns are expected with low-
risk investments, while higher returns are expected with high-risk investments).
Dissatisfied lenders may impose stricter covenants on subsequent borrowing of
capital. Dissatisfied shareholders may reflect their concerns through several means,
including selling their stock. Institutional investors (e.g., pension funds, mutual
funds) often are willing to sell their stock if the returns are not what they desire,
or they may take actions to improve the firm’s performance such as pressuring top
managers and members of boards of directors to improve the strategic decisions and
governance oversight.^116 Some institutions owning major shares of a firm’s stock may
have conflicting views of the actions needed, which can be challenging for managers.
This is because some may want an increase in returns in the short-term while
the others desire a focus on building long-term competitiveness.^117 Managers may have
to balance their desires with those of other shareholders or prioritize the importance
of the institutional owners with different goals. Clearly shareholders who hold a large
share of stock (sometimes referred to as blockholders, see Chapter 10) are influen-
tial, especially in the determination of the firm’s capital structure (i.e., the amount
of equity versus the amount of debt used). Large shareholders often prefer that
the firm minimize its use of debt because of the risk of debt, its cost, and the possi-
bility that debt holders have first call on the firm’s assets over the shareholders in case
of default.^118
When a firm is aware of potential or actual dissatisfactions among capital market
stakeholders, it may respond to their concerns. The firm’s response to stakeholders
who are dissatisfied is affected by the nature of its dependence on them (which, as© Africa Studio/Shutterstock.com
As a firm formulates its strategy, it must consider all of its primary
stakeholders in the product and capital markets as well as
organizational shareholders.