An empirical investigation of how the simultaneous influence of multiple stakeholders acts on the focal
firm: a stakeholder theory perspective
Student Number: s2457369 Name: Libin Ding
Study Program: Msc BA SIM Supervisor: Prof. Dr. Hans van der Bij
June, 2014
(Word count: 8301)
Abstract
Albeit that the stakeholder theory has recently gained widespread attention among scholars and managers, the research which investigates how the simultaneous influence of multiple stakeholders acts on the focal firm is rare. In order to fill this gap, the author in this study developed and empirically tested a conceptual framework that demonstrate how the interaction between firm’s multiple stakeholders acts on the performance of the focal firm. The empirical results of this study suggest that the stakeholder indeed has a positive influence on focal firm’s financial performance.
Specifically, firm’s supplier orientation is positively related to firm’s short-term financial performance. However, the interaction between different stakeholders has not been found having a significant interaction effect on focal firm’s financial performance. The results of this study have provided some theoretical contribution because there have not been much research focused on supplier orientation yet;
besides there have not been much research focused on interaction effect on different stakeholders as well. Moreover, this study has also provided several practical insights for managers to practice stakeholder theory.
Keywords: Stakeholder theory; Corporate Social Responsibility; Supplier orientation;
Shareholder value; Firm performance
Contents
1. Introduction ... 1
2. Theoretical background and hypotheses ... 3
3. Methodology ... 10
4. Results ... 17
5. Discussion and Conclusion ... 20
Acknowledgements ... 26
Reference ... 27
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1. Introduction
The increasingly fierce competition nowadays has made scholars and managers realized that developing new technologies for their own products internally is no longer enough. In recent decades, firms across industries have increasingly acquired external technologies to complement their internal knowledge bases (Teece, 1986;
von Hippel, 2007; Beamish & Lupton, 2009). This phenomenon brought more and more attention of scholars and managers to the concept of stakeholder management.
The concept of stakeholder was first proposed by Freeman (1984), which is defined as
‘Any group or individual who can affect or is affected by the achievements of the firm’s objectives’. In brief, stakeholder theory discusses that the focal firm has relationships with many constituent groups and these relationships can result into a maintained support from these groups by balancing their relevant interests (Freeman, 1984; Freeman and Evan, 1990; Clarkson, 1998; Jones and Wicks, 1999).
In order to survive in an unstable and uncertain environment in a long-term period, firms must satisfy a variety of stakeholders, who are all capable of creating unacceptable damage on the viability of the firms if their interests were not satisfied (Garvare and Johansson, 2010). Therefore, how to satisfy the needs and expectations of firms’ stakeholders has been a crucial subject that most firms are confronted with today. One camp of researchers claims that business practice nowadays will be composed by the limits of the natural ecosystem and in favor of a more social and environmental-friendly rationale (Hart, 1995). Others suggest that satisfying shareholders and customer would be the most crucial issues when the managers carry out their work (Martin, 2010; Boyer, 2000). Based on their work, it is obvious that firms nowadays turn away from a single orientation on creating shareholder value to a wider array of stakeholders such as the environment, society and customers (Harrison et al., 2010). Previous studies have suggested a mechanism for describing the simultaneous influence of multiple stakeholders and for predicting firm’s responses (Rowley, 1997). Nevertheless, no empirical studies have been found to investigate
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how the simultaneous influence of multiple stakeholders acts on the focal firm.
Considering this background, I will try to relate Corporate Social Responsibility (CSR) orientation, supplier orientation and shareholder orientation to a firm’s short-term financial performance and long-term financial performance in this study. From the previous researches, some scholars suggest that CSR orientation contributes to improving the firm’s financial performance (Berman et al., 1999; Porter and Kramer, 2006). Moreover, to achieve success, firms are more than ever dependent on their suppliers’ resources, capabilities and relationships with these suppliers, thus cooperating with the suppliers can create outstanding performance (Freeman et al., 2004). Last but not least, from shareholder orientation, if firms stress their shareholders’ rights, then the firms’ stock price might perform well in the stock market, thus will also increase the financial performance ultimately.
Based on a literature review, I did not find any research which addressed: (1) whether multiple orientations interact with each other, (2) whether firms that meet the multiple stakeholders’ demands simultaneously perform better than those firms that only meet part of the multiple stakeholders’ demands, (3) whether these different kinds of orientations have similar weight. Therefore, the final research question this study aims to answer is that how the interaction between firm’s multiple stakeholders acts on the performance of the focal firm?
According to the empirical studies, supplier orientation is not defined as clearly as CSR orientation and shareholder orientation. Therefore, in order to make this definition clearly in this study, supplier orientation is defined as the processes and activities that are necessary to identify, select and collaborate with the most adequate suppliers which can best support the focal firm’s business processes. That is to say, the focal firm should select the most adequate supplier rather than choose the least costly supplier which is based on the transaction cost theory. I adopt stakeholder theory as a guiding perspective to relate CSR orientation, supplier orientation and shareholder orientation to the firm’s short-term financial performance and long-term
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financial performance.
The paper is organized as follows. It will start with a literature review of stakeholder theory and the concepts of CSR orientation, supplier orientation, shareholder orientation and financial performance. This is followed by the general framework of the study, hypotheses. Then the measurement scales and analyses results are presented.
Finally, the paper presents a discussion based on the empirical analysis and concludes with theoretical contributions, implications, limitations and directions for future research.
2. Theoretical background and hypotheses Stakeholder Theory
The development of stakeholder theory has centered around two related streams.
Define the stakeholder concept and then classify stakeholders into categories that provide an understanding of individual stakeholder relationships (Rowley, 1997). The term ‘stakeholder’ was first presented in an internal memorandum at the Stanford Research Institute (SRI) in 1963 (Freeman, 1984). They defined stakeholders as those groups on which the organization is dependant for its long-term survival, and they limited its focus merely on shareholders whose needs were perceived to be the only goals of a business. This definition was obviously too narrow. So later, Freeman redefined stakeholders as ‘any groups or individuals who can affect or is affected by the achievements of the firm’s objectives’ (Freeman, 1984). This revised concept made it clear that organizations are required to address not only the shareholders demands but also a set of other stakeholder expectations. Since then, a large number of literatures have appeared that are variations of Freeman’s concept. For instance, Carroll (1993) claimed that groups or individuals can be stakeholders by virtue of their legitimacy, but he enlarged the scope of the definition to include those who have power (the ability to impact the organization). Wicks et al. (1994) defined stakeholder as ‘what interacts with and gives meaning and definition to the corporation’. Clarkson
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(1995) argued that stakeholders are those who bear some risk as a result of having invested some form of capital, either financial or human in a firm and, therefore, has something to lose or gain depending on an organization’s behaviors. In sum, under any definition within the stakeholder perspective, organizations are required to address a set of multiple stakeholder demands. In this study, the multiple stakeholders will be chosen as customers, suppliers and shareholders. More specifically, I will mainly focus on how the focal firm addresses the demands of CSR orientation, supplier orientation and shareholder orientation.
Nevertheless, a stakeholder theory requires not only an understanding of different types of stakeholder influences but also how the focal firm responds to those influences. In 2002, Freeman (2002) suggested in his new research that focal firms should redistribute benefits and crucial decision–making power to all stakeholders based on the contribution they make. This viewpoint provided a new direction to develop the stakeholder theory because firms do not simply respond to each stakeholder individually. Furthermore, Berman et al. (1999) claimed that there is a new domain to research the stakeholder theory which is instrumental research.
Instrumental research focuses on the effects of a stakeholder orientation to business performance and stakeholder outcomes. Against this background, an analysis of the complex array of relationships among multiple stakeholders to predict firm’s behaviors and performances would contribute to the instrumental domain in stakeholder theory. Thus, this study will focus on how external stakeholder orientations result in firm performance. In other words, the stakeholders’ satisfaction encourages managers and employees of the focal firms to get a sense of the value that the firms want to create. In their interactions with these stakeholders, they will allow the firm generating outstanding performance (Freeman et al., 2004). In this study, I will mainly focus on how CSR orientation, supplier orientation and shareholder orientation act on the performance of the focal firm.
Corporate Social Responsibility (CSR) Orientation
In recent decades, Corporate Social Responsibility (CSR) has become a hotspot of the
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society. Firms like Apple, though having put lots of efforts on CSR issues, still facing overtime work accusations of their Chinese supplier Foxconn, fear damage of their reputation due to their supplier’s actions. Hence, scholars have shown a growing interest in research CSR. Among different definitions of CSR in the previous studies, consistent with McWilliams and Siegel (2000) and McWilliams et al. (2006), CSR is defined as a series of initiatives where the firm goes beyond compliance and engages in ‘actions that appear to further some social good, beyond the interests of the firm and that which is required by law’ in this study. A firm’s CSR orientation may lead to a good relationship with different stakeholders such as employees and customers (Hillman & Keim, 2011). In this study, CSR orientation is refer to an orientation towards the general public through the support of environmental, social and ethical needs. Thus, if the focal firm puts lots of efforts on CSR issues, it may increase the reputation of the focal firm and reduce the transaction costs associated with the suppliers and customers ultimately. In this study, inspired on Deshpandé and Farley (1998), CSR orientation is defined as the set of cross-functional processes and activities directed at continuously identifying and integrating environmental and societal needs in business processes. Based on the stakeholder theory, considering that devoting to the CSR orientation can help firms get good word of mouth among their customers, so if a firm focuses on the CSR issues, it will help the firm build a good reputation in the market, thus providing an important intangible resource to the firm, generating sustained competitive advantage, reducing the transaction costs associated with the suppliers as well as customers and increasing the short-term and long-term financial performance ultimately.
Therefore, I hypothesize:
Hypothesis 1a: Firm’s CSR orientation is positively related to short-term financial performance.
Hypothesis 1b: Firm’s CSR orientation is positively related to long-term financial performance.
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Supplier Orientation
Driven by an ongoing trend in the outsourcing of business activities, firms are increasingly depending on suppliers to achieve their objectives (Handfield, 1993).
Therefore, a firm’s success does not only depend on the capabilities the firm has, but also depends on other parties (such as suppliers) with respect to their critical (strategic) resources. In view of this fact, the supplier has become an important stakeholder as well as a crucial partner in the value creation process of the firm. From a relational perspective, if the focal firm builds trust with its suppliers, the relationship between them will provide the assurance that opportunistic hazards are limited (Fames et al., 2008). Furthermore, trust is an informal, self-enforcing safeguard of transaction-specific assets. Because it is self-enforcing, it does not require the specification of contracts, installment of monitoring systems or enforcement through third-parties. Thus, the transaction costs will be lower and ultimately increase the focal firm’s financial performance (Dyer & Chu, 2000; Fames et al., 2008). Firms that engage in cross-functional processes and activities directed at developing and operating excellent supplier relationships pursue a supplier orientation. A supplier orientation is a strategic means to support managing the firm effectively and it focuses not only on the efficient management of the physical processes from raw material to final user but also on the improvement of processes and routines (Hult et al., 2008;
Roy et al., 2004). In this study, based on Deshpandé and Farley (1998) and Hult et al.
(2008), supplier orientation represents the set of cross-functional processes and activities directed at developing and managing an excellent supply base. Based on the stakeholder theory, supplier orientation can be another driver of firm financial performance. Moreover, the lower transaction costs and more efficient supply management will ultimately increase the focal firm’s financial performance, therefore I hypothesize:
Hypothesis 2a: Firm’s supplier orientation is positively related to short-term financial performance.
Hypothesis 2b: Firm’s supplier orientation is positively related to long-term financial performance.
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Shareholder Orientation
The recent neoliberal era has seen a significant change in the corporate behavior. One of its features is creating “shareholder value”. An Organization for Economic Cooperation and Development (OECD) study summarizes these developments as follows:
“One of the most significant structural changes in the economies of OECD countries in the 1980s and 1990s has been the emergence of increasingly efficient markets in corporate control and an attendant rise in shareholders’ capability to influence management of publicly held companies. In particular, owing to the expanded possibilities for investors to use the capital market to measure and compare corporate performance of corporations and to discipline corporate management, the commitment of management to producing shareholder value has become perceptibly stronger; this represents a significant change in the behavior of large corporations.(1998, p. 15)”
Researchers in previous studies indicated that there is an ‘owner-manager conflict’ at the firm level, that is to say, managers always look at the long-run growth of the firm, while shareholders rather focus on the short-run development of stock values (Crooty, 1990; Boyer, 2000; Stockhammer, 2004). Furthermore, if the firms are only interested in increasing shareholder value (in a short-term perspective), the other stakeholders may react as the best employees look for a new job in another firm; informed customers turn away; suppliers strike back; governments start to redefine the ‘law’s of the game’ by changing conditions of investment incentive grants, environmental protection laws or laws for corporate governance (Kennedy, 2000).
Thus how to balance the shareholder value and other stakeholder value would be a crucial issue that the top managements should concern. In this study, I developed a new definition inspired on the market orientation definition of Deshpandé and Farley (1998). Thus shareholder orientation is defined as the set of cross-functional processes and activities directed at continuously creating value to shareholders and satisfying shareholders’ demands. Considering that there is an ‘owner-manager conflict’ at the firm level, so the shareholder orientation might have different influence to the firm’s
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short-term financial performance and long-term financial performance. Therefore, I hypothesize:
Hypothesis 3a: Firm’s shareholder orientation is positively related to short-term financial performance.
Hypothesis 3b: Firm’s shareholder orientation is negatively related to long-term financial performance.
Multiple Stakeholder Orientations and Financial Performance
An instrumentalist perspective on stakeholder management suggests that establishing constructive stakeholder relationships should contribute to the performance of the firm, not only in the short-term but also in the long-term (Freeman et al., 2007).
Furthermore, considering there is an ‘owner-manager conflict’ at the firm level, thus, in this study, examining both the firm’s evaluation of current performance compared to its major competitors and the firms prospects on its future performance compared to firm’s current performance is necessary and important.
Nevertheless, the previous studies always examined binary relation between an external stakeholder orientation and firm performance which is incapable to give a panorama of how different stakeholders interact together. Therefore, this study will not only examine the individual influence by different stakeholders, but also focuses on the interaction effect by these stakeholders. Since the stakeholder theory suggests that the more stakeholder orientations are embedded in the firm’s activities and processes, the more leads the firm acquires to achieve success (Preston & Donaldson, 1999). Thus, I hypothesize:
Hypothesis 4a: The interaction between CSR orientation, supplier orientation and shareholder orientation has a positive effect on focal firm’s short-term financial performance.
Hypothesis 4b: The interaction between CSR orientation, supplier orientation and shareholder orientation has a positive effect on focal firm’s long-term financial performance.
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Research Framework
Based on the previous discussion on literature, I build a conceptual model that allows examining (1) whether multiple orientations interact with each other, (2) whether firms that meet the multiple stakeholders’ demands simultaneously perform better than those firms that only meet part of the multiple stakeholders’ demands, (3) whether these different kinds of orientations have similar weight. The conceptual frameworks are presented below.
Note: Direct effect Interaction effect Figure 1: Conceptual model
CSR Orientation
Supplier Orientation
Shareholder Orientation
Firm
Performance
Control variables:
Firm size
Technology turbulence Market turbulence
▪Short-term
▪Long-term
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3. Methodology
Sample and Data Collection
In order to examine CSR orientation, supplier orientation and shareholder orientation among multiple firms operating in a supply chain, the survey data was collected from three parties operating in a supply chain: a focal firm, one of its key suppliers, one of its key business customers and its shareholders. For each group of respondents, a separate questionnaire was developed. The respondents participating in this research were typically executives from companies based in the Netherlands. Executives were selected as key respondents for the survey because they are thought to be the most knowledgeable about the strategic orientation of their firms. The participating executives were asked to identify one of their key suppliers and one of their key customers using the following criteria: (1) one of their top three suppliers/ customers that (2) are perceived crucial for running business operations of the focal firm. I followed other studies that adopted a supply chain setting (Deshpandé et al., 1993;
Farh et al., 1998; Langerak, 2001; Siguaw et al., 1998) focusing on key rather than average suppliers and customers to increase the reliability of potential supply chain effects (Kotabe et al., 2003). Besides, shareholders of these firms did not participate in the survey directly; but rather the voice of the shareholders was reflected by the executives.
The multi-item survey measure was administered to a sample of 885 general executives registered in the databases of three professional platforms: CSR Netherlands (MVO Nederland, 382), VOKA Chamber of Commerce Kempen (400), and buyers’ cooperative INKA (103). Freelancers, consultants and firms were excluded because they were expected not to have key supplier relationships. In total 528 executives were contacted for participation. There were 182 of these executives that were willing to participate and received a personal questionnaire through a web-enabled survey tool or a digital survey format by email. 125 completed questionnaires were received after reminders by email and phone (68.7% of the sent questionnaires). Contact details of 98 suppliers and 95 customers were obtained (53.3%
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of the participants that received the questionnaire).These 193 contact persons at supplier and customer firms received the questionnaire, and 185 of them were returned after several reminders. Unfortunately, two of the surveys could not be used due to missing data, and only matched chains could be included in the paper, resulting in a final number of returned and useable questionnaires for 88 matched supply chain relationships (48.4% of the focal firms that received the questionnaire).
These 88 firms were operating in manufacturing (36 firms: 40.9%), construction (22 firms: 25.0%), information and communication (11 firms: 12.5%), wholesale and retail trade (7 firms: 7.9%), administrative and support service activities (4 firms:
4.5%), other industries (8 firms: 9.1%). To test for possible non-response bias, I followed the extrapolation method of Armstrong and Overton (1977) comparing early (half split completed matched questionnaires in one chain) with late responses on performance. Results indicated no non-response bias. Moreover, no differences exist between the respondents of the different databases.
Pretest
The original questionnaire was developed in English and translated to Dutch to allow both Dutch focal firms and international supply chain partners to participate in the research. The Dutch version was prepared using the parallel-translation/double translation method (Adler, 1983; Sekaran, 1983). Minor inconsistencies were discussed with all four translators and the final Dutch questionnaire was slightly modified for meaning.
The purpose of the pretest of the questionnaire was to assess the adapted and translated scales. The pretest was conducted in three sets of firms existing of three focal firms and three suppliers. The respondents were asked to fill out the questionnaire and “think aloud” during reading and answering the questions (Hunt et al., 1982). The interviews were recorded and carefully monitored by two researchers.
The analysis of the pre-test interviews resulted in adaptations for wording and instructions.
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Measures CSR orientation
Corporate Social Responsibility (CSR) is a concept that is strongly associated with stakeholder theory (Harrison et al., 2010). In this study, CSR orientation describes the firm-wide attitude and behavior towards embedding social, environmental and ethical needs into its business processes and product solutions and a willingness to find solutions for these needs. Inspired by market orientation, CSR orientation is defined as "a set of cross-functional processes and activities directed at continuously identifying and embedding environmental, social and ethical needs in business processes" (adapted from Deshpandé & Farley, 1998).
For CSR orientation, a new scale was developed inspired on the market orientation scale of Deshpandé and Farley (1998) with the three dominant application domains for CSR: environmental assessment, social issue management, and ethical business behaviour (Bansal, 2005; Brammer & Pavelin, 2006; Clarkson, 1995; Waddock &
Graves 1997). Items used in the two scales are for instance ‘we define corporate social responsibility as one aspect of our strategies for competitive advantage’ and
‘we have routines to reduce our energy consumption.’
Supplier orientation
A supplier orientation as a strategic means to support managing the firm efficiently has not received explicit research attention yet. Hult et al. (2008) introduced supplier orientation as a subset of supply chain management. In their perspective, supplier orientation refers to the processes that enable the progress of the value from raw material to final user and back to redesign and final disposition. Their concept of supplier orientation is instrumental to value chain activities. However, these authors do not acknowledge suppliers as essential stakeholders for achieving firm effectiveness. Therefore, I combine the formulations of the scale suggested by Hult et al. (2008) with the market orientation scales of Deshpandé and Farley (1998) to fully represent the set of cross-functional processes and activities directed at developing and managing an excellent supply base. Examples that have been used are like that ‘in
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our company we consider our main suppliers as drivers of competitive advantage’ and
‘we systematically monitor developments in the supply market.’
Shareholder orientation
A shareholder orientation is defined as “the set of cross-functional processes and activities directed at continuously creating value to shareholders and satisfying shareholders’ demands’ in the questionnaire (adapted from Deshpandé & Farley, 1998).” The scale includes items such as ‘our objectives are driven by the creation of shareholders’ and ‘comparing our share prices with those of our competitors at least once a year.’
Firm performance
Performance has been evaluated at the focal firm. An instrumentalist perspective on stakeholder management suggests that establishing constructive stakeholder relationships should contribute to the effectiveness of the firm, not only in the short run but equally in the long run (Freeman et al., 2007). Therefore, it is important to examine both the firm’s evaluation of current performance compared to its major competitors and its own objectives, and the firms prospects on its future performance compared to firm’s current performance. Hence, I examine short term performance based on return on equity, profit margin and net profits compared to competitors and compared to its own objectives over the last three years (Narver & Slater 1990;
Spanos & Lioukas, 2001).
Researchers that used both subjective and objective measures of performance found strong correlations between the two (Min et al., 2007). Antecedent-justification suggested that self-reported perceptual measures do well represent objective performance measures. Especially the use of comparison measures (performance relative to major competitors and relative to current performance) is recommended to provide an anchor point to more objectively assess firm’s performance. For long-term performance, it is asked whether return on equity, profit margin, return on investment and net profits are expected to alter for the better or the worse compared to current
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business performance in the next five years (Narver & Slater 1990; Spanos & Lioukas, 2001). Table1 provides the details of the survey measures.
Table1: Description of Survey Measures
Variable Definition
Firm’s CSR orientation is the set of cross-functional processes and activities directed at continuously identifying and embedding environmental, social and ethical needs in business processes (adapted from Deshpandé &
Farley, 1998).
Items = 5. Assessed on a 7 point Likert scale labeled 1=strongly disagree to 7 = strongly agree.
Firm’s supplier orientation represents the set of cross-functional processes and activities directed at developing and managing an excellent supply base (adapted from Deshpandé & Farley, 1998; Hult, et al., 2008).
Items = 5. Assessed on a 7 point Likert scale labeled 1=strongly disagree to 7 = strongly agree.
Firm’s shareholder orientation is the set of cross-functional processes and activities directed at continuously creating value to shareholders and satisfying shareholders’ demands’ in the questionnaire (adapted from Deshpandé & Farley, 1998).
Items = 4. Assessed on a 7 point Likert scale labeled 1=strongly disagree to 7 = strongly agree.
Short-term performance evaluates return on equity, profit margin and net profits over the last three years compared to competitors and compared to own objectives (Narver et al., 1990; Spanos et al., 2001).
Items = 8. Assessed on a 7 point Likert scale labeled 1 = much worse to 7 = much better.
Long-term performance evaluates return on equity, profit margin, return on investment and net profits expected in the coming five years compared to current business performance (in 2007) (Narver et al., 1990; Spanos et al., 2001).
Items = 4. Assessed on a 7 point Likert scale labeled 1 = much worse to 7 = much better.
Control variables
In this research, market turbulence, technology turbulence and firm size are chosen as control variables. Market turbulence— the rate of change in the composition of customers and their preferences— is considered to be one of the environmental factor that may be argued to influence firm performance. Organizations that operate in the
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more turbulent markets are likely to have to improve their products and services continually so as to satisfactorily cater to customers’ changing preferences. Therefore, stakeholders’ orientations are likely to be more strongly related to firm performance in turbulent markets than in stable markets (Jaworski & Kohli, 1993). Two items for the market turbulence scale have been measured and assessed the extent to which the composition and preferences of a firm’s customers tended to change over time (e.g.,
“our customers tend to look for new products all the time”). A second environmental factor that may be argued to influence a focal firm’s performance is technology turbulence — the rate of technology change. Organizations that work with nascent technologies that are undergoing rapid change may be able to obtain a competitive advantage through technological innovation, thereby diminishing the importance of a market orientation (Bennett & Cooper, 1979; Houston, 1986; Jaworski & Kohli, 1993). Therefore, under high technological turbulence situation, the relationship between stakeholders’ orientation and the focal firm’s performance would be weaker compared to low technological turbulence. Technology turbulence scale has been measured by two items and assessed the extent to which technology in an industry is in a state of flux (e.g., “Technological changes provide big opportunities in our industry”). A third environmental factor posited to affect a focal firm’s performance is firm size. Firm size has long been found to be an important effecting factor to firm survival and performance (Porter, 1981). Larger firms tend to be more established, constructing more stable ties with their stakeholders (Peng & Luo, 2000). Firm size has been measured by sales volume. The sales volume has been logged to correct for a skewed distribution and labeled Log SALES.
Analysis
Since the number of factors are prescribed, as well as which items should belong to which factor have already been known, an exploratory factor analysis (EFA) using principal component analysis with varimax rotation is performed in SPSS 20. After performing the EFA, I reviewed each construct and delete items that loaded on multiple constructs or had low item-to-construct loadings. After that, I calculated the
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Cronbach alpha for each construct to check whether the items used for each factor together have good construct reliability. The Cronbach alpha ranged from .81 to .96, which indicated that reliabilities in the acceptable range suggested in literature (Nunnally, 1978). In the next step, a correlation analysis was performed.
Table 2 displays the final result of confirmatory factor analysis and Table 3 displays the descriptive statistics, Cronbach alpha and correlations of the constructs in the conceptual model.
Table 2: The result of exploratory factor analysis
Rotated Component Matrixa Rescaled Component
1 2 3
CO1 .826 .147 -.071
CO3 .791 .223
CO2 .760 .128 .091
CO8 .686 .159 -.016
CO4 .682 -.015 .091
CO6 .642 .194
CO7 .615 .117 .268
SPO6 -.040 .815 -.092
SPO1 .174 .753 .068
SPO4 .304 .736 .181
SPO7 .026 .669 -.067
SPO2 .093 .640 .128
SPO5 .322 .512 -.031
SPO3 .210 .509 -.103
SHO4 .179 .033 .836
SHO3 .083 .815
SHO5 .099 .122 .789
SHO1 .048 -.157 .771
SHO2 -.134 .018 .642
Extraction Method: Principal Component Analysis.
Rotation Method: Varimax with Kaiser Normalization.
a. Rotation converged in 5 iterations.
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Table 3: Descriptive Statistics, Cronbach α and Correlation Matrix
α Mean SD A B C D E F G H
SPO A .81 4.70 1.05 -
CO B .86 4.65 1.22 .394** -
SHO C .83 3.64 1.42 .040 .139 - MT D - 4.35 1.31 .334** .287** .133 -
TT E - 4.84 1.33 .238* .048 -.174 .461** - LogSALES F - 7.75 .70 -.045 .027 .141 .076 -.104 - FPS G .96 4.50 1.10 .329** .165 .074 .220* .126 .197 - FPL H .96 4.66 1.17 .045 .055 -.051 .151 .192 .011 -.163 -
*Correlation is significant at the 0.05 level (2-tailed).*
**Correlation is significant at the 0.01 level (2-tailed).*
Note: SPO =Supplier orientation CO= CSR orientation SHO=Shareholder orientation MT=Market Turbulence TT =Technology Turbulence Log SALES=lg (sales volume) FPS=Short-term performance FPL =Long-term performance
4. Results
In order to test the hypotheses, I have used multiple regression analyses. As the correlations between the variables are presented in Table 3, there is a relatively strong correlation between supplier orientation and focal firm’s short-term financial performance (r=.33, p<.01). Considering that there are high correlations between several stakeholders’ orientations, multi-collinearity may exist among different stakeholders’ orientations. In order to solve the multi-collinearity problem, the independent variables in the interaction have been mean-centered (Baron & Kenny, 1986).
To test H1, H2 and H3, I conducted regression analyses between the three different stakeholders’ orientations and focal firm’s short-term and long-term financial
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performance. Furthermore, in order to assess the interaction among supplier orientation, CSR orientation and shareholder orientation together with firm’s financial performance, I computed four new independent variables, namely CO*SPO, CO*SHO, SPO*SHO and SHO*SPO*CO to conduct multiple regression analyses to check the H4.
Table 4 and Table 5 outline the result of regression analyses of CSR orientation, supplier orientation and shareholder orientation in relation to focal firm’s short-term financial performance and focal firm’s long-term financial performance.
Table 4 Regression results— Dependent variable: Firm’s short-term financial performance (N=88)
Unstandardized Regression Coefficients
Independent Model 1 Model 2 Model 3 Model 4
Variables B t B t B t B t
MT .147 1.479 .064 .610 .042 .363 .040 .348
TT .053 .546 .039 .388 .018 .174 .026 .261
Log Sales .297 1.799 .319 1.976 .317 1.969 .296 1.856
SPO .307 2.543* .267 2.152* .292 2.365*
SHO .023 .276 .048 .575 .010 .114
CO .014 .136 .012 .112 -.063 -.565
CO*SPO -.154 -1.634 -.168 -1.794
CO*SHO .085 1.190 .091 1.288
SPO*SHO -.140 -1.562 -.155 -1.738
SHO*SPO*CO .120 1.645
R2 .085 .165 .217 .243
ΔR2 0 .080* .132* .158*
Adjusted R2 .052 .103 .126 .145
F 2.586 2.658* 2.398* 2.475*
Note: Log SALES=lg (sales volume).
ΔR2 = R2(model n)- R2(model 1)
*p<.05
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Table 5 Regression results— Dependent variable: Firm’s long-term financial performance (N=88)
Unstandardized Regression Coefficients
Independent Model 1 Model 2 Model 3 Model 4
Variables B t B t B t B t
MT .068 .623 .074 .614 .047 .355 .050 .386
TT .140 1.306 .136 1.196 .184 1.598 .173 1.522
Log Sales .037 .204 .041 .222 .062 .338 .090 .502
SPO -.037 -.268 -.019 -.135 -.055 -.391
SHO -.035 -.376 -.073 -.768 -.020 -.206
CO .041 .349 .053 .453 .156 1.244
CO*SPO .111 1.033 .130 1.232
CO*SHO -.094 -1.153 -.102 -1.280
SPO*SHO .229 2.237* .249 2.475*
SHO*SPO*CO -.167 -2.021*
R2 .042 .045 .115 .160
ΔR2 0 .002 .073 .118
Adjusted R2 .008 -.025 .013 .050
F 1.234 .642 1.126 1.462
Note: LOG SALES=lg (sales volume).
ΔR2 = R2(model n)- R2(model 1)
*p<.05;
To test the hypotheses, four models were presented per dependent variable. First, a model only included control variables (Model 1). Then, a model included control variables and three independent variables (Model 2). Third, a model included control variable, three independent variables and 2-way interactions (Model 3). The last model included all the control variables, three independent variables, 2-way interactions and 3-way interactions (Model 4).
CSR orientation: The results indicate no significant relationship between firm’s CSR orientation and short-term financial performance (H1a), as well as no significant relationship between firm’s CSR orientation and long-term financial performance (H1b).
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Supplier orientation: The results report there is a significant and positive relationship between firm’s supplier orientation and short-term financial performance (H2a;
b=.292, p<.05). However, no significant relationship is found between firm’s supplier orientation and long-term financial performance (H2b).
Shareholder orientation: No significant relationship is observed between firm’s shareholder orientation and short-term financial performance (H3a). Moreover, firm’s shareholder orientation is not related to long-term financial performance significantly (H3b).
Interaction effect: It is surprising to observe that those focal firms satisfy supplier orientation, CSR orientation and shareholder orientation simultaneously have a significant negative interaction effect on focal firm’s long-term financial performance (b=-.167, p<.05) at first. However, notwithstanding the results hint that there are negative returns when focal firms focus on all these orientations simultaneously, these results should be interpreted with caution. Due to the F-value is not significant, thus, H4b has not been confirmed. Moreover, focal firms that satisfy the CSR orientation, supplier orientation and shareholder orientation simultaneously do not have a significant interaction effect on focal firm’s short-term financial performance (H4a).
Another doubtful result that should be mentioned here is that although the interaction between supplier orientation and shareholder orientation has a significant positive effect on focal firm’s long-term financial performance (b=.249, p<.05), likewise, due to the non-significant F-value, this result cannot be interpreted, either.
Control variables: Of control variables, market turbulence (MT), technology turbulence (TT) and firm size (Log SALES) are all non-significant in explaining the firm’s financial performance.
5. Discussion and Conclusion
The objective of this study is to follow the stakeholder theory to understand how the
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firm’s simultaneous orientations on multiple stakeholders act on the performance of a focal firm. Albeit stakeholder theory has received considerable attention in empirical studies, research that investigates how the simultaneous influence of multiple stakeholders acts on the focal firm is rare. I have attempted to fill this gap in this study.
In particular, I proposed and empirically tested a conceptual framework reflecting the assumption that firms satisfy the CSR orientation, supplier orientation and shareholder orientation simultaneously have a positive interaction effect on focal firm’s financial performance.
The empirical findings of this study suggest that the stakeholder orientation indeed have a positive influence on focal firm’s financial performance. However, only partial hypotheses have been supported. Specifically, I found that firm’s supplier orientation is positively related to short-term financial performance as I expected. Unfortunately, I did not find that firm’s shareholder orientation and CSR orientation have a significant positive or negative relationship to firm’s financial performance. Moreover, although the interaction effects between supplier orientation, CSR orientation and shareholder orientation does not produce a significant F-value on focal firm’s long-term financial performance, these results can be interpreted with caution due to the significant t-value. Laursen and Salter (2006) showed in their research that search breadth have an inverted U-shape relationship with firm performance which means that if firms are oriented towards more stakeholders, the cost of maintaining these relationships will increase, and meanwhile the difficulty of integrating all the information will increase either due to the absorptive capacity problem and the attention allocation problem. Another reason might be that these three stakeholder orientations have diverse interests, thus the focal firm would not be able to satisfy them simultaneously. For instance, a focal firm invests money in social responsibilities might impact shareholder value because the shareholder returns would be decreased. Researchers in previous studies indicated that there is an
‘owner-manager conflict’ at the firm level, that is to say, managers always look at the long-run growth of the firm, while shareholders rather focus on the short-run payback (Crooty, 1990; Boyer, 2000; Stockhammer, 2004). Therefore, the shareholders may
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be unwilling to allow the focal firm to invest money on those issues that would not bring enormous payback. The conflict between different stakeholders may place the focal firm in a dilemma thus influence the long-term financial performance ultimately.
Moreover, due to the significant t-value, the positive two-way interaction between supplier orientation and shareholder orientation could indicate that simultaneous investments in these 2 parties lead to positive returns, which means both of them yield more direct returns as compared to the indirect effects of CSR investments.
Last but not least, the non-significant F-value might be due to the small sample size and limitations of this study design. The reasons will be illustrated in detail in the following parts.
Theoretical Contribution
Firstly, the results make a strong empirical case study for stakeholder theory. More particular, this study contributes to the research in purchasing and supply management concerning the role of the supplier and its impact on a firm’s financial performance.
Of all the three different stakeholder orientations examined, only supplier orientation is directly related to firm’s financial performance, particularly to firm’s short-term financial performance. This result suggests that firms which are focused on matching their suppliers to their business will see immediate returns compared to other stakeholders. This observation is prominent because there has not been much research focused on supplier orientation yet (Hult et al., 2008).
Furthermore, contrary to what has been expected, focal firms that satisfy different stakeholder orientations simultaneously do not have a positive interaction effect on focal firm’s financial performance. Apparently, the consideration of multiple stakeholder orientations in a larger, more comprehensive model seems to be a new interesting avenue for research of the stakeholder theory. Moreover, from a methodological point of view, this result indicates that researchers should concern with the number of orientations when they include in their models. Particularly, they might include as many as stakeholder orientations as possible instead of examining
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stakeholder orientation individually in further research. In this research, stakeholders has been selected as suppliers, shareholders and customers, while in further research, other stakeholders such as government, creditors and employees could be considered to examine the relationship between these stakeholders and firm’s performance.
Practical Implication
The findings of this research also provide several practical insights for managers. First of all, managers should realize that the supplier orientation is an important source of firms’ profit and success. Firms that are focused on matching their suppliers to their business will see immediate financial returns. Creating awareness of the importance of suppliers for the firm’s competitive position leads to a better use of external supplier resources and capabilities and thus improves firms’ short-term financial performance. Therefore, investing in supplier selection and relationship management will create superior firm performance.
Furthermore, although the results of this study have not revealed the answer of the debate on which stakeholders to satisfy, in other words, it is still unclear whether multiple stakeholder approach for focal firm to satisfy different stakeholders will be able to realize superior firm performance in long-term, managers still had better consider which combination of those diverse stakeholders should be satisfied simultaneously so as to achieve outstanding firm performance efficiently and effectively. This is because different combination of stakeholders might lead to different firm performance.
Limitations and Future Research
This research no doubt has certain limitations that must be addressed, but that also offer several avenues for future research. Firstly, during the literature review, I found that there is an ‘owner-manager conflict’ at the firm level so the shareholder orientation might have different influence on the firm’s short-term financial performance and long-term financial performance (Crooty, 1990; Boyer, 2000;
Stockhammer, 2004; Kennedy, 2000). Namely, firm’s shareholder orientation is
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positively related to short-term financial performance, while firm’s shareholder orientation is negatively related to long-term financial performance. However, there is no significant relationship between shareholder orientation and firm’s financial performance indicated in the results directly. This non-significant result may come from the insufficient interview questions or the limitations of this study design. This study has not investigated shareholders directly; instead the voice of the shareholder has been reflected by the focal firms’ managers. Therefore, future research needs to design a more elaborate questionnaire and investigate shareholders of the firm directly so as to avoid the biases and confirm whether there is really an ‘owner-manager conflict’ existing at firm level.
Secondly, this study only focused on data from one focal firm, one key supplier, and one key customer. Although the effort of collecting data at these parties was intense, these supply chains miss the fact that firms work with multiple suppliers and for multiple customers and shareholders. This data collection makes the possibility that significant results in this study will become non-significant if average partners are examined instead of key partners and vice versa. Refinement of the relationships by examining a few focal firms in relation to multiple suppliers, customers and shareholders would be a fruitful avenue for further research. There is no doubt that the data collection process will be difficult, but involving multiple suppliers, customers and shareholders in the research design is required to further academic understanding of the stakeholder theory.
Thirdly, the results of this study have revealed that researching on stakeholder orientations may be subjected to the kind and number of different stakeholder orientations included. In this study, three major stakeholder orientations were included, namely, CSR orientation, supplier orientation and shareholder orientation.
Nevertheless, the firm cooperates with more direct and indirect stakeholders. Future research on stakeholder theory could further extend and elaborate on the other stakeholders such as customers, governments, creditors, employees and NGOs.
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To conclude, in a global fiercely competitive business environment, it has become increasingly difficult for a firm to possess and develop all resources, competences and capabilities in-house. Based on the stakeholder theory, this paper has provided a new avenue for scholars and mangers to consider how to develop relationships with different stakeholders.
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Acknowledgements
I wish to thank my supervisor, Prof. Dr. Hans van der Bij for his patient guidance, continual support and helpful comments on this master thesis. I would also like to appreciate Dr. Mirjam Kibbeling and Prof. Dr. Arjan van Weele for their prominent data collection work. Moreover, I extend my heartfelt acknowledgement to all the professors in the Innovation Management and Strategy Group who have offered me great help and kindly guidance in the previous year. Last but not least, I wish to thank my parents, thank you for your emotional and financial support in the past years to help me to realize my dream.
