External+Stakeholders-Extended

Introduction
The realization of the economic value from a transaction often depends critically upon the institutional environment in which it is embedded. The institutional environment may pose hazards to value generation in the form of a risk of expropriation by a political actor or by a private actor using political influence. Alternatively, changes in the current regulatory or policy environment may alter the returns to a transaction. Such changes may either enhance the value of a transaction with positive economic returns or transform a transaction with negative economic returns to one with positive returns. Any of these actions may be motivated by political actors seeking to use their discretionary power to generate private gains for themselves or their constituents, to sustain their power or that of their allies, or to maximize social welfare. The behavior of political actors, their allies and constituents is influenced by the provision of information, ideological beliefs or by the (in)direct transfer of goods, services or cash.

Actors are connected via myriad economic, political and social ties. Those ties alter their beliefs and behavior. Modeling the policymaking process requires the incorporation of these network ties among a diverse set of external stakeholders into the design and implementation of their influence strategies. The network of relevant stakeholders encompasses the entire political, economic and social value chain for a given issue: producers (including producers of substitutes and complements), suppliers (including providers of finance and labor), buyers (including consumers), voters as well as those directly impacted or having preferences over the distribution of economic returns or externalities including but not limited to the media and activists.

The theoretical modeling and empirical analysis of this strategic game of external stakeholder influence is among the most nascent domains in the field of strategy but also, arguably, among the domains with highest potential payoff. The institutional environment is too often modeled as an exogenous parameter or, in the non-market strategy literature [i], simplified down to a carefully delimited set of lobbying or informational interactions among actors in a particular context. Given the nascent status of the research domain, the reader focuses more on the necessary building blocks or foundation of a potentially successful research program rather than on the evolution of the domain to date. These building blocks are found in diverse social science disciplines including economic and financial history, law, international business, political economy, world polity, development, social movement theory, sociology, communications, psychology and corporate social responsibility.

The core questions and challenges for researchers are: (1) What strategic actions by a focal firm can minimize the downside risk of expropriation posed by political actors or by private actors using political influence? (2) How does one surmount the inherent data hurdles both in capturing an organization’s influence strategy and linking it to performance particularly in the international context? (3) How should researchers balance the insight gained into particular mechanisms and tactics available through deep dives into a specific context against the loss of generalizability?

An Iconic and Provocative Figure
Edward Bernays was among the earliest, most influential and most prolific scholars and practitioners of influence strategies. His career began promoting unheralded artistic causes including off-Broadway plays on sexually transmitted diseases, Italian opera singers and Baltic Symphony orchestras. His success in the artistic audience won him wide acclaim and he successfully used his network of influence in New York to secure a position within the US government’s propaganda office during World War I. There he rose to a position of leadership spearheading the million man marches in Europe that lauded President Wilson. He turned next to the private sector championing shareholder interests of companies selling cigarettes, automobiles and breakfasts of eggs & bacon. He also maintained his ties to government devising the duck and cover drills to build support for the Cold War defense build-up. Occasionally, he could serve both clients at once as was the case in his infamous work for The United Fruit Company and the CIA in Guatemala where he helped to organize a coup against the Guatemalan government sponsoring land reform inimical to United Fruit’s interests and Eisenhower’s ideology. Bernays (1947) offers insights into his repertoire that he claimed allowed him and other practitioners to “engineer consent” among the public in the interests of his clients.

Bernays shaped the perception of key external stakeholders transforming the apathetic or uninterested into powerful allies of his client. He tapped into not only economic interests but also, and more commonly, emotional levers of aspiration and fear to promote his preferred outcome often relying on supposedly independent experts and staged media events to raise awareness and alter opinion. Among his most famous exploits was the tripling of cigarette smoking by women. At an appointed hour, on a pre-ordained street corner before photographers from all major media outlets who had been summoned by their trusted confidante, a group of women planted in suffragist parade drew “Torches of Freedom” out of their garters and lit them in an effort to draw attention to the desire for equality: the right to vote and the right to smoke.

While Bernays was an exemplary practitioner and author, the tactics he used were not original but rather drew upon the writings of his uncle Sigmund Freud and many other studies of human motivation and action. Any attempt to formalize or codify influence strategies should thus also draw insight the multiple domains in which it has long been and will continue to be deployed.

International Business
As international business is defined by the extension of an economic transaction across a political frontier, political risk has long been a central concern among scholars in the field. While the vast majority of the political risk management literature has emphasized the strategies of avoidance or adaptation as responses to political risk, a few classic pieces of scholarship and some more recent ones emphasize strategies that firms can take to influence the outcome of policymaking processes.

Moran’s (1973) classic comparative case study of Kenecott and Anaconda Copper’s sensitivity to the expropriation risk posed by the Chilean government in the 1960s emphasizes the formation and deployment of a diverse network of external stakeholders including providers of capital to the project and to the government that guarantees it with whom Anaconda crafted an alignment of interests. As a result of this concerted effort to construct a strong network of advocates to whose concerns the Chilean government was sensitive, Anaconda better weathered the wave of nationalizations than its peers. Other classic international business contributions include Raymond Vernon’s multiple texts beginning with //Sovereignty at Bay// and culminating with //In the Eye of the Hurricane: The Storm over Multinationals//. Vernon’s (1977) //Foreign Affairs// article offers a timeless introduction into his perspective on the complex pressures from host and home country governments shaped by competing ideologies and interests that define the strategic challenge for multinational corporations.

The bargaining power model of international business has sought to formalize and codify this process with some empirical success as demonstrated by Kobrin (1987) who predicts the outcome of a bargaining process over the equity share of a host country subsidiary between the host country government and a multinational firm. Over the subsequent twenty years, the political risk was, however, largely moribund as the neoliberal wave of economic reform shifted attention to the realization of economic opportunities and away from political complications. [ii]

The East Asian (or IMF) crisis offered an important stimulus for reevaluation by practitioners and scholars alike. Woodhouse (2006) examines the boom and bust of private investment in independent power projects emphasizing the limits of a contractual response to political risk. Orr and Scott (2008) draw insights from a wider array of global projects to develop a process model of political and social risk management. Henisz, Zelner and Holburn (2009) quantitatively analyze the determinants of renegotiation in a large sample of power projects developing and finding empirical support for a recursive model of policy change that combines cognitive, political and economic factors at the state and state-system level to predict the incidence of renegotiations in a given country-year.

Political Economy
A deep understanding of the context and process of policymaking forms an important component of any effort to model external stakeholder influence. Putnam’s (1988) analysis of two sided negotiations highlights many of the key inputs from this literature into such a model including multi-party negotiations among principals who vary in their power and credibility representing agents who vary in the homogeneity of their preferences. As a result of these and other characteristics of the players in the game and the strategies that they employ, the range of possible bargaining outcomes varies widely.

The work of Bruce Bueno de Mesquita summarized in //Predicting Politics// formalizes and extends this bargaining framework. Walker (1991) provides additional contextual detail and insight into the interest groups that form the basis of action in Bueno de Mesquita’s model and Jones and Baumgartner (2001) do the same for the process of their interaction to influence government policy. Together these additional supplementary readings deepen the conceptual insights offered by Putnam with additional formal modeling tools and contextual detail that emphasize strategic action by firms in a rich and complex policymaking space encompassing both formal political actors as well as other members of the value chain.

Sociology
Models of political economy make two simplifying assumptions which are clearly contradicted by the deep process oriented studies of Walker and Jones & Baumgartner. Formal models treat actors as rational autonomous utility maximizing actors. Yet, the connections among these actors clearly influence their beliefs and behavior. Furthermore, powerful ideas and frames or events can create cascade effects particularly under the right political opportunity structure which seem to invoke mechanisms beyond the realm of political economy. For deeper insights into these two necessary extensions, we turn to the discipline of sociology.

Rowley (1997) applies network tools and metrics to extend extant stakeholder theory. The article both serves as a useful introduction into the stakeholder perspective and the implications and methods for the incorporation of networks of policymakers into a model of strategic influence. Rowley introduces and applies such constructs as network density and centrality to help predict the form of interaction between a focal firm and its external stakeholders.

Another vein of sociology of relevance to external stakeholder influence strategy focuses not just on the power of structure that links political actors but rather the impact of mobilizing structures and cognitive frames within a political opportunity structure. McAdam (2009) offers a rich summary of the social movement literature specifically designed to inform the understanding of political and social resistance to large global investment projects.

Supplementary readings build upon these core concepts by providing the sociological analogue to the argument of Putnam (1988) from political science in the writings of George Simmel on the //Triad//; demonstrating the modeling the policymaking process as a network (Knoke, 1990) and applying such a network perspective infused with powerful cognitive frames to the understanding of the behavior of non-governmental activists (Keck and Sikkink, 1990).

Strategic Communications and Negotiations
While Political Economy and Sociology offer the theoretical tools to depict the policymaking process, they are less forceful or at least less rich in the depiction of strategic behavior than the reality suggested by the process oriented studies in international business or policy. For more insight into the strategies of persuasion, we turn to the literature on strategic communications and negotiation. Sebenius (1992) offers a summary of the key insights from the negotiations literature which are further extended by the more recent managerially-oriented supplementary article by Watkins (2001). Elsbach (2006) offers a similarly broad and thorough summary of the literature on organizational perception management including the shaping of organizational identity and the maintenance of reputation in the face of crisis or adversity.

Integration
Henisz (2009) seeks to incorporate the insights from the political economy, sociology and strategic communications and negotiations literatures into a strategic decisionmaking process for influence strategy that incorporates information on the preferences, power, issue salience and beliefs of individual actors as well as the strength of ties between them to identify the efficacy of various influence strategies at their disposal using simulation techniques.

Conclusion
The literature on external stakeholder influence introduced here is interdisciplinary and as of yet lacking in both rigorous formal theoretical development and empirical analysis. Yet, as we survey the drivers of organizational performance heterogeneity, particularly across international markets or in times of domestic political and economic upheaval such as the global crisis of 2009, the ability to strategically “change states of mind” or generate “a feeling of personal comfort in social relations that is sometimes called solidarity” (Barnard 1968: 148) is clearly among the key drivers of performance. We hope that the introduction offered to the literature here can motivate subsequent development by scholars in or entering the field of strategy.

[i] For more depth on this topic see the survey by De Figueiredo. [ii] Recent overviews of two additional related literatures are provided in the supplementary reading list. (1) The international development literature has long sought to incorporate political and social factors in the process of economic growth. Nobel-prize winner Douglass North (1991) has long emphasized the central role played by institutions in the process of economic growth. More recently, scholars have sought to highlight certain pathologies or patterns of dysfunction by which political interests conspire to retard economic growth. Prominent among these is the capturing of the state by a narrow set of economic interests (Black, Kraakman and Tarassova 2000; Rajan & Zingales 2003; Root 2006). More subtle but perhaps more challenging problems are posed by the gaps between our economic models of growth and socio-political processes that underlie them (Kogut & Spicer 2004). Ellerman (2005) offers a process model for economic development that focuses upon instead of ignores these gaps by emphasizing the need for development policy to teach the poor how to fish as opposed to providing fish. The interdisciplinary scope of Ellerman’s (2005) text and its process orientation is echoed by the process model of Orr & Scott (2008) in international business as well as the corporate stakeholder engagement manuals introduced at the end of this syllabus. (2) The literature on corporate social responsibility has similarly struggled with the best means to incorporate non-economic factors into the process of strategy formulation and implementation. Baron (2001) highlights the strategic case for doing so while Vogel (2006) critically reviews the empirical evidence to date. Elkington (2006) provides the perspective of a leading practitioner which is echoed by a review of toolkits used in the development and corporate sectors.