A Study on Small and Medium Enterprises’ Sustainable Development

A Study on Small and Medium Enterprises’ Sustainable Development
Strategies Based on Stakeholder Theory
LAN Changxian1, YE Min1, LI Minghai2
1. School of Management, Beijing Union University, Beijing, P.R. China, 100101
2. School of Mechatronics, Beijing Union University, Beijing, P.R. China, 100101
[email protected]
Abstract: This paper, in the perspective of stakeholder theory, makes a study on small and medium
enterprises’ (SMEs’) sustainable development strategies and constructs a framework for the analysis of
the strategies based on stakeholder theory. This paper uses stakeholder theory and methods to study on
problems during the establishment of SMEs’ sustainable development strategies, the strategy planning,
the long-term aims of SMEs’ development, and implementation measures of the sustainable
development strategies.
Keywords: Stakeholders, Sustainable development, Small and medium enterprises (SMEs)
1 Introduction
Sustainable development has been attracting more and more attention. There will be no sustainable
development for national economy if enterprises can not achieve it. Since China’s reform and
opening-up in 1970s, shareholder primacy theory has been predominating in enterprise management.
Shareholder primacy theory believes that shareholders are born to have the ownership of their
enterprises. A lot of property rights literature (such as Grossman and Hart (1986) and Hart and Moor
(1990)) argues that parties without ownership may be discouraged from undertaking asset-specific
investments because the owners of asset can use their control rights to hold them up. It influences
traditional strategic management which insists that the aims of an enterprise’s strategic management are
mainly to maximize shareholders’ benefits. This theory takes into account neither the key factors of
enterprises’ sustainable development nor the impact factors of enterprises’ sustainable development to
the environment.
In mid-1980s, another theory of the firm, stakeholder theory, was proposed which addresses morals and
values in managing an organization. It was originally detailed by R. Edward Freeman in the book
Strategic Management: A Stakeholder Approach, and identifies and models the groups which are
stakeholders of a corporation, and both describes and recommends methods by which management can
give due regard to the interests of those groups. In short, it attempts to address the “Principle of Who or
What Really Counts.” (Freeman, 1984)
There have been numerous articles and books written on stakeholder theory. However, research at this
field has just begun in China. Chu (2004) describes the progress and achievements of stakeholder theory
in his book, the Latest Development of Stakeholder Theory. Zhao & Zhao (2005) raises the point that
one major contribution of stakeholder theory to the theory of the firm is to extend the reasons for the
existence of enterprises. It makes enterprises highlight the satisfaction of multi-stakeholders instead of
narrow traditional financial criteria. Thus enterprises have to redefine the relationship between
organization and environment, seem stakeholders as a new source of competitive advantages, and
innovate in the philosophy of strategic management.
This paper adopts stakeholder theory and theory of corporate strategic management & sustainable
development, and makes a study on problems during the establishment of SMEs’ sustainable
development strategies, the strategy planning, the long-term aims of SMEs’ development, and
implementation measures of the sustainable development strategies. The strategic system of SMEs’
sustainable development is expected to been built to help SMEs find out right ways of sustainable
development.
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2 SMEs’ Strategic Targets Based on Stakeholder Theory
In the traditional view of the firm, the shareholder view (the only one recognized in business law in
most countries), the shareholders or stockholders are the owners of the company, and the firm has a
binding fiduciary duty to put their needs first, to increase value for them. In older input-output models of
the corporation, the firm converts the inputs of investors, employees, and suppliers into usable (salable)
outputs which customers buy, thereby returning some capital benefit to the firm. By this model, firms
only address the needs and wishes of those four parties: investors, employees, suppliers, and customers.
However, stakeholder theory argues that there are other parties involved, including governmental bodies,
political groups, trade associations, trade unions, communities, associated corporations, prospective
employees, prospective customers, and the public at large. Sometimes even competitors are counted as
stakeholders.
The stakeholder view of strategy is an instrumental theory of the corporation, integrating both the
resource-based view as well as the market-based view, and adding a socio-political level. This view of
the firm is used to define the specific stakeholders of a corporation as well as examine the conditions
under which these parties should be treated as stakeholders. These two questions make up the modern
treatment of stakeholder theory.
The traditional shareholder primacy theory leads to the ignorance of environmental protection and some
stakeholders’ benefits. Before the reform and opening-up, China’s state-owned enterprises undertook too
many social functions and responsibilities. After then, along with the establishment of modern corporate
management institutions, the rise of private enterprises and the flow-in of foreign capital, enterprises,
especially SMEs, accepted the philosophy of profits maximization and costs minimization. This directly
causes the ignorance of environmental protection, some stakeholders’ benefits and corporate social
responsibilities.
Miracles of development and profits increase were created by China’s SMEs with the instruction of
traditional theory of the firm, but these miracles were achieved at the cost of high energy-consumption
and serious pollution. According to Dr. Zhao Xiao (2004), director of Macro-strategy Research
Department of Development Research Center of the State Council, China’s GDP accounted for 4% of
the total in the whole world; but petrol consumption in China ranked the second; electric consumption
accounted for 13%; steel consumption, 27%; cement consumption, 40%; and coal consumption, 31%.
This resulted in the rise of prices of steel, coal, electrics, petrol and marine transportation. In 2003, the
power supply was shut off in 22 provinces. The shortage of electric power reached 3 000 kilowatts in the
summer of 2004. The energy bottle-neck caused short supply and insane production of coal which led to
more mine disasters. Therefore, high energy-consumption, serious pollution and low output have to be
brought to a close, and sustainable development strategies must be implemented. To realize the
sustainable development of national economy, SMEs have to take social and environmental
responsibilities. This research of sustainable development based on stakeholder theory is of realistic help
to SMEs’ management and development.
3 Environmental Analyses of SMEs’ Sustainable Development Strategies in the
Perspective of Stakeholders
Strategic environment analysis must be conducted before the establishment of SMEs’ development
strategies. Whether a SME can survive and get better development chances results from the change of
inner/outer environments or whether a SME can adapt to the change and create market opportunities.
Thus the optimized allocation can be achieved; in other words, largest benefits can be obtained with
least resource consumption and lowest costs.
3.1 Environmental analyses based on traditional theory of the firm
There are five methods for environmental analyses, namely PEST, Porters five forces, GREP and
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SWOT.
3.1.1 PEST analysis
PEST analysis stands for “Political, Economic, Social, and Technological analysis” and describes a
framework of macro-environmental factors used in the environmental scanning component of strategic
management. The model has recently been further extended to STEEPLE and STEEPLED, adding
education and demographics factors. It is a part of the external analysis when conducting a strategic
analysis or doing market research and gives a certain overview of the different macro-environmental
factors that the company has to take into consideration. It is a useful strategic tool for understanding
market growth or decline, business position, potential and direction for operations.
Specifically, political factors include areas such as tax policy, labour law, environmental law, trade
restrictions, tariffs, and political stability. Economic factors include economic growth, interest rates,
exchange rates and the inflation rate. Social factors include the cultural aspects such as health
consciousness, population growth rate, age distribution, career attitudes and emphasis on safety.
Technological factors include ecological and environmental aspects, such as R&D activity, automation,
technology incentives and the rate of technological change. Legal factors include discrimination law,
consumer law, antitrust law, employment law, and health and safety law. Environmental factors include
weather, climate, and climate change, which may especially affect industries such as tourism, farming,
and insurance.
3.1.2 Porter’s five forces analysis
Porter’s five forces analysis is a framework for the industry analysis and business strategy development
developed by Michael E. Porter of Harvard Business School in 1979. It uses concepts developed in
Industrial Organization (IO) economics to derive five forces which determine the competitive intensity
and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry
profitability. An “unattractive” industry is one where the combination of forces acts to drive down
overall profitability. A very unattractive industry would be one approaching “pure competition”.
Porter referred to these forces as the micro environment, to contrast it with the more general term
macro-environment. They consist of those forces close to a company that affect its ability to serve its
customers and make a profit. A change in any of the forces normally requires a company to re-assess the
marketplace. The overall industry attractiveness does not imply that every firm in the industry will
return the same profitability. Firms are able to apply their core competences, business model or network
to achieve a profit above the industry average.
3.1.3 GREP systematic analysis
GREP systematic analysis is in fact a method for analysis on inner environment. It is believed that
strategies are the process of finding and improving factors of corporate performance and it is a system
that decides the existence of enterprises. This system comprises governance (G), resource (R),
enterpriser (E) and product (P). If an enterprise performs badly at any one aspect of these four, this
enterprise will not exist and, obviously, can not have advantages against the peer.
3.1.4 SWOT analysis
SWOT analysis is a strategic planning method used to evaluate the strengths (S), weaknesses (W),
opportunities (O), and threats (T) involved in a project or in a business venture. It involves specifying
the objective of the business venture or project and identifying the internal and external factors that are
favorable and unfavorable to achieving that objective.
These above four analyses are all concerned with corporate strategic environment and have not reached
a level of sustainable development. Therefore, the analysis method of stakeholder theory can be adopted
in the perspective of sustainable development.
3.2 The application of stakeholder analysis on SMEs’ strategic management
A stakeholder is a party that affects or can be affected by the actions of the business as a whole. The
term has been broadened to include anyone who has an interest in a matter. (See table 1)
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Table 1 Examples of Stakeholders
Stakeholder
Examples of interests
Owners private/shareholders
Profit, Performance, Direction
Government
Taxation, VAT, Legislation, Low unemployment
Senior Management staff
Performance, Targets, Growth
Non-Managerial staff
Rates of pay, Job security
Trade Unions
Working conditions, Minimum wage, Legal requirements
Customers
Value, Quality, Customer Care, Ethical products
Creditors
Credit score, New contracts, Liquidity
Local Community
Jobs, Involvement, Environmental issues, Shares
It is encouraged to conduct SMEs’ stakeholder analysis in the following three aspects.
3.2.1 Classification of stakeholders
Stakeholders can be divided into social stakeholders and non-social stakeholders. Major social
stakeholders include shareholders & investors, communities, employees & management, customers,
suppliers and other cooperative companies; minor social stakeholders include government &
government regulatory agencies, social pressure groups, media and competitors. Major social
stakeholders have direct benefits in a company and affect the company’s development. Minor social
stakeholders also influence the company, especially in its reputation and social status. Major non-social
stakeholders include natural environment, future generations and non-human beings; minor non-social
stakeholders include environmental protection pressure groups and animal protection groups.
Stakeholders can also be divided into core stakeholders, strategic stakeholders and environmental
stakeholders. Furthermore, they can be divided into inner stakeholders and outer stakeholders.
One important issue of SMEs’ stakeholder analysis is to help major stakeholders achieve their aims and,
to some extent, satisfy other stakeholders; meanwhile, SMEs are encouraged to make profits. Thus it
results in win-win. Without the economic success of SMEs, benefits of all stakeholders will disappear;
at the same time, only win-win can guarantee the long-term benefits of enterprises.
3.2.2 The key issues of SMEs’ stakeholder analysis
The key issues of SMEs’ stakeholder analysis consist of the following five important questions: who are
the stakeholders, what rights and benefits do the stakeholders have, what opportunities or challenges do
the stakeholders bring, what responsibilities do SMEs owe to the stakeholders, and what strategies and
measures can SMEs take to deal with these opportunities and challenges.
3.2.3 Impacts of stakeholder analysis on SMEs’ sustainable development strategies
Through stakeholder analysis, we can find opportunities & challenges from stakeholders and resource
advantages & drawbacks of stakeholders. SMEs can convert the advantages into their core resources and
abilities, and hence improve their own core competitiveness. They can also deal with threats from
stakeholders and create opportunities for cooperation; especially, they can exactly foresee impacts from
non-social stakeholders and take responding measures. This will be of help to SME sustainable
development and guarantee long-term benefits.
4 Measures for SMEs’ Sustainable Development Strategies Based on Stakeholders
Only if it undertakes measures for sustainable development can a SME have its own core competitive
edges which can not be stimulated and realize sustainable development. Strategic measures must be
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implemented in order to make profits and satisfy all stakeholders.
4.1 Establishing corporate culture which cares stakeholders
The future, spirit, and core values of a SME should highlight rights and benefits of all stakeholders, e.g.
being responsible to customers, insuring high-quality products and services, respecting employees &
guaranteeing equal opportunities of development and promotion, being responsible to shareholders,
protecting environment and natural resources, and paying close attention to communities.
4.2 Changing SMEs’ governance mode
The SMEs’ governance mode should change from “shareholders first” to “care stakeholders”. SMEs,
especially those having negative impacts on environment, should share residual manipulation and
residual claim with management, employees and other stakeholders.
4.3 Optimizing resource allocation
Resource allocation must be optimized in order to realize SMEs’ sustainable development. SMEs’
financial resources, human resources and core technical resources should help realize goals of
stakeholders. When optimizing resource allocation, a SME should turn resources from stakeholders into
a kind of competitive advantages, earn higher reputation, improve company image and form core
competitiveness.
4.4 Adjusting industrial structure
Adjusting industrial structure is an important aspect of SMEs’ sustainable development strategies. It
helps SMEs keep growing and be adapted to the change of social environment. Industries which have
negative impacts on the environment, the survival of other beings and the development of future
generations must be adjusted to satisfy non-social stakeholders and achieve sustainable development.
4.5 Conducting technology self-innovation
Technology elf-innovation is the endless drive for SMEs’ sustainable development. Enterprises have to
conduct technology self-innovation, especially in green product development, green manufacturing and
green resources. Only self-innovation can help products meet requirements of sustainable development
and satisfy stakeholders.
5 Conclusion
This paper proposes a stakeholder analysis framework for SMEs’ sustainable development strategies in
the perspective of stakeholder theory.
SMEs’ sustainable development requires them to take into account current needs for development as
well as future needs. Meanwhile, SMEs have to be responsible to employees, consumers and social &
natural environments when they create profits and are responsible to shareholders.
Since there are flaws in the aims of SMEs’ development strategies under traditional theory of the firm,
this paper explores the relationship between stakeholder theory and SMEs’ sustainable development and
points out those social responsibilities taken by SMEs are well connected with their financial
performances.
The realization of SMEs’ sustainable development depends on strategic measures and activities.
Stakeholder theory indicates that SMEs must take relative strategic measures to satisfy stakeholders.
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