Academy of Management Review Discussion 2022

Please develop a table of at least 25 articles Citation Research objectives Methodology Findings Conclusion/Future research Find answers to these questions 1- what are the important infrastructure needed in a company and a country to make e-commerce work 2- success factors for e-commerce adoption 3- e-commerce in airlines 4- code sharing 5- competiteve advantage 6- the personalization through e- commerce all those related chapter 2

How Applying Instrumental Stakeholder Theory Can Provide
Sustainable Competitive Advantage
Journal: Academy of Management Review
Manuscript ID AMR-2016-0111-Original.R3
Manuscript Type: Original Manuscript
Theoretical Perspectives:
Stakeholder Theory, Business Ethics, Resource Based View, Strategy,
Leadership theories, Microfoundations of strategy, Knowledge-based view,
Human capital theory, Behavioral theory of the firm
Topic Areas:
Business-level resources/capabilities < Business and Competitive Strategy
< Business Policy and Strategy, Knowledge management < Strategic
Management Process < Business Policy and Strategy, Stakeholder
management < Upper Echelons/Corporate Governance < Business Policy
and Strategy, Capabilities and Competencies < Organization and
Management theory, Culture < Organization and Management theory,
Knowledge Flows and Knowledge Management < Organization and
Management theory, Trust and Cooperation < Organization and
Management theory, Ethics and codes of conduct < Social Issues in
Management, Organizational virtues and ethics < Organizational
Development and Change
Abstract:
Instrumental stakeholder theory (IST) considers the performance
consequences for firms of highly ethical relationships with stakeholders
characterized by high levels of trust, cooperation and information sharing.
While research suggests performance benefits, an obvious question
remains: if IST-based stakeholder treatment is so valuable, why isn’t it the
dominant mode of relating to stakeholders? We argue that the existing IST
literature has three shortcomings that limit its ability to explain variance in
performance. 1) Little theory exists around how IST-based stakeholder
management could provide sustainable competitive advantage. 2) The IST
literature has largely neglected the potential downsides (i.e., costs)
associated with pursuing these sorts of stakeholder relationships. 3) There
is a paucity of theory on the contexts in which the incremental benefits of
IST-based stakeholder relationships are most likely to exceed the costs. As
our primary contribution, we develop a theoretical path from a communal
sharing relational ethics strategy to a close relationship capability, which
we argue to be valuable, rare, and difficult to imitate, and thus a potential
source of sustainable competitive advantage. We also consider the
potential costs of achieving this capability and identify contexts in which
the resulting relationships are likely to have the greatest net value.
Academy of Management Review

Page 1 of 53 Academy of Management Review
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HOW APPLYING INSTRUMENTAL STAKEHOLDER THEORY CAN PROVIDE
SUSTAINABLE COMPETITIVE ADVANTAGE
Thomas M. Jones
Professor Emeritus
University of Washington
Seattle, WA 98195 USA
[e-mail]
Jeffrey S. Harrison
W. David Robbins Chair in Strategic Management
University of Richmond
Richmond, VA 23173 USA
[e-mail]
Will Felps
Associate Head of the School of Management
University of New South Wales Business School
Sydney NSW 2052 Australia
[e-mail]
Forthcoming in Academy of Management Review
Acknowledgement: We greatly appreciate the constructive advice we received from
Associate Editor Mike Pfarrer and three anonymous reviewers during the preparation of
this manuscript.
Page 2 of 53Academy of Management Review
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HOW APPLYING INSTRUMENTAL STAKEHOLDER THEORY CAN PROVIDE
SUSTAINABLE COMPETITIVE ADVANTAGE
ABSTRACT
Instrumental stakeholder theory (IST) considers the performance consequences for firms of
highly ethical relationships with stakeholders characterized by high levels of trust, cooperation
and information sharing. While research suggests performance benefits, an obvious question
remains: if IST-based stakeholder treatment is so valuable, why isn’t it the dominant mode of
relating to stakeholders? We argue that the existing IST literature has three shortcomings that
limit its ability to explain variance in performance. 1) Little theory exists around how IST-based
stakeholder management could provide sustainable competitive advantage. 2) The IST literature
has largely neglected the potential downsides (i.e., costs) associated with pursuing these sorts of
stakeholder relationships. 3) There is a paucity of theory on the contexts in which the
incremental benefits of IST-based stakeholder relationships are most likely to exceed the costs.
As our primary contribution, we develop a theoretical path from a communal sharing relational
ethics strategy to a close relationship capability, which we argue to be valuable, rare, and
difficult to imitate, and thus a potential source of sustainable competitive advantage. We also
consider the potential costs of achieving this capability and identify contexts in which the
resulting relationships are likely to have the greatest net value.
Keywords: Stakeholder theory, stakeholder management, instrumental stakeholder theory,
resource-based perspective, competitive advantage, sustainability, business ethics, relational
ethics, close relationship capability
Page 3 of 53 Academy of Management Review
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Stakeholder theory is an umbrella term for a genre of theories that help scholars and
managers understand relationships between firms and their stakeholders, as well as some of the
performance outcomes of these relationships. The theory is often characterized as being divided
into three interrelated streams: descriptive, normative, and instrumental (Donaldson & Preston,
1995). The focus of this article is instrumental stakeholder theory (hereafter IST), although we
recognize that there are both descriptive and normative elements in our narrative (cf., Harris &
Freeman, 2008). Specifically, the core hypothesis of IST is that developing stakeholder
relationships governed by the norms of traditional ethics – e.g., fairness, trustworthiness, loyalty,
care, and respect (Hendry, 2001, 2004) – will lead to improved financial performance. As
summarized by Jones (1995), IST holds that “…firms that contract (through their managers) with
their stakeholders on the basis of mutual trust and cooperation will have a competitive advantage
over those that do not (422).”
Although IST is a powerful theory with strong prescriptive and normative conclusions,
the IST literature has failed to answer a vital question: if the performance effects of ethical
relationships with stakeholders are positive, according to both theory and empirical studies (Choi
& Wang, 2009; Harrison, Bosse, & Phillips, 2010; Henisz, Dorobantu, & Nartey, 2014; Jones,
1995; Jones & Wicks, 1999; Sisodia, Wolfe, & Sheth), why do so many firms treat stakeholders
selfishly at best (Mintzberg, Simons, & Basu, 2002) and unethically at worst (Clement, 2006;
Greve, Palmer, & Pozner, 2010)? We provide some answers to this question by addressing three
shortcomings that limit the ability of scholars to fully understand the performance effects of IST-
based measures and to provide guidance to practicing managers.
First, although much of the IST literature explains why highly ethical treatment of
stakeholders should be valuable, thus far there has not been a thorough evaluation of such an
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approach against the other resource-based criteria that help identify potential sources of
sustainable competitive advantage (Barney, 1991; Barney & Wright, 1998). Specifically, are the
resources/capabilities that result from IST-based stakeholder treatment also rare and difficult to
imitate? As noted by Freeman and colleagues (2010: 95), “the theoretical links between
stakeholder theory and the resource-based view have not been adequately established in the
minds of many strategic management scholars.”
Second, prior IST scholarship notes that close relationships with stakeholders, developed
through ethical treatment, can have a number of benefits (e.g., Bosse & Coughlan, 2016; Cooper
& Gardner, 1993; Larson, 1992; Uzzi, 1997). However, most of the field has displayed a “sunny-
side” bias, and only a few scholars have begun to consider the costs of close relationships with
stakeholders (e.g., Garcia-Castro & Francoeur, 2016; Harrison & Bosse, 2013).
Third, traditional IST generally assumes that ethically grounded stakeholder management
strategies will be associated with higher financial performance regardless of context. 1 But it is
probable that the link is stronger, non-existent, or even negative in various contexts. Like
Bridoux and Stoelhorst (2014; 2016), we believe that identification of moderating influences is
critical to the stakeholder discussion. Moderators are particularly important given that the
business environment seems to be changing in important ways – i.e., becoming more dynamic,
knowledge intensive, and interdependent. As such, this article raises the question: is an IST-
based stakeholder management approach becoming a more or less viable means of achieving
sustainable competitive advantage given changes to the business environment?
1 Exceptions are found in the theoretical work of Bridoux and Stoelhorst (2014, 2016), and the empirical work of
Garcia-Castro & Francouer (2016). We extend the former work by including more moderators, and specifically
moderators that are closely associated with pervasive environmental forces. The latter work does not directly speak
to firm/stakeholder relationships.
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In this paper, rather than examining IST solely from the perspective of various programs
and policies that firms implement unilaterally that have either helpful or harmful effects on
stakeholders (as much of the extant IST literature has done), we use relational theory to examine
the nature of the two-way interactions that develop between managers and stakeholders. In so
doing, we draw on relational models (Bridoux & Stoelhorst, 2016; Fiske, 1992) and arm’s length
versus embedded relationships (Uzzi, 1997). This approach answers a call from Jones (2011),
who argues: “Instead of examining company policies and specific actions, researchers should be
examining the content and nature of the relationships themselves (60).”
A relational approach provides greater specification to the claim that the prescriptions of
IST can lead to sustainable competitive advantage. At the core of these arguments is the idea that
a firm’s ethics (ground rules) for managing relations with stakeholders can lead to the
development of capability that can be a source of sustainable competitive advantage. Sustainable
competitive advantage, in turn, can be defined as a firm’s ability to persistently create more
economic value than the marginal (breakeven) competitor in its product market (Peteraf &
Barney, 2003). Specifically, we argue that a communal sharing relational ethics strategy (CSRE),
characterized by an intention to rely on relational contracts, joint wealth creation, high levels of
mutual trust and cooperation, and communal sharing of property, can lead to what we call a close
relationship capability. A close relationship capability helps a firm co-create more economic
value with stakeholders. We also examine a close relationship capability’s potential to be rare
and difficult to imitate, thus explaining why such an approach can be a source of sustainable
competitive advantage.
We provide a balanced perspective of a close relationship capability by examining
incremental costs associated with developing and maintaining it. We explain further that the
Page 6 of 53Academy of Management Review
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costs of developing this capability will vary depending on the existing stakeholder culture of the
firm (Jones, Felps, & Bigley, 2007). Thus, stakeholder culture serves as a firm specific
moderator that ultimately influences the value proposition (i.e., benefits less costs) associated
with developing and maintaining a close relationship capability. In addition, we extend the
limited research on moderators of the relationship between an IST-based stakeholder
management approach and firm performance by explaining why dynamic, knowledge intensive,
and interdependent environments increase the potential benefits associated with a close
relationship capability.
To preview the structure of the paper, we first introduce the concept of relational ethics
strategies, explain the communal sharing relational ethics (CSRE) strategy and contrast it to the
arms-length relational ethics (ALRE) strategy. We argue that the desired outcome of a CSRE
strategy is a close relationship capability. We then provide a succinct review of the IST literature
as it relates to how a close relationship capability can provide incremental value, the first of the
standard RBV criteria. We also discuss the incremental costs of developing a close relationship
capability through a CSRE strategy, noting that a capability is only valuable if the benefits
associated with creating and maintaining it outweigh the costs. We argue also that these costs are
less for firms that have an existing culture that is other-regarding. Having established the
potential of a close relationship capability to provide incremental value, we examine three
plausible contextual moderators. We then screen the close relationship capability using the other
RBV criteria of rarity and imitability. The final section discusses the implications of this more
refined IST perspective for research and practice. Figure 1 contains a model of the proposed
relationships among our primary constructs.2
2 The lines in Figure 1 associated with the RBV criteria are dotted (and do not have arrows) because they are
definitional features rather than causal variables.
Page 7 of 53 Academy of Management Review
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----------------------------------------
Insert Figure 1 About Here
----------------------------------------
To our knowledge, we are the first to rigorously apply the resource-based criteria to an
evaluation of how the strategy of interacting ethically with stakeholders relates to the
sustainability of competitive advantage. Doing so provides a stronger rationale for managers to
adopt such a strategy in their own firms. It also helps us understand why the associated capability
is rare in spite of its apparent economic attractiveness. By identifying the factors that make such
a strategy hard to imitate, we help clarify what firm managers must focus on if they are going to
be successful in implementing it. The ultimate ambition of our article, like most Instrumental
Stakeholder Theory, is to identify situations where managers could change their behaviors in
ways that improve both firm profits and stakeholder welfare.
RELATIONAL ETHICS STRATEGIES
We frame our analysis in terms of a firm’s relational ethics strategy. 3 Each word in this
concept label deserves specification. First, as with any term used by the population at large,
“relational” and “relationship” are used in many different ways (Reis, Collins, & Berscheid,
2000). Here, we are using relational to refer to consensually held role expectations that emerge
during interactions between members of a dyad (Hinde, 1997; Sluss, van Dick, & Thompson,
2011). The dyad that our theory considers is the focal firm and a stakeholder group.4 Second, the
3 We use the term “ethics strategy” fully aware that some ethicists will regard this usage as self-contradictory. In this
view, ethics employed instrumentally is not ethics at all. That is, authenticity and moral motives are essential to
ethics. Here we regard a strategy as intended behavior, regardless of the motivation on which it is based.
4 Stakeholder relationships can be conceived of at different levels of abstraction (Bosse & Coughlan, 2016; Sluss &
Ashforth, 2008) – e.g. between individuals, between the firm and a specific stakeholder group, or between the firm
and all stakeholders simultaneously. Low levels of abstraction – e.g. relationships between specific individuals – are
going to be more accurate predictors of individual behavior, but are much more complex. High levels of abstraction
– e.g. relationships between the firm and all stakeholders simultaneously – seem analytically simpler, but raise
difficult methodological questions of how to empirically combine relationships across stakeholders, and are likely to
be less empirically predictive. We believe that, in trying to understand drivers of firm performance, the level of
abstraction that is the most empirically and practically useful is that of the relationship between the firm and a
stakeholder group. As such, that is the level of abstraction at which our theory is pitched.
Page 8 of 53Academy of Management Review
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element of the relationship upon which we focus has to do with ethics. How we treat others is a
core concept in ethics. Relational expectations can involve many very specific schema that have
little to do with ethics (Baldwin, 1992) – e.g. the place where interactions will occur. This article
is interested in the ethical elements of relationships. Third, and finally, strategy refers to the
shared plans and initiatives of general managers, involving utilization of resources to achieve a
firm’s aims (Nag, Hambrick, & Chen, 2007). Specifically, the element of strategy in question is
what kind of relational ethics to form with a stakeholder group. Importantly, the intended
strategy may not be realized and may change over time. Indeed, relationships take time to mature
and how they develop depends on the actions of both dyad members (Bosse & Coughlan, 2016).
As such, we use strategy to refer to the preferred/intended relational ethics that a firm seeks vis-
à-vis a stakeholder rather than the realized relational ethics.
Note that these three dimensions assume that members of a firm will be consistent in the
way they treat a particular stakeholder group – e.g., they will follow the relational ethics strategy.
This position is consistent with Brickson (2007), who argues that firms interact with their
stakeholders in consistent patterns. Specifically, our claim is that norms regarding relationships
with stakeholder groups are communicated and reinforced by firm managers through words and
actions, and that they become ground rules for action. These norms are not merely the result of
aggregating the values of employees within a firm. Firms are not democracies. Rather, particular
managers, typically those highest in the governance hierarchy, have the greatest influence on the
norms that are established (de Luque, Washburn, Waldman, & House, 2008; Mayer, Kuenzi,
Greenbaum, Bardes, & Salvador, 2009). Relational ethics strategies are unlikely to be
consistently applied unless the general managers lead the effort. They can do so through role-
modeling appropriate stakeholder treatment, the decisions they make, the management structure
Page 9 of 53 Academy of Management Review
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they establish, the information they give priority, their communication in speeches, meetings,
personal interactions, and written communications of many types, as well as the people they hire,
reward, promote, and dismiss.
Like some other models of relational orientations (e.g., Cooper & Gardner, 1993), we
focus on two very different types of relational ethics strategies – self-interested, market oriented
strategies based on arm’s length relational ethics (ALRE) and highly joint-interest oriented
strategies based on communal sharing relational ethics (CSRE).5 We explain these two strategies
as ideal types to facilitate a more focused comparison of their essential characteristics. However,
it is important to recognize that these types are really points on a continuum, with some
relational ethics strategies falling somewhere between the two and some falling outside of this
range. The distribution of relationships along the arm’s length to communal sharing range of the
continuum is an open empirical question. However, based on arguments presented below, we
expect that a far greater number fall near the arm’s-length point on the continuum.
Arm’s Length Relational Ethics (ALRE)
ALRE strategies can be defined as a shared intention among a firm’s general managers to
relate to a stakeholder group based on the norms of arms-length relationships. Arms-length
relationships form a sort of “baseline” economic theory examining economic exchanges in
competitive markets (Powell, 1990; Uzzi, 1997). Firms and stakeholders that establish arms-
length relationships regularly switch exchange partners. Price data are the key determinants of
exchange, and firms rely on switching cost barriers for repeated transactions.
5 Semantic conventions among these models are varied, but the fundamental differences between the archetypes
remain profound. Examples include: relational vs. transactional exchanges (MacNeil, 1974); relational vs. explicit
contracts (Baker, Gibbons, & Murphy, 2002); embedded vs. arm’s length relationships (Uzzi, 1997); and communal
vs. exchange relationships (Mills & Clark, 1984). Also, while we focus on the arm’s-length versus communal
dimension of relationships, there are surely other dimensions – e.g. whether the relationships are egalitarian versus
hierarchical. These other dimensions represent attractive topics for future research.
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There are a number of specific behavioral manifestations of an ALRE strategy. To begin
with, the dominant exchange modes of ALRE strategies are discrete transactions or detailed,
temporally-bounded formal contracts, with little concern for future interactions, in the context of
fair market competition. ALRE strategies involve bargaining with stakeholders at arm’s length
with the intent of maximizing the firm’s interests. Power differentials and information
asymmetries are exploited where present. While moral considerations do not enter into ALRE-
based transactions or negotiations, participants are expected to comply with generally understood
rules/norms of market interactions – what Hendry (2001) calls “market morality.” This means
that ALRE strategies are consistent with obeying the law and adhering to relevant regulations.
Those in arm’s-length relationships bargain in good faith and expect to honor the explicit terms
of the resulting contracts, which are mostly written and formal. But, disputes involving
significant sums are typically resolved through legal mechanisms. While information
asymmetries may be exploited, blatant deceit is generally avoided. An ALRE strategy would be
consistent with Milton Friedman’s argument that “the social responsibility of business is to
increase its profits… without deception or fraud” (1970: 124).6
Communal Sharing Relational Ethics (CSRE)
CSRE strategies can be defined as a shared intention among a firm’s general managers to
develop a relationship with a stakeholder group based on the norms of communal sharing as they
apply to economic relationships. These relational strategies include an assumed shared future,
and they are associated with a number of specific behavioral manifestations. To begin with, firms
6 We must acknowledge that not all firms engaging in arm’s length relationships adhere to these standards. Some
firms may embrace a strategy of regularly acting unethically toward stakeholders, and use deceit, fraud, threats of
violence, and corruption to accomplish strategic aims (Greve, Palmer, & Pozner, 2010). However, such strategies
appear to be relatively rare and unsustainable in the long-run (Sullivan, Haunschild, & Page, 2007) – even in
transitional economies where the rule of law is weak (Zheng, Luo, & Wang, 2014). As such, patently unethical
strategies are outside the scope of our analysis.
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pursuing CSRE rely on relational contracting to a much greater extent than do ALRE firms.
Rather than being specific, explicit, and temporally bounded contracts, the promises involved in
relational contracting are general, implicit, and open-ended commitments to cooperate
voluntarily and generously with partners in joint wealth creation efforts. CSRE strategies keep
the prospect of a continuing relationship firmly in mind, relying on mutual trust and
trustworthiness to maintain reciprocal loyalty. Because the terms of these contracts are invariably
unclear and nearly impossible to enforce, they are “sustained by the shadow of the future” and/or
internal moral constraints rather than third party enforcement (Gibbons & Henderson, 2012:
1350). Formal contracts, when they are necessary, are often left purposefully indefinite to allow
“wiggle room” to make things fair (Scott, 2003). If problems emerge – e.g., due to unanticipated
problems or changes in economic conditions or regulatory environments – they are settled in a
cooperative manner (e.g., by seeking equitable solutions rather than establishing blame). Under
these circumstances, two objectives are paramount – resolving the problem at hand and
maintaining the integrity of the relationship. As such, litigation is seen as a last resort and is
employed only under dire circumstances because it would signal the end of the CSRE strategy.
Trusting behaviors reflect a desire to cooperate extensively for mutual gain.
CSRE strategies involve willingness to share property (especially intellectual property)
without regard for either its proprietary value or its potential appropriation by relationship
partners. Information asymmetries will not be exploited and, since information relevant to the
success of the joint effort is voluntarily shared, may cease to exist. Negotiations between the firm
and its stakeholders seek to satisfy both side’s needs.
In sum, a CSRE strategy manifests in the behaviors of promise keeping, relying on
relational contracts, refraining from taking advantage of power imbalances or information
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asymmetries, willingly sharing relevant information, treating property as a communal resource,
making voluntary contributions to joint efforts, and addressing emerging problems and settling
disputes in a cooperative manner. A CSRE strategy is consistent with, but a substantial extension
of, some existing formulations of IST, which tend to focus on mutual trust, cooperation, and
justice (Harrison et al., 2010; Jones, 1995). Importantly, while we submit that firms with CSRE
strategies are rare, behaviors consistent with a CSRE strategy do exist, as is made clear in a
number of case studies (e.g., Browning, Beyer, & Shetler, 1995; Doz, 1996; Larson, 1992; Uzzi,
1997). More specifically, Browning, Beyer, and Shetler describe the development of a “moral
community in which individuals and firms made contributions to the industry without regard for
immediate and specific payback” in the semiconductor industry’s manufacturing technology
consortium SEMATECH (1995: 113). Similarly, Doz (1996) notes that GE and Snecma’s
(successful) joint jet engine program featured substantial trust and cooperation. In another well-
known example, the Japanese auto industry is characterized by strategies compatible with close
relationships as opposed to manifestations of arm’s length relationships such as explicit contracts
(Nishiguchi, 1994; Ouchi & Jaeger, 1978).
COMMUNAL SHARING RELATIONAL ETHICS TO CLOSE RELATIONSHIP
CAPABILITY TO SUSTAINABLE COMPETITIVE ADVANTAGE
Firms that successfully implement a CSRE strategy are assumed to have the ability to
create a communal sharing relationship with a stakeholder. We call this a close relationship
capability, defined as the ability to convince members of the stakeholder group to treat the firm
as a close relation. Treating the firm as a close relation (Reis et al., 2000) is synonymous with
having a commitment bond – i.e. “a volitional psychological bond reflecting dedication to and
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responsibility for a particular target” (Bosse & Coughlan, 2016: 1207) – or adopting a communal
sharing relational model vis-à-vis the firm (Fiske, 1992; Bridoux & Stoelhorst, 2016).
Of course, successfully implementing a CSRE strategy can be quite demanding, requiring
both skill and effort on the part of managers. Therefore, close relationship capabilities are both
rare and difficult to imitate as well as valuable (as described in detail below). Nonetheless,
managers have several “tools” at their disposal to pursue successful implementation. As
described above, these tools include role-modeling behavior, the substance of decisions and the
priorities revealed in those decisions, the establishment of compatible management structures,
informational priorities, written and verbal communications in various venues and forms,
personal interactions, as well as hiring, firing, rewarding, and promoting decisions. Therefore,
according to the resource-based view of the firm, if a close relationship capability can be shown
to be valuable, rare, and difficult to imitate, it becomes a potential source of sustainable
competitive advantage. We devote much of the remainder of this section to demonstrating that
these criteria are met.
The Value of a Close Relationship Capability
In this sub-section we review arguments found in the IST and related literatures that are
most closely related to the idea that a close relationship capability can provide benefits that are
not available to firms that do not possess such a capability. Building on prior work, we argue that
additional economic value is created in a firm with a close relationship capability as stakeholders
are motivated to contribute more to joint value creation and, importantly, as value creation
processes become more effective. Our definition of value as economic value is consistent with
the RBV literature (Peteraf & Barney, 2003), but we do not claim that the value we describe will
be directly correlated with financial profits or shareholder returns. As Coff (1999) made clear,
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the profits of a business will not reflect the true value it creates if too much of that value is
siphoned off by stakeholders with strong bargaining power. Or, in the case of a firm pursuing a
CSRE strategy, much of the incremental value could be distributed back to stakeholders during
the course of business, such that bottom-line profitability may not reflect all of the additional
value created. We do claim, however, that additional value will be available to participants in the
joint value creation efforts of firms that enjoy the benefits of a close relationship capability (cf.,
Tantalo & Priem, 2016) and that, according to the norms of communal sharing, the additional
value should be distributed fairly.7 This value comes from improvements in reciprocal
coordination, knowledge sharing, attracting high quality stakeholders, lower transactions costs,
and greater moral motivation.
We should state from the outset that each of these sources of value requires particular
behaviors on the part of the firm that are similar to what it expects from stakeholders. For
example, reciprocal coordination is a cooperative two-way process so a firm that expects its
stakeholders to share valuable knowledge should share valuable knowledge with its stakeholders.
In a sense, then, the incremental sources of value we are about to explain also contain an implied
set of behaviors for firms that pursue a CSRE strategy. We should note also that these behaviors
are entirely consistent with a reliance on relational contracts and sharing of property.
Improved reciprocal coordination. Management scholars dating back to Barnard
(1938) and Thompson (1967) have regarded coordination as essential to organizational success.
Thompson (1967) describes three modes of coordination. Reciprocal coordination, where needed
contributions depend on the nature and extent of previous contributions and mutual adjustment is
required, is most relevant to communal sharing relationships. Communal sharing relationships
7 Given that the partners are expected to distribute the costs and benefits of the joint effort fairly, the probability that
the focal firm will end up with an unfairly small share is low and the probability that it will end up with none of the
incremental value seems miniscule.
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function without elaborate plans, rules, or contracts (Bridoux & Stoelhorst, 2016). Indeed, plans,
rules, and contracts are poor substitutes for mutual adjustment when tasks involve reciprocal
interdependence (Barki & Pinsonneault, 2005). In such highly interdependent tasks, reciprocal
coordination enables the creation of higher quality products/services at quicker speeds (Larson,
1992; Uzzi, 1997). In short, a close relationship capability is potentially valuable because it
allows firms to engage in reciprocal coordination more efficiently, resulting in better products
and services and more rapid adaptation to changing conditions.
Knowledge sharing. A number of scholars have emphasized the importance of ethical
norms and “relationship quality” on the effective utilization and dissemination of knowledge
between parties (Hosmer, 1994; Larson, 1992; Su, 2014; Uzzi, 1997). The importance of
knowledge as a source of competitive advantage has been long appreciated (Cohen & Levinthal,
1990). Firms engaged in joint efforts often share knowledge, and benefit from knowledge
received from stakeholders. Although much knowledge is generated and stored by employees
(Argote, 1999), learning from other stakeholders is also important to competitive success
(Harrison et al., 2010; von Hippel, 1988).
Knowledge has at least three attributes that distinguish it from other forms of property
(e.g., manufacturing equipment, real estate) and each is relevant to the close relationship
capability employed to make use of it (Dosi, Malerba, Ramello, & Silva, 2006). First, knowledge
is appropriable; once disclosed, others can use it free of charge.8 Second, knowledge may be
useful only when combined with other capabilities, such as knowledge from other stakeholders,
and the value of both the combination and the contributions of individual partners are unknown a
priori. Third, much knowledge is tacit and cannot easily be formally transferred from one partner
8 Of course, patent law provides some protection against this sort of appropriation. However, many ideas are not
patentable and many others are not worth the time and trouble. In any case, litigation is expensive.
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to another (Nelson & Winter, 1982). In some situations, the value of formally transferred
knowledge is reduced substantially without the concomitant transfer of tacit knowledge. Full
value knowledge transfers often involve ongoing and close interactions between the transferor
and the transferee. A close relationship capability involves shared perspectives and shared
vocabularies that are necessary for the transmission of subtle forms of tacit knowledge (Larson,
1992; von Hippel, 1988). In a mixed methods empirical study, Uzzi (1997) found that
“embedded” relationships were characterized by high quality (i.e., detailed, tacit, and holistic)
information exchanges. In sharp contrast, a firm with an arms-length relationship with a
stakeholder is likely to be unaware of useful tacit knowledge because there is more psychological
distance and less trust in the relationship. In sum, a close relationship capability has the benefit
facilitating high quality knowledge sharing between a firm and a stakeholder group.
Attracting “high quality” stakeholders. Because the joint value creation processes that
are the focus of this paper may only be as strong as the weakest partner involved, attracting high
quality stakeholders is of considerable importance. There are a couple of reasons that a close
relationship capability is likely to be attractive to “high quality” stakeholders. First, stakeholders
may be attracted to these firms because they feel as though they are participating in something
“larger than themselves,” an opportunity not readily available if firms rely exclusively on market
based, arms-length transactions to manage relations with stakeholders (Turban & Greening,
1997; Valentine, Godkin, Fleischman, Kidwell, & Page, 2011).
Second, because communal sharing relationships tend to create more value than other
relational forms (Bridoux & Stoelhorst, 2016), and because that value is expected to be
distributed fairly among participants, firms with a close relationship capability may be able to
attract stakeholders with more valuable portfolios of attributes (Tantalo & Priem, 2016). One of
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the most important of these attributes is their ability to adhere to the relational norms that lead to
greater wealth creation. That is, for firms pursuing a CSRE strategy, the “quality” of a
stakeholder depends, in part, on whether the stakeholder is willing and able to adhere to the
norms of close relationships. Such stakeholders can be expected to openly and voluntarily
contribute to the joint wealth creation effort of the focal firm in conjunction with other relevant
stakeholders. This attribute is a necessary (but not sufficient) condition for stakeholder
superiority, because without it the stakeholder becomes an inappropriate partner for a communal
sharing relationship. Of course, also important are the resources and skills the stakeholder brings
to the joint value creation process.
Lower transactions costs. Jones (1995) described the transaction cost advantages
associated with a relationship capability based on mutual trust and cooperation, advantages that
would certainly apply to a firm with a close relationship capability. The basic idea is that an
atmosphere of trust and an absence of opportunistic behavior make frequently re-negotiated,
detailed, formal contracts with elaborate safeguards unnecessary (see also Barney & Hansen,
1994). Furthermore, since incidents of breach of implicit contracts will be infrequent, and will
tend to be settled amicably among the parties, expensive legal costs can be avoided (Kessler &
Leider, 2011; Scott, 2003).
Moral motivation. Another benefit of a close relationship capability is that it can
motivate loyalty to or additional effort expended on behalf of the firm (Hosmer, 1994). Many
stakeholders will exert effort to help the firm as a going concern if they have a commitment bond
with the firm (Bosse & Coughlan, 2016). Conversely, many stakeholders will go out of their
way, and sometimes go against their own self-interest, to punish firms that have treated them
unfairly (Fehr & Schmidt, 2006; Hayibor, 2017). This may involve lawsuits, boycotts, strikes,
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spreading negative word-of-mouth, or just refusing to transact with a company with which one
has a poor relationship.
Another manifestation of moral motivation is lower team production problems. Team
production problems can emerge when the contributions of individual members to a joint effort
are difficult to isolate. Such situations give individual members an incentive to “shirk” or “free
ride” on the contributions of others and could arise in firm/stakeholder relationships such as
alliances and joint ventures. While Jones (1995) argues that mutual trust and cooperation are
ways to reduce team production costs, the norms associated with communal sharing relationships
could eliminate them entirely (Wagner, 1995).
To sum up, a close relationship capability has the potential to lead to higher levels of
joint value creation due to more efficient reciprocal coordination, knowledge sharing advantages,
the ability to attract higher quality stakeholders, reduced transaction costs, and greater moral
motivation. Now, we consider incremental costs associated with developing and maintaining a
close relationship capability through a CSRE strategy.
Incremental Costs of Developing and Maintaining a Close Relationship Capability
Similar to most of the IST literature, the foregoing discussion has largely extolled the
unique benefits of a close relationship capability. However, the CSRE strategy used to develop
and maintain a close relationship capability may entail costs that a firm relying on arms-length
relations can avoid. Of course, the relevant value of a close relationship capability is its net value
– benefits less incremental costs.
Potential non-reciprocation. Among the most important of these costs is the possibility
that a stakeholder will not abide by the norms of communal sharing despite the firm generously
sharing resources – e.g., time and effort, and (proprietary) knowledge – that may have great
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value (Bridoux & Stoelhorst, 2014). This could occur as a failure of the intended relationship to
emerge at all with a particular stakeholder, or it could occur as a breakdown of an existing close
relationship with a stakeholder. A related cost is the risk that a stakeholder may exploit the firm
due to the limited use of formal protective contracts. An associated cost is the additional
resources devoted to searching for suitable stakeholders with whom to engage, or in developing a
stakeholder relationship to the point at which they are willing to reciprocate. Just as few firms
actually follow a CSRE strategy to the point that they fully develop a close relationship
capability, stakeholders that are willing to abide by the norms of CSRE may also be rare.
Overly generous bargaining. Another incremental cost of the CSRE strategy could be
an overly generous allocation of jointly created value back to one or more of the stakeholders
who helped create it (Harrison & Bosse, 2013; Harrison et al., 2010). Arms-length relationships
require only the contractually agreed-upon allocation of value based on self-interested
bargaining, providing an opportunity for a firm to extract large amounts of value from a
relationship based on aggressive bargaining tactics, power imbalances, or favorable information
asymmetries (Coff, 1999). In contrast, substantially unfair distributions of created value are
unlikely in a communal sharing relationship; neither of the parties will engage in aggressive
value appropriation based on advantageous circumstances. In sum, firms pursuing a CSRE
strategy could get a smaller slice of a larger pie.
Unprofitable loyalty. Finally, a firm that adopts CSRE will tend to be loyal to a
stakeholder with which it has developed a communal sharing relationship, even if that
stakeholder ceases to provide adequate value to the joint value creation process (Uzzi, 1997). A
firm might continue the relationship because of the values it has adopted in consequence of its
CSRE strategy, but also because ending a relationship could send a negative signal to other
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stakeholders about the firm’s commitment to communal sharing values, thus weakening its close
relationship capability. Irrespective of reason, such unprofitable loyalty could prevent the firm
from engaging new stakeholders with more valuable capabilities.
This description of potential costs raises the question: under what circumstances will the
benefits of a close relationship capability outweigh the costs of pursuing it through a CSRE
strategy – i.e., when will a close relationship capability lead to sustainable competitive
advantage? Our approach to understanding these benefit/cost balances is to identify the contexts
in which a close relationship capability is likely to have the greatest net value (e.g., benefits
minus costs). We begin by explaining the probable influence of a firm’s existing ethical culture
on the costs associated with implementing a CSRE strategy in managing relations with a
stakeholder group.
Other-Regardingness of a Firm’s Ethical Culture
This section contends that firms differ in how costly it is to develop a close relationship
capability with a stakeholder group through a CSRE strategy. In particular, we would predict that
it would be much easier for a firm to develop a close relationship capability with a stakeholder
group if the firm has an overall ethical culture that is consistent with such a relational model.
Conversely, the further away a firm’s overall ethical culture is from the norms associated with a
close relationship, the more costly it will be to develop a close relationship capability vis-à-vis a
stakeholder group.
There are several different ways of describing a firm’s ethical cultures (for a good
review, see Mayer, 2014), but the version that seems most relevant here is stakeholder cultures,
developed by Jones and colleagues (2007). These authors posit a continuum of ethical
orientations toward stakeholders ranging from completely self-regarding to completely other-
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regarding. They identify “ideal types” along this continuum – consisting of (1) agency cultures,
(2) corporate egoist cultures, (3) instrumentalist cultures, and (4) moralist cultures9 – in order of
an increasingly other-regarding (as opposed to self-regarding) focus. We propose that the further
a firm’s stakeholder culture is from the moralist/other-regarding end of the continuum, the more
expensive it will be to effectively develop a close relationship capability with a stakeholder
group through a CSRE strategy. This is because it would take a large amount of management
time and other resources to a) develop a close relationship capability with a stakeholder group
that is in contradiction to the firm’s overall ethical culture, or b) change the firm’s overall ethical
culture to be consistent with a close relationship capability.
To elaborate, let us briefly consider each of the ideal types along the continuum. First, the
costs of a developing and maintaining a close relationship capability through a CSRE strategy
will be lowest for moralist cultures, which attempt to adhere to moral principles in their
relationships with all of their stakeholders. Developing a close relationship capability based
around relational contracts, joint wealth creation, cooperation, and communal sharing of property
should be comparatively easy for a firm with a moralist culture.
Next, the costs of pursuing a close relationship capability through a CSRE strategy will
be somewhat higher for instrumentalist cultures, which ultimately care only about profit (or
shareholder wealth) maximization, but recognize that is it often important to appear moral when
interacting with stakeholders. In other words, they are inauthentic moralist firms. However, a
good deal of scholarship suggests stakeholders can detect ethical authenticity, and that this
9 Jones and colleagues (2007) also mention the logical possibility of an altruist stakeholder culture, which tries “to
maximize the other party’s outcome with less concern for their own (140).” Jones and colleagues acknowledge that
“Altruist cultures are included for the sake of completeness (149)” and that “As a practical matter, conditions of
economic competition make significant growth or proliferation of [altruist] companies improbable (150).” Given
that such cultures are likely to be exceedingly rare in a market economy, we do not consider them further here.
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awareness can translate into value adding (or destroying) behavior (Cording, Harrison,
Hoskisson, & Jonsen, 2014; Jones, 1995; Schultz, Hatch, & Larsen, 2000). As such,
instrumentally ethical firms will have a harder time than moralist firms convincing a stakeholder
that they will conform to the norms of a close relationship. They will have to allocate more
resources to ensuring that members of their own firm both understand and conform to these
norms to a sufficient degree that the stakeholder is convinced, and to making sure that the norms
are not violated so that the benefits of a close relationship are fully realized. In terms of the
specific costs described previously, they will be higher because there is a higher probability that
the stakeholder will not abide by the norms of communal sharing in spite of the firm’s efforts to
establish such a relationship. If the stakeholder does not conform, then additional value will not
be created.
Next, the costs of developing a close relationship capability through a CSRE strategy will
be higher still for corporate egoist cultures, which focus on short-term maximization of profits
(or shareholder wealth), aggressively contracting (at arm’s length) with their stakeholders to
keep costs down in order to compete successfully in their product or service markets. The stance
of a corporate egoist culture is clearly in contradiction to the norms of close relationships.
Successfully enacting a close relationship with a particular stakeholder group while having a
larger ethical culture opposed to such a strategy will be expensive, and likely to fail.
Finally, we contend that the costs of developing a close relationship capability through a
CSRE strategy are highest for agency cultures, characterized by self-interest at the individual
level such that the interests of the firm itself are advanced only to the extent that internal
incentives link personal and corporate goals. The gap between agency cultures and a close
relationship capability can only be described as enormous, as will be the costs and the amount of
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time it will take to bridge it. Therefore, the net value (and the resulting sustainable competitive
advantage) of pursuing a close relationship capability with a stakeholder group will be smallest
for firms starting out with agency cultures.
MODERATORS OF THE VALUE OF A CLOSE RELATIONSHIP CAPABILITY
It is possible that while a CSRE strategy (and the resulting close relationship capability)
will add value in some contexts, it could be less effective than an ALRE strategy in others. We
have already argued why the degree of other-regardingness found in a firm’s exiting ethical
culture is a firm-specific moderator influencing the incremental costs of developing a close
relationship capability through the CSRE strategy. Here we evaluate environmental dynamism,
knowledge intensity, and interdependence as key elements in determining the extent to which a
close relationship capability is more valuable. We focus on these three moderators because they
collectively represent increasingly important elements of the 21st century economy (Dicken,
2011; Powell & Snellman, 2004). Indeed, these three moderators are interrelated. Many firms
have changed dramatically as they have attempted to cope with environmental dynamism (Dess
& Beard, 1984), the term used to describe rapid and pervasive environmental change. One of the
most influential forms of dynamism has resulted from the rapid advancement of information
technology, which has put a premium on the creation and dissemination of knowledge (Powell &
Snellman, 2004). To cope with, and as a result of, dynamism and the “knowledge economy”,
firms have become much more interdependent (Dicken, 2011). Because the strength of these
general forces is likely to vary from industry to industry, we will now evaluate their potential as
moderators of the relationship between a firm’s close relationship capability and sustainable
competitive advantage.
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Environmental dynamism. Dynamic “high velocity” industries (e.g., software
development, innovative electronics, healthcare, some segments of the fashion industry) require
constant adaptation to new competitive, technological, and regulatory conditions (Dess & Beard,
1984). A firm with a close relationship capability is in a stronger position to create value in a
dynamic context (Joshi & Campbell, 2003). A close relationship capability should facilitate the
required rapid transfer of information. The skills associated with reciprocal coordination will
also be helpful in organizing activities in dynamic environments. In addition, in an environment
that is changing rapidly, written contracts associated with arms-length relationships will quickly
become outdated, requiring frequent adjustments and increasing the possibility of opportunistic
behavior. This can be expected to lead to time delays. In addition, partners continually involved
in re-writing contracts will experience increased transactions costs. In this situation, transactions
costs associated with a CSRE strategy are likely to be lower than with an ALRE strategy (Joshi
& Campbell, 2003).
Knowledge intensity. The kind of adaptation needed to thrive in knowledge intensive
industries (e.g., high tech industries, pharmaceuticals, healthcare) requires the transfer of
information among stakeholders (Harrison & Thompson, 2015). Not all firm/stakeholder
relationships are dependent on extensive knowledge sharing. Knowledge intensity can be defined
“as the extent to which a firm depends on the knowledge inherent in its activities and outputs as a
source of competitive advantage (Autio, Sapienza, & Almeida, 2000: 913).” Knowledge
intensive businesses rely on knowledge creation and transfer as a primary means of generating
value. Firms that depend on knowledge intensity are more likely to rely on the knowledge
sharing skills associated with a close relationship capability. Also, because knowledge is such an
appropriable resource (Dosi et al., 2006), firms must be able to trust that a stakeholder will not
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act opportunistically when provided with proprietary or especially valuable knowledge. Thus, a
close relationship capability is expected to be particularly valuable in knowledge intensive
environments. On the other hand, if knowledge is not particularly critical to a firm’s strategy and
competitiveness, as in low-tech businesses, an arms-length relationship may be more efficient.
Task and outcome interdependence. Bridoux and Stoelhorst (2016) suggest that
communal sharing relationships are particularly efficient in environments with high task and
outcome interdependence. Comparing these sorts of conditions with conditions in which there is
high task and outcome independence can help to substantiate their claim. Task and outcome
independence is found in industries in which firms produce products in-house, through simple
production processes, or with simple inputs from relatively few stakeholders (e.g., commodities,
fast foods, standardized components such as nuts and bolts). In these environments the additional
costs associated with a CSRE strategy are less likely to be offset by the incremental value created
from possession of a close relationship capability. In fact, there are likely to be economic
advantages to aggressive bargaining in order to obtain the lowest market prices available for
required inputs.
The situation is reversed in industries with long and complicated value chains in which
the norm is for multiple stakeholders to participate in supplying pieces of the final product (e.g.,
aerospace, automobiles, healthcare). Because complex products or production processes require
inputs from multiple stakeholders, some of them deeply involved in the design and production of
the product involved, complex coordination will be required. These processes will benefit greatly
from the advantages in reciprocal coordination possessed by firms with a close relationship
capability. In an empirical study of the fashion industry, Uzzi (1997) documents the value of
reciprocal coordination in highly interdependent tasks (see also Larson, 1992).
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In addition, because transactions costs are likely to be higher where tasks and outcomes
are interdependent, reducing them through the trust-based governing mechanisms of a close
relationship capability can be quite valuable, thus increasing the potential for sustainable
competitive advantage. Firms with a close relationship capability are able to engage in efficient
relational contracting (rather than expensive formal written contracting) and dispute resolution
through cooperatives means (rather than expensive litigation). Furthermore, because relevant
information and partner effort are voluntarily contributed, negotiations over who contributes
what are dramatically reduced. In short, the efficiencies associated with transactions costs, along
with those related to reciprocal coordination, make a close relationship capability particularly
valuable in contexts of task and outcome interdependence. Finally, task and outcome
interdependence, accompanied by greater coordination requirements and transactions costs, is
likely to increase with the number of stakeholders involved in the joint wealth creation effort.
The Resource Based View’s Standards for Sustainable Competitive Advantage
We have now reviewed the circumstances in which the benefits of a close relationship
capability are likely to be highest relative to the incremental costs of the CSRE strategy used to
develop and maintain it. In so doing, we have addressed the “valuable” criterion of the Resource
Based View of the firm (Barney, 2011; Barney & Wright, 1998). This section develops the
argument that a close relationship capability also holds the potential to achieve a sustainable
competitive advantage. As pointed out by the RBV, a capability is only likely to lead to superior
firm performance in the long run if a) few other firms have the capability (i.e., it is rare), and b)
it would be very difficult and expensive to copy (i.e., it is inimitable) (Barney & Clark, 2007;
Barney & Wright, 1998).10 Otherwise, other firms will just develop the capability and compete
10 In early versions of the Resource Based View, there was another criterion for a resource to be a plausible source
of sustained competitive advantage – non-substitutability (Barney, 1991). However, non-substitutability can be
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away any superior returns. We now consider why it is plausible that a close relationship
capability may be rare despite being valuable.
A close relationship capability is rare. A close relationship capability is likely to be
rare for a variety of reasons, and these reasons tend to fall into the three categories described by
Chen (1996) as (1) not being aware of the benefits, (2) not having the proper motivation to
pursue the requisite strategy, or (3) being unable to implement the requisite strategy successfully.
Each is considered in turn.
First, for the most part, business education and the existing norms of the economic
system have stressed the pursuit of organizational self-interest as the best means of achieving
corporate goals (Ferraro, Pfeffer, & Sutton, 2005; Ghoshal, 2005; Mintzberg et al., 2002;
Podolny, 2009). As a result, arms-length transactions tend to be the default position with regard
to how firms manage relationships with their stakeholders (Bridoux & Stoelhorst, 2016). If
managers are to move away from this default, deliberate efforts must be made to establish and
reinforce the idea that the values and behaviors associated with a CSRE strategy are valid and
desirable. However, managers may not be aware of the potential gains available to their firms if
they are able to develop a close relationship capability. Managers may push back at the notion of
communal sharing in favor of what is sometimes called “market morality” (Hendry, 2004),
thinking that pursuing joint interests leads to inferior economic outcomes for the firm. A related
point is that managers may believe that focusing on maximizing shareholder wealth is morally
required (Jones et al., 2007), particularly since some influential thinkers have advanced this
position (for a review, see Stout, 2012).
folded into the valuable criterion – i.e., if there are no good substitutes for a resource, it is more valuable. As such,
more recent incarnations of the Resource Based View do not break out non-substitutability as a separate criterion
(Barney & Clark, 2007; Barney & Wright, 1998).
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Second, several factors can reduce the motivation of managers to adopt CSRE norms in
pursuit of a close relationship capability. For instance, many managers are subject to incentives –
e.g., performance bonuses based on profit targets – that direct their attention to short-term goals.
Indeed, the nature of incentives is that they typically need to provide timely rewards for behavior
that is tied to concrete outcomes (Aguinis, Joo, & Gottfredson, 2013). Given the causal
ambiguity and social complexity surrounding the relationship between morality and financial
outcomes, it is difficult to design incentives that effectively and precisely reward ethical
behavior. Since developing communal sharing relationships is likely to be a long-term endeavor
with indeterminate outcomes, many un-incentivized managers may be reluctant to make the
attempt. In addition, revealing valuable proprietary information to a stakeholder partner without
substantial safeguards can be seen as naïve by peers and can be quite costly if the partner proves
untrustworthy. Psychologically and economically “safe” strategies may be much more appealing
to many managers. Even managers willing to look beyond their short-term self-interest may be
discouraged by a realistic view of the difficulty of successful adoption.
Third, relatively few firms will be able to implement a CSRE strategy successfully, thus
finding it difficult or impossible to develop a close relationship capability. The ambitious
behavioral standards of CSRE are difficult to achieve and sustain, particularly since
approximately half of all individuals begin with social dispositions that are either self-regarding
and individualist (38%) or competitive (12%) (Au & Kwong, 2004; Bridoux & Stoelhorst, 2016).
Existing relational ethics norms within the firm may be far removed from those of the CSRE
strategy (as we discussed in our section on costs of CSRE strategies), or may be unclear or
inconsistent. In addition, communal norms are often more fragile than arm’s-length norms
(Chatman & Barsade, 1995), and are vulnerable to perceived self-interested behavior or breaches
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of trust (Bridoux & Stoelhorst, 2016; Lewicki & Bunker, 1995). The unsuccessful clearing of
these hurdles, and the high costs of doing so, can lead to a reversion to market pricing
relationships (Bridoux & Stoelhorst, 2016) and arms-length strategies.
Furthermore, suitable stakeholder partners may be difficult to find. Such stakeholders
must: 1) have the requisite capabilities to complement the focal firm in their joint value creation
effort, 2) clear the formidable CSRE hurdles outlined above, and 3) want to engage in such a
relationship. Indeed, many potential stakeholders may be conditioned to expect self-interested
behavior in any economic context (Ferraro et al., 2005), and may be unwilling to trust that the
focal firm is actually benevolent. These fixed beliefs in self-interest can be self-fulfilling, such
that it becomes possible to interact only with such parties on a transactional basis (Ferraro et al.,
2005; Miller, 1999). For these reasons, we conclude that a close relationship capability will be
rare, and may thus be a source of competitive advantage.
A close relationship capability is difficult to imitate. The primary benefit of a close
relationship capability – improved joint value creation through more valuable information
exchanges and better coordinated activities – may be attractive to firms that are currently
pursuing an ALRE strategy. The question, then, is how difficult it would be to imitate the CSRE
strategy and successfully develop the associated close relationship capability. Imitability is
related to path dependence (the manner in which firm’s resources develop over time), causal
ambiguity (difficulties in determining the sources of a firm’s competitive strengths), and social
complexity (difficulties in replicating complex social phenomena) (Barney, 1991, 2011). A
firm’s close relationship capability is likely to be difficult to imitate because it is highly
dependent on the manner in which the firm’s relationships with stakeholders have evolved over
time (path dependence) – in some cases, considerable time. In addition, since relationship quality
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is opaque to outsiders, other firms are unlikely to understand the extent to which the firm’s
sustainable competitive advantage is related to its close relationship capability (causal
ambiguity). Moreover, communal sharing relationships are more socially complex than arms-
length relationships. Thus, according to the three well-accepted criteria for inimitability, a close
relationship capability will be difficult to imitate. Because it is rare and difficult to imitate, we
conclude that a close relationship capability, in contexts in which the benefits exceed the costs,
has the potential to lead to a sustainable competitive advantage.
DISCUSSION
In this article, we set out to provide some answers to a question that should be quite
important to IST researchers, but to date has drawn scant attention. Simply put, if the ethical
prescriptions of IST research are valuable, as theory and empirical studies indicate they are, why
are these measures not the dominant mode of firm/stakeholder relationships? This article
addresses this question by arguing that extant IST research has three significant shortcomings
that limit its usefulness to scholars and corporate managers. First, virtually all IST-based studies
make and defend claims that certain ethical practices are valuable, but very few show them to be
rare or difficult to imitate – the other two criteria for sustainable competitive advantage
according to the resource-based view of the firm. How can a practice yield sustainable
competitive advantage if many firms are employing it, or firms can easily adopt it? Second,
while the benefits of certain ethical practices have been well documented, the costs of adopting
them have been given scant attention. How can a practice be deemed valuable if the costs of
adopting it exceed the benefits it yields? Third, few theoretical or empirical efforts have
considered the competitive context in which a firm operates as relevant to IST-predicted
performance outcomes. Are the benefits of ethical practices the same for firms that produce
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simple commodities – e.g., nuts and bolts or copier paper – as for firms producing cellular
phones or complicated medical equipment?
This article examined how and under what circumstances a stakeholder management
strategy, based on a refined set of ethical norms associated with IST, is likely to lead to
sustainable competitive advantage. In so doing, it fills a void in the extant IST literature.
Specifically, to summarize the argument: 1) successfully adopting a relational ethics strategy
consistent with communal sharing relationships (a CSRE strategy) results in a close relationship
capability; 2) a close relationship capability has a number of benefits – including improved
reciprocal coordination, better knowledge sharing, attracting higher quality stakeholders, lower
transaction costs, and greater moral motivation and therefore is potentially valuable; 3) a CSRE
strategy, and by extension a close relationship capability, also has some costs – including the
risks of generous resource sharing being exploited (non-reciprocation), unnecessarily generous
allocation of jointly created value, and unprofitable loyalty; 4) the costs of enacting a CSRE
strategy are especially high when the firm’s overall ethical culture is more self-regarding than
other-regarding; 5) the benefits, and by extension the net value, of a close relationship capability
will be greater under certain circumstances – specifically, under conditions of environmental
dynamism, knowledge intensity, and reciprocal interdependence with stakeholders; 6) even
under conditions where the benefits outweigh the costs, a close relationship capability will be
rare; 7) and it will be difficult to imitate; so 8) there are conditions under which a close
relationship capability is likely to be a source of sustainable competitive advantage.
Extending the Theory
While the establishment of a close relationship capability as a potential source of
sustainable competitive advantage fulfills the requirements of the RBV, this capability is only an
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interim goal for firms in a competitive market economy. Superior profitability is the ultimate
goal. Therefore, as a minor extension of our theory, we suggest some potential directions for
development of a theoretical link between a close relationship capability and actual sustainable
competitive advantage. We assume that stakeholders, existing and potential, will be attracted to a
communal sharing relationship within which they can co-create value with the focal firm. This is
certainly not a heroic assumption because such relationships have real incremental value, as
argued by Bridoux and Stoelhorst (2016) and substantially expanded on in this article. The
details of how this assumption can be developed into credible theory will likely involve such
questions as the following. How can the firm convey a willingness and capability to engage in
communal sharing relationships? What sorts of stakeholders will be attracted to a potential
communal sharing relationship? How will firms select stakeholders with appropriate attributes?
(An analysis of the role of reputations will likely be useful here.) Can firms convert existing
arm’s length relationships to communal sharing relationships? If so, how? Are such conversions
likely to be more or less difficult than establishing new relationships? Scholars wishing to extend
the theory will have to deal with these questions, among others.
Understanding the Influence of Costs and Context
We believe our model is the first to identify a range of costs specific to close
relationships. Of particular interest for future research, we suggest that close relationships may
lead to unprofitable loyalty (e.g., not laying off workers when there are other laborers, perhaps in
other countries, who could do the same quality job for less money; sticking with a supplier even
when another supplier offers a similar product at a lower price). Future research identifying these
costs’ frequency, scope, and conditions of occurrence would help us to understand whether and
when a close relationship capability will be valuable.
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Another interesting research question emerges from our evaluation of the costs of
pursuing a CSRE strategy vis-à-vis a particular stakeholder group when the firm’s overall ethical
culture promotes contradictory norms. One of the key empirical questions that emerges is
whether it is possible for a firm with a firmly entrenched relational ethics strategy based on an
agency or corporate egoist culture to successfully adopt a CSRE strategy and thus develop a
close relationship capability with a stakeholder. We would predict that a moral crisis of some
magnitude would be required, and possibly a change in leadership. Perhaps one strategy that
could help with such a transition would be to adopt a CSRE strategy on a small scale first, with
one or a few stakeholders or in only one division of a larger company. If the effort is successful,
it could create an impetus for changes with other stakeholders or other parts of the firm.
Almost all of the IST research is based on the (often unstated) assumption that an IST-
based strategy is good for all firms in all situations. Very recently, scholars have begun to
explore potential moderating influences (Bridoux & Stoelhorst, 2014, 2016; Garcia-Castro &
Francoeur, 2016). We extend this work here, thus offering a theoretical foundation upon which
other researchers can build. Each of the three contextual moderators represents a potential
research proposition that can be tested in future research. The environmental moderators of
dynamism, knowledge intensity, and interdependence with stakeholders are especially important
because they are increasing in pervasiveness. Freeman (1984) argued in the early pages of his
classic book that a stakeholder approach to management is an effective way to deal with a
tumultuous and complex environment. That was over three decades ago, and the business
environment has become even more turbulent and complex. It is possible, then, that a
stakeholder approach to management is actually increasing in its importance and effectiveness
due to ongoing forces.
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For practitioners, then, this paper offers a plausible argument for why their firms should
seriously consider adopting a CSRE strategy in spite of its incremental costs, particularly if they
find themselves in a highly dynamic business, or one in which knowledge intensity is high, or
when they have a large, complicated, and interdependent production system. It helps to explain
that if managers develop a close relationship capability, it is going to be rare and hard to imitate,
and may thus serve as a source of sustainable competitive advantage.
The flip side of this conclusion is that it tells managers the circumstances under which the
ethical treatment of stakeholders is very unlikely to improve (and may harm) the firm’s financial
performance. This observation leads to a potential ethical dilemma. Our theory explains why an
arms-length relationship may lead to higher financial performance in certain situations, as in
environments characterized by low dynamism, low knowledge intensity, or low stakeholder
interdependence. As scholars have convincingly argued, it is not good for society if firms are
oriented only toward profits (Harrison & Wicks, 2013; Jones & Felps, 2013a; Stout, 2012). As
Jones and colleagues (2016) explain, achieving social welfare gains, in the context of firms
attempting to maximize the wealth of their shareholders, is quite difficult. Consequently, in
certain circumstances, there seems to be an underlying tension between what might be good for a
firm and what is most beneficial for society as a whole. How individual managers react to this
dilemma depends on their conscience and amount of discretion (Phillips, Berman, Elms, &
Johnson-Cramer, 2010).
In the introduction to a recent AMR Special Topic Forum on Management Theory and
Social Welfare, Jones and colleagues (2016) also urged management scholars to include an
assessment of the social welfare implications of their research in their publications. They were
particularly concerned about prescriptions that promise greater profitability for firms without an
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assessment of the welfare effects on stakeholders. They concluded that the only certain formula
for improving social welfare is through Pareto improvements – i.e., policies/decisions in which
one (or more) parties is made better off without making any other party worse off. Our theory
demonstrating how a CSRE strategy can lead to sustainable competitive advantage through
development of a close relationship capability may have the potential to meet this standard in
many cases because the benefits of the firm/stakeholder joint wealth creation effort are intended
to be distributed fairly and the strategy does not require that any other party be negatively
affected. Indeed, a firm-level ethical culture that would be most supportive of a CSRE strategy
would also discourage managers from making other parties worse off.
Connecting with the RBV Literature
As outlined in the previous sections, our study addresses a number of problems with
currently available versions of IST theory. However, since it makes use of the resource-based
perspective, it also makes a contribution to the strategic competitiveness literature. In spite of the
obvious link between organizational ethics and a firm’s relationships with its stakeholders, and
the importance of stakeholder relationships to a firm’s competitiveness, the critical link between
the nature of a firm’s ethics and competitive advantage has rarely been addressed (Litz, 1996).
One noteworthy exception is Manroop, Singh, and Ezzedeen (2014), who used the resource-
based perspective (RBV) to examine how human resource systems influence the ability of a
firm’s ethical climate to create strategic value.
Of the three main research streams within RBV – the classic RBV perspective, the
knowledge-based view, and the relational view (Acedo, Barroso, & Galan, 2006; Dyer, 1997;
Dyer & Singh, 1998) – our study is most consistent with the relational view and, while we did
not employ the knowledge-based view per se, knowledge intensity is also an important construct
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in our analysis. Our approach builds on the increasingly popular idea in the RBV literature that
intangible resources (capabilities) such as stakeholder relations, culture, and competencies, when
utilized effectively, can be more effective sources of sustainable competitive advantage than
tangible resources such as products (Barney, 2011; Newbert, 2007).
Building on the Relational View of Stakeholder Theory
Most of the IST literature focuses on the existence (or absence) of stakeholder-friendly
(or -hostile) policies or programs established by firms regarding treatment of stakeholders.11 We
depart from this pattern by contributing to a small but increasingly important stream in this
literature on bilateral interactions between firms and stakeholders, an approach advocated by
Jones (2011). Our theory acknowledges that firm/stakeholder relationships are bi-directional,
develop over time, and depend on the relational orientations of the stakeholders themselves. For
example, it accounts for the fact that a stakeholder may not always behave in ways predicted by
extant IST theory (Bridoux & Stoelhorst, 2014). In addition to differences in their willingness to
reciprocate, stakeholders may be unwilling to divulge the kind of information needed to achieve
sustainable competitive advantage (Harrison et al., 2010), thus reducing benefits from knowledge
transfer. Likewise, many stakeholders may not be willing to adopt the other ethical norms, such
as a reliance on informal contracting or high levels of voluntary cooperation with the objective of
creating joint value. Consequently, essential to the nature of a firm’s relationship with
stakeholders is its ability to attract high quality stakeholders that are willing to conform to the
norms of CSRE. In terms of future research, this suggests that assessing stakeholder relationships
requires measuring the behaviors and attitudes of both the firm and particular stakeholders, and
11 The majority of empirical tests of IST to date contain variables similar to those found in the Kinder Lydenberg &
Domini (KLD) database. Examples include whether the firm has a profit sharing program, whether it has policies
regarding the way it treats particular groups, a strong product safety program, or whether the firm is generous in
donating to charities. For a complete list, see MSCI ESG Research (2011). A review of this literature can be found
in Freeman, Harrison, Wicks, Parmar, & de Colle (2010).
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to measure how those relationships change over time. We would expect such scholarship to
explain much more variance in economic performance (Larson, 1992).
In addition, adopting a relational perspective opens up a number of interesting questions
about relationships with stakeholders. For example, what types of norms violations cause a close
relationship capability to disappear (or are some stakeholders comparatively forgiving) and how
can close relationships be repaired? How long does it take to develop a close relationship
capability leading to sustainable competitive advantage? How do CSRE strategies evolve over
time and in response to different kinds of feedback? Also, to what extent are CSRE strategies
more likely, or more advantageous, in collectivist versus individualist societies? And to what
extent do Western ideals regarding ethics influence perceptions of the attractiveness, content and
efficacy of a CSRE strategy and the resulting close relationship capability?
Limitations
Our analysis also comes with limitations. First, and perhaps most important, for analysis
purposes we divided our relational ethics strategies into two very different models of stakeholder
management. Although there are firms that have norms that are reflected by these idealized
states, we recognize that some firms will fall somewhere in between on the close
relationship/arms-length transactions scale. But this raises the question, at what point do the
benefits associated with a close relationship capability manifest? Is the relationship linear or are
there threshold effects? This actually represents an opportunity for researchers to explore what
other relational ethics strategies look like, and how they might perform under particular
circumstances.
Another issue worth mentioning is the focus of this paper on dyadic relationships
between firms and stakeholder groups. Two observations are warranted here. First, there is no
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reason that our conclusions could not be extended to multi-party relationships. For example, a
firm, a key customer, and a supplier might team up to develop a new or improved product.
Second, we fully recognize that perceptions of a CSRE strategy, and the intentions behind it, will
be affected by the kinds of strategies the firm pursues with regard to other stakeholders. For
instance, if a stakeholder group knows a firm treats another group differently, it may see the firm
as inauthentic, which could undermine the ability of the firm to develop a close relationship
capability. Along these lines, we suspect that a firm is more likely to be successful in developing
a close relationship capability if firm members are consistent in their CSRE strategy across
stakeholders. In other words, even though a particular relationship may be dyadic, it is
influenced by norms and behaviors that are typical in the broader firm community. We leave it to
future researchers to more carefully evaluate these sorts of influences.
In addition, our analysis and theory may not apply as well to cultures other than those
found in North America and particularly in the US. Many of these cultures – e.g., much of Asia –
are much more collectivist. As such, strategies resembling CSRE are less likely to be rare and
may be easier to imitate, making any competitive advantage accruing to them less valuable and
sustainable. We leave questions related to cultural differences to future research.
We should add that it will take substantial effort to measure the constructs discussed in
this paper. Going forward, empirical research to test the relationships described in this paper
would have to be different from most of what currently exists in the literature. Just as the theory
contained herein provides a more fine-grained perspective on IST, the measures used in its
testing will have to be more precise. Globally, databases containing a lot of information around
the topics of corporate responsibility and sustainability are growing in number. However, as
mentioned earlier in the paper, the data in these databases are policy and outcome oriented, and
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do not contain much information of use in describing the actual nature of firm/stakeholder
relationships. To measure CSRE strategies, we would suggest surveying firm leaders on whether
their intention vis-à-vis a particular stakeholder (group) is to develop a communal sharing versus
market pricing relationship. To measure whether firms actually have a close relationship
capability, we suggest asking stakeholders (e.g. customers, employees, suppliers) whether their
interactions with the firm are governed by the norms of communal sharing and whether they feel
a bond of commitment to the firm (Bosse & Coughlan, 2016). To accomplish this, we suggest
adapting items from existing relational models scales (Haslam & Fiske, 1999; Haslam, Reichert,
& Fiske, 2002). For example, researchers might pose the following sorts of items to stakeholders,
“If a disagreement arose with [the firm], we would resolve it by consensus”; “I share similar
values to those expressed by [the firm]”; and “In interacting with [the firm], the focus is on
mutually beneficial outcomes.” Examination of relational data based on extraction of news
stories is another possibility (Henisz et al., 2014). Finally, the sort of relational theory of
competitive advantage that we advance could be meaningfully specified and elaborated on by
careful ethnographic work (e.g., Larson, 1992; Uzzi, 1997). Such work, while often fascinating,
is also quite time intensive and raises questions of generalizability.
With regard to dependent variables, the ultimate dependent variable in IST research tends
to be firm financial performance – as operationalized by measures such as shareholder returns,
returns on assets, and returns to debt holders. However, to fully capture the elements of the
theory, it would be necessary also to somehow reflect the total value created from a close
relationship capability. Total value will not be entirely captured by financial measures, especially
because firms that pursue such a strategy may voluntarily distribute comparatively more value
back to the stakeholders that helped to create it. To capture total value creation, it would seem
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necessary to use broader constructs such as stakeholder utility or happiness enhancement
(Harrison & Wicks, 2013; Jones & Felps, 2013b) as well as analytic methods such as Data
Envelopment Analysis (DEA) that can combine disparate kinds of goods (Bendheim, Waddock,
& Graves, 1998). Of course, case study methodologies can also provide opportunities to refine
both the theory contained in this paper and techniques to measure both the nature of
firm/stakeholder relationships and value-based performance measures.
CONCLUSION
This paper integrates prior work on relational models (Bridoux & Stoelhorst, 2016; Fiske,
1992), stakeholder culture (Jones et al., 2007), and arm’s length versus embedded relationships
(Uzzi, 1997) with work on IST (Harrison et al., 2010; Jones, 1995; Tantalo & Priem, 2016) and
the RBV (Barney, 1991). While a substantial body of prior scholarship suggests that close
relationships have value (e.g., Bosse & Coughlan, 2016; Cooper & Gardner, 1993; Larson, 1992;
Uzzi, 1997), we are not aware of any other study that provides a detailed examination of why the
capability to create a close relationship with a stakeholder could represent a source of sustainable
competitive advantage. We have provided a model that illustrates that, given particular
contextual and firm-specific conditions, the incremental benefits of a close relationship
capability can exceed the costs of a strategy used to develop and maintain it. Furthermore, firms
that are successful in developing a close relationship capability may enjoy a sustainable
competitive advantage because such capabilities are likely to be rare and are very difficult to
imitate, even in contexts in which they are the most advantageous.
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Thomas M. Jones ([e-mail]) retired as the Boeing Professor of Business
Management at the Foster School of Business at the University of Washington in 2014. He
received his Ph.D. from the University of California at Berkeley. His ongoing research interests
include stakeholder theory and the relationship between management theory and social welfare.
Jeffrey S. Harrison ([e-mail]) is a University Distinguished Educator and the
W. David Robbins Chair in Strategic Management at the University of Richmond. He received
his Ph.D. from the University of Utah. His research deals primarily with ethical approaches to
strategic management, and stakeholder theory in particular.
Will Felps ([e-mail]) is an associate professor at the University of New South
Wales Business School. He received his Ph.D at the University of Washington. Reoccurring
themes in his research include ethics, metascience, organizational behavior, and measuring
knowledge.
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Communal
Sharing Relational
Ethics (CSRE)
Strategy
as compared with
an Arm’s Length
Relational Ethics
(ALRE) Strategy
Close
Relationship
Capability
Incremental Value of a
Close Relationship
Capability
- Reciprocal coordination
- Knowledge sharing
- Higher quality
stakeholders
- Lower transactions costs
- Moral motivation
Incremental Costs of a
Close Relationship
Capability
- Potential non-reciprocation
- Generous bargaining
- Unprofitable loyalty
Contextual Moderators
- Environmental dynamism
- Knowledge intensity
- Stakeholder interdependence
Successful
Implementation of
CSRE Strategy
Firm-Specific
Moderator
- Other-regardingness
of firm’s existing
ethical culture
(+)
(+)
(+)
(+)
(-)
(+)
Valuable
Capability
Competitive
Advantage
RBV Criterion
- Value exceeds
costs
RBV Criterion
- Rarity of close
relationship
capability
RBV Cr
- Inimitab
of close
relation
capabil
(-)
(+)
(+) (+) (
Figure 1
Linking a Communal Sharing Relational Ethics (CSRE) Strategy to Sustainable Competitive Advantage
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