The Origin and Foundation of Stakeholder Management

Some people were shocked to hear of a systemic problem in the venerable Wells Fargo Bank, where employees had been creating new credit accounts for their customers without their knowledge. Other people were not particularly surprised. After all, Volkswagen was caught programming its diesel engines to fool emissions testing equipment and Enron's off-book financial deals led to bankruptcy and financial disaster for thousands of employees and investors. In addition, Johns-Manville knew that producing asbestos was harming its employees, yet the company concealed this information instead of addressing the problem. So, the Wells Fargo incident, though disappointing, is just one example of a larger problem in business today. At the core of these sorts of problems is an organizational value system, supported by an incentive system, that puts short-term

financial profits ahead of the welfare of one or a group of stakeholders (Stout, 2012).

Stakeholders are groups and individuals that have a valid interest in the activities and outcomes of a firm and on whom the firm relies to achieve its objectives (Freeman, 1984; Freeman et al., 2007a ). For most business firms, which are the focus of this Element, primary stakeholders include customers, employees, suppliers of tangible goods and services, suppliers of capital (including shareholders if the firm is a corporation or similar form), and the communities in which the firm operates. Other common stakeholders vary in importance depending on the nature of the firm and its industry. They often include government officials and regulators (in addition to those at the community level), special-interest groups, consumer advocate groups, nongovernmental organizations (NGOs), the media, unions, and competitors. These additional stakeholders are sometimes called secondary because they do not contribute as directly to the value-creating processes of the firm (Freeman et al., 2007a; Phillips, 2003). We do not mean to imply that they are not important, but rather that, from a practical perspective, much of a manager's time and attention will (and should) focus on the stakeholders who contribute most to the value the firm creates- the primary stakeholders.

1.2 Core Concepts of Stakeholder Management

Although this Element takes a practical approach, we would first like to establish a foundation of understanding upon which we will build the concepts and techniques found in later sections. We will base our approach to stakeholder management on the following seven core concepts (Freeman et al., 2007a, 2010).

Concept 1: A Managerial Focus

The stakeholder perspective is useful in that it describes what managers actually do.

Business executives manage stakeholders (Freeman, 1984), and the manner in which the stakeholders are managed influences the value a business firm creates (or destroys).

The real challenge is to determine best practices in managing stakeholders, and to determine the contexts in which those practices are most likely to lead to the best value-creating results. "Management" here does not mean manipulation and exploitation, but how to craft relationships in which all of a firm's key stakeholders win over time, or what might be called "win-win-win-win-win" relationships. To a great extent, that is what this Element is about. Based on our experiences as scholars and consultants who have developed and applied stakeholder theory in many types of organisations for the past several decades, we intend to share with you some of the ideas and tools we have found most useful in managing stakeholders.

Concept 2: A Moral Foundation

Stakeholder management is based on a moral foundation that includes respect for humans and their basic rights, integrity, fairness, honesty, loyalty, freedom to choose, and assumption of responsibility for the consequences of the actions a firm takes (Freeman et al., 2010; Phillips, 2003). The fact that stakeholder management is a moral approach is inherently satisfying to those managers who practice it. Their consciences tend to be less encumbered with feelings of guilt, the need not "fake" virtue around colleagues and stakeholders, they have a moral code that helps them make decisions, and they can enjoy a greater sense of self-worth. This is not to say that they do not make mistakes, but they have a set of guidelines that are somewhat universally understood and tend to be respected by those around them. They don't have to spend a great deal of energy rationalising their decisions.

Concept 3: An Overarching Purpose (Enterprise Strategy)

The purpose of a firm can be defined in terms of what it does for its stakeholders, which is a part of what might be called a firm's enterprise strategy (Freeman and Gilberty, 1988). Firms should ask why they are doing the things they are doing. What is their purpose? What do they stand for? The answers tend to lead to a statement of purpose an values. They both empower and proscribe action.

What does the firm value? Perhaps the best way to determine the real values I a firm is to trace decisions back to the individuals who made them and their motivations for these decisions (Pastin, 1986). For example, a manager may allow an employee to arrive late to work without penalty to be able to attend an award ceremony for a child, or the manager many require the employee to miss the award ceremony to show loyalty to the firm. Either of these decisions is likely a result of a value that is held by the manager and reinforced by the firm through past decisions made by the manager or others in the firm, and possibly even communicated through a corporate values statement or an address or a memo from a top manager. Similarly, an employee may accept a returned product from a customer even if the product is damaged, or may turn the customer sway unsatisfied these sorts of decisions tend not to be made in insolation of other decisions. Decisions within firms form a pattern, and the pattern reveals the true values of the firm.

Another term that is sometimes used to describe this aspect of a firm's enterprise strategy is stakeholder culture (Jones et al.,2007). Firms form what might be called a predominant stakeholder culture that provides guidance in how manager and employees should treat stakeholders.

There is wide variance in stakeholder cultures across organisations. Stakeholder culture represents an opportunity for a firm to differentiate itself from competitors and other firms. That is, especially in a world in which corporate scandals and poor stakeholder treatment are common, firms that adopt a stakeholder-based culture as part of their enterprise strategy have an opportunity to distinguish themselves in the eyes of both current and potential stakeholders.

Finally, enterprise strategy also deals with a firm's responsibility to society (Freeman et al., 2007a). Capitalism is allowed to function only because society allows it to function. The modern corporation (and similar forms of organisation) is under attack because of manifest corruption and greed, harm to the environment, harm to stakeholders, and a perceived attitude of irresponsibility with regard to some of the action's corporations take. The sustainability movement grew out of societal forces and more than corporate initatives (Harrison and van der Laan Smith, 2015). Also, new regulations tend to come from corporate inattention to things that are important to society. Consequently, firms should take the initiative and determine for themselves, and in advance of new regulations, boycotts, or bad press, what their responsibilities are to society.

At the heart of enterprise strategy is what might be called the "ethical leader" (Freeman et al., 2007a). The chief executive officer (CEO) and other top managers set the tone for a firm's values, and its responsibilities to stakeholders and the broader society in which the firm operates. Ethical leaders use tools such as example, internal and external communications, and rewards systems to both establish and reinforce a firm's enterprise strategy.

Concept 4: Creation of Both Economic and Noneconomic Value

The value a business firm creates for its stakeholders is more than economic in nature, and can include a wide variety of other benefits associated with human factors such as personal development, affiliation, freedom to choose, esteem, and happiness (Harrison and Wicks, 2013). These benefits tend to be considered when firms discuss employees, but they extend also to other stakeholders. For example, customers, suppliers, community members, and even financiers can enjoy feelings of pride through affiliation with a firm they consider virtuous, as well as happiness if they are treated well.

This particular concept is important to the stakeholder approach to management because these noneconomic factors have to be included in discussions of stakeholder welfare. Stakeholders look at the whole package of what they get from a firm when they decide whether to engage and/or continue to engage with it (Harrison et al., 2010). They tend to weigh the total "utility" (or value) they get from interactions against what they would get from interactions with a different firm ( Harrison and Wicks, 2013 ). These are sometimes called opportunity costs, and even though there may be costs associated with switching to another firm (switching costs), at some point stakeholders will do so if they believe their opportunity costs are too high. Consider an employee who realizes she is being underpaid and, to make matters worse, does not feel respected by managers in the firm. Consider an employee who realizes she is being underpaid and, to make matters worse, does not feel respected by managers in the firm. At some point the employee's perception that she would be treated better at another firm, and possibly even paid more, will move her from her comfort zone, and she will seek employment elsewhere. With regard to suppliers, we are aware of a firm that walked away from a very big contract with Walmart, America's largest retailer, because the CEO felt that he was being mistreated. The same logic applies, in both positive and negative ways, to stakeholders.

In all sense, all stakeholders hold "customer-like" power in that, in a society that allows freedom of choice, they can decide whom to trade with. They may have resources the firm needs, such as money, talent, time, knowledge, or physical goods, and they can choose to engage with the firm that they believe will provide them with the package of utility that is most to their liking, and often noneconomic factors are a big part of their decision-making processes. Consider, for example, a consumer who buys meat exclusively at Whole Foods because Whole Foods has a value system that prevents cruelty to animals. Also, many employees continue to work for an employer in spite of low pay because of the happiness they experience from affiliation with a company that has an attractive moral code. However, it is important not to reduce stakeholder relationships to a set of individual transactions. As trust develops with stakeholders, a presumption develops that the relationship will continue over time (Freeman, 1984). Shared understanding and mutual interconnected interests begin to trump any formal contracts that are produced at the beginning of a relationship (Bridoux and Stoelhorst, 2016; Jones et al., 2018).

Concept 5: Reciprocity

Humans respond positively when they are treated well and negatively when they are treated poorly. Reciprocity means that it is possible for a firm to gain net economic benefits from additional investments of time, money, and resources in serving stakeholders, in spite of the incremental costs of such investments (Bosse et al., 2009). As with the previous concept, much of reciprocity has to do with perceived opportunity costs. So an employee who believes she or he is being provided with more values through working with one firm rather than another (including value provide from salary, benefits, respect, inclusion, affiliation, perquisites, and so forth) will tend to give back more to the company in terms of effort, commitment, sharing of important information, enthusiasm, and loyalty. Similarly, consider a customer who believes she or he is getting a better deal in terms of the value received for the price paid, respect, feelings of affiliation with a virtuous organisation, and the quality of service provided. This sort of customer will tend to be more enthusiastic about the product and the company, will share this enthusiasm with others, and will buy from the company again when the opportunity arises.

Some companies make a deliberate effort to give back to their communities through a variety of means such as providing employees for local service efforts or contributing to local charities. They can also enjoy benefits from reciprocity. Members of communities in which these sorts of companies operate will want to work for the company. Its leaders will be more likely to approve building permits for expansion or extend tax breaks or other incentives for doing so, and to approve or encourage infrastructure investments that are helpful to the firm. Stakeholders who are treated very well become "fans" of the firm rather than simply suppliers, customers or employees.

We have highlighted employees, customers, and communities here, but the same sort of reciprocity exists for all of a firm's primary stakeholders and, to some extent, for secondary stakeholders as well. These secondary effects are explainable, in part, through the advantage of a good reputation.

Concept 6: Reputation

A business firm gains a reputation (Fombrun, 1996) from the way it treats its stakeholders, and this reputation can influence how attractive the firm is to both existing and potential future stakeholders (Freeman et al., 2007a; Harrison et al., 2010; Jones et al., 2018). For example, a potential customer can become aware of how a firm treats its customers through word-of-mouth or through consumer reports and media coverage. Potential employees tend to find a stakeholder-oriented company a much more attractive prospect relative to other companies that do not have a reputation. Suppliers, communities, and financiers likewise respond favourably to a firm with a good reputation and unfavourably to one with a tainted reputation (Fombrun and Shanley, 1990).

An important secondary effect is also evident from the strength of a firm's reputation. Secondary stakeholders such as the media and special-interest group may not have direct interactions with a firm; however, they become aware of the way firm treats its stakeholders. This awareness can lead these stakeholders to engage in negative reporting, lobbying for new regulations, organisation of boycotts, or other behaviours that can reduce the amount of value the firm produces. A strong positive reputation makes these sorts of behaviours less likely.

Concept 7: Stakeholder Interests Converge Over Time

An important part of the stakeholder discussion is whether the interests of one stakeholder must be traded off against the interests of another stakeholder (Freeman, 1984; Freeman et al., 2010). In other words, does increasing the amount of value provided to one stakeholder reduce the amount of value available to one or more other stakeholders? We would like to share three points on this important question.

First, an increase in value to one stakeholder does not have to be accompanied by a decrease in value to another one because the amount of value a firm creates is not fixed.

Think of slices of a pie, with each stakeholder getting a even slice. If the pie were fixed in size, then the only way one stakeholder could get a bigger slice is if another one gets a smaller slice. But the real synergy occurs as an increased allocation of value to one or more stakeholder results in a successful business outcome, as well as reciprocal behaviour, and thus the creation of even more value by the firm. The pie gets larger, which means that each slide can expand. One of the ccritcisms of the larger pie concept is that it takes time for reciprocity to result in incremental value, and so some stakeholders will lose in the short term. This may be true in some cases, but not all. An astute decision maker can often find mutually beneficial solutions that lead to increased value for soe stakeholders with little or no loss of value to other stakeholders.

Of course, over time avoiding trade-offs is even easier to do, and this is our second point. If a particular stakeholder has been treated very well in the past, he or she is much more likely to be accepting of a firm's decision that would seem to take value from him or her in the short-term. This because stakeholders have memories, and so what may seem like an unattractive trade-off in the here and now may not look unattractive if it is considered part of a series of decisions the firm has made over a period year. Alternatively, if value is allocated to one stakeholder over another in the short term, and the firm communicates the future value such a decision will create, the losing stakeholder can anticipate that the immediate loss of value will be compensated for rwhen that additional value is created. This sort of thinking is going to work only for a firm that has a well-established record of being fair with stakeholders - a firm with a stakeholder-oriented enterprise strategy.

Third, a stakeholder-oriented manager will attempt to make decisions that are beneficial to one or more stakeholders without hurting the others (win-win-win-win decisions). Some decisions make this an easy objective to accomplish. For example, the decision to launch a new product can have posiive effects for employees, suppliers, finaciers, and even communities. This is a mutually beneficial decision. Sometimes, though, tough decisions have to be made, such as closing a plant that has been losing money for years. The first stakeholder who comes to mind in this situation is probably the employee; however, firs have developed a number of mechanisms to soften the blow or even enhance the situation for employees, including generous severance packages, outplacement programs, and transfers to new locations of an employee's choosing (complete with moving expenses). There will always be employees who are not satisfied regardless of what is done for them, but the typical employee would see these sorts of actions as positive, and possibly even attractive, especially compared with simply being let go.

These actions cost money, so don't they hurt shareholders? Actually, if the plant was losing money, closing it is likely to boost the share price of the firm, regardless of severance and relocation costs, so the shareholder will be better off. Suppliers and communities are a little tougher to satisfy in such circumstances, but loyalty to suppliers in terms of using them at other plant locations can go a long way toward helping them to feel well treated. A firm's actions to reduce the impact on the community it is leaving are going to vary depending on each unique situation, but donating the land upon which the operation was located for creation of a park or donating the building to a college might be possibilities. Also, remember that most managerial decisions, even major ones, are not as difficult as this one in terms of being fair to stakeholders or making them feel well treated. The concept here is that managers should attempt to look for solutions that minimise or eliminate losses of value to each of their stakeholders.

Who is a Stakeholder?

Typically, an executive' s most limited resource is time. How much time should be spent in planning, communicating, meeting with people, organizing or attending events, and collecting or analysing information? Which activities, projects, and stakeholders deserve the most attention if the firm is going to achieve its objectives? A big part of the prioritization task is determining who deserves attention and how much. This section focuses primarily on who deserves attention.

A short answer to the "who" question is that all of a firm' s stakeholders deserve attention. This does not mean that every manager is responsible for every stakeholder. It does mean that every stakeholder should be accounted for in the information gathering, planning, and decision processes of the firm (Freeman et al., 2007a).

The concept of stakeholders implies a two-way relationship, at a minimum. It is actually even more complex, because in reality stakeholders interact with each other, and thefi rm sits at the center of an interconnected value-creating network (Rowley, 1997). Nonetheless, in the interest of succinctness, given the brevity of this Element, we are going to focus primarily on bidirectional relationships between the firm and its stakeholders.

Primary Stakeholders and Value Creation

Primary stakeholders are directly involved in the value-creating processes of the firm. This gives them an economic stake. For example, financiers such as banks require repayment of loans and shareholders expect price appreciation and dividends, employees expect competitive remuneration and job security, local communities demand taxes, customers expect a product or service with economic value at least equal to what they paid, and suppliers demand to be paid for what they provide to the firm. Of course, economic benefit is not the only value that is created for stakeholders. For example, a primary stakeholder may get emotional satisfaction through affiliating with a particular company, or the company could provide security, respect, political influence, knowledge, or network connections (Freeman, 1984; Harrison and Wicks, 2013). In turn, because they contribute to the creation of value, the firm depends on these stakeholders.

They can also exhibit a very strong influence on firm decisions (Frooman, 1999). Thus, there is a strong two-way relationship, and a concern for both fairness and managerial effectiveness suggests that these stakeholders should be given ample attention by management (Freeman et al., 2007a ; Phillips, 2003 ; Mitchell et al., 1997). They are best treated as partners in value creation rather than adversaries or neutral parties with which the firm simply exchanges goods and services (Harrison and John, 1996; Jones et al., 2018).

What is a Firm?

If a business firm is not composed of its employees, then what is it? In this Element we use the word "firm" to describe a mechanism for organizing and directing stakeholder resources and actions so that value is created and then allocated fairly to stakeholders, which includes employees. The firm' s managers have direct responsibility for these value-creating activities. This Element is focused on business firms, although stakeholder theory can also be applied to other types of organizations.

3.1.3 The Importance of Secondary Stakeholders

Having defined the firm and its primary stakeholders, how do secondary stakeholders fit in and how do they qualify as stakeholders? Secondary stakeholders typically have what might be called an "influencer" stake in the firm (Freeman, 1984). This means they are not engaged directly in value-creating processes, but they do have a legitimate interest in what the firm does. They may well influence and affect the interests of primary stakeholders. For instance, consumer advocate groups have an interest in the quality and safety of the firm' s products and services and how the firm treats its customers. That is their mission, which makes their interest legitimate even if it does not create value per se. The media serves as a "watch dog" reflecting societal interests and the need for transparency in the firm' s operations. Government officials and regulators can be primary stakeholders to the extent that sometimes they partner with firms in creating value for stakeholders, but typically they simply collect tax revenues and set and enforce rules by which firms operate. Secondary stakeholders have an influencer stake because although they do not typically participate directly in the creation of value, their influence can help or hurt the ability of the firm in the achievement of its value-creating objectives (Eesley and Lenox, 2006 ; Freeman et al., 2007a ; Su and Tsang, 2015). For instance, a special-interest group, especially if it is adept at working with the media, can hurt a firm's reputation, which can influence sales and the attractiveness of a firm to potential employees and other stakeholders with which the firm might want to engage.

As a result of their potential for influence, many firms are now partnering with secondary stakeholders; for instance, a well-organised NGO can influence government regulations. Union leaders can dramatically alter the competitiveness of a firm through their influence on wages, benefits, and other working conditions. Of course, the media, unions, special interests, and NGOs can also have a positive influence on a firm's reputation (Doh and Guay, 2006). For this reason, firms should pay attention to these stakeholders and should look for ways to cooperate with them whenever possible in the creation of value for stakeholders. For example, secondary stakeholders sometimes possess very useful information that can help a firm create more value.

Competitors are a special type of secondary stakeholder because their actions have so much influence on the outcomes of the firm and its ability to achieve its objectives. Government officials and regulators have a great deal of influence on a firm's activities and outcomes. Fostering good relationships with these stakeholders is there-fore very important.

Identification of Specific Stakeholders

Grouping stakeholders into broad categories is a useful starting point in identifying stakeholders. It can be helpful to group stakeholder into categories such as "suppliers" or "customers" because they share common interests based on their functions in the value-creating process, and assigning them into groups can make decision making less complicated. For example, it may be helpful to consider customers as a whole when defining basic principles for how customers will be treated. However, the truth is that stakeholder interests are not completely homogeneous within these broad groups. Managing stakeholders is not that simple. To be more practical, th stakeholder framework must identify specific stakeholders and their needs and interests (McVea and Freeman, 2005). This allows the firm to adapt its plans and actions around particular stakeholders.

As an example of this finer level of identification, instead of using a broad grouping such as financiers, the firm might use categories such as bondholders, domestic banks, foreign banks, Class A stockholders, and Class B stockholders. Instead of customers, useful classifications could include families, singles, repeat customers, and business. As an alternative, customers could be segmented based on age groups, regions in which they live, or other demographic or sociocultural factors. Secondary stakeholders deserve this sort of segmentation also. Instead of competitors. A firm might find useful a classification such as price competitors, product competitors, or innovation competitors (Freeman et al., 2007a).

Moving to this more specific level of categorization, the firm is acknowledging that all stakeholders have customer-like power (mentioned in Section 1), in that they have a choice of whether and when to engage with the firm (Freeman, 1984; Harrison and Wicks, 2013). The firm is generalizing a very basic marketing approach of segmenting customers based on common needs, features, or interests. Of course, there might be different stakeholder maps for different businesses that are part of a multi business firm. The appropriate level for mapping stakeholders is the level at which strategies are established for managing those stakeholders in the value creating process.

Beyond even these more specific classifications, stakeholders also have names and faces (McVea and Freeman, 2005). For example, a specific firm may sell its products to Walmart and target, and through Amazon. The more traditional retailers are very different from the online giant Amazon in terms of their processes, needs and interests. A supplier should account for these differences.

Given all of the complexities and challenges associated with identifying stakeholders, let alone trying to use this information to manage value-creating processes, is it possible to get anything valuable from doing so? In other words, does advantages outweigh the costs associated with this sort of activity? The reality is that value-creating systems are incredibly complex. We cannot escape this complexity, and oversimplifying the systems to facilitate decision-making processes means that many additional value-creating opportunities will be missed (best case scenario); the firm will more often make poor decisions that reduce stakeholder value (medium case scenario); and / or the firm may even go out of business, thus destroying much of the value for stakeholders (worst case scenario).

Stakeholders Are People

Stakeholders are people. They have emotions, biases, desires, needs, and interests. They also have varied experiences, cognitive capabilities, perspectives, skills, and backgrounds. In other words, people are complicated, although much of the popular thinking about business seems to assume the opposite. For example, many economics-based business models are founded on an assumption that humans are consistently rational, even though both research and anecdotal evidence suggests they are not. Closely associated with this notion is the assumption that people are completely self-interested (Bosse and Phillips, 2016). Following from this assumption, firms should feel compelled to use numerous safeguards when they interact with stakeholders in the form of long, detailed contracts and tight security on everything, including carefully guarded information and restricted access to other value-creating resources. These sorts of constraints, however, also reduce the ability of stakeholders to contribute to value-creating processes because they may not have access to the information and other resources needed to do so, or the freedom to do things that are not specified by a contract (Davis et al., 1997). They are limited. Also, the assumption of narrow self-interest can be self-reinforcing - when people are treated as though they are self-interested, they begin to act that way.

We are not suggesting that people do not have any degree of self-interest, and that all information and resources should be shared with everyone, nor are we suggesting that contracts are never necessary. But what if we started with the assumption that people have an urge to create things of value for and with other people? Indeed, voluntary effort is the only reason that capitalism works as well as it does (Freeman et al., 2007b). This is not to deny the economic reality of an employee receiving a pay check, or of a supplier getting paid. But how much money could be saved if a firm did not have to make and enforce such elaborate protection mechanisms (Jones, 1995; Jones et al., 2018)? Contracts, when really necessary, could be shorter and simpler. People would voluntarily work together to create more value. This assumption of voluntary cooperation in the creation of value is one of the essential assumptions of stakeholder management (Freeman et al., 2010).

Assessment of Stakeholder Power

It is not uncommon for a firm to possess more power than one of its stakeholders because of its size, political connections, or the asymmetric information it may possess and, as mentioned in other sections, one of the ways a firm can build trust and loyalty is by not using this information to the disadvantage of that stakeholder. However, it is also common for a stakeholder to possess power, even great power, owing to a number of situation factors (Porter, 1980, 1985). We are using the word power to mean a stakeholder's capacity to influence the outcomes of a firm's decisions and strategies (Harrison and John, 1996). Awareness of the power of stakeholders helps a firm determine the nature of the strategies it should pursue with each of them.

In general, the more power a stakeholder possesses, the more a firm should take actions to ensure that the stakeholder feels like a partner in value creation rather than a foe.

Power can be assessed in general terms by looking at stakeholders in broader groups such as suppliers or customers, but it is frequently more useful to assess power at the individual "names-and-faces" level.

Economic Power of Stakeholders is influenced by a firm's dependence on the resources they provide to value creating processes. That is, resource dependence is foundational to many of the specific factors that give stakeholders economic power (Pfeffer and Salancik, 1978).

Economic Power of Customers

Although all customers are important, some have more economic power than others. Economic power can give stakeholders a great deal of influence over the decisions a firm makes and outcomes from those decisions (Frooman, 1999; Harrison and John, 1996). For instance, they can use economic power to dictate terms and conditions associated with the products and services they are buying, as well as their prices. However, they can also wield economic power to influence firms in areas such as governance, corporate responsibility, information disclosure, employee treatment, and choice of suppliers.

Typically, customers have more economic power if any or all of several conditions are present:

1. They are few in number, which means the firm cannot afford to lose one.

2. They make high-volume purchases, which produces an economic dependence.

3. The products they are buying from the firm are widely available from other firms.

4. They have better information about the firm they are buying from than the firm has about them. For example, the customer may know precisely the raw materials and production costs that go into a product, whereas the firm does not have reliable information about the real value of the product to the customer.

5. It is easy for a customer to switch to another supplier of the product or service. There are low switching costs. Some companies, such as IBM. Built their business on the notion of making their products unique so it is hard for a customer to switch to a different vendor (Porter, 1980, 1985).

Economic Power of Suppliers

Suppliers with a high level of economic power can influence uncertainty through the prices they charge; the terms they require; the level of service they offer; and the nature, quality, and availability of the products and services they provide.

The following factors, many of which mirror the customer factors, give suppliers economic power:

1. Only one or a few suppliers provide what the firm needs.

2. They do not depend much on the firm for a large portion of their sales. They are not economically dependent.

3. The characteristics of the product or service the supplier provides are essential to the value the firm creates. This is especially true if a supplier provides products and services that are highly differentiated.

4. They have better information about the firm they are selling to than the firm has about them.

5. They have made it costly to switch to other sources of supply (Porter, 1980, 1985).

Questions to Answer:

What are 2 things you understood well from this passage?

What is 1 thing that you did not understand and what specifically or why?

What is thing that you really liked from this passage?