Stakeholder theory of entrepreneurship

The stakeholder theory of entrepreneurship is being developed by this blog’s author, but has roots in a debate that had occurred between professors Ron Mitchell and S. Venkataraman in 2002. They were discussing how entrepreneurship and ethics overlap. In particular, entrepreneurship and strategy tend to be about how to crated wealth, whereas stakeholder theory is more about how that wealth should be distributed. The premise is that entrepreneurial opportunities emerge from the failure of incumbent firm managers to balance stakeholder interests.

I take the argument farther. Opportunities created by imbalanced stakeholder management, that is, the gaps between actual stakeholder interest balancing and ideal balancing can be thought of as the fodder for stakeholder arbitrage opportunities. Wherever stakeholder imbalances occur, entrepreneurial opportunities are born as entrepreneurs discover how, by serving a different mix of these under-served stakeholders, a new firm can thrive by creating new value through redistribution.

Uber’s recent case in Austin is interesting because they left rather than increasing their cost structure (finger-printing drivers) and risk setting a precedent for other jurisdictions. But weeks after they left, a flurry of non-profit ride apps took over the market Uber left behind. The drivers and riders of Uber were willing to try more pro-social alternatives rather than revert to taxis.

Incumbents that do not effectively balance stakeholder interests have lower firm performance and are leaving value on the table for competitors and new entrants to exploit. That value is discoverable (recoverable) by individuals and teams that study their environments and act. Even if incumbents strike the right balance among competing stakeholder claims, it may be difficult or, at times, impossible to reconcile their divergent interests. This implies that there will be room for several firms with different stakeholder salience configurations. Since many incumbents are pressured to induce focus on a single objective function, such as maximizing profits using the old ways, most corporations leave many imbalances for entrepreneurs to pick through.

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