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2018

How Applying Instrumental Stakeholder TheoryCan Provide Sustainable Competitive AdvantageThomas M. Jones

Jeffrey S. HarrisonUniversity of Richmond, harrison@richmond.edu

Will Felps

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Recommended CitationJones, Thomas M., Jeffrey S. Harrison and Will Felps. “How Applying Instrumental Stakeholder Theory Can Provide SustainableCompetitive Advantage.” Academy of Management Review 43, no. 3 (2018): 371-391. https://doi.org/10.5465/amr.2016.0111.

Q Academy of Management Review2018, Vol. 43, No. 3, 371–391.https://doi.org/10.5465/amr.2016.0111

HOW APPLYING INSTRUMENTAL STAKEHOLDER THEORY CANPROVIDE SUSTAINABLE COMPETITIVE ADVANTAGE

THOMAS M. JONESUniversity of Washington

JEFFREY S. HARRISONUniversity of Richmond

WILL FELPSUniversity of New South Wales Business School

Instrumental stakeholder theory considers the performance consequences for firms ofhighly ethical relationships with stakeholders, characterized by high levels of trust,cooperation, and information sharing. While research suggests performance benefits,an obvious question remains: If instrumental stakeholder theory–based stakeholdertreatment is so valuable, why isn’t it the dominant mode of relating to stakeholders?We argue that the existing instrumental stakeholder theory literature has threeshortcomings that limit its ability to explain variance in performance. (1) Little theoryexists around how instrumental stakeholder theory–based stakeholder managementcould provide sustainable competitive advantage. (2) The literature has largelyneglected the potential downsides (i.e., costs) associated with pursuing these sorts ofstakeholder relationships. (3) There is a paucity of theory on the contexts in which theincremental benefits of instrumental stakeholder theory–based stakeholder relation-ships are most likely to exceed the costs. As our primary contribution, we developa theoretical path from a communal sharing relational ethics strategy—characterizedby an intention to rely on relational contracts, joint wealth creation, high levels ofmutual trust and cooperation, and communal sharing of property—to a close re-lationship capability, which we argue is valuable, rare, and difficult to imitate and,thus, a potential source of sustainable competitive advantage. We also consider thepotential costs of achieving this capability and identify contexts in which the resultingrelationships are likely to have the greatest net value.

Stakeholder theory is an umbrella term for agenre of theories that help scholars andmanagersunderstand relationships between firms and theirstakeholders, as well as some of the performanceoutcomesof theserelationships.The theory isoftencharacterized as being divided into three interre-lated streams: descriptive, normative, and in-strumental (Donaldson & Preston, 1995). The focusof this article is instrumental stakeholder theory(IST), although we recognize that there are bothdescriptive and normative elements in our narra-tive (cf. Harris & Freeman, 2008). Specifically, thecore hypothesis of IST is that developing stake-holder relationships governed by the norms oftraditional ethics—for example, fairness, trust-worthiness, loyalty, care, and respect (Hendry,2001, 2004)—will lead to improved financial

performance. As summarized by Jones, IST holdsthat “firms that contract (through their managers)with their stakeholders on the basis ofmutual trustand cooperation will have a competitive advan-tage over those that do not” (1995: 422).Although IST is a powerful theory with strong

prescriptive and normative conclusions, the ISTliterature has failed to answer a vital question: Ifthe performance effects of ethical relationshipswith stakeholders are positive, according toboth theory and empirical studies (Choi & Wang,2009; Harrison, Bosse, & Phillips, 2010; Henisz,Dorobantu, & Nartey, 2014; Jones, 1995; Jones &Wicks, 1999; Sisodia,Wolfe, & Sheth, 2007), why doso many firms treat stakeholders selfishly at best(Mintzberg, Simons, & Basu, 2002) and unethicallyat worst (Clement, 2006; Greve, Palmer, & Pozner,2010)? We provide some answers to this questionby addressing three shortcomings that limit theability of scholars to fully understand the

We greatly appreciate the constructive advice we receivedfrom former associate editor Mike Pfarrer and three anony-mous reviewers during the preparation of this manuscript.

371Copyright of theAcademy ofManagement, all rights reserved. Contents may not be copied, emailed, posted to a listserv, or otherwise transmittedwithout the copyright holder’sexpress written permission. Users may print, download, or email articles for individual use only.

performanceeffects of IST-basedmeasuresand toprovide guidance to practicing managers.

First, although much of the IST literature ex-plains why highly ethical treatment of stake-holders should be valuable, thus far there has notbeen a thorough evaluation of such an approachagainst the other resource-based criteria that helpidentify potential sources of sustainable competi-tive advantage (Barney, 1991; Barney & Wright,1998). Specifically, are the resources/capabilitiesthat result from IST-based stakeholder treatmentalso rare and difficult to imitate? As noted byFreeman, Harrison, Wicks, Parmar, and de Colle,“The theoretical links between stakeholder theoryand the resource-based view have not been ade-quately established in theminds ofmany strategicmanagement scholars” (2010: 95).

Second,prior ISTscholarshiphasnoted that closerelationshipswithstakeholders,developed throughethical treatment, can have a number of benefits(e.g., Bosse & Coughlan, 2016; Cooper & Gardner,1993; Larson, 1992; Uzzi, 1997). However, most of thefield has displayed a “sunny-side” bias, and onlya few scholars have begun to consider the costs ofclose relationships with stakeholders (e.g., Garcia-Castro & Francoeur, 2016; Harrison & Bosse, 2013).

Third, in traditional IST there is the generalassumption that ethically grounded stakeholdermanagement strategies will be associated withhigher financial performance, regardless of con-text.1 But it is probable that the link is stronger,nonexistent, or even negative in various contexts.Like Bridoux and Stoelhorst (2014, 2016), we be-lieve that identification of moderating influencesis critical to the stakeholder discussion. Modera-tors are particularly important given that thebusiness environment seems to be changing inimportant ways—that is, it is becoming more dy-namic, knowledge intensive, and interdependent.As such, this article raises the question: Is an IST-based stakeholder management approach be-coming a more or less viable means of achievingsustainablecompetitiveadvantage,givenchangesto the business environment?

In this article, rather than examining IST solelyfrom the perspective of various programs andpolicies firms implement unilaterally that haveeither helpful or harmful effects on stakeholders(asmuch of the extant IST literature has done), weuse relational theory to examine the nature of thetwo-way interactions that develop between man-agers and stakeholders. In so doing we draw onrelational models (Bridoux & Stoelhorst, 2016;Fiske, 1992) and arm’s-length versus embeddedrelationships (Uzzi, 1997). This approach answersa call from Jones: “Instead of examining companypolicies and specific actions, researchers shouldbe examining the content and nature of the re-lationships themselves” (2011: 60).A relational approach provides greater specifi-

cation to the claim that the prescriptions of IST canlead to sustainable competitive advantage. At thecore of these arguments is the idea that a firm’sethics (ground rules) for managing relationswith stakeholders can lead to the development ofa capability that can be a source of sustainablecompetitive advantage. Sustainable competitiveadvantage, in turn, canbedefinedasa firm’sabilityto persistently createmore economic value than themarginal (breakeven) competitor in its productmarket (Peteraf & Barney, 2003). Specifically, weargue that a communal sharing relational ethics(CSRE) strategy, characterized by an intention torely on relational contracts, joint wealth creation,high levels of mutual trust and cooperation, andcommunal sharing of property, can lead towhatwecall a “close relationship capability.” A close re-lationship capability helps a firm cocreate moreeconomic value with stakeholders. We also exam-ine a close relationship capability’s potential to berare and difficult to imitate, thus explaining whysuch an approach can be a source of sustainablecompetitive advantage.We provide a balanced perspective of a close

relationship capability by examining incrementalcosts associated with developing and maintainingit. We explain further that the costs of developingthis capability will vary, depending on the existingstakeholder culture of the firm (Jones, Felps, &Bigley, 2007). Thus, stakeholder culture serves asa firm-specific moderator that ultimately influencesthe value proposition (i.e., benefits less costs)associated with developing and maintaininga close relationship capability. In addition, weextend the limited research on moderators of therelationship between an IST-based stakeholdermanagement approach and firm performance by

1 Exceptions can be found in the theoretical work of Bridouxand Stoelhorst (2014, 2016) and in the empiricalwork of Garcia-Castro and Francouer (2016). We extend the former workby including more moderators, specifically moderators thatare closely associated with pervasive environmental forces.The latter work does not directly speak to firm/stakeholderrelationships.

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explaining why dynamic, knowledge-intensive,and interdependent environments increase thepotential benefits associated with a close re-lationship capability.

To preview the structure of the article, we firstintroduce the concept of relational ethics strate-gies, explain the CSRE strategy, and contrast itwith the arm’s-length relational ethics (ALRE)strategy. We argue that the desired outcome ofaCSRE strategy is a close relationship capability.We then provide a succinct review of the IST lit-erature as it relates to how a close relationshipcapability canprovide incremental value, the firstof the standard resource-based criteria. We alsodiscuss the incremental costs of developinga close relationship capability through a CSREstrategy, noting that a capability is only valuableif the benefits associated with creating andmaintaining it outweigh the costs. We argue alsothat these costs are less for firms that have anexisting culture that is other-regarding. Havingestablished the potential of a close relationshipcapability to provide incremental value, we ex-amine three plausible contextualmoderators.Wethen screen the close relationship capability us-ing the other resource-based criteria of rarity andimitability. In the final section we discuss theimplications of this more refined IST perspectivefor research and practice. Figure 1 contains amodel of the proposed relationships among ourprimary constructs.2

To our knowledge, we are the first to rigor-ously apply the resource-based criteria to anevaluation of how the strategy of interactingethically with stakeholders relates to the sus-tainability of competitive advantage. Doing soprovides a stronger rationale for managers toadopt such a strategy in their own firms. It alsohelps us understand why the associated capa-bility is rare, in spite of its apparent economicattractiveness. By identifying the factors thatmake such a strategy hard to imitate, we helpclarify what firmmanagersmust focus on if theyare going to be successful in implementing it.Our ultimate ambition in this article, as withmost IST, is to identify situations where man-agers could change their behaviors in ways thatimprove both firm profits and stakeholderwelfare.

RELATIONAL ETHICS STRATEGIES

We frame our analysis in terms of a firm’s re-lational ethics strategy.3 Eachword in this conceptlabel deserves specification. First, as with anyterm used by the population at large, “relational”and “relationship” are used in many differentways (Reis, Collins, & Berscheid, 2000). Here weare using “relational” to refer to consensuallyheld role expectations that emerge during in-teractions between members of a dyad (Hinde,1997; Sluss, vanDick,&Thompson, 2011). Thedyadwe consider is the focal firm and a stakeholdergroup.4 Second, the element of the relationship wefocusonhas todowithethics. Howwe treat others isa core concept in ethics. Relational expectationscan involve many very specific schema that havelittle to dowith ethics (Baldwin, 1992)—for example,the place where interactions will occur. We are in-terested in the ethical elements of relationships.Third, strategy refers to the shared plans and ini-tiatives of general managers, involving utiliza-tion of resources to achieve a firm’s aims (Nag,Hambrick, & Chen, 2007). Specifically, the elementof strategy in question is what kind of relationalethics to form with a stakeholder group. Impor-tantly, the intended strategy may not be realizedand may change over time. Indeed, relationshipstake time tomature, andhow theydevelopdependson the actions of both dyad members (Bosse &Coughlan, 2016). As such, we use “strategy” to referto the preferred/intended relational ethics that

2 The lines in Figure 1 associated with the resource-basedcriteria are dotted (and do not have arrows) because they aredefinitional features rather than causal variables.

3 We use the term ethics strategy fully aware that someethicists will regard this usage as self-contradictory. In thisview, ethics employed instrumentally is not ethics at all. Thatis, authenticity andmoralmotives are essential to ethics. Herewe regard a strategy as intended behavior, regardless of themotivation it is based on.

4 Stakeholder relationships can be conceived of at differentlevels of abstraction (Bosse & Coughlan, 2016; Sluss &Ashforth, 2008): between individuals, between the firm anda specific stakeholder group, or between the firm and allstakeholders simultaneously. Low levels of abstraction—forexample, relationships between specific individuals—aregoing tobemoreaccuratepredictorsof individualbehaviorbutare much more complex. High levels of abstraction—for ex-ample, relationships between the firm and all stakeholderssimultaneously—seem analytically simpler but raise difficultmethodological questions of how to empirically combine re-lationships across stakeholders and are likely to be less em-pirically predictive. We believe that, in trying to understanddrivers of firm performance, the level of abstraction that is themost empirically and practically useful is that of the relation-shipbetween the firmanda stakeholder group. As such, that isthe level of abstraction at which our theory is pitched.

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a firm seeks vis-a-vis a stakeholder, rather thanthe realized relational ethics.

Note that these three dimensions assume thatmembers of a firm will be consistent in the waythey treat a particular stakeholder group—thatis, they will follow the relational ethics strategy.This position is consistent with Brickson (2007),who argued that firms interact with their stake-holders in consistent patterns. Specifically, ourclaim is that norms regarding relationshipswith stakeholder groups are communicated andreinforced by firm managers through words andactions and that they become ground rules foraction. These norms are not merely the result ofaggregating the values of employees withina firm. Firms are not democracies. Rather, par-ticular managers, typically those highest in thegovernance hierarchy, have the greatest influ-ence on thenorms that are established (de Luque,Washburn, Waldman, & House, 2008; Mayer,Kuenzi, Greenbaum, Bardes, & Salvador, 2009).Relational ethics strategies are unlikely to beconsistently applied unless general managerslead the effort. They can do so through the rolemodeling of appropriate stakeholder treatment;the decisions they make; the management struc-ture they establish; the information they give pri-ority; their communication in speeches, meetings,personal interactions, and written communica-tions of many types; and the people they hire, re-ward, promote, and dismiss.

As in some other models of relational orienta-tions (e.g., Cooper & Gardner, 1993), we focus on

two very different types of relational ethics strat-egies: self-interested, market-oriented strategiesbased on ALRE and highly joint interest–orientedstrategies based on CSRE.5 We explain these twostrategies as ideal types to facilitate a more fo-cused comparison of their essential characteris-tics. However, it is important to recognize thatthese types are really points on a continuum,withsome relational ethics strategies falling some-where between the two and some falling outsideof this range. The distribution of relationshipsalong the arm’s-length to communal sharingrange of the continuum is an open empiricalquestion. However, based on arguments pre-sented below,we expect that a far greater numberfall near the arm’s-length point on the continuum.

ALRE

ALRE strategies can be defined as a shared in-tention among a firm’s general managers to relate

FIGURE 1Linking a CSRE Strategy to Sustainable Competitive Advantage

CSRE strategy(as compared withan ALRE strategy)

Closerelationshipcapability

Incremental value of aclose relationship

capability

- Reciprocal coordination- Knowledge sharing- Higher-quality stakeholders- Lower transaction costs- Moral motivation

Incremental costs of aclose relationship

capability

- Potential nonreciprocation- Generous bargaining- Unprofitable loyalty- Potential cost of changing stakeholder culture

Contextual moderators- Environmental dynamism- Knowledge intensity- Stakeholder interdependence

Successfulimplementation of

CSRE strategy

Firm-specificmoderator

- Other-regardingness of firm’s existing ethical culture

(+)

(+)

(+)

(+)(-)

(+)

Valuablecapability

Competitiveadvantage

Potential forsustainablecompetitiveadvantage

RBV criterion- Value exceeds costs

RBV criterion- Rarity of close relationship capability

RBV criterion- Inimitability of close relationship capability

(-)

(+)

(+) (+) (+)

5 Semantic conventions among thesemodels are varied, butthe fundamental differences between the archetypes remainprofound. Examples include relational versus transactionalexchanges (MacNeil, 1974), relational versus explicit contracts(Baker, Gibbons, & Murphy, 2002), embedded versus arm’s-length relationships (Uzzi, 1997), and communal versus ex-change relationships (Mills&Clark, 1984). Also,whilewe focuson the arm’s-length versus communal dimension of re-lationships, there are surely other dimensions—for example,whether the relationships are egalitarian versus hierarchical.These other dimensions represent attractive topics for futureresearch.

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to a stakeholder groupbasedon thenormsof arm’s-length relationships. Arm’s-length relationshipsform a sort of “baseline” economic theory examin-ing economic exchanges in competitive markets(Powell, 1990; Uzzi, 1997). Firms and stakeholdersthat establish arm’s-length relationships regularlyswitch exchange partners. Price data are the keydeterminants of exchange, and firms rely onswitching cost barriers for repeated transactions.

There are a number of specific behavioral man-ifestations of an ALRE strategy. To begin with,the dominant exchange modes of ALRE strategiesare discrete transactions or detailed, temporallybounded formal contracts, with little concern forfuture interactions, in the context of fair marketcompetition. ALRE strategies involve bargainingwith stakeholders at arm’s lengthwith the intent ofmaximizing the firm’s interests. Power differen-tials and information asymmetries are exploitedwhere present. While moral considerations do notenter into ALRE-based transactions or negoti-ations, participants are expected to complywith generally understood rules/norms of marketinteractions—what Hendry (2001) calls “marketmorality.” This means that ALRE strategies areconsistent with obeying the law and adhering torelevant regulations. Those in arm’s-length re-lationships bargain in good faith and expect tohonor the explicit terms of the resulting contracts,which are mostly written and formal. But disputesinvolving significant sums are typically resolvedthrough legal mechanisms. While informationasymmetries may be exploited, blatant deceit isgenerally avoided. An ALRE strategy would beconsistent with Milton Friedman’s argument that“the social responsibility of business is to increaseits profits . . . without deception or fraud” (1970:124).6

CSRE

CSRE strategies can be defined as a sharedintention among a firm’s general managers to

develop a relationship with a stakeholder groupbased on the norms of communal sharing as theyapply to economic relationships. These relationalstrategies include an assumed shared future, andthey are associated with a number of specificbehavioral manifestations.To begin with, firms pursuing CSRE rely on re-

lational contracting. Rather than being specific,explicit, and temporally bounded contracts, thepromises involved in relational contracting aregeneral, implicit, and open-ended commitments tocooperate voluntarily andgenerouslywithpartnersin joint wealth creation efforts. CSRE strategieskeep the prospect of a continuing relationshipfirmly in mind, relying on mutual trust and trust-worthiness to maintain reciprocal loyalty. Becausethe terms of these contracts are invariably unclearand nearly impossible to enforce, they are “sus-tained by the shadow of the future” and/or internalmoral constraints, rather than third-party enforce-ment (Gibbons & Henderson, 2012: 1350). Formalcontracts, when they are necessary, are oftenleft purposefully indefinite to allow “wiggleroom” to make things fair (Scott, 2003). Ifproblems emerge—for instance, because ofchanges in economic conditions or regulatoryenvironments—they are settled in a cooperativemanner (e.g., by seeking equitable solutionsrather than establishing blame). Under thesecircumstances, two objectives are paramount:resolving the problem at hand and maintainingthe integrity of the relationship. As such, litiga-tion is seen as a last resort and is employed onlyunder dire circumstances because it would sig-nal the end of the CSRE strategy. Trusting be-haviors reflect a desire to cooperate extensivelyfor mutual gain.CSRE strategies involve willingness to share

property (especially intellectual property)withoutregard for either its proprietary value or its po-tential appropriation by relationship partners.Information asymmetries will not be exploitedand, since information relevant to the successof the joint effort is voluntarily shared, may ceaseto exist. Negotiations between the firm and itsstakeholders seek to satisfy both side’s needs.In sum, a CSRE strategy manifests in the be-

haviors of keepingpromises, relying on relationalcontracts, refraining from taking advantage ofpower imbalances or information asymmetries,willingly sharing relevant information, treatingproperty as a communal resource, making volun-tary contributions to joint efforts, and addressing

6 We must acknowledge that not all firms engaging inarm’s-length relationships adhere to these standards. Somefirms may embrace a strategy of regularly acting unethicallytoward stakeholders and use deceit, fraud, threats of violence,andcorruption toaccomplishstrategicaims (Greveet al., 2010).However, such strategies appear to be relatively rare and un-sustainable in the long run (Sullivan, Haunschild, & Page,2007), even in transitional economies where the rule of law isweak (Zheng, Luo, & Wang, 2014). As such, patently unethicalstrategies are outside the scope of our analysis.

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emerging problems and settling disputes in a co-operative manner. A CSRE strategy is consistentwith, but a substantial extension of, some existingformulations of IST, which tend to focus onmutualtrust, cooperation, and justice (Harrison et al.,2010; Jones, 1995). Importantly, while we submitthat firms with CSRE strategies are rare, behav-iors 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 et al. described the development ofa “moral community in which individuals andfirms made contributions to the industry withoutregard for immediateandspecific payback” in thesemiconductor industry’s manufacturing tech-nology consortium SEMATECH (1995: 113). Simi-larly, Doz (1996) noted that GE and Snecma’s(successful) joint jet engine program featuredsubstantial trustandcooperation. Inanotherwell-known example, the Japanese auto industry ischaracterized by strategies compatiblewith closerelationships, as opposed to manifestations ofarm’s-length relationships, such as explicit con-tracts (Nishiguchi, 1994; Ouchi & Jaeger, 1978).

CSRE TO CLOSE RELATIONSHIP CAPABILITYTO SUSTAINABLE COMPETITIVE ADVANTAGE

Firms that successfully implement a CSREstrategy are assumed to have the ability to createa communal sharing relationship with a stake-holder. This close relationship capability is theability to convince members of the stakeholdergroup to treat the firm as a close relation. Treatingthe firm as a close relation (Reis et al., 2000) issynonymous with having a commitment bond—that is, “avolitional psychological bond reflectingdedication to and responsibility for a particulartarget” (Bosse & Coughlan, 2016: 1207)—or adopt-ing a communal sharing relational model vis-a-vis the firm (Bridoux & Stoelhorst, 2016; Fiske,1992).

Of course, successfully implementing a CSREstrategy can be quite demanding, requiring bothskill and effort on the part ofmanagers. Therefore,close relationship capabilities are both rare anddifficult to imitate, as well as valuable (as de-scribed in detail below). Nonetheless, managershave several “tools” at their disposal to pursuesuccessful implementation. As described above,these tools include role-modeling behavior, thesubstance of decisions and the priorities revealed

in those decisions, the establishment of compati-ble management structures, informational prior-ities, written and verbal communications invarious venues and forms, and personal in-teractions, as well as hiring, firing, rewarding,and promoting decisions. Therefore, according tothe resource-based view (RBV) of the firm, if aclose relationship capability can be shown to bevaluable, rare, and difficult to imitate, it becomesa potential source of sustainable competitiveadvantage. We devote much of the remainder ofthis section to demonstrating that these criteriaare met.

The Value of a Close Relationship Capability

Here we review arguments found in the IST andrelated bodies of literature that are most closelylinked to the idea that a close relationship capa-bility can provide benefits not available to firmsthat do not possess such a capability. Building onprior work, we argue that additional economicvalue is created in a firmwith a close relationshipcapability as stakeholders are motivated to con-tribute more to joint value creation and, impor-tantly, as value creation processes become moreeffective. Our definition of value as economicvalue is consistentwith theRBV literature (Peteraf& Barney, 2003), but we do not claim that the valuewe describe will be directly correlated with fi-nancial profits or shareholder returns. As Coff(1999)made clear, the profits of a businesswill notreflect the true value it creates if too much of thatvalue is siphoned off by stakeholders with strongbargaining power. Or, in the case of a firm pur-suing a CSRE strategy, much of the incrementalvalue could be distributed back to stakeholdersduring the course of business such that bottom-line profitability may not reflect all of the addi-tional value created. We do claim, however, thatadditional value will be available to participantsin the joint value creation efforts of firms thatenjoy the benefits of a close relationship capa-bility (cf. Tantalo & Priem, 2016) and that, accord-ing to the norms of communal sharing, theadditional value should be distributed fairly.7

This value comes from improved reciprocal

7 Given that the partners are expected to distribute the costsand benefits of the joint effort fairly, the probability that thefocal firm will end up with an unfairly small share is low, andthe probability that it will end upwith none of the incrementalvalue seems miniscule.

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coordination, knowledge sharing, attracting high-quality stakeholders, lower transaction costs, andgreater moral motivation.

We should state from the outset that each ofthese sources of value requires particular be-haviors on the part of the firm that are similar towhat it expects from stakeholders. For example,reciprocal coordination is a cooperative two-wayprocess, so a firm that expects its stakeholders toshare valuable knowledge should share valuableknowledgewith its stakeholders. In a sense, then,the incremental sources of value we are about toexplain also contain an implied set of behaviorsfor firms that pursue a CSRE strategy. We shouldnote also that these behaviors are entirely con-sistent with a reliance on relational contracts andproperty sharing.

Improved reciprocal coordination.Managementscholarsdatingback toBarnard (1938)andThompson(1967) have regarded coordination as essential toorganizational success. Thompson (1967) describedthree modes of coordination. Reciprocal coordi-nation, where needed contributions depend onthe nature and extent of previous contributionsand mutual adjustment is required, is most rele-vant to communal sharing relationships. Com-munal sharing relationships function withoutelaborate plans, rules, or contracts (Bridoux &Stoelhorst, 2016). Indeed, plans, rules, and con-tracts are poor substitutes for mutual adjustmentwhen tasks involve reciprocal interdependence(Barki & Pinsonneault, 2005). In such highly in-terdependent tasks, reciprocal coordination en-ables the creation of higher-quality products/services at quicker speeds (Larson, 1992; Uzzi,1997). In short, a close relationship capability ispotentially valuable because it allows firmsto engage in reciprocal coordination more effi-ciently, resulting in better products and ser-vices and more rapid adaptation to changingconditions.

Knowledge sharing.Anumber of scholars haveemphasized the importance of ethical norms and“relationship quality” on the effective utilizationand dissemination of knowledge between parties(Hosmer, 1994; Larson, 1992; Su, 2014; Uzzi, 1997).The importance of knowledge as a source of com-petitive advantage has long been appreciated(Cohen & Levinthal, 1990). Firms engaged in jointefforts often share knowledge and benefit fromknowledge received from stakeholders. Al-thoughmuch knowledge is generated and storedby employees (Argote, 1999), learning from other

stakeholders is also important for competitivesuccess (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 eachis relevant to the close relationship capabilityemployed to make use of it (Dosi, Malerba,Ramello, & Silva, 2006). First, knowledge is ap-propriable; once disclosed, others can use it freeof charge.8 Second, knowledgemaybeuseful onlywhen combined with other capabilities, such asknowledge fromother stakeholders, and thevalueof both the combination and the contributions ofindividual partners are unknown a priori. Third,much knowledge is tacit and cannot easily betransferred formally from one partner to another(Nelson & Winter, 1982). In some situations thevalue of formally transferred knowledge is re-duced substantially without the concomitanttransfer of tacit knowledge. Full-value knowledgetransfers often involve ongoing and close in-teractions between the transferor and the trans-feree. A close relationship capability involvesshared perspectives and shared vocabulariesthat are necessary for the transmission of subtleformsof tacit knowledge (Larson, 1992; vonHippel,1988). In a mixed-methods empirical study, Uzzi(1997) found that “embedded” relationships werecharacterized by high-quality (i.e., detailed, tacit,and holistic) information exchanges. In sharpcontrast, a firm having an arm’s-length relation-ship with a stakeholder is likely to be unawareof useful tacit knowledge because there is morepsychological distance and less trust in the re-lationship. In sum, a close relationship capabil-ity has the benefit of facilitating high-qualityknowledge sharing between a firm and a stake-holder group.Attracting high-quality stakeholders. Because

the joint value creation processes that are the fo-cus of this article may only be as strong as theweakest partner involved, attracting “high-quality”stakeholders is of considerable importance.There are a couple of reasons that a close re-lationship capability is likely to be attractive tohigh-quality stakeholders. First, stakeholdersmay be attracted to these firms because they feelas though they are participating in something

8 Of course, patent law provides some protection againstthis sort of appropriation. However, many ideas are not pat-entable, andmanyothers are notworth the timeand trouble. Inany case, litigation is expensive.

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“larger than themselves”—an opportunity notreadily available if firms rely exclusively onmarket-based, arm’s-length transactions tomanage relations with stakeholders (Turban &Greening, 1997; Valentine, Godkin, Fleischman,Kidwell, & Page, 2011).

Second, because communal sharing relation-ships tend to create more value than other re-lational forms (Bridoux & Stoelhorst, 2016), andbecause that value is expected to be distributedfairly among participants, firms with a close re-lationship capability may be able to attractstakeholders with more valuable portfolios of at-tributes (Tantalo & Priem, 2016). One of the mostimportant of these attributes is the ability to ad-here to the relational norms that lead to greaterwealth creation. That is, for firms pursuinga CSRE strategy, the “quality” of a stakeholderdepends, in part, on whether the stakeholder iswilling and able to adhere to the norms of closerelationships. Such stakeholders can be expectedto openly and voluntarily contribute to the jointwealth creation effort of the focal firm in con-junction with other relevant stakeholders. Thisattribute is a necessary (but not sufficient) condi-tion for stakeholder superiority, because withoutit the stakeholder becomes an inappropriatepartner for a communal sharing relationship. Ofcourse, the resources and skills the stakeholderbrings to the joint value creation process are alsoimportant.

Lower transaction costs. Jones (1995) describedthe transaction cost advantages associated witha relationship capability based on mutual trustand cooperation—advantages that would cer-tainly apply to a firm with a close relationshipcapability. The basic idea is that an atmosphereof trust and an absence of opportunistic behaviormake frequently renegotiated, detailed, formalcontracts with elaborate safeguards unnecessary(see also Barney & Hansen, 1994). Furthermore,since incidents of breach of implicit contracts willbe infrequent andwill tend to be settled amicablyamong the parties, expensive legal costs can beavoided (Kessler & Leider, 2011; Scott, 2003).

Greater moral motivation. Another benefit ofa close relationship capability is that it can mo-tivate loyalty to or additional effort expended onbehalf of the firm (Hosmer, 1994). Many stake-holders will exert effort to help the firm as a goingconcern if they have a commitment bond withthe firm (Bosse & Coughlan, 2016). Conversely,many stakeholders will go out of their way, and

sometimes go against their own self-interest, topunish firms that have treated themunfairly (Fehr& Schmidt, 2006; Hayibor, 2017). This may in-volve lawsuits, boycotts, strikes, spreading neg-ative sentiment, or simple refusal to transactwith a company with which one has a poorrelationship.Another manifestation of moral motivation is

lower team production problems. Team pro-duction problems can emerge when the contri-butions of individual members to a joint effort aredifficult to isolate. Such situations give individualmembers an incentive to “shirk” or “free ride” onthe contributions of others and could arise in firm/stakeholder relationships such as alliances andjoint ventures. While Jones (1995) argued thatmutual trust and cooperation are ways to reduceteam production costs, the norms associated withcommunal sharing relationships could eliminatethem entirely (Wagner, 1995).In sum, a close relationship capability has the

potential to lead to higher levels of joint valuecreation because of more efficient reciprocal co-ordination, knowledge sharing advantages, theability to attract higher-quality stakeholders,reduced transaction costs, and greater moralmotivation. We now consider incremental costsassociated with developing and maintaininga close relationship capability through a CSREstrategy.

Incremental Costs of Developing andMaintaining a Close Relationship Capability

Similar to most of the IST literature, the fore-going discussion largely extolled the uniquebenefits of a close relationship capability. How-ever, the CSRE strategy used to develop andmaintain a close relationship capability may en-tail costs that a firm relying on arm’s-length re-lations can avoid. Of course, the relevant value ofa close relationship capability is its net value—benefits less incremental costs. We now describethree types of incremental costs particular to thedevelopment and maintenance of a close re-lationship capability, with a fourth type of costdescribed in the next section.Potential nonreciprocation. Among the most

important of these costs is the possibility thata stakeholder will not abide by the norms ofcommunal sharing despite the firm’s generoussharing of resources—for example, time, effort,and (proprietary) knowledge—that may have

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great value (Bridoux & Stoelhorst, 2014). This couldoccur as a failure of the intended relationship toemerge at all with a particular stakeholder, or itcould occur as a breakdown of an existing closerelationshipwithastakeholder.Arelatedcost is therisk thatastakeholdermayexploit the firmbecauseof the limited use of formal protective contracts. Anassociated cost is the additional resources devotedto searching for suitable stakeholders to engagewith, or developing a stakeholder relationship tothe point where they are willing to reciprocate. Justas few firms actually follow a CSRE strategy to thepoint that they fully develop a close relationshipcapability, stakeholders willing to abide by thenorms of CSRE may also be rare.

Overly generous bargaining. Another incremen-tal cost of the CSRE strategy could be an overlygenerous allocation of jointly created value backto one or more of the stakeholders who helped cre-ate it (Harrison & Bosse, 2013; Harrison et al., 2010).Arm’s-length relationships require only the con-tractually agreeduponallocation of valuebasedonself-interested bargaining, providing an opportu-nity for a firm to extract largeamounts of value froma relationship based on aggressive bargainingtactics, power imbalances, or favorable informationasymmetries (Coff, 1999). In contrast, substantiallyunfair distributions of created value are unlikely ina communal sharing relationship; neither of theparties will engage in aggressive value appropri-ation based on advantageous circumstances. Insum, firms pursuing a CSRE strategy could geta smaller slice of a larger pie.

Unprofitable loyalty. Finally, a firm that adoptsCSRE will tend to be loyal to a stakeholder it hasdevelopedacommunal sharing relationshipwith,even if that stakeholder ceases to provide ade-quate value to the joint value creation process(Uzzi, 1997). A firmmight continue the relationshipbecause of the values it has adopted in conse-quence of its CSRE strategy but also becauseending a relationship could send a negativesignal to other stakeholders about the firm’scommitment to communal sharing values, thusweakening its close relationship capability. Irre-spective of reason, such unprofitable loyaltycould prevent the firm from engaging new stake-holders with more valuable capabilities.

This description of potential costs raises thequestion: Under what circumstances will the ben-efitsofaclose relationshipcapabilityoutweigh thecosts of pursuing it through aCSRE strategy—thatis,whenwill a close relationship capability lead to

sustainable competitive advantage? Our ap-proach to understanding these benefit/cost bal-ances is to identify the contexts in which a closerelationship capability is likely to have the great-est net value (i.e., benefits minus costs). We beginby explaining the probable influence of a firm’sexisting ethical culture on the costs associatedwith implementing aCSRE strategy inmanagingrelations with a stakeholder group.

Other-Regardingness of a Firm’s Ethical Culture

In this section we contend that firms differ inhow costly it is for them to develop a close re-lationship capability with a stakeholder groupthrough a CSRE strategy. In addition to the costsmentioned in the previous section, we introducea fourth category—the costs associated withadjusting a firm’s culture such that it is supportiveof aCSREstrategy.Without this support, theCSREstrategy would likely fail to produce a close re-lationship capability. In particular, we predictthat it will be less costly for a firm to developa close relationship capabilitywith a stakeholdergroup if the firm already has an ethical cultureconsistent with such a relational model.There are several different ways of describing

a firm’s ethical culture (for a good review seeMayer, 2014), but the version that seems mostrelevant here is stakeholder cultures, developedby Jones and colleagues (2007). These authorsposit a continuum of ethical orientations towardstakeholders, ranging from completely self-regarding to completely other-regarding. Theyidentify “ideal types” along this continuum—

consistingof (1) agency cultures, (2) corporate egoistcultures, (3) instrumentalist cultures, and (4) moral-ist cultures9—in order of an increasingly other-regarding (as opposed to self-regarding) focus. Wepropose that the further a firm’s stakeholderculture is from the moralist/other-regarding endof the continuum, the more expensive it willbe to effectively develop a close relationship

9 Jones and colleagues also mention the logical possibilityof an altruist stakeholder culture, which tries “to maximize theother party’s outcome with less concern for their own” (2007:140). The authors acknowledge that “altruist cultures are in-cluded for the sake of completeness” (2007: 149) and that “asa practical matter, conditions of economic competition makesignificant growth or proliferation of [altruist] companies im-probable” (2007: 150). Given that such cultures are likely to beexceedingly rare in a market economy, we do not considerthem further here.

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capability with a stakeholder group througha CSRE strategy. This is because it would takea large amount of management time and otherresources to (a) develop a close relationship ca-pability with a stakeholder group that is in con-tradiction to the firm’s overall ethical culture or(b) change the firm’s overall ethical culture to beconsistent with a close relationship capability.

To elaborate, let us briefly consider each of theideal types along the continuum. First, the costs ofa developing and maintaining a close relation-ship capability through a CSRE strategy will belowest for moralist cultures, which attempt toadhere to moral principles in their relationshipswith all of their stakeholders. Developing a closerelationship capability based around relationalcontracts, joint wealth creation, cooperation, andcommunal sharing of property should be com-paratively easy for a firm with a moralist culture.

Second, the costs of pursuing a close relation-ship capability through a CSRE strategy will besomewhat higher for instrumentalist cultures,which ultimately care only about profit (or share-holder wealth) maximization but recognize thatis it often important to appear moral when inter-acting with stakeholders. In other words,they are inauthentic moralist firms. However,a good deal of scholarship suggests that stake-holders can detect ethical authenticity and thatthis awareness can translate into value-adding(or -destroying) behavior (Cording, Harrison,Hoskisson, & Jonsen, 2014; Jones, 1995; Schultz,Hatch, & Larsen, 2000). As such, instrumentallyethical firms will have a harder time than moralistfirms convincing a stakeholder that they will con-form to the norms of a close relationship. They willhave to allocate more resources to ensuring thatmembers of their own firm both understand andconformto thesenormstoasufficientdegree that thestakeholder is convinced and to making sure thatthe norms are not violated so that the benefits ofa close relationshipare fully realized. In termsof thespecific costs described previously, they will behigher because there is ahigher probability that thestakeholder will not abide by the norms of commu-nal sharing, in spite of the firm’s efforts to establishsuch a relationship. If the stakeholder does notconform, then additional value will not be created.

Third, the costs of developing a close relation-ship capability through a CSRE strategy will behigher still for corporate egoist cultures, whichfocus on short-term maximization of profits (orshareholder wealth), aggressively contracting (at

arm’s length)with their stakeholders to keep costsdown in order to compete successfully in theirproduct or service markets. The stance of a cor-porate egoist culture is clearly in contradiction tothe norms of close relationships. Successfullyenacting a close relationship with a particularstakeholder group while having a larger ethicalculture opposed to such a strategy will be ex-pensive and likely to fail.Fourth, we contend that the costs of developing

a close relationship capability through a CSREstrategy are highest for agency cultures, character-ized by self-interest at the individual level such thatthe interestsof the firm itselfareadvancedonly to theextent that internal incentives link personal andcorporate goals. The gap between agency culturesand a close relationship capability can only be de-scribed as enormous, as will be the costs and theamount of time it will take to bridge the gap. There-fore, the net value (and the resulting sustainablecompetitive advantage) of pursuing a close relation-ship capability with a stakeholder group will besmallest for firms starting out with agency cultures.

MODERATORS OF THE VALUE OF A CLOSERELATIONSHIP CAPABILITY

It is possible that while a CSRE strategy (and theresultingcloserelationshipcapability)willaddvaluein some contexts, it could be less effective than anALRE strategy in other contexts. We have alreadyexplainedwhy the degree of other-regardingnessfound in a firm’s existing ethical culture is a firm-specific moderator influencing the incrementalcosts of developing a close relationship capabil-ity through the CSRE strategy. Here we evaluateenvironmental dynamism, knowledge intensity,and task and outcome interdependence as keyelements in determining the extent to which aclose relationship capability is more valuable.We focus on these threemoderators because theycollectively represent increasingly importantelements of the twenty-first-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 dy-namism (Dess & Beard, 1984), the term used todescribe rapid and pervasive environmentalchange. One of the most influential forms ofdynamism has resulted from the rapid advance-ment of information technology, which has put apremium on the creation and dissemination of

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knowledge (Powell & Snellman, 2004). To copewith—and as a result of—dynamism and the“knowledge economy,” firms have become muchmore interdependent (Dicken, 2011). Because thestrength of these general forces is likely to varyfrom industry to industry, we will now evaluatetheir potential as moderators of the relationshipbetweena firm’s close relationship capabilityandsustainable competitive advantage.

Environmental Dynamism

Dynamic,“high-velocity” industries (e.g., softwaredevelopment, innovative electronics, health care,some segments of the fashion industry) requireconstant adaptation to new competitive, tech-nological, and regulatory conditions (Dess &Beard, 1984). A firm with a close relationship ca-pability is in a stronger position to create value ina dynamic context (Joshi & Campbell, 2003). Aclose relationship capability should facilitate therequired rapid transfer of information. The skillsassociated with reciprocal coordination will alsobe helpful in organizing activities in dynamicenvironments. In addition, in an environment thatis changing rapidly, written contracts associatedwith arm’s-length relationships will quickly be-come outdated, requiring frequent adjustmentsand increasing the possibility of opportunisticbehavior. This can be expected to lead to timedelays. In addition, partners continually involvedin rewriting contracts will experience increasedtransaction costs. In this situation transactioncosts associated with a CSRE strategy are likelyto be lower than those associated with an ALREstrategy (Joshi & Campbell, 2003).

Knowledge Intensity

The kind of adaptation needed to thrive inknowledge-intensive industries (e.g., high-techindustries, pharmaceuticals, health care) re-quires the transfer of information among stake-holders (Harrison&Thompson, 2015). Not all firm/stakeholder relationships are dependent onextensive knowledge sharing. Knowledge in-tensity can be defined “as the extent to whicha firm depends on the knowledge inherent in itsactivities and outputs as a source of competitiveadvantage” (Autio, Sapienza, & Almeida, 2000:913). On the one hand, knowledge-intensivebusinesses rely on knowledge creation andtransfer as a primarymeans of generating value.

Firms that depend on knowledge intensity aremore likely to rely on the knowledge sharingskills associated with a close relationship ca-pability. Also, because knowledge is such anappropriable resource (Dosi et al., 2006), firmsmust be able to trust that a stakeholder will notact opportunistically when provided with pro-prietary or especially valuable knowledge.Thus, a close relationship capability is ex-pected to be particularly valuable in knowledge-intensive environments. On the other hand,if knowledge is not particularly critical to a firm’sstrategy and competitiveness, as in low-techbusinesses, an arm’s-length relationship may bemore efficient.

Task and Outcome Interdependence

Bridoux and Stoelhorst (2016) have suggestedthat communal sharing relationships are partic-ularly efficient in environments with high taskand outcome interdependence. Comparing thesesorts of conditionswithconditions inwhich there ishigh task and outcome independence can help tosubstantiate their claim. Task and outcome in-dependence is found in industries where firmsproduce products in-house, through simple pro-duction processes, or with simple inputs from rel-atively few stakeholders (e.g., commodities, fastfoods, standardized components such as nuts andbolts). In these environments the additional costsassociated with a CSRE strategy are less likely tobe offset by the incremental value created frompossession of a close relationship capability. Infact, there are likely to be economic advantagesto aggressive bargaining in order to obtain thelowest market prices available for requiredinputs.The situation is reversed in industries with

long and complicated value chains where thenorm is for multiple stakeholders to partici-pate in supplying pieces of the final product(e.g., aerospace, automobiles, health care). Be-cause complex products or production processesrequire inputs from multiple stakeholders, someof them deeply involved in the design and pro-duction of the product involved, complex co-ordinationwill be required. These processeswillbenefit greatly from the advantages in re-ciprocal coordination possessed by firms witha close relationship capability. In an empiricalstudy of the fashion industry, Uzzi (1997) docu-mented the value of reciprocal coordination in

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highly interdependent tasks (see also Larson,1992).

In addition, because transaction costs are likelyto be higher where tasks and outcomes are in-terdependent, reducingthemthroughthetrust-basedgoverning mechanisms of a close relationshipcapability can be quite valuable, thus increasingthe potential for sustainable competitive advan-tage. Firms with a close relationship capabilityare able to engage in efficient relational con-tracting (rather than expensive formal writtencontracting) and dispute resolution through co-operativesmeans (rather thanexpensive litigation).Furthermore, because relevant information andpartner effort are contributed voluntarily, negotia-tions over who contributes what are dramaticallyreduced. In short, the efficiencies associated withtransaction costs, along with those related toreciprocal coordination, make a close relationshipcapability particularly valuable in contexts of taskand outcome interdependence. Finally, task andoutcome interdependence,accompaniedbygreatercoordination requirements and transaction costs, islikely to increase with the number of stakeholdersinvolved in the joint wealth creation effort.

The RBV’s Standards for SustainableCompetitive Advantage

We have now reviewed the circumstances inwhich the benefits of a close relationship capa-bility are likely to be highest relative to the in-cremental costs of the CSRE strategy used todevelop and maintain it. In so doing we haveaddressed the “valuable” criterion of the RBV ofthe firm (Barney, 2011; Barney & Wright, 1998). Inthis section we develop the argument that a closerelationship capability also holds the potential toachieve a sustainable competitive advantage. Aspointed out by the RBV, a capability is only likelyto lead to superior firm performance in the longrun if (a) few other firms have the capability—thatis, it is rare—and (b) it would be very difficult andexpensive to copy—that is, it is inimitable (Barney&Clark, 2007; Barney&Wright, 1998).10Otherwise,

other firms will just develop the capability andcompete away any superior returns. We nowconsider why it is plausible that a close relation-ship capability may be rare despite beingvaluable.A close relationship capability is rare. A close

relationship capability is likely to be rare for a va-riety of reasons, and these reasons tend to fall intothe three categories described by Chen (1996): (1)not being aware of the benefits, (2) not having theproper motivation to pursue the requisite strategy,or (3) being unable to implement the requisitestrategy successfully. We consider each in turn.First, for the most part, business education and

the existing norms of the economic system havestressed the pursuit of organizational self-interestas the best means of achieving corporate goals(Ferraro, Pfeffer, & Sutton, 2005; Ghoshal, 2005;Mintzberg et al., 2002; Podolny, 2009). As a result,arm’s-length transactions tend to be the defaultposition with regard to how firms manage re-lationships with their stakeholders (Bridoux &Stoelhorst, 2016). If managers are to move awayfrom this default position, deliberate efforts mustbemade toestablishand reinforce the idea that thevalues and behaviors associated with a CSREstrategy are valid and desirable. However, man-agers may not be aware of the potential gainsavailable to their firms if they are able to developa close relationship capability. Managers maypush back at the notion of communal sharing infavor of what is sometimes called “market moral-ity” (Hendry, 2004), thinking that pursuing joint in-terests leads to inferior economic outcomes for thefirm. A related point is that managersmay believethat focusingonmaximizing shareholderwealth ismorally required (Jones et al., 2007), particularlysince some influential thinkers have advancedthis position (for a review see Stout, 2012).Second, several factors can reduce the motiva-

tion of managers to adopt CSRE norms in pursuitof a close relationship capability. For instance,many managers are subject to incentives—forexample, performance bonuses based on profittargets—that direct their attention to short-termgoals. Indeed, the nature of incentives is that theytypically need to provide timely rewards for be-havior that is tied to concrete outcomes (Aguinis,Joo, & Gottfredson, 2013). Given the causal ambi-guity and social complexity surrounding therelationship between morality and financial out-comes, it is difficult to design incentives that ef-fectively and precisely reward ethical behavior.

10 In early versions of the RBV, there was another criterionfor a resource to beaplausible sourceof sustained competitiveadvantage: nonsubstitutability (Barney, 1991). However, non-substitutability can be folded into the valuable criterion—thatis, if there are no good substitutes for a resource, it is morevaluable. As such, more recent incarnations of the RBV do notbreak out nonsubstitutability as a separate criterion (Barney&Clark, 2007; Barney &Wright, 1998).

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Since developing communal sharing relation-ships is likely to be a long-term endeavor withindeterminate outcomes, many unincentivizedmanagers may be reluctant to make the attempt.In addition, revealing valuable proprietary in-formation to a stakeholder partner without sub-stantial safeguards can be seen as naive by peersand can be quite costly if the partner proves un-trustworthy. Psychologically and economically“safe” strategies may bemuchmore appealing tomany managers. Even managers willing to lookbeyond their short-term self-interest may be dis-couraged by a realistic view of the difficulty ofsuccessful adoption.

Third, relatively few firms will be able to im-plement a CSRE strategy successfully, thusfinding it difficult or impossible to developa close relationship capability. The ambitiousbehavioral standards of CSRE are difficult toachieve and sustain, particularly since approx-imately half of all individuals begin with socialdispositions that are either self-regarding andindividualistic—38 percent—or competitive—12percent (Au & Kwong, 2004; Bridoux & Stoelhorst,2016). Existing relational ethics normswithin thefirm may be far removed from those of the CSREstrategy (as we discussed in our section on costsof CSRE strategies) or may be unclear or in-consistent. In addition, communal norms areoften more fragile than arm’s-length norms(Chatman&Barsade, 1995) and are vulnerable toperceived self-interested behavior or breachesof trust (Bridoux & Stoelhorst, 2016; Lewicki &Bunker, 1995). The unsuccessful clearing of thesehurdles, and the high costs of doing so, can leadto a reversion to market pricing relationships(Bridoux & Stoelhorst, 2016) and arm’s-lengthstrategies.

Furthermore, suitable stakeholder partnersmaybedifficult to find. Such stakeholdersmust (1)have the requisite capabilities to complement thefocal firm in their joint value creation effort, (2)clear the formidable CSRE hurdles outlinedabove, and (3) want to engage in such a relation-ship. Indeed,manypotential stakeholdersmaybeconditioned to expect self-interested behavior inany economic context (Ferraro et al., 2005) andmay be unwilling to trust that the focal firm isactually benevolent. These fixed beliefs in self-interest can be self-fulfilling such that it becomespossible to interact only with such parties ona transactional basis (Ferraro et al., 2005; Miller,1999). For these reasons, we conclude that a close

relationship capability will be rare and, thus,may be a source of competitive advantage.A close relationship capability is difficult to

imitate. The primary benefit of a close relation-ship capability—improved joint value creationthrough more valuable information exchangesand better coordinated activities—may be at-tractive to firms that are currently pursuing anALRE strategy. The question, then, is how difficultit would be to imitate the CSRE strategy andsuccessfully develop the associated close re-lationship capability. Imitability is related to pathdependence (the manner in which firm’s re-sources develop over time), causal ambiguity(difficulties in determining the sources of a firm’scompetitive strengths), and social complexity(difficulties in replicating complex social phe-nomena; Barney, 1991, 2011). A firm’s close re-lationship capability is likely to be difficult toimitate because it is highly dependent on themanner in which the firm’s relationships withstakeholders have evolved over time (pathdependence)—in some cases, considerable time.In addition, since relationship quality is opaqueto outsiders, other firms are unlikely to un-derstand the extent to which the firm’s sustain-able competitive advantage is related to itsclose relationship capability (causal ambigu-ity). Moreover, communal sharing relationshipsare more socially complex than arm’s-lengthrelationships. Thus, according to the three well-accepted criteria for inimitability, a close re-lationship capability will be difficult to imitate.Because it is rare and difficult to imitate, weconclude that a close relationship capability, incontextswhere the benefits exceed the costs, hasthe potential to lead to a sustainable competitiveadvantage.

DISCUSSION

In this article we set out to provide some an-swers to a question that should be quite importantto IST researchers but, to date, has drawn scantattention. Simply put, if the ethical prescrip-tions of IST research are valuable, as theoryand empirical studies indicate they are, why arethese measures not the dominant mode of firm/stakeholder relationships? This article addressesthis question by arguing that extant IST re-search has three significant shortcomings thatlimit its usefulness to scholars and corporatemanagers. First, virtually all IST-based studies

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make and defend claims that certain ethicalpractices are valuable, but very few show themto be rare or difficult to imitate—the other twocriteria for sustainable competitive advantageaccording to the RBV. How can a practice yieldsustainable competitive advantage if many firmsare employing it or if firms can easily adopt it?Second, while the benefits of certain ethicalpractices have been well documented, the costsof adopting them have been given scant atten-tion. How can a practice be deemed valuableif the costs of adopting it exceed the benefitsit yields? Third, few theoretical or empiricalefforts have considered the competitive contextin which a firm operates as relevant to IST-predicted performance outcomes. Are the benefitsof ethical practices the same for firms that pro-duce simple commodities—for example, nuts andbolts or copier paper—as for firms producing cellphones or complicated medical equipment?

In this articlewe examined howand underwhatcircumstances a stakeholder management strat-egy, based on a refined set of ethical norms asso-ciated with IST, is likely to lead to sustainablecompetitive advantage. In so doing the article fillsa void in the extant IST literature. Specifically, tosummarize the argument: (1) Successfully adopt-ing a relational ethics strategy consistent withcommunal sharing relationships (aCSREstrategy)results inaclose relationshipcapability. (2)Acloserelationship capability has a number of benefits,including improved reciprocal coordination, betterknowledge sharing, attraction of higher-qualitystakeholders, lower transaction costs, and greatermoral motivation, and therefore is potentiallyvaluable. (3) A CSRE strategy—and, by extension,a close relationship capability—also has somecosts, including the risks of generous resourcesharing being exploited (nonreciprocation), un-necessarily generous allocation of jointly createdvalue, and unprofitable loyalty. (4) The costs ofenacting a CSRE strategy are especially highwhen the firm’s overall ethical culture is moreself-regarding than other-regarding. (5) Thebenefits—and, by extension, the net value—ofa close relationship capability will be greater un-der certain circumstances, specifically under con-ditions of environmental dynamism, knowledgeintensity, and reciprocal interdependence withstakeholders. (6) Even under conditions where thebenefits outweigh the costs, a close relationshipcapability will be rare. And (7) it will be difficult toimitate, so (8) there are conditions under which

a close relationship capability is likely to be asource of sustainable competitive advantage.

Extending the Theory

While the establishment of a close relationshipcapability as a potential source of sustainablecompetitive advantage fulfills the requirementsof the RBV, this capability is only an interim goalfor firms in a competitive market economy. Su-perior profitability is the ultimate goal. Therefore,as a minor extension of our theory, we suggestsome potential directions for development ofa theoretical link between a close relationshipcapability and actual sustainable competitiveadvantage. We assume that stakeholders, exist-ing and potential, will be attracted to a communalsharing relationship within which they can co-create value with the focal firm. This is certainlynot a heroic assumption because such relation-ships have real incremental value, as argued byBridoux and Stoelhorst (2016) and substantiallyexpandedon in this article. Thedetails of how thisassumption canbedeveloped into credible theorywill likely involve such questions as the follow-ing. How can the firm convey a willingness andcapability to engage in communal sharing re-lationships? What sorts of stakeholders will beattracted to a potential communal sharing re-lationship? How will firms select stakeholderswith appropriate attributes? (An analysis of therole of reputations will likely be useful here.) Canfirms convert existing arm’s-length relationshipsinto communal sharing relationships? If so, how?Are such conversions likely to be more or lessdifficult than establishing new relationships?Scholarswishing to extend the theorywill have todeal with these questions, among others.

Understanding the Influence of Costsand Context

We believe our model is the first to identify arange of costs specific to close relationships. Ofparticular interest for future research, we suggestthat close relationships may lead to unprofitableloyalty (e.g., not laying off workers when there areother laborers, perhaps in other countries, whocould do the same quality job for less money;sticking with a supplier even when an-other supplier offers a similar product at a lowerprice). Future research identifying these costs’frequency, scope, and conditions of occurrence

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would help us to understand whether and whena close relationship capability will be valuable.

Another interesting research question emergesfrom our evaluation of the costs of pursuing aCSRE strategy vis-a-vis a particular stakeholdergroup when the firm’s overall ethical culturepromotes contradictory norms. One of the keyempirical questions that emerges is whether it ispossible for a firm with a firmly entrenched re-lational ethics strategy based on an agency orcorporate egoist culture to successfully adopta CSRE strategy and, thus, develop a close re-lationship capability with a stakeholder. Wewould predict that a moral crisis of some magni-tude would be required, and possibly a change inleadership. Perhaps one strategy that could helpwith such a transition would be to adopt a CSREstrategy on a small scale first, with one or a fewstakeholders or in only one division of a largercompany. If the effort is successful, it could createan impetus for changeswith other stakeholders orother parts of the firm.

Almost all of the IST research is based on the(often unstated) assumption that an IST-basedstrategy is good for all firms in all situations. Veryrecently, scholars have begun to explore potentialmoderating influences (Bridoux & Stoelhorst, 2014,2016; Garcia-Castro & Francoeur, 2016). We extendthis work here, thus offering a theoretical founda-tion that other researchers can build on. Each of thethree contextual moderators represents a potentialresearch proposition that can be tested in futureresearch. The environmental moderators of dyna-mism, knowledge intensity, and interdependencewith stakeholders are especially important becausethey are increasing in pervasiveness. Freeman ar-gued in theearlypagesof his classic book (StrategicManagement: A Stakeholder Approach, 1984) thata stakeholder approach to management is an ef-fective way to deal with a tumultuous and complexenvironment. Thatwas over three decades ago, andthe business environment has become even moreturbulent and complex. It is possible, then, thata stakeholder approach to management is actuallyincreasing in its importance and effectiveness ow-ing to ongoing forces.

For practitioners, then, this article offers aplausible argument for why their firms shouldseriously consider adopting a CSRE strategy inspite of its incremental costs, particularly if theyfind themselves in a highly dynamic businessor one in which knowledge intensity is high,or when they have a large, complicated, and

interdependent production system. It helps to ex-plain that if managers develop a close relation-ship capability, it is going to be rare and hard toimitate and may therefore serve as a source ofsustainable competitive advantage.The flip side of this conclusion is that it tells

managers the circumstances under which theethical treatment of stakeholders is very unlikelyto improve (and may harm) the firm’s financialperformance. This observation leads to a potentialethical dilemma. Our theory explains why anarm’s-length relationship may lead to higher fi-nancial performance in certain situations, as inenvironments characterized by low dynamism,low knowledge intensity, or low stakeholder in-terdependence. As scholars have convincinglyargued, it is not good for society if firms are ori-ented only toward profits (Harrison & Wicks, 2013;Jones & Felps, 2013a; Stout, 2012). As Jones andcolleagues (2016) have explained, achieving socialwelfare gains, in the context of firms attempting tomaximize thewealth of their shareholders, is quitedifficult. Consequently, in certain circumstancesthere seems to be an underlying tension betweenwhat might be good for a firm and what is mostbeneficial for society as a whole. How individualmanagers react to this dilemma depends on theirconscience and amount of discretion (Phillips,Berman, Elms, & Johnson-Cramer, 2010).In the introduction to the recent AMR Special

Topic Forum on Management Theory and SocialWelfare, Jones and colleagues (2016) also urgedmanagement scholars to include an assessmentof the socialwelfare implicationsof their researchin their publications. They were particularly con-cerned about prescriptions that promise greaterprofitability for firms without an assessment ofthe welfare effects on stakeholders. They con-cluded that the only certain formula for improvingsocial welfare is through Pareto improvements—that is, policies/decisions in which one (or more)parties is made better off without making anyother party worse off. Our theory demonstratinghow a CSRE strategy can lead to sustainablecompetitive advantage through development ofa close relationship capability may have the po-tential to meet this standard in many cases be-cause the benefits of the firm/stakeholder jointwealth creation effort are intended to be distrib-uted fairly and the strategy does not require thatany other party be negatively affected. Indeed,a firm-level ethical culture that would be mostsupportive of a CSRE strategy would also

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discourage managers from making other partiesworse off.

Connecting with the RBV Literature

As outlined in the previous sections, our studyaddresses a number of problems with currentlyavailable versions of IST theory. However, since itmakes use of the resource-based perspective, it alsomakes a contribution to the strategic competitive-ness literature. In spite of the obvious link betweenorganizational ethics and a firm’s relationshipswithits stakeholders, and the importance of stakeholderrelationships to a firm’s competitiveness, the criticallink between the nature of a firm’s ethics and com-petitive advantage has rarely been addressed (Litz,1996). One noteworthy exception is Manroop, Singh,and Ezzedeen (2014), who used the RBV to examinehow human resource systems influence the abilityof a firm’s ethical climate to create strategic value.

Of the three main research streams within RBV—the classic RBV perspective, the knowledge-basedview, and the relational view (Acedo, Barroso, &Galan, 2006; Dyer, 1997; Dyer & Singh, 1998)—ourstudy is most consistent with the relational view,and while we did not employ the knowledge-based view per se, knowledge intensity is also animportant construct in our analysis. Our theorybuilds on the increasingly popular idea in theRBVliterature that intangible resources (capabilities)such as stakeholder relations, culture, and com-petencies, when utilized effectively, can be moreeffective sources of sustainable competitive ad-vantage than can tangible resources such asproducts (Barney, 2011; Newbert, 2007).

Building on the Relational View ofStakeholder Theory

Most of the IST literature focuses on the ex-istence (or absence) of stakeholder-friendly(or stakeholder-hostile) policies or programsestablished by firms regarding treatment ofstakeholders.11 We depart from this pattern by

contributing to a small but increasingly importantstream in this literature on bilateral interactionsbetween firms and stakeholders, an approachadvocated by Jones (2011). Our theory acknowl-edges that firm/stakeholder relationships are bi-directional, develop over time, and depend on therelational orientations of the stakeholders them-selves. For example, it accounts for the fact thata stakeholder may not always behave in wayspredicted by extant IST theory (Bridoux &Stoelhorst, 2014).In addition to differences in their willingness

to reciprocate, stakeholders may be unwilling todivulge the kind of information needed to achievesustainable competitive advantage (Harrisonet al., 2010), thus reducing benefits from knowl-edge transfer. Likewise, many stakeholders maynot be willing to adopt the other ethical norms,such as a reliance on informal contracting or highlevels of voluntary cooperation. Consequently,essential to the nature of a firm’s relationship withstakeholders is its ability to attract high-qualitystakeholders that are willing to conform to thenorms of CSRE. In terms of future research, thissuggests that assessing stakeholder relationshipsrequires measuring the behaviors and attitudes ofboth the firm and particular stakeholders, as wellas measuring how those relationships changeover time. We would expect such scholarship toexplain much more variance in economic perfor-mance (Larson, 1992).Furthermore, adopting a relational perspec-

tive opens up a number of interesting questionsabout relationships with stakeholders. For ex-ample, what types of norm violations causea close relationship capability to disappear(or are some stakeholders comparatively for-giving), and how can close relationships berepaired? How long does it take to developa close relationship capability leading to sus-tainable competitive advantage? How do CSREstrategies evolve over time and in response todifferent kinds of feedback? Also, to what extentare CSRE strategies more likely, or more ad-vantageous, in collectivist versus individualistsocieties? And to what extent doWestern idealsregarding ethics influence perceptions of theattractiveness, content, and efficacy of a CSREstrategy and the resulting close relationshipcapability?

11 The majority of empirical tests of IST to date containvariables similar to those found in the Kinder, Lydenberg &Domini (KLD) database. Examples include whether the firmhasaprofit sharingprogram,whether it haspolicies regardingthe way it treats particular groups, whether it has a strongproduct safety program, or whether the firm is generous indonating to charities. For a complete list, see MSCI ESGResearch (2011). A review of this literature can be found inFreeman et al. (2010).

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Limitations

Our analysis also comes with limitations. First,and perhaps most important, for analysis pur-poses we divided our relational ethics strategiesinto two very different models of stakeholdermanagement. Although there are firms that havenorms that are reflected by these idealized states,we recognize that some firmswill fall somewherein between on the close relationship/arm’s-lengthtransactions scale. But this raises the questionof at what point the benefits associated witha close relationship capability manifest. Is therelationship linear or are there threshold effects?This actually represents an opportunity for re-searchers to explore what other relational ethicsstrategies look like and how they might performunder particular circumstances.

Another issue worth mentioning is our focus inthis article on dyadic relationships between firmsand stakeholder groups. Two observations arewarranted here. First, there is no reason that ourconclusions could not be extended to multipartyrelationships. For example, a firm, a key cus-tomer, and a supplier might team up to developa new or improved product. Second, we fully rec-ognize that perceptions of a CSRE strategy, andthe intentions behind it, will be affected by thekinds of strategies a firm pursues with regard toother stakeholders. For instance, if a stakeholdergroup knows a firm treats another group differ-ently, it may see the firm as inauthentic, whichcould undermine the ability of the firm to developa close relationship capability. Along these lines,we suspect that a firm is more likely to be suc-cessful in developing a close relationship capa-bility if firmmembers are consistent in their CSREstrategy across stakeholders. Moreover, eventhough a particular relationshipmay be dyadic, itis influenced by norms and behaviors that aretypical in the broader firm community.We leave itto future researchers to more carefully evaluatethese sorts of influences.

In addition, our analysis and theory may notapply aswell to cultures other than those found inNorth America and particularly in the UnitedStates. Many of these cultures—for example,much of Asia—are much more collectivist. Assuch, strategies resembling CSRE are less likelyto be rare and may be easier to imitate, makingany competitive advantage accruing to them lessvaluable and sustainable. We leave questionsrelated to cultural differences to future research.

Weshouldadd that itwill take substantial effortto measure the constructs discussed in this arti-cle. Going forward, empirical research to test therelationshipswehavedescribedwouldhave tobedifferent from most of what currently exists in theliterature. Just as the theory contained hereinprovides a more fine-grained perspective on IST,the measures used in its testing will have to bemore precise.Globally, databases containing a lot of infor-

mation around the topics of corporate responsi-bility and sustainability are growing in number.However, as mentioned earlier in the article,the data in these databases are policy and out-come oriented and do not contain much in-formation of use in describing the actual nature offirm/stakeholder relationships. Tomeasure CSREstrategies, we would suggest surveying firmleaders on whether their intention vis-a-visa particular stakeholder (group) is to developa communal sharing versus market pricing re-lationship. To measure whether firms actuallyhave a close relationship capability, we wouldsuggest asking stakeholders (e.g., customers,employees, suppliers) whether their interactionswith the firm are governed by the norms of com-munal sharing and whether they feel a bond ofcommitment to the firm (Bosse & Coughlan, 2016).To accomplish this, we would suggest adaptingitems from existing relational models scales(Haslam & Fiske, 1999; Haslam, Reichert, & Fiske,2002). For example, researchers might pose thefollowing sorts of items to stakeholders: “If a dis-agreement arosewith [the firm], wewould resolveit by consensus”; “I share similar values to thoseexpressed by [the firm]”; and “In interacting with[the firm], the focus is on mutually beneficial out-comes.” Examination of relational data based onextraction of news stories is another possibility(Henisz et al., 2014). Finally, the sort of relationaltheory of competitive advantage that we advancecould be meaningfully specified and elaboratedon by careful ethnographic work (e.g., Larson,1992; Uzzi, 1997). Such work, while often fascinat-ing, is also quite time intensive and raises ques-tions of generalizability.With regard to dependent variables, the ulti-

mate dependent variable in IST research tends tobe firm financial performance—as operational-ized by measures such as shareholder returns,returns on assets, and returns to debt holders.However, to fully capture the elements of thetheory, it would be necessary also to somehow

2018 387Jones, Harrison, and Felps

reflect the total value created from a close re-lationship capability. Total value will not beentirely captured by financial measures, espe-cially because firms that pursue such a strategymay voluntarily distribute comparatively morevalue back to the stakeholders that helped tocreate it. To capture total value creation, it wouldseem necessary to use broader constructs suchas stakeholder utility or happiness enhancement(Harrison &Wicks, 2013; Jones & Felps, 2013b), aswell as analytic methods such as data envelop-ment analysis (DEA) that can combine disparatekinds of goods (Bendheim, Waddock, & Graves,1998). Of course, case study methodologies canalso provide opportunities to refine both thetheory contained in this article and techniquesto measure both the nature of firm/stakeholderrelationships and value-based performancemeasures.

CONCLUSION

This article integrates prior work on relationalmodels (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 scholarshipsuggests that close relationships have value(e.g., Bosse & Coughlan, 2016; Cooper & Gardner,1993; Larson, 1992; Uzzi, 1997), we are not aware ofany other scholarship that provides a detailedexamination of why the capability to createa close relationship with a stakeholder couldrepresent a source of sustainable competitiveadvantage. We have provided a model that illus-trates that, given particular contextual and firm-specific conditions, the incremental benefits ofa close relationship capability can exceed thecosts of a strategy used to develop and maintainit. Furthermore, firms that are successful in de-veloping a close relationship capability mayenjoy a sustainable competitive advantage be-cause such capabilities are likely to be rare andare very difficult to imitate, even in contexts inwhich they are the most advantageous.

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ThomasM. Jones (rebozo@u.washington.edu) retired as the Boeing Professor of BusinessManagement at the Foster School of Business at the University ofWashington in 2014. Hereceived his Ph.D. from the University of California at Berkeley. His ongoing researchinterests include stakeholder theory and the relationship between management theoryand social welfare.

Jeffrey S. Harrison (harrison@richmond.edu) is a University Distinguished Educator andthe W. David Robbins Chair in Strategic Management at the University of Richmond. Hereceived his Ph.D. from the University of Utah. His research deals primarily with ethicalapproaches to strategic management, particularly stakeholder theory.

Will Felps (w.felps@unsw.edu.au) isanassociateprofessorat theUniversityofNewSouthWales Business School. He received his Ph.D at the University of Washington. Reoccur-ring themes in his research include ethics, metascience, organizational behavior, andmeasuring knowledge.

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