Table of Contents
- Stakeholders
- Internal Stakeholders
- External Stakeholders
- Stakeholder Aligned Objectives
- Stakeholder Conflict
- Stakeholder Mapping
- Simple Review Questions
- Past Paper Review Questions
- Command Terms
- References
- Click Here To See The Previous Unit 1.6!
Stakeholders
Stakeholder refers to any person or organization with a direct interest in, and is affected by, the activities and performance of a business.
Internal Stakeholders
Internal stakeholders are members of the organization, i.e. the employees, managers, directors and shareholders of the organization.
| Stakeholders | Explanation |
| Employees | – The individuals who work for the company – Motivated by personal interests in compensation, benefits, job security and working conditions |
| Managers and Directors | – Individuals who run the organization – Responsible for setting aims and objectives, and making sure these aims and objectives are met – Look at the long term financial health of their organization and aim to retain profits for further investment in the business – Must create an environment in which employees can work together to meet these objectives – They also have personal ambitions, for instance, the advancement of their own careers, compensation, benefits, legacy and job security |
| Shareholders | – Owners of the company – Invest in a business in order to receive a return on their investment – Primarily concerned at the company’s profitability – 2 main objectives: a) maximize dividends (a proportion of the company’s profits distributed to shareholders) b) achieve a capital gain in the value of shares – called as external stakeholders in the case of large publicly held companies, because they are not involved in the day to day running of the business |
External Stakeholders
External stakeholders do not form part of the business but have a direct interest/involvement in the organization, e.g. customers, suppliers, pressure groups, competitors and the government.
| Stakeholder | Explanation |
| Customers | – Both individuals and other businesses that purchase the products of the organization – Demand good service and quality products that are also safe and are sold at a reasonable price – A driving force for a company to change its practices in order to be more ethical and sustainable – Customers ensure that the product’s quality are optimum and well above the standard |
| Suppliers | – Individuals and businesses that sell goods and services to another organization – Maintain a stable business relationship with the companies they supply in order to ensure a reliable market for their goods – Concerned about the health and continued existence of the business to which they sell |
| Pressure groups | – Force a business to review its approach to ethics through their lobbying – May harm a firm’s image if it is not adopting a socially responsible approach to conducting business |
| Banks and financial institutions | – Ensure that business’ loans are paid back – Monitor the organization’s financial health closely using final accounts – Pay attention to other indicators of the organization’s health as reported in the community and in the media – Companies may also need to renegotiate the payment schedules they have with their lenders |
| Labour unions | – Protect the livelihood and rights of employees – Have more resources to defend employees’ interests than the employees in a single company acting alone – Provide training and support for employees |
| Competitors | – Rival businesses of an organization – Businesses might benefit from some competition as rivalry can create an incentive to be innovative and/or to produce new products – Need to be aware of and respond to practices of rivals – Business may risk their competitive advantage to other businesses |
| Government | – Ensure that the business act in the public’s interest – Enforce laws and reprimand business when necessary – Dependent upon businesses to provide tax revenues and employment – Can also be customers of business (e.g. in the defense industry and pharmaceutical industry) – Provide regulations that can regulate the businesses during their commercial activities |
Stakeholder Aligned Objectives
Often, stakeholder interests are more aligned in the long term than the short term
- Economic sustainability = most stakeholders will want to see a business survive and thrive, especially if it is meeting human needs; stakeholders need to recognize that the business needs to cover its costs at a minimum
- Sociocultural sustainability = most stakeholders associated with the business want it to have a positive impact on people, this means distributing value to a wide range of stakeholders instead of extracting value for just one group
- Environmental sustainability = most stakeholders associated with the business want it to have a positive impact on the planet, businesses are a part of the environment and depend on the health of the planet for their future
Stakeholder Conflict
Conflict
Conflict refers to situations where stakeholders have disagreements on certain matters due to differences in their opinions. This can lead to arguments and tension between the various stakeholder groups.
| Stakeholders | Reasons |
| Managers VS. Employees | – Managers may wish to maximize productivity – Employees may prefer to work under less stress conditions – One potential solution = employee participation in management/ownership and performance related pay E.g. In 2022 postal workers were engaged in strike action against their employer Royal Mail as they objected to a range of changes being made to their pay and working conditions intended to boost profits |
| Shareholders VS. Managers | – Managers may sometimes look after their own interests rather than those of the shareholders – They may engage in activities that improve their personal reputation/remuneration without improving profits – One potential solution = granting managers stock options to buy shares in order to try to align their interests with those of shareholders. However, this may pit managers with shareholders against other stakeholders with longer-term interests in the business |
| Shareholder VS. Customers | – Shareholders may focus on getting high investment from their shares, thereby increasing the prices of products sold – Customers want to have goods and services at affordable prices E.g. Customers of UK energy suppliers have been concerned that record-breaking shareholder dividends in 2022 occurred at the same time as consumer prices rose by more than 60% |
| Shareholders VS. Government | – Governments expect businesses to pay their fair share of taxes according to the laws available – Shareholders may pressure management to reduce the company’s tax burden through sophisticated accounting and legal schemes – Minimizing taxes is not in the interest of the government E.g. Large corporations such as Amazon and Shell have been accused of tax avoidance through the offshoring of profit, reducing the amount of corporation tax paid to the UK government |
| Local community VS. Shareholders | – Shareholders often want to maximize returns on investment – Local community and/or environmental groups often focus on sustainability – Local communities would want to ensure that environmental resources are not depleted and the area where the business operates is inhabitable in the long run |
| Managers VS. Unions | – Managers may oppose unions’ intervention in the relationship between managers and employees at a particular firm – Unions can assist employees in obtaining better wages and benefits from management than employees |
| Customers VS. Suppliers | – Customers demand high quality and low prices – Suppliers’ interest in being paid fairly – E.g. between agricultural producers and consumers/with supermarkets in the middle coming under pressure from both stakeholders |
| Pressure groups VS. Employees | – Pressure groups may oppose certain projects that have the potential to harm the environment – These same projects may benefit the employees and local community by providing employment E.g. In 2019, plans to build a new high-speed rail line, HS2, faced opposition from residents of areas affected by the proposed route, who argued that the project would damage the environment, disrupt communities, and be too expensive |
Factors To Consider When Dealing With Conflicts
1. Type of organization
2. Aims, strategic or tactical objectives of the business
3. Source and degree of power of stakeholders
Stakeholder Mapping
Definition
A model to analyze and assess the relative interests of stakeholders and their degree of power on businesses as shown in the figure above. It allows managers to assess ways to deal with changing and conflicting stakeholder objectives, helping them prioritize which actions first.
Diagram Analysis
- Group A Stakeholders
– Have low interest and low level of power
– Needs of stakeholders can be ignored - Group B Stakeholders
– Have high interest but low level of power
– Needs to be informed to plant a sense of belonging and encourage support
– This can be done through newsletter and informative website
– E.g. Local community - Group C Stakeholders
– Have low interest but high level of power
– Needs to be satisfied; must make them feel included
– This can be done through the media = public relations, press conferences, media events etc
– E.g. shareholders - Group D Stakeholders
– Have both high interest and high level of power
– Fully informed and satisfied
– E.g. CEO, shareholders, employees
In summary, those belonging in Group A are unlikely to receive much attention from decision makers, while stakeholders belonging in Group D will receive the highest attention and prioritized since they are the key stakeholders of the organization. On the other hand, those in Group B need to be kept informed while other stakeholders in Group C must be kept satisfied or be involved in group strategic discussions for decision-making.
Simple Review Questions
- State the 3 different internal stakeholders and explain their roles in the business!
- What is the difference between stakeholders and shareholders?
- Why are customers often considered to be the key stakeholders in an organization?
- Explain 2 stakeholder conflicts and why they arise! Evaluate with a real life example!
- How might businesses resolve stakeholder conflict in the workplace? Refer to the Stakeholder Mapping Tool!
- State 3 different external stakeholders and explain their roles in the business!
Past Paper Review Questions
Question 1
Answer
(a) Shareholders are a type of stakeholder who own a stake in limited liability companies. Shareholders invest money in a company by purchasing shares in the business. As the owners of the company, they are also entitled to a share of its profits.
A stakeholder is any person or organization with a direct interest in, and is affected by, the operations of a business, e.g. Nokia’s employees, managers, directors and its rivals (such as Apple and Samsung).
(b) Different stakeholder groups are affected in various ways by Microsoft’s takeover of Nokia. For example:
- Shareholders of Nokia will have suffered from the company’s market value falling from $150 billion to $7.3 billion at the time of the takeover (Nokia’s share price dropped by 93%).
- Shareholders of Microsoft will have acquired Nokia, with the potential to earn greater dividends in the future as Nokia presents them with an additional revenue stream.
- Senior managers and directors of Nokia may have lost their jobs due to the takeover and a subsequent restructuring of the new company.
- Employees were transferred to Microsoft in early 2014 (all 32 000 of them), requiring them to adjust to a new corporate culture.
- Rivals such as Apple and Samsung would respond accordingly to Nokia being taken over by Microsoft, in order to maintain their market leadership in the mobile phone industry.
- Accept any other relevant answer written in the context of the takeover of Nokia.
Question 2
Answer
(a) External stakeholders are individuals and parties not part of the organization but have a direct interest in its activities and performance, such as customers, suppliers, pressure groups and the government.
(b) The question requires candidates to examine any two relevant stakeholder groups and how they are affected by the poor performance of a school or college, such as:
- Employees – the morale of teaching and non-teaching staff is likely to fall, especially if there are negative impacts on pay, job security, productivity and labour turnover.
- Customers – the parents (and students) might become dissatisfied with the quality of teaching and learning, and perhaps look at alternative schools for their children.
- Local community – schools and colleges play a vital role in influencing house prices and the reputation of the local area, which are likely to suffer in this case.
- Competitors – other schools in the area are likely to benefit from their rival suffering from poor performance.
- Government – there may be some government intervention and funding implications due to the poor performance. In extreme cases of poor performance, the government might even close down the school or college.
Therefore, the poor performance of the school will normally have negative impacts on its stakeholders, at least in the short run. Rival schools are perhaps the only exception.
Question 3
Answer
(a) Shareholders of RBS Group might be concerned about its performance because:
- RBS Group was one of the largest banks in the world, but struggled to survive without the government bailing it out in the global financial crisis.
- The share price of RBS Group dropped from £3.54 to just £0.11, so shareholders would have lost almost 97% of their investment.
- Due to the financial turmoil, RBS Group had to sell its stake in Bank of China, yet did not make any profit from doing so.
- RBS Group’s record £24.1 billion ($39.1 billion) loss in 2008 would concern shareholders about the company’s ability to recover and to survive.
- Ultimately, the performance of RBS Group has been poor, suggesting that the bank had not been hugely successful and failed to survive the financial crisis. The company’s record losses would clearly have been a concern for shareholders whose return on investment would have plummeted based on its poor performance.
(b) The extent to which a business like RBS Group should listen to the views of its various stakeholder groups depends on the relative degree of interest and influence of these different stakeholder groups. It is likely that stakeholder conflict will arise. The company will need to take decisions that will address the interests of some stakeholder groups but at the expense of not being able to meet the needs of other groups. For example, selling its stake in Bank of China would please senior managers as RBS Group was facing a liquidity issue, but not being able to make a profit on the sale of the shares would displease the shareholders.
The extent to which RBS Group should listen to the view of its stakeholders will depend on several factors, including:
- The level of power (influence) and interest that the various stakeholder groups have in the organization
- The costs of complying with what the various stakeholder groups demand
- The costs of resolving any conflict that might exist
- The management style and corporate culture will influence decion-making at RBS Group.
Question 4
Answer
(a) External stakeholder groups include:
- Customers of Škoda Auto
- Suppliers of Škoda Auto’s parts and components
- Competitors of Škoda Auto
- The Czech and Chinese governments
- Distributors for Škoda Auto’s exports.
(b) Conflict refers to situations where different stakeholder groups have disagreements about certain matters due to discrepancy in their opinions. Examples of conflict at Škoda Auto include:
- Škoda Auto (employer) and its employees over pay and benefits
- Employees strike action and the consequences on the Czech government and domestic economy (loss of output)
- Employees securing improved pay and benefits but at the expense of inflationary pressures on the domestic economy, i.e. the repercussions for the Czech government
- Employees (higher pay and benefits) and shareholders (who demand greater levels of profitability).
(c) It is highly unlikely that Škoda Auto can fulfil the aims of all its stakeholders simultaneously. Therefore, it is likely that Škoda Auto will seek a best fit compromise so that the various stakeholder groups are all reasonably pleased with the outcome of the pay dispute.
Stakeholder mapping can be used to assess the relative interest of Škoda Auto’s stakeholders and their relative influence (or power) on the company’s behavior. For Škoda Auto, the map might look something like the following:
Stakeholder mapping allows the managers at Škoda Auto to assess how to deal with conflicting stakeholder objectives and to prioritize their actions to resolve the conflict. Using this model, it is unlikely that the local community will receive much attention from the decision-makers at Škoda Auto.
Conversely, employees will receive the most attention as they are essential to the smooth operation of the business and they have threatened industrial action (i.e. they have a high degree of influence). Pay deals are likely to go through a process of negotiations which aims for a win–win outcome (or a mutually acceptable result) for both employees and the employer. Škoda Auto, for example, might warn that soaring wage claims would be harmful to the company’s ability to compete in growing markets such as China, resulting in mass redundancies. The outcome of the negotiations will, of course, depend on the relative bargaining powers of the two parties.
Question 5
Answer
(a) Stakeholders are individuals and organizations that have a direct interest in the conduct and performance of a business. The internal stakeholders are those parties who own or work in the organization, e.g. shareholders, employees, managers and directors of Royal Dutch Shell.
(b) There are arguments for and against Royal Dutch Shell allowing environmental and pressure groups to influence its decision making.
Arguments for doing so include:
- Royal Dutch Shell operates in an industry that is heavily monitored by external stakeholder groups such as environmental action groups. Powerful pressure groups such as Greenpeace can exert major influences on the media and internal stakeholders so Royal Dutch Shell might need to consider the interests of these stakeholders in its decision-making process.
- If there is supporting evidence to suggest that environmental and pressure groups can have an unfavorable impact on Royal Dutch Shell’s business, then it is more likely to take decisions that comply with the wishes of such stakeholders. In fact, there might be net benefits to Royal Dutch Shell being perceived as a firm that is socially and environmentally responsible, i.e. higher market share and/or improved labour morale.
However, there are arguments as to why large global companies such as Royal Dutch Shell can/should act independently of pressure and environmental groups:
- Royal Dutch Shell’s main priorities are to deal with the interests of their internal stakeholders, rather than those of environmentalists and pressure groups.
- Royal Dutch Shell is a private sector organization that operates to satisfy the demands of its owners (the shareholders) and to achieve its organizational objectives. So, it can be argued that it is not the role of Royal Dutch Shell to protect the environment; instead this is the role of the public sector, i.e. the government.
- Adhering to the interests of environmental and pressure groups might ultimately raise the costs (and hence reduce the profits) of Royal Dutch Shell; much to the detriment of its shareholders.
Overall, the extent to which large organizations, such as Royal Dutch Shell, will consider the interests of environmental and pressure groups will depend on a host of factors, such as: the issue/problem at hand, the resources available to tackle the issue/problem, management preferences/intuition, and the degree of public awareness/concern over the activities of the business in question.
Command Terms
References
- https://ebooks.papacambridge.com/viewer/ib/group-3-individuals-and-societiesbusiness-management-ibid-business-management-paul-hoang-third-edition-ibid-2014-pdf
- https://app.kognity.com/study/app/grade-12-business-management-hl-2023-2024/sid-351-cid-162407/book/internal-stakeholders-id-36526/
- https://www.savemyexams.com/dp/business-management/hl/24/revision-notes/1-introduction-to-business-management/1-4-stakeholders/stakeholder-conflicts/
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