CH 3
CH 3
CH 3
1. Government 2. Employees
5. Society 4. Consumers
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Business and its Stakeholders
Concept
•The term stakeholder is not the same as stockholder,
although the words sound similar. Stockholders—
individuals or organizations that own shares of a
company’s stock—are one of several kinds of
stakeholders
•Business organizations are embedded in networks
involving many participants –
- Each of these participants has a relationship with
the firm, based on ongoing interactions
- Each of them shares, to some degree, in both the
risks and rewards of the firm’s activities
Business and its Stakeholders
Concept
- Each has some kind of claim on the firm’s
resources and attention, based on law, moral
right, or both.
•The number of these stakeholders and the variety of
their interests can be large, making a company’s
decisions very complex
• Managers make good decisions when they pay
attention to the effects of their decisions on
stakeholders, as well as stakeholders’ effects on the
company
Business and its Stakeholders
Concept
•On the positive side, strong relationships between a
corporation and its stakeholders are an asset that
adds value
• On the negative side, some companies disregard
stakeholders’ interests- either out of the belief that
the stakeholder is wrong or out of the misguided
notion that an unhappy customer, employee, or
regulator does not matter
•Today, for example, companies know that they
cannot locate a factory or store in a community that
strongly objects
• They also know that making a product that is perceived
as unsafe invites lawsuits and jeopardizes market share
Types of Stakeholders
• Primary stakeholders: with direct stake in the
organisation and its success – owners, managers, share
holders, and workers.
Includes:
– Core stakeholders: essential to the survival of the firm,
– Strategic stakeholders: vital to the organisation and to face
its threats and opportunities – owners and managers
• Secondary stakeholders: public or special interest stake
in the organisation – consumers, government, civil
society, neighbourhood, environment. Also called:
– Outside stakeholders
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Business and its Stakeholders
Types of Stakeholders
A. Market and Non Market Stakeholders
• Market stakeholders are those that engage in
economic transactions with the company as it carries
out its primary purpose of providing society with
goods and services. (For this reason, market
stakeholders are also sometimes called primary
stakeholders.)
• Each relationship is based on a unique transaction, or
two-way exchange
• Stockholders invest in the firm and in return receive
the potential for dividends and capital gains. Creditors
loan money and collect payments of interest
Business and its Stakeholders
Types of Stakeholders
A. Market and Non Market Stakeholders
• Employees contribute their skills and knowledge in
exchange for wages, benefits, and the opportunity for
personal satisfaction and professional development
• In return for payment, suppliers provide raw
materials, energy, services, and other inputs
• Wholesalers, distributors, and retailers engage in
market transactions with the firm as they help move
the product from plant to sales outlets to customers
• All businesses need customers who are willing to buy
their products or services
• These are the fundamental market interactions every
business has with society.
Market Stakeholders
Employees
Distributors
Wholesalers
Retailers Stockholders
Business Firm
Customers
Creditors
Suppliers
Types of Stakeholders
A. Market and Non Market Stakeholders
• Nonmarket stakeholders, by contrast, are people
and groups who—although they do not engage in
direct economic exchange with the firm—are
nonetheless affected by or can affect its actions
(also called secondary stakeholders by some
theorists)
• Nonmarket stakeholders include the community,
various levels of government, activist groups and
nongovernmental organizations, the media,
business support groups, and the general public
Types of Stakeholders
A. Market and Non Market Stakeholders
• The natural environment is generally not
considered a stakeholder, because it is not a social
group, but is represented by activists, who include
environmentalists
• The classification of government as a nonmarket,
or secondary, stakeholder has been controversial in
stakeholder theory
- Most theorists say that government is a
nonmarket stakeholder because it does not
normally conduct any direct market exchanges
(buying and selling) with business
Types of Stakeholders
Communities
General
Public
Government
Business Firm
Business
Support
Activists
Groups
Group
Media
Types of Stakeholders
A. Market and Non Market Stakeholders
• Diagrams of market (primary) and nonmarket
(secondary) illustrate the firm’s relationship to
each stakeholder, but not stakeholders’
relationships with each other
• Some theorists have suggested that a more
accurate way to visualize the relationship is to
show the business firm embedded in a complex
network of stakeholders, many of which have
independent relationships with each other
• Some individuals or groups may play multiple
stakeholder roles
Business and Stakeholders
Stakeholders
Business Stakeholders
Firms
Stakeholders Stakeholders
Types of Stakeholders
B. Internal Vs External Stakeholders
• Internal stakeholders are those, such as
employees and managers who are employed by the
firm
• They are “inside” in the firm, in the sense that they
usually contribute their skills and efforts usually at
a company worksite
• External stakeholders, although may have
important transactions with the firm- are not
directly employed by it
Types of Stakeholders
C. Voluntary Vs Involuntary Stakeholders
• Voluntary Stakeholders can choose whether or
not to be a stakeholder to an orgnaisation where as
Involuntary Stakeholders cannot
• Employee can choose to leave the employment of
the organisation and therefore is voluntary
stakeholder
• Local society or community are not able to make
its choice and therefore be considered to be
involuntary stakeholders
Stakeholder Management Strategy
Stakeholder’s Potential for Threat to Organisation
HIGH LOW
Stakeholder’s
Potential for Stakeholder Type 4
H IGH Stakeholder Type 1
Cooperation Mixed Blessing
Supportive
with Strategy:
Organisation Collaborate
Strategy:
Involve
Stakeholder Type 3
Stakeholder Type 2
LOW Non-supportive
Marginal
Strategy:
Strategy:
Defend
Monitor
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The Clarkson Principles of Stakeholder
Management
1. Acknowledge: and monitor concerns of legitimate stakeholders.
2. Listen and communicate with stakeholders,
3. Adopt mechanisms sensitive to stakeholders’ claims and
requirements,
4. Interdependence and distribution: recognise the interdependence
of interests, and distribute benefits accordingly.
5. Cooperate with other public and private entities – to reduce any
negative impacts of the business, and to pay compensation,
6. Avoid activities that infringe rights of stakeholders, e.g. right to
life, property, and clean environment.
7. Transparency of activities, reporting of actions taken to address
stakeholders’ requirements.
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Competitive forces
• In perfect competition, firms work in a no risk
environment, with equal shares in the market, and
equal profits
• But in the real world, there is no perfect competition,
only oligopoly or monopolistic competition,
• Businesses have to face different types of competition
risks, affects their market size and profits
• SWOT analysis – Strengths, Weaknesses,
Opportunities and Threats
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Porter’s - Five Forces
• Porter: to diagnose the principal competitive
pressures in a market and assess its strength
and importance to the firm.
• He identifies five forces that affect the
competitive structure of firms.
• The five forces are external forces that impact
on a company’s ability to compete in a given
market.
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Porter’s - Five Forces
Threat of new
entrants
Threat of
substitutes
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1. Rivalry among firms: cut throat competition, oligopoly,
high fixed costs, no product differentiation.
2. Threat of new entrants: low barriers to entry,
government licensing policy, economies of scale,
expected retaliation.
3. Bargaining power of buyers: monopsony, consumers’
knowledge, undifferentiated products (no brand
loyalty)
4. Bargaining power of suppliers: supplies from few
firms, vertical integration, few or no substitutes.
Influences input prices (oil)
5. Threat of substitute products: rivals develop
substitutes, technology, adv campaigns
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Stakeholder Analysis
• The process used by managers to identify
relevant stakeholders and to understand their
interests and power they may assert.
• Who are relevant stakeholders?
The Stakeholder Analysis process:
1. Identify all stakeholders (Brainstorming)
2. Identify stakeholder needs & interests
3. Classify groups of interests (Stakeholder Mapping)
4. Identify areas of conflict: Organisation v
Stakeholder, Stakeholder v Stakeholder
5. Prioritise, reconcile and balance stakeholders
6. Align significant stakeholder needs with
organisation’s strategies and actions
Advantages of Stakeholder Analysis
• Get to know stakeholders better:
– Relative importance, power and interests
– Better managed relationships
– Risks identified
• Make better strategies and decisions
• Greater acceptance of organisation actions by
stakeholders
Disadvantages of Stakeholder Analysis
• Best done on continuous basis
• Assessment of analysis may be subjective
• Maybe not all stakeholder interests can be
met at the same time
– Focus on most important stakeholder
– Balance & reconcile all interests according to
importance or urgency
Stakeholder Interests
• Stakeholder have unique relationship to the
organization.
• Stockholders for their part, have an ownership
interest in the firm.
• Customers are interested in gaining fair value
and quality for product and service.
• Employees for their time and effort want to
receive compensation
Stakeholder Analysis
B. Stakeholders Interests
• Each stakeholder have unique relationship with the
organization, and managers must respond accordingly
• Stockholders , for t heir part , have an ownership
interest in the firm and in exchange for their
investment, stockholders expect to receive dividends
and , over time , capital appreciation
• The economic health of the corporation affects these
people & they may also seek social objectives through
their choice of investments
• Customers , for t heir part , are most interested in
gaining f air value and quality in exchange for t he
purchase price of goods and services
Stakeholder Analysis
B. Stakeholders interests
• Suppliers , likewise , wish to receive fair
compensation for products and services they provide
• Employees , in exchange f or their time and effort ,
want to receive fair compensation and an opportunity f
or professional development
• Governments , public interest groups , and local
communities have another sort of relationship with
the company. In general, their stake is broader than
financial stake of owners, customers , and suppliers.
They may wish to protect t he environment , assure
human rights , or advance other broad social interest
Stakeholder Power
• It’s the ability to use resources to make an
event happen or to secure a desired outcome.
• Five different kinds of power:
– Voting Power
– Economic Power
– Political Power
– Legal Power
– Informational Power.
Stakeholder Analysis
C. Stakeholders power
• Stakeholder power means the ability to use resources to
make an event happen or to secure a desired outcome
• Experts have recognized four types of stakeholder power:
voting power, economic power, political power, and legal
power
1. Voting power
• It means that the stakeholder has a legitimate right to cast a
vote.
• Stockholders typically have voting power as per the
percentage of the company’s stock he or she owns.
Stockholders typically have an opportunity to vote on such
major decisions as mergers and acquisitions, as well as
various social issues that may come before the annual
meeting
Stakeholder Analysis
2. Economic Power
• Customers, suppliers, and retailers have economic power
with the company
Suppliers can withhold supplies or refuse to fill orders
if a company fails to meet its contractual
responsibilities
Customers may refuse to buy a company’s products or
services if the company acts improperly and even can
boycott products if they believe the goods are too
expensive, poorly made, or unsafe
Employees, for their part, can refuse to work under
certain conditions, a form of economic power known
as a strike or slowdown
Economic power often depends on how well organized
a stakeholder group is
Stakeholder Analysis
3. Political power
• Governments exercise political power through
legislation, regulations, or lawsuits.
• Other stakeholders use their political power
indirectly by urging government to use its powers by
passing new laws or enacting regulations
• Citizens may also a different kind of voting power &
vote for candidates that support their views with
respect to government laws and regulations affecting
business
• Stakeholders may also exercise political power
directly, as when social, environmental, or community
activists organize to protest a particular corporate
action
Stakeholder Analysis
4. Legal power
• Stakeholders have legal power when they bring suit
against a company for damages, based on harm caused
by the firm
• Lawsuits brought by customers for damages caused by
defective products, brought by employees for damages
caused by workplace injury, or brought by
environmentalists for damages caused by pollution or
harm to species or habitat
Stakeholders stand out to managers when they have
power, legitimacy, and urgency and stakeholders
possessing all three attributes are called definitive
stakeholders; those possessing two attributes are
called expectant stakeholders
Stakeholder Nature of Interest and Power
Stakehol- Nature of interest- Nature of Power-
der Stakeholder wishes to Stakeholders
influences company
by
Employees -Maintain stable -Union bargaining
employment in firm power
- Receive fair pay for work -Work actions or strikes
-Work in safe, comfortable -Publicity
environment
Stockhold- -Receive satisfactory return -Exercising voting
ers on investments (dividends) rights based on share
- Realize appreciation in ownership
stock value over time --Exercising rights to
inspect company's
books and records
Stakeholder Nature of Interest and Power
Stakehol- Nature of interest- Nature of Power-
der Stakeholder wishes to Stakeholders
influences company by
Customers -Receive fair exchange: - Purchasing goods from
value and quality for competitors
money exchange - Boycotting companies
- Receive safe, reliable whose products are
product unsatisfactory or whose
policies are unacceptable
Suppliers - Receive regular order -Refusing to meet orders
for goods if conditions of contract
-Be paid promptly for are breached
supplies delivered - Supplying to
competitors
Stakeholder Nature of Interest and Power
Stakehol- Nature of interest- Nature of Power-
der Stakeholder wishes to Stakeholders influences
company by
Retailers / -Receive quality goods in -Buying from other
Wholesalers timely fashion at suppliers if terms of
reasonable cost contracts are not satisfactory
- Offer reliable goods and - Boycotting companies
services tat consumer whose goods / services or
trust and value policies are unsatisfactory
Creditors -Receive payments of - Calling in loans if
loans payments are not made
- Collect debts and -Calling legal authorities to
interests repossess or take over
property if loan payments
are severely delinquent
Stakeholder Nature of Interest and Power
Stakehol- Nature of interest- Nature of Power-
der Stakeholder wishes to Stakeholders influences
company by
Communities -Employ local residents -Issuing or restricting
in the company operating license and
- Ensure the local permits
environment is protected - Lobbying government for
- Ensure that local area is regulations of company`s
developed policies or methods of land
use and waste disposal
Business Stakeholders
Managing key stakeholder issues
•CSR in the Workplace
Employees right to the most professional training equipment
Prepare employees for safe, ethical performance of their duties
and career growth
• CSR in the marketplace
Companies need to positively contribute in promotion of
professional and ethical reputation of compliance and
enforcement
• CSR in the community
Companies responsibility to support local community and make
positive difference to those who work for it
•CSR in the ecological environment
Orgsnisations have a responsibility to minimize their
environmental impact and make most use of the resources
available
Managing Key Stakeholder Issues
Stakeholder's Issues
Classifies stakeholders in
relation to the power they hold
and their aptitude for action
(dynamism)
Can be used to indicate where
political effort should be made
before instigating change
Power / Dynamism Matrix:
72
• Many large companies flout ethics due to their
money power.
– Coca cola – exploitation of labour in South and
Central America, pesticide content – India,
– Union Carbide – Bhopal gas tragedy,
– Nestlé - selling genetically modified food in some
Asian countries without labelling them explicitly.
– Health drinks (Complan, Horlicks) – as substitutes
for a balanced diet, increase intelligence!