Business entities, funding and exit strategies

2.4.Stakeholders.pdf

Home >Education homework help >Business entities, funding and exit strategies

BUSINESS FORMATION & FUNDING OPTIONS

BUSINESS & ENTREPRENEURSHIP PROGRAM OXFORD SUMMER COURSES

STAKEHOLDER ANALYSIS In this excerpt we are going to reflect on and dive deeper into the stakeholder analysis. You will need this document for the completion of this work activity as well as for your final project work to complete Topic 2. What Is a Stakeholder? 1 A stakeholder is a party that has an interest in a company and can either affect or be affected by the business. The primary stakeholders in a typical corporation are its investors, employees, customers and suppliers. However, the modern theory of the idea goes beyond this original notion to include additional stakeholders such as a community, government or trade association. Understanding Stakeholder Stakeholders can be internal or external. Internal stakeholders are people whose interest in a company comes through a direct relationship, such as employment, ownership or investment. External stakeholders are those people who do not directly work with a company but are affected in some way by the actions and outcomes of said business. Suppliers, creditors and public groups are all considered external stakeholders. Example of an Internal Stakeholder Investors are a common type of internal stakeholder and are greatly impacted by the outcome of a business. If, for example, a venture capital firm decides to invest $5 million into a technology startup in return for 10% equity and significant influence, the firm becomes an internal stakeholder of the startup. The return of the company's investment hinges on the success, or failure, of the startup, meaning it has a vested interest. An Example of an External Stakeholder External stakeholders are a little harder to identify, seeing as they do not have a direct relationship with the company. Instead, an external stakeholder is normally a person or organization affected by the operations of the business. When a company goes over the allowable limit of carbon emissions, for example, the town in which the company is located is considered an external stakeholder because it is affected by the increased pollution. Conversely, external stakeholders may also sometimes have a direct effect on a company but are not directly tied to it. The government, for example, is an external stakeholder. When it makes policy changes on carbon emissions, continuing from above, the decision affects the operations of any business with increased levels of carbon. Problems With Stakeholders

1 https://www.investopedia.com/terms/s/stakeholder.asp

BUSINESS FORMATION & FUNDING OPTIONS

BUSINESS & ENTREPRENEURSHIP PROGRAM OXFORD SUMMER COURSES

A common problem that arises with having numerous stakeholders in an enterprise is their various self interests may not all be aligned. In fact, they may be in direct conflict. The primary goal of a corporation, for example, from the viewpoint of its shareholders, is to maximize profits and enhance shareholder value. Since labor costs are a critical input cost for most companies, a company may seek to keep these costs under tight control. This might have the effect of making another important group of stakeholders, its employees, unhappy. The most efficient companies successfully manage the self-interests and expectations of their stakeholders. Stakeholders vs. Shareholders Stakeholders are bound to a company with some type of vested interest, usually for a longer term and for reasons of greater need. A shareholder, meanwhile, has a financial interest, but a shareholder can sell a stock and buy different stock or keep the proceeds in cash; they do not have a long-term need for the company and can get out at any time. For example, if a company is performing poorly financially, the vendors in that company's supply chain might suffer if the company no longer uses their services. Similarly, employees of the company, who are stakeholders and rely on it for income, might lose their jobs. However, shareholders of the company can sell their stock and limit their losses. Difference Between Internal and External Stakeholders2 Business exists in a large environment and many factors affect the business directly and indirectly. Every organization has its stakeholders, irrespective of its size, nature, structure and purpose. The stakeholders can be any person or entity, who influence and can be influenced by the company’s activities. In a business environment, stakeholders are classified into two categories, Internal Stakeholders, and External Stakeholders. Internal stakeholders refer to the individuals and parties, within the organization. On the other hand, external stakeholders represent outside parties, which affect or get affected by, the business activities. Due to the complexity of the business environment, it is very difficult to identify that which factor is considered as the internal or external stakeholder. So, here in this article, we are presenting you the differences between internal and external stakeholders.

2 https://keydifferences.com/difference-between-internal-and-external-stakeholders.html

BUSINESS FORMATION & FUNDING OPTIONS

BUSINESS & ENTREPRENEURSHIP PROGRAM OXFORD SUMMER COURSES

Comparison Chart

BASIS FOR COMPARISON INTERNAL STAKEHOLDERS EXTERNAL STAKEHOLDERS

Meaning The individual and parties that are the part of the organization is known as Internal Stakeholders.

The parties or groups that are not a part of the organization, but gets affected by its activities is known as External Stakeholders.

Nature of impact Direct Indirect

Who are they? They serve the organization. They get influenced by the organization's work.

Employed by the entity

Yes No

Responsibility of the company towards them

Primary Secondary

Includes Employees, Owners, Board of Directors, Managers, Investors etc.

Suppliers, Customers, Creditors, Clients, Intermediaries, Competitors, Society, Government etc.

Definition of Internal Stakeholders Internal Stakeholders are those parties, individual or group that participates in the management of the company. They can influence and can be influenced by the success or failure of the entity because they have vested interest in the organisation. Primary Stakeholders is the second name of the Internal stakeholders. Internal Stakeholders are dedicated to providing services to the company. They are highly affected by the decisions, performance, profitability and other activities of the company. In the absence of internal stakeholders, the organisation will not be able to survive in the long run. That is why they have a great impact on the company. Further, they are the ones who know all the secrets and internal matters of the entity. The following are the list of internal stakeholders:

• Employees: Employees are the group of people who work for the company, for remuneration.

• Owners: The individual or group who owns the organisation. They can be partners, shareholders, etc.

• Board of Directors: They are the group of individuals who governs the incorporated entity. They are elected by the members of the company at the AGM (Annual General Meeting).

BUSINESS FORMATION & FUNDING OPTIONS

BUSINESS & ENTREPRENEURSHIP PROGRAM OXFORD SUMMER COURSES

• Managers: The person who manages the entire department is known as Manager. For example Sale Manager, General Manager, etc.

• Investors: The individual or group who invest their money in the organisation are investors.

Definition of External Stakeholders External Stakeholders are those interested parties, who are not a part of the management, but they indirectly affected by the work of the company. They are the outside parties which form part of the business environment. They are also known as Secondary Stakeholders. They are the users of financial information of the company, in order to know about its performance, profitability, and liquidity. External Stakeholders, do not participate in the day to day activities of the entity, but the actions of the company influence them. They deal with the company externally. They have no idea about the internal matters of the company. Given below is the list of external stakeholders:

• Suppliers: They provide inputs to the organisation like raw material, equipment, etc.

• Customers: They are considered the king of business because they are the one who is going to consume the product.

• Creditors: They are the individual, bank or financial institution who provides funds to the organisation.

• Clients: They are the parties, to whom the company deals and provides its services.

• Intermediaries: They are the marketing channels that create a link between the company and customers like the wholesaler, distributors, retailer, etc.

• Competitors: They are the rivals who compete with the organisation for resources and the market as well.

• Society: A firm has its responsibility towards society as well because the enterprise uses its valuable resources.

• Government: A firm is guided and controlled by government rules and regulations like it has to pay taxes and duties that are levied on the business.

Conclusion Every enterprise operates in an environment, and there are some factors in that environment. The company has to deal with those factors and fulfil the responsibilities towards them like it is the responsibility of the company to pay fair wages to the workers and should not discriminate between employees. Similarly, it is the duty of the company to pay money to suppliers, deliver goods to customers, pay taxes to local authorities on time. They are the readers of the financial statement of the company so the company should provide a true and fair view of its financial statement along with transparency in their accounts. The trade union is a combination of both internal and external stakeholders.

BUSINESS FORMATION & FUNDING OPTIONS

BUSINESS & ENTREPRENEURSHIP PROGRAM OXFORD SUMMER COURSES

27 CHALLENGES TO LEADERSHIP – STAKEHOLDER MAP

Tel: +44 203 457 5774 | Email: [email protected] | Website: getsmarter.com

Page 6 of 11

cam.ac.uk

The Porter model is a traditional value chain approach developed by Michael Porter. This model divides business operations into primary and secondary activities. Primary activities encompass logistics, operations, marketing and sales; while infrastructure, human resources, technology and procurement are considered secondary activities.

There are also newer approaches to mapping value chains, such as the World Economic Forum’s, which is based on the model used by Henry Ford in automobile manufacturing. Here, the use of a value chain enables better use of limited natural resources and attempts to reduce negative environmental effects.

3.3 Stakeholders

Contemporary leaders will face challenges from various stakeholders, both internally and externally. To mitigate these challenges, it is necessary for a high impact leader to be aware of the roles that various external stakeholders play in their organisation, and to understand the effects that the actions of these stakeholders have on the organisation’s operations. Figure 2 illustrates the distinction between internal and external stakeholders.

Figure 2: Internal vs external stakeholders.

Tel: +44 203 457 5774 | Email: [email protected] | Website: getsmarter.com

Page 7 of 11

cam.ac.uk

Table 1 details the gaps that leaders will need to bridge to effectively communicate with external stakeholders.

Table 1: Challenges of external stakeholders. (Source: O’Neill, 2016)

Challenge Description

Language “Different terminology to describe company performance and different indicators to measure this performance”

Time frame “Companies are pressured by investors to report on short-term results while often needing to focus on issues that play out over the medium to long term”

Expertise “Inadequate levels of mutual comprehension and technical capacity”

Relationships “Lack of strong internal relationships impacts relationships with external stakeholders”

Resources “Not enough time or other resources are dedicated to communicating with investors”

3.4 Competitors

Competitors can often pose a challenge to leadership, but many organisations are finding ways to turn competitors into “co-opetition” (co-operative competition) or collaborators, thereby turning a challenge into an opportunity. The aim of co-opetition is to enable organisations to work together for mutual benefit, rather than having a single organisation dominate the market.

For instance, in the technology sector, co-opetition helps mitigate the losses associated with technology, which rapidly becomes outdated. One particularly successful example of co-opetition is the 2004 Sony-Samsung joint venture, which saw two major competitors working together to develop LCD panels for flat-screen TVs. Instead of the typical win-lose situation, such collaborations allow both parties to succeed, which benefits the consumers.

Another example of co-opetition linked to technology is the Sustainable Smartphone Working Group. In 2016, as part of its 2030 Initiative for Sustainable Consumption and Production, Transform Together launched its Sustainable Smartphone Working Group. This initiative includes representatives from civil society, organisations, progressive businesses and governments working together to solve a common challenge: improving the environmental and social impact of smartphones.