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Stakeholders in Business | Definition, Role, Types & Issues in Stakeholder Management

Stakeholders


What is Stakeholder ?


A stakeholder can be defined as an entity (a person, group or organisation) which has a stake in the organisation. This stake can be direct or indirect. Some of the major stakeholders of an organisation are its employees, its directors, creditors, suppliers, the owners, customers, the government and the community at large. The relationship between the stakeholder and the organisation is two-fold. On one hand, the stakeholder has the power to influence the decisions, policies, actions and practices of the organisation, while on the other hand they also get influenced by these factors.

Stakeholders Meaning in Business


The stakeholder can thus be defined as "an individual, a group, or an organisation that gets affected or affects the actions, policies, or objectives of the organisation." 

For example, the product marketing of an organisation affects its customers (better products), employees (greater salaries, incentives), suppliers (orders for raw material, packaging), creditors (credit for the growth plans of the organisation), owners (returns on equity), the government (increased corporate taxation revenue), etc.

Various stakeholders of an organisation have differing objectives. The stakeholders are dependent on the top management of the firm for maximising their returns. The management of the firm often has to play a balancing role between fulfilling the needs of the firm and maximising returns to stakeholders. 

For example, the stakeholders are concerned with maximizing returns of their investment in the form of dividends, bonuses, salaries, incentives, etc. The leadership on the other hand would want to spend more on research and development department which increases the productivity of the organisation and makes it more future-ready. To achieve this, the stakeholders need to forego short-term benefits. This balancing act is done by the leadership of the company to meet the short-term benefits of stakeholders and long-term investments of the organisation.

Stakeholders in Business

Definitions of Stakeholder


According to Bisset :
"Stakeholder is a person with an interest or concern in something".

According to R. Edward Freeman :
"A stakeholder in an organisation is (by definition) any group or individual who can affect or is affected by the achievement of the organisation's objectives".

According to Post, Preston, and Sachs :
"The stakeholders in firm are individuals and a constituencies that contribute, either voluntarily or involuntarily, to its wealth-creating capacity and activities, and who are therefore its potential beneficiaries and for risk bearers".

Role of Stakeholders in Strategic Management


The role of the stakeholder varies depending on the organization and the particular project being developed or decided upon. Importance of stakeholders in strategic Management that define as follows :

1) Voting and Decision-Making : 
Stakeholders have a very important role to play through voting on various issues relating to the organisational strategy. Stakeholders can be involved in the decision-making process and voting, which is conducted annually or during a meeting. The stakeholders can intervene in electing the management of the organisation which is responsible for designing the strategy of the company and in decision-making. If the organisation is not performing satisfactorily, then stakeholders such as Board of Directors can intervene to make necessary changes and formulate appropriate strategies.

2) Managing and Supervising Positions in the Organisation : 
Stakeholders may also be important members of management who influence the firm's actions and policies through their work. They may be directly answerable to the Director, CEO or CFO of the firm. The managers of different departments can be the stakeholders as they may affect the performance of a particular department in the organisation by their actions. They may also be responsible for recruiting people in their departments, training them and keeping the department up-to-date with any changes in the organisation's policies.

3) Fulfilling Responsibilities for Society and Environment : 
Firms exist in a society and hence have a social responsibility. The stakeholders need to ensure that the organisation's strategy, policies and actions are not harmful to the interests of society and the environment. This can take many forms. The stakeholders may decide to switch over to an alternate source of energy, if the existing one is depleted. They may also choose to donate money to a cause or a country which is in need. One of the prime motives of any business should be to work for public interest along with its personal interest. It is the social responsibility of stakeholders to ensure that all the actions of the firm give priority to the interests of society before their own personal gains.

4) Project Planning :
Stakeholders actively participate in the planning process of any project. The various activities of project planning are identifying the objectives of project, specifying and allocating the resources, deciding the methods to carry-out the project, analysing critical events, and finally, evaluating the results. The participation of stakeholders in the project planning ensures transparency in the project and its process.

Types / Classification of Stakeholders in Business


On the basis of relationship with the organisation, stakeholders can be classified into two (Internal and External Stakeholders) major groups. Types of stakeholders are as follows :
1) Internal stakeholders 
2) External stakeholders

Internal Stakeholders


The people that are inside the organisation, or those who work directly with the organisation, are known internal stakeholders. Some major internal stakeholders are as follows : 

1) Shareholders : 
Shareholders are the individuals or companies who hold the shares of the organisation. Hence they are called the "owners of the business". Shareholders are treated as the members of the organisation. These shareholders invest in the organisation so as to help it in realizing its objectives. The organisation's prime responsibility is to fulfill the interests of shareholders. The shareholders get the share in the profits as a return on the investments made by them.

2) Workers/Employees : 
Workers or employees are the people who work in the organisation, and in return expect remuneration, benefits, security, etc. The relationship between employees and the organisation is based on the employment contract. Employees contribute their time and efforts for the benefit of the organisation, which in turn poses certain obligations on the organisation. It becomes the responsibility of the organisation to fulfill its duties regarding its employees. One of the major responsibilities of the organisation towards its employees is to treat them as human beings and acknowledging their significance as a valuable resource for achieving organisational goals.

3) Management : 
Management of an organisation affects the organisation as well as other stakeholders. Management is related with the organisation through an implicit or explicit contract. The major responsibility of the management is to maintain the operations of an organisation as well as to make strategies for the well-being of the organisation. Management is responsible for harmonising the different entitlements of the stakeholders.

External Stakeholders 


The individuals, groups or companies that are outside the organisation and work indirectly with the organisation are known as external stakeholders. External stakeholders can influence and be influenced by the changes in the organisation. Some of the key external stakeholders are as follows :

1) Customers :
Customers or consumers are the people or organisations that purchase the products of an organisation. Hence, customers are one of the main sources of revenue for any business. As these earnings are re-invested in various business activities, therefore, customers are the key asset involved indirectly in the new product/service development process. They maximize the sales of the organisation by purchasing its products and by spreading a positive word-of-mouth. Hence, satisfying customers is one of most important goals for an organisation to survive in the long-run.

2) Suppliers : 
Suppliers are those individuals or business owners that supply raw materials or semi-finished goods to the organisation for the final production process. Some suppliers that deliver finished goods to the customers are called distributors. The quality and value of end product is defined by the material provided by the suppliers. Therefore, business dealings with the suppliers should be treated wisely by the organisation. It is very important for the organisation to develop good relations with the suppliers through which the production costs can be minimised while productivity and quality can be maximised.

3) Creditors : 
The companies that provide raw materials or semi-finished goods on credit to the organisation are called as creditors. If the organisation does not pay the due amount in time, then the business is at a risk of losing its competitive edge, as judicious relation between the organisation and its suppliers is one of the major sources of success. In dissatisfaction, the suppliers can affect the case of business of an organisation by discontinuing the supply of goods or by supplying poor quality goods.

4) Competitors : 
The organisation is grateful to its competitors as it is towards its stakeholders. Any competitive strategy adopted by the firm can positively or negatively affect the operations of its competitors and vice versa. Hence, an organisation should always adopt ethical measures for survival in the competitive market.

5) Government : 
Government regulates the activities and policies of the organisations by formulating various laws and posing restrictions. One of the prime responsibilities of an organisation is to abide by the laws governing its activities. Management should formulate the strategies considering the laws enforced by the government. Management can affect and in-turn gets affected by the taxes, laws, and duties imposed on the business. Management can help the government by practicing fair trade, paying taxes timely, and not indulging in unfair trade practices.

6) Society/Community : 
Society or community in which the organisation exists also affect its operations. The management is responsible for educating and informing the society as well as ensuring its well being by raising the standard of living of the society at large. The organisations should not adopt measures that can harm the society like discharge of hazardous waste and pollutants.

Issues in Stakeholder Management


Stakeholder management seeks to link various managerial concerns that were previously executed separately, like strategic management, organisation management, marketing, human resource management, and corporate social responsibility. This linkage makes it possible for the organisation in formulating strategies and also in treating possible conflicts that may lower the efficiency of the stakeholders.

While managing stakeholders, various issues such as relationships, communication, leadership, commitment, etc., should be recognised and resolved so that there is a mutual understanding and a sense of unity among different stakeholders of the organisation. the stakeholders may put the goals of the organisation in jeopardy by resisting major changes,, initiatives, etc., in the haste of realizing their individual goals. Some of the major problems with stakeholder mapping are as follows :

1) Relationships with Stakeholders : 
To understand the stakeholders and their interests, organisations need to understand the characteristics of relationships between various stakeholders and how they interact within the business system. This includes identifying the culture in which the organisation exists and the power dynamics among various stakeholders of an organisation. The managing of stakeholders therefore is more important than just getting them to participate in the affairs of the company and also involves management of complex relationships, which if maintained properly can create a competitive advantage for the company over its competitors.

The key lies in building an environment of understanding which fosters an appreciation of each other's viewpoints and thus removes the scope for creating conflicts. Arranging the stakeholders in the power hierarchy can also give the organisation an idea of how better communication and management of relationships among the stakeholders impact the successful fulfillment of the organisational objectives. This in turn will lead to successful execution and implementation of the project.

2) Communication between the Organisation and Stakeholders : 
Communication is one of the basic aspects of any business. It is a process through which people exchange their views and ideas with each other. It has different techniques and is important for maintaining the flow of information at different levels of the organisation. Stakeholders are connected with each other through various methods and also exchange information about various aspects such as products, services, supporting the flow of information, giving instructions, etc.

Communication is absolutely vital for managers not only with compliant stakeholders but also with stakeholders who are hostile and can put major hurdles in the implementation of a project. Having an effective and active communication with the stakeholders can alert the organisation towards the future issues and risks. If the project managers are successful in creating an effective channel of communication with the stakeholders, they can play a vital role in keeping the stakeholders engaged and also averting any major problem from occurring in the organisation.

Lack of communication or closed communication systems are a major cause of creating roadblocks in stakeholder management. Having open communication channels not only solves and averts major problems but acts as a strategic defence system for the organisation.

3) Leadership and Commitment : 
For an organisation to operate in an efficient way there should be a strong leadership that can guide the employees in their work. Some important factors such as the mission statement, management of the organisation, its core values and principles etc., lay foundation for effective leadership. Along with a strong leadership, there should be commitment among the employees and management towards the achievement of pre-determined organisational goals. Vision statement based on successful short and medium term goals plays a crucial role in developing a sense of commitment among the employees and stakeholders.

4) Influence and Interests of Stakeholders : 
Different stakeholders have different interests, and stakeholders try to address their interests by influencing organisational processes. Stakeholders often collaborate with one another to influence and affect the behavior of the organisation. It is not possible for the organisation to accommodate the interests of all stakeholders. If the bond between different stakeholders is strong, then they can influence the organisational activities and decisions. Hence, an organisation should try to keep optimum number of stakeholders, as the challenge of fulfilling their individual interest increases with the increasing number of stakeholders. 

5) Perception and Impact of Stakeholders : 
The perception of stakeholders about the organisation has a significant impact on its operations. Perception can either be positive or negative. While positive perception may lead to willingness in the stakeholders to work, negative perception may create conflicts and disagreements between the stakeholders and the management.

In the similar fashion, the impact of stakeholders can be categorised as positive and negative. While a positive impact may lead to effective communication and higher living standards, a negative impact may disrupt the organisation's working environment and cause a group of stakeholders to have an adverse effect on other stakeholders of the organisation.

6) Aligning Values and Motivation of Stakeholders : 
One of the most effective ways of achieving effective stakeholder management is to align values and provide motivation through incentive schemes. To align the values, an organisation requires two fundamental aspects, i.e., sharing values and beliefs, and developing shared values, through effective and proper communication.

There are many ways to motivate the stakeholders. One of the most influential ways for motivating stakeholders is through incentives. Incentives act as a stimulator for improved performance and help in achieving the predetermined goals and objectives.

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