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What Is A Stakeholder In Business?

What Is A Stakeholder In Business

If you’ve ever wondered what a stakeholder in business is then read on for everything you need to know. A stakeholder in a business is any party, be it an individual, group or organisation that has an interest in a company. These parties can influence how a company is perceived, and how it runs its business operations or they can be impacted directly or indirectly by the company’s actions. 

A business can’t function without its stakeholders and all stakeholders have a role to play with different levels of influence over business operations. Stakeholders can be internal or external and examples of stakeholders include but are not limited to; investors, employees, customers, suppliers and the community.

How Do Stakeholders Influence A Business?

Businesses are made up of lots of different people, teams and invested parties, each with their own direct and indirect interest and impact on the overall success of the organisation.

This complex ecosystem of stakeholders is made up of individuals, groups or other organisations that are directly involved with, or indirectly affected by a business, and their influence is inextricably linked to its success, failure and how it operates.

The influence that a stakeholder has on a business will largely depend on whether they are internal stakeholders or external stakeholders and how closely linked they are to the business and its operations, but business leaders must be able to engage positively with company stakeholders at all levels as they are crucial to its overall success.

Business owners must therefore successfully balance and manage relationships between internal and external stakeholders to ensure the long-term success of their business. By defining, reviewing and nurturing these key relationships, business leaders create long-term value for their key customers, suppliers, employees and community stakeholders which in turn leads to a strong business model to build upon.

Internal And External Stakeholders

Internal stakeholders such as the board, shareholders, employees and investors directly influence business operations and their interest in a company come through a direct relationship. Their inputs ensure that the business is running smoothly with enough physical, strategic and capital resources to aid the success of its operations. A business relies on its internal stakeholders working closely together towards common business goals.

External stakeholders are individuals or groups who do not directly work with a company but can impact its performance or can be affected by the actions and outcomes of the business. For example, customers, suppliers and external investors and external organisations directly interact with the company and can influence it or be impacted by it. For example, customers may change their buying habits, suppliers could change their distribution or manufacturing processes and investors could withdraw funding.

Additional external stakeholders also set the operating environment that the business exists in and therefore have an indirect impact on its ability to perform. For example, the media can sway buyer habits and sentiment, the government can introduce new regulations or amend existing rules and unions can impact employee actions.

In every business, both internal and external stakeholders have an important role to play. From making up the work environment itself to shaping the environment that that business operates within, these stakeholders have a direct and indirect impact on how a business operates which will impact business operations, logistics and ultimately profitability.

Different Types Of Stakeholders

Each business will have different internal and external stakeholders and they will all have a different influence on business operations, with some holding more weight than others, but ultimately businesses don’t function without their stakeholders.

For example, a financial services company may prioritise its investors as this is the sector it runs in and an oil refinery might choose to prioritise its operational stakeholders such as logistics and environmental groups due to the nature of its impact on emissions and road congestion.

Stakeholder Impact

Two pieces of a jigsaw being put together

Whilst not all individual stakeholder impact is equal, the impact that stakeholders have can be broken down into five broad categories; financial and operational, environmental, health and wellbeing, capability building and satisfaction.

Business owners should ensure that the key stakeholder(s) in each of these five areas of impact are fully considered in terms of their needs and how these needs can be met, and the benefit of doing so compared to making no improvements.

Financial And Operational Impact

Reviewing the financial and operational impact on your stakeholders means reviewing your key stakeholder’s long-term financial position and how this can be improved over time. For example, this could cover employee wages, shareholder stock price and director dividends.

Whilst actively improving the financial outlook for your stakeholders may increase business costs, it’s important to weigh up the benefit of doing so in terms of the return on investment that you’re making. Take raising employee wages for example, if you can commit to paying over the national living wage you are likely to attract a more engaged workforce with less turnover which could, in turn, reduce expensive recruitment costs and increase the productivity of the staff you have, and therefore increase business profitability. In this example, the benefit is likely to outweigh the cost but you should follow this style of analysis for each stakeholder and the financial and operational decisions made.

Environmental Impact 

The environmental impact that your business has on its key stakeholders should be reviewed in terms of the waste, pollution, drain on natural resources and emissions that impact environmental health.

By taking a positive environmental stance, businesses can attract new funding and enter new markets that either assist in green initiatives or support your stance. Green-centred businesses are often seen more favourably than companies that are not actively reviewing and improving the impact they have on the environment around their operations. This in turn can lead to positive impact, engagement and support with business stakeholders.

For example, we know that climate change is on the agenda of governments around the world and that legislation is coming to mandate carbon emissions. By getting ahead of this curve, you could benefit from government funding and reduce costs by phasing in new environmentally friendly practices when compared to being forced to take action in the future. Examples could be switching to electric company cars or only holding meetings virtually to reduce international travel between offices and subsidiaries.

Health & Wellbeing Impact

Reviewing the health and wellbeing impact on your stakeholders focuses both on the organisational health of the company as a whole, as well as the health and wellbeing of the individual stakeholders with an interest in it.

As a healthy business is the result of the leadership team’s ability to create goals, deliver strategies and adapt to the forces around it as well as successfully manage the people that it employs and works with, it’s important to consider how you can strengthen and adapt these areas to see improvements in the overall health and wellbeing and the organisations and people within them. This could be as simple as investing in employee healthcare insurance or creating processes that allow the business to adapt to changes in market trends more quickly.

Capability Building 

The fourth area of important stakeholder impact is capacity building. This focuses on the skillset held and the process of upskilling the people and organisations within your key stakeholder groups.

Having the right skills across your business and the partnerships that it needs to thrive is fundamental to long-term business growth and success. This means that by investing in training and learning programs that bolster the skills you need, business owners can positively impact the effect their stakeholders have on the success of the business.

A simple example is setting benchmark skill levels that staff need to meet or for something wider-reaching, an organisation could invest in sharing waste reduction best practices throughout their supply chain for a cumulative positive effect on building upon the existing capabilities.

Satisfaction Impact 

Finally, reviewing the satisfaction that your stakeholders experience when interacting with the company, its products, or services can do wonders for relationships, productivity, loyalty and success at all levels.

This far-reaching impact could cover everything from how easy it is for suppliers to find your office, the quality and speed of communications with new customers, initiatives to improve employee wellbeing or working structures, or generous credit terms with clients.

Time and time again higher satisfaction levels are linked to profitability and company success so this is an area that business owners should prioritise for their stakeholders.

Building Strong Stakeholder Relationships

Handshake between two business people

Due to the level of involvement and impact that stakeholders have at all levels of business operations and its overall success, business owners need to be able to identify who their stakeholders are and take time to define and understand the needs of each one.

Doing this will enable them to take action that builds a strong relationship and level of trust between them which can be beneficial for both sides. As business changes will need to be supported by its internal and external stakeholders to progress, having open and strong lines of communication is key.

Whilst, not every stakeholder need can be met, the ability to have frank and honest discussions at all levels can increase the likelihood that healthy and respectful stakeholder relationships can be maintained even if they don’t agree all of the time.

For example, employee and board relationships are an area that can have a huge impact on business success. By taking steps to talk to these internal stakeholders, get their feedback, and listen and take action on matters that are important to them, you can build a supportive and engaged workforce from the inside out.

If a business has a direct impact on the local community that it operates in, then engaging in local meetings to meet and talk to the people it serves and effects can build community buy-in and support as well as learning from other people’s thoughts and experiences.

Customers or purchases are important for every business. So ensuring that you listen, learn and adapt to consumer buying behaviour by tracking how they find the business, what leads them to purchase with you and how things like pricing impact their buying decisions, you can take action that directly impacts your bottom line.

Problems With Stakeholders

We’ve largely focused on the positive impacts that stakeholders can have on a business so far and how business leaders can focus on building good relationships with their key stakeholders, but it’s important to consider stakeholder problems that can arise too.

Whilst having stakeholders that agree with a business’s decisions. Strategy and proposals are nice, it’s not realistic to expect this to happen all the time and conflicts will be more likely to arise, the higher the number of stakeholders there are.

A common problem is when the interests of several stakeholders do not align or cause a direct conflict. A high-level example of this might occur is when a business’s primary goal is to maximise profits. This could lead to cost-saving decisions being made over working conditions and pay that cause conflict amongst its employee stakeholders.

Whilst it’s nearly impossible to avoid some conflict between business stakeholders, a successful business will be able to manage the interests, facilitate discussions, reach compromises and not be afraid to disagree with their key stakeholders whilst ensuring that the overall sentiment of the relationships remains positive.

Summary

This article has given a simple overview of the question, ‘what is a stakeholder in business’. To recap, a stakeholder in a business is any party, (individual, group or organisation) that has an interest in a company, can influence how a company runs or can be impacted directly or indirectly by the company’s actions.

Every company has internal and external stakeholders and whilst not all stakeholders are equal in terms of their impact on a company or how a company impacts them, when leadership teams focus on building strong, trusted stakeholder relationships at all levels, they should consider five key stakeholder impact areas for their business; financial and operational, environmental, health and wellbeing, capability building and satisfaction

Key takeaways: 

  • Business stakeholders are individuals, groups or other organisations that are directly involved with, or indirectly affected by a business, and their influence is inextricably linked to the business’s success, failure and how it operates.
  • Internal stakeholders such as the board, shareholders, employees and investors directly influence business operations and their interest in a company come through a direct relationship.
  • External stakeholders are individuals or groups who do not directly work with a company but can impact its performance or can be affected by the actions and outcomes of the business. For example, customers, suppliers and external investors and external organisations that either directly interacts with the company, can influence it or be impacted by it.
  • Additional external stakeholders also set the operating environment that the business exists in and therefore have an indirect impact on its ability to perform. For example, the media can sway buyer habits and sentiment, the government can introduce new regulations or amend existing rules and unions can impact employee actions.

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