Golspie High School. Business Management Higher Understanding Business. 7 Stakeholders

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1 Golspie High School Business Management Higher Understanding Business 7 Stakeholders

2 Learners should be aware of the differing objectives of groups of stakeholders in terms of: stakeholder conflict and resolution stakeholder interdependence Stakeholders are individuals or groups of people who have an interest in, and stand to be affected by, the success or failure of an organisation. Internal stakeholders groups within a business include: Stakeholder Interest Influence Owner(s) (sole trader/ partnerships) Shareholders (limited companies and plcs) Managers Profit Good return on the money they have invested in the business Increase in value of the business Stability to ensure future returns Shareholders will be interested in healthy profits which will ensure them a high level of dividend, growth and stability leading to an increase in the value of their shares. Stability to ensure future returns Fair salary and bonuses Promotion opportunities Status and responsibility Job satisfaction and security Managers may put desire for perks /fringe benefits (eg company cars), ahead of profit maximisation. Employees Good rate of pay - profitability to determine if Make decisions that will affect the business Invest more capital in the business Sell their investment in the business Invest more capital in the business Sell their investment in the business Contribute to decision making by voting at the Annual General Meeting Sell their shares in business which won t affect organisation directly but may cause the share price to fall which in turn may harm the organisation s image in the press. Vote at the AGM choose the BOD, approve the dividend percentage. The strength of individual shareholders depends on number of shares they own. Protest against decisions they don t agree with, eg a big salary increase for the MD. Makes decisions on future plans of the organisation; poor decisions can affect success of the business, eg employing unreliable staff Will suggest areas of investment, areas needing improved to provide a better service, ensure objectives are met, etc Standard of work can produce a quality Stakeholders Page 2

3 they are entitled to a wage increase Job satisfaction and security Good working conditions product or service by working hard Customer service Lack of motivation Industrial action eg go on strike High/low absence rates Put forward suggestions for improvement of services External stakeholders groups outside a business include: Stakeholder Interest Influence Customers Banks Value for money on product or service Good-quality product or service Good customer service Business to open an account with them The stability of the organisation to ensure it will be able to repay loans on time and in full Choose to shop here or elsewhere Complain about product or customer service Damage reputation of business Approve/refuse to provide overdraft or loan Charge higher interest rates Suppliers Government Local community Business to place repeat orders To be paid for goods or services supplied on time and in full Correct amount of tax is paid to Inland Revenue Legislation is adhered to Provision of employment Social responsibility in local area Provision of employment Increase/decrease their prices Withdraw offers of discount Refuse trade credit Deliver late Deliver goods that are not fit for purpose Change the rate of tax Change the rate of minimum pay Change legislation Protest against the business through MPs and local press Petition the organisation to make a change to environmental policies Stakeholder Interdependence & Conflict Stakeholders Page 3

4 Interdependence Why a stakeholder needs another stakeholder. Conflict of Interests The disagreements that can occur between different stakeholders. A business cannot satisfy the interests of all stakeholders all of the time: this is known as a conflict of interest. Some examples of conflicts of interest follow. Stakeholders Interdependence Conflict Owners and employees Owners need employees to carry out different tasks and employees need owners to pay their wages. Owners want to pay as low a wage as possible so that their profit is high whereas employees want high wages for their work. Owners need employees to be as productive as they can and employees need owners to provide the necessary job training. Owners want employees to work as many hours as they can whereas employees want to work as few hours as possible. Disagreement can occur about the working environment, for example temperature. Reorganisation of the business to become more efficient will benefit the owner, but employees may feel they are being given extra responsibility without training or financial reward. Owners and Owners need customers to Owners want to make as customers buy products from them to much profit as possible by make profit and customers charging the highest price need owners to provide they can whereas customers them with the product they want as low a price as want. possible. Owners need customers to Owners want to keep costs become loyal to increase low by providing the market share and customers cheapest possible service they want to be rewarded for can whereas customers want loyalty (eg discounts). the best possible service (eg after-sales). Employees Employees need customers Employees want customers Stakeholders Page 4

5 and customers Owners and suppliers to buy from an organisation so that they get paid and customers need employees to provide them with good customer service. Owners need suppliers to provide products on time and suppliers need owners to provide them with repeat orders. Owners need suppliers to provide a quality product at a suitable price to make a profit and suppliers need owners to pay their invoices within an agreed time to prevent cash flow problems. to spend as much as possible to increase their commission whereas customers want as much discount as possible. Owners want supplies for as low a price as possible whereas suppliers want to maximise profits. Owners want to wait for as long as possible before paying their debts whereas suppliers want paid as quickly as possible. Owners vs managers Owners want to maintain control of the business but managers can become too powerful and influential. Managers will focus on their personal objectives, eg high salary and bonuses. which will conflict with the owner s objective of maximising profit. Customers vs owners Customers expect a satisfactory quality of goods for the price they paid. The business may try to reduce costs by using poorer quality materials, resulting in customers wanting a refund and the business losing sales revenue. Customers want delivery of the goods as soon as possible, but the cost of this can make it difficult for a business to achieve the customers expectations. Customers expect excellent customer service before, during and after buying a product. However, it is expensive for a business to train staff and provide this level of service. Suppliers vs managers To improve cash flow managers want to keep cash within the business for as long as possible and may delay paying suppliers for goods/services provided. However, if suppliers are not paid within a reasonable time (usually 28 days) this can cause them financial hardship and cash flow problems of their own. Management/Owners vs Local Community Stakeholders Page 5

6 They may want to build another outlet to achieve their aim of growth. However this may upset the local community who try to block their planning permission because they do not want additional traffic in their area Employees vs Customers Workers may want a higher rate of pay however this may lead to higher prices for consumers which conflicts with their desire for low prices Owners v Banks Owners of the business may want to invest in new technology and need the bank s approval for a loan. However, banks may be unwilling to lend money to the business because they think it is too high a risk. Interdependence of stakeholders Why a stakeholder needs another stakeholder. Despite possible conflicts of interest stakeholders also rely on each other to achieve their own objectives. Owners rely on the skills and ability of the management team to achieve their objective, and the managers rely on the owners for job security, salary and support in their management role. Owners need employees to carry out different tasks and employees need owners to pay their wages. Employees rely on managers to provide leadership and direction to successfully do their jobs, while managers rely on employees to achieve their targets and meet deadlines. Managers are accountable if their employees work inefficiently. Business owners are reliant on customers to buy their goods/services to generate sales revenue, while customers are employees of businesses and rely on them to earn their salary to generate enough income to buy goods/services to satisfy their needs and wants. Stakeholders Page 6

7 Different groups of stakeholders will have different aims regarding an organisation. Suppliers will want to get regular orders with prompt payment after a reasonably brief period of credit. Customers will want low prices, high quality, and good after -sales service. Banks will want the firm to be able to meet its loan and interest repayments on time. The government will want to ensure the organisation complies with the law, pays the correct amount of Corporation Tax and Value Added Tax, and provides employment for the working population. The community as a whole (that is, society) will want organisations to demonstra te corporate responsibility, not harm the environment, treat employees fairly, and not exploit consumers. Taxpayers have a stake in businesses because some of the taxes that they pay may be used to help businesses, e.g. in the form of government grants or other assistance. Taxpayers will wish to ensure that these payments are used for their benefit, e.g. to increase employment opportunities. Donors are important stakeholders in charities. They will wish to see the money that they have donated used for the purpose of the charity, e.g. to help refugees, to prevent cruelty to animals, etc. The local community has a stake in businesses which are situated in their area. Businesses provide employment and may also sponsor local events. Their existence may influence the provision of services like schools and hospitals. They may also affect the local environment (e.g. if new roads are built). Local government may have a stake in businesses in their local area because they are responsible for providing services for businesses like refuse collection and road building and maintenance. Stakeholders can exert influence on organisations in a variety of ways: Ordinary shareholders have voting rights at the Annual General Meeting of limited companies. Managers have day-to-day decision-making powers. Employees may take industrial action, such as strikes or working to rule, to persuade the organisation to do what they want. Suppliers can vary the period of credit and/or the level of discount offered to firms. Customers influence firms by buying, or refusing to buy, their output. For example in the 1980s some customers stopped buying Nestlé products in an attempt to deter the firm from supplying powdered baby milk to third world countries. Banks have the power to grant or withhold loans to firms and to set the rate of interest charged. The government can introduce laws to make firms carry out its wishes for example, the Sex Discrimination Act has made it illegal for firms to refuse to employ a man or a woman simply because of their gender. The community as a whole can persuade firms to do as it wants through pressure groups such as Greenpeace, etc. Donors can influence what charities do by altering the amount of money that they donate. If a charity does something with which many donors do not agree, it may receive less money from them. Stakeholders Page 7

8 The local community can influence how businesses in their area behave through the local newspapers (e.g. by writing letters for or against things the business has done); or through protesting against a business s decisions such as the closure of a factory. Local government can influence business organisations through planning and other legislation for which local government are responsible. They can also provide help through the creation of suitable sites for businesses such as business parks. Question 1 (Source: 2014 SQA Specimen Section 1 Question 1g) Describe the interdependence of Sainsbury s stakeholders identified in the information provided. 2 Question 2 (Source: 2013 SQA Section 2 Question 5d) Describe the interests stakeholders have in an organisation. 4 Question 3 (Source: 2010 SQA Section 1 Question 7b) Describe the different interests 5 stakeholders may have in an organisation. 5 Question 4 (Source: 2009 SQA Section 1 Question 2b) Describe how 5 different stakeholders could influence the organisation. 5 Question 5 (Source: 2007 SQA Section 1 Question 2) The local council are carrying out a consultation exercise with stakeholders. Describe how 4 different stakeholders of the local council could influence the council s future plans. 4 Question 6 (Source: 2006 SQA Section 2 Question 3bii) Describe one interest each of the following stakeholders has in an organisation s information. Inland Revenue Employees Creditors 3 Stakeholders Page 8

9 Question 6 (Source: 2006 SQA Section 2 Question 4di) A large department store is finding it difficult to maintain profits. A hostile takeover has been proposed by one of its competitors. Shareholders have been offered the opportunity to sell their shares. Describe the ways in which shareholders influence organisations. 3 Stakeholders Page 9

10 Task 1 Match the type of stakeholder to each example of interest given. Choose from: Type of stakeholder A) Owner - private shareholders B) Non managerial staff C) Government D) Senior management staff E) Trade unions F) Customers G) Creditors H) Local community Examples of interest 1. VAT 2. environmental issues 3. financial return 4. minimum wage 5. direction 6. quality 7. liquidity 8. job security 9. customer care 10. jobs 11. value 12. taxation 13. working conditions 14. rates of pay 15. profit 16. involvement 17. credit score 18. targets 19. legislation 20. new contracts 21. performance Stakeholders Page 10

11 Task 2 (Source: Higher Business Management with Answers by Peter Hagan and Alistair B Wylie, Page 33, Question 11) (a) What is a stakeholder in business? (b) Give 3 examples of stakeholders in business. (c) What kind of influence may stakeholders be able to exert on business? (d) Complete the following table by inserting an example for each type of business. The first row has been completed as an example. TYPE OF ORGANISATION EXAMPLE OF STAKEHOLDER EXAMPLE OF INFLUENCE Sole Trader Owner Owner s motivation to succeed Partnership Private Limited Company Public Limited Company Voluntary Organisation Charity Public Corporation Government-funded Service Provider Local Government-funded Provider Activity 5 (a) Identify at least 3 examples of stakeholders in 2 different types of organisation. Identify and explain 3 reasons why their aims might conflict. Stakeholders Page 11

12 Task 3 Stakeholder interest and conflict 1. BT/Shell/Co-operative; comparisons of how they balance stakeholder interests and resolve conflict Reed Elsevier Case Study from Times 100 No 17. Conflict between stakeholders. Stakeholders Page 12

13 Task? Stakeholders Definition: Stakeholders are individuals or groups of people who have an interest in, and stand to be affected by, the success or failure of an organisation. Who are the stakeholders in a school? Stakeholder Interest Are the interests of these stakeholders the same? Stakeholders Page 13

14 Who might be the stakeholders in a limited company? Take each of the above stakeholders and say what their interests might be: Stakeholder Interest In what ways might the interests of these stakeholders conflict? Stakeholders Page 14

15 Task 5 Henley Garden Centre Henley Garden Centre is owned by Sandra Thompson who is retired and lives in Venice. She employs a manager who has an assistant to help run the business. The manager concentrates on finance and administration while his assistant is responsible for production, selling and staff. Thirty staff are employed in the large garden centre and they have just been offered a 4% wage increase. They had requested a 13% pay rise on the grounds that in the previous 2 years they had agreed to a pay freeze. The staff are very angry with this final offer and they have all agreed not to work at weekends. The management have always been unpopular with the employees because they feel that they are being exploited. For example, the manager and the assistant manager both drive company BMWs and take it in turns to take time off to play golf 3 times a week. However, since the owner lives abroad, is reasonably satisfied with the profit made by the company and is not entirely aware of the circumstances, the situation is unlikely to change. 1 Identify possible sources of conflict between the management and the employees. 2 How might the conflict between the management and employees affect the business? 3 Explain whether there might be a conflict in this case between the owner and management. 4 Which stakeholder would have the most to lose if the business were to collapse? Explain your answer. Stakeholders Page 15