Many different groups of people are interested in the activities of a business. These are called the stakeholders of the business. Each group of stakeholders may have its own objectives for the business. The purpose of a business organization is to meet the objectives of its stakeholders through the production of goods or the provision of services that are wanted by people in society. The success of business is measured by the extent to which it achieves these objectives.
Who are the stakeholders?
Stakeholders are individuals and groups involved with a business or with an interest in the activities of business. They include: consumers, employees, managers, owners, financiers, the community as a whole, the government.
Some stakeholders, such as employees and managers are internal (inside the business) while others, such as consumers and financiers (people and business that provide finance or loans for the business), are external (outside the business). Each group of stakeholders has its own objectives and exerts influence over the business in order to achieve these:
• Consumers – the main areas of interest for consumers are quality of product and value for money; they have influence over a business because they can take their custom elsewhere.
• Employees – the main areas of interest for employees are working conditions and pay; they have influence over a business because they can produce poor work, strike, or leave to find employment elsewhere.
• Managers – the main areas of interest for managers are the success of the business, power and payment for themselves; they have influence over a business because they are responsible for planning the activities of the business and for its day-to-day running.
• Owners – the main areas of interest for the owners of a business are the success of the business and the amount of profit the business makes: the higher the profit of a business, the more the owners receive; they have influence over the business because they have the final power to take decisions on the activities of the business.
• Financiers – the main areas of interest for those with a financial interest in a business are how secure is the money they have invested in or loaned to the business, and the return they are receiving; they have influence over the business because they can withdraw their financial support, causing the business to curtail its activities, and possibly even close down.
• The community as a whole – the main areas of interest for the community are social and environment matters such as pollution, noise and destruction of the environment; they have influence because they can organize pressure groups to lobby the business itself, other groups of stakeholders, and the government.
• The government – the main areas of interest for the government are the well-being of all sections of society, including employees, consumers, the community as a whole, and environmental issues; it has influence over the business because it can legislate on matters of concern, restricting the activities of business or compelling them to behave in certain ways. The government also has an interest in the success of business in the country, and may support business through grants and subsidies, by promoting export abroad and by restricting imports.
Stakeholders can increase their power by forming alliances. For example, suppose a textile company disposes of its waste in a local river. This pollutes the river and kills fish, but is an effective and cheap way to get rid of the waste. The community objects of the damage to the environment and wants the textile company to stop the pollution. Since the final customers of the cloth produced by the textile company are members of the community, the company’s own customers, such as clothing and fabric manufacturers, are concerned that their own business might suffer if they are seen as supporting a business whose activities damage the environment. They therefore threaten to take away their custom. The owners of the textile company are afraid that the company will lose customers and support the other stakeholders in changing the company’s policies on the disposal of waste.
Sometimes the objectives of different stakeholder group conflict. For example, traditional farming method are increasingly being changed is response to new technology. Machinery can now enable one person to do the work that was previously done by several. This has reduced the cost of farming, leading to lower prices for customers while maintaining the farmer’s profits. Obviously, this benefits both the farmers and their customers. However, it conflicts with the interests of farm workers, who may lose their jobs.
The widespread use of cash dispensers had led to a reduction in employment in banking resulting in reduced personnel cost and increased profits for the bank. This is to advantage of the bank’s shareholders who see their dividends increasing. However, is conflict with the interest of bank employees who may lose their jobs.
Where are the objectives of different stakeholder groups conflict, a compromise must be reached.
The purpose or objectives of a business largely depend on whether the business is a private enterprise established to make a profit for its owners, a non-profit-making organization such as a charity or voluntary organization, or a public enterprise set up to provide a service to the community. In some circumstances the objectives of a business may conflict or change over time.
Making a profit
One of the main objectives of private enterprise (business owned by private individuals) is to make a profit. All business activity costs money, and business must pay their costs out of the income they receive from selling their goods and services. The profit a business makes is the amount by which its income exceeds its costs. Part of the profit of a business must be paid to the government in business or corporation tax. The remaining profit may be:
• Kept by the owners of the business as a return on the money they have invested in the business
• Distributed among the employees of the business, perhaps as a bonus in recognition of their efforts
• Retained within the business to pay for new equipment, fund expansion, or just to meet future emergencies
• Used to pay back loansIncrease sales revenue
The sales revenue of a business is the amount it receives from selling its goods and services. As we have seen, the excess of sales revenue over costs is profit. By increasing sales revenue without a corresponding increase in costs, a business can generate a higher profit.
The market for a product consists of the total value of sales of that product. Market can be regional, national or international in scope. Obviously, to be successful, a business must gain a share of the market in which it operates. The larger the share of the market that a business has the better, since a larger share of the market means more sales and greater profits. A prime objective of many businesses is therefore to gain and enlarge their market share.
Growth
As businesses grow they are able to enjoy economies of scale. This means that they able to produce their goods or services for a lower average cost, increasing sales, leading to increased production, taking on more employees, and perhaps even opening new factories or sales outlets, or by taking over or merging with another business, so that the combined business produces more goods and sell them at a more competitive price to more customers than either of the original businesses.
Small businesses are often set up in order to provide employment for their owners. This may then be a main objective for many small businesses.
In larger businesses the owners may not be employed in the business. No business can survive without employees to produce the goods or services, and to run the business, however. All businesses, whatever their size or product, must provide employment.
Public service organizations provide services, such as education, health and national security, which are considered essential to the welfare of society. Some public services, such as museums, may not be provided if people had to buy the service individually. Other public services, such as national defence, must be provided to everybody in a society, or not at all – it is impossible to provide an army to defend some people and not others. The government usually takes over the provision of public services, which are paid for out of tax revenues.
Non-profit-making organizations include charities and voluntary organization. They may be national, such as Voluntary Action Network India, or international in scope, such as the Red Cross. Charities and voluntary organizations are set up to fulfill a perceived social need or to provide help to a specific section of the community.
Funds are raised through donations from the general public, other business organization and governments. Any surplus, after the running costs of the organization have been deducted, is used to support the charity’s cause or reason for existence. Charities and voluntary organizations do not make a profit.
Sometimes the different objectives of a business may conflict. For example, a major concern is conservation of the environment. Most businesses share this concern and try to behave in an environmentally friendly way. A cement factory may therefore decide to burn a fuel that does not pollute the atmosphere rather than a chemical fuel that does cause pollution, even though the chemical fuel is cheaper and more efficient. While this helps the cement factory to achieve its objective of being environmentally friendly, however, the additional cost of the fuel, and the poorer performance of the factory hinders the factory from achieving its objective of maximizing profit. The objectives conflict and the factory must make a business decision about the action it should take on burning fuel.
• Stakeholders are people and groups who are interested in the activities of businesses.
• Stakeholders try to influence the behavior of businesses in order to achieve their own objectives.
• Businesses have objectives they are seeking to achieve.• The objectives of a business may change and conflict over time.
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