Definition And Functions Of Internal And External Stakeholders

Stakeholders can be defined as a person or group that are affected and/or affect an organization or business. According to R. Edward Freeman, the (grand) father of stakeholder theory, a stakeholder is “any group or individual who can affect or is affected by the achievement of the organization’s objectives.” Freeman, (2010) Stakeholder theory and/or stakeholder management have, for some time, been prominent issues in the social sciences, mostly but not exclusively within the business management literature. Attention mostly goes to the strategic significance attributed to ethical principles like trust and cooperativeness as sources of sustainable competitive advantages, (Jones 1995). Within the management literature, stakeholder theory has increased in popularity partly due to the theory explaining and predicting how an organization functions with regards to the relationships and influences existing in its surrounding environments, (Rowley 1997). This also attributed to its descriptive accuracy, instrumental power, and normative validity (Donaldson and Preston 1995). Stakeholders are either internal or external. In this essay, external stakeholders, their types, importance and issues is discussed.

Stakeholder theory has been simply and clearly articulated by Jones and Wicks, (1999); Businesses have relationships with different inter-connected groups called stakeholders that both affect and are affected by its decisions. This theory focuses on the nature of these relationships with respect to processes and their outcomes both for the business and the stakeholders.

The stakeholder theory typically consists of three relatively distinct approaches. These are ethical, descriptive and instrumental approaches. Descriptive approaches explain that the nature of the firm’s stakeholders, their influence on decisions and values are important considerations where anticipating organizational behavior is concerned. Brenner & Cochran, (1991). Instrumental perspectives elaborate the advantages gained by the direct involvement of organizations and external stakeholders based on mutual trust and cooperation, Jones & Wicks (1999). Ethical approach aims at explaining what types of moral obligations are placed on leadership structures especially when it comes to the relative importance of obligations to shareholders and other stakeholder groups, Boatright (1994). From this logic, scholars gather that business need to take stakeholders’ interests as having intrinsic value to the business.

External Stakeholders then, are defined as individuals or groups outside a business or project that still affect and get affected by the said business or project. These kinds of stakeholders have a lot of influence on the long term success of the business or project, because they will often be the end users/customers. Boundless (2015), define external stakeholders as individuals, groups, and entities from outside that are affected by the consequences and outcomes of an organization's decisions. Reed Elsevier (2013), give an even clearer and simpler definition that explains that external stakeholders are those individuals or groups outside a business.

There are quite a number of external stakeholders that businesses consider when making decisions and carrying out operations. These are the government, community, customers, creditors, suppliers and society. Their roles are explained as follows, respectively.

The government collects taxes from businesses/companies. Because of this, it can be said that they have quite a big role in the growing of the business. A government is thus regarded as a primary stakeholder, due to the profit motive involved. The government’s services include regulatory oversight among businesses, seeing to it that ethical norms, accounting practices and legal procedures are correctly done by companies. Government benefits from the tax it secures from the firm itself, its employs and its general expenditure in terms of sales and purchases of logistics of the firm. The government also benefits from the overall Gross Domestic Product (GDP) the firms contribute.

Firms are a great asset to the community since they facilitate local access to rare goods and services, tax money, jobs, as well as community development programs such as building of clinics and assisting the less privileged in the community. Businesses can nonetheless have a negative effect on the community. An increase in pollution and traffic may be seen and undermining of smaller businesses may also be experienced as well as interfering with standard prices of real estate. Businesses therefore need to consider the needs of the community, making sure that negative repercussions are minimized significantly while increasing positive interaction with the community. Firms can instead engage the community giving the locals job opportunities and funding schools and local development projects. Upcoming firms may also give back to the community to increase popularity among the locals and have a chance to showcase and advertise themselves more while improving the community. A socially responsible business looks to develop more environmentally friendly practices so as to pollute the community or the broader world less. Local NGOs push companies towards such practices, representing the community and its environment, ultimately representing them as stakeholders. When a firm's activities directly affect the community and its environment, such as ecotourism ventures, the firms hold an ethical responsibility to involve community groups and organizations in its planning activities.

Goods and services are mainly provided meet the needs of consumers. The needs of the firm’s main customer base need to be understood in order to optimize operations to best meet those needs. This is thus an important part of managing a company. Gathering information from customers using statistical data from social media, emails, storefronts, user testing groups, as well as delivering services and goods is a significant part of maintaining a stable and strong community and what they need from the firm or business. These days, big data plays an important role in finding out what the needs of customers are. Understanding trends, habits, and trajectories in user data, helps companies foresee the needs of customers and adjust their products and services.

Firms supply goods and services to customers. The customers then support the firms by buying or paying for these goods and services. The sales further show the company what they ought to produce more and offer more to the customers. Thus the direction of small businesses is determined by the demand of the customers at a given time period. Customers can air their views, satisfaction and dissatisfaction with the firm through the customer service department, thus prompting changes in products and services. Firms establish what the customers need or what by constant interaction and getting feedback from its customers and evolving accordingly.

Creditors may lend out money to the firm with or without eyeing the firm’s assets. They are usually paid using proceeds from these assets or using the same assets should things not go according to plan. Creditors are prioritized over stokeholders in the event of a shutdown. Creditors may be in form of suppliers, bond holders, and banks.

Suppliers and other strategic alliances co-dependent. That is, where the success of one will impact the success of another. As a result, suppliers are closely related to organizations as key external stakeholders. Timely payments, shipments, communication, and operational processes are key to maintaining a strong relationship with this stakeholder group.

Raw materials that a company needs to produce its goods are provided by suppliers. Suppliers may also provide finished goods/products. A particular supplier might hold more importance than others if they produce a rare and good quality product. Small firms with particular areas of business may find themselves dependent on a particular supplier for specific products. Risk to the company and other stakeholders is inevitable in this kind of setup because if the business can't secure supplies from this source, it may need to be too flexible as the supplier may dictate the prices of the said material that their business is hinged on.

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Due to digital and global economy, a business may have a significant impact on the world. For example, firms like Airbnb and Uber have changed their industry, creating dynamically varying economies with a larger variety of participants than ever. Walmart has significantly affected the viability of small businesses in many parts. Food that is from fast foods have a huge negative impact on global health. Developing nations have their ecosystems entirely transformed by manufacturing companies. Large amounts of data is being collected by Social networks. How all these are managed determines whether these are good or bad developments for the society. It is therefore imperative to find ways of managing all these things responsibly.

The financial livelihood of employees is what is at stake even though they may or may not have a profitability stake or financial risk stake. Should the company shutdown, the employee is out of a job and hence their livelihood is compromised. Thus, the success of the company is of high interest to the employee. An ambitious employee looking to advance and grow in the company holds an even higher interest in the success of the company. Firms may offer the employee stockholding plans and profit sharing, thereby adding to the employees' interest in working hard and improving the company’s standings. Employees are thus considered internal stakeholders.

External stakeholders do not possess a direct tie to the company. They are neither employees and nor have any direct financial interest in the profit or loss of the company. Instead, they hold an interest in how the company affects the community or a part of the community. External stakeholders may include the government and its entities such as city councils, local schools, other businesses and residents in the area where the company conducts business. The external stakeholder maintains an interest in the success, failure or direction of a company because it directly impacts his own interests. A manufacturing plant company in a city will have external stakeholders who want to see the plant stay in the community instead of it moving to another, because the plant may have a financial impact on other businesses, suppliers and the overall financial state of the town. The mayor of the city for example, is an external stakeholder seeking to maintain a positive relationship and create a conducive environment such as waiving off taxes for the plant to stay. External stakeholders are trying to protect their personal, financial and business interests. Not every external stakeholder has the same type of stake or interest in any one particular business. The school in the example, concerned about dispensaries has a moral rather than financial concern. When lobbied, the city lawmakers and representatives, the politicians have a stake in both parties involved. They need to meet their voters' needs and demands while ensuring a business community for success. So the local representatives are external stakeholders in the company who may have conflicting interests based on their own stakeholders.

Local business development that stimulates a city economy with jobs, revenues and bigger industry is another external stakeholder need. Smaller businesses in competition with a company may seek fairness in trading and prices as the external stakeholders. This need can be seen when large supermarkets are built at shopping malls and small businesses start to close because they may not be able to compete with the prices of the supermarket.

Voicing opinions on the direction a firm or business is taking is one of the most fundamental function of external stakeholders. The external stakeholders’ own personal issues in relation to the company helps determine whether the firm is doing something right or wrong. This opinion of external stakeholders serves as an advisory role for companies. However, the external stakeholder has no control over whether the business follows the advice.

That said, a business direction or action that goes against the external stakeholders usually leaves the company at a loss as it can potentially create a number of issues for the company. For example, If the local small businesses get together to oppose a new big-box store getting a permit to build a large center, there could be issues where city planning ends up opposing and preventing the opening. A real estate developer could run into permit problems if the residents don't want the company to build on a bird sanctuary or don't want high rise buildings next to their residential homes. Despite them not having direct control, external stakeholders’ indirect control has great impact on major business development decisions.

It is therefore imperative that business leaders understand the implications of their firms in the community. External stakeholders should be viewed as partners rather than adversaries. A growing business that needs support from key players needs to know how to manage external stakeholder input and expectations.

Preparing your business ahead of external stakeholders ahead of time for any issues that might arise is the best way to manage them. Plan growth strategies and consult with external stakeholders while in the planning process to get input and develop strategies where everyone wins. While this doesn't prevent every adverse action coming from external stakeholders, it greatly mitigates aggressive adverse actions.

External stakeholders enjoy participating being part of the planning and decision making process; it gives the illusion of some level of control. You want the external stakeholders on your side whenever possible. Business is just easier that way. This is why a CEO's role is critical while the operations officer is managing day-to-day operations. The CEO must get buy-in among stakeholders, internal and external, to move the company strategically toward its next set of goals. Without external stakeholder buy-in, companies often face a long road to growth.

Usually, senior level management is what people think about when dealing with external stakeholders. The chief executive officer often meets with city officials, other business leaders and key external stakeholder leaders. However, a company can do a lot with public relations with external stakeholders by having a positive company image. When the employees are excited to go to work every day, people notice. It is a social proof PR campaign that holds a lot of weight with external stakeholders. The employees are mostly people who live within the community, send their kids to schools within the community, vote and pay property taxes. They are therefore, influencers of many key external stakeholders. If they are happy and successful, the community expands.

Another way a large corporation can build positive relationships with external stakeholders is to run community campaigns in which employees are given time to volunteer for local organizations supported by the company. This gets people out in the community building positive relationships from the ground up. A chief executive officer is better served walking into meeting with an external stakeholder who is already excited about all the great things the firm has done so far in the community.

In conclusion, every firm or business has internal and external stakeholders. Internal stakeholders are easier to define because they hold a financial angle in the company. External stakeholders are not so easily defined. They are not directly involved in the operations or decisions of the company. While external stakeholders have no direct financial stake in the company, they tend to have an interest in the direction, success and failure of a company as they are affected in one way or another as articulated in the essay. They are therefore critical to the overall success of businesses growing in any community. Internal stakeholders include owners, investors, stockholders and employees who have a direct or indirect financial risk tied to the company's success.