Chapter 2

Strategic Management of Stakeholder

Relationship
Chapter Outline

Stakeholders: Definition, Types and Examples

Stakeholders Issues and Interactions
Performance with Stakeholders
Developing Stakeholder Relationships
Implementing Stakeholder Perspective in Social Responsibility
Link Between Stakeholder Relationship and Social Responsibility
 Stakeholders: Definition, Types and Examples

A stakeholder is a party that has an interest in a company and can either affect or be
affected by the business. The primary stakeholders in a typical corporation are
its investors, employees, customers, and suppliers.
However, with the increasing attention on corporate social responsibility, the concept has
been extended to include communities, governments, and trade associations.
Types of stakeholders are internal and external. Internal stakeholders are people whose
interest in a company comes through a direct relationship, such as employment,
ownership, or investment. External stakeholders are those who do not directly work with
a company but are affected somehow by the actions and outcomes of the business.
Suppliers, creditors, and public groups are all considered external stakeholders.
 Stakeholders: Definition, Types and Examples

Different Categories of Stakeholders

• Internal or external: stakeholders that exist inside or outside the organization, such
as employees or customers.
• Primary or secondary: stakeholders that are directly or indirectly affected by the
organization's activities, such as owners or media.
• Direct or indirect: stakeholders that have a direct or indirect contact or
communication with the organization, such as suppliers or communities.
• Users, providers, influencers, governance: stakeholders that use, provide,
influence, or govern the organization's products or processes.
 Stakeholders: Definition, Types and Examples
(investopedia.com.)

Investors are internal stakeholders who are significantly impacted by the associated concern and
its performance. If, for example, a venture capital firm decides to invest $5 million in a
technology startup in return for 10% equity and significant influence, the firm becomes an
internal stakeholder of the startup.
External stakeholders, unlike internal stakeholders, do not have a direct relationship with the
company. Instead, an external stakeholder is normally a person or organization affected by the
operations of the business. When a company goes over the allowable limit of carbon emissions,
for example, the town in which the company is located is considered an external stakeholder
because it is affected by the increased pollution.

Conversely, external stakeholders may also sometimes have a direct effect on a company without
a clear link to it. The government, for example, is an external stakeholder. When the government
initiates policy changes on carbon emissions, the decision affects the business operations of any
entity with increased levels of carbon.
Why are stakeholders important?

Business’s operations rely on their ability to work together toward the business goals
External stakeholders affect the business indirectly.
For example, consumers can change buying habits, suppliers can change their
manufacturing and distribution processes, government, and government modify laws and
regulations.
Thus, managing relationships with internal and external stakeholders is key to a business
long-term success.
 Stakeholders Issues and Interactions

Relationship Between Social Responsibility and Profitability

Problems with Stakeholders:
1. Lack of Congruence – priorities of diverse stakeholders are completely
different.
2. Stakeholder’s Legitimacy - specific stakeholder's activities are not in
line with the organization’s values and norms. Their role in the
organization and their purpose is then put into question.
3. Organizational Legitimacy - the organization violates the norms and
values of its external stakeholders.
 Stakeholders Issues and Interactions
4. Generational Gap - This generational difference means that each
stakeholder’s approach and commitment to an organization's values
and mission will be different and can cause some conflicts.
Previous generations saw commitment to an organization as a long
term relationship, and took part in many activities out of a sense of
duty. Nowadays, younger generations seem to get involved in
short-term commitments and are much more motivated by what they
can gain from the experience.
Developing Relationships with Stakeholders

What is a stakeholder relationship?

Stakeholder relationships are professional connections businesses form with
people or groups who have an interest in their activities and decisions

Why is it important to build relationships with stakeholders?

1. they will be more likely to be supportive to the organization’s goals and objectives.
2. stakeholders can provide feedback and insights that can help the organization improve
its operations.
3. strong relationships with stakeholders can help build trust and credibility, which can
lead to more financial and other forms of support.
Developing Relationships with Stakeholders

How to build a positive relationship with stakeholders?

1. Communicate openly and frequently.
2. Show commitment to the stakeholder’s success as well.
3. Show appreciation to the relationship.
Stakeholders’ Perspective in CSR

The Stakeholders’ Theory (stated by Atkinson, Waterhouse and Wells (1997)

It asserts that maximizing wealth for shareholders fails to maximize
wealth for society and all its members and that only a concern with
managing all stakeholder interests helps in finding a solution to this problem.
It states that all stakeholders must be considered in the decision making
process of the organization for 3 reasons: namely, (a) It is the morally and
ethically correct way to behave; (b) Doing so actually also benefits the
shareholders and (c) It reflects what goes on in an organization.
It argues that stakeholder management, or corporate social responsibility, is
not an end in itself but is simply seen as a means for improving
economic performance.
Stakeholders’ Perspective in CSR

Stakeholder theory is a concept that emphasizes the interrelationship between a business

and its various stakeholders, including investors, customers, employees, suppliers, etc.
The stakeholder theory of the firm proposes that the nature of an organization’s
stakeholders, their values, their relative influence on decisions and the nature of the
situation are all relevant information for predicting organizational behavior and
outcomes.
The objectives of a corporation can only be achieved by protecting and balancing the
interests of these different groups of stakeholders.
The stakeholder theory approach to CSR
The interrelationship between stakeholder theory
and CSR (Freeman and Dmytriyev, 2017)
The interrelationship between Stakeholder
theory and CSR
CSR emphasizes the benefit to society at large whereas stakeholder theory works on
building relationships and value between a business and its various stakeholders.
Though there are certain differences between the two concepts, they can be aligned to
work for the betterment of the company and society.
How to do it?
Aaddress the issue of a lack of awareness of the benefits of CSR (Harrison, et al., 2019).
CSR aligned with stakeholder theory generates the maximum benefits in the form of societal
development as well as creating a motivated workforce, better company branding, larger
sales and profitability, satisfied customers, etc (Nikolova & Arsić, 2017). Thus, CSR is an
integral part of corporate responsibility which involves the participation of various
stakeholders for its successful implementation.
Case example of CSR and stakeholder theory:
McDonald’s CSR Report, 2018)
the company considers its employees as its key stakeholder and works on improving its interests
through career development programs, providing training and development, and good
compensation.
It works on improving customer satisfaction by providing them with affordable and healthy food
choices.
Its CSR initiatives include affordable products through standardization and having a robust supply
chain, boosting employment for the local workforce.
It addresses the interests of its shareholders by having stable business operations and increasing
profitability and revenues.
undertakes community development support and environmental programs for the betterment of the
larger community.
Source: Stakeholders Perspective on Corporate Social Responsibility (CSR) - MBA Knowledge Base
(mbaknol.com)