Internal and External Stakeholders (Edexcel A-Level Business): Revision Notes
Internal and External Stakeholders
Understanding stakeholders
A stakeholder is any person, group or organisation that can influence or be influenced by a business's actions, decisions and policies. Stakeholders exist both inside and outside the business, and each has different interests depending on their relationship with the organisation.
Stakeholders can be classified into two main categories: internal stakeholders (those working within the business) and external stakeholders (those outside the business who are affected by its activities). Understanding these different groups is essential for effective business decision-making, as their interests may sometimes align but can also conflict with one another.
Stakeholder interests may align in some situations but can also directly conflict with one another. Successful businesses must carefully navigate these competing interests when making strategic decisions.
Internal stakeholders
Internal stakeholders are individuals or groups who work within the business and have a direct interest in its performance and survival. Their livelihoods and careers are typically closely linked to the business's success.
Business owners
Business owners hold a financial stake in the business as its legal proprietors. Their primary interest centres on financial returns and capital growth.
Owners benefit when the business performs well through:
- A share of profits generated
- Increased business valuation over time
- Return on their initial investment
Owners face significant risks alongside their potential rewards. If the business fails, they may lose their entire investment. This risk-return relationship is fundamental to business ownership.
In larger companies, particularly public limited companies (plcs), ownership becomes more complex:
- Most shares are held by external shareholders (financial institutions like pension funds, investment banks and insurance companies)
- Some senior managers and board members own shares as part of their remuneration packages
- Employees may participate in share ownership schemes (e.g. BT's 'saveshare' scheme where employees contribute from their salary to purchase shares at a discount)
When employees own shares in their employer, they become part-owners, creating a dual stakeholder role as both employee and owner.
Exam tip: Be prepared to distinguish between internal owners (owner-managers in small businesses) and external shareholders (investors in large plcs) as their interests and influence differ significantly.
Employees
Employees work for the business and depend on it for their income. For most workers, their salary represents their sole source of earnings, making job security a critical concern.
Employee interests typically include:
- Fair wages and competitive salaries
- Job security and stable employment
- Safe and pleasant working conditions
- Opportunities for career development
- Reasonable working hours
Some employees are represented by trade unions, which act as collective representatives to negotiate on their behalf. When this occurs, trade unions themselves become stakeholders in the business.
Conflicting Interests:
Employee interests frequently conflict with those of owners and managers, particularly regarding:
- Wage levels: employees want higher pay; owners want to control costs
- Working conditions: employees want improvements; owners consider cost implications
- Job security: employees want protection; owners need flexibility
Managers and directors
In small businesses, managerial functions (organising, planning, decision-making and control) are handled by the entrepreneur. However, larger businesses require professional management structures.
The board of directors makes key strategic decisions about company policy and long-term direction. They are accountable to shareholders and must act in the company's best interests.
Managers implement the strategies and policies determined by the board. Large businesses employ specialist managers for different functional areas:
- Marketing managers
- Production managers
- Finance managers
- Human resources managers
Managerial responsibilities include:
- Demonstrating leadership within their departments
- Making operational decisions
- Resolving disputes and conflicts
- Motivating and managing subordinates
- Controlling resources (finance, equipment, time, personnel)
Accountability is a crucial concept in management. Managers are responsible not only for their own actions but also for those of their subordinates. They answer to senior managers in the hierarchy, while the board of directors is ultimately accountable to shareholders.
External stakeholders
External stakeholders are individuals, groups or organisations outside the business who nonetheless have an interest in its activities and performance. These stakeholders can significantly influence business decisions.
Shareholders
In large companies, most shareholders are not involved in day-to-day operations. They are investors seeking financial returns rather than operational involvement.
External shareholders (often institutional investors) have specific interests:
- Receiving dividends (share of profits)
- Capital growth (increasing share price)
- Return on investment
Shareholders possess voting rights at the company's Annual General Meeting (AGM), where they can:
- Re-elect or dismiss directors
- Vote on major company decisions
- Approve company accounts
However, many external shareholders, particularly institutional investors, do not actively exercise these voting rights. If dissatisfied with company performance or returns, they typically sell their shares rather than attempt to influence management.
Exam tip: Distinguish between shareholders (external investors) and owner-managers. Shareholders in plcs are typically passive investors, while owner-managers actively run their businesses.
Customers
Customers purchase the goods and services that businesses produce. This creates a relationship of mutual dependence.
Businesses depend on customers because:
- Purchases generate revenue
- Revenue creates profit necessary for survival
- Customer loyalty builds sustainable income streams
Customers depend on businesses because:
- Businesses provide products and services they need and want
- Businesses create choice in the marketplace
Customers can be classified as:
- Consumers: individuals and families who use (consume) products for personal use
- Business customers: organisations purchasing products for commercial purposes (e.g. JCB selling construction machinery to building companies)
Customer interests include:
- Quality products and services
- Competitive pricing
- Good customer service
- Product safety and reliability
Creditors
Creditors lend money to businesses and have a financial interest in their success. Creditors may include:
- Banks providing loans and overdraft facilities
- Family members offering personal loans
- Private investors such as venture capitalists
Creditor interests focus on:
- Receiving regular interest payments
- Repayment of principal at the end of the loan term
- Clear communication about business performance
- Confidence in the business's ability to meet financial obligations
Businesses depend on creditors for:
- Working capital to fund operations
- Investment capital for expansion
- Financial flexibility during difficult periods
Suppliers
Suppliers provide the resources businesses need to operate, including:
- Raw materials
- Components for manufacturing
- Commercial services
- Utilities (electricity, water, gas)
The relationship between businesses and suppliers is characterised by mutual dependence:
Businesses need suppliers for:
- Good quality resources at reasonable prices
- Prompt delivery to maintain production schedules
- Trade credit (buy now, pay later arrangements)
- Flexibility to meet changing demands
Suppliers need businesses for:
- Regular orders providing stable income
- Prompt payment to maintain cash flow
- Long-term relationships for business planning
Maintaining positive supplier relationships is essential for business success. Poor relations can lead to supply disruptions, quality issues or unfavourable terms.
The local community
Most businesses impact their local community, and local residents have a legitimate interest in business activities.
Positive impacts on the local community include:
- Employment creation for local residents
- Increased prosperity when business performs well
- Higher wages and more overtime opportunities
- Multiplier effects (extra spending benefits local shops, restaurants and entertainment venues)
- Support for local infrastructure and services
Negative impacts can include:
- Noise pollution from operations
- Environmental damage
- Traffic congestion
- Working at unsociable hours (e.g. night shifts)
- Factory closures causing local unemployment
Real-World Impact: UK Coal Mine Closures
The closure of coal mines in the UK during the 1980s demonstrates the devastating impact business closures can have on communities. Mining communities experienced severe unemployment and economic decline when their primary employer disappeared.
This example illustrates how businesses can become the economic cornerstone of entire communities, and their closure can have far-reaching consequences beyond immediate job losses.
The government
The government has an interest in all businesses operating within its jurisdiction.
Generally, governments favour business success because:
- Businesses provide employment, reducing unemployment costs
- Successful businesses generate wealth for the economy
- Businesses pay corporation tax
- Employees pay income tax and National Insurance
- Tax revenues fund public services (NHS, schools, benefits)
However, governments also regulate businesses to:
- Protect consumers from exploitation
- Ensure fair competition
- Safeguard employee rights
- Prevent environmental damage
- Maintain health and safety standards
When businesses fail, governments face:
- Lost tax revenue
- Increased benefit payments for unemployed workers
- Economic decline in affected areas
The Government's Dual Role:
Consider the government's dual role as both supporter of business (through favourable policies) and regulator (through legislation). This creates potential tension between economic growth and social protection.
The environment
Business activity significantly impacts the environment, making environmental protection an important stakeholder consideration.
Environmental damage from business can include:
- Pollution of air, water and soil
- Destruction of wildlife habitats
- Climate change from carbon emissions
- Depletion of natural resources
Environmental stakeholders include:
- Individual citizens concerned about sustainability
- Environmental pressure groups (Friends of the Earth, Greenpeace)
- Wildlife conservation organisations
- Future generations affected by current decisions
Environmental groups have become increasingly influential in business decision-making as public awareness of environmental issues grows. Businesses face pressure to:
- Reduce carbon footprints
- Adopt sustainable practices
- Use renewable resources
- Minimize waste and pollution
- Report on environmental impact
Remember!
Key Points to Remember:
- Stakeholders are individuals, groups or organisations that can affect or be affected by a business's decisions and actions
- Internal stakeholders (owners, employees, managers) work within the business and have direct interests in its success
- External stakeholders (shareholders, customers, creditors, suppliers, local community, government, environment) exist outside the business but are affected by its activities
- Different stakeholder groups have different objectives, which may conflict with one another
- Successful businesses must balance competing stakeholder interests when making strategic decisions
Key Terms:
- Stakeholder: person, group or organisation affected by business actions
- Internal stakeholders: groups inside the business (owners, employees, managers)
- External stakeholders: groups outside the business with an interest in its activities
- Accountability: responsibility for actions and decisions
- Trade unions: organisations representing employee interests
- AGM: Annual General Meeting where shareholders vote on company matters
- Mutual dependence: when two parties rely on each other (e.g. businesses and suppliers)