V.K.M.LAXMAN 1

Stakeholders

Business objectives Vs stakeholder objectives

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Mind map

Stakeholder and conflicts

Business objectives

Stakeholder objectives

Objectives and conflicts

Balancing the objectives with

profit as an objective.

Meaning

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Meaning

Stake holders are individuals or groups which are likely to have interest in a particular organization.

They can be seen either external to the company or internal but some may be both.

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Stakeholder conceptTraditionally, large businesses

organizations have been run to further the interests of shareholders. This involves maximizing shareholders value, which usually also involves raising the share price. This is called the SHAREHOLDER CONCEPT and often means that the interests of other stakeholders are ignored.

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Stakeholders of a companyInternal

External Common

Owners and shareholders

Customers Staff and employees

Managers

Suppliers Share holders

Staff and employees

Community Local residents

Government

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Business objectives Profit Make a fortuneGlobal power EnvironmentBrand Recognition Long term survivalReputation and image Market shareShare price To increase add value

Social responsibilitiesSatisfying TurnoverEthical Issues Customer satisfactionEfficiency Brand loyaltyPersonal satisfaction Market power

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Stakeholder objectives

Internal stake- holders

Objectives External stake- holders

Objectives

Owners/share holders

Profitability, growth, dividends, stability, security, share value

Suppliers /creditors

Size, variation and security of orders, payment period, prices

Directors Growth, market share, profitability, security

Customers Price, quality, after sales service, product variety, credit terms

Managers Growth, cash flow, security, promotion prospects, job satisfaction, trade union involvement, holidays, salaries, status, responsibility

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Stakeholder objectives continueEmployees

Earnings, working conditions, job security, job satisfaction, trade union involvement, holidays, salaries, status, responsibility

Competitors Intensity and fairness of the competition

Society/community

Job creation, impact on other firms, impact on the environment, ethical standards, contribution to society and its artistic and cultural life, assistance to the disadvantaged, equal opportunities

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Stakeholder objectives continued

The government.

Contribution to tax receipts, job creation, economic growth and balance of payments, trading practices, impact on the environment, compliance with law.

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Objectives and Conflicts

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Employees and owners

1. Levels of pay: In most businesses, rates of pay are negotiated every year. Bargaining takes place between employers and owners or managers. The two sides may disagree on new wage levels. This might be, for example, because workers want more than the owners or managers are prepared to pay.

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Working conditions: Conflict may arise if, for example, the working environment is too cold or too hot or too must dust or too much noise for employers to do their jobs.

Changing practices: In recent years a number of new working practices have been introduced in business. Disputes may occur when employees are asked to perform new tasks or change the way they undertake existing tasks. Employees often feel that they are being asked to do more work when practices change. For example technology.

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Redundancy: when employees are faced with the threat of losing their jobs, quite naturally they react. Workers are often angry when their jobs are lost due to reorganization.

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Owners and managers In some businesses the management team may

become powerful and influential. When this happens they may pursue their own interests rather than those of the owner. This might involve paying themselves high salaries or organizing their time to suit their own needs, while achieving satisfactory levels of profit rather than high levels of profit. This would go against the interest of owners, who benefit more from higher profits. Such conflict may result in some owners selling their shares.

It is everyone’s interests to settle conflict as quickly as possible. Conflict can lead to lower levels of output and loss of profits for the owners. Managers and other employees may suffer from poor motivation, a lack of job security and loss of wages.

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Customers and businessPrice: Owners may wish to

maximize profit which might involve charging the highest possible price. However, consumers want to buy goods as cheaply as possible. If competition exists in the market consumers will generally benefit. However, if there is a lack of competition, consumers may not have a choice except to go without.

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Quality: Consumers may be dissatisfied with the quality of the products they have bought. If consumers return goods then business lose income, so disagreements often occur as to whether a firm should accept returned goods.

Delivery time: Customers are often keen to receive the goods which they have ordered as quickly as possible. A dispute would occur if, for example, a business cannot deliver a wedding dress promised for the day of a wedding. A firm which supplying break – fast to the employees, if unable to provide on time.

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Suppliers, managers and owners

‘New’ production methods have led to a closer relationship between suppliers and managers. However, conflict does still exist. Some suppliers, particularly small firms supplying larger business, have criticized their customers’ managers or owners for taking too long to pay for products. Late payment can cause severe hardship for smaller suppliers. For example Di and Donny supplying to TESCO.

Similarly late delivery by suppliers can cause problems for managers and owners of businesses which are customers. Late supply can delay production and may lead to lost orders and profit.

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Owners and community

Conflict can arise between owners and the community when the quality of life enjoyed by local residents is threatened by business activity. The most likely causes of conflict are business disturbing the local community or polluting the nearby environment. An example of such conflict was the opposition of residents in south Manchester to the construction of a new runway at Manchester air port. They argued that noise pollution resulting from extra traffic would be intolerable.

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Benefits of stakeholder concept

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Benefits If needs of employees are taken into account

they may be better motivated, more productive, more loyal, more flexible and less likely to leave. Companies that focus too much on shareholder needs might find it difficult to recruit high quality staff.

If business have a higher regard for the local community they might win their support. For example, if the local is consulted when expansion plans are announced, there may be less resistance to the construction of new buildings. Having regard of the local community is also likely to improve the image of the company.

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Looking after suppliers can generate significant benefits. For example, if suppliers are paid more promptly they may become more flexible.

If the needs of customers are satisfied more effectively there is likely to be an increase in business. For example, if firms deal with complaints in a friendly and supportive manner, customers are more likely to return and ‘spread the good word’.

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Profits Vs Other objectives

Balancing conflicting business objective of profit with other

business objectives

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Balancing the objectives with profit as an objective

Profit: many firms have profit maximization as an objective, but it influences other objectives also. it should be handled properly otherwise will affect adversely on other objectives of the company.

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Profit Vs sales maximization

Positive: Through profits sales can be increased, means firms can advertise in different ways, and can make qualitative goods, attractive packing. Furthermore firms may use high technology so output increases, and firm enable to invest when ever required since the profits are high. Therefore all these leads to create a good demand in the market and finally leads to sales maximization.

Negative: Too much profit orientation leads to higher prices. It is difficult for the customer to buy the products as a result it leads to low demand and ultimately sales decrease.

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Profit Vs Maximizing shareholders value1. Maximizing shareholders value:

a) positive: company will get more investors so financial problems will be solved. Company can produce and supply as per customer requirement.

b) Negative: shareholders only expect returns so company may ignore the objectives of other stakeholders. So employees may not be satisfied, customer due to high prices may not be satisfied etc.,

Therefore, business should maintain reasonable profits so that it should not affect negatively on the stakeholders. Because business has to satisfy all the stakeholders.

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Profits Vs Social responsibility1. More profits may maximize shareholders wealth

and business growth but pressure groups always fight against company to contribute for society development, eventually it leads to bad reputation. Therefore businesses should have concern about society. Businesses can use profits to develop society, for example controlling the pollution, infrastructure development, donations to charitable trusts, providing employment gives good reputation. Therefore, for businesses profits also important as well as society.

2. Due to earn more profits businesses charges high prices but customers may not be affordable. Therefore businesses set prices according to the customers.

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Profit Vs GrowthProfits are mainly useful for business growth. Growth may

provide employees motivation because of job security and good working environment.

The salaries for employees and returns for the shareholders increase. So more investors and reduce labor turnover

Qualitative goods and services to the customers so customer satisfaction as a result businesses may become market leaders.

Companies retained profits will increase if company makes more profits, this can be again utilized in the business for further development.

But too much profit concern leads to everyone dissatisfaction and leads to bad reputation of the businesses. Therefore businesses have to maintain reasonable profits.

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Profits Vs Ethics Profits should be made but

ethically. Means earning profits by fair trading practices. For example fair advertisements, fair wages and salaries to the employees, fair treatment to the employees, fair prices to the customers etc.,

Businesses should follow ethical code and try to earn profits.

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QUESTION

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Evaluate how profit maximization as an objectives influences the other objectives of the objectives of the company? ( 10 marks )

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Effect on stakeholders if a company becomes ‘PLC’ (question asked in 2009 January) (question number 9e) 12 marks.

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Marks break up

AO1 (level1) knowledge and understanding: 1 – 2

AO2 (level2) Application : 3 – 5

AO3 (level3) Analysis : 6 – 7

AO4 (level4) Evaluation : 8 – 12

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Answer plan Knowledge and understanding (level1): Up to 2

marks are available for simple responses such as defining what is meant by limited liability, stakeholder or plc.

Application (level2): Who are the stakeholders, what type of business it is (up to 3 marks)

Analysis (level3): In this case the candidate must identify and explain the consequences of being a plc to the business for example of ability to raise finance and the consequences for production, sales and/or revenue.

Evaluation (level4):Evaluation must be present, i.e. the candidate must present arguments for and against - in the context of given data – a business becoming a plc.

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Paragraph 1: Public limited company which has limited

liability under private sector. This is enlisted in the stock exchange and can issue shares to the public. It ends with the name plc., and has separate legal entity.

Stake holders are individuals or groups which are likely to have interest in a particular organization. They can be seen either external to the company or internal but some may be both. (1 – 2 marks)

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Paragraph 2: Reggae Reggae Sauce is a relatively small

business which has a very important stakeholder in Sainsbury, the buyer OR the Caribbean community of the UK are likely to be significant external stakeholders as consumers, OR applies stakeholders, e.g. suppliers of chillies/tomatoes (3 – 5)

NOTE: Here students have to understand what is the business who are the stakeholders of that particular business

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Paragraph 3: Reggae Reggae sauce being a plc, e.g. if RRS became

a plc then it might have greater access to funding through the sale of shares on the Stock Exchange which could provide finance for improving the production process by financing more technological machinery and a bottling plant which would speed up production and could lead to an increase in sales since supply would be enhanced.

If RRS was a plc then this might give it access to further funding to enable the business to expand sales or production overseas, possibly back in the Caribbean or in parts of the world where there is a significant Caribbean population who may wish to buy the sauce, e.g. the USA. This expansion of the market could lead to an increase in turnover for RRS (6 – 7)

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Shareholders: 1. Positive: opportunity to invest in

the business may be good dividends are possible if organization runs in profits.

2. Negative: if company incur losses dividends will be less, if company unable to produce and meet the demand return will be less for the shareholders.

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Customers1. Positive: Customers are benefited

with wide production range and supplies by the company because company can have finance to produce according to the demand.

2. Negative: due to the competition and resistance of the employees to accept the changing working practices may not provide goods and services what customer expects.

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Paragraph 4: Reggae Reggae sauce can gain economies of scale being a plc

and can provide low cost sauce to the customer. Further expansion also possible by the finance which is through issue of shares therefore new customers for the business. Moreover quality also improve as technology introduced in the business.

costs of Reggae Reggae Sauce being a plc, e.g. however, by becoming a plc RRS might find itself in a position where there would be a divorce between ownership and control, in this case the Levi Roots family might find itself the minority shareholder and so be subject to a majority shareholder decision like cutting staff during a recession, which the family would not have otherwise sanctioned. RRS could eventually be subject to a takeover bid, quite possibly by a supermarket buyer, which would therefore lead to Levi Roots losing ownership of his family business altogether.

 

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Conclusion However Reggae Reggae Sauce is a family run,

market orientated business which is essentially successful because it operates in a niche market providing a product which is wanted by a specific market segment (implicitly the Caribbean communities of the UK) then it is unlikely that the owner will want to expand production to the extent that he would require finance from the sale of shares to the public on the stock exchange.

It is therefore more likely that Levi Roots will do no more than grow either by seeking finance from lenders such as banks, or inviting other shareholders privately, by only going as far as expanding by becoming a Ltd company.

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