Importance of Stakeholders
Creditors Creditors are another form of stakeholder. These are banks, other financial institutions, or individ- uals that loan the company money. If the company does not repay its loans as agreed, it may find it difficult to continue getting new loans when it needs capital and could damage its credit rating, thus raising the interest rate on future loans. Creditors also include anyone to whom the company owes money, for example, a supplier that has sold goods to the company for which payment has not yet been made or employee wages that have not been paid.
Employees As they are the ones providing the good or service, it goes without saying that employees are also one of the firm’s most vital stakeholders. If the business fails, investors lose just their investment and banks just their loans, but employees lose their jobs and put their families in jeopardy. Com- panies vary greatly in how they treat their employees. At one end of the spectrum, employees are highly valued and sometimes are co-owners of the company. Ocean Spray Cranberries and, at one time, United Airlines include employees in the ownership structure. Companies invest in them, train them, and provide long-term benefits. At the other end of the continuum, employees are treated as commodities or objects, hired and let go at will, even being replaced by part-timers to “save” the cost of having real employees. In Mexican maquiladoras, duty-free zones along the U.S.-Mexico border are low-cost-labor-manufacturing plants owned by U.S. and Japanese compa- nies. For every employee hired, another 10–20 wait to take their place. The incentive to give them opportunity, career paths, and even stock in the company is zero. Likewise in China, some workers are forced to work in almost inhumane conditions around the clock until they burn out. This is not considered a problem because, again, many others are ready to take their place. Cultures differ on this, but valuing the employee stakeholder can have its own rewards, benefiting the company more in the long term than treating them like cattle.
Many companies believe, however, that they owe no duty to employees other than simply employ- ing them. With this attitude, employees are considered a “cost” and neither a resource nor stake- holder. Companies feel proud to outsource a lot of their operations for “cost-effective reasons,” laying off employees without a second thought. They also try to automate their processes, par- ticularly expanding the use of information technology (IT) and justify the cost-effectiveness of the changes by laying off workers. A company that valued employee stakeholders might be more likely to use IT to free up workers to do other valuable work for the company.
Customers Customers are another body with a stake in the company, but are they really stakeholders? In truth, every company makes promises to its customers, either explicit or implicit, that when they buy a product or service, it will perform as advertised, will not harm them, and will not break down in the first few days or months. Companies that consider customers as stakeholders want them to believe that any product it sells will keep or exceed its promises. Such companies have strong brand reputations. Other companies’ products break down often or harm buyers and
CHAPTER 1Section 1.9 Importance of Stakeholders
eventually cause customers to buy elsewhere; for such companies, customers are not stakehold- ers, but rather nothing more than a source of revenues.
Other Stakeholders Host communities, which are towns or cities where a company is based, are considered to have a stake in the company as well. While some companies feel the most they owe to a host community is to provide employment, other companies take a more active role in the community. Providing employment does indeed support many other businesses and services in the town, and many towns in turn exist because of a single large employer. Company towns, although at first owned by their only employer, sometimes became regular public cities and towns as they grew. Sometimes, a single corporation employs most of a town’s inhabitants, resulting in a physical and economic setting much like a company town. Usually, company towns are detached from neighbors and centered around a manufacturing setting such as lumber or steel mills or an automobile plant. Locals will typically work for the company or be related to those who do. When a company is unsuccessful or fails, the financial toll on the town can be disastrous (Green, 2010). Beyond pro- viding employment, a more active company might contribute works of art for public display and sponsor many community and educational activities. Is this corporate social responsibility or valu- ing a host community as a stakeholder? It doesn’t matter. What matters is that the environment in which employees live is valued as much as the employees themselves. Generally speaking, a happy employee is more inclined to be productive at work and loyal to the company.
But things turn ugly when a large corporation decides, for economic or competitive reasons, to close a factory in a small town where it is the largest or even its only employer. Clearly, cost sav- ings and profits dominate the decision. What happens to the employees that lose their job and the other myriad small businesses that depend on them are rarely factored into the decision. These companies clearly do not consider the host community a stakeholder.
Lastly, but important nonetheless, is the role of the environment as a stakeholder in a company. What duty do companies owe the environment? In the past, the answer to that question would be, None. For years, companies’ factories would belch forth smoke and soot or dump contami- nants into running streams and rivers just because they could. In Mexico, pollution from maquila- doras continues unabated, and exhaust from cars make Mexico City the most polluted city in the world (Energy Information Agency, n.d.). This is what economists call “externalizing the costs of doing business.”
In the past, some workers were forced to work in hazardous environments without adequate protection, breathing in dangerous fumes for hours and days on end, and contracting all man- ner of illnesses. If not for regulations that protect the general and workplace environments, such practices would continue. Regulations are another way of saying, “Treat the environment as a stakeholder”; the public interest and the future of our planet is worth protecting and trumps the private interests of one company. To comply with regulations, companies have to build air- treatment systems that release only pure air into the environment, dispose of toxic byproducts of production in approved ways instead of dumping them into the nearby river or sewer, and give employees protective masks to filter unhealthy fumes. These increase a company’s cost of doing
CHAPTER 1Summary
business and may even make it uncompetitive with foreign companies whose behavior is unregu- lated; but in this country, it’s the law.
Recently, in an effort to slow climate change, companies are being required to “reduce their car- bon footprint,” that is, to minimize or cease emission of greenhouse gases (carbon dioxide equiva- lent) into the atmosphere. Although there is no law as yet in the area of being eco-friendly, many companies are “going green” not only because they believe in not wasting or degrading precious resources but also because it has become a value embraced by their employees and even their customers. Thus, in many ways, the environment, thought of on many different levels, is becoming an important stakeholder.
Summary
Strategic management is a complex process that is fundamental to a company’s ongoing and future success. It includes both strategic formulation (planning) and implementation. Successful companies use feedback from their planning and operations to improve the decisions they make the next time around.
Strategic planning is the way of deciding what strategy the company should pursue in order to be more successful in the future. Some companies, especially small companies or those run by a founder or autocratic CEO, typically don’t do strategic planning. In a changing world, making deci- sions without good data, analysis, and the inputs of those who will have to implement the strategy is foolhardy. Strategic planning is a structured and proven process for choosing the best strategy for a company to follow and making good strategic decisions. Without competitors, a company wouldn’t need a strategy.
Competition is a capitalist society’s way for consumers to tell producers what they need and want to buy. A company and its competitors comprise an industry and serve markets comprised of groups of customers. Markets are often confused with industries yet are very different: the former buy products and services while the latter produce them.