One of the great things about returning to the classroom is that if what I teach to my students is timely and relevant, it should also be valuable to readers of this column. So, periodically, I will take you “inside my classroom” and share with you what I am discussing with my students.
As I introduced my MBA students to strategic management, one of the important concepts we addressed was to be sure to consider the various stakeholders of your business when making strategic decisions and understanding that some of these stakeholders have conflicting interests. Therefore, as businesses weigh these decisions, they must consider the inevitable tradeoffs they must make, knowing that a given decision will please some of their stakeholders and potentially upset others. In today’s column, I will remind you who your stakeholders are and then look at some examples of tradeoffs that businesses have had to consider when making strategic decisions.
First, we need to consider what a stakeholder is. For a business, a stakeholder is a party that has a vested interest in a company and/or can either affect or be affected by the business. While stakeholders can be members of the organization they have a stake in, they can also have no official affiliation. Stakeholders can have a direct or indirect influence on the company and their support, or lack thereof, can affect the company’s success. That is why it is so important to consider the impact on our stakeholders when making decisions. With that in mind, let us identify who a business’ stakeholders are and categorize them as either internal or external stakeholders.
Internal Stakeholders are within the organization. Therefore, decisions and activities within the firm directly impact them. They include employees, managers, owners, board members, and investors.
External Stakeholders, unlike internal stakeholders, are outside of the organization and are affected by the business. They include customers, suppliers, creditors, labor unions, communities, and governments.
As you can imagine, there are some issues in which most stakeholders agree most of the time, while there are instances in which there is significant disagreement among some of the stakeholders. Let us first look at some general situations where we might expect agreement among some stakeholders and others in which some stakeholders would be at odds. Then, we will look at some recent examples in the auto industry which highlight potential stakeholder conflicts.
For the most part, the internal stakeholders are all on the same page in terms of supporting the company’s strategies and activities that will improve the financial performance of the firm. Certainly, managers, owners, board members, and investors tend to make financial performance their number one objective. However, with employees, it is not as clear-cut. If employees are rewarded based on firm financial performance, then they are onboard, but if their pay, benefits, and/or culture are negatively impacted by aiming for higher profitability, they will not. So, one of the inevitable stakeholder conflicts can arise between the employees and the other internal stakeholders.
Due to improved tax revenues, communities and governments are external stakeholders who also have a clear interest in a firm’s financial success. However, many of the stakeholder tradeoffs are driven by external constituencies. Customers want appropriate value and therefore, often look for lower prices and higher quality than the firm may be able to deliver.
Customers, along with communities and governments, might also be looking for companies to be more sensitive to environmental and social issues. In a recent Aug. 27 edition of “Mondays with Rick,” Gary Kauffman and I explored how brands like Bud Light and Target were impacted by their decisions related to social issues. It is important to realize that all customers do not think alike and understanding your target market is important.
One industry that is presently dealing with a number of stakeholder tradeoffs is the auto industry, and such tradeoffs are highlighted in two important issues. First, is the issue of electric vehicles (EVs) and second is the impending potential strike by the United Auto Workers (UAW) against the three major domestic automobile manufacturers.
Adoption of EVs is happening, but there is a strategic decision for most automobile manufacturers on how much of their product mix should consist of EVs versus traditional internal combustion engine vehicles. While stakeholders such as the federal government and some communities are not only promoting EVs, but also putting legislation in place to limit traditional fossil fuels, customers beyond the early adopters of EVs are harder to find. While some customers might be in favor of EVs from an environmental perspective, they are often unwilling to pay the higher prices for EVs. This limited demand for EVs is causing most internal stakeholders to favor slowing the transition to EVs. So, while the level of EV production is an important strategic decision for most automobile manufacturers, there are clearly tradeoffs among stakeholder satisfaction in making this decision.
Similarly, stakeholder tradeoffs will need to be made as new contracts are negotiated with the UAW. While many of the internal stakeholders want to keep labor costs down in order to retain solid profitability, they also understand the ramifications of a strike and/or lost employees. An interesting element of this issue is how Ford is addressing two of its stakeholders, one internal and one external, who are closely tied together. Ford is negotiating its contract with the UAW, the union, which is an external stakeholder, who is negotiating on behalf of Ford’s employees, who are internal stakeholders. However, because Ford feels the UAW is not presenting their offer appropriately, Ford is also interacting with their employees directly to show them why they think their offer is a fair one. In this case, Ford is dealing with both stakeholders, when traditionally they would only be dealing with the union.
The example of the auto industry is both timely and relevant, but it is certainly not unique. All companies and industries need to understand what their stakeholders want and must attempt to balance those desires in a way that is best for the company. I hope you are all paying attention to your various stakeholders and addressing them appropriately!