Quazi Nafiul Islam

1 | O p p o r t u n i t y C o s t a n d S t a k e - H o l d e r s

•Researching demand for the business idea •Evaluating all ideas •Sorting out best ideas

Market reseasrch

•Finding out if theideas are compatable or if they will survuive in a market

Ideas •Identifying strengths and weaknesses of the ideas •Identifying main competitors

Chosen Ideas

•The cost of following the other ideas instead

Oppertunity cost

Topic 3: Lesson 5

Opportunity cost and stakeholders Learning objectives:

1. The term ‘Opportunity Cost’ 2. What affects which business idea is chosen 3. The term ‘Stakeholder’

1. Opportunity cost

A business is likely to have many business ideas. However, in most cases, it may lack the funds to go for all the options. Thus, the business has to choose. When a business has chosen an option, the next best one will be the opportunity cost.

The opportunity cost of a product or service is the benefit of the next best option foregone, when making a choice between a number of alternatives.

At all times, the business will try to minimize this. This is down by making the best decision. The things that need to be considered are:

• The chances of success o How risky is the idea?

• The financial burden o Many business Ideas don’t make it because they are too expensive

• The effect upon stakeholders o The extent to which stakeholders influence the business may determine the choice that

is made.

Now, the business will have to make this decision satisfying the wants off all its stake holders.

Quazi Nafiul Islam

2 | O p p o r t u n i t y C o s t a n d S t a k e - H o l d e r s

2. Stake holders

Stakeholders are individuals or groups who are affected by the business’ activity, and thus have an interest in its activities.

For example you are a stakeholder in your school, because the school’s policy will affect what you do and how you go about business in school.

Stakeholders differ from situation to situation. For example, the stakeholders of an Oil Refining company would be different from a Sport Shoe manufacturing companies. However, they have very much in common. Similarly, stakeholders will change with business size, for example, a small sole trader business will have different stakeholders than a Multi-national company. However, they too will have many things in common.

Hence, we can draw out some common stakeholders:

• Different Stake-holders will have different perspectives • And thus this causes a conflict of objectives

Quazi Nafiul Islam

3 | O p p o r t u n i t y C o s t a n d S t a k e - H o l d e r s

Figure 1: Thanks to Cadbury and Schweppes© for making this wonderful illustration.

These are Non-Governmental Organizations, and they include Environmental groups like Green Peace, Env. Groups are pressure groups

Quazi Nafiul Islam

4 | O p p o r t u n i t y C o s t a n d S t a k e - H o l d e r s

Stake-holder Perspective

Owners • Are the people who have invested into the

business • Company has share holders, and Sole-trader

and partnership has owners and partners • They will want to maximize profits

Directors and

Senior managers

• Two types of directors: o Executive: They handle to day-to-day

activities of the business; they are paid and employed by the business. They handle part of the business such as operations, marketing, and finance.

o Non-Executive: These are not full time members of the board and do not handle day-to-day activities; they are there to provide advice on certain topics. They can be either employed by the business or self-employed.

• They mainly want the business to perform well.

• If they perform poorly, they will be made redundant.

• But good performance may lead to pay rises, bonuses or even promotions.

Workers

• They are the ones involved in production, such as in a factory or actually providing the service.

• They will always want high pay, job security and job satisfaction.

• However, they also want the good of the company, if the business is performing poorly, they will need to slash jobs. This links back to job security.

• A successful business will provide opportunities for promotion.

Customers • Want a good product o Want value for money: A good price and a

good quality.

Suppliers

• Generally, will want maximum possible rate from business.

• But will also have to consider Business’ position as it wants to keep on trading with the business.

• May give low rates to have good relations with the business, or to become a long time partner.

Quazi Nafiul Islam

5 | O p p o r t u n i t y C o s t a n d S t a k e - H o l d e r s

Stake-holder Perspective

Local, National And

International Communities

• Influenced in a variety of ways • Economic Prosperity:

o Jobs o Technology into developing

nations • Some Local Communities may want housing,

like Rowntrees in New York. • Mc Donald’s is accused of ruining French

Cuisine, by introducing fast-foods. • Many companies are charitable and helped to

reduce poverty.

Environmental Groups:

The Environment

• More eco-friendly methods of production. • Less pollution, e.g. Noise, Visual etc.

Future

Generations

• More planning and funds for the future. • Less waste, e.g. making a nuclear power plant

today will mean the next generation will have to deal with its disposal.

• Less pollution: A clean environment for the people of tomorrow.

Conflict of Objectives

A conflict of objectives occurs when stakeholders have opposite objectives.

Conflict between Owners and Directors

• Owners, especially in large limited companies are shareholders. They want maximum turnover.

• However managers do want turnover to be high, but they also want growth, as this means greater chances of promotion.

• However, growth is an expensive process, and this will reduce profit.

• Referred to as ‘divorce of ownership and control’.

Quazi Nafiul Islam

6 | O p p o r t u n i t y C o s t a n d S t a k e - H o l d e r s

Workers vs. Stakeholder groups

• Workers want high wage, but this will reduce profit, which is one of the main objectives of the Shareholders.

• Better working conditions; mean that more has to be spent by the business to maintain work premises. This will increase costs, and reduce profits (Owners want high profits but workers want better and more pleasant working conditions). But, the company must motivate its workers well in order to get good quality work and thus a good quality product or service, and working conditions is a part of Maslow’s safety needs.

• Damaging too much profit may cause the company to fail. This is something that the workers will not want, as they will lose their jobs. The workers have to be careful about pushing their claims too far.

Customers vs. Stakeholders

• Customers will always want highest quality at the lowest prices; they want value for their money.

• But, producing a high quality product will mean more Research & Development for the business; this will increase cost and thus increase the price, which will likely lead to lower sales, thus lower profit, a key objective for the owners.

• Sometimes a better quality product may mean more sophisticated machinery required, this may mean the workers have to be trained, or even less workers required, leading to job cuts. Purchase of new and more sophisticated machinery may mean decrease in profit in the short term. Training will also be expensive for the business to afford. Thus, increasing the quality may be in the customer, but may lead to a conflict with workers and owners.

Supplier vs. Stakeholders

• Want to maximize profit; they will want to charge the business as much as possible. • But if this happens, then profits will decrease due to increase in costs, thus shareholders will

not be happy. • Charging more than other suppliers may cause the business to stop buying goods from the

supplier. Losing a customer will damage their sales and profit. • A supplier may even charge lower than the competition to have the business as a long time

customers by making good relations with it, this would be an interest as long term contracts would mean a more stable business option for the supplier and the business itself.

• Quality, delivery times and service may lead to conflict with other stakeholder groups.

The community and government vs. Stakeholders

• The community mainly wants jobs and economic prosperity from the business. • The shareholders want to make maximum profit.

Quazi Nafiul Islam

7 | O p p o r t u n i t y C o s t a n d S t a k e - H o l d e r s

• The community will want to have a good environment, and this environmentally friendly building. Less pollution such as noise and chemical pollution. But caring more for the business will mean that more expenses to building premises, increasing costs and consequently decreasing profits.

Environmental groups vs. Stakeholders

• Want more environmental regulations. • This increases day-to-day expenses for the business. • Decreases profit, thus conflicting with shareholders.

Stakeholder approach

• Paying more importance to other stakeholders than owners.

Advantages Disadvantages • Attractive employment policies will attract

higher quality of applicants. This may lead to the business becoming more efficient. A more motivated workforce should lead to increase profits

• Effective consumer care policies should lead to higher sales and thus more profit.

• Good co-operation with supplier should lead to the purchaser getting value for money; Will be easier to sort out late deliveries or

defective work with whom the business has good co-operations

• Giving something to the community such as charity or housing, will cause the business to acquire a better reputation.

• Being environmentally friendly will an overall decrease in costs, e.g. solar cells will produce free electricity, but have a very high initial cost. Being seen as environmentally friendly may increase sales and profits, due to good publicity.

• Less importance to profit will likely cause less return on capital employed. This may detract investors.

The practicality of the advantages is very little, if everyone could make more profit by taking being environmentally friendly, or charitable, then every company would take a shareholder approach, but in truth this is not the case.