What is stakeholder theory and what is stakeholder analysis? There are theories applicable in all areas of life, and business is no different. This article explains stakeholder theory and stakeholder analysis, how they relate to one another and how they apply to the tourism industry.
What is stakeholder theory?
Stakeholder theory is an organisational management and business ethics theory. It was first proposed by R. Edward Freeman, an American philosopher and professor of business administration. The theory stands in contrast to that of economist Milton Friedman, who proposed shareholder theory – the idea that a company’s main responsibility is making money for its shareholders.
Stakeholder theory, which Freeman set out in his 1984 book Strategic Management: A Stakeholder Approach, is different. It accounts for everyone impacted by a business: its employees, the suppliers, customers, local communities, creditors and more. Stakeholder theory is concerned with the morals and values that come alongside managing an organisationand is closely linked to ideas such as corporate social responsibility (CSR) and social contract theory.
Viewing and implementing strategy or strategies from the stakeholder’s perspective adds a socio-political element to a business. It takes a resource-based and market-based view, focusing on what is best for all people who have some sort of ‘stake’ in the business – rather than only doing best by the shareholders…
Freeman says: “If you can get all your stakeholders to swim or row in the same direction, you’ve got a company with momentum and real power. Saying that profits are the only important thing to a company is like saying, ‘Red blood cells are life.’ You need red blood cells to have life, but you need so much more.”
What is stakeholder analysis?
So what is stakeholder analysis, and how does it relate to the theory? Stakeholder analysis is the actual process of assessing (or analysing) the system in place – in business, usually, but in conflict resolution and project management too, sometimes – and any potential changes in terms of how they relate to stakeholders. The information born from this analysis is used to assess how the interests of these people should be taken into consideration as things progress.
The point in stakeholder analysis is to look at all of the stakeholders of a business or situation, and examine how a particular issue is or will be affecting them. Stakeholders have different demands and feelings depending on who they are, and it is important that people in a managerial position take all of them into consideration. There is rarely a way of making everybody happy, but good stakeholder analysis ensures that everybody is considered and the best overall option is taken forward.
What (or who) is a stakeholder?
Before going any further in examining stakeholder theory and analysis, it is important to understand what a stakeholder actually is – who counts, who doesn’t, and why.
The ISO 26000 is a helpful set of guidelines for businesses and organisations, especially when it comes to having any form of social responsibility. It was published in 2010 by the International Organization for Standardization. Although it was published more than 15 years ago, ISO 26000 has been reviewed and confirmed as current, and it is still used by organisations across the globe. It was written by a unique group representing governments, non-governmental organisations (NGOs), industry professionals, consumer groups, labour, and academic/consultancy organisations around the world.
But why does that matter? Well, ISO 26000 is useful when looking at who or what is a stakeholder. It defines a stakeholder as an: “individual or group that has an interest in any decision or activity of an organization.” This may include (but is not limited to):
- Suppliers
- Members
- Internal staff
- Freelancers
- Investors
- Consumers
- Shareholders
- Regulators
- Local communities
- Regional communities
- Purchasers
- Owners
- Clients
- NGOs
- Unions
- Trade associations
As you can see, there are many examples of a stakeholder. Almost anybody can have some sort of stake in a business. This is why stakeholder analysis is so important – it gives businesses the best chance to consider and do right by as many people as possible who have some sort of vested interest in their company.
A real-life example of stakeholder analysis
It is all well and good examining stakeholder theory and analysis in theory, but how does it work in reality? Below you’ll see how stakeholder analysis works, and how it is done.
The matrix
Creating a stakeholder analysis matrix is a great way to get started. This can be done as a table, where you list the stakeholders themselves (individual people or wider groups) alongside sections for how much impact the business or project has on the stakeholder, as well as how much influence they have over it.
Also in this grid, there are additional sections for how the stakeholder could or does contribute, as well as how they can or do ‘block’ the project or make things difficult for the business. It also gives space to examine what is important to each stakeholder, as well as what strategy can be used to engage each stakeholder.
Mapping
Once this matrix has been laid out and the organisation has established who its stakeholders are, it is time to ‘map’ the stakeholders. This is a way of ‘prioritising’ the different people or groups, to ensure the most effective outcome is reached.
There are different ways and techniques of mapping stakeholders during analysis. Some of the best known are summarised below.
- Mendelow’s matrix (1991) – a widely used power/interest grid, which places stakeholders into four groups (manage closely, keep satisfied, keep informed and monitor) according to their level of power and interest.
- Cameron et al – a process of ranking stakeholders based on their needs, and by the relative importance of stakeholders to other stakeholders.
- Fletcher et al – mapping stakeholder expectations based on value hierarchies and key performance indicators (KPIs).
- Mitchell et al (1997) – a classification of stakeholders based on their power to influence the business, the legitimacy of each stakeholder’s relationship with the organisation, and the urgency of the stakeholder’s claim on the organisation.
- Savage et al (1991) – a way to classify stakeholders according to their potential threat and their potential for cooperation.
- Turner et al – a process of identification alongside assessment of awareness, support and influence, which leads to strategies for communicating with stakeholders and assessing their satisfaction. It also determines who is aware or unaware, and whether their attitude is supportive or opposing.
How stakeholder analysis works
Let’s look at a tangible example of stakeholder analysis using a hypothetical construction company. There will be various people who are considered stakeholders, given their ‘stake’ or vested interest in the company. These include shareholders, employees, suppliers, environmentalists, the local community and more.
The people at the top of the construction company would create a matrix including all of these groups of people, and work out how much their next project (for example, building a new airport) would impact the stakeholders as well as how much influence these people might have on the project. For example, building an airport would have a big impact on the local community as it would cause more traffic to and from the nearby area as well as increased noise pollution. Environmentalists would have a big influence on the project, being able to examine plans (which, according to stakeholder theory, they should have access to) and advise on any environmental issues which may arise during the building of the new airport.
The construction company can use its analysis to form a plan of action. This plan might include meeting with certain groups of people, or offering compensation to particular stakeholders where appropriate. Real-world infrastructure projects, such as the proposed expansion of London’s Heathrow Airport, involve extensive consultation with stakeholders including local residents, airlines, environmental groups and government.
Stakeholder theory in tourism
Stakeholder theory is widely used in tourism planning and management, because tourism affects so many different groups of people. Stakeholders in tourism include tourists, local residents, tourism businesses (such as hotels, tour operators and travel agents), employees, governments, destination management organisations (DMOs) and NGOs.
Each of these groups has different interests. For example, a hotel chain may want to expand, local residents may be concerned about housing costs and crowding, and environmental groups may focus on protecting natural resources. Balancing these interests is central to sustainable tourism, and many destinations now involve residents and other stakeholders when developing tourism strategies, particularly in places affected by overtourism.
Video: Who are the stakeholders in tourism?
Why is stakeholder theory important?
When applied properly, stakeholder theory – and analysis – supports a fair business model which continually strives to improve itself. It allows businesses to be considerate, and to focus on things other than making money. When done right, it should allow for the implementation of corporate social responsibility factors, sustainability, compensation for those affected negatively and so on.
There are tangible benefits of stakeholder theory, too. These might include:
- Employee satisfaction leading to more productivity and lower staff turnover rates
- Better ideas coming from people you (as a business) might not speak to otherwise
- Increased funding if investors are happy with how things are working out
- A more sustainable and/or eco-friendly way of running a business which provides benefits for the local and wider community
- Better mental health of all stakeholders involved
- More attractiveness as an ethical company leading to further business, happier customers and so on
Stakeholder theory: FAQs
Below are answers to some of the most common questions about stakeholder theory and stakeholder analysis.
What is stakeholder theory in simple terms?
Stakeholder theory is the idea that a business should create value for, and consider the interests of, everyone affected by it – including employees, customers, suppliers, local communities and shareholders – not just its owners.
Who developed stakeholder theory?
Stakeholder theory was developed by R. Edward Freeman, who set it out in his 1984 book Strategic Management: A Stakeholder Approach.
What is stakeholder analysis?
Stakeholder analysis is the process of identifying an organisation’s or project’s stakeholders, assessing how they are affected and how much influence they have, and deciding how to engage with each of them.
What is a stakeholder map?
A stakeholder map prioritises stakeholders, often using a grid such as Mendelow’s power/interest matrix, which groups stakeholders into those to manage closely, keep satisfied, keep informed or monitor.
Who are the stakeholders in tourism?
Stakeholders in tourism include tourists, local residents, tourism businesses, employees, governments, destination management organisations and NGOs, all of whom have different interests in how tourism develops.
Further reading
If you found this article on stakeholder theory and stakeholder analysis useful, these articles may also be of interest:
- Shareholder theory: A simple explanation
- Stakeholders in tourism
- What is sustainable tourism?
- Belbin’s Team Roles: Made SIMPLE
- Maslow’s Hierarchy of Needs: Made SIMPLE and FUN
- Butler’s Tourism Area Life Cycle Model: A simple explanation
