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The true cost of poor stakeholder management (that most businesses fail to understand)

Updated: Sep 17, 2023

Stakeholder management is one of the most important aspects of business, yet many businesses fail to recognise its importance. It's not simply about keeping your customers happy; it's about ensuring you have a solid relationship with all groups involved in your business.

If you are a business owner, stakeholder management is no doubt a top priority. It is essential to your business’s success. But how many businesses have actually taken the time to understand what stakeholder management is, why it’s important, and how it can benefit them?

The answer: not many.

There seems to be a misunderstanding among many businesses that stakeholder management is just another generic term for customer service. In fact, it is way more than that. It is a systematic process of identifying all the people who have an interest in your company and taking care of their needs in a proactive manner.

So why should you bother with such an effort? You might ask yourself: “What’s so important about stakeholders anyway?” Well, there are several reasons why you should invest time and effort into understanding how to manage them effectively.

First of all, let's dive into the real definition of stakeholder management.

Stakeholder management is a key part of any good business strategy. It's all about understanding who your stakeholders are, what they want, and how they can be involved in your business.

A business' stakeholders are the people or organisations that have an interest in the business and can affect its performance. These include customers, employees, investors, and suppliers.

The term 'stakeholder' comes from the idea that each person or organisation has a stake in the company's success - whether it's by buying their products, working for them, or investing in them.

Stakeholder management involves identifying all of these groups of people and understanding what motivates them, so you can meet their needs and build stronger relationships with them.

Why is having a good stakeholder relationship important for business?

The value of stakeholder relationships is multifaceted, but the most important reason we focus on them is that they create a virtuous cycle. When companies build strong relationships with their stakeholders, they can better anticipate and address their needs. And when stakeholders feel like their voices are heard, they’re more likely to be loyal and supportive of the company.

In short, these relationships help companies make better decisions.

When you think about it, this makes sense: If you can understand where your customers come from, what they want, and how they feel about your product or service, then it’s easier to make smart changes that will resonate with them.

The reasons why many businesses fail to understand the importance of having a nurtured stakeholder relationship

There are several reasons why businesses may fail to understand the importance of having a nurtured stakeholder relationship:

  1. Lack of awareness: Some businesses may not be aware of the importance of stakeholder relationships and the role they play in the success of the business.

  2. Short-term focus: Some businesses may prioritise short-term goals and objectives over building long-term relationships with stakeholders.

  3. Lack of resources: Some businesses may struggle to devote the time and resources needed to effectively engage with and nurture relationships with stakeholders.

  4. Misaligned priorities: Some businesses may prioritise other goals, such as maximising profits or increasing market share, over building strong relationships with stakeholders.

  5. Lack of transparency: Some businesses may not be transparent about their operations and decision-making processes, making it difficult for stakeholders to understand how they can influence the business.

The negative impact of poor stakeholder management

Poor stakeholder management can have a variety of negative impacts on businesses. Some of these include:

  1. Decreased trust and reputation: If businesses fail to effectively engage with and address the concerns of stakeholders, they may struggle to earn the trust and respect of these groups. This can damage the reputation of the business and make it more difficult to build relationships with stakeholders in the future.

  2. Decreased innovation and creativity: If businesses do not actively seek out and listen to the ideas and feedback of stakeholders, they may miss out on valuable insights and opportunities for innovation and creativity.

  3. Decreased customer loyalty: If businesses do not prioritise the needs and concerns of customers, they may struggle to retain their loyalty and may lose customers to competitors.

  4. Decreased employee satisfaction and retention: If businesses do not effectively engage with and address the concerns of employees, they may struggle to retain and motivate their workforce, leading to decreased productivity and increased turnover.

  5. Legal and regulatory issues: If businesses do not effectively engage with stakeholders and address their concerns, they may be more vulnerable to legal and regulatory challenges.

Keep in mind that the quality of your stakeholder relationship is a reflection of the quality of your business.

If you are not servicing your customers, you are losing money. If you are not servicing your employees, you are losing productivity and innovation. If you are not servicing your investors, you are losing capital.

The same is true for stakeholders. If you ignore them, they will stop bothering you and move on to someone else who appreciates their value to the organisation. This can be devastating to any organisation that depends on outside support or funding from investors or other groups that want to see a return on their investment in the company.

How a business should operate using the best practices of stakeholder management

It’s important for business leaders to manage their stakeholders effectively because they are often the key to success or failure. For example, if an employee doesn’t feel valued by their company, they may not feel motivated to do their best work or remain loyal to it. If a customer feels ripped off by your business, they might tell their friends about it and refuse to do business with you again.

To be successful at stakeholder management, you need to understand how each stakeholder group thinks and behaves so you can anticipate their needs and respond accordingly.

By building relationships with your stakeholders, you can create loyalty among them that will benefit both sides in the long run (and hopefully lead them back into your store).

The best practices of stakeholder management are:

1. Be aware of your stakeholders. Who cares about your business and how you operate? Who has something at stake in your company's success or failure? Who can affect your company's success or failure? What are their interests, concerns, and agendas? What do they want from you? How do they expect to be treated by you?

2. Get to know your stakeholders' needs, interests and expectations. Ask them directly if possible; otherwise, observe their behavior and listen carefully to what they tell you. Once you know what each stakeholder expects from you, make sure that their expectations are met as much as possible — ideally far better than they expect!

3. Make sure that each stakeholder's needs are met with equal care and attention — no picking favorites! If one stakeholder feels neglected or slighted by another stakeholder, this will lead to problems down the road. Create a win-win situation for all parties involved by making sure that each person feels like they're getting what they need from the relationship with your business.


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