Quazi Nafiul Islam

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’

Oppertunity
Ideas
•Researching demand •Identifying strengths cost
for the business idea and weaknesses of
•Finding out if the ideas •The cost of following
•Evaluating all ideas
theideas are the other ideas
•Sorting out best ideas compatable or if they •Identifying main instead
will survuive in a competitors

Market market
Chosen Ideas
reseasrch

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.
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Quazi Nafiul Islam

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

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 Quazi Nafiul Islam

These are Non-Governmental

Organizations, and they include
Environmental groups like Green
Peace, Env. Groups are pressure
groups

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

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Quazi Nafiul Islam

Stake-holder Perspective
• Are the people who have invested into the
business
Owners • Company has share holders, and Sole-trader
and partnership has owners and partners
• They will want to maximize profits
• 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
Directors be either employed by the business or self-
employed.

and • They mainly want the business to perform

well.
• If they perform poorly, they will be made
Senior managers redundant.
• But good performance may lead to pay rises,
bonuses or even promotions.
• 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
Workers 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.

• Want a good product

Customers o Want value for money: A good price and a
good quality.

• Generally, will want maximum possible rate

from business.
• But will also have to consider Business’

Suppliers
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.
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Stake-holder Perspective
• Influenced in a variety of ways
• Economic Prosperity:
Local, National o Jobs
o Technology into developing
And nations
• Some Local Communities may want housing,
International like Rowntrees in New York.
• Mc Donald’s is accused of ruining French
Communities Cuisine, by introducing fast-foods.
• Many companies are charitable and helped to
reduce poverty.

Environmental
Groups: • More eco-friendly methods of production.

The • Less pollution, e.g. Noise, Visual etc.

Environment
• More planning and funds for the future.
• Less waste, e.g. making a nuclear power plant
Future today will mean the next generation will have
to deal with its disposal.
Generations • 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’.

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Quazi Nafiul Islam

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.

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Quazi Nafiul Islam

• 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 • Less importance to profit will likely cause less
higher quality of applicants. This may lead to return on capital employed. This may detract
the business becoming more efficient. A more investors.
motivated workforce should lead to increase The practicality of the advantages is very little, if
profits everyone could make more profit by taking being
• Effective consumer care policies should lead environmentally friendly, or charitable, then every
to higher sales and thus more profit. company would take a shareholder approach, but
• Good co-operation with supplier should lead in truth this is not the case.
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.

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