External Stakeholders: Definition, Types and Importance

By Indeed Editorial Team

Published 12 October 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Stakeholders play an important role in the decision-making and implementation of strategies of the organisation. Stakeholders can be internal or external, and each of them has specific functions in the company. Knowing about the roles and responsibilities of each stakeholder can improve management and help the business achieve its objectives while protecting the interests of all parties. In this article, we define what external stakeholders are, list the different types and discuss their importance for business success.

What are external stakeholders?

External stakeholders are people, parties, factors or organisations that have no say in the day-to-day running of a company but who are affected by its activities and decisions or can influence the operations of a business or project. An example of such stakeholders are customers, people living near a company's factory or industry regulators. These stakeholders are vital for the long-term success of any business or project, which makes it important to protect their interests. While these stakeholders might have zero or minimal equity in the company, they can influence the company's decisions when the organisation's activities affect their interests.

Stakeholders typically derive value from a company's products, services or conduct and play an important role in keeping businesses accountable. An example of this is when a company produces inferior products and charges customers a premium price for goods. Customers can decide to boycott such a company's products until they apologise and change their behaviour. A stakeholder can also be an environmental agency. If such an agency notices that a company under its jurisdiction is flouting environmental regulations, it can warn or penalise the organisation to ensure that it adheres to industry guidelines.

Related: Stakeholder vs. Shareholder: Definitions and Key Differences

Types of external stakeholders

Businesses have different types of stakeholders to consider in their operations, including:

Government

There are several government agencies that can influence the operations of businesses. These include agencies that oversee tax regulations, labour laws and employee safety requirements. Some government agencies are responsible for issuing licences and permits, enforcing environmental protection rules, monitoring compliance with competition laws and safeguarding consumer rights. These government regulators ensure companies operate within the laws and regulations guiding their specific industry. Adherence to governmental guidelines ensures businesses can continue operating without penalties. It can also help build customer loyalty and a strong brand image.

Customers

In many organisations, the customer is the primary stakeholder outside of the company. Any decision a business makes typically impacts the customer. Customers can influence a company by choosing to buy or not to buy its product or service. Depending on how a company portrays itself and treats customers, consumer buying behaviour can affect its long-term success.

Customers can also affect a business through their reviews. Positive reviews and word-of-mouth referrals can help a company convert new customers and build a loyal customer base. For example, if a company offers a unique product at an acceptable price point, customers can share their pleasant buying experience with friends and relatives, which can lead to increased loyalty and revenue generation. Conversely, when the market feels a business short-changes them, customers may find alternatives or share negative feedback about the company on public domains.

Related: What Is Good Customer Service? Definition and Guideline

Communities

The community where a company operates in is also an external stakeholder because the organisation's operations have a direct impact on the environment and the people themselves. For example, companies operating in a community can provide employment opportunities for residents. Some businesses also allocate some of their profit to support community projects. This shows the community the business cares about its affairs, leading to a trusting and mutually beneficial relationship. Conversely, if a business pollutes the environment or doesn't employ people living around it, this can also lead to tension between host communities and the company.

Suppliers and vendors

Suppliers and vendors can affect the productivity, revenue and reputation of businesses. The decision of the business can also affect these stakeholders. For example, if a supplier always delivers shipments late, a company might replace them to avoid production delays. The same applies to vendors who raise prices suddenly regardless of contract terms. The quality of the supplies a vendor delivers can also determine whether they're going to continue working with an organisation.

The choice of suppliers a business uses can affect the quality of its products and the cost of production. Some suppliers offer generous credit terms for businesses, allowing them to pay for goods delivered later at low-interest rates. If a business loses access to such important suppliers, it can disrupt its operations by raising production costs and making the company lower its quality standards. This makes it vital for businesses to consider their suppliers' and vendors' interests in their decision-making.

Related: Procurement vs. Purchasing: Definitions and Differences

Junior shareholders

Businesses consider junior shareholders as external stakeholders because they don't have a direct role in business operations. While these stakeholders might get only a small amount of the financial returns a company generates, the poor performance of the business can have an outsized impact on their investments. When the business performs well, they receive rewards such as higher profits.

Creditors

Creditors and lenders have an external stake in a business because the repayment of their loans or credit depends on the overall success of the business. If the business is generating enough capital to pay back its loans and keep credit lines open, creditors and lenders make money. Creditors and lenders typically hold a larger external stake in a business because many businesses, especially startups, depend on loans and lines of credit to stay open or to enter the market.

Media organisations

Media houses often partner with businesses to expand their reach and influence. This can mean that the media organisation is an external stakeholder in the business because, if the business is thriving, it can provide funding and other resources for the media outlet. The connection to the business can also help the media organisation grow and create new networking opportunities or build its audience.

Related: Essential Media Production Skills and Tips to Improve Them

Trade unions

Trade unions are made up of employees and contractors who exist outside of the business but still affect its internal operations. Trade unions bargain for better wages, benefits and working conditions for their skilled tradesmen. This has a positive effect on both the company and the union, which can create better working environments and better pay and increase the level of quality products or services that a business can produce.

Celebrities

Celebrities sometimes partner with their favourite brands to offer sponsorship and market the products to their fan base. These celebrities share the success of the business through monetary gain and provide a unique service to the brand. If the company performs well, the celebrity can credit some of their contributions to the company's success and receive compensation for their services.

Company partners

When businesses partner with each other, they create external stakeholders with that partnered business. Each business now depends on the other to provide a product or service and experience the effects of that service. Partnering with another company is also a great way to keep a business accountable and to ensure the quality of the products and services the company produces. Business partnerships can help businesses grow within their industry and create more competition.

Related: A Complete Guide to Business Partnerships (With Definition)

Importance of external stakeholders

They play an important role in the operations of various businesses. By monitoring business activities, buying products or services and creating basic expectations, customers and government regulations help ensure a safe, fair market. They hold a lot of influence over the long-term success of a company.

Different stakeholders can have varying demands from the company. A customer may want something completely different from vendors, government regulators or consultants. A customer might expect a high-quality, affordable product that meets their basic expectations, whereas a government regulator might require the company to report production numbers to ensure fair taxation.

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