Difference Between Internal and External Stakeholders

Difference Between Internal and External Stakeholders

Companies do not operate in isolation. In addition to their employees and customers, they also interact with other businesses, the government, local authorities, and the general public. All of these people are stakeholders. They can influence or be influenced by the business’s actions, objectives or policies. In this blog, we have discussed the two major types of stakeholders, i.e., internal and external, and the relationship they share with a company.

Who is a stakeholder?

A stakeholder is any individual, organization, social group, or society who has a stake in the business or has something to gain or lose. A stake implies a vital interest.

To put it in another way, a stakeholder is any individual or group whose interests are affected by the operations of the business. The key stakeholders in a typical company are its investors, employees, shareholders, and suppliers. However, in recent years, the definition of stakeholders has been expanded to include customers, communities, and governments as well. These are the people who are affected by the decisions of the business in some form or the other.

There are many types of stakeholders and not all stakeholders are equal. That is to say, the consumers of a company are entitled to fair trading practices but they are not entitled to the same amount of consideration as the company’s employees.

Internal and external stakeholders

Stakeholders can be internal and external. Both have some sort of interest in the company. Internal stakeholders are usually easy to identify because they have a financial stake in the business. External stakeholders are more difficult to define because they are not directly involved in the company’s operations or decisions. Even though an external stakeholder does not have a direct financial interest in the organization, they do care about its success, failure, and direction.

Who are internal stakeholders?

Internal stakeholders are those who have a direct relationship with the business, for example, in terms of ownership, employment or investment. They either own the company’s shares or are otherwise actively involved in the affairs of the company. Due to their vested interest in the business, they are directly impacted by the ups and downs in the business’s performance and by its policies & decisions. Internal stakeholders, among others, include the board of directors, senior executives, owners, shareholders, and employees.

Employees, for example, are impacted a lot in terms of their economic well-being. Employees have a common concern about how much and how frequently they are paid by the company. Management decisions affecting such concerns are extremely significant to these stakeholders. Their financial well-being is directly impacted by how well the company is doing and how profitable it is.

Further, in this regard, if the business owner decides to provide perks and other compensation packages to employees, it too has an impact on employees and they are affected by such decisions. As a result, one of the primary concerns of employees is the company’s long-term financial viability.

Similarly, investors and shareholders are internal stakeholders as they benefit directly when the company makes a profit. Their investment decisions also depend upon how well or badly the company performs. In addition, they also examine the company’s financial data to ensure that the company is performing well and that their investment is not losing money. They may also be in charge of voting on specific fund allocations.

Not only are internal stakeholders impacted by the company’s operations, but they also play an influential role in determining its performance. For example, managers and owners are the ones who take important strategic decisions in a business for its growth and survival. Similarly, the sincerity and hard work with which employees carry out their duties can have an impact on the degree of profitability of the business.  

Who are external stakeholders?

An external stakeholder, on the other hand, is someone who is not directly engaged with the business but may or shall be influenced by it at some point in time. External stakeholders are outside parties that do not work directly with the company but are affected by the activities of the business. In today’s corporate organizations, debt holders, trade creditors, suppliers, customers, the government, and society are all a part of external stakeholders.

For example, if the government imposes any new regulation with regard to environmental pollution, businesses must comply with it to ensure that their production activities do not harm the environment. Similarly, if a manufacturing unit pollutes the environment, social groups may protest, and hence, they fall under the category of external stakeholders.

Customers are external stakeholders as well, particularly if they rely substantially on the company’s products or services to purchase products that they use on a daily basis. Likewise, they may also affect the business. For instance, the customers’ likes and dislikes or demand patterns affect the nature of production/provisioning of services to be done by the company.

Unlike internal stakeholders who work closely within an organization, external stakeholders are indirectly influenced by the performance of the business and its successes or failures. Moreover, they are also not aware of the internal affairs of the business. They come to know about its profitability and state of affairs only through the information which is publicly available such as financial statements and annual reports. For example, before doing business, suppliers who provide raw materials to a company rely on its market reputation and external reports.

Why it is important to operate in the interests of stakeholders?

Stakeholders are essential for a variety of reasons. Internal stakeholders are crucial since the business’s operations rely on their ability to collaborate & work efficiently to achieve the company’s goals. External stakeholders, on the other hand, can have an indirect impact on the firm. Customers, for example, can change their purchasing patterns, suppliers can change their manufacturing and distribution techniques, and governments can change their laws and regulations.

Successful relationships with stakeholders are critical to the success of any business. In today’s world, it is critical for every business organization not only to meet stakeholders’ expectations but also to make genuine efforts to provide them with more than they are entitled to or desire because a business cannot survive in a vacuum without stakeholders.

That is why businesses should develop strategies that enhance value for all stakeholders and ensure to give long-term benefits to the shareholders as well as society at large.

A comparison table showing differences between internal and external stakeholders

The key points of difference between internal and external stakeholders are summarized in the table below:

BasisInternal stakeholdersExternal stakeholders
MeaningInternal stakeholders are those who have a direct relationship with the business, for example, in terms of ownership, employment or investment.External stakeholders are not directly engaged with the business but may or shall be influenced by it at some point in time.
Participation in business decisionsThese stakeholders are directly involved in managing the affairs of the company.They are not directly involved in the company’s operations or decisions.
Examples-Employees
-Shareholders
-Managers
-Proprietors (individual)
-Board of Directors
-Investors
-Suppliers and probable suppliers
-Creditors
-Financial institutions
-Community and public groups
-Governments
-Customers & probable customers
-Competitors
-Labor Unions
Financial stakeThey have a financial stake in the company.They need not necessarily have a financial stake in the company; however, they are impacted by the company’s operations in some form or the other.
Another nameThese are also known as primary stakeholders.These are also known as secondary stakeholders.
AwarenessInternal stakeholders are aware of the internal affairs of the business.External stakeholders use publicly available information to know about a company.
ImpactThey are directly impacted by the ups and downs in the business’s performance and by its policies & decisions.External stakeholders are indirectly influenced by the performance of the business.
Nature of responsibilityThe company holds a primary responsibility towards them.The company holds a secondary responsibility towards external stakeholders.
Difference between internal and external stakeholders

Conclusion

Stakeholders exist in every organization, regardless of its size, type, structure, or goal. Any person or entity that influences or is influenced by the company’s actions is considered a stakeholder. It is the duty of every organization to meet the expectations of the stakeholders with a view to achieving success and being able to survive in the internal as well as external environment.


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Ruchi Gandhi

The author enjoys to write informational content in the domain of company law and allied laws. She takes interest in doing thorough and analytical research on legal topics. She is a CA along with MBA (Fin) and M. Com.

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