Friday, April 14, 2006

This post is about how Public Relations strenghtens the Ballance Sheet and increases profits using Stakeholder Relationship Management.

This is a cross post from the blog Stakeholder Relationship Management. Where companies can reduce costs, the effect on the bottom line is dramatic. A example provided by Mike Arenth, Cara Dunaway and Carrie Ericson in Supply and Demand Chain offers and example.

But, as we all know it is not as easy as that and this post examines how The Clarity Concept is more effective.

The working hypothises is asks: How do you increase profits by 50%? The first model is based on screwing the supplier:




In addition, it is a narrow and short sighted view. The impact of such strategies can be disastrous and to look at external costs in isolation is myopic.
If we model the stakeholders of an organisation with the objective of optimising the bottom line, the model looks very different. The objective of increasing profits by, say, 50% is a simple model and the numbers are easy based on profits of 5%.

If one draws a pretty standard stakeholder map and evaluate the stakeholders for three elements: Importance, Influence and Attitude, the model might look like this:


This is interpreted statistically, using the metrics that come from this kind of modelling and produces statistics like these:


Now, if one reduces vendor costs a number of stakeholder changes take place:


The remaining vendors become more important but the company looses some of the goodwill. At the same time, there will be a marginal shift among employees and customers and the stockholders show volatility.


What is noticeable is that a small shift in vendor relations has a ripple effect on other stakeholders.


Attitude difference:
Stockholders +15 (have an interest in higher yields)
Customers - 3
Employees 0
Vendors -18 (have squeezed margins)
Banks 0
Community 0
Competitors 0


Importance difference:
Stockholders 0
Customers 0
Employees 0
Vendors +15 (Fear of loosing vendors – have to be nurtured)
Banks 0
Community 0
Competitors 0


Influence difference:
Stockholders +20 (putting pressure on to get higher dividends)
Customers 0
Employees 0
Vendors +17 (Now can change the contracts with less loss)
Banks 0
Community 0
Competitors 0

The company has not grown, it has not become more competitive but it has created a stakeholder relationship issues and made itself vulnerable.


The objective for the organisation was to:


  • Either reduce vendor cost by 5%

  • Increase sales by 20% or

  • Cut overhead (usually meaning employee costs) by 20%


The company has not grown, it has not become more competitive but it has created a stakeholder relationship issues and made itself vulnerable.


The objective for the organisation was to increase profitability by %50.


The options available were:


  • Either reduce vendor cost by 5%
  • Increase sales by 20% or
  • Cut overhead (usually meaning employee costs) by 20%


and the chosen route was squeeze vendors and we have see what effect that can have.


This gives us a clue as to how effective stakeholder management can be deployed to increase profitability (not to be confused with ROI).


In this instance we view stakeholders as an asset. Some assets perform well and on all three counts while others do not. This thinking is covered more extensively in the Blog Leverwealth.


We have a set of values for each stakeholder group and need to look at each one to find out where each one can make contributions.


Thus for example if we increase the attitude of the employees can we identify the a productivity gain and, if so, how much. A 5% productivity enhancement is equal to 1% increase in profits. If we increase the influence of employees will that improve communication and reduce cost of internal communication failure, training, recruitment? If we increase the relative importance of employees will that translate into lower staff turnover, enhanced performance of other stakeholders etc?


Such judgements have to be made and quantified for each of the stakeholder groups.


Even the stockholders win because they now have an added (relationship) asset on the balance sheet with no diminution of earnings. Equally a plan to improve relationship with competitors (joint ventures, IP exchange, joint production or distribution etc) will have returns on lowering cost and increasing efficiencies and even laying off some R&D costs.


Thus, as managers responsible for each stakeholder group carry responsibility for enhanced relationship to generate their proportion of profit enhancement, the company increases its value (balance sheet), increases profits and grows.


For each of the stakeholder groups, we seek an enhanced return. Our objectives for each stakeholder group will be

SMARTso that they can be measured and, using this approach, the outcomes are measurable too.


Such a strategy for each group will be designed to spread the return on relationship asset among all stakeholders and, in this case we can spread the load between them.


Because we have a statistical base we can set realistic stakeholder relationship objectives, enhance the value of such relationships (a goodwill asset). We shift the cost of relationship management from P&L to the balance sheet.


This then is a brief examination of how stakeholder relationship management makes companies more profitable. It is Based on The Clarity Concept of stakeholder management.

Using the Clarity approach is helpful for all manner of Stakeholder mapping, evaluation, measurement and evaluation. This includes such areas of interest

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