The Business and Its Stakeholders: Environment, PESTEL and Mendelow

A business does not operate in a vacuum. It buys from suppliers, sells to customers, employs people, borrows money, obeys laws and affects the community around it. Everything outside the firm that can affect it is its environment, and every person or group with a stake in the firm is a stakeholder.

This topic shows you how to analyse both, using the frameworks the Institute of Chartered Accountants of Nigeria (ICAN) Business Environment paper tests: PESTEL, Porter’s five forces and Mendelow’s matrix.

By the end you should be able to classify a business, analyse its environment, identify and prioritise its stakeholders, and explain how their interests conflict. Those are exactly the steps an exam scenario asks you to follow.

What is a business?

A business is an organisation that combines resources, such as people, money, equipment and knowledge, to provide goods or services that customers want. Most aim to earn a profit, but profit is rarely the only objective.

• Profit: earning more revenue than cost, to reward owners and fund growth.
• Survival: staying in business through hard times.
• Growth: becoming larger, with more sales, staff or branches.
• Social and ethical goals: serving the community, protecting the environment and treating people fairly.

Types of business organisation

The form a business takes decides who owns it, who is liable for its debts and what laws apply. Companies in Nigeria are governed by the Companies and Allied Matters Act 2020 (CAMA 2020).

The business environment

The business environment is the set of internal and external factors that affect how a business operates and performs.

Internal environment

The internal environment is what the firm controls: its owners, managers, staff, culture, structure, resources and systems. Analysts often call the strengths and weaknesses found here the internal analysis.

External environment

The external environment is outside the firm’s control. It has two layers.

• The micro (or task) environment is the firm’s close surroundings: customers, suppliers, competitors, lenders and distributors. The firm deals with them directly and can influence them.
• The macro environment is the wider setting that affects every firm: politics, the economy, society, technology, the natural environment and the law. A single firm can rarely change it and must adapt to it.

The business environment in the syllabus

The business environment is everything beyond the firm’s control, its people, institutions and wider forces, that still decides how well the firm performs and whether it survives. It has an internal side, such as employees and resources, and an external side, such as customers, markets and competitors.

Characteristics of the business environment

How government policy affects business

Government policy is the government’s stated plan of action and its targets on a particular matter. Even in free markets, governments step in to stabilise markets, set up institutions, enforce contract law and property rights, and bail out failing markets. Policy applies at national, state and local level, and international treaties can shape business too.

Legal and regulatory frameworks

A legal framework is the regime of laws passed by legislatures, such as constitutions, statutes and codes, which settles disputes, upholds the rule of law, enforces contracts and protects property rights. A regulatory framework supervises particular industries. Its parts are laws (binding rules enforced by government), regulations (standards set and enforced by regulatory bodies) and policies (broad principles that guide decisions).

The areas covered include company formation and registration with the Corporate Affairs Commission, taxation including value-added tax, labour law, intellectual property, contract law, financial and sustainability reporting, sector rules for finance, telecoms and energy, foreign exchange control, data protection under the Nigeria Data Protection Act 2023 and the Nigeria Data Protection Regulation, and corporate governance.

Understanding them matters for compliance, fairness and transparency, stability and predictability, protection of rights and trust with investors, lenders and customers.

Purposes of environmental analysis

Environmental analysis studies how the economy, technology, rules, rivals and society are shifting. It serves four purposes: recognising opportunities early, managing threats, crafting strategy by matching strengths and weaknesses to opportunities and threats, and strengthening competitive edge. The syllabus names two major models, PESTEL analysis and strengths, weaknesses, opportunities and threats (SWOT) analysis. PESTEL is covered below. SWOT is covered in its own topic.

The macro and micro environment

PESTEL analysis

PESTEL is a checklist for the macro environment. Each letter names one group of factors. The analysis has no value unless you go on to say how each factor affects this particular business.

How to use PESTEL in the exam

1. Pick the factors that matter for the business in the question. You rarely need to cover all six at length.
2. For each, state the factor, then say whether it is an opportunity or a threat and why.
3. Say what the firm should do in response.

The competitive environment: Porter’s five forces

PESTEL looks at the wide environment. Michael Porter’s five forces look at the competition inside an industry. The stronger the forces, the weaker the industry’s profit.

• Threat of new entrants. Low barriers to entry let new firms in and push down profit.
• Bargaining power of buyers. Powerful customers demand lower prices or higher quality.
• Bargaining power of suppliers. Powerful suppliers raise prices or restrict supply.
• Threat of substitutes. Different products that meet the same need, such as mobile transfers in place of cash, limit what a firm can charge.
• Rivalry among existing competitors. Price wars and heavy advertising reduce profit.

Stakeholders

A stakeholder is any individual or group that is affected by the firm’s activities, or that can affect them. A shareholder is an owner of the company’s shares. Every shareholder is a stakeholder, but most stakeholders are not shareholders. Employees, customers, suppliers, lenders, the community and the government all have a stake without owning a share.

Stakeholders in the syllabus

The syllabus defines a stakeholder as an individual or group with an interest, often financial, in the success of a business, and it sorts them into two groups.

The syllabus gives ten examples. Senior management make strategic decisions. Investors, shareholders and debt holders, want a return. Employees rely on jobs and security. Customers want quality and value. Owners have a financial stake. Competitors are affected by the firm’s success. Other departments depend on its outcomes. Suppliers and vendors gain business when the firm succeeds. Communities do not want harm to their health, safety or economic development.

The government collects taxes from the company and its employees.

Stakeholders matter because they provide resources (capital, skills, revenue and market access), influence decisions (strategy, risk management, innovation), build relationships and trust (communication, reputation, alignment) and improve business performance.

Classifying stakeholders

Mendelow’s power and interest matrix

A business cannot give every stakeholder equal attention. Mendelow’s matrix helps it decide. It places each stakeholder on two scales: how much power they have over the business, and how much interest they have in what it does.

Positions change. A quiet community group (low power, low interest) becomes a key player if a factory pollutes the river and the group organises a protest.

Conflict between stakeholders

Stakeholders want different things, and the wants often collide.

• Shareholders want high dividends. Employees want higher pay. Both draw on the same profit.
• Customers want low prices. Shareholders want high margins.
• The community wants a clean environment. Managers want to keep costs down.
• Lenders want safe, steady returns. Shareholders may want the firm to take bigger risks for bigger returns.

Managers can handle conflict by identifying who is affected, ranking stakeholders with Mendelow’s matrix, communicating openly, negotiating compromises, and building stakeholder interests into the strategy and the firm’s social responsibility policies.

Worked example: stakeholder analysis

The key points for the marks are the classification, the reason for each position on the grid, and a different treatment for each group.

The environment and stakeholders in more detail

PESTEL applied: what to look for in each factor

Mendelow’s matrix: how to treat each group

Doing a stakeholder analysis

1. List all the stakeholders, internal and external.
2. For each, assess its power and its interest, and what it wants and fears.
3. Plot each on the power-interest grid.
4. Decide how to treat each group and who will manage the relationship.
5. Review regularly, because positions change.

Handling conflict between stakeholders

Stakeholders often want opposite things: shareholders want lower costs and employees want secure jobs. A firm cannot satisfy everyone fully. It should identify the interests behind each position, weigh the power and legitimacy of each claim, look for a compromise that meets the core interests of the most important groups, explain the decision openly, and compensate those who lose, for example through relocation help or retraining.

Consultation and clear communication reduce resistance even when the decision is unwelcome.

Everything the syllabus says about stakeholders: complete notes

Definition

A stakeholder in an organisation is a person who has an interest, or ‘stake’, in what the organisation does, and who might therefore try to influence its decisions and actions. Stakeholders are individuals and other organisations, but they often share a common interest, so they can be grouped. They are people or groups within the organisation (internal) or people, groups or entities outside it (external).

A stakeholder is often one with a financial interest in the success of the business. The primary stakeholders in a corporation are its investors, employees, customers and suppliers.

Internal stakeholders and their interests

Internal stakeholders are people whose interest arises through a direct relationship, such as employment, ownership or investment. They include employees, owners, the board of directors, project managers and investors.

In a business organisation they fall into three groups: shareholders, executive directors and senior managers, and other managers and current employees. It may be sensible to divide managers and employees into sub-groups, because managers and employees in different divisions or departments may have different concerns.

Shareholders and owners

In a large company the main shareholders are usually not involved in day-to-day management. They are investors seeking a return in dividends and a higher share price, and they leave management to the board and executive team. They may become more involved, and try to influence the directors, when they feel their interests are threatened. They might be worried by:

• falling profits and a falling share price;
• lower dividend payments;
• a proposal to invest in a major project where the business risk is high; or
• a takeover bid for or by another company.

Major shareholders can discuss their concerns with the chairman and other senior directors. All shareholders can express displeasure by voting against the directors at a general meeting, although their rights and powers are limited by company law. A company may also have a majority shareholder, who owns enough shares to control the board and the directors’ decisions.

His interests may differ from those of the minority shareholders, so the majority and minority may be separate stakeholder groups.

Executive directors and senior managers

A board may have executive and non-executive directors. Executive directors are usually full-time employees and are involved in management, so their interests are often like those of senior executives who are not on the board. Their interests include remuneration, including bonuses and performance incentives, power and status, and job security.

Other managers and employees

Their interests include pay, working conditions, job security, job satisfaction and quality of life.

External stakeholders and their interests

Ten examples of stakeholders

Senior management or executives (leaders who make strategic decisions); investors (shareholders and debt holders seeking a return); employees (who rely on jobs and job security); customers (who expect quality and value); company owners (who have a financial stake); competitors (who are affected by the firm’s success or failure); other departments (adjacent teams affected by outcomes); suppliers and vendors (whose revenue depends on the firm); communities (who do not want harm to health, safety or economic development); and the government (which gets tax and gross domestic product (GDP) from the business, taxing the company and its employees).

The main stakeholders and connected stakeholders

The main stakeholders, internal or external, are those who exercise the greatest influence. Usually these are the board of directors and possibly senior executives below board level, since they take most decisions. The directors are often influenced by shareholders, especially the largest, because shareholders can act against directors who disappoint them: they can vote against their re-election and, in extreme cases, vote to remove a director.

A connected stakeholder is a stakeholder who is not a decision-maker, and not part of the permanent full-time infrastructure of the organisation, but who is nevertheless very influential in shaping its future and its leaders’ decisions. The main connected stakeholders in a company are usually non-executive directors, employees, key suppliers and key customers. To influence decisions they need some power. The syllabus lists sources of power:

Stakeholder mapping: Mendelow’s matrix in the syllabus’s terms

Managers should manage their stakeholders, especially the most influential. Stakeholder mapping helps senior managers assess their main stakeholders and decide what, if anything, to do to win support for particular decisions. One approach is a 2 × 2 power/interest matrix, the Mendelow matrix, named after its originator.

It compares the stakeholder’s interest in an issue, on a scale from 0 (not at all interested) to +10 (very interested), with its power, on a scale from 0 (very weak) to +10 (very powerful). The recommended approach is shown in each quadrant:

Example 1. A board wants to make a takeover bid for another company, and stock market rules require the shareholders’ agreement. The shareholders have great power and a high level of interest, so the directors must win their full support. Example 2. The directors plan to close a loss-making operations centre.

The employees who will be made redundant or transferred have little power over the decision but a strong interest, so the directors should keep them fully informed about developments, the plans and how each employee will be affected.

Conflicts of interest between stakeholders

Stakeholders’ objectives differ but need not clash. Shareholders want a good return, which need not conflict with executives’ wish for high pay, especially if the pay is performance-related. Employees want a secure job, good pay and good conditions, which are not inconsistent with making profit. Customers want value for money, and a business makes profit by meeting customers’ needs better than its competitors.

A business can therefore normally meet many stakeholders’ objectives, provided some compromises are accepted. In exceptional cases a serious conflict can arise. Directors and senior managers should try to avoid serious conflicts of interest between stakeholder groups. One approach is to apply the principles of good corporate governance and to recognise the company’s corporate social responsibility.

Why stakeholders matter to a business

Questions that could be asked on this topic, and how to answer them

Exam focus: characteristics of the business environment and why stakeholders matter

May 2026 (Question 1) asked for a definition, five characteristics, two types of stakeholder and three aspects of stakeholders that are vital to a business. The points below match that answer.

Definition

The business environment is the totality of internal and external forces, factors, institutions and conditions that influence the operations, performance and decisions of a business. It includes everything inside and outside the organisation that affects its ability to achieve its objectives.

Characteristics of the business environment

• Complexity. Many elements interact, such as employees and resources inside and customers, markets and competitors outside. A change in one area can ripple into others, so outcomes are hard to predict.
• Dynamism. The environment changes constantly, so a business must adapt to stay competitive.
• Multifaceted nature. It has economic, social, political, technological, legal and environmental dimensions.
• Uncertainty. Future events cannot always be predicted, so a business must be ready for surprises and opportunities.
• Interrelatedness. The components affect each other.
• Relativity. It differs from one place and one industry to another, so strategy must fit the setting.
• Far-reaching impact. It affects survival and growth.
• Opportunities and first-mover advantage. Spotting opportunities early and acting first can give a lasting competitive edge.

Two types of stakeholder

• Internal stakeholders have a direct relationship with the business through employment, ownership or investment. Examples are employees, owners, directors, managers and investors.
• External stakeholders do not work for the business but are affected by what it does. Examples are suppliers, creditors, customers, government and public interest groups.

Do not use stakeholders and shareholders as if they meant the same thing. Shareholders are only one group of stakeholders. Examiners reported this as a common mistake.

Why stakeholders matter to a business

• They provide resources. Investors supply capital, employees supply skills, and customers, suppliers and partners provide revenue and market access.
• They influence decisions. Engaging them gives a wider view for planning, helps spot risks early and can spark new ideas.
• They build relationships and trust. Open dialogue improves communication, strengthens reputation and increases support for company goals.
• They enhance performance. Understanding their needs improves efficiency and resource use, makes projects more likely to succeed and supports long-term sustainability.

Goal incongruence

Goal incongruence is a situation where personal goals conflict with the objectives of the business. It is the root of many conflicts between stakeholders, for example a manager who wants a larger bonus while owners want long-term profit.

Exam focus: government policy, the legal framework and how firms adapt

How government policy affects business

Government policy applies at national, state and local level, and international treaties can also shape how firms trade. Businesses must be flexible enough to respond when rules change.

• Taxation. Higher taxes raise costs and may force price rises or lower profit. Tax incentives or exemptions encourage investment in chosen sectors.
• Subsidies and incentives. They cut production costs and support growth, for example the Lagos State Employment Trust Fund (LSETF) support for SMEs.
• Regulations and compliance. Environmental, labour and consumer protection laws create a framework. Compliance costs money but gives a level playing field and protects consumers and the environment.
• Infrastructure development. Roads, ports and energy cut transport costs, ease trade and attract investment.
• Monetary and fiscal policies. Interest rates, exchange rates and government spending affect investment and spending. Lower interest rates encourage borrowing.
• Trade policies. Tariffs raise the cost of imports, while trade agreements ease trade and investment.

Legal and regulatory frameworks

Legal frameworks, such as constitutions and statutes, settle disputes, support the rule of law, enforce contracts and protect property. Regulatory frameworks supervise specific industries. The key components are laws (binding rules enforced by government), regulations (standards made by regulatory bodies) and policies (broad principles that guide decisions).

Areas covered:

• company formation and registration with the Corporate Affairs Commission (CAC)
• taxation, including income tax and value added tax (VAT)
• labour laws (contracts, conditions, minimum wage, termination, benefits)
• intellectual property (trademarks, patents, copyright)
• contract law
• financial and sustainability reporting
• sector-specific regulation (finance, telecoms, energy)
• foreign exchange control
• data protection under the Nigeria Data Protection Act 2023 and the Nigeria Data Protection Regulation (NDPR)
• corporate governance

Why firms must understand them: compliance, fairness and transparency, stability and predictability, protection of rights, and building trust with investors, lenders and customers.

How firms adapt to their environment

1. Flexibility and adaptability. Responding quickly to market shifts with agile processes.
2. Innovation. Encouraging creativity and risk-taking.
3. Continuous learning and development. Training staff to handle change.
4. Strategic planning. Regular environmental scans to spot opportunities and threats and to plan responses.
5. Strong networks and partnerships. Access to new technology, skills and resources.
6. Technology. Using it to streamline processes and stay competitive.
7. A growth mind-set. Treating challenges as opportunities.
8. Change management. Limiting disruption and resistance during transformation.
9. Sustainable practices. Reducing environmental impact and gaining from the green economy.
10. Understanding consumers and competitors. Tracking changing preferences and rival strategies.

Common mistakes in the exam

• Using ‘stakeholder’ and ‘shareholder’ as if they meant the same thing.
• Listing the six PESTEL factors with generic definitions and no link to the business in the question.
• Placing stakeholders on Mendelow’s matrix without giving the reason for each position.
• Naming the strategy (manage closely, keep informed) without explaining what the business should actually do.
• Forgetting that stakeholder positions change over time.
• Mixing the micro and macro environment. Customers and competitors are micro. Inflation and the law are macro.

Quick revision

• Know the types of business: sole proprietor, partnership, private company, public company, cooperative, public sector and not-for-profit.
• Internal environment is under the firm’s control. The micro environment is its close surroundings. The macro environment is the wider setting.
• PESTEL: political, economic, social, technological, environmental, legal. Each point must end with an effect on the business.
• Porter’s five forces: new entrants, buyers, suppliers, substitutes and rivalry.
• All shareholders are stakeholders, but not all stakeholders are shareholders.
• Syllabus: eight characteristics of the environment, six areas of government policy, laws, regulations and policies, four purposes of environmental analysis, and internal versus external stakeholders.
• Mendelow: high power and high interest means manage closely. High power and low interest means keep satisfied. Low power and high interest means keep informed. Low power and low interest means monitor.

Practice questions

These are original questions written in the style of the ICAN exam. Try each one before you open the answer.

Section A style: multiple choice

Section B style: written questions

A further written question

Model answers

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