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E1 Chapter 1 Organisations

Organisations

Organisations are formed when people are grouped together to pursue a goal.

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Definitions

Organisation

A group of people, organised and managed in a way that aims to follow a corporate goal or
need.

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Not every business is an organisation, e.g. one person working alone on all aspects would be a sole
trader.

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Types of organisation

There are several different types of organisation.

All business can be separated into private sector or public sector businesses.

Private Sector Organisations Public Sector Organisations

Owned by investors Owned by the state

Responsible to shareholders/owners Responsible to the government

May be run for profit or not for profit Generally not run for profit

Not-for-profit organisations are one type of private sector organisation. Sometimes they are known
as NGOs.

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Definition

NGO

A Non Governmental Organisation (NGO) is a private sector organisation which is not run
for profit, but focuses on other goals such as ethical standards, e.g. OXFAM.

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Profit-seeking organisations

Profit seeking organisations have the primary objective of maximising returns for the owners
(shareholders) and can be split into incorporated and unincorporated organisations.

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Definition

Unincorporated organisation

When the business owners and the business itself hold the same legal identity.

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The owners of an unincorporated business are held personally responsible for the debts i.e. they
have unlimited liability for any debts.

The two types of unincorporated organisation are:

• Sole trader

• Partnership – A collection of owners working together who are jointly liable for debts

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Definition

Incorporated organisation

When the business owners and the business have separate legal identities.

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The owners of an incorporated business are not held personally responsible for the debts of the
business i.e. they have limited liability for the business’s debts.

There are two types of incorporated organisation:

• Private Limited Companies (Ltd)

• Public Limited Companies (PLC)

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Features of PLCs and Ltd companies

Public limited companies (PLC) Private limited companies (Ltd)

Shares can be issued to the public and traded on Shares cannot be issued to the public
the stock exchange

Owners risk losing control by selling stakes to Owners retain a high degree of control
the public of the business

Large number of shareholders to report and Small number of shareholders to report


additional regulations to comply with to

Tend to be large companies who have issued Tend to be smaller companies, e.g.
shares to fund business ventures market town retailers

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Other organisations: co-operatives and mutual organisations

Co-operatives and mutual organisations are both owned and controlled by the members, rather
than shareholders.

• Co-operatives – The welfare of members, who may be customers or staff, is a key goal, e.g.
UK department store John Lewis

• Mutual organisations – Members are usually customers and they tend to focus on
financial products, e.g. mutual building societies such as the UK’s Nationwide

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Stakeholders
Business

Organisations don't operate in a vacuum. They affect others and others can affect them.

business

Definition

Stakeholders

Stakeholders are any parties that can affect or be affected by an organisation's strategy and
policies.

Business

We can classify stakeholders according to their position relative to the organisation:

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Classifying stakeholders:

Internal Within the company, e.g. managers, employees and board


members

Connected Outside the business but closely connected to it, e.g.


customers, shareholders, banks and suppliers

External Outside the company, not closely connected, e.g. government,


community and pressure groups.

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Stakeholder objectives

• Organisational objectives should be considered in relation to the objectives of different


stakeholders

• This ensures a wide range of needs are considered in the objective-setting process, and
balanced objectives are produced

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Stakeholder needs

The different internal, connected and external stakeholders have different needs:

Internal
Directors Pay, bonus, overall performance, job security
Employees Pay, bonus, overall performance, job security

Connected
Shareholders Share price growth, dividend payments
Customers Prices, quality, delivery times, assured supply
Suppliers Assured custom, high prices
Financiers Interest payments, ability to pay back loans

External
Government Tax, law, wealth of nation
Pressure groups Environment or other ethical issues, pricing etc.
Local community Employment, nice place to live
Wider community Environment, local jobs etc.

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Stakeholder power

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The degree to which stakeholder needs are considered as part of the objective-setting process
depends on their level of stakeholder power.

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Definition

Stakeholder power

A stakeholder’s ability to influence and affect an organisation.

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The needs of powerful stakeholders tend to be prioritised, e.g. customers who can buy in large
quantities will have more power over products and prices than customers who buy in small
quantities.

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Stakeholder mapping (Mendelow’s matrix)


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An organisation should weigh up to what extent it needs to meet a stakeholder’s needs by


mapping its stakeholders.

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Definition

Stakeholder mapping

The mapping of stakeholders onto a visual matrix to enable the organisation to determine
the nature of the relationship required.

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Mendelow’s Matrix

Mendelow's matrix identifies four levels of relationship that should be built with different
stakeholders based on:

• Power – The power to influence the organisation and affect its decision-making

• Interest – The interest which the stakeholder has in the organisation

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• Minimal effort – Stakeholders have low interest in the business and low power. The
company will provide stakeholders with basic information to meet their needs, but do little
else, e.g.. a member of the local community with no interest in the business.

• Keep informed – Stakeholders have high interest but low power, e.g. a full-time employee.
The company should regularly communicate with these stakeholders, particularly in areas
they are interested in.

• Keep satisfied – Stakeholders have high power but low interest., e.g. tax authorities They
should be kept satisfied to avoid these stakeholders from exercising their power.

• Key players (keep close) – Stakeholders have a high interest and high power. Regular
communication should be maintained, and their goals and objectives included as part of
the strategy-setting process and business approach, e.g.the CEO of a business.

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Business

Stakeholder conflicts
Business

Stakeholders have different sets of needs and expectations, which may result in conflict. It is critical
to understand the needs of varying stakeholders to resolve conflicts wherever possible.

Cyert and March

Cyert and March proposed four ways in which a company can look to resolve stakeholder conflict.

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Cyert and March’s four methods for resolving stakeholder conflict:

Satisficing A mash-up of “satisfying” and “sacrificing”. It means holding


negotiations between key stakeholder groups and arriving at
an accepted compromise.

Sequential attention Taking turns focusing on the needs of different stakeholder


groups.

Side payments The stakeholder is compensated for their unmet needs.

Exercise of power The conflict is resolved by a senior figure who exercises their
power to force through a decision.

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Stakeholders and not-for-profit organisations

Stakeholders in not-for-profit companies exercise influence in the following ways:

• Objectives and goals – Without the need for profit, goals and objectives may vary
depending on stakeholder influence

• Strategies – There may be a focus on efficiency and effectiveness of service and also
compliance with ethical standards

• Management style and practice – Volunteer environment may encourage open and
democratic style with few levels of hierarchy

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Change in organisations
Business

The rate in which change occurs in the world is accelerating as technology is becoming more
integrated into everyday life. As a result, organisations are having to adapt the way they do
business.

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Key factors of change that are forcing organisations to adapt:

Changing technology Organisations must adapt to emerging technologies, which


have capabilities to take over routine tasks and perform new
tasks.

Changing levels of Organisations are having to deal with rapid changes in the
competition levels of competition, e.g. new entrants to the market or rapid
disruption to industries.

Growing collaborative Refers to the growing popularity of sharing goods and service,
consumption which can disrupt their respective industries by creating new
business models, e.g. ride-sharing disrupting the taxi industry.

Changes to customer What the customer expects from a business and its products is
experiences changing, and businesses have to adapt to meet the
customers’ needs, e.g. faster customer service.

Less customer loyalty With greater access to information and a more competitive
market, customers tend to be less loyal to a particular brand
and more likely to research different products before
purchasing.

Globalisation Economies and cultures are becoming more integrated with


one another through interconnected networks, and the spread
of technology and media. It is easier for a business to source
products and materials in other countries, and sell products to
overseas markets.

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Changes to roles in the finance function

As wider changes happen to the organisation, the finance function has to change too. This means
the roles of those working in the finance function are evolving.

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Definition

Finance function

Controls and manages anything related to finance in an organisation.

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And finally...
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Stop!

By this stage you should know:

 What is an organisation?

 The different types of organisations

 What is the difference between private-sector and public-sector organisations?

 What an NGO is

 The two types of profit-seeking organisations

 What is the difference between unincorporated and incorporated organisations?

 What the two types of unincorporated organisations are

 About the two types of incorporated organisations

 What are co-operatives and mutual organisations?

 What stakeholders are

 How can stakeholders be classified?

 Why do stakeholder objectives need to be considered?

 The different stakeholder needs

 What is stakeholder power?

 What stakeholder mapping is

 How to use Mendelow’s matrix to map stakeholders

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 About the four methods proposed by Cyert and March to resolve stakeholder
conflict

 How to stakeholders of not-for-profit organisations exercise influence?

 About the key factors of change occurring in organisations

 How are changes to organisations affecting the finance function?

Got it?

If not, go back and re-read the study text before moving on.

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