CIMA E1 Course Notes. Chapter 1. Introduction to Organisations

Transcription

1 CIMA E1 Course Notes Chapter 1 Introduction to Organisations

2 1. Organisations Introduction An organisation is a social group of people that is organised and managed in a way that aims to follow a corporate goal or need. All types of businesses follow a structure that is controlled by management who determine how the business performs particular activities and the key roles and responsibilities of it's members. 2. Types of organisation The economy of a country can generally be split into two sectors: the private sector and the public sector. Organisations within these sectors can be profit seeking or not for profit. Profit seeking organisations Profit seeking organisations operate to maximise returns for owners or shareholders. Therefore, profitability is their primary objective. Such organisations can be split into two main groups which are distinguished by the extent of liability the owners have for company debts. Unincorporated the business owners and the business itself hold the same legal identity. This means the owners are held personally responsible for the debts a company may incur. Therefore they are considered to have

3 unlimited liability for the business s debts. The two main types of ownership in this category are: Sole trader one sole owner of the business (wholly liable for debts) Partnership a collection of owners working together (jointly liable for debts) Incorporated the business owners and the business itself have a separate legal identity. This means the owners are not held personally responsible for the debts a company may incur. Therefore they are considered to have limited liability for the business s debts. The two main types of ownership in this category are: Private limited companies shares cannot be issued to the public. Often a smaller company such as a market town retailer. However, can be larger companies looking to retain a high degree of control. For example: Walkers Snack Foods Ltd and New Look Retail Ltd Public limited companies shares can be issued to the public. Usually larger companies who wish to increase funding for business ventures through a public share offering. For example: Tesco Plc and British Airways Plc Not for profit organisations Not for profit organisations do not set out to make a profit for their owners. This does not mean that they are unprofitable, but their aim is to provide a service to their members and subscribers rather than maximise returns for owners. Like profit seeking companies they aim to operate efficiently and to be cost effective. Not for profit organisations include trade unions, charities, co-operatives, mutual organisations, clubs and societies and educational establishments. Not for profit organisations exists in both the public and private sector: Public sector - owned by the state and are responsible to the government for their business activities. Public sector organisations can be in the form of a state owned industry or a government run department. For example, The NHS and The Forestry Commission Private sector similar structure to profit seeking companies in that they are owned by investors and responsible to the shareholders/owners. However, their goals and objectives do not surround profit maximization, rather focus on other goals such as ethical standards and service delivery. For example, Oxfam and Cancer Research UK. 3. Stakeholders As we have seen a profit seeking organisation has a primary responsibility to maximise wealth for its shareholders. However, there are a number of

4 groups which have an interest in how an organisation operates. These groups are called stakeholders. Stakeholders can affect or be affected by an organisations strategy and policies. Therefore, it is important for all organisations to understand their stakeholders and the stakeholders interests. Examples of stakeholders include: customers, employees, suppliers, creditors, debtors, the community, government and unions. Each stakeholder will exert a different level of influence over how an organisation operates. This influence can be positive (supporting or contributing) or negative (blocking or opposing). In the example below the influence of customers is considered: Supporting leaving positive feedback/reviews, championing the brand, extending the reach of the product or service to new customers (friends and family etc.) Opposing leaving negative feedback/reviews, switching to a competitor Participating suggestions for improvement (Research & Development stage or continuous) Classifying Stakeholders To inform decision making and policies it is crucial that an organisation classifies its stakeholders into various groups. This can be done in a number of ways; for example, the organisation can determine whether the stakeholder is internal, external or connected. Internal stakeholders who reside within the company, e.g. managers, employees, board members. External stakeholders who reside outside of the company and are not closely connected with the company s core offering, e.g. government, community, pressure groups Connected stakeholders who are closely connected to the company s core offering, e.g. customers, shareholders and suppliers

5 Mendelow s matrix An additional tool for analysing stakeholders is Mendelow s matrix. The tool recognises that each stakeholder or stakeholder group will have a different level of interest in business activities, as well as a different level of power over how the company operates. Mendelow suggests these criteria (as can be seen in the axes below) are critical in informing how a business builds its relationship with stakeholders and how this should inform decision making. a) Low priority stakeholders with a low level of interest and low power require the least consideration when making business decisions. An example of such stakeholder is an independent contractor hired for intermittent

6 building work. These stakeholders should be monitored, but require minimal effort. b) Keep informed stakeholders with a high level of interest and low power need to be kept informed when making business decisions. An example is the local community or community representatives. They have no great influence on business decision making, but may influence other more powerful stakeholder groups, by protesting or lobbying etc. Therefore, they should be kept informed of relevant decisions and involved in the decision making process where necessary. For example: holding community meetings/outreach work and keeping the community informed through leafleting and newsletters. c) Keep satisfied - stakeholders with a low level of interest and high power should be kept satisfied during business decision making. An example could be national government. Such groups may have no direct interest, but have the potential to move to (d) if the business activity concerns or involves them. Stakeholders in this sector should be monitored and kept involved in the decision making process. For example: consultation with government on environmental issues and complying with regulations. d) Key players - stakeholders with a high level of interest and high power must be consulted with throughout the decision making process. An example, for a profit seeking, private sector organisation, would be shareholders. It is critical to keep this group informed and involve them in decision making. For example: conducting regular board meetings where shareholders views can influence decision making and updating shareholders regularly with strategic plans. Stakeholder conflicts It is crucial that an organisation realises its stakeholders have different sets of need and expectations. These needs and expectations may result in conflict between stakeholders. Therefore, it is critical to understand such conflicts when making decisions and to resolve these wherever possible. Some examples of stakeholder conflicts are:

7 Cyert and March propose four ways a company can look to resolve stakeholder conflict: Satisfying holding negotiations between key stakeholder groups and arriving at an accepted compromise Sequential attention focussing on stakeholder groups in order based on the importance of action Side payments when a stakeholders needs cannot be met initially they are compensated in some way as a compromise Exercise of power when a compromise or action cannot be agreed upon it is resolved by a senior figure who exercises their power to force through a decision Stakeholders and not for profit organisations As discussed in a profit seeking organisation the shareholders will be the key stakeholders. However, for a not for profit organisation other stakeholders will be most important. Due to the competing demands of a variety of stakeholders, the organisation must manage expectations and balance demands. Below is an example of a charity, its stakeholders and their competing demands: Stakeholders in not for profit companies exercise influence in the following ways: Objectives and goals without the need for objectives based on profit, goals and objectives may vary depending on stakeholder influence. For

8 example, donors may require objectives based on delivery of funds to beneficiaries Strategies in terms of how the company operates as a whole, again profitability will not be a key strategy. However, there may be a focus on efficiency and effectiveness of service and also compliance with ethical standards Management style and practice how employees are treated is likely to be of critical importance given the nature of low paid employees and volunteers. There may be an impetus to manage in an open and democratic style with few levels of hierarchy Mintzberg Academic Henry Mintzberg identified 5 key areas of a business, each with their own unique contributing factors towards effective production and operations. Like the Cousins strategic wheel (discussed later in the chapter) they must all be considered when aligning operational strategy as they are all interlinked and thus will affect each other: The strategic apex control the direction and strategy of the firm, they are usually the directors and senior managers, the middle line then take these goals/strategies and turn them into tasks and jobs that they then designate to the operational core who then conduct the day to day operational jobs such as procurement and sales. These three categories are assisted by the technostructure that design and standardise work processes and outputs (such as quality control etc.) these may be roles such as accountants and engineers. Finally the support staff make up the rest of the organisation, these workers supply the general infrastructure that allows the businesses to operate in a sustained and maintainable environment; this encompasses many roles from legal teams to canteen/cleaning staff.

9 Some functions such as finance can take on roles in two different areas in this case (i) technostructure rules for company approach to finance and budgeting (ii) support staff providing financial information to both internal and external stakeholders. 4. Dimensions of Organisations There are two different types of dimensions in organisational design; structural and contextual. Structural dimensions describe the internal characteristics of an organisation, whereas contextual dimensions focus on everything that shapes the structure of the organisation. Both types of dimensions have a number of factors that impact the design structures of organisations: Structural Dimensions: Specialisation Specialisation focuses on grouping. Organisations often split into departments and this is done through specialisation. Specialisation encourages efficiency because it may require less training to become an efficient worker, thus encouraging an increase in productivity. Formalisation Formalisation is about the number of rules, policies and procedures that a business follows. Formalisation is more commonly found in highly regulated working environments such as hospitals and nuclear power stations where health and safety is at a high risk. Whilst formalisation ensures that the organisation is following legal standards and safety regulations, it can mean that the organisation is restricted to change. Size The structure of an organisation can be highly dependent on the size of the organisation itself. Smaller company's such as as single retail store or a restaurant tend to hold a rather simple structure. Larger organisations tend to acquire a more formal structure where tasks are highly specialised and detailed rules and leadership influence work procedures. As a result, the basic design dimensions of larger organisations are generally formalised, specialised, standardised and complex. Contextual Dimensions: Technology Technology can play an important role in the structure of an organisation, in addition to determining how work flows through a business. With the introduction of computer networking, businesses encouraged their

10 employees to work as groups. As a result, employees were not restricted to work in the same room or even the same building. Technology is also impacting businesses in a way that can eliminate unnecessary jobs such as file clerks, saving valuable time and money to businesses. At the same time, this also means that there is a need for IT technicians as a department to maintain and grow the computer network. As technology proceeds to take over many jobs in the workplace, the form of organisational structure also changes within it. Environment The business environment may have an impact on a company's organisational structure. Environments can be described as either stable or dynamic: Stable Environment In a stable environment, there are minimal or subtle changes. The business is able to predict the organisational performance and may feel confident with the consumers' wants and needs because they are likely to remain consistent for a long period of time. An example of an organisation that may be in a stable environment is a manufacturer of cleaning products such as Nicols. Dynamic Environment In a dynamic environment, the organisation performance tends to be less predictable. Customers' desires are continuously changing, resulting in great difficulty for businesses to keep up with such high demands. It is important for businesses in dynamic environments to keep technology up-to-date, in order to maintain some control. An example of an industry that functions in a dynamic environment is electronics. With technology continuously developing, the competition for electronics industries continues to build competitive pressures, a long with the changing desires of customers. Generally, organisations operating in stable environments tend to use a more automated structure. This approach ensures efficiency, to cope with the minimal changes that will benefit the long-term performances. In contrast, organisations operating in dynamic environments are more likely to use a more integrated structure because it allows the organisation to respond to change much more productively. Culture Business culture is a key element in business relating to the behaviour, ethics, etiquette, communication, social media and more. It can have a strong impact on the organisational structure and strategic direction of a business. Culture plays a significant role in management decisions and

11 choices, along with business functions. Businesses using a hierarchical structure, will reflect a culture where freedom is discouraged. On the other hand, if a company's organisational structure is decentralised, the culture is likely to be more independent and personalised as a result of the shared power and authority. 5. Organisational Structure Organisational structure is the arrangement of roles, responsibilities and reporting relationships within an organisation. This arrangement is designed to ensure the most efficient and beneficial coordination of activities, management of people and measurements and control, according to the activities of the organisation. There are four main types of organisational structures: Functional Functional organisational structure is a structure where the organisation is grouped into functional areas, such as IT, marketing and human resources. A functional structure allows employees to focus on their most knowledgeable and skilled subject. It can be argued that functional structures allow greater operational efficiencies whereby employees with shared skills and knowledge are grouped together. Divisional Divisional organisational structure like functional structures, consists of several teams (divisions) focusing on a single product or service line. However, it differs from a functional structure because divisions are more independent than departments. Geographical Geographic organisational structure is typically used in companies with operations that are distributed over a large region. For example, national or international offices. Regional managers are given complete authority over their region. Matrix Where the organisation is divided into multiple reporting lines; or a structure where individuals may have more than one superior is classified as a matrix structure. For example, a manufacturer of consumer goods may have three divisions: foods, personal care and cleaning products. It may also be divided into three structural divisions such as sales, marketing and distribution. Each employee will therefore work in two divisions, one functional and one product. In this case, an employee might be a unit of

12 the sales division as well as the foods division, both of which are controlled by two different managers. 6. Forms and Functional Boundaries Vertical and Horizontal Structures As explained earlier, an organisations structure determines how roles are allocated, how work is divided and who is in position of authority. Evidently, there are a number of different structures that a business can adopt. To explain further, the structure that a business chooses to operate in can depend on the business goals and objectives. Most companies operate with a vertical structure, however some may favour the horizontal structure. Vertical Vertical organisational structures focus on a strict hierarchical layering system, meaning that power of authority remains at the top of the system. This may apply to the organisation as a whole or to a specific project, team or department within the company. Employees in this type of structure report to the person directly above them. Advantages of Vertical Structures: Efficient Decisions can be made quickly Responsibility is in the hands of the person in the highest chain of command. Clearly defined duties Specialised tasks: less need to learn new tasks and skills Disadvantages: Strict: many rules to follow Employees may feel that their input isn't important. Horizontal Horizontal organisational structures allow employees across horizontal lines to have similar input into how the organisation is run. This means that the organisation holds a less-defined chain of command where employees have no set duties; instead employees might work in teams where equal input is encouraged. Instead of employees reporting to a single person of authority, there is the option to report to several supervisors.

13 Advantages: Fewer rules-based Employees have more power: encouraging employee satisfaction Employees feel a stronger sense of identification: part of a team. Disadvantages: Less efficient A lot of time and resources spent making decisions Bigger need to learn skills: high stress levels for employees Closed and Open Systems Systems are generally described as a group of interacting units or elements that have a common purpose. Systems in organisations can be classified as open or closed systems: Open systems Open systems interact with other systems or the outside environment. Open systems have open boundaries that allow feedback exchanges from inside and outside the business. The controllers of open systems concentrate on their external and internal environment and customer needs and reactions. Unlike closed systems, open systems are not restricted to one specific way to accomplish goals and they can reach similar results with different conditions and operations. Closed systems Closed systems are not determined by external influences like the environment, external resources, competition and suppliers to name a few. This type of system allows managers and organisational theorists to analyse problems through examination of the internal structure of a business with little influence of the external environment. Outsourcing Outsourcing is the process of 'going out' to find the 'source' of what a business might need. When businesses require a certain expertise or skill that they may not have within their organisation, one option is to turn to external sources. It may be the case that, these tasks can be performed by in-house employees however there may be financial advantages that come from outsourcing.

14 An example of outsourcing is an organisation using an external call centre company that may even be located overseas. The main reason to outsource is because it often saves organisations a substantial amount of money. Many companies, like call centres, are able to work for a considerable amount cheaper because they don't have to provide benefits and incentives; whilst also reducing risks and office space. Another advantage of outsourcing is the fact that companies can seek for the best experts for specialised work, without having to train their current employees, which may take up a lot of time. Of course, there are some disadvantages to outsourcing. An obvious drawback is the fact that the business will have less direct oversight and control over the product or service that it is purchasing, which can be a massive threat towards the company and its customer. Outsourcing overseas can also be a problem, one major problem is the language barrier. Security can also create issues for the organisation that is outsourcing it's private information. Alliances Alliances in business is the process of two or more firms joining together to combine talents or strengths in order to grow. Alliances tend to have similar goals for a specific purpose such as improving customer service and reducing costs. Both businesses usually have a team that shares the agreement of sharing risk and opportunity. There are five basic types of alliances: 1. Sales alliances: selling products or services that compliment one another. 2. Solution-specific: an agreement to develop and sell a particular business solution together. 3. Geographic-specific: an agreement to market products and services in a particular geographical location together. 4. Investment: the agreement to combine funds for shared investment. 5. Joint venture: an agreement to share control, profit and loss in a particular economic undertaking. Small business wanting to grow look for alliances because such partnerships can quickly and cheaply provide access to technology, expertise, marketing, production, distribution and other capabilities. The opportunity to grow is clear within alliances because new markets are reached because each partner's distribution channels are open to market.

15 Virtual Network Structures The virtual network structure is an organisation structure where a firm outsources a number of its major processes to different companies and coordinates their activities from it's headquarters to gain proficiency in the competitive market. Managers in a virtual network structure spend a lot of time coordinating and controlling external relations. The virtual network structure lowers costs and encourages flexibility because it uses the help of external (usually larger) companies. However, a business using a virtual network structure can lose control over the processes that they may assign to others.

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