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Business Organisations and their Stakeholders. Chapter 1. Organisation. Definition A social arrangement which pursues collective goals , which controls its own performance and which has a boundary separating it from its environment. Environment. Organisation. Organisation. - PowerPoint PPT Presentation
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Business Organisations and their Stakeholders
Chapter 1
Organisation
• Definition– A social arrangement which pursues collective
goals, which controls its own performance and which has a boundary separating it from its environment.
Organisation
Environment
Organisation
Characteristics of Organisations
• Performance– Measure performance to meet specific standards
• Systems and Procedures– Formal, documented systems and procedures allow organizations to control
the performance
• Specialise– Group of people.– Different people do different things
• Objectives and goals– Common goals– Variety of goals
• Inputs, Process, Output– Inputs (eg. Materials) and process them into outputs (eg. Products that
people could buy)
Why do organisations exist?
• Organisations enable people to be more productive– Overcome individual limitations– People can specialise in what they do best– Saves time
• People work together• Two different tasks can be done at the same time
– Accumulate and share knowledge• Shared expertise
– Synergy • Combined output of a number of individuals working together
will exceed that of the same individuals working separately• 2+2 = 5
How do organisations differCharacteristic Detail
Ownership Private vs. Public ownership
Control Shareholders vs. Management vs. government-sponsored regulators
Activity Different organisations exist in different industries hence do different types of work
Profit Motive Profit seeking vs. Not-for-profit
Legal Status Limited companies vs. Partnerships
Size Small family business or Multinational Company
Sources of Finance Borrow from banks vs. government funding vs. issuing shares
Technology Different businesses have varying degrees of technology use ex. Computer firm vs. local shop
What the organisation does
• Industry and ActivityAgriculture• Producing and Processing food
Manufacturing• Acquiring raw materials and, by the application of labour
and technology, turning them into a product• Car manufacturing company
Extractive / Raw Materials• Extracting and refining raw materials• Mining
What the organisation does
• Industry and ActivityEnergy• Converting one resource into another• Wind to electricity
Retailing / Distribution• Delivering goods to the end customer• STO
Intellectual Production• Producing intellectual property• Software, Publishing, Films, Music etc
What the organisation does
• Industry and Activity
Service Industries• Includes Business services and public services• Business – retailing, distribution, transport, banking, business
services like accounting and advertising• Public – Education, Medicine
Types of Business Organisations
Profit Motive
Commercial(profit seeking)
Exist to make a profit
Not-for-profit Not profit oriented
Primary Goal: Provision of
goods/services
Primary Goal: Maximize Profit
Profit vs. non-profit orientation
INPUTS ( Materials, Labour, Finance)
MAXIMIZE profit (Dividend)
OWNERS
PROFIT
OUTPUT of Goods / Services
INPUTS ( Materials, Labour, Finance)
PROVISION of Goods / Services
PUBLIC / BENEFICIARIES
OUTPUT (Goods / Services)
MINIMIZE cost of Primary Goal
Primary Goal
Secondary Goal
COSTS
Revenue from Goods / Services
REVENUE (TAXATION)
Profit Non profit
Types of Business Organisations
Ownership
Private sector Private owners or shareholders
Public Sector
Owned or run by the central or local government or
government agencies
The Private Sector
• Business Organisations -> Profit is the driving factor
• There are different types of businesses in the private sector– Sole Traders– Partnership– Limited company– Co-operatives
Limited Company
• Limited liability
– Owners are the shareholders who have bought a part (share) of the company
– The company has a separate legal personality from its owners
– Can be a businesses of any size
The legal protection available to the shareholders of the company under which the financial liability of each shareholder for the
company's debts and obligations is limited to the amount invested in the company
Limited Company
• Ownership and Control of a limited company are legally separate
SHAREHOLDERS• Owners• Limited rights over day to day running of
the company
DIRECTORS• Appointed by shareholders • Executive Directors • Non-Executive Directors
OPERATIONAL MANAGERS• Recruited to operated the business
EMPLOY ACCOUNTABLE TORun company on behalf of
ACCOUNTABLE TOEMPLOY
Types of Limited CompaniesLimited Companies
Private Limited Company (Ltd)
Public Limited Company (Plc)
Number of shareholders
Owned by only a small number of shareholders
Owned by a wider proportion of the general public
Transferability of shares
Shares are rarely transferable without the consent of the shareholders
Shares can be offered to the general public
Directors as shareholders
Directors are more likely to hold a substantial portion of the company’s shares
Directors less likely to hold shares
Source of Capital • Founder or promoter• Business associates of the
founder or employer• Venture capitalists
• Directly from the public• Institutional investors• Recognized markets
Advantages and Disadvantages of Limited Companies
ADVANTAGES DISADVANTAGES
More money available for investing Legal compliance cost – because of limited liability, financial statements have to be audited and published for shareholders
Limited Liability hence reduced risk for investors
Shareholders have little practical power
Separate legal personality. A company can own property, make contracts etc.Ownership is legally separate from control hence investors need not get involved in operationsNo restrictions on size
Flexibility – Capital and enterprise can be brought together
The Public Sector
Organisations owned or run by central or local government or government agencies
• The objectives of public sector companies vary depending on the type of activity it is involved in
Key Characteristics of the Public Sector
• Accountability– Usually to the Parliament
• Funding– Raising taxes– Making charges (eg. For prescriptions)– Borrowing
• Demand for Service– Demand is unlimited
• Limited Resources– Cannot always meet demand. Government expenditure
constraints (government budget) means resources are limited
Advantages and Disadvantages of Public Sector
ADVANTAGES DISADVANTAGES
Fairness Accountability. Taxpayers bear losses no one takes accountability. Results in inefficiency
Fill gaps left by the private sector by providing public goods. Everything is not profitable. Eg. Streetlights
Interference. Political pressures may result in popular rather than necessary decisions
Public Interest. Public interest can best be served if the state run certain services
Cost. Conflict between operation cost and adequate service
Economies of scale. Save costs throuh centralisationCheaper finance. Government backed borrowing or taxes can be cheapEfficiency Public sector is sometimes more efficient
Non-governmental organisations (NGO)
• Not part of government AND not for profit• Primary aim is not commercial• Diverse range of activities promoting social,
political or environmental change
An independent voluntary association of people acting together for some common purpose (other
than achieving government office or making money)
Non-governmental organisations (NGO)
• Just like Commercial organisations, NGO’s require a lot organisation structure to undertake its various day to day tasks like– Staffing by volunteers and full time employees– Finance from grants and contracts– Skills in advertising and media relations– Some kind of national “headquarters”– Planning and budgeting expertise
Co-operatives
• Co-op• Businesses owned by the workers or customers (people
who use its services)• The members of a Co-op share profits within them• Common features
– Open membership– Democratic control – one member, one vote regardless of
number of shares– Distribution of the surplus in proportion to purchases– Promotion of Education
• In a co-operative one shareholder cannot dominate
Mutual Associations
• Similar to Co-op• Owned by members rather than outside
investors• Example: Credit Unions
Questions
• Which of the following defines an organisation?– A - A social arrangement which pursues collective
goals, which controls its own performance and which has a boundary separating it from its environment
– B A social arrangement which exists to make a profit, controls its own performance and which operates within certain boundaries
Questions
• A private sector organisation is one owned or run by:– A) Central government– B) Local government– C) Government agencies– D) None of the above
Question
• Businesses owned by their workers or customers who share profits are called– A Limited Companies– B Private limited companies– C Co-operatives– D Partnerships
Individuals or groups that, potentially, have an interest in what the organisation does
Stakeholders
• In an organisation:– Managers are not free to do as they please. – Managers have to consider different groups of
stakeholders before setting objectives– Manager s are agents for the stakeholders
Types of Stakeholders
Inside the organisation with contractual relationship
Outside the organisation but connected by way of a contract of some sort
Entirely outside the organisation with no contractual relationship
Prim
ary
Stak
ehol
ders
Seco
ndar
y St
akeh
olde
rs
Internal Stakeholders
• Employees and Management• Internal stakeholders are intimately connected to the
organisation, hence their objectives are likely to have a strong influence on how it is run
Internal Stakeholder Interests to defend Response Risk
Employees and Managers • Job/Careers• Money• Promotion• Benefits• Satisfaction
• Pursuit of “system goals” rather than shareholder interests
• Industrial action• Negative power to
impede implementation
• Refusal to relocate• Resignation
Connected Stakeholders
Connected Stakeholder Interest to defend Response Risk
Shareholders • Increase in shareholder wealth measured by Profitability, increased dividends
• Sell shares or boot out management
Banks • Security of loan• Adherence to loan
agreement
• Denial of credit• Higher interest charges• Receivership
Suppliers • Profitable sales• Payment for goods• Long-term relationship
• Refusal of credit• Court action• Wind down relationship
Customers • Goods as promised• Future benefits
• Buy elsewhere• sue
External Stakeholders
External Stakeholder Interests to defend Response risk
Government • Jobs, training, tax • Tax increase• Regulation• Legal action
Interest/pressure groups • Pollution• Rights• Other
• Publicity• Direct action• Sabotage• Pressure on government
Professional bodies • Member’s ethics • Imposition of ethical standards
• External stakeholders have very diverse objectives
Stakeholder Conflict
• Because different stakeholders have different interests and some of these interests clash, conflicts between stakeholders arise.
Stakeholders Conflict
Employees vs. Managers Jobs/wages vs. bonus (cost efficiency)
Customers vs. shareholders Product quality/service levels vs. profits/dividends
General public vs. shareholders Effect on the environment vs. profit/dividends
Managers vs. shareholders Growth vs. independence
Source: http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Stakeholder%20analysis.aspx
Stakeholder mapping: Power and Interest
• Mendelow matrix can be used to classify stakeholders according to their power and interest.
• It helps understand the influence each stakeholder has over the organisation’s objectives
• It helps define the type of relationship the organisation should seek with its stakeholders.
AMinimal Effort
DKey Players
CKeep Satisfied
BKeep informed
LOW
LOW
HIGH
HIGH
Power
Level of Interest
Mendelow Framework
LOW
LOW
HIGH
HIGH
Power
Level of Interest
Stakeholder’s ability to influence objectives (What they can do)
Stakeholder’s willingness (How much they care)
HIGH POWER – HIGH INTEREST
• Key players• Stakeholders with highest
influence• Ex. Major customers• Most important
HIGH POWER – LOW INTEREST
• Keep Satisfied• Capable of being key players• Ex. Institutional shareholders
LOW POWER – LOW INTEREST
• Minimal Effort• Can be ignored
LOW POWER – HIGH INTEREST
• Keep informed• Low influence• May move downwards by
making coalitions• Ex. Community representatives
and charities
Why map stakeholders?
• By mapping stakeholders, we are in effect evaluating the significance of each stakeholder to the organisation. – Corporate governance– Reposition – Identify blockers and facilitators
• Each group in the Mendelow framework has 3 choices:– Loyalty : do as told– Exit: sell shares or quit job– Voice: Stay and change the system. Influence the organisation
The Strategic Value of Stakeholders
• Managing stakeholder relationships can help firms make strategic gains.– Correlation between employee and customer
loyalty (reduced staff turnover -> repeat business)– Continuity and Stability in relationships with
employees -> helps respond to change -> necessary for sustanability of business
Measuring Stakeholder Satisfaction
• How can an organisation know whether they have been successful in satisfying their stakeholders?
• Many stakeholder expectations relate to qualitative matters so difficult to measure
Stakeholder group MeasureEmployees Staff turnover, pay and benefit relative to
market rate, job vacanciesGovernment Pollution measures, promptness of filling
annual returns, accident rate, energy efficiency
Distributors Share of joint promotion paid for, rate of running out of inventory
Questions
• Which one of the following are examples of internal stakeholders?– A) Shareholders– B) Employees– C) Suppliers– D) Financiers
• According to Mendelow’s matrix, stakeholders in segment C (Low Interest, high power) should be kept informed. Is this true or false?