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

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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?