Business Organisations and Their Stakeholders Study Notes

Chapter 1: Business Organisations and Their Stakeholders

Characteristics of Organisations

Definition of Organisation

• An organisation is defined as a ‘social arrangement which pursues collective goals, which controls its own performance and which has a boundary separating it from its environment’.
      - Boundaries can be physical (such as location) or social (such as cultural context).

Syllabus Learning Outcomes

Business Organisations

• Define ‘business organisations’ and explain why they are formed.
• Describe common features of business organisations.
• Describe how business organisations differ from each other.
• List the sectors in which business organisations operate.
• Identify the different types of business organisation and their main characteristics.

Stakeholders

• Define stakeholders and explain the agency relationship in business and its variance in different types of business organisations.
• Define internal, connected, and external stakeholders and discuss their impacts on organisations.
• Identify the main stakeholder groups and their objectives.
• Explain the interactions between different stakeholder groups and potential conflicts of their objectives.
• Compare the power and influence of various stakeholder groups and how their needs should be addressed, referencing the Mendelow matrix.

Common Characteristics of Organisations

• Pursue a variety of objectives and goals.
• Specialisation exists as different people do different things in the organisation.
• Focus on performance and the goal of meeting or improving standards.
• Contain formal, documented systems and procedures for control.
• Acquire inputs (e.g., materials) and process them into outputs (e.g., products for sale).

Why Organisations Exist

Reasons Organisations Achieve Results

1. Overcoming Individual Limitations: Organisations can overcome physical or intellectual limitations that individuals may face.
2. Facilitating Specialisation: Enable individuals to specialise in the tasks they perform best.
3. Saving Time: Allow for simultaneous task execution by groups.
4. Accumulating and Sharing Knowledge: Serve as a platform for collective learning.
5. Synergy: The combined output of a group working together exceeds what individuals can accomplish alone.

How Organisations Differ

Points of Differentiation

1. Ownership:
      - Private sector organisations are owned by shareholders.
      - Public sector organisations are owned by the government.
2. Control:
      - Businesses may be controlled by the owners, employees, regulators, or the state.
3. Activity:
      - Ranges widely from agriculture to manufacturing to healthcare.
4. Profit Orientation:
      - Most businesses aim to generate profit, while some, like the military, are service-oriented.
5. Legal Form:
      - Includes limited companies vs partnerships.
6. Size:
      - Ranges from family-owned businesses to multinational corporations.
7. Sources of Finance:
      - Differentiated by debt vs equity financing.
8. Technology Utilisation:
      - Varies based on the type of company.

Sectors in Which Organisations Operate

1. Industry Activity:
      - Agriculture: Producing and processing food.
      - Manufacturing: Transforming raw materials into finished products (e.g., automobiles).
      - Extractive Industries: Extracting and refining raw materials (e.g., mining).
      - Energy: Converting resources into energy (e.g., coal into electricity).
      - Retailing/Distribution: Delivering goods to consumers.
      - Intellectual Production: Producing content such as software, films, or music.
      - Service Industries: Covers various sectors, including transport, banking, and healthcare.

Types of Business Organisations

Examples

• Commercial: Sinopec
• Not-For-Profit (NFP): Olympic Committee
• Public Sector: Fire Service
• Charity: Save the Children
• Trade Union: All-China Federation of Trade Unions (ACFTU)
• Local Authority: Provincial Government
• Non-Governmental Organisations (NGOs): UNICEF
• Co-operatives: China Co-op

Profit vs Not-For-Profit Organisations

Main Differences

• Primary Goals:
     - Profit-oriented organisations aim to maximise profit for owners, primarily through dividends.
     - Non-profit organisations prioritize the provision of goods/services for public benefit or beneficiaries.
• Secondary Goals:
     - Profit organisations focus on output while minimising costs; non-profits focus on income through taxation and managing expenditures.

Private vs Public Sector

Definitions

• Private Sector: Organisations not owned or run by the government.
• Public Sector: Organisations owned and operated by government entities.

Characteristics of Public Sector Organisations

• Accountability: Ultimately responsible to the government.
• Funding Sources:
     - Raising taxes
     - Making charges
     - Borrowing
• Demand: Service demand is practically limitless, unlike price-driven demand in the private sector.
• Limited Resources: Despite demand, resources are constrained due to governmental expenditure limits.

Advantages and Disadvantages of Public Sector

Advantages

• Ensures fair access to services for all, irrespective of ability to pay.
• Fills gaps in private sector services (e.g., public goods).
• Can better serve the public interest through state provision of necessary services.
• Benefits from economies of scale and centralised purchasing power.
• Often secures cheaper finance from government backing.

Disadvantages

• Accountability issues can result in inefficiencies due to taxpayer responsibilities.
• Political interference may occur despite lack of business operational knowledge.
• Balancing cost and service adequacy presents resource challenges.

Private Sector Commercial Business Organisations

Structure

• Profit remains the driving force; however, various legal structures exist:
    - Sole traders
    - Partnerships
    - Limited liability companies

Limited Companies Explained

• A limited company has a separate legal personality from its owners (shareholders).
• Shareholders typically cannot be sued for business debts, with liability limited to their investment amount.

Ownership vs Control in Limited Companies

• Ownership: Shareholders are regarded as owners who provide capital.
• Control: Operates through directors:
    - Executive Directors: Manage daily operations.
    - Non-Executive Directors: Offer advice to the board.

Advantages of Limited Companies

• Enhanced investment capital availability.
• Reduced risk for investors due to limited liability.
• Ability to own property and enter contracts as distinct legal entities.
• Ownership separation from operation provides flexibility.
• Capacity to grow without size restrictions, accommodating many shareholders.

Disadvantages of Limited Companies

• Legal compliance incurs audit and publication costs.
• Shareholders wield minimal practical power beyond selling shares or voting out directors.

Differences Between Private and Public Limited Companies

Key Aspects

• Naming Convention: Exhibits as X Ltd (Private) or X plc (Public).
• Shareholder Market: Limited market for private, broader public market for public.
• Transferability of Shares: Private companies often require consent for share sales; public companies can trade publicly.

Co-operative Societies and Mutual Associations

Characteristics of Co-operatives

• Owned by workers/customers; profits are shared amongst members.
• Open membership.
• Democratic control (one member, one vote).
• Surplus distributions based on purchases.
• Education promotion among members.

Mutual Associations

• Similar to co-operatives, members ‘own’ the association rather than external investors.
• Credit Unions are a key example, offering financial services to their members.

Stakeholders Defined

• Stakeholders are individuals or groups with a vested interest in the organisation.

Types of Stakeholders

1. Internal Stakeholders: Employees and management.
2. Connected Stakeholders: Shareholders, customers, suppliers, financiers.
3. External Stakeholders: Community, government, pressure groups.

Conflict Among Stakeholders

• Conflicts may arise from differing stakeholder objectives, such as:
    - Shareholders: Focus on share price and dividends via profit growth.
    - Directors: Concerned with personal bonuses/salaries.
    - Employees: Interested in salary increases.
    - Customers: Seek lower prices.
    - Suppliers: Desire higher prices for goods.
    - Government: Focus on taxation and employment factors.
• Compromise is often necessary to ensure stakeholder satisfaction.

Supermarket Example of Conflict

• Stakeholder conflicts manifest as:
    - Customers looking for lower prices.
    - Employees seeking higher wages.
    - Farmers pushing for higher payments for goods.
    - Shareholders often desiring the inverse.

Mendelow's Power-Interest Matrix

Understanding the Matrix

• The matrix positions stakeholders based on their power and interest in the organisation's activities.
• Categorises as:
    - A: Minimal Effort (e.g., casual labor)
    - B: Keep Informed (e.g., core employees)
    - C: Keep Satisfied (e.g., institutional shareholders)
    - D: Key Players (e.g., main suppliers)

Categories Explained

• D (Key Players): Strategy must be acceptable to these stakeholders. They may engage in decision-making.
• C (Keep Satisfied): These stakeholders require careful treatment as they are passive but can increase influence.
• B (Keep Informed): Limited influence but their views can affect more powerful stakeholders.
• A (Minimal Effort): Minimal engagement required.

Significance of Stakeholder Groups

• Stakeholder mapping must be dynamic, as positions can change with new strategies. The corporate governance framework should acknowledge stakeholders' power and interest levels and, where necessary, reposition them in contexts of organisational change.

Stakeholder Responses to Dissatisfaction

• Options include:
    - Loyalty: Compliance with the status quo.
    - Exit: Selling shares, leaving employment.
    - Voice: Attempting to enact change within the organisation.

Exam Focus Points

Potential Exam Questions

• Identify who the stakeholders are in a given situation.
• Determine the specific interests of stakeholder groups.

Specimen Exam Questions and Solutions

• Q5: What should directors focus on for policies in alignment with public interests?
    - Answer: The collective well-being of stakeholders— directors account for multiple constituencies, including shareholders, employees, and connected stakeholders.

• Q23: Identify connected stakeholders from a provided list.
    - Answer: Customer and Supplier— both engage in business transactions but are external to management.

• Q30: What characteristics distinguish public limited companies from cooperatives?
    - Answer: Members can vote based on shares owned, and shares can be traded through personal transactions.

Specimen Exam - Section B

Background Scenario: Sport-4-Kidz

• A charitable sports centre with trustees holding land for the facility. The management committee oversees operations and has proposed facility expansion, facing local resident opposition concerning construction impacts. Local politicians are involved in the residents' committee.

Task 1 Answers (Stakeholder Classification)

• Local residents = External
• Building companies = Connected
• Management committee = Internal
• Donna and Dietmar = Connected

Task 2 Answers (Mendelow's Grid)

• Building companies: Low power, High interest— kept informed.
• Local residents: High power, High interest— treated as key players.
• Use local politicians' influence and interest in the communications strategy.

Summary of Chapter 1

• Business organisations exist to achieve collective results unattainable by individuals.
• Key types include commercial, non-profit, public sector, and NGOs.
• Limited liability companies operate as distinct legal entities from their owners.
• Stakeholders hold vested interests and require balanced consideration in managerial strategy making.