ACCA BT (F1) - Business and Technology
Chapter 1 - Business Organizations and Stakeholders
Complete Notes
Chapter 1
Business Organizations and their Stakeholders.
Purpose, Type and Reasons for Existence of
Organizations:
Organizations can achieve results which individuals cannot
achieve by themselves
Definition of Organization: A social arrangement which
pursues collective goals, controls its own KEY performance and has a
boundary separating it from its environment.
The common characteristics of organizations are as follows:
They work towards a variety of objectives and goals
There are several people who do different things resulting in
specialization in one activity.
Organizations target to achieve good performance by working on
improvements of standards or meeting target goals in the best
possible way.
Organizations are based on formal, documented systems and
procedures which help them control their tasks.
Mostly organizations are obtaining inputs like raw materials to
process them into saleable outputs which others can buy.
Organizations are different from each other due to several
reasons:
Sectors in which Organizations Operates:
1. Agriculture: To Produce and process food
2. Manufacturing: Acquiring raw materials using labor and
technology to convert raw material acquired into a product (e.g., a car)
3. Extractive/raw materials: This includes Extraction and refining
of raw materials (e.g., mining)
4. Energy: This includes Converting of one resource (e.g., coal)
into another (e.g., electricity)
5. Retailing/distribution: To Deliver goods to the end consumer
6. Intellectual production: Involve in Production of intellectual
property (e.g., software, publishing, films, music)
7. Service industries: This involves different areas like retailing,
distribution, transport, banking, various business services (e.g.,
accountancy, advertising) and public services such as education,
medicine
Organizations are categorized into different
types including:
1. Commercial
2. Not for profit
3. Public sector
4. Charities
5. Trade unions
6. Local authorities
7. Non-governmental organizations (NGOs)
8. Co-operative societies and mutual association
Areas of differentiate between Profit and Non-
Profit Organizations:
Public Sector vs Private Sector:
Organizations which are owned and run by the government fall under the public sector.
Apart from these all the others are part of the private sector.
Limited Liability Companies
These companies are denoted by X Ltd or X plc in the UK
These companies hold the status of separate legal entity that
means they are separate from their owners (shareholders).
This means that the shareholder’s liability is limited to the
amount they have invested in that company, which is the key benefit.
Main advantages include:
More money is available for investment from different
shareholders
These organizations can easily raise capital from banks
and other lenders
Ownership and control are legally separated, investors
need not run the company
However, there are some drawbacks for such companies which
include:
Greater administrative burden and cost, especially for
listed entities
Lack of privacy as financial statements are publicly
available
In UK, there are 2 types of limited companies:
Private limited companies (e.g., X Limited)
Co-operative Societies and Mutual
Associations
Owned by their workers or customers, who share the profits
Some common features include:
Open membership
Democratic control (one member, one vote)
Distribution of the surplus in proportion to purchases
Promotion of education
However, unlike limited companies there is some measure of
democratic control, this is based on one share, one vote which means:
No shareholder can dominate a co-operative.
Mutual associations are organizations that exist for the mutual
benefit of their members. Such as:
Savings and loan organizations (building societies in
the UK) in which the members are the savers who deposit
their savings in the organization.
As there are no external shareholders to pay dividends
to, the profits of the organization are enjoyed by members in
the form of more favorable interest rates.
A person or group of people who have a stake in the
organization.
Stakeholders
Agency Relationship:
Managers of the organizations are the agents for the
stakeholders.
Agency relationship refers to the concept of separation between
an organization’s owners (the shareholders) as the ‘principal’, and
those managing the organization on their behalf (the company
directors) as their “agent”.
Primary vs Secondary Stakeholders
Primary stakeholders:
They are the shareholders or the partners of the
proprietor.
Their major stake/interest is the money invested in the
business.
Therefore, they expect a return on their investment so
that their wealth increases either in terms of growing profits
or increasing share value.
Secondary stakeholders:
All other parties apart from primary stakeholders who have a stake/interest in the
business fall under this category.
Usually owned by a small number of people (family members), and their
shares are not easily transferable usually
1. Public limited companies (X plc)
Stakeh What is
olders expected
W out of
h them
a from the
t business?
i
s
a
t
s
t
a
k
e
?
Directo
rs/
manag L
ers i
employ v
ees and e
trade li
unions
h
o
o
d
s
C
a
r
e
e
r
s
R
e
p
u
t
a
ti
o
n
s
F
a
ir
a
n
d
g
r
o
w
i
n
g
r
e
m
u
n
e
r
a
ti
o
n
C
a
r
e
e
r
p
r
o
g
r
e
s
si
o
n
S
a
f
e
w
o
r
k
i
n
g
e
n
v
ir
o
n
m
e
n
t
T
r
a
i
n
i
n
g
P
e
n
si
o
n
Custo
mers
T
h
e
ir
c
u
s
t
o
m
P
r
o
d
u
c
t
s
/
s
e
r
v
i
c
e
s
t
h
a
t
a
r
e
o
f
g
o
o
d
q
u
a
li
t
y
a
n
d
v
a
l
u
e
F
a
ir
t
e
r
m
s
o
f
tr
a
d
e
C
o
n
ti
n
u
it
y
o
f
s
u
p
p
l
y
Supplie
rs and
other T
busines
s
h
partne e
rs it
e
m
s
t
h
e
y
s
u
p
p
l
y
F
a
ir
t
e
r
m
s
o
f
tr
a
d
e
P
r
o
m
p
t
p
a
y
m
e
n
t
C
o
n
ti
n
u
it
y
Lender Money lent A return
s on their
investment
:
I
n
t
e
r
e
s
t
R
e
p
a
y
m
e
n
t
o
f
c
a
p
it
a
l
Govern
ment
& it’s N
agencie a
s ti
o
n
a
l
i
n
fr
a
s
tr
u
c
t
u
r
e
u
s
e
d
b
y
b
u
si
n
e
s
s
T
h
e
w
e
lf
a
r
e
o
f
e
m
p
l
o
y
e
e
s
T
a
x
r
e
v
e
n
u
e
R
e
a
s
o
n
a
b
l
e
e
m
p
l
o
y
m
e
n
t
a
n
d
o
t
h
e
r
b
u
si
n
e
s
s
p
r
a
c
ti
c
e
s
S
t
e
a
d
y
o
r
ri
si
n
g
s
tr
e
a
m
o
f
t
a
x
r
e
v
e
n
u
e
The Reasonabl
local e
commu N employme
nity a nt and
and ti other
public o business
at n practices
large
a
l
i
n
fr
a
s
tr
u
c
t
u
r
e
u
s
e
d
b
y
b
u
si
n
e
s
s
T
h
e
w
e
lf
a
r
e
o
f
e
m
p
l
o
y
e
e
s
The Reasonabl
natural e
enviro T environme
nment h ntal and
e other
e business
n practices
v
ir
o
n
m
e
n
t
s
h
a
r
e
d
b
y
a
ll
Types of Stakeholders by Johnson & Scholes (2005):
As per this model internal and connected falls under “primary stakeholders” category
whereas external is part of “Secondary stakeholders”.
Stakeholder Conflict
As the interests of different stakeholders may be widely
different, conflict between stakeholders may exist.
Potential for such conflict should be considered by managers
while policy setting
Managers must be prepared to deal such scenarios with their
effecting organization’s performance.
Most commonly occurring conflict is usually between managers
and shareholders. The relationship gets disputed when the managers’
decisions focus on maintaining the organization as a vehicle for their
managerial skills whereas the shareholders are pleased to see changes
which will enhance their dividend stream and increase the value of
their shares.
These conflicts can be seriously damaging to the company’s
stability.
Shareholders may force resignations and divestments
of businesses
Managers may try to preserve their empire and provide
growth at the same time by undertaking risky policies.
Managers despite their willingness need to
acknowledge that the shareholders have the major stake as
owners of the company and its assets therefore focus shall be
paid on profit maximizations and increasing worth of the
company’s shares
This may happen at the expense of long-term benefit of
the company resulting in hijacking of long-term strategic
plans of the company as focus is on a particular year
profitability compromising other prospects.
Mende Low’s Matrix
Stakeholders can be mapped on Mende low’s Matrix in terms of:
How interested they are in the company’s strategy (would they
want or resist it)
How much power they have over the company’s strategy (would
they be able to resist it)
The matrix can be used to:
Track the changing influences between different
stakeholder groups over time.
This can act as a trigger to change strategy as
necessary
Assess the likely impact that a strategy will have on
different stakeholders’ group
Its aim is to assess:
Whether stakeholders’ resistance is likely to inhibit the
success of the strategy
What policies or actions may ease the acceptance of
the strategy
Conclusion:
If an organization effectively manages its stakeholder’s relationship it can make
strategic gains. For this purpose, it may have to measure the level of satisfaction of its
stakeholders which can be achieved by having qualitative and quantitative measures
though it’s not a straightforward task.
Mark Complete
