F1 Accountant in Business

Chapter 1 The business organisation

Chapter learning objectives
Upon completion of this chapter you will be able to: define the term organisation explain the need for a formal organisation distinguish between different types of organisation summarise the main areas of responsibility for different functions within an organisation explain how different departments co-ordinate their activities explain the nature and process of strategic planning explain the purpose of each level organisational management. of

ORGANISATIONS

NATUREE

MAIN DEPARTMENTS

PLANNING LEVELS

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F1 Accountant in Business The nature of organisations ORGANISATIONS

WHAT ARE THEY?

WHY DO WE NEED THEM?

DIFFERENT TYPES

What is an organisation? 'Organisations are social arrangements for the controlled performance of collective goals.' (Buchanan and Huczynski) The key aspects of this definition are as follows: collective goals social arrangements controlled performance.

Expandable text As yet there is no widely accepted definition of an organisation. is because the term can be used broadly in two This ways: It can refer to a group or institution arranged for efficient work. To organise implies that there is an arrangement of parts or elements that produces more than a random collection. Organisation can also refer to a process, i.e. structuring and arranging the activities of the enterprise or institution to achieve the stated objectives. The very word organisation implies that is order or there structure. There are many types of organisations, which are set up to serve a number of different purposes and to meet a variety of needs. They include: service companies factories retail companies political parties charities local councils the army, navy and air force schools.

W hat they all have in common in summarised in the definitionby Buchanan and Huczynski: given
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F1 Accountant in Business 'Organisations are social arrangements for the controlled performance of collective goals.'

a) 'Collective goals - organisations are defined primarily by their goals. A school has the main goal of educating ' pupils and will be organised differently from a company where the main objective is to make profits.

b) 'Social arrangements- someone working on his own does not ' constitute an organisation. Organisations have structure to enable people to work together towards the common goals. Larger organisations tend to have more formal structures in place but even small organisations will divide up responsibilities between the people concerned.

c) 'Controlled performance- organisations have systems and procedures to ensure that goals are achieved. ' These could vary from ad-hoc informal reviews to complex weekly targets and performance review. For example, a football team can be described as an organisation because: It has a number of players who have come together to play a game. The team has an objective (to score more goals than its opponent). To do their job properly, the members have to maintain an internal system of control to get the team

to work together. In training they work out tactics so that in play they can rely on the ball being passed to those who can score goals. Each member of the team is part of the organisational structure and is skilled in a different task: the

goalkeeper has more experience in stopping goals being scored than thoseforward line of the team. in the In addition, there must be team spirit, so that everyone works together. Players are encouraged to do

their best, both on and the field. off Test your understanding 1 Which of the following would be considered to be an organisation? (i) A sole trader (ii) A tennis club (iii) A hospital A) (i), (ii) and (iii) B) (i) and (ii) only C) (ii) and (iii) only D) (i) and (iii) only

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F1 Accountant in Business Why do we need organisations?

Organisations can achieve results that cannot be produced by individuals on their own. This is because organisations enable peopleto: share skills and knowledge specialise and pool resources.

As the organisation grows it will reach a size where goals, structures and control procedures need to be formalised to ensure that objectives achieved. are These issues are discussed in further detail below.

Illustration 1 The nature of organisations

W hen families set up and run restaurants, they usually do not have to consider formalising the organisation of their business until they have five restaurants. After this stage responsibilities have to be clarified and greater delegation is often required.

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There are many reasons why organisations exist: They satisfysocial needs e.g. the companionship of people with similar tastes leads to the formation of clubs, , societies and unions. People join organisations because they consider that they will be more secure, more successful, have more needs and wants satisfied and be better off. Organisations exist primarily because they are more efficient at fulfilling needs than individuals who attempt to cater for all their requirements isolation and without assistance from others. The main reason for this in is the ability that organisations have of being able to employ the techniques of specialisation and the division of labour. In particular: They save time - a group can accomplish a task more quickly than lone individuals. They pool knowledge - members of organisations can share knowledge and skills. They are power centres - an individual rarely has the power to influence events on a large scale whereas most organisations can influence demand, win orders and create wealth. Specialisation is perhaps the oldest organisational device. It occurs when organisations or individual workers concentrate on a limited type of activity. This allows them to build up a greater level of skill and knowledge than they would if they attempted to be good at everything. The advantage of arranging work in this way lies in the fact that, by concentrating on one type or aspect of work, it is possible to become much more efficient. By concentrating its expertise into a limited range of activities, the
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F1 Accountant in Business specialisation involves the division of labour.

organisation plans and arranges its output to achieve the most efficient use of its resources. A key aspect of

The specialisation of labour developed as industrialisation advanced, and larger organisations became more popular. It was first used in car production at Ford and is associated with the work of Taylor, which we will be discussing later. The car production process was broken down into many separate tasks and each worker was required to specialise in only one small aspect of the total process. This benefits the manufacturer in three ways: Simple tasks encourage the use of highly specific equipment, e.g. power wrenches that speed up the manufacturingoperation. Semi-skilled labour can be employed rather than highly skilled operatives. Workers are only responsible for one process and so are able to develop a high level of expertise and increase their output per period.

Modern industrialised economies make great use of specialisation and the division of labour, but for organisations to gain the full benefits of these techniques they also employ another organisational device known as hierarchy. We will be examining this further when we discuss the distribution of authority, responsibility and accountability within the organisation.

Test your understanding 2 Suppose you are organising a student ball. What advantages could be gained by forming a committee to manage the process and ultimate event? Classifying organisations by profit orientation Organisations can be classified in many different ways, including the following: Profit-seeking organisations Some organisations, such- as companies and partnerships, see their main objective as maximising the wealth of their owners. Such organisations are often referred to as 'profit-seeking'. The objective of wealth maximisation is usually expanded into three primary objectives: to continue in existence (survival) to maintain growth and development to make a profit.

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Peter Drucker suggested that profit-seeking organisations typically have objectives relating to the following: has
market standing innovation 5

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F1 Accountant in Business productivity physical and financial resources profitability manager performance and development worker performance and attitude public responsibility.

Not-for-profit organisations
Other organisations do not see profitability as their main objective. Such not-for-profit organisations ('NFPs or NPOs') are unlikely to have financial objectives as primary. Instead they are seeking to satisfy particular needs of their members or the sectors of society that they have been set up to benefit. Illustration 2 The nature of organisations NFPs include the following: government departments and agencies (e.g. HM Revenue and Customs) schools hospitals charities (e.g. Oxfam, Red Cross, Red Crescent, Caritas) and clubs.

The objectives of NFPs can vary tremendously: Hospitals could be said to exist to treat patients. Councils often state their 'mission' as caring for their communities. A charity may have as its main objective 'to provide relief to victims of disasters and help people prevent, prepare for, and respond to emergencies'. Government organisations usually exist to implement government policy.

One specific category of NFPs is a mutual organisation. Mutual organisations are voluntary not-for-profit associations formed for the purpose of raising funds by subscriptions of members, out of which common services can be provided to those members.

Mutual organisations include some building societies trade unions and some working-men's clubs. 6

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F1 Accountant in Business

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Many NPOs view financial matters as constraints under which they have to operate, rather than objectives. For example, Hospitals seek to offer the best possible care to as many patients as possible, subject to budgetary restrictions imposed upon them. Councils organise services such as refuse collection, while trying to achieve value for money with residents' council tax. Charities may try to alleviate suffering subject to funds raised.

Classifying organisation by ownership/ control

Public sector organisations The public sector is that part of the economy that is concerned with providing basic government services and is thus controlled bygovernment

Illustration 3 The nature of organisations

The composition of the public sector varies by country, but in most countries the public sector includes such services as: police military public roads public transit primary education and healthcare for the poor.

Private sector organisations The private sector, comprising non-government organisations, is that part of a nation's economy that is not controlled by the government.

Illustration 4 The nature of organisations

This sector thus includes: businesses charities and 7

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F1 Accountant in Business clubs. Within these will be profit-seeking and not-for-profit organisations.

Co-operatives
A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise. (The International Co-operative Alliance Statement on the Co-operative Identity, Manchester 1995) Co-operatives are thus businesses with the following characteristics: They are owned and democratically controlled by their members -the people who buy their goods or use their services. They are not owned by investors. Co-operative are organised solely to meet the needs of the member-owners, not to accumulated capital for investors.

Illustration 5 The nature of organisations

For example, a retail co-operative could comprise a group of people who join together to increase their buying power to qualify for discounts from retailers when purchasing food.

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Co-operatives are similar to mutual organisations in the sense that the organisations are also owned by the members/clients that they exist for. However, they tend to deal in primarily tangible goods and services such as agricultural commodities or utilities rather than intangible products such as financial services. Test your understanding 3 A hospital is considering bringing its cleaning services back 'in house' having previously out sourced. Comment on how this might impact the hospital's stated objective of providing the best patient care. Test your understanding 4 Some building societies have demutualised and become banks with shareholders. Comment on how this may have affected lenders andborrowers. Test your understanding 5 Which of the following are usually seen as the primary objectives companies? of (i) To maximise the wealth of shareholders (ii) To protect the environment (iii) To make a profit A) (i), (ii) and (iii) B) (i) and (ii) only C) (ii) and (iii) only D) (i) and (iii) only
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F1 Accountant in Business Test your understanding 6

Many schools run fund-raising events such as fetes, where the intention is to make a profit. This makes them 'profit-seeking'. True or False? The roles and functions of the main departments in a business organisation The main functions within an organisation The main departments in a business organisation are as follows: Department Research and development Role Improving existing products Developing new products Key concerns Anticipating customer needs Generating new ideas Testing Cost Price and payment terms Quality Stock levels/delivery schedules

Purchasing

Acquiring the goods and services necessary for the business

Production

Converting raw materials into finished goods

Quality (of materials and finished goods) Costs Wastage/efficiency Stock levels/production schedules

Direct service provision Marketing

Providing services to clients (e.g. accountancy firm) Identifying customer needs Market research Product design Pricing Promotion Distribution Administrative support Processing transactions

Quality Time sheets/scheduling Customer needs Quality Promotional strategy Distribution channel strategy Pricing strategy

Administration

Efficiency Information processing

Direct service provision

Providing services to clients (e.g. accountancy firm)

Quality Time sheets/scheduling

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F1 Accountant in Business Finance Bookkeeping Financial reporting Financial controls Budgeting The raising of capital Job analysis and job design Recruitment and selection Performance appraisal Rewards(e.g. setting pay) Training and development Grievances and discipline Accuracy and completeness of record keeping Monthly management reporting Annual financial reporting Staff competence Staff commitment / motivation Cost Staff W elfare( e.g. stress) Compliance (e.g. equal opportunities legislation)

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Human Resources

Test your understanding 7 Which of the following is not part of the responsibility of a research and development department? (a) Improving existing products. (b) Developing new products. (c) Researching new technologies for application to future products. (d) Researching market demand for products.

Co-ordination It is vital that effective co-ordination is achieved between different departments and functions. The main way this is achieved is through the budget-setting process, e.g. to ensure that production make enough products (subject to stock policies) to meet predicted sales figures from marketing. Both the production and marketing budgets will be based on the same set of assumptions. Other mechanisms for co-ordination include the following: regular planning meetings between the managers effective and regular communication between departments to confirm deadlines, target activity levels, etc. clear, well-documented reporting lines supervision.

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F1 Accountant in Business Expandable text

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Co-ordination is achieved in one or more of the following ways; the relative complexity of the work affects the method chosen: Standardised work processes - the work is specified, and everybody works in the same way. Standardised outputs- through such things as product or service specifications. Whilst the results are standardised, the means are not. Standardised skills and knowledge - even though each job is performed independently. This is an important coordinating mechanism in professional activities and specifies the kind of training needed to perform the work. Direct supervision- exists throughout the hierarchy where individuals issue instructions and monitor performance. One person has a specific co-ordinating role. Mutual adjustment co-ordination results from internal communication and through informal contact between the people performing their organisational roles. This exists in simple structures where people work closely together. It also applies to some complex tasks, e.g. in a research project if the outcome is uncertain, colleagues will adjust their activities in the light of new findings. Test your understanding 8 An over-keen sales person promises a new product to a major client before production anticipates manufacturing it. W hat problems could this cause and how could it haveavoided? been

Strategic, tactical and operational planning levels in the organisation

STAREGIC PLANNING

TACTICAL PLANNING

OPERATIONAL PLANNING

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F1 Accountant in Business Different levels of planning Strategic planning is long-term, looks at the whole organisation and defines resource requirements. Tactical planning is medium-termlooks at the department/ divisional level and specifies how to use ,

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resources. Operational planning is very short-termvery detailed and is mainly concerned with control. , Strategic plans will have to be translated into medium-term tactical plans, which in turn need to be converted into detailed performance targets and budgets.

Illustration 6 Strategic, tactical and operational planning

The above planning levels could be applied to a farmer as follows: Strategic planning would look at deciding which crops should be grown and how much land should be allocated for crops,livestock, etc. These decisions would be based on consumer trends, the actions of competitors, changes in EU Common Agricultural Policy, etc. Tactical planning would then look at how best to use specified resources such as fields. This would include issues such as crop rotation. Operational planning would include organising extra staff for harvesting, etc. Test your understanding 9 A hospital is considering whether to have specialist wards or multi-disciplinary wards. At which planning level is this decision being made? The nature of strategic planning Strategic planning is characterised by the following: Long-term perspective. Looks at the whole organisation as well as individual products and markets. Sets the direction of the whole organisation and integrates its activities. Considers the views of all stakeholders, not just the shareholders' perspective. Analyses the organisation's resources and defines resource requirements. Relates the organisation to its environments. Looks at gaining a sustainable competitive advantage.

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F1 Accountant in Business The strategic planning process The rational approach to strategic planning breaks down the process into three distinct steps. Strategic analysis - three key areas External analysis of markets, competitors, the business environment, etc. to identify opportunities and threats. Internal analysis of the firm's resources, competences, etc. to identify strengths and weaknesses. Stakeholder analysis - to understand stakeholder expectations/influence in order to clarify objectives.

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Strategic choice - again three key angles to consider What is the basis of our strategy? In particular how are we going to compete - high quality, low costs? Where do we want to compete? Which markets, countries, products? How do we want to get there? Organic growth, acquisition or some arrangement such as franchising? joint

Strategic implementation Once determined, the long-term strategy needs to be translated into plans for marketing, human resources management, IT,production, organisational structure, etc. The strategy may involve major changes so these will also have tomanaged. be

Test your understanding 10 Give three strategic issues that should be considered by the headmaster of a school as part of strategic analysis.

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F1 Accountant in Business

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Chapter Summary
ORGANISATION

NATURE

DEPARTMENT

PLANNING LEVELS

Definitions Social arrangements Collective goals Controlled performance

Main functions R&D Purchasing Production Direct service provision Marketing Admin Finance

Strategic Long term, looks at the whole organisation and defines resource requirements. Tactical Short term, looks at the department? divisional level and specifies how to use resources. Operational Very short term. Very detailed and is mainly concerned with control

Types
Profits seeking v NFP Private v public sector Co-operatives

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F1 Accountant in Business Test your understanding answers Test your understanding 1 A sole trader would normally be someone working on their own, so there would be no collective goals. Test your understanding 2 The committee would give the following benefits: It would help overcome your limitations by pooling knowledge, ideas and expertise. It would enable individuals to specialise in particular roles. It would save time through joint effort. It would enable synergy to be gained. It would satisfy social needs.

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All these should result in a more successful ball. Test your understanding 3 The reasons for returning services in-house are likely to be: Improved quality of cleaning due to better control, thus reducing the risk of infection. This should improve patient care. It may be cheaper to perform cleaning in-house as the external supplier will be charging a fee to cover costs and a profit margin. This may improve customer care if, e.g. the funds are used to buy new equipment. The danger is that the decision is driven by cost considerations without a resulting improvement in quality. Test your understanding 4 Mutual building societies exist for the benefit of their members. This is reflected in setting: interest rates for borrowers as low as possible interest rates for savers as high as possible. The aim is not to make a profit so the borrowing and saving rates are moved as close as possible with a small margin sufficient tocover costs. Once it becomes a bank the building society must then seek to maximise shareholder wealth and become profit seeking. This is done by increasing borrowing rates and reducing saving rates. Members will thus find that the terms offered by the building society become less attractive. However, when demutualising most building societies give their members windfalls of shares so members become shareholders, thus benefiting from dividends and share price increases. Test your understanding 5 D While protecting the environment is to be encouraged and is reinforced within statute to some degree, it is not a
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F1 Accountant in Business primary objective of the company. Companies exist primarily to make their owners rich. Test your understanding 6 F alse

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Schools run fund-raising activities to help pay for extra books, e.g. to improve the quality of education given to pupils. The primary objective is educational, not profit. The money made at the fete is a means not an end. thus Test your understanding 7 D Demand would be assessed by a market research function within the marketing department. Test your understanding 8 The problems this will cause are: either the firm will let down its major customer, with resulting loss of goodwill and impact on future orders or the firm will incur extra costs to advance production to meet the deadline set. This could have been avoided by the following: better communication between sales and production ensuring that sales staff are briefed by their supervisor regarding delivery and production schedules haying an IT system where all sales staff can verify stock and anticipated production times before confirming orders. Test your understanding 9 Tactical - the issue is how best to use existing resources (i.e. wards). Test your understanding 10 Strategic issues could include the following: Internal analysis Review of Ofsted reports to identify areas for improvement. Review of government league tables. An assessment of each member of staff to identify strengthsweaknesses. and A review of assets, including buildings and equipment. External analysis Local birth rates to anticipate likely future student numbers. Numbers of graduates going into teaching to anticipate future of teachers. supply Proposed government legislation relating to schools,funding. e.g. Stakeholder analysis Feedback from PTA groups and other parent groups. Feedback from school governors.
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