ACCOUNTANT IN BUSINESS

Contents
Exam Structure.............................................................................................................................................. 2
Examiner Comments on Candidate Performance ........................................................................................ 2
Chapter 1: Business Organizations ............................................................................................................... 3
Chapter 2: Stakeholders................................................................................................................................ 9
Chapter 3: The Business Environment-Political and Legal Factors ............................................................. 15
Chapter 4: The Business Environment-Social and Demographic Factors ................................................... 22
Chapter 5: Business Environment: Technological and Environmental Factors .......................................... 26
Chapter 6: Business Environment-Competitive Forces .............................................................................. 32
Chapter 7: Business Environment-Macroeconomic Factors....................................................................... 40
Chapter 8: Business Environment: Microeconomic Factors ....................................................................... 53
Chapter 9: Formal and Informal Organization ............................................................................................ 64
Chapter 10: Business Organization Structure and Design .......................................................................... 66
Chapter 11: Organizational Culture ............................................................................................................ 87
Chapter 12: Committees in Business Organizations ................................................................................... 93
Chapter 13: Governance and social responsibility in business ................................................................... 97
Chapter 14: The Relationship Between Accounting And Other Business Functions ................................ 105
Chapter 15: Accounting and finance functions within business ............................................................... 108
Chapter 16: Principles Of Law And Regulation Governing Accounting And Audit ................................... 115
Chapter 17: Financial Systems, Procedures and Related IT Applications ................................................. 118
Chapter 18: Internal controls, Authorization, Security and Compliance within Business ........................ 126
Chapter 19: Fraud and fraudulent behavior and their prevention in business. ....................................... 133
Chapter 20: Leadership, management and supervision ........................................................................... 139
Chapter 21: Recruitment and selection of employees ............................................................................. 152
Chapter 22: Individual and Group Behavior, Teams within an Organization ........................................... 164
Chapter 23: Motivating individuals and groups ........................................................................................ 170
Chapter 24: Learning and training at work ............................................................................................... 178
Chapter 25: Review and appraisal of individual performance ................................................................. 186
Chapter 25: Personal Effectiveness .......................................................................................................... 192
Chapter 26: Communicating in business ................................................................................................. 200
Chapter 27: Fundamental principles of ethical behavior ......................................................................... 207

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Exam Structure

The new structure will see the paper divided into two parts.

 Section A: Section A of the new style exam will contain a mix of 30 two-mark questions and 16
one-mark questions. One-mark questions are new and are usually shorter and will either have no
background statement or a brief one. The structure of these questions is that they will either be
multiple-choice questions (MCQ) where there is one correct option from two or three options, or
they will be multiple-response (MR) questions where there are two correct options from a total
of three. In the MCQ versions of the one-mark questions, the two option questions may be
presented as true or false questions.
 Section B: The six MTQs in Section B may be sub-divided. Where this is the case, some or all parts
may be related to a common scenario. However, a scenario may be relevant to just part of the
question. For example, part (a) of a question may be built around a team scenario with a
requirement to apply the theories of Belbin or Tuckman, with part (b) set on a related theme but
not directly connected to the scenario.

Examiner Comments on Candidate Performance

Most candidates achieved a pass, so clearly the majority of those presenting themselves for the
examination were able to use their knowledge productively.
 The syllabus is broad, so it is challenging to gather sufficient knowledge across all topics. The best
approach is to build a general understanding of as many topics as possible.
 Most candidates will benefit by spending more time on understanding the technical words and
jargon associate with the study of management, organizations and human behavior.
 The more complicated theories may not always be the most difficult to understand, as some of
the words and phrases encountered will serve as ‘triggers’ to memory.
 Those who practice questions across the whole syllabus are spending their preparation and
revision time wisely.
 Candidates need to strike a balance between spending enough time on each question, and not
thinking too much about why answers that appear to be incorrect might be justifiable.
 The examination will never include trick questions, so if an answer stands out as the correct
response, then this is probably confirmation that the candidate understands the issues.

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Chapter 1: Business Organizations

In this Chapter

a) Define ‘business organizations’ and explain why they are formed.

b) Describe common features of business organizations.

c) Outline how business organizations differ.

d) List the industrial and commercial sectors in which business organizations operate.

e) Identify the different types of business organization:

i. Commercial
ii. Not-for-profit
iii. Public sector
iv. Non-governmental organizations
v. Cooperatives

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Organizations

Definition: An organization is an arrangement where a collection of people with a set of shared objectives
create a formalized group.

Organizations are formed to provide goods or services (or both) to consumers, they are able to control
their own performance and have a boundary separating them from the environment. Organizations have
an impact on the environment and various factors from the environment affect them.

Why are Organizations Formed?

Time Saving
When a lot of people work together for a common objective, they can
achieve their goals faster.
Why are Organizations

Division of Labour
People working togther can focus on what they do best. In that manner
they can concentrate on their tasks.
Formed

Synergy Effect
People working together can produce higher output than the output if
they worked separately. 2+2=5

Knowledge Sharing
Organizations will combine the knowledge of all people working in it.
People can learn from each other and improve their knowledge.

Satisfying Social Needs

People come together in an organization and share ideas, opinion and
feelings. They interact which is a basic social need.

How Organizations Differ

1. Ownership and Control: Some organizations are sole proprietorships and are owned and controlled
by one owner while others are partnerships where two or more people jointly own and control an
organization. Public listed companies are owned by general public and controlled by board of
directors.
2. Legal Status: Organizations can be differentiated based on the law under which they are formed e.g.
limited companies in the UK are formed under the UK Company Law while partnerships are formed
under the Partnership Act 1890.
3. Activity: Different organizations provide varying goods and services. Some organizations are
manufacturing concerns like General Motors and Ford while other companies provide services like
law firms and audit firms.

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4. Profit or Not for Profit Organizations: Some organizations exist to make a profit like Honda while other
organizations exist to serve the society or environment like Red Cross and Make a Wish Foundation.
5. Size: Some organizations are small and their operations are restricted to one country or city while
others are large and are spread across countries and continents like Adidas and IKEA.
6. Level of Technology: Businesses use varying levels of technology. There are organizations that use
advanced technology like Samsung and Airbus while other organization’s processes use basic level
technology like Walmart.

Industrial and Commercial Sectors in Which Business Organizations Operate

Given below are some of the sectors in which businesses can operate.

Industry Activity Example

Manufacturing Sector Transforming raw material with the help Nestle
of machines and manpower into Volkswagen Group
finished, usable products for sale. Samsung Electronics
Extractive Sector This sector extracts its products from Barrick Gold-Precious Metals
natural resources like earth, sea and air. Shenhua Energy-Coal
It extracts and refines raw material.
Construction Sector This sector engages in construction Grupo ACS-Spain
activities like bridges, sky scrapers and Balfour Beatty-UK
roads.
Retailing/Distribution Organizations in this sector buy finished Walmart
Sector products and sell them to public. Tesco
Service Sector Includes organizations that provide Netflix
services to consumers. Services could be American Express
of any nature including healthcare or
legal etc.

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 Different Types of Business Organizations

Also known as These These

organizations are An
Profit-making organziations do

Not For Porfit Organizations

Public Sector Organizations

organizations. not exist to make owned or organization
Commercial Sector

Examples: a profit, their controlled by the or

purpose is to governement. association

Co-operatives
-Sole Traders They work for the
provide benefit that is
-Partnerships to the society or welfare of the owned and
the environment. people.
-Private limited managed
-Public limited jointly by
those who
use its
facilities and
services.

1. Commercial Sector

Organizations in this sector exist to make a profit. Their activities revolve around the fact that their
revenue should be greater than the cost. Such entities are created to generate a profit.

There are several types of organizations in the commercial sector:

Commercial
Sector

Private Limited Public Limited

Sole Trader Partnerships
Companies Companies

i. Sole Traders

In sole trader organizations, the owner runs the business. One person owns and controls the organization.
Although other people work in the organization, the ultimate responsibility of the business lies with the
owner. Such business have unlimited liability meaning that the owner would be responsible for all debts
of the business.

ii. Partnerships
A partnership is formed when two or more individuals pool resources to jointly own and control a
business. In this way the responsibility of the business is divided among partners.
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iii. Limited Companies
In limited companies, the ownership and control of the business is legally separate. They are owned by
shareholders who are the fund providers and controlled by a Board of Directors. There are two types of
limited companies:
a) Private limited company
b) Public limited company

The differences between these two can be summarized as the following

Characteristic Private Limited Public Limited

Owned by Friends and family General public
Traded Privately (not on stock market) On the stock market
Managed by Board of Directors Board of Directors
Financed by • Founder • Share capital raised by public
• Banks • Loan notes
• Venture Capitalists • Institutional Investors

2. Not For Profit Organizations

In direct contrast to commercial organizations, not-for-profit organizations are started and run for the
purpose of providing benefits. These benefits may be provided on an individual level or to society as a
whole. Their primary goal is not to generate a profit, they exist to provide benefits to people.

Not-for-profit organizations can derive their income from donations given by the public or through
government funding. Not-for-profit organizations vary greatly in terms of both size and type.

Non-Governmental Organizations
Non-governmental organizations (NGOs) are any organizations that work towards a social, cultural,
economic or educational cause. They are usually started and run to provide a good or service that the
government is not providing or for the interests of citizens. NGOs cover a wide spectrum of aims ranging
from education to the environment.

Examples include Amnesty International, Greenpeace and the Red Cross. Amnesty International
campaigns for human rights across the globe. Greenpeace activities are geared towards protecting and
preserving the natural environment. The Red Cross’ mission is to provide relief to victims of wars and
internal conflicts.

3. Public Sector Organizations

Public sector organizations are owned and controlled by the government. They are run by elected
government officials and obtain funds from tax payers, borrowing or charging individuals for services.
Their objectives are defined by the government and depends on what the public wants. They will often
provide services that profit making organizations do not provide like electricity, water, gas, public
transportation etc.

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4. Cooperatives
These organizations and associations are jointly owned and controlled by consumers who use their
services. Since they are jointly owned, all members have equal votes and enjoy a democratic control on
the organization. Examples include cooperative banks.

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Chapter 2: Stakeholders

In This Chapter

a) Define stakeholders and explain the agency relationship in business and how it may vary in
different types of business organization.

b) Define internal, connected and external stakeholders and explain their impact on the
organization

c) Identify the main stakeholder groups and the objectives of each group.

d) Explain how the different stakeholder groups interact and how their objectives may conflict
with one another.

e) Compare the power and influence of various stakeholder groups and how their needs should
be accounted for, such as under the Mendelow framework.

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Stakeholders

Definition: Stakeholders are entities and individuals that can affect and are affected by an
organization’s activities.

Stakeholders depend on the organization to fulfill their own goals and on whom in turn the organization
depends. (Johnson, Scholes and Whittington)

Agency Theory
Agency theory is based on the premise that Shareholders are the owners or principals in this relationship
and are the primary fund providers while Directors are the agents who are hired by shareholders to run
the company on their behalf.

The theory suggests that interests of the company and its stakeholders should be given preference over
self-interest. Directors should ensure as agents that they are considering all stakeholders and their
interests when taking decisions.

Agency theory is different in different types of organizations. For example in a partnership, any partner
that acts on behalf of the company is an agent to the rest of the partners and is entrusted with the duty
to act in the best interests of the business and the principals.

In a limited liability company, the directors are agents and the shareholders are the principals. Directors
are entrusted with the duty to act in the best interests of principals.

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Types of Stakeholders

There are three basic types of stakeholders: internal, external and connected stakeholders.

External Stakeholders
Connected
e.g Pressure Groups Stakeholder
e.g Suppliers
Connected
Connected
Stakeholder
Stakeholder
e.g
e.g Customers
Shareholders
Organization
Internal External Stakeholders
Stakeholders
e.g Government
e.g Employees
and Managers

Internal Stakeholders

Internal stakeholders are present within the organization and are intimately connected to its objectives.
An example of internal stakeholders is employees and managers. Internal stakeholders want several
things from the organization like:

 Fair wages
 Job Security
 Good working conditions
 Promotions
 Benefits
 Authority

If these wants are not fulfilled by the organization, adverse effects may occur like employees resigning,
demotivated employees, refusal to accept change and poor performance.

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Connected Stakeholders

These stakeholders are not working for the organization, like internal stakeholders are. Rather, these
stakeholders are individuals and entities that have a financial link with the organization. Examples of
connected stakeholders and what they need from an organization are given below:

 Shareholders: want maximization of wealth and security of investment value.

 Banks/Loan Providers: want timely payment of dues and the company to follow loan terms and
conditions.
 Customers: want fair prices, good quality and after sales services.
 Suppliers: want timely payments and a long term relationship.

If these wants are not fulfilled the organization would have to face adverse consequences like
shareholders may sell their shares, banks may require immediate repayment of loan, suppliers may stop
supplying raw material or may demand cash payments and customers may stop buying products.

External Stakeholders

External stakeholders are neither involved in running the organization nor do they have a financial link
with the organization. These stakeholders are affected by an organization’s activities and can affect the
organization as well. Examples of these stakeholders and what they need from the business are as follows:

 Government: wants prosperity and increase in employment and compliance with law and
regulation
 Pressure Groups: want to protect the environment from pollution and ensure employee rights are
fulfilled.

Not fulfilling external stakeholders’ wants could lead to negative affects like fines and penalties levied by
the government or suspension of operations. Not addressing pressure groups’ concerns could lead to
negative reputation.

Conflicting Stakeholder Objectives

Stakeholder needs are vastly different and often times the organization and directors have a tough
decision to make. If the organization takes decisions to fulfill one stakeholder groups’ needs they may
have to compromise on another stakeholder groups’ objectives. This leads to conflict among stakeholders.

Examples: ABC co. has recently increased management’s pay due to pressure by employees. This has led
to increased payroll costs and a reduced profit hence reducing dividends paid to shareholders.
Shareholders have been concerned over dropping dividends. The directors now have a problem, if they
try to reduce costs, including labor costs, employees are demotivated. If they fulfill the needs of
employees and pay higher wages, dividends drop and shareholders raise concerns.

Other examples may include: Growth of the organization might be at the expense of the local community
and the environment. An organization’s customers would like it to charge the lowest possible price for its
goods and services. Shareholders would like it to charge the highest possible price, as they will make more
money.

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Directors need to prioritize stakeholders and devise a strategy to deal with stakeholder needs and manage
the conflict. To do this, stakeholder mapping is used.

Mendelow’s Framework

Mendelow’s framework is used by directors to identify the most important stakeholders and draft an
appropriate strategy to address their needs.

This framework is used by the organization to analyze which stakeholder is most interested in an
organization’s day to day activities and have the power and influence to change decisions. In this way the
organization can decide how to prioritize stakeholders and fulfill their demands.

High Power, Low Interest High Power, High Interest

Keep Satisfied Key Players

Stakeholder
Power

Mapping

Low Power, Low Interest Low Power, High Interest

Minimum Effort Keep Informed

Level of Interest

High Power; Low Interest

These stakeholders have high power and can influence the decisions taken by the organization. They do
not take an active interest in the daily activities of the organization.

Government will fall into this category. The government does not take an interest in what the organization
is doing as long as law and regulation is followed however government has the power to shut down
operations if it felt that laws are not being followed.

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Such stakeholders should be kept satisfied and their demands should be met so that they don’t interfere
in decision making.

High Power; High Interest

These are the key players in an organization and all decisions taken by the business should be acceptable
to them. They take an active interest in organizations daily activities and have the power to significantly
affect business if they want.

Major customers fall into this category. Not only do they take interest in what the organization is doing,
they have the power to significantly reduce revenue.

Low Power; Low Interest

These are the minimum effort stakeholders. They have very little interest in the organizations activities
and do not have the power to influence decisions.

Migrant workers are examples of this category. They are hired for a fixed term contract and hence they
do not have an interest in the business activities beyond that time period and do not have the power to
influence decisions.

Low Power; High Interest

These are the stakeholders that should be kept informed of the organizations activities. They do not have
the power to influence decisions but do take an active interest in what the organization is doing.
Management needs to convince opponents to the strategy that the plans are justified; otherwise they will
try to gain power by influencing stakeholders in higher power groups like shareholders.

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Chapter 3: The Business Environment-Political and Legal Factors

In this Chapter
a) Explain how the political system and government policy affect the organization.

b) Describe the sources of legal authority, including supra-national bodies, national and regional
governments.

c) Explain how the law protects the employee and the implications of employment legislation for the
manager and the organization.

d) Identify the principles of data protection and security.

e) Explain how the law promotes and protects health and safety in the workplace.

f) Recognize the responsibility of the individual and organization for compliance with laws on data
protection, security and health and safety.

g) Outline principles of consumer protection such as sale of goods and simple contract.

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Business Environment

Environment is everything that surrounds an organization, physically and socially. No organization is

likely to achieve its aims if it fails to take account of the characteristics of the environment in which it
operates.

Environment is dynamic and tends to change hence businesses that do not analyze the environment in
which they operate are more likely to fail.

There are several factors from the environment that affect the organization and PESTEL analysis is a
helpful tool.

PESTEL stands for

• Political Factors
• Economic Factors
• Social Factors
• Technological Factors
• Environmental Factors
• Legal Factors

All of these factors combined with Competitive Forces affect an organization. This chapter will be looking
at each factor in detail.

Social and
Technological
demographic
Factors
factors

Economic Environmental
Factors Factors

Political and Organization Competitive

Legal Factors forces

The following text expands on political and legal factors affecting an organization.

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Political and Legal Factors Affecting an Organization
A country’s political system and government policy will set the rules and regulations of the external
environment that all organizations must operate in. In turn, the combination of these rules and
regulations will create the economic, social and political conditions that organizations must work under.

From time to time the government will change these rules and frameworks, forcing businesses to change
the way they operate. The organization is thus intensely affected by Government policy. They will
influence decisions the organizations makes on factors such as:

 What goods or services to provide;

 How to provide these goods and services and
 Where to provide these goods and services.

Furthermore these conditions will change over the course of time either making life simpler or more
difficult for an organization.

There are several government bodies that make laws and regulations that are applicable on organizations.
Sources of laws and regulations could be as follows:
Sources of Legal Authority

Regional Government
-Sets laws only for its own particular region
-Similar laws may or may not exist in other regions

National Government
-Higher legal authority than any regional government
-Sets laws for all the regions and citizens of its country
-However has no authority over any other country

Supra-national Government
-Comprises of a number of member nations and
governing board
-Governing board comprises of representatives from
each member nation

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Different Laws Applicable on an Organization

Laws Affecting a
Business

Employee Data Health and Consumer

Protection Protection Safety Protection

1. Employee Protection

This law primarily ensures that organization provides equal opportunities to all without discriminating
based on gender, ethnicity or religion. It also requires that businesses have a formal code of conduct for
all employees to follow at all times so that the workplace has a hospitable environment.

Governments have sought to establish laws and regulations which provide employment protection, as a
result they have established laws that discourage employers from terminating employee contracts
without a clearly defined and just reason. This has meant that businesses have been forced to treat most
forms of termination of employment with a lot of patience and care.

There are several forms of termination of employment some which are detailed below:

a) Retirement: It can be forced or voluntary, the trend in recent years has moved towards voluntary
retirement with employers seeking to hire younger employees and promoting experienced
employees within the organization. Of course this has meant that they have to provide employees
adequate compensation for them to retire voluntarily.

b) Resignation: Resignations should be dealt with care, as people resign for a variety of reasons. In any
case, the organization should provide the employees with opportunities to voice their concerns. This
can be ensured by conducting exit interviews to gain insight into reasons behind leaving.

c) Dismissal: Dismissal of an employee, including circumstances where contract term has ended without
renewal or employee is dismissed due to breach of contract terms should be dealt with care. The
statutory minimum period of notice to be given is determined by the employee's length of continuous
service with the employer.

Longer periods may be written into the contract, at the employer's discretion, and by agreement.
Either party may waive their right to notice, or accept payment in lieu of notice. An employee is
entitled to a written statement of the reasons for dismissal.
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  Wrongful Dismissal: Wrongful dismissal is dismissal that breaches the contract of employment.
An example would be failure to give the contractual period of notice (assuming the circumstances
did not justify summary dismissal).

 Unfair Dismissal: This is a dismissal of an employee without good reason by the employer. Under
law, the employer has to prove that the dismissal was fair. For example an employee could have
been unfairly dismissed for telling higher level management about potential fraud within the
organization.

d) Redundancy: Dismissal due to redundancy would occur if the business has stopped trading or if those
particular jobs were not required anymore within the business. A notice of redundancy should be
given to employees with compensation to encourage amicable execution of the process.

2. Data Protection and Security

Privacy is the right of every individual and means to control the use of information about them, including
financial data or health related information.

Almost all organizations have a policy to keep information on their employees confidential. What
distinguishes personal information from official information is that the law requires personal information
to be kept private and confidential. The law also regulates how personal information is to be collected,
stored and used. The Data Protection Principles include the following
 Personal data should be obtained for lawful purposes.
 Data should be relevant to that purpose and not be excessive.
 Personal data should be accurate and up-to date;
 Data should be kept no longer than necessary and,
 always kept securely and not disclosed to any third party without the employee’s consent

Security involves setting systems in place that ensure that sets of information are only available to
employees who are authorized to see and use that particular information.

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Main ways to keep data securely are:

• Would prevent unauthorized

Restricted/Secured
employees and outsiders from
Access System
accessing information.

Anti-Virus detection
• Protect loss of data due to a computer
and removal
virus
programs

• Control and restrict outsiders from

Firewalls
accessing information

3. Health and Safety at Workplace

In most countries, employers have a legal obligation to ensure that employees are provided with a safe
working place. Since accidents and illnesses have their costs, they also harm a company’s reputation.
Organization should ensure the following:
 All employees are competent; and have the necessary skills to perform tasks. Accidents are less
likely to occur if employees are well trained and experienced.
 All machines and equipment are safe and they are regularly repaired to ensure they do not cause
harm to employees that use the machines.
 A safe working environment is maintained at all times by designing a safety policy and visible
safety procedures such as exit plans, fire extinguishers, emergency numbers etc.

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Responsibility of Organization and Employees for Compliance with Laws

Responsibilities

Employers Employees

- Ensure employees trained - Exercise a degree of care and

and safety policies visible. responsibility when
- Protect sensitive information performing tasks.
- Avoid discrimination when - Follow safety policies
recruting ensuring equal - Not attempt to gain access
opportunities. to private information

4. Consumer Protection:

Consumer is someone who buys goods and services from an organization. Consumer protection laws aim
to protect the consumers from cheated into buying products by giving misleading information. It also
ensures that in case of something going wrong there are laws to ensure that businesses are held
accountable for their actions.

Consumer protection laws broadly ensure:

 Consumers should be given clear and up to date information about the product or service they
are paying for.
 Businesses should ensure that they fulfil performance standards like quality standards.
 Consumer information should be kept confidential.
 Consumers should not be subjected to any unreasonable payment liabilities.
 Consumers should be given the opportunity to compare prices and quality standards of similar
products and services before they make payments.

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Chapter 4: The Business Environment-Social and Demographic Factors

In This Chapter
a) Explain the medium and long-term effects of social and demographic trends on business
outcomes and the economy.

b) Describe the impact of changes in social structure, values, attitudes and tastes on the
organization.

c) Identify and explain the measures that governments may take in response to the medium
and long-term impact of demographic change.

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The business environment has several factors that can affect the organization’s performance and the
decisions it takes

Social and
Technological
demographic
Factors
factors

Economic Environmental
Factors Factors

Political and Organization Competitive

Legal Factors forces

The following text will expand on the social and demographic factors affecting an organization

Social & Demographic Factors

Social and demographic trends are extremely important for organizations as they affect:

 The recruitment ability and process of the organization.

 They affect the demand of products/services offered by the business
 They can affect the supply of materials used by the organization to provide goods/services.

Demographic Factors: Demography is the study of populations in terms of their size and characteristics.
Among the topics of interest to demographers are:
 The age structure of a country will shape the nature of goods and services demanded.
 Household patterns like traditional household patterns
 The balance between male and females as this can affect the organizations ability to recruit from
a particular area.
 The likely future size of the population and its characteristics to anticipate the growing market
for products
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Social Trends
Organizations need to analyze the following social changes and attempt to understand how they will affect
their activities.
 social structure
 values
 attitudes
 tastes

Impact of Social Changes on Organization

Social Structure  Divides society into classes (socio-economic groups)
 People from same class have similar tastes and buying patterns
 Change in social structure will result in changes in level and demand for goods
/ services offered by organizations
Values  Collective values of a society also determine type of product demanded and
level of demand.
 Change in collective values will also result in changes in demand for goods /
services.
Attitudes  Customers today are "value maximizers“ and demand high quality goods /
services
 Organizations need to improve quality of their goods / services and content of
their advertising to be able to continue to sell to changed consumer attitude
and buying patterns
Tastes  When collective tastes of its customer base changes, organization needs to
alter its product mix

Government Influence on Demographic Factors

The government may try to influence the demographic factors through the following:

Population Size and Growth Rate

• Government may try to reduce the population size and growth rate in overpopulated
countries by restricting the number of births like China's 'One Child Policy'.
• Government in less populated areas could encourage immigration by relaxing laws and
offering tax credits to households with two children or more for a wider workforce.
•In an area where workforce is aging, teh government could increase the retirement age

Social Structures
• Government could reduce the gap in the income levels in households by introducing a tax
system that ensures a more just division of income.
•High income households may be taxed more while subsidies could be provided to low income
households

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 Education Level
• Government could strive to increase the education level in society by making primary and
secondary education mandatory.
• Government could also subsidize instiutional fee in an effort to encourage workforce to gain
competencies useful for recruitment.

Health
• Government could pass laws against food or other products considered injurious to health for
example stricter laws against sale and advertisement of tobacco.
• Government could also fund medical and healthcare facilities in order to reduce mortality
rates and improve facilities provided to population

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Chapter 5: Business Environment: Technological and Environmental
Factors

In this Chapter
Technological Factors
a) Explain the potential effects of technological change on the organization structure and
strategy:
I. Downsizing
II. Delayering
III. Outsourcing

b) Describe the impact of information technology and information systems development on

business processes.

Environmental Factors

a) List ways in which the businesses can affect or be affected by its physical environment.

b) Describe ways in which businesses can operate more efficiently and effectively to limit
damage to the environment.

c) Identify the benefits of economic sustainability to stakeholders.

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 Social and
Technological
demographic
Factors
factors

Economic Environmental
Factors Factors

Organization
Political and & its Competitive
Legal Factors forces
Environment

Technological Factors
Effects of Technological Change on Organizational Structure

Organization structures have modernized along with technological changes as there are lesser
management levels and one manager can oversee a larger number of employees as communication
systems have improved and systems to monitor performance have advanced.

This has ensured that organizations are more flexible and can adapt to changes better.

Effects of Technology on Structure

Downsizing Delayering Outsourcing

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 I. Downsizing

Downsizing is simple terms means reducing the number of people in the workforce. This could occur due
to technological factors as technology would reduce the number of people due to automation and
improve the productivity of the remaining employees.

Example: a computer software capable of maintaining ledgers would reduce the number of employees
in Accounts department as entries would be posted from day books to ledgers automatically by the
system. It would also increase the number of entries processed in a day by the remaining employees as
part of the process would be automated.

Impact of Downsizing on the Organization

 Reduced labor costs.

 Demotivated workforce
 May affect the organization’s reputation negatively.

II. Delayering

Delayering refers to reducing the number of managerial layers in an organization to make it more efficient.
As technological advancement has led to improved communication and monitoring systems throughout
the organization, lesser managerial levels are required and one manager can supervise a larger number
of employees.

Example: ABC Co. had five managerial levels with one manager supervising three employees. ABC
recently invested in an integrated software that enables all employees to communicate with one
another and the managers even if managers are working from home. Attendance has been automated
and the system generates hours worked reports and error reports at day end for managers’ review and
follow up.

ABC has consequently reduced managerial levels to two as managers are able to supervise a larger
number of employees.

III. Outsourcing

Outsourcing means contracting out business tasks to specialist firms. There are three main reasons why
an organization will outsource one of its activities:
 It will result in cost savings;
 It will allow the organization to concentrate on its core competencies (providing its goods or
services) and / or;
 The outside party can perform and deliver the function better. Hence, the benefit of experts can
be enjoyed by the organization.

28
There are several advantages of outsourcing outlined as follows:

Advantages of Outsourcing
Specialist skill Outsourced firm may possess more skills than the organization itself
hence leading to improvement in the quality of performance.
Fixed fee contract Outsourced firm may be working on a fixed fee contract that would
reduce the uncertainty of costs.
Business flexibility The organization would only contract the outsourcing firm when
needed. An in-house department would be a constant cost and would
require constant tasks, this is eliminated with outsourcing.
Improved efficiency Specialist skills and task driven contracts for a fixed term would
combine to improve efficiency of tasks leading to cost savings.

Impact of IT & Information Systems Development on Business Processes

Process Impact
Product  Products have become sophisticated offering far more features to
consumers than before.
 Product development has become faster and competition from similar
products has increase as more businesses are likely to adopt IT.
 New products for organizations like the online banking facilities
introduced by banks.
Production Process  Automation has revolutionized production processes with fewer errors
and lesser wastage hence improved efficiency.
 Better monitoring of the process has led to improved quality of the end
product.
Marketing Process  IT has introduced a large number of ways that products can be promoted
like advertisement on social media and Google ads.
 Organizations have improved the way they distribute products using IT.
Businesses have online vendors and actual retail outlets as well.
 Organizations are able to reach more customers using customer
databases.
Human Resources  IT has helped maintenance of employee records thus reducing confusion
and errors in payroll calculation.
 Biometric attendance systems have reduced the need for continued
monitoring of the workforce.

29
 Social and
Technological
demographic
Factors
factors

Economic Environmental
Factors Factors

Organization
Political and & its Competitive
Legal Factors forces
Environment

An important part of the business’s environment are environmental factors.

Environmental Factors

Impact of environment on business Impact of business on environment

1. Diversity: The diversity of ecosystems and Depletion of natural resources: Overconsumption
living things. These resources are used by of natural resources has led to fewer reserves that
agricultural and pharmaceutical industries. will limit the ability of businesses to survive in the
future.
2. Renewable and Nonrenewable Resources: Deforestation: Rapid development of businesses
Provision of natural resources like air and has led to depletion of natural forests that can
water are vital to survival of all organizations. disturb ecosystems and cause extinction of animal
Nonrenewable resources like crude oil and species.
coal are used for energy generation
throughout industries.
3. Geographical Factors: Factors like climate Pollution: Air, noise and water pollution created
affect the industries that can survive in a by businesses and their commercial activities has
geographical location like the wine industry led to worsening of environment and the air we
thrives in France due to the climate that allows breathe in.
grape cultivation.
4. Natural Hazards: Hazards like earthquakes Global Warming: Industrial world burning fossil
and floods affect the businesses’ ability to fuels leads to imbalance of gases in the earth’s
survive and conduct day to day activities. atmosphere and depletion of the ozone layer.

30
Ways to Reduce Impact on the Environment

 Recycling: Businesses can recycle paper, glass, fabric and other materials to reduce the resource
consumption.
 Going Paperless: By investing in integrated computer systems, businesses can reduce the amount
of paper used for business activities and prevent deforestation. This can also cause a reduction
in costs.
 Waste Treatment: Organizations can treat the waste harmful water and air containing chemicals
emitted from factories to reduce harmful emissions into the environment.
 Eco-labelling: Businesses can inform consumers that products have been produced in an eco-
friendly way so that customers can make conscious decisions.
 Research & Development: Businesses can invest in research and development to find innovative
ways to produce goods that are produced in an eco-friendly manner and reduce wastage in order
to preserve natural resources.

Benefits of Economic Sustainability

Definition: Sustainability means using resources at a rate that can be replenished by nature.

Sustainable economic development refers to a pattern of resource utilization (for social and economic
progress) that aims at meeting the present human needs without endangering the future generations’
capacity to meet their needs.

Sustainability presents multiple benefits to the business and its stakeholders.

Employees Economic sustainability of a business would ensure safe and pollution free
working conditions to the employees. Their jobs would also be secured as there
would be continuity of the business
Shareholders Their prime concern relates to their return on investments (ROI). An economically
sustainable organization would enable shareholders to earn good ROI in the long
run.
Customers They interested in continuous supply of good quality and environmentally friendly
products. An organization producing “green” products would be able to keep its
customers happy. For example, customers are most willing to buy organic and free
range poultry products.
Government Organizations acting in an environmentally responsible manner ultimately
contributes to controlling of national and global environment. Governments
encourage companies to follow environmentally desirable policies and provide
grants and tax concessions to support green initiatives.

31
Chapter 6: Business Environment-Competitive Forces

In this Chapter
a) Identify a business’s strengths, weaknesses opportunities and threats (SWOT) in a market and the
main sources of competitive advantage.

b) Identify the main elements within Porter’s value chain and explain the meaning of a value network'.

c) Explain the factors or forces that influence the level of competitiveness in an industry or sector using
Porter’s five forces model.

d) Describe the activities of an organization that affect its competitiveness:

I. Purchasing
II. Production
III. Marketing
IV. Service

32
A way of analyzing the business environment is through the competitive scenario within the market. These
competitive forces will define the type of products a business offers, it’s pricing strategy, how it deals with
customers and suppliers etc. Businesses would conduct an analysis of competitive forces in the following
manner

Impact of
Internal and How a business
competitors and Activites that
External creates value
their products affect
Appraisal of (Porter's Value
(Porter's Five competitveness
Business (SWOT) Chain)
Forces)

SWOT Analysis

Definition: A method of environmental analysis looks at an organization’s internal strengths and

weaknesses as well as external opportunities and threats. This is known as SWOT analysis.

Internal appraisal: (strengths and weaknesses) The strengths and weaknesses analysis is intended to
shape the organization’s approach to the external world. For instance, the identification of
shortcomings in products could lead to a program of product development.

External appraisal: (opportunities and threats) The external appraisal identifies opportunities that can
be exploited by the organization’s strengths and also to anticipate environmental threats against which
the company must protect itself

33
How SWOT can be used by the organization to develop strategies
All of these factors combined will shape what the organization will do in future. How strengths will
be used to exploit opportunities, how strategies will be made to deal with threats and how the
organization will improve on weaknesses.
Strengths - Resources such as financial resources (e.g. availability of loan and
- Can be financial and capability of raising equity funds are strengths)
nonfinancial. - Skilled staff
- Identification of - Good reputation
strengths can lead to - The ability to control costs
competitive advantage. - Innovation
- Can lead to identification - Multiple products and multiple markets
of factors that can be
used to grow the
business further.
Weaknesses - High debt levels
- These can also be - Ineffective marketing and advertisement
financial and - Low cash levels
nonfinancial - Lack of skilled employees.
- Affect the business’s - Poor quality products
ability to survive and
compete
- These can be areas of
improvement for the
organization.
Opportunities - Low inflation can be an opportunity to reduce costs
- Arise from external - Changes in tastes and preferences of customers can increase
environment demand for products.
- These are the - Changes in laws and regulations can make distribution and
circumstances that advertisement of products easier.
organizations plan for. - A competitor shutting down could increase market share.
- If the strategies are
meaningful organization
will grow.
Threats - Increase in competing companies can lead to reduction of demand.
- Arise from external - Unstable political factors can lead to products being banned.
environment - Changing technology can make products obsolete.
- These circumstances will
be avoided by the
organization or
mitigated.
- They can lead to
reduction in business or
even affect ability to
survive.

34
Porter’s Value Chain

This analyzes how organization creates value throughout its functions. How this value is then passed on
to the customer. Customers pay an extra amount for the value created by an organization over the
purchased inputs.

The value chain divides an organization’s activities into two section:

- Primary Activities: that include purchasing raw material (inbound logistics), production of finished
goods (processing), storage and distribution of finished goods (outbound logistics), how products
are marketed and sold and finally the services offered to customers. It is through these activities
that organization creates the most value and this is why a margin is added.
- Secondary Activities: These are support activities meant to improve the impact of primary
production activities.

Example: Brittle Co. makes toys for infants. Raw materials cost $5/unit which are then used for
producing the toys. Production related costs total $10/unit while storage and distribution costs are
$4/unit. Total cost of one finished toy is $19/unit. These toys are sold for $25 each. This increase in value
of products is the result of the value chain.

Primary Activities in the Value Chain

 Inbound logistics: These are the activities concerned with receiving and handling purchased
materials and components and storing them until needed. In a manufacturing company, inbound
logistics therefore include activities such as materials handling, transport from suppliers,
inventory management and inventory control.
 Operations: These are the activities concerned with converting the purchased materials into an
item that customers will buy. In a manufacturing company, operations might include machining,
assembly, packing, and testing and equipment maintenance.
 Outbound logistics: These are activities concerned with the storage of finished goods before sale,
and the distribution and delivery of goods (or services) to the customers. For services, outbound
logistics relate to the delivery of a service at the customer’s own premises.
 Marketing and sales: These are the activities associated with the ‘4Ps’ of marketing, namely;
product, place, price, and promotion.
 Service: These are all the activities that occur after the point of sale, such as installation,
warranties, repairs and maintenance, and providing training to the employees of customers. An
important aspect of service is often the work of customer

The nature of the activities in the value chain varies from one industry to another, and there are also
differences between the value chain of manufacturers, retailers and other service industries. However,
the concept of the primary value chain is valid for all types of business entity. Value is added by all the
activities on the primary value chain. Customers might be willing to pay more for a product or a service if
it is delivered to them in a more convenient way. For example, customers might be willing to pay more
for household shopping items if the items are delivered to their home, so that they do not have to go out
to a supermarket or a store to get them.

35
Secondary value chain activities: support activities

In addition to the primary value chain activities, there are also secondary activities or support activities.
Porter identified these as:

 Purchasing/Procurement: These are activities concerned with buying the resources for the entity
– materials, plant, equipment and other assets. Successful buying often means lower purchase
costs, or achieving a secure source of supply for key materials or components.
 Technology development: These are activities related to any development in the technological
systems of the entity, such as product design (research and development) and IT systems.
Technology development is an important activity for innovation. ‘Technology’ also includes
acquired knowledge: in this sense all activities have some technology content, even if this is just
acquired knowledge.
 Human resources management: These are the activities concerned with recruiting, training,
developing and rewarding people in the organization.

Porter’s Five Forces: The Impact of Competitors on an Organization

Main Factors/Forces influencing level of competition

New Competitive
Substitutes Buyers Suppliers
Entrants Rivalry

Definition: Porter's five forces analysis is a framework that attempts to analyze the level of competition
within an industry and business strategy development. It draws upon industrial organization (IO)
economics to derive five forces that determine the competitive intensity and therefore attractiveness of
an Industry.

1. Threat of New Entrants:

Competition in a market is affected by the threat of new business entities coming into the market and
adding to the competition. When new entrants are able to enter the market, prices of products offered
will be low to increase sales. This would cause older more established businesses to slash prices as well in
order to remain competitive ultimately lowering profit margins.

Competitive forces are reduced when it is difficult for new entrants to break into the market – in other
words, when the ‘barriers to entry’ are high. A number of factors might help to create high barriers to
entry:

- Economies of scale: Economies of scale are reductions in average costs that are achieved by producing
and selling an item in larger quantities. This would lead to larger firms selling products at lower prices
36
 making it difficult for a new firm to enter the market. Newer smaller firms would not be able to achieve
economies of scale and would not be able to compete.
- Capital investment requirements: If a new entrant to the market would have to make a large capital
investment in assets such as factory premises and equipment, this will act as a barrier to entry, as
newer firms are unable to raise the required funds.
- Access to distribution channels: In some markets, there are only a limited number of distribution
outlets or distribution channels. If a new entrant will have difficulty in gaining access to any of these
distribution channels, the barriers to entry will be high.
- Switching costs: Switching costs are the costs that a buyer has to incur in switching from one supplier
to a new supplier. In some industries, switching costs might be high. For example, the costs for a
company of switching from one audit firm to another might be quite high, and deter a company from
wanting to change its auditors. When switching costs are high, it can be difficult for new entrants to
enter into a market.

2. Threat of Substitute Products

Competition within a market or industry will be higher when customers can switch fairly easily to buying
alternative products (substitute products).A substitute is a good or service produced by another industry.
If customers can easily switch to substitutes at good price the profitability in the industry would be low.
Customers might switch between air, rail and road transport services. This means that the competitive
strength of a rail company is restricted by the threat of competitive actions by air transport companies or
bus companies, and also by the costs of private monitoring.

3. Bargaining Power of Suppliers

In some industries, the competitive position of a business entity might be affected by the bargaining
strength of its major supplier or suppliers. When this occurs, the suppliers might charge high prices to
their business customers that these businesses are unable to pass on to their own customers (by charging
higher prices for their own products). An example of high bargaining power of suppliers is the airline
industry where the major suppliers of aircrafts i.e. Boeing and Airbus dominate the market. Airlines would
have to pay the price Boeing and Airbus demand as there are no close alternative suppliers that can be
chosen.

4. Bargaining Power of Customers

Customers can reduce the profitability of an industry when they have considerable buying power.
Powerful buyers are able to demand lower prices, or improved product specifications, as a condition of
buying. Strong buyers also make rival firms compete to supply them with their products. An example of
buyer power is the power of supermarkets that buy consumer goods from manufacturing companies to
sell at their outlets. They are able to force down the prices from suppliers of products for re-sale, using
the threat of refusing to buy and switching to other suppliers. Porter suggested that buyers might be
particularly powerful in the following situations:

 When the volume of their purchases is high relative to the size of the supplier e.g. buying in bulk
 When the products of rival suppliers are largely the same (‘undifferentiated’)
 When the costs of switching from one supplier to another are low.
37
5. Competitive Rivalry

Competition within an industry is obviously also determined by the rivalry between the competing
business entities. Strong competition forces rival firms to offer their products to customers at a low price
(relative to the product quality) and this keeps profitability fairly low. Porter suggested that competitor
rivalry might be strong in any of the following circumstances

 when the rival firms are of roughly the same size and economic strength
 when there are many competitors in the industry or market
 when there is only slow growth in sales demand in the market, so that firms are competing for a fairly
fixed total amount of sales and customers
 When the products of rival firms are largely the same (‘undifferentiated’) when the costs of
withdrawing

Activities that Affect Competitiveness

These are the activities that are in the organization’s control and if performed well, can be a source of
advantage for the business. Successful organizations are the ones that do things differently or better than
their competitors.

Activity How it increases competitiveness Example

Purchasing  Choose a supplier that provides raw An organization that has a
Responsible for material in the shortest time so that separate department to make
purchasing raw production takes minimum time and sure purchases are made from
material needed for goods are delivered before others in suppliers that provide goods
production. the market. faster and at more competitive
 Choose a supplier based on best price rates will beat competitors as
and quality so that cost reductions can purchasing will be more efficient
be achieved leading to improved profit and will save more costs than
margin. them. In this way this
organization can offer goods at
lower rates to customers in
increase demand.
Production  An organization can ensure labor is An organization that invests in
This department trained and knows how to perform its production process by
turns raw materials tasks efficiently with minimal mistakes. training employees and
into finished goods.  An organization can use state of the art purchasing up to date machinery
technology that increases production can improve production
efficiency and improve quality of the efficiency that would lead to
end product as well. cost savings. Up to date
technology would also improve
quality of product that can now
be sold to customers offering
better quality and lower price.

38
 Marketing  Marketing department can conduct An organization with an
This department market surveys in order to understand effective marketing department
finds out what in detail what customers want from the would understand customer
customers want from product. needs better hence improve
products and informs  This department can also help in their product to serve customers
customers about the making customers understand how the better. They would also be more
organization’s products offered by the organization successful in communicating to
products. are different and better than their customers how their
competitors. product is different and better
than others hence improving
revenue for the organization.
Service  Services offered to customers may lead An organization with better after
Services offered by an to better information about products to sales services will help
organization at the customers so they can make informed customers make informed
time of sale and after choices. choices and lower returns and
sale support to  Services can also help identify customer improve customer satisfaction.
customers. grievances and deal with them to This would also make loyal
prevent customers from switching to customers that are less likely to
competitor products. switch to competitors.

39
Chapter 7: Business Environment-Macroeconomic Factors

In this Chapter

a. Define macro-economic policy and explain its objectives.

b. Explain the main determinants of the level of business activity in the economy and how variations in
the level of business activity affect individuals, households and businesses.

c. Explain the impact of economic issues on the individual, the household and the business:
I. Inflation
II. Unemployment
III. Stagnation
IV. International payments disequilibrium.

d. Describe the main types of economic policy that may be implemented by government and supra-
national bodies to maximize economic welfare.

e. Recognize the impact of fiscal and monetary policy measures on the individual, the household and
businesses.

40
Within the analysis of an organization’s external environment, there are several factors to consider

Social and
Technological
demographic
Factors
factors

Economic Environmental
Factors Factors

Organization
Political and & its Competitive
Legal Factors forces
Environment

Economic Factors are further bifurcated into macroeconomic and microeconomic factors. This chapter
discusses the macroeconomic factors and how they can impact an organization.

Macroeconomic Factors

Definition: Macroeconomics is a study of the economy of a country. Macroeconomics identifies factors

that shape the condition of a country’s economy.

Broadly speaking, the condition of an economy equates to the level of demand that there is for the
goods and services being produced in that economy. The better the economy, generally, the higher the
demand of goods and services.

Furthermore, macroeconomics also involves the types of policies that governments can set to influence
factors that affect demand and supply. The underlying rationale is that by influencing these factors,
governments can in turn influence the condition or shape of the economy. For example government
policy could be to cut taxes that would in turn increase income of households and increase demand.

41
 Macroeconomic Policy

Definition: It is a policy adopted by the government to achieve goals like economic growth, reduce
unemployment, and achieve stability of prices and a healthy balance of payments.

Objectives of Macroeconomic Policy

Economic Increase Price Balance of

Growth Employment Stability payments

i. Economic Growth

Economic growth is measured through Gross Domestic Product (GDP). GDP measures the total output
produced by all businesses in the country. An increase in business activity would increase the GDP as well
hence the government wants to adopt policies that promote businesses and business activity to achieve
economic growth.

ii. Increase Employment:

It is one of the government’s aims to increase employment within the country and ensure that the demand
of labor equals the supply so that skilled workers do not have to be idle due to lack of jobs. This is related
to economic growth. The more the economy grows, businesses would flourish and employ more people.

iii. Price Stability

Price stability means consistent process of goods and services over a period of time. Government achieves
this objective by regulating inflation (the consistent rise in prices over a period of time).

iv. Sustainable Balance of Payments:

There is a flow of money in and out of a country as countries export (sell their goods and services to other
countries) and import (buy goods and services from other countries). When a country imports more than
its exports, it creates a balance of payments deficit. When the reverse occurs, there is a balance of
payments surplus.

Level of Business Activity in the Economy

The level of business activity within an economy is affected by the total demand of goods and services
within that economy. This total demand is known as aggregate demand.

42
AD = C + I + G + X – M
This means: Aggregate demand (AD) = Consumer spending (C) + Investment by firms (I) + Government
spending (G) + Demand from exports (X) – Imports (M).

Hence aggregate demand in an economy will define whether business activity will pick up or die down at
a particular time in an economy.

 Consumer Spending: Consumers will spend more if they are confident about the state of the
economy and their own finances. If consumers feel confident, they will spend more and business
activity will pick up i.e. existing businesses will invest more to increase output and new businesses
will set up.
 Investment by firms: This refers to availability of finance in an economy. Business activity will only
increase if businesses have access to the required capital to make investments. Lower interest
rates will make capital cheaper therefore boosting investment by businesses.
 Government Spending: Business activity will increase if government makes policies that
encourage business activity. By subsidizing certain activities or by lowering taxation, business
activity could be encouraged and aggregate demand could rise.
 Exchange Rate: A stronger local currency would mean exports would become expensive while
imports will be cheaper hence reducing aggregate demand locally as consumers would prefer to
import rather than buy locally.

Impact of Business Activity

Business activity tends to fluctuate with a high in business activity known as a ‘boom’ and a downfall in
business activity known as a ‘bust’. Business activity is cyclical thus demand decreases, decreasing
business activity and household income as well, this is known as a trough or a bust. Demand eventually
picks up leading to increased business activity and hence an increase in household income as well, known
as a peak or a ‘boom’.

Business Activity
4
3.5
3
2.5
Axis Title

2
1.5
1
0.5
0
Recession Bust Boom Bust

43
The impact of these changes in business activity is as follows:

Business activity Impact on Households and Individuals Impact on Business

Boom In times of rising demand and business  Demand would rise, leading to
activity: increased revenue.
 Employment would increase with  Increases in revenue will improve
businesses performing well and profit margins as well.
expanding.  Competition in the market would
 Household and individual income rise as more businesses would
would also rise. open to cater to rising demand.
 Increase in income would give rise
to consumer spending hence
encouraging higher business output
and activity.
However,
 Rising demand may lead to inflation
that would in turn reduce
affordability as prices of products
will rise.
 Consumers would be tempted to
borrow in order to spend more
leading to burden on income.
Bust In periods of falling demand and  Lower demand would reduce
business activity: revenue.
 Unemployment would rise as  Drastic measures like downsizing
businesses would have to cut costs. (employee layoffs) to cut costs.
 Income would decrease with job  Decreased profitability.
cuts hence affordability would  Business failures
decrease.  Excess capacity
 Individuals and households may find
it difficult to maintain houses so
standard of living may decrease.
 Loss of consumer confidence and
spending.

44
Impact of Economic Issues
This section will be looking at the impact of economic issues like inflation, unemployment, stagnation and
international payment disequilibrium on businesses and individuals.

1. Inflation

Definition: Inflation relates to how prices for goods and services continuously and considerably rise over
time. The inflation rate refers to the percentage increase that has occurred for the rise in the price for
goods and services.

There can be several causes of inflation like:

a) Demand pull inflation: It happens when aggregate demand (total demand) of any commodity
increases; e.g. basic necessity likes shortage of sugar. An increase in demand for a product would lead
to a rise in prices demanded by businesses.
b) Cost push inflation: It happens when cost of manufacturing increases in an economy and at that time
it is not possible for manufacturer to sell the products at previous prices. An increase in prices of inputs
would cause businesses to increase price of the finished goods charged from customers leading to
inflation.
c) Imported inflation: It happens when a country or a personal (trader) buys goods from other countries
at high prices it brings inflation e.g. rental process plant, high price inputs that would lead to an
increase in the price charged from customers.
d) Inflationary expectations: When customers expect the prices of commodities will increase in future,
they tend to increase demand that results in demand pull situation.
e) Money supply growth: If there is an increase in money supply in a country (increase in currency rate)
the value (importance) of money will decrease. So prices of commodities will increase (because
traders will ask for more currency notes)

Inflation can be measured using the consumer price index (CPI). This basically tracks a price of a standard
basket of consumer goods and services. The price would be estimated at a particular time and then re-
measured for the same basket of goods after a year to measure the rate of increase in prices.

45
Impact of Inflation

Economic Indicator Individuals/Households Businesses

Inflation Inflation can have multiple effects:  Increased costs of inputs so
 Consumers may purchase fewer decreasing margins.
goods since affordability would  Labor costs may rise due to
decrease employees demanding higher
 Decreased consumer confidence. pay to cope with increased
 People on fixed incomes (such as prices.
students or pensioners) may find  Decreased demand will
themselves worse off, as their decrease revenue and profit.
income will not rise even though the
cost of goods has increased.
 People may want to import rather
than buy goods locally due to higher
prices.

2. Unemployment

Definition: It is a situation in which people are able to work but cannot find a job or do not desire for a
job. It can be calculated as:

(Numbers of Unemployed/ Total workforce) x 100

Redundancies, resignations and lay-offs increase unemployment.

There can be several causes of unemployment:

a) Cyclic unemployment: It is also called "Demand deficient unemployment" it is a situation in which
people get unemployed because of “No” or “Low” demand. This would occur because demand for
products is low hence businesses want to cut costs of doing business by letting employees go.
b) Frictional unemployment: It is a situation or a gap between old job and new job. This is short-term
unemployment when individuals are dismissed from their work and have yet to find a new job. The
time taken to find a new job would cause frictional unemployment.
c) Structural unemployment: It occurs when there is a long term structural change in economy; e.g. a
country is moving from manufacturing to service industry like U.K (as cost is low in service but
employee gets unemployed) causing business activity to shift and employee layoffs due to business
closure.
d) Technological unemployment: It occurs when there is a new technique or new technology being
introduced and old skills are no longer needed. The new technology replaces manual labor. This can
happen when manufacturing processes are automated.
e) Seasonal unemployment: This is unemployment, often within a particular industry, because the
demand by firms for labor is higher at some times of the year than at the other. For example, the
demand for agricultural labor might be very seasonal, and there might be high levels of
unemployment in the industry in the low-season periods.

46
Impact of Unemployment

Economic Indicator Individuals/Households Businesses

Unemployment  The number of job opportunities  High unemployment makes it easy
available decreases. for a business to find employees as
 It also means that individuals are there is a ready pool of labor to
forced to reduce their spending draw on.
levels during these times.  It may reduce the amount of wages
 Greater job insecurity. that need to be offered to attract
 Lower income for households new members of staff.
hence standard of living would  Existing staff may be more willing to
fall. take lower pay increases as it will be
difficult for them to find alternative
work.
 However, demand may dry up due
to low income.

3. Stagnation

Definition: Economic stagnation means a prolonged period of significant slower than potential
economic growth. It is also signified by rising inflation while output produce by the economy (GDP) is
declining.

Impact of Stagnation

Economic Indicator Individuals/Households Businesses

Stagnation  The declining output of goods and  Declining demand for goods and
services results in a reduced services overall.
demand for labor by businesses.  Businesses having to go into cost
 Reduced job opportunities and cutting exercises such as reducing
income in a period when the price the number of employees.
of goods and services is on the
rise.
 Growth of household disposable
income becomes stagnant.
 Reduction in saving rates in order
to maintain consumption levels.

4. International payments disequilibrium

Definition: An international payment disequilibrium occurs when the value of a country’s imports is not
equal to the value of exports.

47
 When value of exports is greater than
Surplus the value of imports.

Deficit
When the value of imports is greater
than the value of exports.

Impact of Balance of Payments

Economic Indicator Individuals/Households Businesses

Surplus  Higher demand for the goods and  Greater demand for their goods and
services. services typically translates into
 Greater opportunities for greater profitability.
individuals’ jobs.  Businesses expanding or increasing
 Higher income because of higher the goods and services they offer.
job opportunities.  Greater employment.
 Greater expenditure on goods and
services by households as well as
individuals.
Deficit  Fewer job opportunities.  Lower demand for goods / services
 Reduced expenditure on goods / results in lower profits.
services.  Leads to business contraction.
 Lower income of households
leading to reduced expenditure.

48
Policies Adopted to Achieve Economic Objectives

Economic Objective Policy Adopted by the Government

Economic Growth/High Inflation To boost growth, government could reduce taxes so that
Economic growth is signified by individuals can take home a higher income. This leads to higher
periods of high demand as people spending as well. This growth leads to inflation as demand for
earn and spend more. These goods and services drives prices upwards.
factors push prices of goods and
services up and lead to inflation. To tackle increasing inflation, government can take steps like
increasing interest rates. This will encourage individuals to save
more so that they can deposit money in savings accounts and earn
a high return. High interest rates will reduce business expansions
as well since it will become .more expensive for businesses to take
loans and expand. This will in turn reduce demand for goods and
services.
Managing Unemployment/Low Government can reduce taxes to induce growth and demand and
Growth at the same time reduce interest rates. This will encourage
Periods of low growth lead to low individuals to spend more and create demand.
business activity hence reducing Businesses will find it easier to take a loan and produce more
the demand labor causing goods and services hence demanding more labor for higher
unemployment. production. This will reduce unemployment.
Growth/Balance of Payments While economic growth is best for economy and the government,
In periods of high economic deficit is unfavorable. The government needs to balance growth
growth where aggregate demand while minimizing imports. Government can reduce the level of
for goods and services is imports through import duties. These duties will make imports
increasing, imported goods are expensive hence discouraging people from importing.
also demanded more leading to a
deficit (where value of imports is A quota can also be introduced limiting the amount of goods that
more than value of exports) can imported from other countries. Both duties and quotas can
level the balance of payments.

49
Government Policies

Government
Policy

Fiscal Policy Monetary Policy

Tax Interest Rates

Govt Spending Money Supply

Government policies that aim to control price inflation and unemployment by influencing total aggregate
demand in the economy. Government takes support for this purpose from:

1. Fiscal policy
2. Monetary policy

1. Fiscal policy: is the means by which a government adjusts its spending levels and tax rates to monitor
and influence a nation's economy. The four macro-economic objectives (growth, inflation,
unemployment &BOP) are managed through a combination of government expenditure and revenue
collection.
 Government expenditure is aimed at developing infrastructure, education, health, law & order and
public buildings among other things.
 Government collects taxes and sometimes collects direct charges from the public for using certain
services. These two are the major sources of revenue
i. Direct taxes, which are paid directly by an individual to the Revenue authority. These taxes
include income tax, property tax, capital gains tax and corporation tax.
ii. Indirect taxes, which are paid indirectly through an intermediary. Sales tax or VAT are examples
of indirect taxes.
 Government collects tax to serve a range of purposes which include the following :
a) To raise revenue to run the government and serve the general public.
b) To discourage the use of certain products. For example governments charge high taxes on
tobacco related products to discourage their use.
c) To ensure equity and redistribute income and wealth.
d) To protect local industries from foreign competitors.
50
Using Fiscal Policy: Government may use fiscal policy in the following ways:If an economy is suffering
from stagnation (low growth) and high unemployment the government may increase its expenditure
and/or reduce taxation. This will lead to an increase in aggregate demand. The downside of such an
approach can be a corresponding increase in inflation as increase in demand will push prices of goods and
services upwards. Increased government expenditure would also lead to a budget deficit. A budget deficit
occurs when a government spends more than what it collects in the form of taxes. In such a situation the
deficit is financed through borrowing and the amount of borrowing needed to finance the deficit is called
PSNCR (Public Sector Net Cash Requirement).

If an economy is facing the challenge of high inflation the government may decrease its expenditure
and/or increase taxation. The result would be a decrease in aggregate demand as people would pay higher
taxes and have less money to spend resulting in lower inflationary pressure. The downside of such a policy
is a possibility of low growth as demand of goods and services will result in low business revenue and
possibly high unemployment. It is also very difficult for governments to reduce its expenditures as most
of its expenditures are on public welfare projects like hospitals and education. If a government collects
more than what it spends it is said to have a surplus on its budget or a negative PSNCR (Public Sector Net
cash Requirement).

2. Monetary policy is the process by which the monetary authority of a country, like the central bank or
currency board, controls the supply of money, often targeting an inflation rate or interest rate to
ensure price stability and general trust in the currency.
 Governments control money supply in the economy through the central bank to manage its
macroeconomic objectives.
 Money supply is controlled through interest rates.

Using Monetary Policy:

If an economy is suffering from stagnation (low growth and high interest rates) the central bank may
reduce interest rates in order to stimulate the economy. Borrowing capital becomes cheaper and
incentive to retain savings accounts reduces resulting in higher investment and increased aggregate
demand. Thus increasing growth and reducing unemployment. The downside of such a policy can be the
resultant increase in inflations.

If an economy is facing high inflation the central bank may decide to increase its interest rates. Borrowing
capital will become expensive and retaining and investing in savings accounts become lucrative. This
results in a reduction in aggregate demand thus reducing inflation. A reduction in inflation also has a
positive effect on balance of payments as the country’s products become cheaper. The downside of such
a policy is the possibility of low growth accompanied with increased levels of unemployment.
It is important to note that the changes in interest rates does not result in instant shifts in economy and
the transmission might take considerable time.

51
Supply side policy: Government policies that aim to increase aggregate supply in an economy are known
as supply side policies. These policies attempt to remove constraints on productivity of resources (local
public are restricted to find resources). For example by reducing taxes to encourage people and firms to
work harder and encouraging competitions to expand output and keep prices low

Actions to control supply side policy

• Tax reduction
• Competition
• Privatization
• Deregulation (ruling out old rules)
• Labor market reforms I.e. trade unions under control
• Improving education and training
• New research

52
Chapter 8: Business Environment: Microeconomic Factors

In this Chapter

a) Define the concept of demand and supply for goods and services.

b) Explain elasticity of demand and the impact of substitute and complementary goods.

c) Explain the economic behavior of costs in the short and long term.

d) Define perfect, competition, oligopoly, monopolistic competition and monopoly.

53
Microeconomics

Definition: Microeconomics attempts to examine how supply and demand decisions made by
consumers, firms and industries affect the selling prices of goods and services within an industry or
market.

Concepts of Demand and Supply

Demand

Definition: Demand for a product or service can be defined as the quantity that the consumers desire to
buy at a particular point of time and a particular price, backed by their ability to buy and willingness to
spend.

There are several factors that affect demand of a good or service. These include:

 Price: Generally, the biggest determinant of demand is price. Consumers tend to demand a
product/service more if the price is affordable and vice versa. The higher the price of a particular
product/service, the lower the demand.
 Substitute: Demand of a particular product/service is affected by the amount of similar
products/services in the market. Demand is likely to be lower for a product if there are several
substitutes (similar products) available in the market.
 Complementary Products: Complementary goods are those that are used with each other for example
bread and butter, cars and gasoline, pencils and erasers etc. Demand of a product is related to the
availability and price of complementary goods. If complementary goods are easily available, demand
for a given product will increase. High prices of complementary products (like gasoline, erasers and
butter) may discourage consumers from buying primary products (cars, bread and pencils).
 Income of the individual consumer: Change in consumer’s level of income also influences their
demand for different commodities. Normally, the demand for certain goods increase with the
increasing level of income and vice versa.
 Tastes and preferences: The taste and preferences of individuals also determine the demand made
for certain goods and services. Factors such as climate, fashion, advertisement, innovation, etc. affect
the taste and preference of the consumers.
 Expectation of change in price in the future: If the price of the commodity is expected to rise in the
future, the consumer will be willing to purchase more of the commodity at the existing price.
However, if the future price is expected to fall, the demand for that commodity decreases at present.

Law of Demand
The law of demand states that, other factors remaining constant, the demand for a product / service is
inversely related to the price of the product / service , i.e., when the price increases, the demand
decreases and vice versa. When the demand for a good or service changes in response to a change in its
price, the change is referred to as:
 an expansion in demand as demand rises when the price falls
 a contraction in demand as demand falls when the price rises.

54
This change is shown in the table below, how demand of a product expands when price falls and vice
versa.
Price ($) Quantity
Demanded

1 10kg

2 8kg

3 6kg

4 4kg

5 2kg

6 1kg

The graph below illustrates how demand of a certain product can be plotted on a graph.

Price
6
The slope in the graph shows that the demand
5 curve has a negative slope, meaning that quantity
4 demanded has an inverse relationship with price.
The higher the price of a product, the lower the
5 quantity demanded
4

2 Quantity Demanded

0 1 2 4 6 8 10

Supply

Definition: The concept of supply refers to the quantity of a good that existing suppliers or would want
to produce for the market at a given price.

There are several factors that affect supply of a product, these include:

 Cost of production: The higher the cost of producing a product, the lower the supply as businesses will
reduce costs by producing a lower quantity of goods.
 Government subsidies: To boost the supply of certain goods government may pay subsidies. For
example government may want to encourage people to use solar energy and subsidize solar panels
which will result in an increase in their supply.
 Price of substitutes: If a supplier can easily switch to producing substitute products and their price is

55
 rising they will readily switch to the substitutes as it will be more profitable for the businesses to do so.
 Expectations of price changes: An expected increase in the price of a good means a potential increase
in its quantity supplied as suppliers may want to realize profit.
 Changes in technology: Advanced technology means a reduction in cost of production resulting in an
increase in supply. Change in technology may improve efficiency of the production process hence
increasing output from the same amount of input.
 Other factors like changes in weather, natural disasters and fashion can also influence supply.
 Tax policy: An increase in tax maybe to restrict the supply of certain goods like tobacco related
products. Similarly, government may reduce taxes on certain luxuries like cars to increase their supply.

Law of Supply
Supply and price have a direct relationship when other factors remain constant. This means that the
higher the price of a product, the higher the supply as suppliers will want to earn a profit.

In the graph, it is shown that the supply curve has a positive slope meaning that the movement from point
A to point B suggests that every time the price increases, the quantity supplies also increases.

Equilibrium

Definition: Equilibrium price for a good is the price at which the volume demanded by consumers and
the volume that firms would be willing to supply is the same. This is also known as the market clearing
price, since at this price there will be neither surplus nor shortage in the market.

56
In the graph above, P signifies the market clearing price or the equilibrium price. If price is raised by
suppliers to P1, the quantity demanded (A) would be much less than quantity supplied (B) leading to
excessive stock levels at businesses forcing them to reduce prices in order to sell excessive stock. This
would lead to the price falling back down to equilibrium price.

If price is reduced to P2, the quantity demanded (D) would be much higher than the quality supplied (C)
hence leading to shortage in the market. As suppliers realize the high demand, they would be able to raise
the price of the product back to P, the equilibrium price.

Elasticity of Demand

Definition: Demand elasticity is a term used to describe the degree of responsiveness of quantity
demanded of a good / service to changes in any of the determinants of demand.

Elasticity of demand is calculated using the following formula:

Elasticity= Percentage Change in quantity demand

Percentage Change in determinant of demand

Elasticity of demand can be measured using three determining factors

57
 Elasticity of Demand Price Elasticity of Demand

Income Elasticity of Demand

Cross Elasticity of Demand

1. Price Elasticity of Demand

Definition: is a measure of the extent of change in the market demand for a good in response to a
change in its price.

Price elasticity of demand (PED) can be measured as:

PED= Percentage change in quantity demanded

Percentage change in price

The answer can be ranging from more than 1, equal to 1 or less than 1. Typically a negative sign in the
answer would be ignored.

 PED value of greater than 1 means the demand is elastic to price, signifying that a small change in
price would bring about a large drop in quantity demanded of the product. For example there are
several cars in the market that the buyers can choose from. This would mean that one car becoming
more expensive would experience a large drop in quantity demanded as buyers have several to
choose from and can simply switch to another company’s cars.
 PED value of less than 1 means the demand is inelastic, signifying that changes in price would not lead
to a significant change in quantity demanded. For example people would buy bread and sugar even if
there were increases in prices as these are staple goods or necessities that would be demanded even
if prices were to increase.

58
Factors that Influence Price Elasticity of Demand (PED)
Factor Influence
Proportion of income spent When a large portion of income is spent on a product like air travel or
on the good cars, demand is likely to be elastic and a small change in price may bring
about a large change in quantity demanded as these are deemed
expensive and customers may either switch demand to other cars and
train travel or not demand the goods and services altogether.

A lower portion of income spent on goods such as tea, bread, butter and
stationery would mean that demand would be relatively inelastic and
hence would be unchanged sue to variations in price.
Substitutes If there are close substitutes (similar products) readily available in the
market, demand would be elastic meaning that small changes in price
would lead to large changes in quantity demanded. Customers would
easily switch to other similar products in the market. Lack of substitutes
would mean that customers would be unable to switch to other options
hence price changes would not affect demand.
Necessities Demand for necessities like salt, sugar and gasoline is unlikely to be
elastic. Price changes are unlikely to affect the quantity demanded.
Time In the short run, consumers may not know of possible alternative goods,
so they may continue to buy certain goods even when their prices rise.
Such inelasticity may be lessened in the long run as consumers acquire
greater knowledge of markets and can switch to alternative goods.

2. Income Elasticity of Demand:

Definition: The income elasticity of demand for a good indicates the responsiveness of demand to
changes in household incomes. When household income rises people will not only increase their
demand for existing goods but also start to demand new goods which they could not previously afford.

Income elasticity of demand (IED) can be measured as:

Income Elasticity of Demand= Percentage change in quantity demanded

Percentage change in income

Factors Influencing IED

Factor Influence
Inferior Goods Goods whose demand eventually falls as income rises are called
inferior goods: examples include 'value' or 'basics' ranges of own-
brand supermarket foods (which could be substituted for more
expensive ranges), and bus or coach travel (which could be
substituted for rail or air travel). The reason for falling demand is that
as incomes rise, demand switches to superior products as they
improve their standard of living.

59
 Thus income elasticity of demand of inferior goods is negative i.e. as
income rises, demand of such products will fall.
Necessities Goods whose demand does not change with the change in income are
necessities and would be demanded regardless of high or low income.
An example is basic food stuff like bread, sugar and salt whose
demand does not depend on income levels and will be demanded in
the same quantities in all circumstances.

Thus demand of necessities is inelastic to income and the IED value

will be 0 or close to 0.
Luxuries Luxury goods are likely to be expensive and are not considered
necessities for example luxury cars, expensive holidays or yachts.
These goods will be demanded when income increases hence IED is
normally positive and higher than 1.

3. Cross Elasticity of Demand

Definition: Cross elasticity of demand is a term used to describe the degree of responsiveness of quantity
demanded of a good/service to changes in the price of any of its related (substitutes or complementary)
goods.

Cross elasticity of demand (CED) can be measured as:

Cross Elasticity of Demand= Percentage change in quantity demanded of Product A

Percentage change in price of Product B

Factors influencing CED

Factor Influence
Substitute Substitutes are products that can be used interchangeably for
example cars from different companies are considered
substitutes. If price of one car increases, customers will shift to
cars from different companies. This will lead to a positive cross
elasticity of demand.
Complement Complements are products that are used with each other for
example cars and gasoline. If price of gasoline was to increase,
demand for gasoline would fall along with the demand for cars
as people would prefer shifting to public transport. Hence cross
elasticity of demand for complements would be negative, as
demand for product would decrease if price of complements
was to increase.

60
Types of Competition

Type of Competition Explanation

Perfect Competition A perfectly competitive market is one in which:
 there are many firms producing homogeneous goods or services
 there are no barriers to entry to the market or exit from the market
 both producers and consumers have perfect knowledge of the
market place.

Under such conditions, the price and level of output will always tend
towards equilibrium as any producer that sets a price above
equilibrium will not sell anything at all, and any producer that sets a
price below equilibrium will obtain 100% market share. The demand
is perfectly elastic, which means that small price changes may lead to
abnormally large changes in quantity demanded.

Monopoly A monopoly arises when there is only one producer in the market. It
should be noted the laws of many countries define a monopoly in less
extreme terms, usually referring to firms that have a very high market
share.
Customers do not have alternative similar products to turn to and
hence have no choice but to purchase products despite changes in
prices. A monopoly enjoys a privilege in that it can strike its own price
in the market place, which can give rise to what economists call
‘super-normal profits’. For this reason, monopolies are usually subject
to government control, or to regulation by non-governmental
organizations.
Oligopoly An oligopoly arises when there are few producers that exert
considerable influence in a market. As there are few producers, they
are likely to have a high level of knowledge about the actions of their
competitors, and should be able to predict responses to changes in
their strategies.
The minimum number of firms in an oligopoly is two, and this
particular form of oligopoly is called a duopoly. There are several
examples of duopolies, including the two major cola producers and,
for several product lines, Unilever and Procter & Gamble. However,
markets dominated by perhaps up to six producers could be regarded
as oligopolistic in nature. Where a few large producers dominate a
market, the industry is said to be highly concentrated.

61
 It is frequently noted that their characteristics include use of product
differentiation, significant barriers to entry and a high level of
influence on prices in the market place.
Monopolistic Market Monopolistic competition arises in markets where there are many
producers, but they will tend to use product differentiation to
distinguish themselves from other producers in the
market. Therefore, although their products may be very similar, their
ability to differentiate means that they can capture a large market in
the short term irrespective of what their competitors are doing.
For monopolistic competition to exist, consumers must know of – or
perceive – differences in products sold by firms. There tend to be
fewer barriers to entry or exit than in oligopolistic markets.

Economic Behavior of Costs

Economic behavior of costs tends to vary overtime.

Short term Cost Behavior:

Costs in the short term can be classified into variable and fixed costs.

 Total fixed cost (TFC): these costs are independent of the level of production of a firm. Regardless of
the business’s activity, these costs tend to be constant.
 Average fixed cost (AFC): determined by dividing TFC by number of units produced. The average fixed
cost decreases with increase in production activity as denominator increases reducing the average
costs.
 Total variable cost (TVC): these costs increase with increase in production activity. They are directly
proportional to the units produced. The higher the units produced, the higher the variable costs.
 Average variable cost (AVC): determined by dividing TVC by number of units produced.
 Total cost (TC): this can be calculated as TFC + TVC
 Marginal cost (MC): this refers to the additional cost incurred by a firm in an attempt to produce an
additional unit of product / service.

In the short term, micro economists believe that costs follow the law of diminishing returns. As equal
quantities of one variable factor of input such as labor are added to a fixed factor, output initially increases
by a greater proportion, increasing returns and causing the average cost per unit to fall.

However, beyond a certain point, the addition to output will begin to decrease and the average cost per
unit will start to rise again.

Increasing the number of workers in a factory could initially increase production and may lead to an
increased output but as workers keep increasing, they are more likely to cause an overall decrease in
output. This decrease would occur due to various reasons like conflicts, getting in each other’s way leading
to an overall fall in productivity.

62
Long Term Cost Behavior
In the long term, all costs tend to be variable in nature. This is because it is now possible to vary the
quantities of any factors that were fixed in the short term. Many costs that cannot be managed and
reduced in short term are all variable in the long run.

Eventually, however, as the business expands, it will tend to become less efficient at controlling costs due
to poor management and pressure on supplies. This effect is sometimes referred to as diseconomies of
scale and results in the average cost of production increasing.

63
Chapter 9: Formal and Informal Organization

In this Chapter

a. Explain the informal organization and its relationship with the formal organization.

b. Describe the impact of the informal organization on the business.

64
Formal Organization

Definition: a group of people get together to work towards a common goal, a well-defined system must
be put into place. This will enable each employee to know exactly what is expected of him/ her.

Within a formal organization, there will be division of labor where every employee will be informed about
his/her duties so that the specification will help them perform their roles better. Once division of labor is
achieved, this labor will be combined in the form of teams so that employees can coordinate tasks and
work towards a common organizational goal.

This combination and coordination of employees will give rise to an informal structure within an
organization known as an informal organization.

Informal Organization

Definition: A type of structure in which rules, regulations, specific duties, and formal hierarchy is not
designed; People usually have informal relation like friends group. An informal organization will be
present to some degree within all formal organizations.

Features of an informal organization are:

 The speed of communication is faster than the formal communication. This is due to ‘grape vine’ or
informality of communication which bypasses the blockages in the formal communication channels.
 Employees are more committed to the organization if their social needs are being met through
informal channels. They are less likely to leave if they develop meaningful friendships within the
organization and are comfortable in their working environment.
 Informal organization gets work done quickly and efficiently at times due to commitment of
individuals involved in it. The respond to each other’s needs much quickly and efficiently than they
would do through formal channels. Thus making the informal organization more responsive.
 The level of co-operation may be higher in the informal organization. Employees are more likely to
help each other and coordinate on tasks if they have an informal relationship hence enabling them to
cooperate on tasks.
 It is more flexible as it is not bound by formal rules and regulations.
 There is greater knowledge sharing among employees as there will be more sharing of ideas leading
to higher creativity.

There are other, less attractive effects of an informal structure as well like:
 Social groupings may act collectively against organizational interests, as employees may be engaged
in interaction rather than performing their tasks leading to reduced efficiency.
 The grapevine is often inaccurate and can carry morale-damaging for employees that get to hear
inaccurate details about the organization or themselves from others.
 The informal organization can become too important in fulfilling employees' needs: individuals can
suffer acutely when excluded from cliques and networks.
 Informal work practices might 'cut corners', violating safety or quality assurance measures. Informal
structures may encourage employees to overlook compliance with safety rules and other regulations.
65
Chapter 10: Business Organization Structure and Design

In this Chapter
a) Describe Mintzberg’s components of the organization and explain the different ways in which
formal organizations may be structured
i. Entrepreneurial
ii. Functional
iii. Matrix
iv. Divisional: (geographical, by product, or by customer type)
v. Boundary less: (virtual, hollow or modular)

b) Explain basic organizational structure concepts:

i. Separation of ownership and management
ii. Separation of direction and management
iii. Span of control and scalar chain
iv. Tall and flat organizations
v. Outsourcing and offshoring,
vi. Shared services approach

c) Explain the characteristics of the strategic, tactical and operational levels in the organization
in the context of the Anthony hierarchy.

d) Explain centralization and decentralization and list their advantages and disadvantages.

e) Describe the roles and functions of the main departments in a business organization:
i. Research and development
ii. Purchasing
iii. Production
iv. Direct service provision
v. Marketing
vi. Administration
vii. Finance.

f) Explain the role of marketing in an organization:

i. Definition of marketing
ii. Marketing mix
iii. Relationship of the marketing plan to the strategic plan

66
Basic Organizational Structure Concepts

In a public organization (a concept detailed before), the owners (shareholders) are different from the
management (directors) who are responsible for running the organization. There are other distinctions as
well, like the separation of direction and management which means that activities of an organization are
divided into three main components:

Direction: Deciding upon the strategic direction for

the organization i.e. what products to provide and
for what markets.

Management: Deciding upon how the organization

should go about producing the selected products.
This would mean deciding how to produce those
products and how to enter new markets.

Operational: Actually delivering the selected

products. This would mean deciding on the
quantities of products and small details about
products.

As the organization grows these activities become complex as more employees are added to the
organization.

Span of Control

Definition: Span of control is a term used to denote the number of employees a manager has under his
direct supervision.

Span of control is the number of subordinates reporting to their immediate officer. If a manager has three
subordinates the span of control is three. On the other hand a manger with eight employees will have a
span of control of eight. It may be

 Narrow span of control: Narrow span of control would mean lesser number of employees being
supervised by one manager.
 Wide span of control: Wide span of control would mean larger number of employees being
supervised by one manager.

67
The more the number of subordinates the wider the span of control.

Factors that affect span of control

 Geographical dispersion: If the branches of a business are widely dispersed, then the manager will
find it difficult to supervise each of them, and thus the span of control will be smaller .
 Capability of workers: If workers are highly capable, need little supervision, and can be left on their
own, e.g. Theory Y type of people, they need not be supervised much as they are motivated and
take initiative to work, and thus the span of control will be wider.
 Capability of boss: An experienced boss with good understanding of the tasks, good knowledge of
the workers and good relationships with the workers, will be able to supervise more workers.
 Value-add of the boss: A boss that is adding value by training and developing new skills in the
workers will need a narrow span of control than one who is focused only on performance
management (this is the reverse of the capability of workers point above).
 Similarity of task: If the tasks that the subordinates are performing are similar, then the span of
control can be wider, as the manager can supervise them all at the same time.
 Volume of other tasks: If the boss has other responsibilities, such as membership of committees,
involvement in other projects, liaising with stakeholders, the number of direct reports will need to
be smaller.
 Required administrative tasks: If the boss is required to have regular face to face meetings,
complete appraisal and development plans, discuss remuneration benefits, write job descript ions
and employment contracts, explain employment policy changes and other administrative tasks
then the span of control is reduced.

Scalar Chain

Definition: A scalar chain is an unbroken vertical line of command that begins with the top manager
and flows down sequentially.

Tall and Flat Organizations

Tall Organizational Structure: is one which has many levels of hierarchy. In these organizations, there are
usually many managers, and each manager has a small span of control – they are in charge of only a small
group of people.

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 This diagram illustrates a tall
CEO organization.

Divisional
Directors
Regional
Managers

Department Heads

Team Leads

Workers

Advantages of tall organization

 Narrow span of control
 Small groups enable team members to participate in decisions
 A large number of steps on the promotional ladders assist management training and career
planning

Disadvantages of tall organization

 Inhibits delegation
 Rigid supervision can be imposed, blocking initiatives
 The same work passes through too many hands increasing administration and overhead costs
 Slow decision making and responses, as the strategic apex is further away

Flat Organizational Structure: (also known as horizontal organization or delay ring) has an organizational
structure with few or no levels of middle management between staff and executives.

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 This diagram illustrates a flat
organizational structure.
Owner/CEO

Heads of
Departments

Team Leads

Workers

Advantages of flat organization

 More opportunities of delegation of tasks as there will be fewer managers who will be delegating
tasks to employees who will be learning more.
 Relatively cheap in theory as fewer levels in hierarchy will mean fewer managers to pay.
 Speeds up communication between strategic apex and operating core as information will have to
pass fewer levels.

Disadvantage of flat organization

 Requires jobs that can be delegated however that will lead to higher errors as employees will learn
on the job.
 Managers may only get a superficial idea of what goes on. If they are overworked they are more
likely to be involved in crisis management which means they will only get know details when
something goes wrong.
 Managers will lose control in how tasks are performed leading to employees not following
instructions, lack of standardization and demotivation.

Due to advancement in communication technologies it has become possible for a person to supervise or
monitor a number of individuals thus widening the span of control and reducing management layers.

The advancement in technology has resulted in delayering. Delayering means reductions in the
management levels. The span of control gets wider, the scalar chain gets smaller and the organization
gets flatter in result. Benefits of delayering are:
 Faster and smoother communication
 Greater empowerment for employees
 Quick decision making
 Leaner organization resulting is cost savings

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Outsourcing and Offshoring:

Outsourcing involves subcontracting an activity to an external activities. It is a growing trend where

organizations outsource certain noncore activities to another organization, a specialist, to focus more on
its core business. For example, an organization could focus on producing quality goods while marketing
function for those quality goods could be outsourced to an advertising agency to ensure that the
organization deals with the products. The advertising agency would then ensure that its specialist skills
were directed at selling the products and increasing revenue. Off shoring means getting work done from
a different country.

Activities like IT services, tax management, cleaning & maintenance and call centers are usually
outsourced. Outsourcing has a number of advantages and disadvantages summarized as following:

Advantages Disadvantages
Allows the management to focus on core activities Outsourcing key services like IT can have an
and generate competitive advantage. adverse effect on the business where
confidential information is given to
outsiders.
Cost savings, as the service provider will be more Opportunities to gain competitive advantage
efficient in doing that activity. The service providers is missed as the third party providing service
will also benefit from economies of scale and pass to one organization can also provide similar
on that to the client as well. services to the competitor.
It allows the organization to develop in house skills An organization may get locked in into a poor
at its own pace without compromising on quality. outsourcing contract where the quality is
unsatisfactory but the tenure has to be
completed.
Organization can benefit from high quality services Lack of organizational skill development.
provided by specialists which would have been too Outsourced services would never be
costly to employ otherwise. developed in-house.

Shared Services Organizations

The shared services organization is a medium through which defined services can be provided across the
organization by a dedicated unit. This differs from outsourcing, in that the shared services provider is
actually a part of the organization.

Shared services organizations reduce the level of duplication of tasks. For example, instead of each part
of the organization employing human resources or information technology specialists, these services can
be provided centrally, through a single team. In this way, they can reduce costs significantly and also
standardise the policies and processes across the business. Management and operational support can be
delivered through facilities such as hotlines or helpdesks.

An example of a very effective use of the shared services concept is the provision of professional training
courses and support across large consultancy firms operating on a regional or multinational basis. While
the use of shared services organizations is increasing, the model is not suitable for all. For example, if the
business units are very diverse, a centralised model may not be appropriate. It has also been suggested
that potential cost reductions should not be over-estimated, as many organizations will still rely on local
provision to meet the idiosyncratic needs of each business function or locality.
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Centralization and Decentralization

Centralization Decentralization
Concentration of decision making authority in the Some, not complete re-distribution of power and
hands of top management / executives. Authority authority from top to middle management and
is normally not delegated. operational staff enabling them to make decisions.
Advantages Advantages
 Resources controlled and saved  Delegation would enable employees and
 More control over business develop skills.
 Management is experienced so can decide  Fast decision making in emergency situations
better from profit point of view and ensure all as employees would not have to refer every
decisions ultimately contribute towards profit issue to a person higher up the chain of
making. command. They can resolve issues when they
 In crisis, it enables better decisions as arise.
decisions are quicker and would be effective at  Motivation because of delegation.
resolving issues. Performance could improve as employees
 Standardized policies and unity of decisions as would get chances to improve skills and
decisions taken by primarily one person. improve pay grade.
 Better decision because of awareness of local
conditions
Disadvantages Disadvantages
 No delegation so employees may feel  No privacy as information would also be given
controlled. to multiple employees as a part of delegation
 Slow decision in emergency situation as issues of decision making.
would first be refered to senior personnel and  Resources not controlled and saved as
then wait for them to resolve issues. different individuals making decisions are
 No motivation as no delegation of likely to different points of view.
responsibilities and lesser chances of  Less control over business.
promotions and pay increases.  Disorganized work.
 Wrong decision because of lack of awareness
of local conditions.

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Mintzberg’s Theory on Organizations

Mintzberg’s model breaks down the organization into five generic components, considering the role of
each in relation to coordinating its activities. These are:
a) strategic apex
b) middle line
c) operating core
d) techno structure
e) support staff.

a) Strategic Apex: This element of the organization is made up of directors and senior executives. Their
role is to interpret or define the mission of the organization and ensure that its objectives are
consistent with this mission. The strategic apex is also responsible for managing the organization’s
relationship with the macro-environment.
b) Operating Core: The operating core carries out the activities necessary to deliver outputs.
c) Middle Line: This element provides the link between the strategic apex and the operating core. The
role is partially one of interpretation, as the work of the operating core has to be consistent with the
expectations and plans of the strategic apex. Simple, smaller organizations may not have a middle line
at all.
d) Technostructure: The technostructure is made up of key individuals and teams working in functions
such as human resources, training, and finance and planning. Mintzberg states that there are several
roles here. Analysers decide on the best ways to perform jobs and seek to standardise skills. Planners
decide on outputs and define quality requirements.
e) Support Staff: Support staff work in functions such as research and development, public relations and
legal services. Their outputs do not contribute directly to the core purposes of the organization, but
their activities contribute to the efficiency and effectiveness of the strategic apex, middle line and
operating core.

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The relative influence of these elements to one another have a significant impact on the nature of the
organization. Mintzberg asserts that each element will have a preferred means of coordination. For
example, the strategic apex will attempt to coordinate through direct supervision, and will be especially
important in smaller organizations with simpler structures. The middle line seeks to standardise outputs,
while the technostructure attempts to standardise work processes. The operating core will try to
standardize skills.

Based on his organizational model, Mintzberg described five categories of organization structure, each
of which would rely on one specific element of the model.

1. Simple Structure
The simple structure is centralised with power emanating from the strategic apex. Typically, control
is exerted by the chief executive or small, influential executive team. Perhaps due to its simplicity, the
structure can be flexible and sometimes informal. However, Mintzberg warns that the simple
structure is vulnerable, stating ‘one heart attack can wipe out the organization’s prime coordinating
mechanism’.

2. Machine Bureaucracy
This structure relies heavily on a robust technostructure. Strategic planners and financial controllers
are influential, leading to the creation of multiple layers of management, formal procedures and
standardised production processes. Due to the high degree of standardisation, the tasks performed
by the operating core can have specific instructions with little room for creativity. For this reason,
Mintzberg observed that motivation can be difficult and the organization can be resistant to the need
for change. The machine bureaucracy is typified by large-scale car manufacturing plants.

3. Professional Bureaucracy
Like the machinery bureaucracy, the professional bureaucracy is based on clear lines of authority and
standard administrative practices. However, the practices may be built on standards set by law,
regulations or independent external bodies, including professional bodies. Mintzberg cites schools,
hospitals and professional practices as examples of this structure. He suggests that the professional
bureaucracy is more democratic than the machine bureaucracy counterpart, and that it is easier to
motivate people. The operating core is the major coordinating influence.

4. Divisionalised
In a divisionalised structure, a small central core provides guidelines for business units that enjoy a
high degree of autonomy. Mintzberg states that this is an extension of the machine bureaucracy, or
may even comprise several machine bureaucracies within a single corporation. It is the middle line
that forms a strong coordinating influence, as its key role is to translate the demands of the small
central core into the objectives of the operating core. The divisionalised structure is typical of
multinational companies.

5. Adhocracy
The adhocracy is task or project-based and has to respond quickly and flexibly to changing demands.
These demands may be driven by rapidly changing markets or by innovation. There is little formality,
so direct supervision and defined processes are less important than in other organization structures.

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 Research and development can be a primary driver of adhocracies, as typified by new technology
industries.

Organizational Structures

i. The Entrepreneurial Structure

The entrepreneurial structure is adopted by smaller businesses. It is simple, informal and very fluid, in
that it may change on a day-to-day basis. Its characteristics are:

 Adopted by sole traders who employ others, some small partnerships and some small companies.
 Those who own and control the business take decisions on the work to be done, how it will be done
and by whom. Decision making will be quicker as not a lot of people would be involved in taking
decisions.
 It is quite common for employees to be expected to multitask and not to expect rigid job descriptions.
The owner/entrepreneur would be expected to specify instructions on how to perform tasks for
everyone working in the organization. Since organization will be small, one employee may be looking
at two different tasks as well.

The entrepreneurial structure is perfect for many small businesses, but is too informal and can even be
chaotic once the level of business activity reaches a certain level. Eventually, the entrepreneur has to
consider formalising the roles that employees play, and creating jobs with defined duties and
responsibilities.

ii. The Functional Structure

The functional structure is the most common organizational model. It is usually depicted as a triangle,
with the chief executive officer at the top and reporting lines of others flowing vertically.

The duties of individuals are allocated according to the functions they perform. For example, a small
company may have a production manager, finance manager, sales manager and IT manager reporting to
the chief executive officer. Each of the functional managers is responsible for a department.

Many larger companies have general managers or assistant general managers responsible for groups of
functions. For example, the General Manager (Marketing) may be responsible for advertising, public
relations, merchandising and direct sales, and there may be a departmental manager responsible for each
of these activities.

For each function, employees are grouped together to perform similar or complementary tasks.

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 Advantages of Functional Organization Disadvantages of Functional Organization
It facilitates specialization, by bringing together It can be inflexible, particularly in a period of rapid
those with the knowledge and skills necessary to change, and in economic systems where it is
carry out each function, and therefore should difficult or costly to recruit or dismiss employees
create economies of scale
It enables the organization to operate It encourages demarcation lines to be created,
through clear lines of authority and well defined which may make employees reluctant to carry out
responsibilities, with all employees knowing to tasks that they consider not to be their
whom they report and for whom they are responsibility
responsible
It prevents duplication of effort, thereby reducing As organizations become larger, there may
inefficiencies be coordination problems as the number of
functions increases as information tends to flow
through formal organizational lines, larger
organizations may encounter communication
problems
It accommodates specialists. Some argue that the functional model is
too inward looking, focusing on processes instead
of considering deliverables defined by customer
needs.

The functional structure is common to many organizations, but different concepts can be deployed within
it. For example:
 The organization can be tall or flat: tall organizations have many levels (a long scalar chain), while flat
organizations have fewer levels the organization may have many employees reporting to each
manager, few employees reporting to each manager, or a combination of these.

 Some organizations concentrate authority at the top of the management hierarchy, with key decisions
taken by senior executives, while others empower subordinates, with greater discretion permitted
further down the management chain: this relates to the concept of centralization and
decentralization.

Functional organization by product

The functional model can be adapted for organizations that offer a range of products. Just as managers
responsible for different products can report to the product manager, it is also possible for each product
manager to have his or her own functional structure. In this way, several functions are duplicated across
the organization, as the manager responsible for each product may have their own production, sales,
marketing, finance and administration departments.

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 This organization structure is sometimes appropriate if the design, production and marketing of each
product is unique or significantly different to those for other products. This structure can also be suitable
if products are distinctive brands. For example, some manufacturers of detergents offer both quality (and
premium) products and discount products. Although they compete with one another to some extent, the
products are usually targeted at different market segments.

Functional organization by geographical region

Many organizations operate across different regions, or across international frontiers, so they may
consider it to be appropriate to maintain separate functional structures in each location. This approach is
not appropriate to all geographically dispersed businesses, but is suitable for organizations whose
geographical locations have distinctive but contrasting characteristics. For example, companies with a
presence in the UK, Ireland and Germany would be able to identify major differences in the demographic
profiles, personal and family values and tastes in the three locations, while companies operating in
Belgium, Luxembourg and the Netherlands would identify differences that are less crucial in commercial
terms.

Functional organization by geographical location is especially important for large companies that operate
across several continents.

iii. Matrix Structure

The matrix structure evolved in companies that sought to overcome some of the rigidities of the functional
organization structure. It was first deployed in the aerospace industry in the USA in the 1950s.

The most common application of the matrix structure is the creation of an extra layer of responsibilities
across the traditional functional structure. As well has occupying a position in the organizational pyramid,
which defines line relationships, employees have responsibilities to project managers. In this way, the
employee may have two or even more managers.

For example, an individual working in the finance department may report to the head of finance but may
also have some duties in relation to IT/IS or marketing projects. The managers responsible for these
projects will be able to call upon staff across organizational boundaries on a formal basis.

Matrix organizations can be taken further in environments that are less dependent on rigid chains of
command and lines of communication. For example, in some professional firms and consultancies, a
position in a functional organization chart is only important for the purpose of establishing
accountabilities under employment law. As one individual working in such an organization put it, when
asked ‘Who is your manager?, the reply was ‘It depends what day it is.’

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 Advantages of Matrix Organization Disadvantages of Matrix Organization
By involving individuals formally in teams The matrix structure sacrifices the notion that
allocated to specific projects, the organization can
every employee should be responsible to one
capitalize on the knowledge, skills and experiencemanager, and this can result in conflicting
they can offer demands on the employee, in terms of what work
should be done, how time should be apportioned
and how work should be carried out
Communication lines are shortened in that project The different managers to whom the individual
managers can deal with staff assigned to them reports may have very different styles, which may
create conflict, or even confusion as to the best or
correct approach
Bureaucracy should be reduced The matrix structure creates additional time
management pressures, which may have an effect
on costs
Employees’ jobs are enriched, and this may If the matrix is not designed or implemented
improve motivation systematically, it can create organizational
inefficiencies, such as slower decision taking.
More ambitious individuals can exploit
opportunities made available to them and more
readily pursue advancement
Cooperation between departments can be
increased,
The matrix approach may make employees more
responsive to change and more willing to welcome
change.

iv. Boundaryless Organizations

Traditionally, organizations bring people together in one or more physical locations in order to process
inputs and create outputs, all within a formally defined structure. Advances in information
communications technology have resulted in new approaches that have redefined where, when and how
people work. The most obvious evidence of this is the reduction in reliance on the 9.00am to 5.00pm
working day, the emergence of flexible working arrangements and increases in work sharing and home
working. Organizations have also adopted new ways of configuring relationships.

Virtual organization

A virtual organization is one which operates primarily through electronic communications, taking
advantage of the efficiencies made possible by information technology. It removes many of the features
of the working environment that were once taken for granted, such as bringing managers and staff
together at a defined location. People work together remotely, with little or no dependence on physical
premises. Instead, communications take place through media such as emails, e-conferencing, extranet
and intranet. This virtual aspect of the operation sometimes extends to links with suppliers (upstream),
and customers (downstream). By extending the virtual concept to customer relationships, the
dependence on retail premises and customer-facing staff is eliminated. Amazon is often cited as the first
major virtual business in this respect.
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The virtual organization model can be adopted wholly or in just certain parts of the business. For example,
one major insurance company maintains a large head office which serves as a base for functional
departments, but many of the staff working for certain departments work from home and rarely if ever
need to visit the office.

Some service organizations can adopt the virtual approach in its entirety, with a token physical presence
at a registered office to satisfy statutory registration requirements.

Advantages Of Virtual Organizations Disadvantages Of Virtual Organizations

Costs can be greatly reduced, as there is less There is heavy reliance on information
dependence on premises. This can result in technology, so if things go wrong this can have a
significant reductions in overheads, such as catastrophic effect. Problems can arise from lack
electricity, water, mortgage or rent, and service of connectivity, hardware and software failures,
staff. malware and security breaches.
The adoption of e-business solutions can create Those who lack basic IT skills, or are unprepared to
efficiencies, such as automated re-ordering and use information technology equipment, have no
seamless transaction processing. In fact, while the prospect of doing business with virtual
virtual organization is a relatively new business organizations or working for them.
concept, many of the technologies deployed have
been available for many years. For example,
electronic data interchange (EDI) was first
developed in the 1960s.
Jobs with the organization may be more In some cultures, there remains a preference for
attractive, as the need for daily commuting is the ‘personal touch’, so virtual organizations may
removed. This can be particularly appealing to find it difficult to achieve a foothold.
those with family commitments at certain times of
day, and those who would be deterred from
working due to the cost of transport and car
parking.
The virtual organization has a modern image Some of those who work for virtual organizations
which may appeal to several stakeholder groups, feel isolated as direct human interaction on a face-
including customers, suppliers and distributors. to-face basis is minimal. Feeling personally
Increasingly, this approach to business aligns with connected to a work group can be motivational,
the expectations of such groups. and this effect is lost when members of teams do
not meet on a regular basis.

Hollow organization

A hollow organization is one which relies heavily on outsourcing, enabling it to maintain low staffing levels
while capitalizing on the competences of partner organizations.

The most common application of this model is where an organization identifies those competences that
are core and must be retained. These are then kept in-house, while all non-core operations are contracted
out.

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The hollow organization must forge strong strategic links with trusted partners. An example of this
organizational form is Nike, a sports goods manufacturer, which sub-contracts production activities whilst
maintaining total control over design and quality specifications.

Modular organization

A modular organization extends the hollow concept by breaking down production processes into modules.
Production is outsourced, but each external organization is responsible for only one element of the
process. For example, in producing the Dreamliner aircraft, Boeing enters into contracts with many
suppliers, each of which is responsible for one component or assembly. The outputs of these suppliers
can then be integrated.
The modular organization is a more efficient, contemporary version of the model previously used by many
car manufacturers, who often owned the subsidiaries which produced components that make up the final
product. The modular organization removes the need for complex ownership structures through holding
companies and subsidiaries, and also creates forced efficiencies, as those responsible for each module
have to compete with organizations in the same marketplace for their services.

Management levels by Robert Anthony

Robert Anthony classified 3 management levels called Anthony hierarchy

Category of activity Strategic Tactical Operational

General types of Plans for acquisition of Plans for utilization Detailed execution
decisions resources of resources of day to
dayschedules
Managerial level Top Middle Low
Time horizon Long (2 + years) term decision Decisions based on 6 Short term decision
making to 24 months making
Level of detail Very summarized information Some details in Very detailed
required of internal and information, internal factors
external factors that can affect primarily internal since these would
organization’s decisions factors since they
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 need to implement involve day to day
decisions. activities.
Degree of uncertainty High Medium Low
Examples of variables Products to sell, on which Operation hours of What to produce
under control of dimension to compete, sizes plants, work force (produce), when, on
management and location of facilities, sizes, inventory what machine
nature of equipment (for levels, (from which
example, general purpose subcontracting vendor), in what
versus specialized, long-term levels, outputs rates, quantity and in
raw material and energy transportation what order, order
contracts; labour skills needed, modes used processing and
nature of production planning follow up, material
and inventory management control
decision systems

Roles and Functions of the Main Departments

Some of the main departments in an organization have common roles and affect the organizations
activities.
I. Research and development
Research and development is meant to incorporate innovation and creativity to the organization’s
products and processes. Many organizations around the world thrive on the basis of their resources
allocated to research and development for example the pharmaceutical industry competition is based
on company’s being able to introduce new revolutionary medicines in order to enhance market share.

Product research is aimed at creating new products or improving the existing ones whereas the
process research is aimed at improving the ways in which those products and services are made and
delivered. This would improve production process efficiency reducing production related costs.

II. Purchasing
The purchasing department is responsible for procuring all the goods or services that an organization
needs to conduct its operations. Purchasing department procures raw material for production as well.
The rationale behind having a dedicated department to perform this function (as opposed to each
department handling its own respective purchasing) is the efficiency and cost savings to the
organization as a whole that can be gained. One department purchasing for the entire organization
would be able to get bulk discounts and conduct business with major suppliers allowing relaxed credit
terms.

Therefore the main responsibility given to a purchasing department is to procure all the goods or
services that the organization will require in the quickest time and at the lowest price, without
compromising on quality.

III. Production
This department produces the goods an organization sells to its customers. It is the functional area
that is responsible for turning inputs (raw materials) into outputs (finished products). The following
decisions have to be taken carefully to ensure maximum value:
 The equipment to be used in production.
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  The workforce involved in production, their training and instructions.
 Production should coordinate with the research and development department to ensure
continuous improvement in the process.
 Production should also keep in close contact with the purchasing department to ensure correct
raw material is purchased in correct amounts.

The role of the production department is to manage the production process in order to ensure that
the products are made on time and meet a certain minimum standard of quality. This department is
also given the responsibility to continually improve the efficiency of the production process

IV. Direct service provision

The direct service provision department is also commonly referred to as the client servicing
department. Its function is to serve as a single point contact for an organization’s clients. It is
sometimes referred to as customer services department.

This department becomes particularly beneficial for organizations whose clients have to deal with
several of their departments. The direct service provision acts as an intermediary between the client
and the rest of the organization.

V. Marketing
The marketing department serves as a link between an organization and its customers. The main
responsibilities for this department are twofold:
 To ascertain the current needs and demands of customers so that products and services are
adapted to what customers want and
 To communicate to the market what the organization’s products and services are in an effort to
inform them and compel them to try products.

VI. Administration
The administration department serves a purely support function. Its main purpose is to ensure that
the overall day to day functioning of the organization goes smoothly and that all departments get the
necessary resources and infrastructure they need. It does this by ensuring that:
_ All buildings and equipment are well maintained and in good order, anything that needs to repaired
or replaced is done so at the right time so that other processes are not hindered;
_ All employees are updated on organizational changes and new policies so that compliance is ensured
throughout the organization;
_ All supporting paperwork of the organization is up to date (e.g. requisition forms, time cards etc).

VII. Finance
The finance function is one of the most important functions of the organization. It forms the
backbone of an organization. It includes raising money, recording transactions, providing information
to managers to help them make decisions and reporting to stakeholders in the annual report.

The main part of a finance function in a business organization is the accounts department. The
accounting function is described in much more detail in a later chapter.

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 Large companies might also have a treasury department within the finance function. The role of a
treasury function is to manage the company’s finances. Activities of the treasury function include: „
 Making sure that the business has the money it needs to pay employees, lenders and suppliers
on time and to finance new investments
 Managing the cash of the business: this is often the responsibility of a chief cashier and
cashier’s sub-department
 Obtaining new funds from the financial markets, including the negotiation of new bank loans
 Investing surplus cash
 Arranging transactions for the purchase of foreign currency (for example to pay for purchases
from other countries) or sale of foreign currency (for example to convert sales income in a foreign

Role of Marketing in an Organization

Definition: ‘the management process responsible for identifying, anticipating and satisfying customer
needs profitably’.

The essence of marketing is captured in the words ‘identifying, anticipating and satisfying’. These imply
a process through which the organization must find out what customers want, or carry out research into
what customers are likely to want in the future, and then fulfil these needs by deploying its resources in
an appropriate manner.

There are countless examples of products that have fulfilled genuine needs in the past, sometimes for
long periods of time, but have eventually been superseded by alternative choices due to changes in needs,
tastes and preferences, or have become totally unnecessary for consumers. Examples include audio
cassettes, Super 8 cine films and projectors, ‘twin tub’ washing machines and cash registers.

Successful business organizations therefore regard marketing as a continuous process, through which
actual and perceived customer needs are constantly analyzed and monitored in order to fulfil these needs
to the extent that the organization’s resources and capabilities allow.

The Marketing Mix

The marketing mix is a model used when considering the range of activities necessary to construct and
implement a comprehensive marketing strategy. It is most commonly expressed in terms of ‘the four Ps’
of product, price, promotion and place. ‘Place’ in this context refers to all activities associated with
distribution.

1. Product: This element of the marketing mix considers the technical features, benefits and limitations
of the product or products offered by the business. Depending on the nature of the business, products
can be physical goods or services.

The technical features of the product are important because they will determine whether it will meet
the actual or anticipated needs of the customer. Features are expressed as technical specifications
and capabilities, and sometimes the limits to which the product is subject.

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 Benefits are the utility to the customer and confirm what may be expected of the product. Benefits
have an important role to play when devising promotional activities and are therefore the crucial link
between the product and promotion elements of the mix.

Some products are subject to a derived demand, so the features may be quite distinct from the
benefits of the end product. For example, nobody actually wants a mortgage, as this represents a
large, long-term financial commitment. The benefit lies in owning an apartment or house, and without
the mortgage, of course, few people can realise this aspiration in the short term.

Nearly all products may be considered with reference to the product life cycle. This model suggests
that products pass sequentially through various stages over time, with revenues increasing through
the introduction and growth stages, then tailing off and eventually declining as shakeout, maturity
and decline take place. The ‘product’ of professional firms is the services they offer, which are mainly
intangible but may sometimes be delivered as reports and other outputs.

2. Price: This refers not only to the price of the product, but to all costs related to the purchase. It may
be expressed in monetary terms, a rate of interest, costs, fees, or a combination of all these elements.
The price may be a one-off payment, or a series of payments over time. It may be subject to time
limits (such as a special deal for a limited period). It may also be conditional on purchasing other
products, or a minimum ‘lock in’ period, such as a mobile telephone contract with a minimum
duration.

In the context of professional services, price is expressed as fees or charges.

3. Promotion: Promotion refers to all activities that are intended to inform the customer and influence
the purchasing decision. The range of promotional media deployed by an organization is sometimes
referred to as the promotional mix. This includes:
 advertising
 direct selling, such as face-to-face interactions and telephone or online sales
 public relations
 merchandising
 sponsorship.

Promotion may be highly specific to individual products or a range of products, or may enhance brand
recognition in respect of the organization’s public image. In some cases, the name of the product may
become synonymous with the organization itself. For example, the ballpoint pen was once referred
to routinely as a ‘biro’, which is both the inventor’s surname (Laszlo Biro) and the name of his
company. Likewise, a vacuum cleaner is still called a ‘hoover’ by many consumers, Hoover being the
name of just one producer.

The promotional mix varies widely from organization to organization. Fast moving consumer goods
producers rely extensively on advertising, while life assurance companies have traditionally used
direct selling to a much greater extent.

Market segmentation can be used for both research and planning purposes. It is highly relevant when
considering the promotional mix and is also important when considering the other elements of the

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 marketing mix. Market segmentation involves analysis of the market with reference to homogeneous
sub-sets that share like characteristics. Commonly used segments include:
 age
 gender
 geographical location
 socio-economic groups
 psychological factors, such as risk appetite, desire to conform or be different, and so on.

Segmentation provides insights into strategic opportunities and options. For example, some
companies choose a highly focused approach by targeted marketing aimed at very specific market
segments (Club 18-30 holidays, insurance for drivers with ‘clean’ licences), while others
apply differentiated marketing strategies to address several segments deploying different marketing
mixes (fast moving consumer goods companies often produce low price brands and premium priced
brands within their product portfolios).
As legal constraints and universally accepted professional standards have changed over time, the
promotional mix used by professional firms has changed radically in recent years. In many countries,
accountants, lawyers and doctors were forbidden from advertising at all, and had to rely on
testimonials and personal referrals, and even when such rules were relaxed, many professionals
frowned upon promotion in the conventional sense. Such attitudes are rarely encountered today.

4. Place: This refers to all activities related to moving the product from the producer to the consumer.
It is concerned with distribution through the producer’s channels to market.

Distribution may involve physically moving the product to the consumer, or to intermediaries who
take responsibility for different stages of distribution, such as agents and wholesalers. In retail
industries, distribution was once only concerned with transferring goods from the point of production
to the point of sale, but the logistics have now changed as more companies embrace online orders
and home delivery alongside (and, in some cases, instead of) their stores.

Advancements in information and communications technology have changed the face of distribution
in the last 20 years. In many countries, it has become apparent that retail shops are finding it
increasingly difficult to compete with the more direct channels facilitated by e-commerce. While for
the foreseeable future consumers will continue to rely on the traditional shopping experience for
certain goods, such as fresh food and fashion, it is clear that certain businesses cannot expect their
traditional business model to be sustainable. This has been borne out by the collapse of some long-
established companies (such as Woolworth) and the difficulties encountered by others (such as
various travel and holiday companies).

Professional firms now rely heavily on virtual channels to market, having previously been highly
dependent on face-to-face interaction.

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The Relationship Of The Marketing Plan To The Strategic Plan
The strategic plan of an organization is formulated in order to achieve the organization’s long-term
objectives. A typical planning horizon is five years, though this may depend on the nature of the business.
For example, a ‘dot com’ company may choose a short timescale if technological developments in its field
of operation are changing fast, while an oil or minerals extraction company might plan for a much longer
period of time.
The strategic plan sets objectives that will be consistent with its values and mission as envisaged by the
directors. In order to realise the objectives set down in the plan, it is necessary for each functional area of
the business to create its own plan. Therefore, there will be a production plan, a human resources plan, a
financial plan, and so on.
Marketing objectives must be consistent with strategic objectives, and be drawn up alongside them. Few
organizations can operate without paying attention to the environmental (PEST) factors, so one of the
first stages of planning is to analyse these factors and consider them in relation to the opportunities and
threats presented by external forces. The marketing plan must also take account of the internal strengths
and weaknesses of the organization. Strengths are the platform upon which competitive advantage can
be built, while weaknesses signal current limitations that the organization may or may not be able to
overcome.

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Chapter 11: Organizational Culture

In this Chapter

a) Define organizational culture.

b) Describe the factors that shape the culture of the organization.

c) Explain the contribution made by writers on culture:

i. Schein – determinants of organizational culture
ii. Handy – four cultural stereotypes
iii. Hofstede – international perspectives on culture

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Organizational Culture

Definition: By Hofstede: It is a collective programming of mind which distinguishes the member of one
category of people from another.

By Edgar Schein: It is set of shared, taken for granted, implicit, assumptions that a group holds an
that determines how it perceives (assumes, thinks about) and reacts to its environment.

It may be identified as ways of behavingor ways of understanding that are shared by a group of
people.

Elements of Culture

There are several factors that make the culture of an organization, for instance:

1. Observable behaviour: this includes observable and expressed elements of culture. This would entail:
 Behavior: Customs and rules that are considered ‘acceptable’ within an organizational culture.
An example could be the fact that everybody in the organization, regardless of their rank eats
lunch in the same hall together.
 Artefacts: Solid expressions like office design, dress codes and symbols. Artefacts mark the
surface of the organization. They are the visible elements in the organization such as logos,
architecture, structure, processes and corporate clothing. This could include formal dressing
by all employees regardless of their position within the organization. These are not only visible
to the employees but also visible and recognizable for external parties.
2. Attitudes: Patterns of behavior such as greeting styles, social ceremonies and business formalities.
For example, employee attitude may be decided by the fact that based on efficiency and effectiveness
of performance, employee of the month is selected every month hence there is constructive
competition among employees and they are all focused on performing well.
3. Values a n d b e l i e f s : These a r e adopted values which are conscious strategies, goals and
philosophies. How does the organization express strategies, objectives and philosophies and how are
these made public? The organization may communicate values through constant employee training
based on values and the organizational belief that any job has to be conducted with integrity.
Employees could be communicated organization’s stance on corruption and bribery too.
4. Basic assumptions: They provide the key to understanding why things happen the way they do.
These basic assumptions form around deeper dimensions of human existence such as the nature of
humans, human relationship and activity, reality and truth. The unwritten and often taken for granted
rules and norms of the organization. The basic underlying assumptions are deeply embedded in the
organizational culture and are experienced as self-evident and unconscious behavior.

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Culture Theories

Determinants of organizational culture

a) The organization's founder. A strong set of values and assumptions is set up by the organization's
founder, and even after they have retired, these values have their own momentum. Or, to put it
another way, an organization might find it hard to shake off its original culture. A smaller organization
that is run primarily by a sole proprietor may find its culture primarily affected by the owner’s values
and beliefs. So if the owner believes in giving precise instructions and expects everyone to follow
them, then the culture would reflect that all employees expect to get a set of instructions that they
need to comply with at all times.
b) The organization's history
 Culture reflects the era when the organization was founded. If businesses followed a more relaxed
culture, then the organizational culture will also be informal.
 The effect of history can be determined by stories, rituals and symbolic behavior. They legitimize
behavior and promote priorities. Overtime, culture with reflect stories and rituals for example all
employees may expect monthly performance meeting since that has happened regularly over 5
years.
c) Leadership and management style. An organization with a strong culture recruits and develops
managers who naturally conform to it and who perpetuate the culture. An organization that values
innovation highly may hire managers and employees that are creative and value good ideas more than
they value the ability to follow instructions.
d) The organization's environment. As we have seen, nations, regions, occupations and business types
have their own distinctive cultures, and these will affect the organization's style.

Handy – four cultural stereotypes

According to Charles Handy, organization’s culture could be divided into four types based on Greek
deities’ names signifying the culture that would be followed:

Cultural Stereotypes

Existential
Power Culture Role Culture Culture
(Zeus) Task Culture
(Apollo) Shaped (Athena) shaped (Dionysus)
Shaped by one by rules and by results shaped by
individual procedures individual
interests

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1. Power Culture: Handy associated this type of culture with the Greek god Zeus.
 Here, power is concentrated in the hands of one person, ‘the boss’. This culture is often found in
small, family businesses, particularly where the name of the business is the same as the name of
the boss.
 Fast – but perhaps random – decisions can be made. Since these decisions are not discussed with
multiple individuals with a variety of skills, decision making may be fast but may not consider
different aspects as the owner would not consult with other employees.
 As businesses grow, it becomes more difficult for one person to wield absolute power simply
because of the demands on their time and ability. It is suitable for the ‘entrepreneurial structure’
but for other structures like functional or matrix it can cause a lot of problems

2. Role culture: Structure is defined and operations are predictable.

 Usually this creates a functional structure, where individuals know their job, report to their
superiors (who have a similar skill set), valuing efficiency and accuracy above all. Handy linked this
type of culture to Apollo, the god of role culture or bureaucracy.
 This is characterized by a traditional organizational structure in which jobs are arranged by function
and seniority, and each employee has a distinct role and job specification. For example making
departments where every department is working towards a common goal and tasks are
predefined.
 This culture can be efficient in a stable environment in which employees are expected to do the
same tasks year-in year-out, but can lead to inflexibility and can slow down response to change as
employees defend their roles and rewards. It will be unsuccessful in an industry where external
factors change rapidly.

3. Task culture: Handy linked this culture to the goddess Athena.

 Teams are formed to solve particular problems. Power is derived from membership in teams
that have the expertise to execute a task.
 Due to the importance of given tasks, and the number of small teams in play, a matrix structure
is common. Here, the emphasis is on getting the job done.
 Flexibility is encouraged and it is more important to serve customers and clients well than to
defend one’s role.
 This culture is much more responsive to environmental and competitive developments.
Performance is judged on results. It also requires a tolerance for mistakes.
 Not suitable for repetitive jobs but definite necessity for innovation.

4. Person culture: Handy linked this culture to the god Dionysus.

 In this type of culture, horizontal structures are most applicable. Each individual is seen as
valuable as and more important than the organization itself.
 This can be difficult to sustain, as the organization may suffer due to competing people and
priorities.
 In the person culture the employee is following a personal ambition in the context of the
organization, and interacts with the organization as little as possible. In this culture the individual
is the central point.

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  The organization is seen as serving the individuals within it. Barristers’ chambers, architects’
partnerships and small consultancy firms often have this person orientation. The organization
structure is as minimal as possible; the individuals are clustered together, a small galaxy of
individual stars.

Hofstede – international perspectives on culture

Hofstede looked for national differences between over 100,000 of IBM’s employees in different parts of
the world, in an attempt to find aspects of culture that might influence business behavior. He found four
traits or ‘cultural dimensions’:

1. Power Distance: Power distance is simply the degree to which an authority figure can exert power and
how difficult it is for a subordinate to contradict them. High power distance prevails in countries
where subordinates are afraid of their boss. They usually have paternalistic and autocratic style. Low
power distance countries in which subordinates and their boss have some sort of informal relation.
They usually have democratic and consultative management style.

High power distance is found in Centralized organizations with complex hierarchies. There are large
gaps in compensation. Low power distance is found in Flatter organizations where supervisors and
employees are considered almost as equals

2. Uncertainty Avoidance: Uncertainty avoidance describes an organization's comfort level with risk-
taking. Organizations need to be comfortable with analyzing and taking risks as the higher the risk, the
higher the return. Strong Uncertainty avoidance: where people tend to avoid uncertain events, their
uncertainty to avoid risks. They do not face these events, Week Uncertainty avoidance: where people
tend to face uncertain events, risk and they face these risks to eliminate, in this people are more
creative.

Organizations with high uncertainty avoidance may find themselves unwilling to change and may lose
market share if they don’t adapt to changing external factors. Organizations that exhibit low
uncertainty avoidance may be open to change and innovation and may readily adapt to changing
environmental factors.

3. Masculinity vs. Femininity: This refers to the way that behavior is characterized as "masculine" or
"feminine" within an organization. For example, an aggressive and hyper-competitive culture is likely
to be defined as masculine. Staff in feminine culture will be motivated more by work life balance,
quality of life and relationship at work.

Organizations exhibiting high masculinity may show strong egos where feelings of pride and
importance are attributed to status. Money and achievement are important factors and rewards are
thought of in those terms. Organizations that exhibit high femininity may focus more on interactive
relationships at work with a view to enhance the quality of working environment.

4. Individualism vs. Collectivism: This could best be described as the degree to which an organization
integrates a group mentality and promotes a strong sense of community (as opposed to
independence) within the organization. It means that in a few countries people work individually
whereas in other countries the same work is carried out in the form of groups or collectively.

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 A high IDV score indicates weak interpersonal connection among those who are not part of a core
"family." Here, people take less responsibility for others' actions and outcomes. In a collectivist
society, however, people are supposed to be loyal to the group to which they belong, and, in
exchange, the group will defend their interests. The group itself is normally larger, and people take
responsibility for one another's wellbeing.

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Chapter 12: Committees in Business Organizations

In this Chapter

a) Explain the purposes of committees.

b) Describe the types of committee used by business organizations.

c) List the advantages and disadvantages of committees.

d) Explain the roles of the Chair and Secretary of a committee.

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Committees

Definition: “A specific type of group meeting in which members in their group role have been
delegated the authority to handle the problem at hand is called committee”.

Purposes of Committees
Purposes of Committees

Innovation: A group of people sharing ideas could lead to the

generation of new ideas and can lead to innovations in product
design or on how to improve efficiency of operations.

Participation and Problem Solving: Committees allow

participation of all employees in an issue and in the decision
making process. Committees can be effective in solving issues by
involving all affected parties.

Multiple Skills: Committees involve people form different

departments and hence with a variety of skills and experience.
This would lead to better discussion as issues would be looked
at from multiple perspective.

Co-ordination: Committees should enable the maximum co-

ordination of all parties, specially all departments involved in a
decision to be achieved, for example in co-ordinating the
budgets of each department and compiling a master budget.
This would ensure all aspects of an organization are working
together.

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Types of Committees

There are several types of committees that can be formed within an organization, like:

1. Executive Committee: May consist of high ranking officials within an organization. This may be
involved in running an organization and taking long term decisions likely to affect the organization
over the long term.
2. Standing Committee: They are called standing because they operate on an on-going basis. They meet
after regular periods of time to fulfill the purpose they were made for. For example a performance
review committee could be formed to develop and make changes to the system through which
employee performance would be evaluated and would then lead to pay raises. This committee may
meet quarterly to review policies and whether they need to change. Although the members of a
standing committee may change over time, its function will not.
3. Ad-hoc Committee: is made for the time being, to resolve an issue or to execute a new project. When
an ad-hoc committee serves its purpose, it is dissolved. The type of committee members that will be
chosen to serve on an ad-hoc committee will depend upon the nature of the problem. A broad ranging
problem would typically require committee members to be chosen from different departments.
4. Joint Committees: may be formed to co-ordinate the activities of two or more committees; for
example, representatives from employers and employees may meet in a Joint Consultative
Committee. This kind of committee can either be permanent or appointed for a special purpose.

Roles of Chair and Secretary of a Committee

Roles of Chairperson Roles of a Secretary

Ensure that the information needed for Prepares the agenda for meetings after
committee meeting is available to all members consulting with the chair.
beforehand.
Check and approve minutes of committee Informing members of the committee about the
meetings. meeting and ensuring they have the agenda
beforehand.
Coordinate with the secretary to ensure that the Ensuring all members are in attendance at
entire agenda is discussed by the committee meetings by recording their attendance.
within a meeting.
Ensure during a meeting that all particpants Maintaining and recording minutes of meetings
participate in the discussion. and ensuring Chairperson’s approval.
All solutions are properly debated and represent Making notes on the people responsible for
a true consensus of the group. taking an action as a result of the meeting.
Make a note of the result of the meeting taking Maintains follow up on the action plan and
special care to note the action plan and the ensures that the required actions are taken.
employee responsible for executing it.

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Advantages and Disadvantages of Committees

ADVANTAGES DISADVANTAGES
Consolidation of power and authority. Decisions Time consuming as building a consensus
which individuals might be reluctant or unable to can take considerable time.
take can be taken with collective responsibility.
Delegation of power and authority to experts If routine matters are given to committees
who can take well informed decisions. it may cause undue delays.
Collective responsibility, making it difficult to Risky and inaccurate decisions due to
target individuals for the actions of the entire abuse of power.
committee.
Well rounded decisions due to the involvement Delegates of the committee may leave
of different individuals with varied points of their real duties and spend too much time
views. on committee proceedings.

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Chapter 13: Governance and social responsibility in business
In this Chapter

a. Explain the agency concept in relation to corporate governance.

b. Define corporate governance and social responsibility and explain their importance in
contemporary organizations.

c. Explain the responsibility of organizations to maintain appropriate standards of corporate

governance and corporate social responsibility.

d. Briefly explain the main recommendations of best practice in effective corporate governance:
i. Executive and non-executive directors
ii. Remuneration committees
iii. Audit committees
iv. Public oversight

e) Explain how organizations take account of their social responsibility objectives through
analysis of the needs of internal, connected and external stakeholders.

f) Identify the social and environmental responsibilities of business organizations to internal,

connected and external stakeholders.

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 Corporate Governance

Definition: Corporate governance is the system by which companies are directed and controlled.

Though simplistic, this definition provides an understanding of the nature of corporate governance and
the vital role that leaders of organizations have to play in establishing effective practices. For most
companies, those leaders are the directors, who decide the long-term strategy of the company in order
to serve the best interests of the owners (members or shareholders) and, more broadly, stakeholders,
such as customers, suppliers, providers of long-term finance, the community and regulators.

The Organization for Economic Co-operation and Development published its ‘Principles of Corporate
Governance’ in 2004. These are:
i. Rights of shareholders: The corporate governance framework should protect shareholders and
facilitate their rights in the company. Companies should generate investment returns for the risk
capital put up by the shareholders.
ii. Equitable treatment of shareholders: All shareholders should be treated equitably (fairly), including
those who constitute a minority, individuals and foreign shareholders. Shareholders should have
redress when their rights are contravened or where an individual shareholder or group of
shareholders is oppressed by the majority.
iii. Stakeholders: The corporate governance framework should recognize the legal rights of stakeholders
and facilitate cooperation with them in order to create wealth, employment and sustainable
enterprises.
iv. Disclosure and transparency: Companies should make relevant, timely disclosures on matters
affecting financial performance, management and ownership of the business.
v. Board of directors: The board of directors should set the direction of the company and monitor
management in order that the company will achieve its objectives. The corporate governance
framework should underpin the board’s accountability to the company and its members.

Corporate Governance and the Agency Problem

Limited companies have a primary duty to their shareholders, but also to other stakeholders as described
above. Not-for-profit organizations must also be directed and controlled appropriately, as the decisions
and actions of a few individuals can affect many individuals, groups and organizations that have little or
no influence over them. Public sector organizations have a duty to serve the State but must act in a
manner that treats stakeholders fairly.

Most of the attention given to corporate governance is directed towards public limited companies whose
securities are traded in recognized capital markets. The reason for this is that such organizations have
hundreds or even thousands of shareholders whose wealth and income can be enhanced or compromised
by the decisions of senior management. This is often referred to as the agency problem. Potential and
existing shareholders take investment decisions based on information that is historical and subjective,
usually with little knowledge of the direction that the company will take in the future. They therefore
place trust in those who take decisions to achieve the right balance between return and risk, to put
appropriate systems of control in place, to provide timely and accurate information, to manage risk wisely,
and to act ethically at all times.

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The agency problem becomes most evident when companies fail. In order to make profits, it is necessary
to take risks, and sometimes risks that are taken with the best intentions – and are supported by the most
robust business plans – result in loss or even the demise of the company. Sometimes corporate failure is
brought about by inappropriate behaviors of directors and other senior managers.

Approaches To Corporate Governance

Most countries adopt a principles-based approach to corporate governance. This involves establishing a
comprehensive set of best practices to which listed companies should adhere. If it is considered to be in
the best interests of the company not to follow one or more of these standards, the company should
disclose this to its shareholders, along with the reasons for not doing so. This does not necessarily mean
that a principles-based approach is a soft option, however, as it may be a condition of membership of the
stock exchange that companies strictly follow this ‘comply or explain’ requirement.

Some countries prefer a rules-based approach through which the desired corporate governance standards
are enshrined in law and are therefore mandatory. The best example of this is the US, where the Sarbanes-
Oxley Act lays down detailed legal requirements.

The Role Of The Board Of Directors

Nearly all companies are managed by a board of directors, appointed or elected by the shareholders to
run the company on their behalf. In most countries, the directors are subject to periodic (often annual)
re-election by the shareholders. This would appear to give the shareholders ultimate power, but in most
sectors it is recognised that performance can only be judged over the medium to long-term. Shareholders
therefore have to place trust in those who act on their behalf.

The role of the board of directors was summarised by the King Report (a South African report on corporate
governance) as:

 to define the purpose of the company

 to define the values by which the company will perform its daily duties
 to identify the stakeholders relevant to the company
 to develop a strategy combining these factors
 to ensure implementation of this strategy.

Structure Of The Board Of Directors

There is no convenient formula for defining how many directors a company should have, though in some
jurisdictions company law specifies a minimum and/or maximum number of directors for different types
of company. Tesco plc, a large multinational supermarket company, has 13 directors. Swire Pacific Limited,
a large Hong Kong conglomerate, has 18 directors. Smaller listed companies generally have fewer
directors, typically six to eight persons.

The board of directors is made up of executive directors and non-executive directors.

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Executive directors
 They are full-time employees of the company and, therefore, have two relationships and sets of
duties.
 They work for the company in a senior capacity, usually concerned with policy matters or functional
business areas of major strategic importance. Large companies tend to have executive directors
responsible for finance, IT/IS, marketing and so on.
 Executive directors are usually recruited by the board of directors.
 They are the highest earners in the company, with remuneration packages made up partly of basic
pay and fringe benefits and partly performance-related pay. Most large companies now engage their
executive directors under fixed term contracts, often rolling over every 12 months.
 The chief executive officer (CEO) and the finance director (in the US, chief financial officer) are nearly
always executive directors.

Non-executive directors (NEDs)

 They are not employees of the company and are not involved in its day-to-day running.
 They usually have full-time jobs elsewhere, or may sometimes be prominent individuals from public
life.
 The non-executive directors usually receive a flat fee for their services, and are engaged under a
contract for service (civil contract, similar to that used to hire a consultant).
 NEDs should provide a balancing influence and help to minimise conflicts of interest.

The Higgs Report, published in 2003, summarised their role as:

i. to contribute to the strategic plan
ii. to scrutinise the performance of the executive directors
iii. to provide an external perspective on risk management
iv. to deal with people issues, such as the future shape of the board and resolution of conflicts.

The majority of non-executive directors should be independent. Factors to be considered in assessing

their independence include their business, financial and other commitments, other shareholdings and
directorships and involvement in businesses connected to the company. However, holding shares in the
company does not necessarily compromise independence.

Non-executive directors should have high ethical standards and act with integrity and probity. They should
support the executive team and monitor its conduct, demonstrating a willingness to listen, question,
debate and challenge.

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Key positions within the Board

Position Responsibilities
Chairman  It is the chairman’s responsibility to ensure that the board
The chairman of the company is the operates efficiently and effectively, get the best out of all of
leader of the board of directors. its members. The chairman should, for example, promote
In most companies the chairman is regular attendance and full involvement in discussions.
a non-executive director.  The chairman decides the scope of each meeting.
 He is responsible for time management of board meetings,
 Chairman ensures that all matters are discussed fully, but
without spending limitless time on individual agenda items.
Chief Executive Officer (CEO)  CEO is responsible for the day-to-day management of the
The chief executive officer (CEO) is organization.
the leader of the executive team.  As well as attending board meetings in his or her capacity as
As such, this individual is nearly a director, the CEO will usually chair the management
always an executive director. committee or executive committee.
 While most companies have monthly board meetings, it is
common for management/executive committee meetings to
be weekly.
Secretary  The secretary provides the agenda and supporting papers for
The secretary is the chief board meetings, and often for executive committee
administrative officer of the meetings also.
company.  He or she takes minutes of meetings and provides advice on
The secretary may be a member of procedural matters, such as terms of reference. The
the board of directors, though some secretary usually has responsibilities for liaison with
smaller companies use this position shareholders and the government registration body.
as a means of involving a high  The notice of general meetings will be signed by the
potential individual at board level secretary on behalf of the board of directors.
prior to being appointed as a
director.

Segregation of Responsibilities
It is generally recognized that the CEO should not hold the position of chairman, as the activities of each
role are quite distinctive from one another. In larger companies, there would be too much work for one
individual.

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Sub Committees of the Board
Corporate governance requires that responsibilities of the board be divided into sub committees
individually responsible for fulfilling tasks delegated by the board. The four committees most often
appointed by public companies are the audit committee, the remuneration committee, the nominations
committee and the risk committee.

1. Audit Committee: This committee should be made up of independent non-executive directors, with
at least one individual having expertise in financial management. It is responsible for:
 oversight of internal controls; approval of financial statements and other significant documents
prior to agreement by the full board
 liaison with external auditors
 high level compliance matters
 reporting to the shareholders.
 sometimes the committee may carry out investigations and may deal with matters reported by
whistleblowers.

2. Remuneration Committee: This committee decides on the remuneration of executive directors, and
sometimes other senior executives. It is responsible for:
 formulating a written remuneration policy that should have the aim of attracting and retaining
appropriate talent, and for deciding the forms that remuneration should take.
 the remuneration committee has to offer a competitive basic salary and fringe benefits (these
attract and retain people of the right caliber), combined with performance-related rewards such
as bonuses linked to medium and long-term targets, shares, share options and eventual pension
benefits (often subject to minimum length of service requirements).

This committee should also be made up entirely of independent non-executive directors, consistent
with the principle that executives should not be in a position to decide their own remuneration.

It is generally recognized that executive remuneration packages should be structured in a manner that
will motivate them to achieve the long-term objectives of the company.

Public Oversight
Public oversight is concerned with ensuring that the confidence of investors and the general public in
professional accountancy bodies is maintained. This can be achieved by direct regulation, the imposition
of licensing requirements (including, where appropriate, exercising powers of enforcement) or by self-
regulation.

As the US operates a rules-based system of governance, these responsibilities are discharged by the Public
Company Accounting Oversight Board, which has the power to enforce mandatory standards and rules
laid down by the Sarbanes-Oxley Act. In the UK, regulation is the responsibility of the Professional
Oversight team of the Financial Reporting Council.

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Corporate Social Responsibilities

Definition: Corporate social responsibility (CSR) refers to the idea that a company should be sensitive to
the needs and wants of all its stakeholders, rather than just the shareholders.

It refers to an organization’s obligation to maximize its positive impacts upon stakeholders while
minimizing the negative effects.

Different organizations have different views regarding CSR. While some organizations may be willing to
do what is necessary to ensure that all stakeholders including shareholders are satisfied other
organizations may only operate with the sole motive of maximizing shareholder wealth.

Corporate Social Responsibility would mean an organization willing to meet its stakeholder expectations
and accepting responsibility for its impact on society and environment.

Strategies for social responsibility

Proactive strategy A strategy which a business follows where it is prepared to take full
responsibility for its actions. A company which discovers a fault in a
product and recalls the product without being forced to, before any
injury or damage is caused, acts in a proactive way.
Reactive strategy This involves following a situation to continue unresolved until the
public, government or consumer group find out about it.
Reference strategy This involves minimizing or attempting to avoid additional obligations
arising from a particular problem
Accommodation strategy This approach involves taking responsibility for actions, probably when
one of the following happens.
Encouragement from special interest groups
Perception that a failure to act will result in government intervention

Social Responsibility and Businesses

Social responsibility action is likely to have an adverse effect on shareholders interests.
a) Additional cost such as those of environmental monitoring.
b) Reduced revenues as a result of refusing to supply certain customers.
c) Diversion of employee effort away from profitable activities.
d) Diversion of funds into social projects.

Milton Friedman argued that, in relation to this definition, a corporation has no responsibility outside of
making profit for shareholders:
 Only human beings have moral responsibility for their actions.
 It is the managers' duty to act solely in the interest of shareholders - this is a point of law. Any other
action is shareholder betrayal.
 Social issue are the province of the state and not corporations.

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Specific Environmental Responsibilities:
Businesses are widely regarded as having a duty to safeguard the natural environment. These are six areas
for action.
a. Environmental auditing to monitor such things as legal compliance, waste treatment, and emissions
b. Economic action charges for environmental damage should be made internally to give managers an
incentive to avoid it.
c. Accounting action a separate set of accounts incorporating shadow prices to represent
environmental costs is prepared.
d. Ecological approach aspects of the business such as a product or a location are selected for
examination to ascertain to their environmental impact.
e. Production is managed to minimize inputs of materials and energy.
f. Quality management is applied using the principle of continuous improvement in environmental
performance.

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Chapter 14: The Relationship Between Accounting And Other Business
Functions

In this Chapter

a. Explain the relationship between accounting and other key functions within the business
such as procurement, production and marketing.

b. Explain financial considerations in production and production planning.

c. Identify the financial issues associated with marketing.

d. Identify the financial costs and benefits of effective service provision.

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Accounting and Procurement

Procurement department is responsible for purchasing all materials reuiqred within an organization. This
means purchasing raw material reuqired for production and any other assets required by departments.
This centralized purchasing department leads to cost savings due its ability to purchase in bulk.

The accounting department must:

a. Ensure that all purchases made are properly authorized and accounted for (e.g. any purchases made
for the production department must be authorized by the production manager and be accompanied
by an invoice). Accounts can do this by ensuring that no purchase transaction is processed further for
payment without proper approval.
b. Account for all other purchase related costs (e.g. if a inward transportation cost is incurred, the
accounts department must record this cost with the cost of goods). This can be achieved by
maintaining adequate records and ensuring that all costs associated with a transaction are recognized
at the right time.
c. Account for all goods that have been returned are properly documented and recorded in ledgers so
that purchases are not overstated.
d. Ensure timely and correct payments are made to suppliers. Accounts department will receive invoices
for payments to suppliers. They can ensure that payment is made within the time mentioned on the
invoice to avail any settlement discounts and ensure that correct payments are made by comparing
invoices to other relevant documents.
e. Compare and contrast the current year and past year’s purchases and outline any significant variations
to ensure that future budgets can be improved.
f. Verify that the purchasing department is obtaining quotations from several different suppliers before
making a purchase (e.g. checking alternative quotations). This can ensure that value for money is
achieved in all purchases.

Although they have very separate functions, the accounting and procurement departments are required
to interact to not only ensure that organization’s resources are not utilized for unnecessary products but
also to ensure that an effective budget is prepared.

Accounting and Production

The financial considerations involved in production and production planning include:

a. Accounting function can help maintain records on how much costs are incurred in production.
i. They will maintain bills and invoices related to costs associated with production (e.g. raw material,
wages, equipment etc.).
ii. They will maintain time sheets and payroll data to estimate the labor costs attributable to
production.
iii. The will help in calculating production related overheads and how they are to be allocated to units
of production.
b. Maintenance of accounting records that reflect the quantity and value of all inventory at year end.
c. They will manage finances by coordinating with the finance department to ensure the company has
enough cash to produce the goods and keep the operations running until the customers’ pay the
company.

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d. They will conduct analysis to forecast revenue and profit generated from production in order to
allocate sufficient funds in the budget to production. They will also calculate and investigate variances
form budget and provide recommendations on ways to improve performance.
Accounting and Marketing
Marketing department is the link between the organization and its customers, they communicate with
customers about their needs and inform them about the organization’s products and services along with
helping in estimating the price of products and services.

The financial issues associated with marketing include:

a. Preparing a sales and marketing budget so that activities can be forecasted and funds can be made
available on time.
b. Determining the cost of advertising activities and obtaining funding for activities that will support
marketing such as promotions and advertising especially for new products that an organization may
be launching.
c. Determining the product price: inputs used here include:
 existing market conditions (e.g. current level of demand for the product and how competitors
have priced competing products); and
 The total cost of manufacturing the product so that margin can be calculated and added.
d. Determining the credit terms that can be granted to customers (e.g. very often the past payment
history of a customer is used as the basis for setting the current credit limit) so that cash cycle can be
managed and avoiding late payments.
e. Following up payments from customers who have been granted credit in order to ensure timely
payments.

Financial Costs and Benefits of Service Provision

Service provision is known as customer services in many organizations. This is a department that is directly
in contact with the customers so can forward valuable customer feedback with the production and
marketing department. This function plays a vital role in revenue generation and maintaining customer
loyalty.

Benefits of Service Provision Costs of Service Provision

Helps the organization in making modifications to salaries of the staff in the department
products based on issues faced by customers.
Will help cater to customer needs better hence Other direct and indirect expenses of the
improving revenue. department such as rent of equipment
Will help in creating awareness about
organizations products and services, outlining
benefits.
Will help create a loyal customer base hence
increasing earnings from recurring customers.

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Chapter 15: Accounting and finance functions within business

In This Chapter
a. Explain the contribution of the accounting function to the formulation, implementation, and control
of the organization’s policies, procedures, and performance.

b. Identify and describe the main financial accounting functions in business:

i. recording financial information
ii. codifying and processing financial information
iii. preparing financial statements

c. Explain the various business purposes for which the following financial information is
required
i. The statement of profit or loss
ii. The statement of financial position
iii. The statement of cash flows
iv. Sustainability and integrated reports

d. Identify and describe the main management accounting and performance management functions in
business:
i. Recording and analyzing costs and revenues
ii. Providing management accounting information for decision-making
iii. Planning and preparing budgets and exercising budgetary control.

e. Describe the main purposes of the following types of management accounting reports.
i. Cost schedules
ii. Budgets
iii. Variance reports

f. Identify and describe the main finance and treasury functions:

i. Calculating and mitigating business tax liabilities
ii. Evaluating and obtaining finance
iii. Managing working capital
iv. Treasury and risk management.

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Accounting Function

Definition: The accounting department basically tracks all the financial activities of a department and
records them. For an activity to be important (in accounting terms) it has to be either a “transaction” or
an “event”.

Recording events and

Recording Financial
transaction along with
Information
the monetary value

Clubbing similar events

Main Purpose of Codifying Financial and transactions
Accounting Function Information together e.g revenue
and costs

Preparing statements
Preparing Financial such as the statement
Statements of financial position and
profit and loss

Accounting can roughly be described as a way of recording, analyzing, and summarizing transactions of a
business. The data delivered by the accounting function should:
 Support management in planning, monitoring and decision-making;
 Help business functions in accomplishing their goals;
 Assess performance of the many functions as well as managers in an organization;
 Enable compliance with several legal requirements (e.g. annual financial statements)

The detail and complexity of the accounting function will be determined by a number of factors regarding
the business including:
 Accounting data and systems for small organization would be very simple as compared to large
businesses.
 Accounting for profit making private sectors organizations would be different from accounting for
non-profit making organizations.
 Similarly accounting for manufacturing industry would be quite different from accounting for retail
or services industry.

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Users of Financial Statements

The products of the accounting system are the financial statements which are used by a varied group of
stakeholders for different purposes. .Users of financial statements are :

User Purpose
Managers of the company They need a full picture of the company’s current financial situation
to make better decisions.
Shareholders Shareholders need financial information to judge whether the
management is fulfilling its role as the agents of shareholders.
Shareholders would assess the financial information for decisions
like whether to keep or sell their shares etc.
Suppliers and Customers Suppliers and customers will be interested in the financial health of
the business to make decisions about future trade relationships.

Lenders Lenders will assess financial statements to ascertain whether the

company will be able to meet its commitments or not,

Tax Authorities (HMRC) HMRC will keep track of the company’s profitability to assess the
amount of tax payable by the company.

Employees Employees of the company would want to assess the company’s

performance as their future careers are dependent on it.

General public To judge the positive and negative contributions of the business to
the society at large

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Types of Accounting
Types of Accounting

Financial Accounting: Provides financial

information about the business to external
stakeholders like shareholders, government etc.

Management Accounting: provide executives and

the managers of an organization with a variety of
information they can use when making operational
and / or investment decisions.

Management Accounting Financial Accounting

For internal parties For external parties
Informs internal decisions, provides feedbackReports on past performance of the business
on the operating performance of the business to external parties
Timely, future orientated Delayed, based on historical data
Tailor made to what info managers required Regulated by regulators (duh) to make sure its
includes certain data
Measures financial and operation performance Only measures financial data
Can be focused on specific areas of the Reports on the entire organization
business

Financial accounting leads to preparation of external reports.

External Reports

External reports are those that are prepared by the business for external stakeholders and users such as
shareholders, banks, government and suppliers. Examples of external reports are:

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 External Reports

Sustainability
Statement of Statement of Statement of
and Integrated
Financial Position Profit and Loss Cash Flows
Reports

Report Purpose
Statement of Profit and Loss This report is prepared for external stakeholders yearly. This will
summarize the revenue earned by the business in a year and the
expenses incurred in generating that revenue. Stakeholders may
measure the business’s success in its ability to generate profit at year
end. Management may need such statements monthly for their
analysis and cost control. Government can ensure that business has
paid the correct tax amount keeping in view the profit generated.
Statement of Financial Position This report summarizes the assets (current and noncurrent) as well
as liabilities for a business. This is essentially a snapshot at year end
of what the business owns and what it owes at year end.
Shareholders will be able to see the value created by the business
through its financial position. Suppliers can assess the business’s
ability to pay back amounts owed on time by looking at other
liabilities owed by the business.
Statement of Cash flows The statement of cash flows takes the information presented in the
profit or loss account and statement of financial position and
analyses it into cash generated or used in different types of activity
such as trading activities or cash generated from sale of assets.
Stakeholders can assess the cash reserves the business possesses
and its ability to make investments and earn a return.
Integrated Reports Sometimes an organization creates nonfinancial value as well by
giving employees a healthy working environment and developing a
strong skilled workforce. It can also generate customer goodwill by
providing good after sales services. Integrated report is a single
document that not only focuses on profit but also specifies
nonfinancial indicators so that stakeholders can get a much broader
picture of the organization.

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Management Accounting Functions

1. Recording and analyzing costs and revenues: Organizations and its departments need to know both
the revenue they are bringing in for an organization and what their activities are going to cost the
organization. This way management can make important decisions regarding departments.

Costs are not only reported but also classified into various categories. Management accounting will
help the organization make a distinction between direct costs that are attributable directly to
production and indirect costs and fixed costs that remain the same regardless of production levels.

This type of reporting makes it significantly easier for an organization to identify and work out ways
to reduce its overall costs.

After analyzing costs, a cost schedule would be prepared that would summarize all costs associated
with production. The main benefits of a cost schedule would be:
 Analysis of costs leading to effective cost control as classification of costs would lead management
to assess which costs are avoidable and which are inevitable.
 Cost schedule would lead to determination of selling price as it would easier for management to
add a margin to costs and reach a selling price.
 Decision making will be easier if management has a summarized schedule of costs to consider
before taking a decision.

2. Providing management accounting information for decision-making: provides the executives and
management of an organization a basis from which to make operational and / or investment
decisions. The primary objective of decision making is to achieve efficient utilization of an
organization’s resources. Management reports will help management in deciding what product mix
to offer to customers by analyzing which are the most profitable and which ones are the least
profitable. They can help the management in determining whether to produce products for resale or
buy them from an outside supplier.

3. Planning and preparing budgets and exercising budgetary control: it should be possible to produce a
budget. This shows the total planned revenues and costs for our business for the coming period. It is
based on the cost schedules mentioned earlier.

Budgets are useful for several reasons. To improve coordination and ensure that employees within a
department work towards a common goal. Budgets also help assign responsibilities to managers and
motivates them to achieve the task at hand. Forecasts and budgets also help improve performance
by drawing comparisons between actual performance and planned performance. This is done
through variance reports that will help highlight areas of improvement in future.

Finance and Treasury Functions

Definition: The finance department through the functions of financial and management accounting is
responsible for monitoring and reporting how an organization’s funds have been utilized. In addition, it
is also responsible for identifying and settling any tax liabilities.

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 The treasury on the other hand is responsible for managing the funds of the organization. In the case of
an organization that requires finances to fund its operations, the treasury will be responsible for
obtaining the needed monies. Alternatively, in organizations that have excess funds (more money than
they need to finance their operations), the treasury is responsible for safely investing the surplus funds.

Roles of Finance and Treasury

Roles Details
Calculating and mitigating Treasury and finance function will help organizations in estimating the
business tax liabilities tax liability for the year along with providing recommendations on
ways to reduce tax payments legally. They will also help in ensuring
that sufficient funds are available when tax becomes due.
Evaluating and obtaining Finance and treasury functions will evaluate the fund requirements of
finance a business and decide on whether these funds will be raised through
debt financing or equity financing. This would also include an analysis
of the impact of additional finance on profit.
Managing working capital Treasury and finance would be responsible for ensuring that cash is
available for oeprations at all times. They would monitor the days
taken to earn cash form sales and would ensure that all debtors are
paying on time. By collecting cash from inventory sales and debt
collection, they can ensure that all creditors are paid on time.
Treasury and risk The other main responsibility of the treasury function is risk
management. management. Risk management refers to mitigating or minimizing
the possibilities of interest rate risk and foreign exchange risk to an
organization. Interest rate risk occurs when an organization borrows
funds from a bank at a fixed rate of interest for a fixed period of time
and then subsequently the rate of interest goes down (the interest
rates banks charge are set by the Government and periodically rise or
decrease).

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Chapter 16: Principles Of Law And Regulation Governing Accounting And
Audit
In this Chapter

a. Explain basic legal requirements in relation to retaining and submitting proper records and
preparing and auditing financial reports.

b. Explain the broad consequences of failing to comply with the legal requirements for
maintaining and filing accounting records.

c. Explain how the international accountancy profession regulates itself through the
establishment of reporting standards and their monitoring.

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Retaining and Submission of Records

Limited companies are required by law to prepare, publish and maintain accounting records. In the United
States for example companies listed on a stock exchange are required to meet stringent requirements of
the Securities and Exchange Commission (SEC) such as filing periodic financial records with the SEC. In the
United Kingdom limited companies are required by the UK Companies Act

1985 to prepare and publish accounts annually; These accounting records are required to be based on
conventional accounting standards and principles which are recognised by professional accounting bodies
in the relevant jurisdiction.

Auditing financial reports

Audit of financial statements of a listed company is required by law in most countries. This would mean
that financial statements need to be verified by an independent specialist who needs to give an opinion
on the truth and fairness of financial statements.

True and Fair View: There is no defined meaning of the statement “true and fair view” but it is widely
accepted to mean accurate and not misleading. Company law requires that financial statements must give
a true and fair view of the financial position at a particular point in time as depicted by the balance sheet,
and must give a true and fair view of the profit or loss of the company in the financial period in question.

To check truth and fairness of financial statements, independent auditors are hired by shareholders to
give an independent opinion and improve the trustworthiness of the reports.

Consequences of Failing to Comply with the Legal Requirements

Failure to keep proper accounting records or to prepare regular financial statements that give a true and
fair view are both criminal offences. In both cases, the responsibility is that of the directors who need to
ensure the company complies with laws. Noncompliance may lead to:
 Fines on the company as well as directors
 Suspension of shares on the stock exchange.
 Failure to pay taxes or evading tax may lead to investigations by tax authorities.

Failure to maintain adequate accounting records may lead to:

 The company’s auditors giving a qualified audit report.
 Can damage the company’s reputation and make it harder and more expensive to raise finance.
 Failure to collect money owed from customers on time, leading to cash flow problems.
 Failure to pay suppliers on time may lead to lost goodwill as well as the removal of the company’s
trade credit facilities.

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Establishment of Reporting Standards and Their Monitoring

There are several areas of financial statements where management uses its own judgment on dealing
with financial issues. As different people have different judgment, this would mean financial statements
would drastically different.

Thus there was a need for the development of accounting standards which removed significant
subjectivity and making it easier to apply the principles in practice, which led to International Accounting
Standards (now International Financial Reporting Standards (IFRS)) being developed.

In the UK the Companies Act 1985 requires a note to the accounts stating that the accounts have been
prepared in accordance with applicable accounting standards or stating otherwise how and why the
accounts have diverged from the standards.

Other countries have similar laws which have effectively deemed that accounting standards have force of
law behind them. European Union countries are also obliged to meet EU directives.

The International Accounting Standards Board was set up to develop a single set of high quality,
understandable and enforceable financial reporting standards which promote transparency and
comparability of financial information.

The IASB is also responsible for the promotion and application of these standards. Convergence of
accounting standards throughout the world particularly between US GAAP (Generally Accepted
Accounting Principles) and IFRS is a major talking point in the financial world, and steps have already been
taken to enable convergence.

The IASB and Financial Accounting Standards Body (FASB) in the US are working together to meet this end.
This has meant that companies and businesses have to keep in touch with developments in accounting
standards.

IFRSs have helped improve and harmonise financial reporting around the world. The standards are used:

 As national requirements
 As the basis for national requirements
 By regulatory authorities
 By companies themselves
 As an international yardstick for those countries which utilize have their own standards

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Chapter 17: Financial Systems, Procedures and Related IT Applications

In this Chapter

a. Identify an organization’s system requirements in relation to the objectives and policies of

the organization.

b. Describe the main financial systems used within an organization:

i. Purchases and sales invoicing
ii. Payroll
iii. Credit control
iv. Cash and working capital management.

c. Explain why it is important to adhere to policies and procedures for handling clients’ money.

d. Identify weaknesses, potential for error and inefficiencies in accounting systems.

e. Recommend improvements to accounting systems to prevent error and fraud and to improve
overall efficiency.

f. Explain why appropriate controls are necessary in relation to business and IT systems and
procedures.

g. Identify and describe the main audit and assurance roles in business
i. Internal audit
ii. External audit.

h. Explain the main functions of the internal auditor and the external auditor and how they
differ.

i. Identify business uses of computers and IT software applications:

i. Spreadsheet applications
ii. Database systems
iii. Accounting packages

j. Describe and compare the relative benefits and limitations of manual and automated
financial systems that may be used in an organization.

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System

Definition: A group of tasks that are bound together by a set of policies. It is also a process for achieving
an objective.

Designing Financial Systems

There can be several benefits to designing financial systems within an organization, such as:
 A set of clear instructions will lead to employees being more efficient as they would know what to do.
 There will be standardization, all transactions will be processed in the same way hence errors will be
easier to identify.
 New staff can be trained swiftly and easily as instructions will be clear on how to complete tasks.

Financial Systems

Purchase Cash and

Sales System Payroll Credit Control
System working capital

The Purchasing System

Process Details
Requisition A standard purchase requisition is made by any department that
requires materials.

Purchase requisition form is approved by a supervisor and usually

compared with a budget to ensure that resources are not wasted on
unnecessary goods.
Ordering A purchase order should be raised using details on the requisition to
ensure the correct order is raised.

When raising a purchase order, quotations should be obtained from

several suppliers to ensure best quality for best price.

A senior member of management should shortlist quotations and

approve the purchase order to prevent errors.
Goods Received When goods are received, a GRN should be prepared and matched with
the order to ensure correct quality and quantity is received.
Invoice Received and When invoice is received, it should be reconciled with the GRN to
Recorded ensure correct invoice is raised.

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 Invoices should be stamped when entered into the system to prevent
duplication.
Payment made Payments should be matched with invoices to prevent under/over
payment.

Once an invoice is paid, it should be stamped to prevent double

payment.

All payments should be approved

The Sales System

Process Details
Order Receipt Once the order is received a standard sales order form should be filled.
Inventory levels should be checked to prevent late deliveries to
customers.
All orders should be confirmed to prevent fake orders.
Goods Despatched When goods are despatched a goods despatch note should be
prepared.

This should be signed by the warehouse supervisor after physically

checking the goods for quality and quantity.

GDN should be compared with the order to ensure correct goods are
delivered to customers
Invoice Sent Sales invoices should be approved and reconciled with the orders to
ensure that correct amounts are mentioned.

An arithmetic check should be performed to ensure that correct

amounts are charged from customers.
Payment Received The persons receiving payments should be different, the person
receiving the payment should be different from the person recording it.

Payments should be matched to invoices to ensure accuracy.

Unpaid Invoices must be followed up on to prevent late payments.

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The Payroll System

Process Details
Attendance and Overtime Attendance should be supervised to ensure all employees that have
been marked present are actually present in the premises.

All overtime must be preapproved to prevent employees from working

excessive overtime and claiming payments.

Overtime must be monitored to ensure that employees are actually

working within that time.
Payroll Processing Pay should be calculated automatically with the help of an integrated
system that uses hours worked form the time sheets and rates of pay
from master files.

Calculations should be checked on a sample basis to ensure accuracy.

Deductions should be reconciled with the documents in the master file

to ensure they are authorized.

Payroll should be approved by senior personnel to prevent errors.

Payment to employees For payments in the form of direct bank transfers, the list should be
reconciled with the payroll sheet to ensure accuracy.

For wage payments in cash, proof of identity should be necessary before

wages are handed over to prevent fraud.

Direct bank transfers should be preferred to ensure security of

payment.

The Cash System

Main controls on a cash system would include:

 Segregation of duties between the person receiving the money, the person depositing it in the bank
and the one making the payments.
 Match bank deposit slips with the cash and cheque receipt register.
 Daily cash receipts immediately recorded in the customers’ accounts so that cash is not left in the
premises.
 Cash receipt register reconciled daily with the customer accounts to prevent theft.
 Periodical management review of the register is to be conducted to ensure that cheques are promptly
deposited into the bank.
 Bank reconciliation to be prepared periodically and differences to be investigated to ensure that
errors are identified and removed on a timely basis.

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Credit Control System

Most organizations get credit terms from their suppliers and give credit terms to their customers. Credit
terms give the customer the option of paying for a good or service after he has taken delivery of it. The
terms usually set a specific date by which payment must be made (e.g. one month after delivery.

The factors an organization looks at when deciding upon the credit level (maximum value of goods and
services that can be purchased on credit) to be granted to a customer include the:
 Payment history of the customer (whether past payments of the customer have been made on time);
 Credit worthiness of the customer (done by using credit rating agencies that reveal an organization /
individual’s track record for making timely payments ) and
 Importance of the customer to the organization (generally the greater the percentage of overall sales
the customer accounts for, the greater the credit limited granted).

Handling Clients’ Money

Examples of such money can include advance payments received, money held due to be paid to third
parties like rents and deposits received from tenants (in case of real estate firms), etc.

Reasons for following proper procedures and policies for handling clients’ money:
 To ensure that the clients’ money is properly accounted for as misplacing clients’ money may lead to
disgruntled clients and loss of client goodwill.
 To ensure that each client’s money is linked with the specific client and not mixed up with the funds
of the business in which case, money may be misplaced. This negligence can also lead to law suits in
some countries.
 To increase customer loyalty and get new customers as positive image may encourage other
customers to trust the organization.
 To ensure clients and other business stakeholders that the business is practicing good policies in
managing clients’ money.

Controls within a Business Function

Definition: Controls are policies and procedures designed and implemented by the management to
prevent and detect error and fraud from manual and IT systems.

They not only prevent errors, controls are responsible for safeguarding assets as well as improving
efficiency of processes.

Design and implementation of controls is the management’s responsibility while auditors are responsible
for testing these systems and then providing recommendations on improvement.

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Inefficiencies within Accounting Systems
Inefficiencies occur when controls are either not designed properly or not being followed. Examples of
poor controls leading to inefficiencies are as follows:

 Single individual being responsible for the entire cycle of a transaction: for example, in an
organization, if only one person is made responsible for placing orders for raw materials, receiving the
delivery of such materials and making payments for the same may result in fraudulent practices by
the individual due to lack of segregation of duties.

 Unauthorized access: this may lead to misuse of confidential data. For example, access of data relating
to credit history of customers from credit control system by unauthorized personnel will result in the
data being passed into wrong hands.

Improving Business Functions

Business functions can be improved by designing and implementing strong controls that not only prevent
and detect errors and frauds but also improve efficiency of operations. This can be achieved by:
 Hiring competent staff that is skilled in designing controls and understands their importance hence
follows them.
 Business functions can also be improved through proper supervision and accountability by having
authorization checks on documents to ensure documents are free from errors.
 Automation could also control the amount of errors as introducing integrated systems would lead to
one detail getting updated automatically hence reducing errors. An example could be payroll being
updated with hours worked automatically from attendance records so that there is no over/under
payment.
 Management reviews the performance to know whether the financial results are according to
expectations and whether the goals have been met. Wherever there are irregularities noticed in the
process of performance review, the management can investigate the reasons for these irregularities
and take corrective action.
 Another way to improve business functions and improve the quality of controls is through regular
audit.

Audit

Definition: Audit simply means checking or verification of information by a specialist. There are two
types of audit: internal audit and external audit.

Audit is one way of verifying financial information and checking controls implemented within an
organization.

Internal auditing is an independent activity, established by management to examine and evaluate the
organization’s risk management processes and systems of control, and to make recommendations for
the achievement of company objectives.

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External auditing is the independent examination of the evidence from which the financial statements
are derived, in order to give the reader of those statements confidence as to the truth and fairness of
the state of affairs which they disclose.

Differences between Internal and External Audit

Internal Audit External Audit
Appointment process Determined by management; Determined by statute; appointed
appointed by management. by Shareholders
Objective The main objective of internal audit is The main objective of the external
to improve a company’s operations, auditor is to express an opinion on
primarily in terms of validating the the truth and fairness of the
efficiency and effectiveness of the financial statements.
internal control systems of a company.
Report to Internal audit reports are normally External audit reports are
addressed to the board of directors, or provided to the shareholders of a
other people charged with governance company. The report is attached
such as the audit committee. to the annual financial statements
of the company and is therefore
publicly available.
Scope The work of the internal auditor The work of the external auditor
normally relates to the operations of relates only to the financial
the organization, whether controls are statements of the organization.
in place and working properly. However, the internal control
systems of the organization will be
tested as these provide evidence
on the completeness and accuracy
of the financial statements.
Relationship with the In most organizations, the internal The external auditor is appointed
organization auditor is an employee of the by the shareholders of an
organization, which may have an organization, providing some
impact on the auditor’s independence. degree of independence from the
However, in some organizations the company and management
internal audit function is outsourced.

Business Use of Computer Software Applications

1. Spreadsheet Applications: A spreadsheet is often called a worksheet and consists of a rectangular

table / grid of information. This grid contains rows and columns as well as “cells” at the points where
its rows and columns intersect.

Numbers or figures are normally entered into these cells relating to the headings of the rows and
columns.

Spreadsheets offer the advantage of being able to process and perform calculations on vast amounts
of information extremely quickly and accurately. In addition, given the ease at which data can be input
or amended, they also allow users to run various “what if” scenarios.
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2. Database Systems: A database system refers to the way a certain set of related information is stored
and accessed by a computer. Information is segregated into a set of fields. As this information is stored
in such a structured manner, retrieving specific sets of or even cross referencing data is greatly
simplified and expedited.

3. Accounting Packages: An accounting package is a software designed to help an organization record,

process and summarize its financial information in prescribed formats.

Benefits and Limitations of Manual and Automated Financial Systems

Manual Systems Automated Systems

Benefits
Easier to understand and lesser training required. More time efficient.
Staff will take lesser time in training as the process Lesser instances of human error.
will be easy.
Machine downtimes can be avoided and hence Access to data will be restricted so data can be
loss of data can also be prevented. secure.
Lesser time spent trying to understand the system Easier to sort and analyze data.
and more time on quality of information.
Disadvantages
Higher instances of error due to human element. Costly, as software development and
implementation will require funds.
Time taking as manual system efficiency will be System downtime can lead to delays and loss of
less than automated systems. data.
Analysis and sorting of information will take time. Staff will need to be trained.
Difficult to correct error once they are made.

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Chapter 18: Internal controls, Authorization, Security and Compliance
within Business
In this Chapter

a. Explain internal control and internal check.

b. Explain the importance of internal financial controls in an organization.

c. Describe the responsibilities of management for internal financial control.

d. Describe the features of effective internal financial control procedures in an organization,

including authorization.

e. Identify and describe the types of information technology and information systems used by
the business organization for internal control.

f. Identify and describe features for protecting the security of IT systems and software within
business.

g. Describe general and application systems controls in business.

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 Internal Controls

1. Definition: Internal control is defined as a process affected by an organization's structure, work and
authority flows, people and management information systems, designed to help the organization
accomplish specific goals or objectives.It is the procedure designed and effected by management to
deliver reasonable assurance about the attainment of the entity’s goals with regard to :

 Trustworthiness of financial reporting

 Usefulness and effectiveness of operations
 Legal compliance

Objectives of Internal Control

Internal control should have the following objectives:

1. Efficient conduct of business: Controls should be there to warrant that procedures flow efficiently and
operations are without disturbances. This guards against the risk of inefficiencies and threats to the
creation of value in the organization.

2. Safeguarding assets: Controls should be there to make sure that assets are deployed for their
appropriate purposes, and are not vulnerable to misuse or theft. A comprehensive approach to his
objective should consider all assets, including both tangible and intangible assets.

3. Preventing and detecting fraud and other unlawful acts: Even small businesses with simple
organization structures may fall victim to these violations, but as organizations increase in size and
complexity, the nature of fraudulent practices becomes more diverse, and controls must be capable
of addressing these.

4. Completeness and accuracy of financial records: An organization cannot produce accurate financial
statements if its financial records are unreliable. Systems should be capable of recording transactions
so that the nature of business transacted is properly reflected in the financial accounts.

5. Timely preparation of financial statements: Organizations should be able to fulfill their legal
obligations to submit their account, accurately and on time. They also have a duty to their
shareholders to produce meaningful statements. Internal controls may also be applied to
management accounting processes, which are necessary for effective strategic planning, decision
taking and monitoring of organizational performance.

Internal checks
Internal controls should not be confused with internal checks which are defined as customary checks on
the day-to-day activities carried on in a business, whereby the work of one person is proved
independently or is complementary to the work of another, the object of the exercise is to avoid errors
or fraud. It includes matters such as delegation, levels of authority and the division of work. Examples of

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an internal check can be checking the work or calculations prepared by a trainee clerk by a senior manager
in order to ensure accuracy of work being performed.

The essential elements of an internal check are:

 checks are implemented on day-to-day transactions
 checks operate continuously as a part of the system
 The work of each person is complementary to the work of another.

By allocating duties in this way, no one person has exclusive control over any transaction.

Arithmetic internal checks include the following:

 A pre-list is a list drawn up before any processing takes place
 A post-list is a list that is drawn up during or after processing
 A control total is a total of any sort used for control purposes by comparing it with another total
that ought to be same.

Importance of Internal Financial Controls

Internal financial controls are implemented within the accounting function for various reasons. While
controls are important throughout the functions, internal financial controls hold significance as they:
 Increase the reliability of financial reporting. Financial reports such as statement of financial
position and others need to be trustworthy because they are primarily used by external
stakeholders like investors. Investors require financial statements to be reliable so that they can
make important decisions such as investing in a business or not.
 Safeguard company assets. Controls such as restricted access to inventory or cash lead to
prevention of theft and fraud related to company assets.
 Help in early prevention and detection of misstatements. Controls help in early recognition of
errors in ledgers and prevent them from landing in the financial statements. Monthly
reconciliations are used to not only detect errors but also ensure that these errors do not affect
financial statement items at year end.

Responsibilities of Management
There are three responsibilities of management towards controls:
1. Designing controls. Since management is responsible for designing business processes and functions,
it only makes sense that they should be the ones to design controls as well. This way, the quality of
controls is enhanced since management understands the processes best.
2. Implementing Controls. Management is responsible for ensuring that employees all over the
organization understand controls designed by them and follow them. This can be achieved by training
employees regularly on the importance of controls and their benefits to the business.
3. Monitoring Controls. Management is responsible for ensuring that controls are not outdated and are
achieving the desired results. Sometimes processes change and if controls are not monitored, they
would become obsolete and will be unable to prevent or detect misstatements.

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Features of Effective Internal Financial Control Procedures
An effective and sound system of internal controls has 5 features summarized below

Features Explanation
Control Environment The control environment sets the tone of an organization,
influencing the control consciousness of its people. It includes
the attitudes, awareness, and actions of TCWG concerning the
entity’s internal control and its importance in the entity.
Risk Assessment For financial reporting purposes, the entity’s risk assessment
process includes:
 how management identifies business risks relevant to the
preparation of financial statements
 how it estimates their significance
 how it assesses the likelihood of their occurrence, and
decides upon actions to respond to and manage them and
the results thereof.
Information and communication The information system relevant to financial reporting, which
includes the accounting system, consists of the procedures and
records designed and established to initiate, record, process,
and report entity transactions (as well as events and conditions)
and to maintain accountability for the related assets, liabilities,
and equity
Control Activities Control activities are the policies and procedures which help
ensure that management directives are carried out. Control
activities, whether within information technology or manual
systems, have various objectives and are applied at various
organizational and functional levels.

Examples of controls are:

Segregation of duties: Assignment of roles/responsibilities to

different people, thereby reducing the risk of fraud and error
occurring. The concept is that no individual person should be
responsible for more than one of the following duties:
(i) the authorization of a transaction;
(ii) the recording of the transaction in the accounting records;
and
(iii) the custody of the asset relating to the transaction.

Information processing: computer controls including general IT

controls, which cover a range of applications and support the
overall IT environment and application controls which operate
on a cycle/business process level ( details given separately)

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 Authorization: approval of transactions by a suitably responsible
official to ensure transactions are genuine.

Physical controls: restricting access to physical assets such as

cash, inventory and plant and equipment, thereby reducing the
risk of theft.

Performance reviews: comparison or review of the performance

of the business by looking at areas such as budget v actual
results.

Arithmetical controls: controls which check the arithmetical

accuracy of accounting records.

Account reconciliations: comparison of an account balance with

another source; often this source is from a third party, such as
the bank, with differences being investigated.
Monitoring Controls It is the process to assess the effectiveness of internal control
performance over time. It involves assessing the effectiveness of
controls on a timely basis and taking necessary remedial actions.

Importance of IT systems and their Security

IT systems are an integral part of an organization as with technological advancement and the introduction
of paperless environment, all of the organization’s functions have been overtaken by IT. The financial data
is primarily maintained in IT systems and any harm to them leads to loss of data. The objectives of controls
that can be implemented on IT systems are to ensure that:
- There are no unauthorized changes to data.
- Data remains complete and free from omissions
- Data is accurately recorded and is free from errors

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There are two types of controls applied on IT systems

IT Controls

General Controls Application COntrols

Input Controls

Processing Controls

Output Controls

General Controls
Examples include
 making regular back-ups of data and storing them off-site;
 having an IT help-desk and IT training for staff;
 keeping computers in locked rooms;
 having a disaster recovery plan;
 all computers have log in codes;
 anti-virus software and firewalls;

Application Controls

1. Input controls
Data input controls ensure the accuracy, completeness, and timeliness of data during its conversion from
its original source into computer data, or entry into a computer application. Examples are given below:

 Format checks: These ensure that information is input in the correct form. For example, the
requirement that the date of a sales invoice be input in numeric format only – not numeric and
alphanumeric.
 Range /Reasonableness checks: These ensure that input data is rejected or highlighted if it is outside
pre-set parameters. For example, where an entity rarely, if ever, makes bulk-buy purchases with a
value in excess of $50,000, a purchase invoice with an input value in excess of $50,000 is rejected for
review and follow-up.

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 Compatibility/dependence checks: These ensure that data input from two or more fields is compatible.
For example, a sales invoice value should be compatible with the amount of sales tax charged on the
invoice.
 Sequence checks: ensure that sequential input of documentation/data is maintained. These facilitate
completeness of processing by ensuring that documents processed out of sequence are rejected. For
example, where pre-numbered goods received notes are issued to acknowledge the receipt of goods
into physical inventory, any input of notes out of sequence should be rejected.
 Control totals: These also facilitate completeness of processing by ensure that pre-input, manually
prepared control totals are compared to control totals input. For example, the total of all the invoices,
such as the gross value, is manually calculated. The invoices are input, the system aggregates the total
of the input invoices’ gross value and this is compared to the control total. This helps to ensure
completeness and accuracy of input.
 Existence checks: the system is set up so that certain key data must be entered, such as supplier name,
otherwise the invoice is rejected. This helps to ensure accuracy of input.
 Check digit verification: Check digits are used to protect against the transposition of data i.e. errors
arising due to accidental reversal of digits. This process uses algorithms to ensure that data input is
accurate.
 Document counts: The number of invoices to be input are counted, the invoices are then entered one
by one, at the end the number of invoices input is checked against the document count. This helps to
ensure completeness of input.

2. Processing controls
Processing controls exist to ensure that all data input is processed correctly and that data files are
appropriately updated accurately in a timely manner. For example, the balance carried forward on the
bank account in a company’s general (nominal) ledger.

3. Output controls
Output controls exist to ensure that all data is processed and that output is distributed only to prescribed
authorized users.

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Chapter 19: Fraud and fraudulent behavior and their prevention in
business.

In this Chapter

a. Explain the circumstances under which fraud is likely to arise.

b. Identify different types of fraud in the organization.

c. Explain the implications of fraud for the organization.

d. Explain the role and duties of individual managers in the fraud detection and prevention
process.

e. Define the term money laundering.

f. Give examples of recognized offences under typical money laundering regulations.

g. Identify methods for detecting and preventing money laundering.

h. Explain how suspicions of money laundering should be reported to the appropriate

authorities.

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Fraud

Definition: Fraud is intentional deception of users of financial statements by management. In a

corporate context fraud can fall into one of two main categories: removal of funds or assets from a
business or the intentional misrepresentation of the financial position of a business.

Circumstances that Increase the Possibility of Fraud

There are several circumstances that can increase the possibility of fraud within financial statements,
like:
 Unskilled and inexperienced staff increasing the possibility that fraud will be undetected.
 Lack of supervision by management that may encourage employees to commit fraud.
 Financial losses incurred by the business that may motivate directors to make fraudulent changes to
financial data.
 Rewards based on profit which could lead to manipulation.
 Unrealistic goals set for management that may encourage them to provide misleading figures.

Types of Fraud
There are two types of fraud:
1. Fraudulent financial reporting
2. Misappropriation of assets.

1. Fraudulent Financial Reporting

Fraudulent financial reporting often involves management override of controls that otherwise may appear
to be operating effectively. Fraud can be committed by management overriding controls using such
techniques as intentionally:
 Recording fictitious journal entries, particularly close to the end of an accounting period, to
manipulate operating results or achieve other objectives.
 Inappropriately adjusting assumptions and changing judgments used to estimate account
balances.
 Omitting, advancing or delaying recognition in the financial statements of events and transactions
that have occurred during the reporting period.
 Omitting, obscuring or misstating disclosures required by the applicable financial reporting
framework, or disclosures that are necessary to achieve fair presentation.
 Concealing facts that could affect the amounts recorded in the financial statements.
 Engaging in complex transactions that are structured to misrepresent the financial position or
financial performance of the entity
 Altering records and terms related to significant and unusual transactions

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2. Misappropriation of Assets

Misappropriation of assets involves the theft of an entity’s assets and is often perpetrated by employees
in relatively small and immaterial amounts. However, it can also involve management who are usually
more able to disguise or conceal misappropriations in ways that are difficult to detect. Misappropriation
of assets can be accomplished in a variety of ways including:
 Embezzling receipts (for example, misappropriating collections on accounts receivable or
diverting receipts in respect of written-off accounts to personal bank accounts).
 Stealing physical assets or intellectual property (for example, stealing inventory for personal use
or for sale, stealing scrap for resale, colluding with a competitor by disclosing technological data
in return for payment).
 Causing an entity to pay for goods and services not received (for example, payments to fictitious
vendors, kickbacks paid by vendors to the entity’s purchasing agents in return for inflating prices,
payments to fictitious employees).
 Using an entity’s assets for personal use (for example, using the entity’s assets as collateral for a
personal loan or a loan to a related party).

Misappropriation of assets is often accompanied by false or misleading records or documents in order to

conceal the fact that the assets are missing or have been pledged without proper authorization.

Implications of Fraud for an Organization

Fraud can lead to several undesirable implications for the management like:
 Fraud decreases the confidence that investors have in a company. Investors would be wary of
providing funds to a company that has had several fraud instances in the past.
 Fraud also erodes a company’s reputation. Recurring fraud could lead to deterioration of an
organization’s reputation in the long run.
 Fraud could lead to investigations by regulatory bodies that could disrupt daily tasks.
 Fraud also causes financial loss to an organization.

Management Responsibilities
Managers and staff should be aware of their responsibilities to help in detecting fraud. Fraud detection is
facilitated by having information readily available and having effective procedures for communicating and
documenting fraud. Managers and staff should note:
 Signs of petty fraud as well as checking the work staff are doing and have done
 Unusual trends in accounting data
 Signs of discontent and low morale
 Internal audit staff should constantly ensure that systems and controls are reliable.

Role of External Auditors

As discussed earlier the responsibility of an auditor is to express an opinion on whether the financial
statements give a true and fair view of the company’s financial position and results. It is has also been
discussed that auditors have procedures for detecting fraud and that management cannot conceal
fraud without collusion and conspiring with auditors The auditors should document instances of fraud and
report them to the appropriate level of management. If the fraud is deemed immaterial the auditors

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should ascertain their duty of confidentiality can be overridden and the matter disclosed in the public
interest.
Directors are responsible for detecting and preventing fraud. If the nature of the fraud is such that the
auditor thinks that it should be reported to a relevant authority they should request the directors to do
so. If the directors do not comply the auditors can report the fraud on their own.

Whistle blowing
The introduction of legislation in many countries which seek to protect employees who disclose fraud
normal practice in their organizations has increased the likelihood of fraud detection. Some employers
have even laid out clear communicative procedures for whistleblowers.

Money Laundering

Definition: Money laundering is the process by which criminals attempt to conceal the true origin and
ownership of the proceeds of their criminal activity, allowing them to maintain control over the proceeds
and, ultimately, providing a legitimate cover for their source of income.

Money Laundering Process

• Placement refers to the physical disposal of the proceeds derived from illegal
activity into an apparently legitimate business activity or property.
Placement • Basically the location of money is changed to avoid detection.

• Layering refers to the separation of illegitimate proceeds from their initial

source by creating complex layers of financial transactions.
• This involves making repetitive transactions and hiding the origin of
Layering transactions.

• Integration refers to the re-injection of the laundered proceeds back into the
economy in such a way that they re-enter the financial system as normal
Integration business funds.

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Recognized Offences

The Proceeds of Crime Act 2002 created three categories of criminal offence: laundering, failure to report,
and tipping off.

1. Laundering: It is an offence to conceal, disguise, convert, transfer, or remove criminal property from
England, Wales, Scotland or Northern Ireland: s327 Proceeds of Crime Act 2002. Concealing or
disguising criminal property includes concealing or disguising its nature, source, location, disposition,
movement or ownership, or any rights connected with it.

'Criminal property' is defined as property which the alleged offender knows (or suspects) constitutes
or represents benefit from any criminal conduct. 'Criminal conduct' is defined as conduct that:
 constitutes an offence in any part of the UK
 Would constitute an offence in any part of the UK if it occurred there.

2. Failure to report: Under s330 individuals carrying on a 'relevant business' may be guilty of an offence
of failing to disclose knowledge or suspicion of money laundering where they know or suspect, or
have reasonable grounds for knowing or suspecting, that another person is engaged in laundering the
proceeds of crime.

This offence only relates to individuals, such as accountants, who are acting in the course of business
in the regulated sector. Any individual who is covered by s330 is required to make disclosure to a
nominated money laundering reporting officer within their organization, or directly to the Serious
Organised Crime Agency (SOCA), as soon as is practicable.

3. Tipping off: Section 333 states that it is an offence to make a disclosure likely to prejudice a money
laundering investigation. It therefore covers the situation where an accountant informs a client that
a report has been submitted to SOCA.

Penalties
The maximum penalty for the s327 offence of money laundering is 14 years' imprisonment. Failure to
report and tipping off are punishable on conviction by a maximum of five years' imprisonment and/or a
fine.

Methods for detecting and preventing money laundering

Money laundering can be detected and prevented by following means:
 Consolidate, cleanse and transform data from all areas of your business into an open, flexible,
industry-specific data model such that suspicious transactions can be readily identified.
 Combine customer records from varied sources and match them against lists of known
or suspected criminals.
 Monitor daily transactions for suspicious behavior.
 Use multiple techniques-such as profiling and predictive modeling-to minimize false-positive
alerts while decreasing the risk of true criminal activity going undetected.
 Ensure the accuracy, effectiveness and efficiency of the system via open access to the system
parameters.

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  Broad array of entities, including banks, credit card companies, life insurers, money service
businesses and broker-dealers in securities, are required to report certain transactions to the
governing authorities.
 Financial institutions are required to engage in customer due diligence, which is sometimes
known in the parlance as “know your customer.”

Reporting Suspicions of Money Laundering

Each organization covered by the regulations must appoint money laundering reporting officer or MLRO.
This is the person to whom other partners and members of staff should report any suspicion. The main
points that should be remembered when making reports of suspicions are as follows:

 Discussions, for example between members of an audit team, should not delay a report being
made to the MLRO
 Clients can be questioned about transactions or events that the accountant doesn't
understand, but as soon as the accountant is suspicious questioning should stop, as there is a
risk of tipping off, which is a criminal offence
 Everyone must know who the MLRO is and how they can be contacted.
 Only the MLRO can decide that a report need not be made to the authorities if there is already
a suspicion
 Once a member of staff has reported a suspicion to the MLRO they have fulfilled their
responsibility.
 The MLRO should issue written acknowledgement of reports received
 Everyone must receive training in money laundering.

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Chapter 20: Leadership, management and supervision

In this Chapter
a. Define leadership, management and supervision and explain the distinction between these
terms.

b. Explain the nature of management:

i. Scientific/classical theories of management Fayol, Taylor
ii. The human relations school – Mayo
iii. The functions of a manager – Mintzberg, Drucker

c. Explain the areas of managerial authority and responsibility.

d. Explain the situational, functional and contingency approaches to leadership with reference
to the theories of Adair, Fiedler, Bennis, Kotter and Heifetz.

e. Describe leadership styles and contexts: using the models of Ashridge, and Blake and Mouton.

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Leadership, Management and Supervision

Definition: Leadership is the way in which one individual leads and coordinates the activities of the group
that he is a member of. Leadership also reflects the personality traits of an individual (e.g. charisma)
that enables him to lead others.

Management can be defined as the practice of planning, organizing, directing, controlling and
coordinating. The term “management” is used to refer to the collection of individuals in an organization
responsible for a specific function or department of that organization.

Supervision occurs when one individual directly oversees the work and activities of other individuals on
a regular basis. Supervision normally involves coaching and mentoring individuals.

Distinction

Leadership Management Supervision

• Sets up a clear but • Sets up smaller • Not only overseeing
broad direction. more detailed tasks people, assisting
• Influence, persuade • Monitors people as well.
and empower employees • Highest level of
people. • High level of involvement as
• Low level of involvement with direct interaction
interaction with people with people.
people

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 Theories of Management

i. Scientific Theory of Management-Fayol

Often cited as the father of the modern management sciences, Henry Fayol (1841-1925) put forward the
concept of ‘universality of management principles’. In simpler words Fayol believed that a single set of
management principles can be applied to all organizations.

Fayol presented five functions of management which apply universally. These are:

Planning

Controlling Organizing

Coordinating Commanding

 Planning: Involves the determination of objectives and strategies. It also involves evaluation of
procedures for achieving those objectives.
 Organising: Management needs to make a foundation of a structure of tasks and duties that need
to be performed. Specifically it can involve the establishment of authority levels, channels of
information, dividing the tasks into various groups and teams etc. It also means making the
necessary resources available for activities like finance, staff and raw materials.
 Commanding: Management needs to lay down instructions to subordinates to help them
fulfill required tasks and objectives. Management needs to understand subordinates in order to
ensure all employees are working towards common goals.
 Co-ordinating: This involves the synchronisation of organizational goals and objectives with
the goals and objectives of individuals and groups. Manager must reconcile differences in
approach and conflicts based on points of views to ensure all employees are motivated to achieve
organizational goals.
 Controlling: Management has to oversee the tasks and operations being performed and strive
to identify and rectify any errors or weaknesses. This means monitoring performance closely to
identify any deviations on timely basis.

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It can be noted that these principles do not contain anything pertaining to ‘motivation’ and
‘communication’. Classical theorist like Fayol believed that individuals work to meet their needs and a
payment of appropriate remuneration is all that is required for them to work effectively. So they focused
more on processes and resources than people. The importance of Human Resource and its management
was recognized by the modern writers later.

Scientific Management Theory-Taylor

Taylor studied the relationship between people and the tasks that they perform. His approach was to
analyze the tasks that individuals perform at work, and break them down into smaller units of work. Each
small unit of work was then analyzed to find ways in which they could be performed with the greatest
efficiency (in the shortest time). Experimentation was used to find ways of improving efficiency for each
small unit of work, and Taylor measured the time that it took to carry out each small task.

Taylor is considered the originator of ‘time and motion study’. Scientific management resulted in:
 dividing larger tasks into much smaller units, „
 employing individuals to specialize in each small unit of work, and therefore „
 Increasing efficiency through the division of work and specialization.

Taylor introduced the four underlying principles of scientific management:

 There should be a science of work, based on the analysis of work methods and work times, with
a view to finding the most efficient way of carrying out tasks. A fair level of performance or
efficiency can be identified. Workers should be rewarded through higher pay if they succeed in
performing more efficiently than the expected or standard level.
 Workers should be selected carefully. They should have the skills and abilities that are well-suited
to the work. They should also be trained in how to do the work efficiently
 The scientifically-selected and trained workers and the science of work should be brought
together for the best results and greatest efficiency.
 There should be an equal division of work between the workers and management, and workers
and managers should operate closely together. (This was not the normal practice at the time, in
the US in the late 1800s.)

The management should take over all the work from the workers for which they are more capable.

Criticisms of scientific management

Scientific management is still associated with work study and time and motion study. It has been strongly
criticized because:
 It results in dull, repetitive and monotonous work.
 Tasks are reduced to such small units, such as tasks on a large production line in a factory, that
they demoralize the workers who do the jobs.
 There is a risk that when employees are doing dull, repetitive work, their efficiency will be low
because they are not at all interested in what they are doing.

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ii. The Human Relations School – Mayo
The main findings of these studies and experiments were:
 That social dynamics and group interactions directly affected the productivity and efficiency of
employees. The higher the group interactions, the better the employees would perform as they
repetitive tasks tend to reduce efficiency.
 Mayo concludes that workers were motivated by psychological conditions more than physical
working conditions.
 Mayo proposed that higher productivity could be gained by good communication and emotional
connection between workers and management. Workers would be more inclined to understand
and follow instructions if they felt managers understood them.

Mayo proposed that an organization is a complex social system and employees are an integral part of this
system. Management has to take into account the personalities of its employees as both individuals and
as members of a group.

The human relations school theory is based upon three main principles:
 Individuals want more than just a pay check from the organization they work for;
 Individuals perform better when empowered and;
 Individual behavior is shaped and influenced by the work group or department they belong to.

iii. Modern Management Theories

The Management Process-Peter Drucker

Drucker argued that all managers performed 5 basic functions:

Function Explanation
Setting Objectives Managers set objectives for the organization, and decide on targets
for the achievement of those objectives, which they then
communicate to other people in the organization.

Organizing Tasks Managers organise the work that is done, by dividing it into activities
and jobs. They integrate the jobs into a formal organization structure
and select and appoint people to do the job.
Motivating Managers need to motivate their employees. They must also
communicate with their employees so that they can do their work.

Job Measurement Managers measure performance, perhaps by comparing it against a

target or yardstick (benchmark). They analyse and assess
performance, and communicate their findings, both to their
superiors and their subordinates.

Developing People Managers need to develop their employees and also themselves.
Drucker wrote that the manager ‘brings out what is in their
employees or he stifles them. He strengthens their integrity or he
corrupts them.’

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The Managers Roles-Mintzberg

Roles Explanation Example

Interpersonal
Figurehead Managers often perform a ceremonial Representing the business in
role, representing the organization at trade forums or conferences to
events and as a ‘public face’ of the make presentations about the
organization. Managers also represent business.
their organization in its dealings with
other organizations. Other people might
refuse to deal with anyone except the
manager, because of the manager’s
formal position and status.
Leader Managers also deal with relations Managers may lead employees
between individuals inside the by example. Manager may come
organization, providing leadership on time and formally dressed to
(hiring, firing, training, motivating and so encourage everyone to follow
on). suit.
Liaison Managers of groups within an Managers conducting team
organization act as a link or bridge with meetings on a weekly basis to
other groups. For example, different discuss employee concerns and
departments often communicate with noting them down for directors.
each other through their managers.
Managers therefore fulfil a role of
obtaining information from other
sources and other groups.
Informational
Monitor Managers build and use ‘intelligence- Managers requiring day end
gathering’ systems and monitor the reports and then conducting
information they receive. They gather weekly meetings based on
information from formal and informal information gathered.
sources, and develop an extensive
knowledge of the organization as a
result.
Spokesperson Managers act as a spokesperson for the Managers may be asked to
group, in a ‘public relations’ capacity. present business information to
prospective customers and
suppliers.
Disseminator Managers disseminate information, Managers act as bridges of
acting as a channel of information within communication between
the group and with others. directors and operating level
employees.

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 Decisional
Entrepreneur Entrepreneurial role would mean Managers may introduce
managers take initiatives and make innovative ideas to perform
innovative changes to a business. tasks more efficiently and with
least amount of errors.
Disturbance Handler They have a role in resolving conflicts Managers handle disturbances
and disputes, and dealing with other and conflict among employees in
similar unexpected problems. a work place.
Resource Allocator They decide how resources should be Managers approve requisitions
used, for example what the available raised by departments when
money should be spent on and how resources are needed.
employees should use their time (what
work they should do).
Negotiator They negotiate with others, and reach Managers agree on contract
decisions through joint agreement. terms and conditions with
suppliers.

Leadership

Definition: Leadership has been described as the “process of social influence in which one person is able
to enlist the aid and support of others in the accomplishment of a common task”

There are three kinds of theories on leadership:

Theories of
Leadership

Trait Style Contingency

Theories Theories Theories
1. Trait Theories: These theorists believe that leaders share certain qualities that make them effective
like being energetic, charismatic, persuasive etc. Descriptions of great leaders in history often refer to
the leader’s personal qualities that distinguished him or her as someone special and a natural leader.
However, a serious problem with trait theory is that there are many different traits that could be
attributed to an effective leaders.. In other words, 'leaders are born, not made'.
2. Style Theories: based on the idea that the behaviour of the leader influences people in different
ways.
3. Contingency Theories: based on the deduction that there is no best way of leading and that
effective leaders adapt their style to various situations
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 Ashridge Model
Style
Theories
Blake & Mouton
Managerial Grid

Ashridge Management College Model

This model is based on the theory that leadership styles can be classified into four styles:

a) Tells
b) Sells
c) Consults
d) Joins

a) Tells:

 Leader makes all of the decisions and issues instructions which must be obeyed without question.
 Quick decisions can be made when there are deadlines or emergency situations at hand.
 It will probably result in better decisions when the subordinate is inexperienced or lacks the required
understanding to contribute usefully to discussions of problems.
b) Sells:

 The leader still makes all of the decisions but believes that subordinates need to be motivated to
accept them thus he endeavors to explain the motive behind the decisions.
 Subordinates are informed about the reasons behind decisions so that they know why certain
decisions have been made and the leader is not dictatorial.
c) Consults:

 The leader confers with the subordinates and asks their opinions about the particular matter about
which a decision needs to be made but still retains the final say.
 Employees are motivated as they are asked to actively participate in making decisions relating to the
business.
 The ability of subordinates to contribute their knowledge and experience to the decision-making
process is enhanced.

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 The opportunity for subordinates to gain better insights and understanding through being involved in
the decision-making discussions.is increased.
d) Joins:

 The leader and the followers make a collective decision based on a harmonized consultation process.
 This produces high motivation and commitment from employees but the decision-making process
can become cumbersome and unnecessarily long.
Blake & Mouton’s Managerial Grid

 (1,1): Impoverished style The leader gives little effort to getting work done and has a lazy approach.
 (1,9): Country club style Low concern for getting the task done, but high concern for people and
maintaining good relations. This leader wants to be on good terms with subordinates however this
style lacks focus on completing tasks. He will be thoughtful and attentive and will try to make the
workplace a comfortable environment to work in.
 (9,1): Authoritarian, compliance style The leader concentrates on efficiency, and getting the work
done, with little concern for people. Will seek to eliminate people from the work if possible (for
example through automation). He will arrange tasks in a manner that require minimum employee
involvement.
 (5,5): Middle-of the road style: ‘organization man’ Does enough to get the job done, but may not be
pushing the boundaries of what is possible. Such leaders concentrate on people and tasks equally
leading to mediocre results on both ends.
 (9,9): Team management High concern for the task and high concern for people. Provides effective
leadership to the team. Within a team, the focus would not only be on people working together but
also on completing tasks.
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Managers/leaders show differing amounts of concern for the task and concern for people, and so may be
laced anywhere on the grid. Blake and Mouton argued that the most effective leaders show high concern
for both the task and for people.

Fiedler's Styles

Adair's Action Centred

Leadership

Heifetz Dispersed
Contingency Theories
Leadership

Bennis Tranformational
Leaders

Kotter: Managing Change

Fiedler’s Contingency Model

He began by identifying two leadership styles:

Psychologically Distant Managers Psychologically Close Managers

Do not seek to interact much prefering that all Do not seek formal roles and seek to interact with
employees stick to their formal roles and positions
employees regardless of their position in the
with the organization. hierarchy.
Withdrawn and reserved in their interactions. Seek to maintain informal relationship and
contact.
Communicate formally prefering formal Prefer informal modes of communication and are
consultation methods. They are task oriented and person oriented rather than focused on task.
would focus on getting the work done rather than
develop formal relationship

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Fiedler concluded that the effectiveness of a leader depends on: „

 the leader’s style, and also „

 the extent to which the work situation gives the leader control and influence.

The work situation depends on three factors :

 The relationship between the leader and the subordinates: If the leader is liked and respected, he
is more likely to have the support of his subordinates.
 The structure of the task. If the task is clearly defined, with clear goals, methods of working and
standards of performance, it is more likely that the leader will be able to exert influence.
 The position power of the leader. If the organization gives power to the leader, for the purpose
of getting the job done, this is likely to increase the influence of the leader.

For example, the leader may have to be authoritarian in his approach when a quick decision is needed, or
when employees are used to being told what to do. The work situation can be favourable to the leader,
unfavourable to the leader, or something in between (intermediate favourableness).

Adair’s Action Centered Leadership

It sees the leadership process in a context made up of three interrelated variables: task needs, the
individual needs of group members and the needs of the group as a whole. These needs must be examined
in the light of the whole situation, which dictates the relative priority that must be given to each of the
three sets of needs.

According to Adair, an effective leader would adapt leadership style to the group needs and individual
needs within a group.

Effective keaders Effective leaders need to:

should:
Group  Define tasks
 Build an Needs  Plan activities
effective team  Allocate resources
for completion
 Keep
communication
open Total
Situation
Task Indivdual
Needs Needs Effective leaders
need to:

 Set individual
objectives.
 Consider the
need to train and
149 coach individuals
Heifetz Dispersed Leadership

Heifetz, a lecturer at Harvard University, stated that nobody can be an ideal leader in every situation and
that fruitful social relations were imperative for leadership to be effective for the organization.

He also stated that every individual at all organizational level can impart some sort of leadership influence
or other. Heifetz distinguished between leadership and the use of authority thus separating leadership
from the formal organizational hierarchy and traditional power centres. According to the theorist, leaders
do not necessarily enjoy a position of power within the organization and hence are separate from formal
organizational structure.

Bennis: the Distinction between Managers and Leaders

Bennis outlines four common abilities that leaders share:

a. Management of attention: This refers to the sense of vision leaders typically have. In fact Bennis
defines leadership as “the capacity to create compelling vision and translate it into action and sustain
it”.
b. Management of meaning: This refers to the ability of leaders to transform their vision into reality.
Leaders should be effective communicators and get others to follow their vision.
c. Management of trust: Bennis defines trust as “the emotional glue that binds followers and leaders
together”. Leaders must have the trust of their followers if they are to be successful.
d. Management of self: Leaders should always be learning. Not only from themselves (and their
mistakes) but also from their employees.

His comparison of managers and leaders is summarized in the table below:

Managers Leaders
Transactional leadership Transformational leadership
Doing things right Doing the right things
Administer, supervising tasks Innovate, will find new creative ways to
get the job done
Maintain, and improve performance Develop skills of employees
Focus on systems and structures, Focus on people, interaction and develop
following instructions. skills and competencies.
Reliance on control and how to stick to Inspire trust within employees.
instructions.
Short-range view Long range perspective
Imitates Originates

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Kotter: Managing Change
Kotter presents the theory of change. According to him, leadership complements management; it doesn’t
replace it. Management is about coping with complexity and leadership is about coping with change.

Key traits of leadership:

 Focuses on change:
 Creates a vision
 Communicates and earns commitment
 Motivates and inspires

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Chapter 21: Recruitment and selection of employees

In this Chapter

a. Explain the importance of effective recruitment and selection to the organization.

b. Describe the recruitment and selection process and explain the stages in this process.

c. Describe the roles of those involved in the recruitment and selection processes.

d. Describe the methods through which organizations seek to meet their recruitment needs.

e. Explain the advantages and disadvantages of different recruitment and selection methods.

f. Explain the purposes and benefits of diversity and equal opportunities policies within the
human resources plan.

g. Explain the practical steps that an organization may take to ensure the effectiveness of its
diversity and equal opportunities policy.

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Recruitment and Selection

Definition: Recruitment is the process of identifying that the organization needs to employ someone
up to the point at which application forms for the post have arrived at the organization.

Selection then consists of the processes involved in choosing from applicants a suitable candidate to fill
a post.

The overall aim of the recruitment and selection process in an organization is to obtain the quantity and
quality of employees required to fulfil the objectives of the organization. This process can be broken down
into three main stages.
a) Defining requirements, including the preparation of job descriptions, job specifications and person
specifications (or personnel specifications).
b) Attracting applicants, including the evaluation and use of various methods for reaching appropriate
sources of labor (both within and outside the organization).
c) Selecting the appropriate candidates for the job, or the appropriate job for the candidate.

The requirement level of recruiting and selecting of a business will vary from organization to organization
and be dependent upon the following factors:
 The size of the organization;
 The turnover of the organization (percentage of employees that leave every year) and
 The growth rate of the organization.

Importance of Effective Recruitment

An organization that does not plan recruitment can face many undesirable consequences like:
 Unskilled staff that does not know how to perform tasks.
 Staff that does not have the right skills for the job will be demotivated.
 High labor turnover, as employees that are not the right fit for the job may not want to stay in an
unsatisfactory job.
 High cost to the organization of advertising for vacancies and then subsequent recruitment process.
 Reduction in the quality of goods produced as unskilled staff may lead to production errors and
inefficiencies.

Recruitment and Selection Process

There are three main stages involved in recruitment and selection:
1. Personnel planning and forecasting: here the organization determines what positions need to be filled
(e.g. employees have resigned, been asked to leave) and what the future needs of the company are
(e.g. if sales levels are likely to increase).

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2. Recruiting: here the organization builds up a pool of applicants to fill its vacant positions. Ideally, there
should be more candidates than job openings so that the organization can be selective in whom it
hires.
3. Selecting: here the organization assesses and compares the various candidates that have applied for
the job, to determine which is the most suitable.

Recruitment Process
When a vacancy is created, the organization can either recruit internally, by choosing one the existing
employees within an organization or recruit externally by advertising for suitable candidates.

The recruitment process follows these steps:

2.Prepare job
5. Select a
1. Identify description 3. Attract 4. Shortlist
suitable
Vacancy and Person Candidates candidates
candidate
Specification

1. Identify Vacancy
At this point the organization needs to consider whether there is actually the need for a person in that
role. They need to consider whether that role can be automated without the need for an employee or is
an employee needed.

2. Job Description and Person Specification

The organization will then conduct a job analysis to know what exactly is a person expected to do in that
role and what kind of a person is needed.

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Purposes of a Job Description
 It helps in attracting, targeting, recruiting and selecting the right candidate for the right job. More
people are attracted to a job if they know exactly what is expected of them from a role.
 It is done to determine what needs to be delivered in a particular job. It clarifies what employees are
supposed to do if selected for that particular job opening.
 This will ensure that the right candidates apply for the job. Job description will specify what is needed
of an employee hence it will attract the right kind of candidates with the right skills and experience.
 It also clarifies who will report to whom. This way the hierarchy will be clear so that accountability is
established.

Person Specification
This would mean identifying the traits of the person required for a specific job. By identifying traits, the
right candidate with the right kind of attitude will be chosen who will fit into the organization’s culture.

Person specification: Possible areas the specification may cover include:

 Personal skills-for example the ability to work under pressure or the ability to work in a job that
requires physical exertion.
 Qualifications-for example a position may require high school diploma level qualification while others
may require candidates with a post graduate degree.
 Innate ability-For example marketing departments may require a person that is energetic and likes to
work in teams and share ideas.
 Motivation-Some jobs are repetitive and may not require employee involvement other than the need
to follow instructions while others may require high level of involvement like directors who need to
be motivated to perform better.
 Personality-The ability to pay attention to details may be required from a position in the internal audit
department.

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3. Attract Candidates
The right candidates for a vacancy can be chosen from within the organization through promotion or from
outside of the organization through external sources.

Internal Sources
An internal recruitment strategy is characterized by promoting employees from within an organization to
fill upcoming positions. Many firms use such devices as job posting boards, email flashes, intranet posts
and fliers to advise existing employees of positions they may vie for. This recruitment may be in the form
of creating and shuffling temporary teams to fill certain tasks or may be permanent changes. Internal
recruitment may be primarily horizontal or it may be for promotions in which the promoted employee's
former position may not be filled.

The advantages of internal recruitment are:

 Considerable savings can be made. Individuals with inside knowledge of how a business operates will
need shorter periods of training and time for 'fitting in'.
 The organization is unlikely to be greatly 'disrupted' by someone who is used to working with others
in the organization and is aware of the organization’s culture and policies for example the employee
would already be aware of company policy to be formally dressed and on time.
 Internal promotion acts as an incentive to all staff to work harder within the organization as they see
it as a reward for consistently good performance.
 From the firm's point of view, the strengths and weaknesses of an insider will have been assessed.

The disadvantages of recruiting from within are:

 Any person that is promoted will create another vacancy hence creating a cycle that would always
leave a vacancy behind.
 An insider may be less likely to make innovative and energetic changes that a new employee would.
 Promotion of one person in a company may upset someone else hence causing demotivation in
employees.

External Sources
An external recruitment strategy is one which a human resources department will systematically search
the employee pool outside its own employees to fill positions. Many firms will use advertisements in
newspapers, job search websites, job fairs and referrals from current employees to fill positions. Some
companies will utilize a temporary employee agency to fill positions that can be completed quickly and
with less company-specific skill required to complete the desired task. Other firms will use headhunters
or hiring consultants to seek, screen and deliver employees for a fee.

Advantages of External recruitment

 External recruitment makes it possible to draw upon a wider range of talent
 Provides the opportunity to bring new experience and ideas in to the business.

Disadvantages of External Recruitment

 It is more costly since there will be cost of advertising and recruitment.
 The company may end up with someone who proves to be less effective in practice than they did on
paper and in the interview situation.

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 Methods of External Recruitment
i. Direct Method: In this method, the representatives of the organization are sent to the potential
candidates in the educational and training institutes. They establish contacts with the candidates
seeking jobs. These representatives work in cooperation with placement cells in the institutions
Persons pursuing management; engineering, medical etc. programmes are mostly picked up in this
manner.

ii. Indirect Methods: Indirect methods include advertisements in newspapers, on the radio and
television, in professional journals, technical magazines etc. This method is useful when:
 Organization does not find suitable candidates to be promoted to fill up the higher posts
 When the organization wants to reach out to a vast territory, and
 When organization wants to fill up scientific, professional and technical posts.

The experience suggests that the higher the position to be filled up in the organization, or the skill
sought by the more sophisticated one, the more widely dispersed advertisement is likely to be used
to reach many suitable candidates.

Job advertising is aimed at attracting quality applicants and aiding self- selection. The object of
recruitment advertising is to attract suitable candidates and deter unsuitable candidates.

Qualities of good job advertising: Job advertisements should be:

 Concise, but comprehensive enough to be an accurate description of the job, its rewards
and requirements
 Attractive to the maximum number of the right people
 Positive and honest about the organization. Disappointed expectations will be a prime source
of dissatisfaction when an applicant actually comes into contact with the organization
 Relevant and appropriate to the job and the applicant. Skills, qualifications and special
aptitudes required should be prominently set out, along with special features of the job that
might attract – on indeed deter – applicants, such as shift work or extensive travel.

Choosing the Best Medium

a. The type of organization. A factory is likely to advertise a vacancy for an unskilled worker
in a different way to a company advertising for a for a department head position.
b. The type of job. Managerial jobs may merit national advertisement, whereas semi-skilled jobs
may only warrant local coverage, depending on the supply of suitable candidates in the local area.
Specific skills may be most appropriately reached through trade, technical or professional
journals, such as those for accountants or computer programmers.
c. The cost of advertising. It is more expensive to advertise in a national newspaper than on local
radio, and more expensive to advertise on local radio than in a local newspaper etc.
d. The readership and circulation (type and number of readers/listeners) of the medium,
and its suitability for the number and type of people the organization wants to reach.
e. The frequency with which the organization wants to advertise the job vacancy, and the duration
of the recruitment process.

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iii. Third Party Methods: These include the use of private employment agencies, management
consultants, professional bodies/associations, employee referral/recommendations, voluntary
organizations, trade unions, data banks, and labor contractors etc., to establish contact with the job-
seekers.
iv. Recruitment agencies: An organization may notify its job vacancies to an external recruitment agency.
The agency attracts individuals looking for a job, and tries to match individuals ‘on its books’ with the
job vacancies.
v. Direct Referrals: Referral recruitment is a recruitment strategy that encourages employees to refer
contacts for specific positions.

4. Shortlist Candidates and Selection of Candidates

Sometimes, selection may involve identifying several suitable candidates to fill a job vacancy and offering
the job to the ‘best’ of the suitable candidates. If the individual who is offered the job rejects the offer,
the ‘next best’ candidate on the list is offered the job. The job is offered to each suitable candidate, in
order of preference, until one of the candidates accepts the offer of the job

Several methods of selection are :

Methods Examples
Interviewing • Individual (one-to-one)
• Interview panels
• Selection boards
Selection tests • Intelligence
• Aptitude
• Personality
• Proficiency
• Medical
Reference checking • Job references
• Character references
Group selection methods • Assessment centres

Types of interviews
i. Individual interviews: Individual, one-to-one or face-to-face interviews are the most common
selection method.
ii. Panel interviews: A panel may consist of two or three people who together interview a single
candidate: most commonly, an HR specialist and the departmental manager who will have
responsibility for the successful candidate. This saves the firm time as these individuals would

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 not have to assess candidates separately and enables better assessment as candidate would be
considered from multiple perspectives.
iii. Selection boards: Large formal panels, or selection boards, may also be convened where there
are a number of individuals or groups with an interest in the selection.

Limitations of Interviews
Problem Comment
Scope An interview it too brief to ‘get to know’ candidates in the kind of depth
required to make an accurate prediction of work performance.
Artificiality An interview is an artificial situation; candidates may be on their best
behavior or, conversely, so nervous that they do not do themselves justices.
Neither situation reflects what the person is really like.
The halo effect A tendency for people to make an initial general judgment about a personal
based on a single obvious attribute, such as being neatly dressed or well-
spoken. This single attribute will color later perceptions, and make an
interviewer mark the person up or down on every other factor in their
assessment.
Stereotyping Stereotyping groups together people who are assumed to share certain
characteristics (women, say or vegetarians), then attributes certain traits to
the group as a whole if then assumes that each individual member of the
supposed group will possess that trait.
Incorrect assessment Qualitative factors such as motivation, honestly or integrity are very difficult
to define and assess objectively
Logical error For example, an interview might decide that a young candidate who has
held two or three jobs in the past for only a short time will be unlikely to last
long in any job. (This isn’t necessarily the case).
Inexperience Inexperience or unskilled interviewers may undermine the process through:
interviewers
• Inability to evaluate information about a candidate properly
• Failure to compare a candidate against the job description or person
specification
• Failure to take control of the direction and length of the interview
• Using inappropriate question types to elicit data or put candidates at ease.
• A reluctance to probe into facts or challenge statements where necessary

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Types of Selection Tests

Type of Test Details

Intelligence Test
These are tests (such as a general IQ test) to establish the general
level of intelligence of the job applicants. They may also test the
problem-solving skills of the job applicants, and their speed of
thought. Candidates are usually required to complete the test, or
as many questions in the test as possible, within a limited amount
of time.
Aptitude Test
These are tests designed to establish a particular aptitude or ability
of the job applicants. For example, an aptitude test might test the
mathematical ability, or manual dexterity, or artistic ability of the
candidates to see if they can be productive in the
department/function that they are applying for.
Competence Tests
A test of competence is a test to establish whether the candidate
has reached a certain level of competence in a specific area. These
are tests set specifically to check whether the candidates have the
ability to perform tasks that are outlined in the job description.
Personality Tests
There are tests designed to analyse personality and character. A
test is commonly in the form of a series of multiple choice
questions. In this manner candidates with the best personality
traits (e.g good interpersonal skills and ability to work with others)
are chosen so that they can settle according to organizational
culture.

Reference checking: References provide further information about the prospective employee. It confirms
the facts written by candidates in their applications. This also gives perspective on candidates
performance in his/her previous job position and whether they are effective or not. For example, a
candidate may have given a good interview and passed selection tests but previous job reference may
highlight the candidate’s difficulty in handling time pressured tasks.

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Group Selection Methods

Role Play

Group
Simulations
Discussions
Assessment
Centres

Written
Peer Rating
Tests

These methods allow the recruiters to analyze candidates in comparative terms helping them select the
best fit for the job. These exercises and appraisal techniques will be pre-planned to check skills like team
working, leadership or communication skills.

Importance of effective recruitment and selection to the organization:

 Recruiters play an important role in the success of an organization. They essentially act as a filter that
-- when used properly -- only selects the best candidates. This can in turn lead to improvement in
quality of output and profitability of a company.
 In a constantly changing business world, companies need to hire people who are adaptable, loyal,
knowledgeable, dependable and confident, thereby creating a foundation for success. Employing the
right person for your small business might be the most important part of your venture.
 An effective recruitment and selection process reduces turnover. These processes match up the right
person with the right job skills. This can help reduce turnover and reduce costs associated with
repeated training and recruitment activities.
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 Interviews and background checks ensure that you employ a candidate who is reliable and carries out
the objectives you planned for providing quality services and goods to your customers.

The role of Human Resource Management in the recruitment and selection process: the purpose of
Human Resource Management (HRM) is to hire, train and develop staff and where necessary to discipline
or dismiss them. Through effective training and development, employees at Enterprise achieve promotion
within the company and reach their full potential. This reduces the need for external recruitment and
makes maximum use of existing talent. This is a cost-effective way for a business to manage its people.

Diversity and Equal Opportunities

Definition: Equal opportunities is a universally used and understood term which describes the idea
that everyone in an organization should have an equal chance to apply and be selected for posts, to be
trained or promoted and to have employment terminated fairly.

Employers can discriminate only on the basis of ability, experience or potential. All employment
decisions are based solely on an individual’s ability to do a particular job. No consideration should be
taken of a person’s sex, age, racial origin, disability or marital status.

Benefits of Diversity and Equal Opportunities:

 A diverse workforce will understand the needs of stakeholders like investors and customers who are
diverse themselves.
 The promotion of equal opportunities makes good business sense. Equal opportunities are promoted
as a key component of good management as well as being a legal requirement. It is also socially
desirable and morally right. It can enhance an organization’s reputation as well.
 Managing diversity expands the horizons beyond equality issues and builds on recognized approaches
to equal opportunities. It creates an environment in which enhanced contributions from all employees
work to the advantage of the business, employees themselves and society generally.
 It offers an opportunity for organizations to develop a workforce to meet business goals and to
improve approaches to customer care. Managing diversity is about having the right person for the job
regardless of sex, race or religion.
 Essentially the management of diversity is a quality assurance approach. It helps identify hidden
organizational barriers, which make it more difficult for people who are perceived as being different
from the majority of their colleagues to succeed and develop careers.
 It also helps to effect cultural change and to create an environment in which people from all
backgrounds can work together harmoniously. The management of diversity combats prejudice,
stereotyping, harassment and undignified behavior.

Ensuring Effective Policy against Discrimination

 Having a diversity committee in place that is responsible for ensuring that diversity and equal
opportunity policies are incorporated in the day to day running of the organization. This committee
can help in:
a) Analyzing the business environment and the need for diversity in the organization. A global
organization with customers and stakeholders all over the world may need a diverse
workforce to understand their needs and fulfill them.
b) Defining diversity and its benefits such that all employees are aware of what it means and
the benefits it brings to business.
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 c) Incorporate diversity policy with the corporate strategy
d) Merge diversity with core HR processes hence ensuring all job advertisements do not
discriminate in applicants based on gender, age, race or religion.
e) Ensure leaders implement policy by showing long-term commitment and using it as a
key factor during training and development of managers so that all employees can be
educated.
f) Communicate diversity policy and initiates clearly both internally and externally
g) Evaluate benchmark progress at regular intervals

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Chapter 22: Individual and Group Behavior, Teams within an
Organization

In this Chapter

a. Describe the main characteristics of individual and group behavior.

b. Outline the contributions of individuals and teams to organizational success.

c. Identify individual and team approaches to work.

d. Explain the differences between a group and a team.

e. Explain the purposes of a team.

f. Explain the role of the manager in building the team and developing individuals within the
team.
i. Belbin’s team roles theory
ii. Tuckman’s theory of team development

g. List the characteristics of effective and ineffective teams.

h. Describe tools and techniques that can be used to build the team and improve team
effectiveness.

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Individuals
Characteristics of Individual Behavior
There are many factors which drive an individual’s behavior at work these include:
 Personality: individual behavior is affected by personality types. Personality refers to individual
differences in characteristic patterns of thinking, feeling and behaving. According to type theories, for
example, there are two types of people, introverts (is a quiet, inflexible, rigid and decision are mainly
on subjective basis) and extroverts (friendly, decisions are mainly on objective basis).
 Attitude: This is a pattern of behavior directed at a group or persons in a given situation. Attitude may
mean attitude at work towards particular people like peers and subordinates. Attitude to work may
also matter like individuals who like to complete tasks with little or no instructions and other who may
be focused on completing it efficiently with instructions.
 Perception: Individual behavior may be affected by their understanding of a certain situation.
Individuals take parts of a message and perceive it differently depending on their experiences and
wants.
 Motivation: This is related to the individual’s desire to work and put in effort at what he/she is doing.

Role Theory
Role theory suggests that an individual’s behaviour is a reaction to other people’s expectations of how
they should behave under those circumstances. Some commonly used terms relating to role theory are:
 A role set in every situation the role is set e.g. Manager, Subordinates etc. Individuals need to be
aware of the role set they inhabit at any given time in order to behave appropriately for that role. It
is based on the individuals that respond to a particular role. For example, the role set of a department
head may be other department heads and subordinates within that department.
 Role ambiguity occurs if an individual is confused about the roles that he has set out to undertake
for example, a manager treating subordinates as his friends will lead to ambiguity.
 Role conflict or incompatibility occurs if an individual is asked to fulfill two or more roles which are
conflicting in demands. For example, a manager who is needed to maintain supervision and discipline
in the department while leading the team and working with the same people that he monitors.
 Role signs indicate the role an individual is filling at a given moment so that others respond to you in
that role without confusion. This may include the type of dress certain roles are expected to be in. For
example, formal dressing of managers.
 Role models are the individuals who others look up to and behave in the same manner that the role
models do. For example, the CEO may be the role model in a business hence employees may follow
suit.

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Groups
Definition: A group is a collection of individuals who perceive themselves as a group. It thus has a
sense of identity.

Characteristics of a Group
 A sense of identity – the group has defined boundaries and it is clear who is within the group and who
is not. For different individuals to identify with a group, it needs to have a sense of identity.
 Loyalty to the group – group members accept one another and have certain standard behaviours that
the follow. This binds the group together and excludes others.
 Purpose and leadership – a group has a purpose and individuals are chosen to join the group in order
to help the group achieve its goals.

Types of Groups
In organizations both informal and formal groups can be shaped.
 Informal groups include workplace circles; networks of people who get together to collect and
exchange information, groups of friends who socialise outside work etc. The relationship and
structure of informal groups evolves continually.
 Formal groups on the other hand are set-up by the organization to carry out certain tasks and duties.
The popularity of such groups arises as a result of the effectiveness with which such groups carry out
and complete their objectives. For example making a formal marketing team to launch a new product
in the market.

Contribution of Individuals and Groups to Organizational Success

Individuals Groups
An individual brings a set of skills to every task Groups combine set of skills to perform tasks.
they perform.
Individuals can contribute ideas based on their Groups contribute wide range of ideas based on a
skill set. wide range of skills.
Individuals can be rigid and resistant to change.Groups provide flexibility and are adaptive to
change.
Individual efforts have a limit to the amount of Groups combine efforts to achieve synergy.
work that can be done.

Teams
Definition: A team can be described as any group of people who must significantly relate with each
other in order to accomplish shared objectives.

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Differences between Groups and Teams

Groups Teams
Refers to a number of people who are connected Team refers to a number of persons associated
by some shared activity. together in work or activity.
May not share a common goal Share a common goal
Individuals are not assigned specific goals. Specific tasks are assigned to each individual.
Members are independent. Members are related and dependent on one
another for completion of tasks.
Groups consist of large number of individuals Teams have smaller number of individuals.
Ultimate authority rests with one individual Teams do not usually have one person in charge,
all members are equally important.

Purposes of a Team
Academic theory over the years has identified three main reasons or purposes of teams:
a. Teams provide the necessary structure or framework that helps to coordinate the efforts of multiple
individuals;
b. Teams are formed to solve problems or address situations that do not fall exactly within the
boundaries of a single individual or department’s responsibilities; and
c. Organizations form teams not only because of the benefits they bring to the business, but also
because teams meet the psychological needs of their members for social interaction and a sense of
belonging.

Whatever the reason(s) for their being assembled, teams are always given a specific objective by an
organization. This goal, in very broad terms is to: either arrive at a strategy or course of action to address
a specific situation, or to solve a specific problem facing the organization.

Tuckman’s Theory of Team Development

According to the writer Tuckman, it is possible to identify five distinct stages of development through
which teams should pass.
 The first stage is the so-called forming stage, when the members meet and decide on the purpose of
the team and how it will operate. At this stage the team is no more than a collection of individuals,
finding out about one another and discussing the task - which may be unclear. Although wasteful and
time consuming, this stage is essential to ensure that the team members become comfortable with
each other.
 The second stage is referred to as storming. The phrase is a deliberate reference to conflict, ideas,
ideals and behavior that are challenged and sometimes rejected. There is competition and argument
about who should fill the roles in the team. Although characterised by conflict, this is constructive
with trust developing and if the individuals are successful with this stage then a stronger team will
result.
 The third stage is norming, when the routines under which the team will operate become established.
The team is now settling down, investigating ideas, testing the reactions of the team's members and
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 consequently norms are established. In addition, patterns of behaviour are established, trust will
develop and the methods by which decisions will be taken will be decided on.
 The fourth stage is performing, this is where the task is actually performed. By the time the
performing stage is reached, the team is complete and is able to perform effectively. Problems with
team roles, conflict and issues of adjustment have been resolved.
 In practice, many teams reach the dorming stage, which is the final stage. The team becomes
complacent, loses interest in the task and self-preservation becomes the dominant issue.

All teams, it is suggested, go through these five stages. However, if for some reason the team loses or
gains members, or the external environment imposes fundamental changes on it, the team very often
may revert to earlier stages of development.

Belbin’s Team Roles Theory

Dr Meredith Belbin has studied team membership (as opposed to team development). He has suggested
that all teams are a matter of balance and that the team members fulfil two roles.
1. The primary role is the skill or function for which the individual was appointed to the team in the first
place. This is usually the individual's professional role.
2. The secondary role is the team role based on the individual's preferred behaviour pattern. All the
team roles are needed for a team to be successful, the team role being in addition to the members
bringing their own disciplines and skills.

It is also possible that members have more than one team role skill, although one will usually dominate.
The team role may change, depending on the task and the number of team members to avoid the problem
of team imbalance.

Belbin describes eight team roles:

 The coordinator provides the leadership, presides and coordinates the activities - he or she is a
balanced and disciplined person, good at working with others
 The company worker is the administrator and organizer who turns the team's ideas into jobs and
tasks - this person is efficient, trustworthy and unexcitable
 The shaper is highly-strung and a dominant, extrovert personality - task-driven to the point of
passion, he or she is a force for action
 The plant is the introvert, invariably intellectually bright, and imaginative who acts as a source of
ideas
 The resource investigator is the popular, social member of the team - an extrovert, this person is
relaxed and a useful source of new contacts but not ideas
 The monitor-evaluator is not creative but is analytically gifted - often tactless and aloof, the role
is to examine ideas and spot errors and flaws
 The team worker is the silent member - concerned with the maintenance of the team, he or she
is supportive, understanding and popular with the team but only noticed when absent
 The completer-finisher enjoys the details, pushes the team to meet targets and sees urgency and
follow-through as important.

Later research has identified a further team role - the specialist. This person joins the team only when
expert or specific advice is required on matters outside the competence of the team. This additional role
has come about because of the greater use of teams for project work.

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Characteristics of Effective Teams
 Commitment to Targets: Effective teams are committed to achieving targets set for it while ineffective
team performance is marred by the fact that the team members do not work towards a common goal.
 Addressing the Problems: Effective teams will try and solve underlying issues causing problems in an
organization while ineffective teams will only deal with outcomes of problems and try and mitigate
the impact without resolving the underlying issue.
 Feedback: Effective teams have a mechanism for constructive feedback aimed at improving
performance while ineffective teams emphasize on criticism and undermining team members.
 Low Turnover: A sign of effective teams is a low turnover where team members may feel empowered
and hence may not want to leave while ineffective team with low motivation to achieve objectives
may experience a higher number of members leaving.
 Sharing Ideas: Effective teams share ideas and present a developed idea as a team while ineffective
teams may individually own ideas without sharing them with others.

Improving Team Performance

Developing a team and improving team performance could include:
 Improved communication, such as through the use of problem solving exercises which force all team
members to discuss a problem the group is facing.
 Building trust between team members, which will help the individual members work as a group.
 Social interaction between the individuals in the team can help to reduce conflict and increase the
cohesion of the group.

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Chapter 23: Motivating individuals and groups

In this Chapter
a) Define motivation and explain its importance to the organization, teams and individuals.

b) Explain content and process theories of motivation: Maslow, Herzberg, McGregor, and Vroom.

c) Explain and identify types of intrinsic and extrinsic reward.

d) Explain how reward systems can be designed and implemented to motivate teams and individuals.

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Motivation

Definition: In an organization, motivation refers to the willingness of individuals to perform certain

tasks or actions. It is the incentive or reason for them behaving in a particular way.

Benefits of Motivation

A motivated workforce can bring several advantages to the business and teams. A workforce whose needs
are fulfilled and is willing to work towards organizational goals will:
1. Increase efficiency of the processes. Demotivated workforce tends to work less and work slow due to
unwillingness to work. For example, an employee who feels he is underpaid for his role, is bound to
work slower because he is unappreciated.
2. Increased cooperation: A motivated workforce will cooperate more with others and lead to faster
achievement of objectives when working in a team.
3. Low staff turnover: a motivated employee is less likely to leave his/her present position in the
organization. An employee that feels underappreciated is more likely to look for opportunities
elsewhere.
4. Public image: the organization that provides better job environment and opportunities to the
employees will have a better image in the public. It will help in attracting competent employees and
will positively affect both, recruitment and retention levels of employees.
5. Facilitate change: A motivated workforce is more likely to be flexible to change and will adapt quickly
to change being eager to learn.

Theories of Motivation

Theories of
Motivation

Content Process
Theories Theories

Maslow McGregor

Herzberg Vroom

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 Content Theories
Content theorists focused on what it was that motivated employees. They believed that all employees
responded to and are motivated by the same set of factors. They are also referred to as ‘need theories’
and assume that human beings have a set of needs or desired outcomes which can be satisfied through
work. There are many content theories, the two prominent ones are:
i. Maslow’s Hierarchy of Needs
ii. Herzberg’s Two Factor Theory

i. Maslow’s Hierarchy of Needs

Maslow identified a set of needs of employees that have to be fulfilled by an organization in order to
keep them engaged and motivated. He also believed that an employee would go through these needs in
stages and would only move to the next stage when previous needs are fulfilled.

Self Actualization
e.g fulfill personal potential
Esteem Needs
e.g recognition and authority
Love, Social Needs
e.g Relationships and Interactions
Safety Needs
e.g. Security and order
Physiological Needs
e.g. Food and Shelter

Each need is important until it is satisfied and then the next need becomes important, i.e., once one has
obtained shelter and food that no longer becomes a priority and one aspires to a need for security and
so on.

 Physiological Needs: refer to basic survival needs such as air, food, shelter, clothing and water. We
can normally buy food and drink and provide shelter as a result of earning a regular salary.
 Security Needs: deal with security, assurance, order and certainty in life of an individual. It is provided
through contracts of employment and pension and medical insurance provision. However, it is
attention to the rest of the needs in the hierarchy, which distinguishes an organization that has a
highly motivated workforce, from one that is less so.
 Social/Love Needs: refer to needs of an individual for love, friendship, belonging and acceptance from
peers. In order to fulfil social/love needs companies with motivated workforces will encourage team
working which leads to better relationships for both managers and subordinates which often
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 translates into higher work output. Together with company parties and outings, staff social clubs and
sports societies are also likely to be heavily subsidized to encourage good relationships outside the
workplace.
 Esteem needs: are the need for respect, recognition and status in society. These are fulfilled through
satisfying the individual. The military were probably one of the initial exponents of this idea through
the awarding of medals for bravery. A modern day equivalent can be seen in McDonalds where hard
work and high levels of customer service result in the employee being awarded stars which they can
proudly wear on their uniform. A very simple way of esteem being fulfilled is to simply recognize good
work through saying thank you.
 Self-actualization is achieved when an employee is able to fulfil their maximum potential. Companies
satisfy this desire by providing no ceiling on promotion and enabling employees to improve
themselves through education and training. More senior roles may give employees discretion in how
they interpret their job roles thus enabling the individual to put their own stamp on a job.

Limitations of the hierarchy of needs

The hierarchy of needs is a simple and logical idea about human motivation, but it has significant
weaknesses and limitations.
 The main problem is its assumption that needs are the same for all people and can be satisfied
for everyone in the same way.
 Individuals have different needs, and they are not necessarily in the hierarchical order suggested
by Maslow.
 Many individuals may seek to satisfy several different needs at the same time. The same need
may cause different reactions and responses from different individuals.

ii. Herzberg’s Two Factor Theory

Herzberg’s motivation theory is one of the content theories of motivation. These attempt to explain the
factors that motivate individuals through identifying and satisfying their individual needs, desires and the
aims pursued to satisfy these desires.

These two separate ‘needs’ are the need to avoid unpleasantness and discomfort and, at the other end
of the motivational scale, the need for personal development. A shortage of the factors that positively
encourage employees (the motivating factors) will cause employees to focus on other, non-job related
‘hygiene’ factors.

 Motivating Factors: The most important part of this theory of motivation is that the main motivating
factors are not in the environment but in the satisfaction gained from the job itself. It follows
therefore that to motivate an individual, a job itself must be challenging, have scope for enrichment
and be of interest to the jobholder. Motivators (sometimes called ‘satisfiers’) are those factors directly
concerned with the satisfaction gained from a job, such as:
 the sense of achievement and the intrinsic value obtained from the job itself
 the level of recognition by both colleagues and management
 the level of responsibility
 opportunities for advancement and
 the status provided

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 Motivators lead to satisfaction because of the need for growth and a sense of self-achievement.
 Hygiene Factors: A lack of motivators leads to over-concentration on hygiene factors, which are those
negative factors which can be seen and therefore form the basis of complaint and concern. Hygiene
factors (often referred to as maintenance factors) lead to dissatisfaction with a job because of the
need to avoid unpleasantness.

They are referred to as hygiene factors because they can be avoided or prevented by the use of
‘hygienic’ methods. The important fact to remember is that attention to these hygiene factors
prevents dissatisfaction but does not necessarily provide positive motivation.

Hygiene factors are also often referred to as ‘dissatisfiers’. They are concerned with factors associated
with the job itself but are not directly a part of it. Typically, this is salary, although other factors which
will often act as dissatisfiers include:
 perceived differences with others
 job security
 working conditions
 the quality of management
 organizational policy
 administration
 interpersonal relations

Understanding Herzberg’s theory recognizes the intrinsic satisfaction that can be obtained from the
work itself. It draws attention to job design and makes managers aware that problems of motivation
may not necessarily be directly associated with the work. Problems can often be external to the job

Process Theories
Instead of looking at factors that can motivate individuals, process theories look at motivation as a
process. They consider ‘how’ individuals are motivated. Process theories change the emphasis from needs
to the goals and processes by which workers are motivated. The theories discussed here are:
i. McGregor’s Theory X and Theory Y
ii. Vroom’s Expectancy Theory

i. McGregor’s Theory X and Theory Y

This theorist classifies workers into two types according to common characteristics and then detailed the
process through which each type would be motivated. Both types are extreme sets of characteristics and
according to Herzberg once the type of employee is known, an appropriate management style and
motivation technique would be adopted. Common characteristics would include:

Theory X Theory Y
Dislikes work and will avoid having to do any if at Putting effort into work is as natural as play
all possible
Forced to work towards the organization’s will apply self-direction and self-control to work
objectives, with the threat of punishment for not towards the objectives of the organization,
working properly. „
Wants to avoid responsibility, has no ambition and Strength of an individual’s commitment to the
wants security more than anything else. organization’s objectives is related to the rewards
associated with achieving those objectives.
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 Wants to be given directions about how work Seek responsibility and do not need constant
must be completed. supervision or guidance
Managers must then be autocratic, exerting Managers should be democratic giving the theory
authority through constant supervision and Y worker a chance to participate and share ideas.
instructions

ii. Vroom’s Expectancy Theory

Victor Vroom stated a formula by which human motivation could be assessed and measured. He
suggested that the strength of an individual's motivation is the product of two factors.

1. Valence: The strength of an individual’s preference for a certain outcome. The higher the valence, the
more motivated the individual would be in performing tasks. If the reward is only a small amount of
money, an employee may not bother. A desired reward may increase your motivation to try and win.
It can be represented as a positive or negative number, or zero – since outcomes may be desired,
avoided or regarded with indifference.
2. S u b j e c t i v e P r o b a b i l i t y : An individual’s expectation that the outcome will in fact result from
certain behaviour. Vroom called this 'subjective probability' or expectancy. Some individuals do not
believe that they are able to achieve better performance by trying harder. They may lack self-
confidence, or training. (Alternatively, they may not be in a position to affect performance, in which
case motivation will be very low, and possibly nil.) Management must consider ways of trying to
increase the expectancy of their employees, for example by providing training and development,
giving them the resources they need to do the job, or by providing supervision and guidance.
Managers must keep the promises that they have given of rewards for performance – and try to make
sure that employees believe that the managers will keep their promises. As a probability, it may be
represented by any number between 0 (no chance) and 1 (certainty).

In its simplest form, the expectancy equation may be stated as:

F=V×E

Where: F = the force or strength of the individual's motivation to behave in a particular way V = valence:
the strength of the individual preference for a given outcome or reward and E = expectancy: the
individual's perception that the behavior will result in the outcome/ reward.

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Extrinsic and Intrinsic Reward

Definition: Extrinsic rewards are separate from (or external to) the job itself, and dependent on the
decisions of others (that is, also external to the control of the workers themselves). Pay, benefits, non-
cash incentives and working conditions (Herzberg's hygiene factors) are examples.

Intrinsic rewards are those which arise from the performance of the work itself (Herzberg's motivator
factors). They are therefore psychological rather than material and relate to the concept of job
satisfaction. Intrinsic rewards include the satisfaction that comes from completing a piece of work, the
status that certain jobs convey, and the feeling of achievement that comes from doing a difficult job
well.

Monetary Incentives

There are three major kinds of monetary incentives:

i. Performance related pay: This is an ongoing scheme where employee performance is measured
in terms of preset standards like profit, sales volume or other indicators. Employees may get
commission or points based on their performance. For example a sales managers getting a 5%
commission on every customer introduced into the business.
ii. Bonus Schemes: Bonuses are usually one off unlike performance related pay. Bonuses may also
be awarded to teams or groups that have met or beaten certain targets. Group bonuses can help
the team to pull together and work as a cohesive unit, but may lead to conflict if some members
of the team are seen to be doing less work than others.
iii. Profit Sharing: usually available to a wide group of employees (often companywide) where
payments are made in the light of the overall profitability of the company. Share issues may be
part of the scheme.

Non-Monetary Incentives

Herzberg’s Proposals to Improve Job Design:

Herzberg advised three ways of improving job design:
a) Job enrichment
b) Job enlargement
c) Job rotation

Job Rotation:
 Job rotation implies the shifting of an employee from one job to another without any change in the
job. With job rotation, a given employee performs different jobs but, more or less, jobs of the same
nature.
 It relieves the employee from the boredom and monotony of doing a single task.
 The organization also stands to benefit as the worker become competent in several jobs rather than
only one. Periodic job changing can also improve inter-department co-operation.
 The basic nature of the job remains unchanged. Also frequent shifting of employees may cause
interruption in the work routine of the organization.

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Job Enlargement:
 It is the process of increasing the scope of a job by adding more tasks to it. The related tasks are
combined.
 Job enlargement involves expanding the number of tasks or duties assigned to a given job. Job
enlargement therefore, naturally is opposite to work simplification. Adding more tasks/ duties to a
job does not mean that new skill and abilities are needed to perform it. There is only a horizontal
expansion.
 Job enlargement reduces monotony and boredom. It helps to increase interest in work and efficiency.
But there is no time increase of the job.
 Enlarged jobs require longer training period as there are more task to be learned.

Job Enrichment:
 It involves designing a job in such a way that it provides the workers greater autonomy for planning
and controlling his own performance.
 It seeks to improve tasks, efficiency and human satisfaction by building into people’s jobs, greater
scope for personal achievement and recognition, more challenging and responsible work and more
opportunity for individual advancement.
 Job enrichment benefits employees and organization in terms of increased motivation, performance,
job satisfaction, job involvement and reduced absentees.
 Further an enriched job shall meet certain psychological needs of job holders (Identity achievement)
etc. Job enrichment is motivating and satisfying as it adds status to one’s job. Empowerment, a by-
product of job enrichment, gives the employees a sense of ownership and control over their job.

Feedback as a motivator
Constructive feedback is vital in job satisfaction and motivation. It allows individuals to assess their
performance from the point of view of the superiors and peers and gives them an indication of the areas
where they need to continue improving and growing. There are two main types of feedback:
 Motivational feedback: is a tool used to reward and emphasize positive behavior and performance
by offering praise and encouragement to the individual.
 Developmental feedback: is offered in areas of performance that need to be enhanced and improved
by pointing out mistakes and recommendations on how behavior in that area needs to be modified.

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Chapter 24: Learning and training at work
In this Chapter
a. Explain the importance of learning and development in the workplace.

b. Describe the learning process: Honey and Mumford, Kolb.

c. Describe the role of the human resources department and individual managers in the learning
process.

d. Describe the training and development process: identifying needs, setting objectives,
program design, delivery and validation.

e. Explain the terms ‘training’, ‘development’ and ‘education’ and the characteristics of each.

f. List the benefits of effective training and development in the workplace.

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Learning

Definition: Learning can be defined as ‘the process of acquiring knowledge through experience,
which leads to changes in behavior’. It includes acquiring new skills, knowledge or attitudes, or a
combination of all three.

Types of Learning
Types of Learning
Formal Learning:
- Learning opportunities provided by
an org to employees.
- Based in a classroom and highly
structured.

Informal Learning:
- Informal learning is spontaneous
and can take place in day to day
activities.

Importance of Learning:
Continued learning of individuals within an organization is important for organization to achieve
objectives. Learning can provide the following benefits:
 Continued learning of employees can make them candidates for promotion and recruitment within
the organization hence saving costs of advertising and external recruitment.
 Learning and development of skills motivates employees and improves their performance at work.
 Non development of skills may lead to higher employee turnover as employees may look for
opportunities within another organization.
 Learning will improve the creativity and innovation of employees leading to better quality of output
and higher profitability.

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Learning Process

Honey and Mumford

Honey and Mumford identified four different learning styles and they argued that each individual has a
preference for a particular style of learning. They therefore suggested that:
 individuals need to understand what their ‘natural’ learning style is, and
 they should seek opportunities to learn in that style

The four learning styles in the Honey and Mumford model are:

Learning Style Explanation

Activist  This individual learns by doing and acting. Activists like to ‘get their
hands dirty’.
 Require practical training and hands on experiences. They do not
respond to theoretical learning.
 Express readiness to try new experiences and are ready for change.
Reflector  This individual learns by observing and thinking about what he has
seen.
 Reflectors prefer to avoid ‘jumping in’ to a task, and prefer to watch
from the sidelines.
 They are slow in learning techniques as they take time considering
what they are observing.
Theorist  This individual likes to understand the theory that supports the
practice.
 Theorists learn with facts, concepts and models.
 They learn with facts, concepts and models drawing conclusions
about what they are learning.
Pragmatist  This individual likes to see how theory is put into practice in the ‘real
world’.
 Pragmatists find abstract theories and concepts of no use unless they
can see their relevance to practical action.

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The Learning Cycle-Kolb
The theory suggests that individuals learn through own experiences hence learning is a cycle in which
individual will experience an event and develop an understanding.

Have an
experience

Learn from
Plan next
the
steps
experience

Draw
conclusions

This theory suggests that:

 Individuals have an experience. For example a production supervisor may experience machine
downtime for the first time on the job.
 Individuals then learn from the experience meaning they will reflect on their own performance in that
experience, what they did right and what went wrong. For example that production supervisor may
consider what he did that led to machine downtime and prolonged it.
 The then draw conclusions and develop understanding of what has happened. The production
supervisor may conclude that he used the machine without a break beyond the recommended hours
that led to downtime and he failed to report the downtime to authorized individuals.
 Individuals then plan the next steps. Production supervisor may then plan to follow machine manual
and may decide to report downtime promptly to the proper channels in future.

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Training and Development

Definition: Development is 'the growth or realization of a person's ability and potential through the
provision of learning and educational experiences'.

Training is 'the planned and systematic modification of behavior through learning events, programs
and instruction which enable individuals to achieve the level of knowledge, skills and competence to
carry out their work effectively'.

Education is defined as that knowledge acquired gradually through learning and instruction. Someone
who is 'educated' is regarded as being in possession of particular knowledge or skills, and having gone
through a particular process in order to acquire them. Education is crucial for a person's professional
development, but it is only one part of the development process.

The Training Process

The training process is based on 5 following steps:

1. 2. 3. 4.
5.
Identifying Setting Program Program
Validation
Needs Objectives Design Delivery

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Stage 1: Identifying Needs

The first step in developing a training program is to identify and assess needs. Employee training needs
may already be established in the organization’s strategic, human resources or individual development
plans. If a business is building the training program from scratch (without predetermined objectives) it
will need to conduct training needs assessments. Training needs can be assessed by:

Method Description
Performance Appraisal A regular performance evaluation can give line managers a
perspective on employee performance in the past and areas of
improvement. In this manner, areas of performance that require
training can be identified.
Observation There may be signs that staff require additional training, such as
poor productivity or high numbers of mistakes. There is evidence
that inadequate training leads to workers failing to meet
production targets, leading to frustration
Organizational Strategy Training should be an organization’s long term objective such that
employee skills can be developed such that all employees work
towards a common goal.

Stage 2: Setting Objectives

 The training needs assessments (organizational, task & individual) will identify any gaps in your
current training initiatives and employee skill sets.
 These gaps should be analyzed and prioritized and turned into the organization’s training objectives.
The ultimate goal is to bridge the gap between current and desired performance through the
development of a training program.
 At the employee level, the training should match the areas of improvement discovered through 360
degree evaluations.

Stage 3 & 4: Program Design and Delivery

The next step is to create a comprehensive action plan that includes learning theories, instructional
design, content, materials and any other training elements. Resources and training delivery methods
should also be detailed. While developing the program, the level of training and participants’ learning
styles need to also be considered. Many companies pilot their initiatives and gather feedback to make
adjustments before launching the program company-wide.

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Training Methods

Training
Methods

On the Job Off the Job

Training Training

On the Job Training

On the job training refers to a form of training which is provided at the workplace during the
performance of the actual job:
 Demonstration/instruction: Employees can learn during working hours through constant
supervision and instruction or demonstration of how a task is performed. By imitating or following
an instructor, employees can learn practically to develop an in depth understanding.
 Job rotation: By rotating employee departments, an organization can ensure that employees
develop a wide variety of skills. For example asking employees to spend three months in different
departments developing a knowhow.
 Temporary promotions: An employee can be temporarily promoted to a senior position to
develop decision making skills and an understanding of how to manage authority and
responsibility.

With on the job training, there could be several benefits:

 Practical, hands on experience can give employees an in depth knowledge of what performance
standards are required of them.
 Since the training will be in work environment that employees are already familiar with, there will be
no adjustment period in application of newly developed skills.
 Employees will develop interpersonal relations as well during job rotation or temporary promotions
that can be a motivational factor.

Off the Job Training

Off the job training is formal training conducted outside the context of the job itself in special training
rooms or off-site facilities. There can be several off the job training programs that can be adopted:
 Courses: These courses will mostly be outside of the business premises with an emphasis on
theoretical knowledge on a specific topic. Employees develop an in depth understanding on a topic
and then apply it to their workplace.
 Computer Based Training: There can be training programs, interactive learning modules and
webinars that can be used to develop employee knowledge.
 Workshops

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Off the job training has several benefits such as:
 Allows employees to focus on learning rather than their jobs.
 Standardized learning as all employees will go through the same course or training program
 Allows employees to apply and practice skills off the job without the fear of making mistakes.

Induction Training
This is the process of training new recruits such that they are familiar with the business environment, its
culture, policies and their peers. Induction training process normally includes seven steps:
i. Identify areas the recruit will have to learn about in order to start on the job
ii. Introduce the recruit to the work premises and facilities
iii. Brief the recruit on relevant policies and procedures, terms of employment, annual leave
allowances, health and safety etc.
iv. Introduce recruit to key personnel in the office
v. Introduce work procedures
vi. Plan and implement an appropriate training programme
vii. Monitor initial progress, as demonstrated by performance, as reported by the recruit’s supervisor

Stage 5: Validation
Training methods once delivered need to be evaluated and validated for future improvement. Evaluation
of the training program aims to assess whether it was successful and whether the training achieved its
objectives. It will also enable the organization to ensure that it is using the right tools for training.
Evaluation can be conducted in the following ways:
 By analyzing how employee behavior has changed after training and whether there have been
fewer or more conflicts.
 By assessing the level of mistakes the employees are making. Higher mistakes would indicate
ineffective training and lack of understanding of employees.
 Whether there has been any value addition in processes.
 By giving employees questionnaires to assess efficacy of training methods.

Benefits of Training: Benefits of training to organization:

 Improved Probability
 Improved Knowledge & Skills
 Improves Moral of Work Force
 Helps people Identify with Org. Goals
 Provides Better Corporate Image
 Creates Authenticity & Trust
 Improves Inter-Org. Relationships
 Provides Org. Development
 Provides Information for Future Needs in all Areas of Org

Role of Human Resource Department and Line Managers

 The HR department is centrally concerned with developing people; they develop and schedule
learning and career planning sessions, managing the progress of individuals, in accordance with
organizational requirements.
 Line managers also have a responsibility for training and development within the organization. Some
organizations appoint specific training managers whose primary aim is to arrange and run training
programs.

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Chapter 25: Review and appraisal of individual performance

In this Chapter
a. Explain the importance of performance assessment.

b. Explain how organizations assess the performance of human resources.

c. Define performance appraisal and describe its purposes.

d. Describe the performance appraisal process.

e. Explain the benefits of effective appraisal.

f. Identify the barriers to effective appraisal and how these may be overcome.[K]

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Performance Appraisal

Definition: Performance appraisal means evaluating an employee's’ current or past performance

relative to his or her performance standards.

Performance appraisal assumes that employees understood their performance standards, and that
their supervisor also provides the employee with the feedback, development, and incentives required
to help the person eliminate performance deficiencies or to continue to excel in his/her position. The
main aim of appraisal is to improve performance.

Purpose of Performance Assessment

 Performance assessments provide employees and managers with an opportunity to discuss areas in
which employees stand out and where they need improvement.
 This helps both the organization and the employee to take any corrective action (if needed) early on,
thereby increasing the chance of both the employee and organization achieving their goals and
objectives.
 Performance appraisals on a regular basis give the employee a chance to deal with personal concerns.
Since most appraisals are two way, this is a way of communicating issues that may be hindering
employee performance.
 In the case of regular appraisals, one of the most important advantages is employee accountability.
Employee performance is less likely to fall below par if he/she knows that it will be appraised at
yearend.
 Discussions between employees and supervisors help in identifying skills and to attain improvement
in required fields. This will help employees in dealing with promotions or any changes to the job
description in future.

Organizations assess performance periodically through performance appraisal.

Main Components of Appraisal

Appraisal has three main components:

 Reward review – measures the degree to which an employee deserves performance-related

bonuses. The annual appraisal interview may be seen as an opportunity for the employee and his or
her manager to discuss pay and other rewards. The employee may have an opportunity to ask for
more pay, or express a wish for promotion. The manager might use the appraisal interview to say
what the individual’s pay will be for the next 12 months. However, although rewards will be discussed
in an appraisal interview, it is normally inappropriate to combine the annual appraisal interview with
the annual pay review. This is because the interview will then focus on pay to the virtual exclusion of
everything else.

 Performance review – identifies training needs and validates training methods. An appraisal system
might be used to assess the performance of the employee since the previous appraisal. One way of
doing this is to agree a target or objective for the individual, and to compare the individual’s actual
performance against this objective or target at subsequent appraisal interview.

 Potential review – as an aid to plan career development and succession. Staff appraisal interviews
can also be used to discuss the employee’s potential for career development and promotion.

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 However, to make this discussion meaningful, there has to be a system of reporting to senior
management and making recommendations.

Appraisal Process

Set criteria

Assessment
Report

Assessment
Interview

Joint
Conclusion

Follow Up
Action

Stage 1: Setting Criteria

Setting criteria is complex and needs to be done well before the appraisal is actually conducted. This would
involve having a benchmark against which performance will be measured. Having a criteria is of absolute
importance to ensure that appraisal is not subjective. Criteria can be set using the following:
a. Purpose of the appraisal: Criteria can be set using the purpose of the appraisal, as in knowing
whether the appraisal is being conducted for rewards, to identify training needs or to assess
whether the individual has the ability to handle more authority and responsibility.
b. Job Requirement: Criteria can also be set using the job requirements outlined when recruiting an
employee and performance can be assessed to know whether those requirements are being met.

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Stage 2: Appraisal Report
A performance appraisal report can be prepared using a wide variety of techniques for assessing
performance:
 Overall assessment – This is where the line manager writes his opinions about the appraisee in
narrative form assessing various areas of performance. There is no standard format and no proper
benchmark that is used.
 Guided assessment – assessors required to comment on specific characteristics and performance
elements. This is where a standard set of questions is asked and the manager is required to answer
those hence assessing performance. Slightly more focused than overall assessment however a
standard set of questions cannot be set for all departments.
 Grading or rating scales – assessors required to allocate or select a value of the level or degree to
which an individual displays a given characteristic. Numerical values may be added to the rating to
obtain rating scales. The values may be added at the end to work out a total score.
 Behavioral incident methods – concentrate on employee behavior, which is measured against typical
behavior in each job
 Results-orientated schemes – this reviews performance against specific standards and targets agreed
in advance by the manager and subordinate. This will lead to joint assessment as the employee may
be able to assess performance himself since targets are known and mutually agreed.

New techniques have been developed over the years to aim at monitoring the appraisee’s effectiveness
from various perspectives or viewpoints. These techniques include:
 Upward appraisal: is a process that involves the evaluation of supervisors by those they supervise.
This helps in evaluating whether the manager is effective in role and has been successful at not only
understanding his subordinates but also in giving instructions.
 Customer appraisal: Gaining real-world knowledge of how employees and organization are viewed
by customers is the best advantage of securing customer opinion. Without this knowledge,
organizations will have little proof that the internal human resources controls affect the business,
either negatively or positively.
 360 degree appraisal: 360 Degree Feedback is a system or process in which employees receive
confidential, anonymous feedback from the people who work around them. This typically includes the
employee's manager, peers, and direct reports. The assessments by each rater are collated by the
manager who carries out the appraisal interview. These assessments are compared with the
individual’s self-assessment, and this provides the basis for the discussion at the interview.
 Self-appraisal: (also known as a self-evaluation or a self-assessment) is your opportunity to reflect on
the things you did well, and the things you didn't do so well — but learned from this past year

Stage 3: Appraisal Interview

Basic to the successful application of appraisal systems is the appraisal interview. A formal appraisal
interview is an integral part of appraisal and performance management. The interview must be organized
properly and carefully. Prior to the interview, the appraiser, who should be the immediate supervisor,
must prepare the correct and relevant documentation.

Documentation for the Interview

This comprises the job description, a statement of performance or appraisal form, and a record
highlighting the employee's performance. Other relevant documentation used at an appraisal can include
peer assessments, if appropriate, comments from clients and customers, and any self-assessment forms

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issued to the employee prior to the interview. Finally, the individual's employment file should be referred
to. This should contain notes on the employee's general personal attitude and any disciplinary issues.

Interview Methods
Many writers and practitioners in people management take one of three basic approaches to the appraisal
interview.

1. Tell and Sell: The so-called tell and sell method involves the appraiser explaining how the assessment
is to be undertaken, gaining acceptance for the evaluation and improvement plan. Interpersonal skills
are important with this approach to motivate the appraisee.
2. Tell and Listen: An alternative approach is the ‘tell and listen’ method, where the appraisee is invited
to respond to the way that the interview is to be conducted. This requires counselling skills and careful
encouragement to allow the appraisee to participate fully.
3. Problem Solving: Finally, there is the problem solving method, where a more helpful approach is
taken which concentrates on the work problems of the appraisee, who in turn is encouraged to think
through any problems. After the interview, both parties should agree on any actions to be taken, an
agreed action plan on improvement, and methods of monitoring progress and appropriate feedback.

Stage 4: Joint Conclusions

Based on appraisals, the employee and the line manager may draw conclusions on performance leading
to agreement on an action plan. This may include the employee working on areas that require
improvement. It may also lead to training plan where skills are considered lacking.

Stage 5: Follow Up
Appraisals may lead to a regular follow up on the conclusions drawn in the appraisal. This will ensure
efficacy of the process as just evaluating performance time and again may not lead to substantial
improvement if there is no follow up on decisions taken during the appraisal.

Barriers to Effective Appraisals

There is often misunderstanding as to how an appraisal should be conducted.
 Appraisees sometimes perceive their annual appraisal as a threat. However, this can be overcome if
the appraisal system is well-constructed, and seen to be fair to the individual and consistent across
the organization.
 A typical negative response to appraisals is that they are confrontational. This is often due to a lack of
agreement on performance or poor explanation by management.
 Additionally, it is sometimes seen as a judgment - a one-sided process based entirely on the manager's
perspective. At the other extreme it is simply regarded as a chat.
 Perhaps the greatest problem with appraisals is that they are often regarded as a nuisance. At best,
appraisals may be considered an annual event, the results of which quickly become out-of-date.
 Moreover, some may view the whole process as bureaucratic - a form-filling exercise devised to satisfy
the organization.

Consequently, the main purpose of an appraisal - that of identifying individual and organizational
performance and improvement - is forgotten.

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Benefits of Appraisal

Benefits to Organization Benefits to Employee

Identifies ways of improving competencies of Regular feedback would mean employees will be
employees. able to identify areas for improvement.
Identifies employees eligible for rewards and Timely rewards and promotions will help motivate
promotions. employees.
Effective way of formulating a human resource Development in skills due to training as a result of
plan, identifying needs of the organization and appraisal will add to employability of individuals.
whether present workforce fulfills them.
Improves communication of issues between
employees and management.

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Chapter 25: Personal Effectiveness

In this Chapter

1. Personal effectiveness techniques

a. Explain the importance of effective time management.
b. Describe the barriers to effective time management and how they may be overcome.
c. Describe the role of information technology in improving personal effectiveness.

2. Consequences of ineffectiveness at work

a. Identify the main ways in which people and teams can be ineffective at work.
b. Explain how individual or team ineffectiveness can affect organizational performance.

3. Competence frameworks and personal development

a. Describe the features of a ‘competence framework’.
b. Explain how a competence framework underpins professional development needs.
c. Explain how personal and continuous professional development can increase personal
effectiveness at work.
d. Explain the purpose and benefits of coaching, mentoring and counselling in promoting
employee effectiveness
e. Describe how a personal development plan should be formulated, implemented, monitored
and reviewed by the individual.

4. Sources of conflict and techniques for conflict resolution and referral

a. Identify situations where conflict at work can arise.
b. Describe how conflict can affect personal and organizational performance.
c. Identify ways in which conflict can be managed.

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Time Management

Definition: The term time management refers to a set of tools and techniques that are used to plan
and schedule an individual’s time. Their main aim is to increase the efficiency and effectiveness of an
individual with regard to how he uses his/her time.

When this happens a person is said to have achieved effective time management mainly because
he/she has been able to achieve more (work, activities etc.) in the same time period.

Effective Time Management

Effective time management allows an individual to:
 Eliminate or reduce amounts of wasted time;
 Better allocate his/her time (i.e. assign more time to more important tasks) leading to more work
done;
 Plan each day and week more efficiently;
 Maximize productivity and
 Impose a better sense of discipline in quality of work life

Effective Time Management: incorporates

Task Detail
1. Goals Time management cannot be effective if there are
no goals to work towards. Goals set by individuals
need to be SMART. Specific, Measurable,
Attainable, Realistic and Time-bounded.
2. Action planning There must be a written plan to achieve goals.
Action plan would include ways to achieve the
goals set out before.
3. Prioritize Tasks have to be completed one at a time,
considering the deadlines.
4. Urgency Tasks that are time pressured and important
should not be put off till the end.
5. Organization Finally, organizing tasks according to the priority
and their urgency for performance.

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Prioritization

Urgent Not Urgent

Important Quadrant 1 Quadrant 2
Not Important Quadrant 3 Quadrant 4

 Quadrant 1 Urgent and Important: These activities are important or essential to successfully achieving
your goals. And, they must be acted upon immediately. If they are postponed there will be painful
consequences.
 Quadrant 2 Important but Not Urgent: These tasks indeed are important but their deadlines are in the
future. These are dangerous because if you don’t get them done you will suffer consequences, but
they are due in the future so it’s easy to procrastinate until it’s too late.
 Quadrant 3 Urgent but Not Important: These tasks often feel urgent but because they are not
important long term, they can distract you from what is truly important. These might be chores like
cleaning your room, shopping, or cooking for a friend.
 Quadrant 4 Not Urgent and Not Important: These tasks can become a problem. They might include
social media, games, partying, and entertainment. Sure, it’s good to relax, but if you get distracted
with small unimportant details you never get to the important stuff.

Work should be adequately planned so that:

 Unforeseen events and outcomes can be dealt with accordingly without any undue pressures and
stress.
 Your work should be coordinated with the work of others in the department or organisation.
 Effective standards and benchmarks should be identified so that work can be assessed
 Tasks should be so performed that they finish on time.

Barriers to Effective Time Management

Barrier Ways to Overcome it

Meetings Time limits and preset agenda can help in keeping
Meetings involve a group of people, often discussions on track and avoiding long drawn
from different functions hence can lead to discussions.
long drawn discussions. This tends to put off
work that is due and poor time management.
Lack of Motivation Timely performance evaluation leading to rewards and
Demotivated employees tend to put off work promotions can keep employees motivated and ensure
till the end then struggles to meet deadlines. commitment to getting work done on time.
Procrastination Procrastination can be avoided by making to do lists
Individuals tend to put off work that they find and prioritizing tasks according to their urgency such
boring and monotonous till the end resulting that the closer deadline are met. Breaking down a large
in inability to meet deadlines. task into smaller achievable objectives can also help.

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Role of Information Technology in Improving Personal Effectiveness

The channel of communication has a significant influence on the effectiveness of the communication
process. Advances in technology have enhanced the number of communication tools available.

Information technology and personal effectiveness

 The effectiveness of an individual is improved by providing him or her with ready access to information
technology – computers and communications.
 Many business activities and operations are now performed by computer system. Computers improve
the speed, processing volume and accuracy of individuals using them.
 Some managers and employees are given portable/laptop computers that give them continual access
to computer technology. They can therefore work when they are out of the office, at home or when
travelling.
 Access to the internet and e-mail allow employees to communicate and obtain information at any time.
With portable computers, mobile telephones or personal organisers, they are able to communicate at
any time and from any place, by voice, or by data or image transmission.

Features of Ineffective People and Teams

Ineffective Individuals Ineffective Teams

Fail to plan properly. This leads to working Dominating/poor leadership. This will lead to lack
beyond the deadlines and making more mistakes of cohesion in team where they are either too
due to the rush. scared to discuss matters with the leader or the
leader does not provide enough guidance.
Poor at communication. Such individuals would Lack clarity. Ineffective teams lack clarity in goals
cause conflicts and breakdown of interpersonal where the team does not know what to work
relations at work. towards. They can also lack clarity in roles where
different individuals may not have clarity on what
they are supposed to do.
Lack initiative. Lack of creativity and initiative Unhealthy competition: Ineffective teams lack
would mean individuals would stick to a routine cooperation from members or the members are
or instructions without making an effort to competitive.
improve performance.
Behave unethically. Such employees to not take Lack resources: teams may also be ineffective as
into account the moral implications of decisions they may simply not have enough resources to
leading to poorly made decisions. finish a task.

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Ineffectiveness’s Impact on Organization
Ineffectiveness can have several disadvantages including:
 High absenteeism and labor turnover. Demotivated workforce will lead to irregularity in attendance
and ultimately high turnover as employees look for opportunities elsewhere.
 Conflicts and poor interpersonal relations. Employees may feel the need to shift blame on others for
not doing their job or for their errors leading to conflicts and inability to work in teams.
 Loss of quality. Organization may lose quality of products and services leading to loss of market share
and decreasing profit.
 Inability to implement and manage change. Employees may find themselves unable to change if they
are ineffective in their present role.

Competence Framework

Definition: The IFAC has defined competence as: “the ability to perform a work role to a defined
standard, with reference to real working environments”

Competency frameworks attempt to identify all the competencies that are required by anyone taking
on a particular role within the organization.

There can be several competencies associated with a position within an organization:

 Communication skills
 Interpersonal skills
 Team working skills
 Innovation and creativity
 The ability to manage people
 The ability to resolve conflicts

Personal Development

Personal development and keeping skills up to date through Continuous Professional Development can
have several advantages for employees including improving their effectiveness:
 Reduces the instances of errors hence does not slow down performance.
 Increases the quality of work hence the better performance of tasks.
 Increases motivation of employees by improving their skill bank.
 Improves employability of employees.

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Personal development can be achieved through:

Personal
Development

Mentoring Coaching Counselling

Mechanism Mentoring Coaching Counselling

Focus Career and personal Development and Performance and
development performance issues at interpersonal issues at
work work
Agenda Set by the mentee with Set by individuals with Set by individuals,
mentor guidance, coach assisting in aimed at achieving
support and experience achieving objectives. short term
sharing performance
improvement goals.
Engagement Period Ongoing relationship Relationship for a short Relationship for a short
that can last for long period. period but recurring as
periods of time. and when required
Benefits - Offers advice - Encourages people to - Observe reactions in
- Impartial sounding improve social issues.
board. performance. - Give advice on how to
- Role model - Normally a senior manage interpersonal
manager so can issues at work.
monitor - Maintain employee
performance. privacy.

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Personal Development Plan

Implementaion
Current Analysis Set Goals Action Plan
& Feedback

Stages Description
Stage 1: Current Analysis Any personal development plan has to start with the employee
analyzing his/her current areas that require improvement and the
opportunities available within and outside of the organization for
development. This can be achieved with a SWOT analysis. This will
help the employee scope out his/her weaknesses and tasks that are
not performed well.
Stage 2: Set Goals Based on weaknesses in performance identified in stage 1, goals
should be set detailing ways in which weaknesses can be removed
and performnce can be improved. The employee must exercise
caution and ensure that goals are SMART i.e. Specific, Measurable,
Attainable, Realistic and Time Bound.
Stage 4: Action Plan An action plan based on goals set should be devised with
possibilities on how goals shall be achieved, whether coaching may
help or training courses.
Stage 5: Implementation and This is the most important stage where monitoring and feedback
Feedback may help the organization in identifying whether the goals set
initially are being achieved and if adjustments should be made to
the action plan.

Conflict

Definition: Conflict arises in a situation when the interests, needs, goals or values of two or more
parties differ from each other. These parties could be individuals with different personalities,
backgrounds, values, attitudes, opinions or teams with conflicting interests, views etc.

Situations Giving Rise to Conflict

- Personalities: Often the cause of conflicts are different personality types within a function or a team.
For example two dominating persons within one team may lead to one adamant on his point of view
while the other disagrees.
- Scarce Resources: The greater the scarcity of resources, the more the competitiveness and conflicts.
There may be conflict in two departments based on who gets the higher departmental budget.
- Poor communication: One reason for conflict is poor communication leading to failure in performance
in task and ultimately conflict in employees trying to shift blame.

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- Role conflict: Conflict may arise when individuals are unsure about the roles they play within an
organization or the authority that they have. Two team leads or managers within a department may
find themselves in conflict over who gets to run which area.
- Poor leadership and control: Employees may experience a rise in conflicts when there is a clear lack
of leadership and monitoring.

Managing Conflicts

Managing interpersonal conflicts: Conflict and sources of disaffection can be managed informally in
several ways.
 Communicate: Communication, open and informal, between employees can help resolve conflict
early on. Communication should be timely so as to avoid long drawn conflicts that can lead to
deteriorated performance. This will help identify the source of problems, whether that is
personality, performance or a difference in opinion.
 Negotiate: This means exploring a range of options with employees to find a solution that suits all.
This will mean employees will have to compromise to reach a resolution. A useful method of
negotiations and compromise is a win win approach to conflict resolution:
i. Win Win Approach: when the point of view of both employees is taken into consideration
and resolution is raeched when both are accomodated. Departments in conflict over
budget for the year can be accomodating them both and equalizing budget for both.
ii. Lose lose Approach: this is where no party in the conflict gets its way. Departments fighting
over a budget could be asked to hand over finances to accounts instead that would release
funds as when required based on its own analysis. Hence no department getsi its own
budget.
iii. Win Lose Approach: this is a common approach where one party in conflict wins while the
other has to compromise. Budget may be increased for the department that directly
affects organization’s profit while the other has to make do with lower funds.
 Separate (avoid personality clashes): If personality clash is the main source of conflict, you may
have to arrange (or request) a way of dealing with the other person as little as possible.

Managing conflict in the team:

 Denial: Sweeping it under the carpet. If the conflict is very trivial, it may indeed blow over without an
issue being made on it, but if the causes are not identified the conflict may grow to unmanageable
proportions
 Suppression: Smoothing over, to preserve working relationship despite minor conflict
 Dominance: The application of power or influence to settle the conflict.
 Compromise: Bargaining, negotiating, conciliating.
 Integration: Emphasis must be put on the task, individuals must accept the need to modify their views
for its sake, and group effort must be seen to be superior to individual effort
 Encounter cooperative behavior: Common goals may be set for all teams and departments. This would
encourage cooperation and joint problem solving.

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Chapter 26: Communicating in business

In this Chapter

a. Describe methods of communication used in the organization and how they are used.

b. Explain how the type of information differs and the purposes for which it is applied at
different levels of the organization: strategic, tactical and operational.

c. List the attributes of good quality information.

d. Explain a simple communication model: sender, message, receiver, feedback, noise.

e. Explain formal and informal communication and their significance in the workplace.

f. Identify the consequences of ineffective communication.

g. Describe the attributes of effective communication.

h. Describe the barriers to effective communication and identify practical steps that may be
taken to overcome them.

i. Identify the main patterns of communication.

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Communication

Definition: Communication can be described as the transmission and receipt of information between
two or more individuals (as there must be at least two parties involved). For communication to take
place, one individual must understand what the other is communicating. This communication can take
place in either written or spoken form.

The Communication Process

Receiver
Coded
Sender Decoded
Message
Message

Stages in Communication Explanation

Model
Stage 1: Encoding Message The sender sends an encoded message in a language that both
parties understand. Message can be verbal or nonverbal in the
form of expressions, body language etc. Proper communication
mediums should be used such as memos, pictures, diagrams,
emails or meetings.
Stage 2: Decoding the message The receiver, receives and decodes the message interpreting the
message in his own way.
Stage 3: Feedback The receiver will then act on what he/she has understood from the
message giving feedback, verbal or nonverbal, to the sender.
Feedback makes communication two way so that sender has the
opportunity to know if the message was interpreted the way
sender intended it.
Stage 4: Relay Sender then understands the feedback and sends his response
back to the receiver hence making communication a cycle.

In this process, there will be noise, or distortions that tend to distort facts sent by the sender. Distractions
and interference in the environment in which communication is taking place may be physical noise
(passing traffic), technical noise (a bad telephone line), social noise (differences in the personalities of the
parties) or psychological noise (anger, frustration, tiredness).

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 Methods of Communication

Methods of
Communication

Verbal Non-Verbal
Communication Communication

Verbal Communication

Verbal communication is where spoken word is used and can take two forms:
i. Written communication
ii. Oral communication

i. Written Communication
The formats for written communication usually used in an organization are:
 Letters
 Reports
 Emails
 Quotations, proposals, forms, enquiries
 Memos
 Handbooks, bulletins, minutes, notices, circulars etc.

Written communication has several advantages for an organization as it can be useful where the
information is meant for a large group of employees especially when they are geographically dispersed.
For example an email can be used to send written information to a large group of employees that is
geographically dispersed.

Written communication also has a record that can be accessed at any time so that complex information
can be accessed and interpreted whenever employees want. Emails, memos can also be cost effective
when sending large amounts of data to a big group of employees.

ii. Oral Communication

The common formats of oral communication used in an organization are:
 Meetings and discussions
 Telephone calls
 Video conferencing
 Interviews
 Presentations and speeches

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Oral communication has several uses like the fact that it is face to face so reduces confusions and
misunderstanding since messages that are not completely conveyed through written words are
understood better with body language and expressions.

Oral communication adds a personal touch and allows interaction so that employees can seek further
clarity if message is vague. It also helps in motivating employees as a personal touch is added, this can be
used to convey a message better and encourage change.

Nonverbal Communication
Include body language and signs of disinterest or boredom within the means of communication.
Identifying and understanding body language enables the receiver of information to be better able to
understand and grasp the underlying theme in the communication or message. Nonverbal
communication provides: Examples of non-verbal indicators include:
 Facial expressions
 Gestures for example, shrugs or hand waving
 Posture
 Proximity and contact
 Movement and stillness
 Silence and sounds
 Appearance

Types of Communication

Types of
Communication

Formal Informal
Communication Communication

Vertical Horizontal Diagonal

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Formal Communication

Formal communication normally occurs between departments within an organization where there are
defined senders, receivers and a formal medium of communication used. There are departmental and
organizational policies used to guide formal communication for example a department wide daily memo,
used to remind employees of the most urgent tasks at hand. There are three channels of formal
communication:
i. Vertical Channels: involves the flow of information up and down the scalar chain; superior to
subordinate and back. Purpose of vertical communication
 To give instructions/direction
 To delegate responsibilities
 To control activities of subordinates
ii. Horizontal Channels: flows between people of the same status or position, in the same section
or department, or in different sections or departments. Horizontal communication between
equals or peers is easier and more direct than vertical communication and can be both formal and
informal. Purpose of lateral communication:
 To co-ordinate the activities of different individuals and groups
 To develop and maintain social relationships at work
iii. Diagonal Channels: They represent the way employees (holding the same rank) communicate
with employees from other departments. This communication can take place for coordination
among departments, resolving inter-departmental conflicts, problems or friction. It can also be
used for sharing inter departmental ideas and information sharing.

Informal Communication
Informal communication complements the formal system. Unofficial means of communication and
rumors within an organization is sometimes referred to as grapevine. Some features of grapevine are:
 Information flows easily and quickly through the grapevine
 Information is distributed or divulged in a selective fashion
 Grapevine usually works inside the place of work and not outside
 The grapevine is most effective when the formal system is operating effectively
 Higher level executives are better communicators and better informed than lower level staff.

Qualities of Information
Effective communication should lead to good quality information being distributed amongst employees.
Attributes of good quality information are:
 Timely – the speed of communication must be linked to the urgency of the issue being communicated.
A report that a machine is out of action is of little use if it is delayed for hours or days, as it will increase
the amount of production time lost.
 Accurate and complete – any information in the communication should be factually correct and all
relevant facts should be stated to avoid wrong conclusions being drawn.
 Relevant – the message should not be excessive in volume as this will overload the receiver. For
example, managers higher up the chain of command may not need data that is too detailed.
 Directed to the right people – care must be taken not to send information to the wrong people. This
could cause confusion or even loss of confidentiality of sensitive information.
 Understandable – care must be taken with the presentation of the information, so that all recipients
will be able to comprehend its meaning.

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 Cost effective – as far as possible, the communication must be achieved at a reasonable cost to the
organization.

Barriers to Communication

Barriers Practical Resolutions

The sender of information might use technical Keeping the knowledge level and department of
words (‘jargon’) that the recipient does not the recipient in mind should solve this problem.
understand. For example, accountants might talk This would help in sender avoiding jargon that the
to non-accountants in technical terms that the recipient may not understand.
non-accountant does not understand.
There may be technical ‘noise’, such as a Avoiding information passing through a lot of
breakdown in the communication system itself channels may help in reducing noise and
distortion.
The recipient of the information might Information should be clear and detailed in order
misunderstand the message. The sender of the to reduce confusions. This can be ensured by using
message might get the information wrong. the correct medium for example meetings should
be used where the data is complex while
straightforward information can be emailed.
Personal differences can cause breakdown in This can be managed by timely identification of
communication where different personality types problem and conflict management techniques like
may lead to problems in communication. compromise or negotiations.
Difference in the status of the sender and receiver Open communication channels and lines may help
may also be a problem where subordinates may resolve problems. Management may set aside a
not feel comfortable giving feedback to their specific time every day to ensure all employees
managers. can voice concerns.

Consequences of Ineffective Communication

Breakdowns in communication can lead to several issues like:
 A break down in top down communication may lead to confusions in employees as information
may not be sent accurately to subordinates thus leading to confusions.
 A breakdown in top down communication may also lead to demotivated workforce as they would
not understand what to do.
 Ineffective upward communication may lead to lack of acknowledgement of employee issues by
management leading to higher turnover.
 Lack of upward communication may also lead to conflicts as management may not be aware of
issues early on.
 Lack of diagonal communication will lead to lack of coordination between departments.
 Ineffective diagonal communication may also lead to lack of commitment towards organizational
goals.

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Patterns of Communication
There are different patterns of communication:
 Chain
 Wheel
 "Y" network
 Circle

The chain, wheel and Y systems of communication system are found in many formal organisation
structures. The speed and effectiveness of communication in each of these patterns depends on the
communication abilities of particular individuals in the system.
 A chain communication structure is likely to be slow and inefficient. In the diagram above, the ability
of the sender to get a message to the final recipient depends on the efficiency and competence of
employees in between. This is because a message must go through them before it can get from the
sender to receiver.
 A wheel structure is a much quicker way to send a message, because all messages go directly to or from
the person at the centre. In the diagram above, sender can send a message to everyone. For one
employee to get a message to another, it must go through the sender, but there are only two stages in
the communication of the message
 The speed of sending messages, and the effectiveness of communication, in a Y structure depends on
the length of the chain or ‘stem’ of the Y pattern. In the diagram above, the chain in the stem of the Y
consists of just three individuals, C, D and E. However, this chain could be much longer.
 Similarly, the speed and efficiency of a circle network depends on the number of people in the circle.
When there are many people in the circle, it can be a very long time before an item of information
reaches everyone.
 An all-channel system of communication is the quickest and most efficient, but it is not suitable for a
formal communication structure in a formal hierarchical organization structure.

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Chapter 27: Fundamental principles of ethical behavior
In this Chapter

a. Define business ethics and explain the importance of ethics to the organization and to the
individual.
b. Describe and demonstrate the following principles from the IFAC (IESBA) code of ethics, using
examples.
i. Integrity
ii. Objectivity
iii. Professional competence
iv. Confidentiality
v. Professional behavior
c. Describe organizational values which promote ethical behavior using examples.
i. Openness
ii. Trust
iii. Honesty
iv. Respect
v. Empowerment
vi. Accountability
d. Explain the concept of acting in the public interest.

2. The role of regulatory and professional bodies in promoting ethical and professional standards
in the accountancy profession
a. Recognize the purpose of international and organizational codes of ethics and codes of
conduct, IFAC (IESBA), ACCA etc.
b. Describe how professional bodies and regulators promote ethical awareness and prevent or
punish illegal or unethical behavior.
c. Identify the factors that distinguish a profession from other types of occupation.
d. Explain the role of the accountant in promoting ethical behavior.
e. Recognize when and to whom illegal, or unethical conduct by anyone within or connected to
the organization should be reported

3. Corporate codes of ethics

a. Define corporate codes of ethics.
b. Describe the typical contents of a corporate code of ethics.
c. Explain the benefits of a corporate code of ethics to the organization and its employees.

4. Ethical conflicts and dilemmas

a. Describe situations where ethical conflicts can arise.
b. Identify the main threats to ethical behavior.
c. Outline situations at work where ethical dilemmas may be faced.
d. List the main safeguards against ethical threats and dilemmas.

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Ethics

Definition: Ethics is concerned with what society considers to be right or wrong. It therefore relates
to standards of behaviour.

Business ethics can be defined as the branch of ethics that examines rules and principles within a
commercial context.

Importance of Ethics
Being ethically conscious and taking decisions that reflect moral behavior of an organization may have
several advantages like:
 Ethical decisions can enhance business reputation thus encouraging investors to invest in company
shares.
 Businesses that are ethically responsible can see a shift in reputation in the long run ensuring ling
term survival of the organization.
 Customers prefer businesses that are ethically responsible and buy more from them hence increasing
revenue.
 Satisfied stakeholders will lead to higher profitability of a business as hindrances are removed from a
business’s operations.

Approaches to Ethics

Ethical behavior may be defined in terms of duties. Many philosophers have argued that certain core
duties are imperatives, and as such will always apply, regardless of circumstances.

1. Absolutists (or dogmatists) admit no exceptions, as these duties are believed to be sacrosanct. They
often have their foundations in religion or deeply embedded values, universally accepted by society.
The most common examples are the duties not to kill and to always tell the truth. This approach to
ethics is sometimes called the deontological approach (from the Greek word ‘deon’, meaning ‘duty’).
2. Relativists (or pragmatists) accept that duties are important but are prepared to admit exceptions.
For example, they may argue that it is right to kill if the cause is just, or to tell a lie if the purpose is
noble. So if a frail and terminally ill loved one asks ‘Am I dying?’, it may sometimes be right to lie.
3. Ethical behavior may also be defined in terms of consequences. This is sometimes referred to as the
teleological approach (from the Greek word ‘telos’, meaning ‘the end’). Here, the right course of
action is that which will result in the most acceptable outcome. Most acceptable to whom? This is
dependent on the ethical stance of those who determine what an acceptable outcome is.
4. Utilitarians regard the right course of action as that which will benefit the majority, or serve the
‘greater good’. In doing so, the ethical decision may disregard any impact on the minority, believing
that they should defer to the greater needs and influence of the majority.
5. On the other hand, pluralists pursue consensus in order to accommodate the needs of both the
majority and the minority.
6. Finally, egoists favour courses of action that are right for them. This last, seemingly selfish approach
to right and wrong was supported by Adam Smith, the 18th century UK economist, who suggested
that pursuit of self-interest is often a catalyst for the creation of prosperity through entrepreneurial
innovation and risk taking.

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A practical application of these concepts may be considered in relation to the conflicting views on the use
of mobile telephones on commuter trains. Should railway users be denied the right to use their mobile
telephones while travelling on trains? If one assumes that the majority will tolerate constantly ringing
telephones and loud conversations during a railway journey:
 the utilitarian will propose that mobile telephones are acceptable to most commuters, so the
minority will have to put up with them
 the pluralist accommodates both groups by setting aside a limited number of ‘quiet’ carriages in
which mobile telephones cannot be used
 the egoist decides on the course of action that is most desirable for him, which may in turn be
based on profit motive or personal belief.

Implications of Ethical Approaches in an Organization

Using the duty-based and consequentialist-based approaches to ethical decisions may result in different
potential outcomes. Consider the case of a highly successful and dynamic chief executive officer who has
been caught up in a scandal relating to his personal life, reported widely in the national newspapers and
on television, with resultant embarrassment to his organization. Should he resign? The duty-based
approach may suggest that, as a senior executive, he should adopt high moral standards in and out of
work, and because he has failed to meet those standards, he should resign. The consequentialist may
agree, stating that by not resigning it will result in damage to the reputation of the organization as long
as he remains in office. However, the consequentialist may also disagree, arguing that by resigning the
chief executive officer deprives the organization of his knowledge, skill and experience, which will result
in a lack of leadership and direction, at least in the short term. This argument may be reinforced by the
view that, in future, other organizations may choose to accept resignations on the same basis, even
though the individual’s personal life should have nothing to do with his work.

Organizational Values and Ethics

It is not adequate to simply identify and articulate the above principles. In order to put them into practice,
organizations must adopt values that will promote adherence to the principles, thereby maintaining the
confidence of stakeholders. Accountants have to recognize that their duties are not limited to what clients
expect of them, and must accept that they have a fiduciary duty, or duty of absolute trust, to a wide range
of stakeholders. The following table sets out additional values that should be adopted.

Value Meaning
Openness Being full and complete in the provision and disclosure of
information and reasoning behind decisions
Trust Relying on the judgments and information provided by other
professionals, and embracing values that encourage others to rely
on our judgments
Honesty Not only telling the truth, but being prepared to give complete
information on which others can fully depend
Respect Treating others with dignity and adopting a professional manner
Empowerment Ensuring that those who are entrusted with responsibilities have
the authority to carry out the tasks necessary to fulfil their duties
Accountability Taking full responsibility for the outcomes of our work, including
work carried out on our behalf by others

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Corporate Code of Ethics
Corporate codes of ethics are published by private sector organisations in order to communicate their
values and beliefs to stakeholders. These include:
 customers, whose buying decisions may be influenced by ethical considerations
 shareholders, whose investment decisions may be influenced by ethical factors
 employees, who have to know the standards expected of them
 suppliers, who need to understand the expectations of their customers and also that they will be
treated ethically during the course of the commercial relationship
 lobby groups, who may have specific interests in certain practices of the organisation
 the community in which the organisation is situated, which may seek reassurance that the
organisation will act in its interest as an employer and as a good ‘corporate citizen’.

Contents of Corporate Code of Ethics

Commitment Content
Core Principles These should refer not only to its commercial objectives but the
manner in which they will be pursued. For example, they may state
social and environmental commitments as well as best practices that
will be adopted
Financing How share and loan capital will be raised. This must also allude to how
the organization will deal with providers of share and loan capital,
confirming that its published statements will be honest
Customers Customers may refer to the statement in order to confirm the
minimum standards that can be expected from their purchases,
especially in terms of benefits to be derived from the products and
services. They may also be interested in matters such as customer
service and distribution channels, supply chain policies (such as
‘Fairtrade’ commitments, organic ingredients, and so on) and animal
testing
Suppliers The code may refer to how suppliers will be chosen and the standards
to which they must adhere. It may also set down the terms of business
on which suppliers are engaged
Employees The code should confirm employment practices in relation to
engagement of workers, including equal opportunities and diversity,
working conditions and how employees will be developed
Community Organizations bring value to the community by providing
employment and generating income, but may also have adverse
effects through traffic congestion, emissions and even
unemployment if the company decides to downsize or relocate. The
code may provide assurances in respect of such factors
Lobby Groups Lobby groups express specific concerns relating to factors such as raw
materials, working conditions and environmental impact. The code
may address such issues by stating broad policies

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Professional Ethics
In common with other major accountancy bodies, ACCA publishes a Code of Ethics and Conduct, as well
as a non-examined, online Ethics and Professional Skills module. Both are available on its website (see
'Related links'). All ACCA members are bound by the provisions of this code, so it is not only desirable but
essential reading. The ACCA Code also defines fundamental principles. It elaborates on the principles
discussed earlier in the article as follows:
 Integrity – ‘Members should be straightforward and honest in all professional and business
relationships.’ The ACCA Rulebook (and the IFAC Code of Ethics) goes on to state that integrity
implies not merely honesty, but fair dealing and truthfulness.
 Objectivity – ‘Members should not allow bias, conflicts of interest or undue influence of others to
override professional or business judgments.’
 Professional competence and due care – ‘Members have a continuing duty to maintain
professional knowledge and skill at a level required to ensure that a client or employer receives
competent professional service based on current developments in practice, legislation and
techniques. Members should act diligently and in accordance with applicable technical and
professional standards when providing professional services.’
 Confidentiality – ‘Members should respect the confidentiality of information acquired as a result
of professional and business relationships and should not disclose any such information to third
parties without proper and specific authority, or unless there is a legal or professional right or
duty to disclose. Confidential information acquired as a result of professional and business
relationships should not be used for the personal advantage of m embers or third parties. ’
 Professional behavior– ‘Members should comply with relevant laws and regulations and should
avoid any action that discredits the profession.’ The ACCA Rulebook goes further, and states that
members should behave with courtesy and consideration towards all with whom they come into
contact in a professional capacity.

The Code then goes on to elaborate on specific responsibilities in relation to many aspects of practice,
including money laundering, whistleblowing responsibilities, advertising and publicity, the descriptions of
members and firms, changes in professional appointments, legal ownership and access to books and other
documents, professional liabilities and clients’ monies.

The Role of Regulatory and Professional Bodies

Ethical behavior can be promoted, or even enforced, in several ways. If specific unethical practices are
considered to be widespread and detrimental to the public at large, a national government or supra-
national authority may take action to curtail such practices by making them illegal. The most obvious
examples are discrimination in the workplace and selling high interest consumer loans to vulnerable
people. Many governments have outlawed various forms of discrimination by passing national legislation
and have introduced disclosure requirements at pre-application stage when personal borrowers are
considering taking out loans that many not be in their best interests.

Professional Bodies: It is not possible to legislate on every matter of concern, however, so professional
bodies have a vital role to play in controlling unethical behaviour. Professions are characterised by offering
specialist services that are underpinned by certain minimum educational standards. Unfortunately,
although it is possible to teach ethics, this does not ensure that those who learn about it will necessarily
become ethical as a result. For this reason, most professional bodies set ethical standards to which all
their members are expected to adhere. Failure to do so may result in censure or even removal from
membership.

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IFAC-International Federation of Accountants: The accountancy profession has to consider ethical issues
not only nationally but also in a global context. It is in this regard that IFAC has a role to play. IFAC is a
global representative body for accountants, with 164 members and associates from 125 countries. It
develops international standards on ethics, auditing and assurance, education and public sector
accounting standards. Under the auspices of IFAC, the International Ethics Standards Board for
Accountants (IESBA) develops ethical standards and guidelines. In turn, the work of IESBA is overseen by
the Public Interest Oversight Board.

Ethical Conflicts and Dilemmas

As the number of human interactions in business is infinite, it follows that professional accountants will
be faced with conflicts of interest and ethical dilemmas that they have to address.

Sources of Conflicts
Conflicts of interest arise from various sources. The accountant may be asked to:
 take a decision on a matter in which the individual has a personal involvement, such as where the
accountant has a family or personal relationship with the client
 advise a company that is in direct competition with an existing client
 support two clients who are in competition with one another.

The ACCA Code provides clear guidance on conflicts of interest. It states that members should not accept
engagements in which such conflicts arise, or even where there is a possibility of such conflicts arising.
Members should evaluate the threats arising from conflicts and apply relevant safeguards against the
threats materializing. If in doubt, the accountant should disclose the conflict to relevant parties.

Ethical Dilemmas
Ethical dilemmas arise when the accountant has to consider two or more seemingly incompatible ethical
obligations. For example:
 he may be asked by a manager to remain silent about certain matters that would have an adverse
impact on the financial accounts of an organization, thereby testing the accountant’s loyalty to
his manager on the one hand, and his responsibilities as a professional accountant on the other
 he may consider that the policies of his employer are unethical and may find it difficult to reconcile
personal values with those of the organization.
 he may be advising a longstanding client who is also a personal friend, only to discover that one
of the client’s family is behaving dishonestly, thereby playing the bond of friendship against the
professional duty to give objective, truthful advice.

Resolution of Ethical Dilemmas

The IFAC Code offers a framework through which ethical dilemmas may be addressed. When faced with
ethical conflicts, the decision taker should consider:
 the facts of the situation
 the ethical principles involved
 related fundamental principles
 relevant internal procedures
 the alternative courses of action
 consequences of each alternative course of action.

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