HAPTER

ORGANISATIONS
1. Organisations
Introduction
Chances are, you used Google today. The search engine is part of our everyday lives.
But have you ever wondered who runs this organisation? How do they make
decisions? To whom are they accountable?

Well, Google is just an organisation of people, like any other. An organisation is a

group of people that are organised and managed in a way that aims to follow a
unified goal or need. All types of businesses follow a structure that is controlled by
management, who determine how the business performs in particular activities and
the key roles and responsibilities of its members. These are types of business
organisations. For example, Google is part of a bigger company called Alphabet,
with each division having its own unique focus. Within the Google division, there is a
group of people working together towards their goal of “organising the world's
information”.

It is vital to note that, in most companies, especially large ones like Google, there is a
separation of ownership and management. This is the idea that owners,
(shareholders) are separate from those who manage day-to-day operations
(managers). The shareholders do not typically involve themselves in operations, and
this can cause conflicts of interest when the shareholders want different things to the
managers.

What about smaller companies, though? For example, if Fred starts freelancing as a
painter and decorator, he will have to do everything, from painting to marketing to
accounting. If he takes on an assistant to manage his social media pages or hires an
accountant, he will have an organisation. The more people Fred takes on, the more

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things he will need to organise! He may even need to change the structure and legal
status of his organisation to manage and account for its growth and activities.

In this chapter, we’ll explore what organisations are and how they work. So let’s get
started!

2. Types of organisation
We said that Google was an organisation like any other. But actually, not all
organisations are created equally. The economy of a country can generally be split
into two sectors: the private sector and the public sector. Within these sectors,
organisations can be profit-seeking or not-for-profit.

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Profit-seeking organisations – commercial

companies
As the name suggests, the primary objective of profit-seeking organisations is to
maximise returns for owners or shareholders. For example, Saudi Aramco is a
profit-seeking organisation within the public sector. It is a state-owned oil company
in Saudi Arabia which is one of the most profitable companies in the world.

Profit-seeking organisations can be further split into two main groups;

unincorporated and incorporated.

Unincorporated organisations
In unincorporated organisations, the business owners and the business itself
hold the same legal identity. For example, if Fred Smith becomes self-employed as
a painter and decorator, he may decide not to incorporate and simply do business as
Fred Smith. It certainly keeps things simple!

But there's a catch. Not incorporating means that the owners are held personally
responsible for the debts the business activity may incur. Therefore, they are
considered to have unlimited liability for the business’s debts.

The two main types of ownership in this category are:

• Sole trader – One sole owner of the business (wholly liable for debts)

• Partnership – A collection of owners working together ( jointly liable for

debts)

Imagine that Fred and some friends pooled together their savings and took out a
loan at a bank in order to start an unincorporated partnership. If things go badly for
them (which hopefully they won't!), then they would not only lose their combined
savings but would also have to repay any debts to lenders (such as the bank and any
suppliers). This is what we mean by an unlimited liability.

To help Fred and his friends avoid such a sticky situation, they can become
incorporated...

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Incorporated organisations
To protect their personal finances, the business owners may decide to create a
separate legal identity for their business. This means that the owners are not held
personally responsible for the debts the company may incur. Therefore, they are
considered to have limited liability for the business’s debts.

The two main types of ownership in this category are:

• Private limited companies (Ltd) - In a private limited company, shares

cannot be issued to the public. These are often smaller companies, such as a
market town retailer. However, larger companies looking to retain a high
degree of control sometimes stay private (e.g. Walkers Snack Foods Ltd or
Virgin Group Ltd). By choosing to stay private, they don't have to report to a
large number of shareholders. They still have to publish their finances to
companies, though!

• Public limited companies (PLC) - In a PLC, shares can be issued to the

public. Usually, larger companies go public when they wish to increase
funding for business ventures through a public share offering, for example,
Tesco PLC and British Airways PLC. However, the owners risk losing control
by selling stakes to the public. They must also comply with additional
regulations when trading publicly.

So, looking back at our last example, if Fred and his friends had set up an
incorporated business instead of an unincorporated partnership, they would still lose
their initial investment (their pooled savings), but they would not be personally
responsible for repaying the company's debts. Now, that is an important difference in
the business world, and Fred's friends are more secure knowing they can still pay
their mortgages even if the company fails!

Cooperatives
A cooperative is an organisation which is owned and controlled by the
members, rather than by shareholders. Those members could be staff, such as with
the John Lewis Partnership, or customers as with The Cooperative Group. While
profits are important, the welfare of members is also a key goal.

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Not-for-profit organisations
Now, on the other side of the fence, we have not-for-profit organisations (or non-
profits). As the name suggests, non-profits do not set out to make a profit for
their owners.

Like profit-seeking companies, non-profits aim to operate efficiently and to be

cost-effective. Not-for-profit organisations include trade unions, charities, clubs,
societies and educational establishments. Not-for-profit organisations can exist in
both the public and private sector.

Public sector
Public sector not-for-profit organisations are owned by the state and are
responsible to the government for their business activities. These organisations can
be in the form of a state-owned industry, which can also be profit-seeking, as
we saw earlier with Saudi Aramco, or a government-run department, e.g. the NHS
in the UK and the Peace Corps in the US.

Private sector – Non-governmental organisations (NGOs)

Private sector not-for-profit organisations have a similar structure to profit-seeking
companies in that they are owned by investors and responsible to the
shareholders/owners. However, their goals and objectives do not focus on
profit maximisation. Instead, they focus on other goals, such as ethical standards
and service delivery. For example, Oxfam and The Make-A-Wish Foundation. These
organisations are called non-governmental organisations (NGOs).

3. Stakeholders
Do you have shares in Google? Well, you might have! But even if you do not stand to
gain financially from Google's business activities, you still have an interest, or a stake,
in how the company operates. This is because you probably use its services every
day. If Google went out of business, your life would be more difficult. This makes you,
as a customer, a stakeholder in Google.

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What are stakeholders?

Stakeholders are any parties that can affect or be affected by an organisation's
strategy and policies.

Let’s imagine a publicly funded school. Who would the stakeholders be? Well, we
would probably quickly come up with a list that included:

• Teachers

• Pupils

• The pupils’ parents and families

• The administrative staff

• The local education authority

All these groups can clearly affect or be affected by the school’s strategy and policies.

So would this be it? No!

Stakeholders would also include:

• Teachers’ unions – Who could organise a strike if they didn’t agree with the
school’s policies

• Local businesses – Who may offer work experience or internships to pupils

• The wider community – House prices may be affected by a school with a

great reputation - or a bad one!

• The local council – Who will run other services for pupils that will require
collaboration with the school

• Other local schools - Who may be competitors, trying to achieve better

results to attract more pupils

• Local media – Who will report, favourably or unfavourably on incidents at the

school

• Exam boards – Schools must hold exams based on the rules of the exam
boards they choose to use

• The government – Decides how much of the national budget goes towards
education

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So there we go: a list with many more stakeholders than you may have first thought
of. However, this is still not an exhaustive list, and our brief examples of how they
may affect/be affected by the school are also not the only ones!

Classifying stakeholders
To make informed decisions and policies regarding all the business's stakeholders, it
is crucial that an organisation classifies its stakeholders into various groups. This
can be done in a number of ways; for example, the organisation can determine
whether a stakeholder is internal, external or connected.

The ICE mnemonic can be a useful way to remember these.

Stakeholders and objectives

Organisational objectives should always be considered in relation to the
objectives of different stakeholders. This ensures that a wide range of needs are
considered in the objective-setting process and balanced objectives are produced.

Bob owns a chain of cafés and is the sole director and the sole shareholder in his
business, so he can just go ahead and do what he wants, right? Wrong!

For any new objective to be a success, Bob will still need to get the support of other
internal stakeholders; his employees must be fully behind the plan, especially any
that will go on to implement the new objective.

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He will also need to get buy-in (this just a management term that means a
commitment to a decision) from some external stakeholders.

Let’s say Bob wants to open a new café. His suppliers will need to be able to scale up
production to meet his increased demand. He will definitely need to get buy-in from
his bank if he needs to borrow funds. He'll also want to get buy-in from his
customers. Will they accept a new café in a new location?

Lastly, he may need to get permission from connected stakeholders, (those closely
linked to an organisation such as a shareholder or customer). In this case, it
could be a local council. He may ask permission to open in certain
neighbourhoods and, depending on where he plans to open, he may need to consult
with local residents and traders.

You can quickly see how an objection or obstruction from any of these stakeholders
could alter Bob's plans.

What do stakeholders need?

So, we’ve seen that organisations have a range of stakeholders with varying needs.
Let’s examine the most common ones:

Category Stakeholder Needs of stakeholder

Directors Pay, bonus, overall performance, job security

Internal

Employees Pay, bonus, personal performance, job security

Shareholders Share price growth, dividend payments

Customers Prices, quality, delivery times, assured supply

Connected
Suppliers Assured custom, high prices

Financiers Interest payments, ability to pay back loans

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Category Stakeholder Needs of stakeholder

Government Tax, law, wealth of nation

Pressure Environment or other ethical issues, pricing, etc.

groups
External
Local Employment, nice place to live, property value
community

Wider Environment, local jobs, etc.

community

Exercise
Spend some time examining who you think the stakeholders for a low-cost airline
(such as Ryanair) would be.

As you do so, consider what those stakeholders’ interests are.

Once you’ve finished, take a look through our list and see if there are any you missed.

Solution
Ryanair’s stakeholders would include:

Stakeholder Explanation

As of 2019, Michael O’Leary was the Chief Executive Officer of

CEO Ryanair and also had a significant amount of shares. As a result,
O’Leary could both affect and be affected by Ryanair’s strategy
and policies.

Irish Air provided a loan and equity to Ryanair in return for shares.
As a shareholder, it would be interested in the performance of the
Funders (e.g.
company, which can be affected by the organisation’s strategy
Irish Air)
and policies. Also, as a shareholder, it will have voting rights which
could shape the strategy and policies of Ryanair.

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Stakeholder Explanation

Some of Ryanair’s employees in certain countries, such as England

Trade and Italy, are eligible to join a union if they wish. Trade unions are
Unions able to affect the policies and strategy of Ryanair by taking strike
action if they feel the strategy and policies of Ryanair are affecting
their members unfairly.

Employees of any business can obviously be affected by an

Employees organisation’s strategy and policies. Of course, depending on the
position they occupy in the organisation, they can also affect the
organisation itself.

How are airports stakeholders? Well, they are really interested in

the strategy and policies of Ryanair because, if Ryanair flies to
Airports
them it, will bring lots of revenue to the airports, both from
Ryanair directly and from their passengers spending money in the
airport shops and restaurants.

Ryanair will have a multitude of different suppliers, from on-board

food suppliers to the manufacturers or lessors of planes. All of
Suppliers
them will be affected by Ryanair’s strategy and policies. After all,
what if Ryanair decided to use a competitor or double the
number of planes?

Competitors too will be affected by Ryanair’s strategy and policy

Competitors
choices. For example, if Ryanair changed its pricing structure, its
low-cost competitors would have to respond and vice versa.

And let’s not forget Ryanair’s customers! If they chose not to use
Ryanair any more, they would dramatically affect Ryanair’s
revenue, strategies and policies! Let’s imagine that Ryanair, a low-
cost airline, decided to change its policy to become a more
Customers
expensive airline, offering its customers more extras. It may lose
its existing customer base but possibly gain a new one.

This is an extreme example, but it demonstrates what an

important group of stakeholders customers are!

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This is not an exhaustive list of all of Ryanair’s stakeholders, but hopefully it

demonstrates the wide array of different individuals and groups that have to be
considered when setting a strategy.

Stakeholder power

Power
If stakeholders are characterised as having power, it means they are able to
influence and affect the organisation.

The degree to which stakeholder needs are considered as part of the objective-
setting process depends on the level of power they have to impact the
organisation and its results. The needs of powerful groups will tend to be prioritised.

For example, large customers (those who can buy in large quantities, e.g. companies)
have significant power as things like products, prices, location of production facilities,
etc. may be impacted by their needs. Small customers (those who buy in smaller
quantities, e.g. individuals) have far less power, so less consideration will be paid to
their individual needs.

So, who would have the power at a school? Well, the teachers in senior roles have the
ability to affect the policies of the school due to their position, as does the board of
governors who would decide the strategic direction of the school.

In contrast, a stakeholder who wouldn’t have much power would be a dinner lady.
This is because dinner ladies only work for the school on a part-time basis, and their
limited role means they would be unable to affect any policy or strategy changes.

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4. Stakeholder mapping (Mendelow’s

Matrix)

Mendelow's Matrix helps to identify the relationships that should be built with
different stakeholders. A stakeholder's position in the matrix depends on two
factors:

Power: The power to influence the organisation and affect its decision-making.

Interest: The interest which the stakeholder has in the organisation. The greater
the interest in the organisation, the greater the level of communication that will be
required with them. Many employees have little power, but good communication of
plans is important to retain their loyalty and motivation.

Each stakeholder is categorised depending on each factor and then treated

differently depending on where they are in the matrix.

Minimal effort
These stakeholders have a low interest in the business and low power. For
example, a member of the local community isn’t interested in the business, its
policies, procedures or long-term strategy, so they have no influence.

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With these stakeholders, the company will give them basic information to meet
their needs but do little else. A member of the local community might, for instance,
be informed if the company were doing building works that might affect them.

Keep informed
Stakeholders in the keep informed box have high interest but low power. For
example, a full-time employee. They are interested in the policies, procedures and
pay as that affects them day-to-day. Strategic changes that affect them are also of
concern. An employee will be very concerned with a redundancy programme or if the
business were going to close. However, ultimately, an individual member of staff has
little power. Should they threaten to leave, the company would probably just wave
goodbye to them and employ someone else!

With these stakeholders, the company should regularly communicate with them,
particularly in the things they are interested in. This helps retain good
relationships and avoids them seeking to increase power (e.g. through staff grouping
together in a union).

Keep satisfied
Stakeholders in the keep satisfied box have high power but low interest. For
example, the government can impose rules, laws and taxes on the company so has
very high power, but it is not usually interested in the running of most businesses.

To avoid them exercising their power, they should be kept satisfied. For example,
with the government, by abiding by the law and paying taxes on time. As they usually
have little interest, only necessary information is given to them (e.g. profit
information to the government to help assess the tax payable).

Key players (Keep close)

Key players are both interested in the company and have high power. For
example, the CEO who is interested in getting a good salary and can exercise power
through voting in director meetings.

Key players should be kept close. Regular communication is maintained, and their
goals and objectives included as part of the strategy-setting process and
business approach.

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Example
For Bob's chain of cafés, some examples could include:

Let's say Bob is concerned that one of the cafés might be overstaffed. He is
proposing to make one full-time employee redundant. The employees are all
outraged. They don't want to be the one who is made redundant and feel that, with
one less employee, the shop will actually be understaffed. This is an example of a
stakeholder conflict.

It is crucial that an organisation realises its stakeholders have different sets of

needs and expectations. These needs and expectations may result in conflict.
Therefore, it is critical to consider varying stakeholder needs when making
decisions and to resolve conflicts wherever possible.

Cyert and March

Cyert and March proposed four ways in which a company can look to resolve
stakeholder conflict:

Satisficing
A mix of “satisfying” and “sacrificing”, this means holding negotiations between key
stakeholder groups and arriving at an acceptable compromise. For example, Bob

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and the employees meet and decide to reduce all employees' hours, instead of
making a redundancy.

Sequential attention
This involves taking turns focusing on the needs of different stakeholder groups.
For example, an employee is not made redundant, but the agreement is that the next
time any redundancies need to be made in the chain, it will be from this café. The
idea is that the needs of the employees are met this time, but next time, a different
stakeholder's needs will be met - namely Bob.

Side payments
When a stakeholder's needs cannot be met initially, they are compensated in
some way as a compromise. For example, one employee is made redundant but is
given a larger than expected redundancy package.

Exercise of power
When a compromise or action cannot be agreed upon, it is resolved by a senior
figure who exercises their power to force through a decision. For example, Bob
decides that the redundancy is the best option and pushes through the decision.

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Stakeholders and not-for-profit organisations

In a profit-seeking organisation, the shareholders will be the key stakeholders.
However, in a not-for-profit organisation, other stakeholders will be more
important. Due to the competing needs of a variety of stakeholders, the
organisation must manage expectations and balance demands.

Stakeholders in not-for-profit companies exercise influence in the following

ways:

• Objectives and goals – Without the need for objectives based on profit, goals
and objectives may vary depending on stakeholder influence. For example,
charitable donors may require objectives based on the delivery of funds to
beneficiaries rather than the money being spent on administration.

• Strategies – In terms of how the company operates as a whole, profitability

will again not be a key strategy. However, there may be a focus on efficiency
and effectiveness of service and also compliance with ethical standards.

• Management style and practice – How staff are treated is likely to be of

critical importance as many are working in not-for-profits for minimum wage
or as volunteers. There may be an impetus to manage with an open and
democratic style with few levels of hierarchy.

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6. Change in organisations
The rate at which change happens in the world is accelerating. We can see
evidence of this change all around, especially in the way that technology is
becoming more integrated into our live. Next time you’re in a public place, take a
look around to see just how many people are using some form of technology. It’s
almost guaranteed that you’ll see someone on a mobile phone! Yet only a few
decades ago, very few people had mobile phones or a personal computer.

We can see evidence of the increasing rate of change in business, with the number of
patents filed to protect intellectual property increasing, and the average life-span of
products decreasing. Change is becoming an everyday reality of an organisation, and
in this increasingly volatile environment, organisations are having to adapt the
way they do business.

Some key factors of change which are forcing organisations to adapt are:

• Changing technology – The key driver of the changes we are experiencing is

thought to be the increasingly rapid rate of technological change, unparalleled

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in recent history. Organisations are having to adapt to emerging technologies,

with capabilities that allow them to take over routine tasks, such as data entry,
and carry out new tasks which have never been possible before, such as the
analysis of massive data sets.

• Changing levels of competition – Organisations are also having to deal with

rapid changes to the levels of competition, with new entrants entering the
market seemingly out of nowhere or causing disruption to whole industries.
For example, the ride-sharing company Uber quickly established itself and
grew rapidly in cities across the world, causing massive disruption to the taxi
industry.

• Growing collaborative consumption – This is the growing popularity of

sharing of goods and services, which is causing disruption to their respective
industries. A good example is Airbnb, in which owners rent out their private
accommodation to others, which is causing disruption to the hotel industry.
This is creating new business models which existing competitors are having to
adapt to.

• Changes to customer expectations – A number of factors are changing what

a customer expects from an organisation and its products. For example, with
faster communication channels, enabled by social media and improvements in
technology, consumers now expect speedier customer service and greater
efficiency from an organisation. Organisations are having to adapt to ensure
that they are fulfilling changing customer needs.

• Less customer loyalty – With greater access to information, through the

development of the Internet and mobile technologies such as smartphones,
combined with a more competitive market, businesses are finding that
consumers are no longer loyal to a particular brand. Consumers are more
likely to “shop around”, and studies have shown that over 80% of customers
will research a product online before buying it.

• Globalisation – Economies and cultures are becoming more integrated with

one another through interconnected networks, such as trade, and the spread
of technology and media. It is getting easier for businesses to source supplies
from other countries and sell their products to foreign markets.

Changes to roles in the finance function

In line with how organisations are adapting to change, the roles of business
professionals are evolving, and the roles of those working in the finance function
are evolving.

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You will come across the term “finance function” a lot, but, for now, to understand
this last point, you just need to know that the finance function is the part of the
organisation which controls and manages anything related to finance. As wider
changes happen to the organisation, so the finance function has to change, too.

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