CIMA. Paper E1. Organisational Management. Study Text

Transcription

1 CIMA Paper E1 Organisational Management Study Text

2 Published by: Kaplan Publishing UK Unit 2 The Business Centre, Molly Millars Lane, Wokingham, Berkshire RG41 2QZ Copyright 2015 Kaplan Financial Limited. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the publisher. Acknowledgements We are grateful to the CIMA for permission to reproduce past examination questions. The answers to CIMA Exams have been prepared by Kaplan Publishing, except in the case of the CIMA November 2010 and subsequent CIMA Exam answers where the official CIMA answers have been reproduced. Notice The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials. Kaplan is not responsible for the content of external websites. The inclusion of a link to a third party website in this text should not be taken as an endorsement. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library. ISBN: Printed and bound in Great Britain. ii

3 Contents Page Chapter 1 The different purposes of organisations 1 Chapter 2 Organisational structure 25 Chapter 3 Governance, regulation, ethics and corporate social responsibility 67 Chapter 4 The purpose of the finance function 111 Chapter 5 Chapter 6 Chapter 7 The contemporary transformation of the finance function The purpose and management of the technology and information function Emerging IS trends and their role in supporting organisational strategy and operations Chapter 8 The purpose of the operations function 229 Chapter 9 Tools and techniques of operations management 261 Chapter 10 Introduction to marketing 307 Chapter 11 The market planning process and the marketing mix 331 Chapter 12 Further aspects of marketing 389 Chapter 13 Introduction to human resource management 411 Chapter 14 Appraisal, training and development, motivation and retention 455 Chapter 15 Employment practices, HR roles and ethics 493 iii

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5 chapter Intro Introduction v

6 How to use the materials These official CIMA learning materials have been carefully designed to make your learning experience as easy as possible and to give you the best chances of success in your Objective Test Examination. The product range contains a number of features to help you in the study process. They include: a detailed explanation of all syllabus areas; extensive practical materials; generous question practice, together with full solutions. This Study Text has been designed with the needs of home study and distance learning candidates in mind. Such students require very full coverage of the syllabus topics, and also the facility to undertake extensive question practice. However, the Study Text is also ideal for fully taught courses. The main body of the text is divided into a number of chapters, each of which is organised on the following pattern: Detailed learning outcomes. These describe the knowledge expected after your studies of the chapter are complete. You should assimilate these before beginning detailed work on the chapter, so that you can appreciate where your studies are leading. Step by step topic coverage. This is the heart of each chapter, containing detailed explanatory text supported where appropriate by worked examples and exercises. You should work carefully through this section, ensuring that you understand the material being explained and can tackle the examples and exercises successfully. Remember that in many cases knowledge is cumulative: if you fail to digest earlier material thoroughly, you may struggle to understand later chapters. Activities. Some chapters are illustrated by more practical elements, such as comments and questions designed to stimulate discussion. vi

7 Question practice. The text contains three styles of question: Exam style objective test questions (OTQs) Integration questions these test your ability to understand topics within a wider context. This is particularly important with calculations where OTQs may focus on just one element but an integration question tackles the full calculation, just as you would be expected to do in the workplace. Case style questions these test your ability to analyse and discuss issues in greater depth, particularly focusing on scenarios that are less clear cut than in the Objective Test Examination, and thus provide excellent practice for developing the skills needed for success in the Operational Level Case Study Examination. Solutions. Avoid the temptation merely to audit the solutions provided. It is an illusion to think that this provides the same benefits as you would gain from a serious attempt of your own. However, if you are struggling to get started on a question you should read the introductory guidance provided at the beginning of the solution, where provided, and then make your own attempt before referring back to the full solution. If you work conscientiously through this Official CIMA Study Text according to the guidelines above you will be giving yourself an excellent chance of success in your Objective Test Examination. Good luck with your studies! Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an to mykaplanreporting@kaplan.com with full details, or follow the link to the feedback form in MyKaplan. Our Quality Co ordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions. Icon Explanations Definition These sections explain important areas of knowledge which must be understood and reproduced in an assessment environment. Key point Identifies topics which are key to success and are often examined. Supplementary reading These sections will help to provide a deeper understanding of core areas. The supplementary reading is NOT optional reading. It is vital to provide you with the breadth of knowledge you will need to address the wide range of topics within your syllabus that could feature in an assessment question. Reference to this text is vital when self studying. Test your understanding Following key points and definitions are exercises which give the opportunity to assess the understanding of these core areas. vii

8 Illustration To help develop an understanding of particular topics. The illustrative examples are useful in preparing for the Test your understanding exercises. Exclamation mark This symbol signifies a topic which can be more difficult to understand. When reviewing these areas, care should be taken. Study technique Passing exams is partly a matter of intellectual ability, but however accomplished you are in that respect you can improve your chances significantly by the use of appropriate study and revision techniques. In this section we briefly outline some tips for effective study during the earlier stages of your approach to the Objective Test Examination. We also mention some techniques that you will find useful at the revision stage. Planning To begin with, formal planning is essential to get the best return from the time you spend studying. Estimate how much time in total you are going to need for each subject you are studying. Remember that you need to allow time for revision as well as for initial study of the material. With your study material before you, decide which chapters you are going to study in each week, and which weeks you will devote to revision and final question practice. Prepare a written schedule summarising the above and stick to it! It is essential to know your syllabus. As your studies progress you will become more familiar with how long it takes to cover topics in sufficient depth. Your timetable may need to be adapted to allocate enough time for the whole syllabus. Students are advised to refer to the notice of examinable legislation published regularly in CIMA s magazine (Financial Management), the students e newsletter (Velocity) and on the CIMA website, to ensure they are up to date. The amount of space allocated to a topic in the Study Text is not a very good guide as to how long it will take you. The syllabus weighting is the better guide as to how long you should spend on a syllabus topic. viii

9 Tips for effective studying (1) Aim to find a quiet and undisturbed location for your study, and plan as far as possible to use the same period of time each day. Getting into a routine helps to avoid wasting time. Make sure that you have all the materials you need before you begin so as to minimise interruptions. (2) Store all your materials in one place, so that you do not waste time searching for items every time you want to begin studying. If you have to pack everything away after each study period, keep your study materials in a box, or even a suitcase, which will not be disturbed until the next time. (3) Limit distractions. To make the most effective use of your study periods you should be able to apply total concentration, so turn off all entertainment equipment, set your phones to message mode, and put up your do not disturb sign. (4) Your timetable will tell you which topic to study. However, before diving in and becoming engrossed in the finer points, make sure you have an overall picture of all the areas that need to be covered by the end of that session. After an hour, allow yourself a short break and move away from your Study Text. With experience, you will learn to assess the pace you need to work at. Each study session should focus on component learning outcomes the basis for all questions. (5) Work carefully through a chapter, making notes as you go. When you have covered a suitable amount of material, vary the pattern by attempting a practice question. When you have finished your attempt, make notes of any mistakes you made, or any areas that you failed to cover or covered more briefly. Be aware that all component learning outcomes will be tested in each examination. (6) Make notes as you study, and discover the techniques that work best for you. Your notes may be in the form of lists, bullet points, diagrams, summaries, mind maps, or the written word, but remember that you will need to refer back to them at a later date, so they must be intelligible. If you are on a taught course, make sure you highlight any issues you would like to follow up with your lecturer. (7) Organise your notes. Make sure that all your notes, calculations etc. can be effectively filed and easily retrieved later. ix

10 Objective Test Objective Test questions require you to choose or provide a response to a question whose correct answer is predetermined. The most common types of Objective Test question you will see are: Multiple choice, where you have to choose the correct answer(s) from a list of possible answers. This could either be numbers or text. Multiple choice with more choices and answers, for example, choosing two correct answers from a list of eight possible answers. This could either be numbers or text. Single numeric entry, where you give your numeric answer, for example, profit is $10,000. Multiple entry, where you give several numeric answers. True/false questions, where you state whether a statement is true or false. Matching pairs of text, for example, matching a technical term with the correct definition. Other types could be matching text with graphs and labelling graphs/diagrams. In every chapter of this Study Text we have introduced these types of questions, but obviously we have had to label answers A, B, C etc rather than using click boxes. For convenience we have retained quite a few questions where an initial scenario leads to a number of sub questions. There will be questions of this type in the Objective Test Examination but they will rarely have more than three sub questions. Guidance re CIMA on screen calculator As part of the CIMA Objective Test software, candidates are now provided with a calculator. This calculator is on screen and is available for the duration of the assessment. The calculator is available in each of the Objective Test Examinations and is accessed by clicking the calculator button in the top left hand corner of the screen at any time during the assessment. All candidates must complete a 15 minute tutorial before the assessment begins and will have the opportunity to familiarise themselves with the calculator and practise using it. Candidates may practise using the calculator by downloading and installing the practice exam at The calculator can be accessed from the fourth sample question (of 12). x

11 Please note that the practice exam and tutorial provided by Pearson VUE at is not specific to CIMA and includes the full range of question types the Pearson VUE software supports, some of which CIMA does not currently use. Fundamentals of Objective Tests The Objective Tests are 90 minute assessments comprising 60 compulsory questions, with one or more parts. There will be no choice and all questions should be attempted. Structure of subjects and learning outcomes Each subject within the syllabus is divided into a number of broad syllabus topics. The topics contain one or more lead learning outcomes, related component learning outcomes and indicative knowledge content. A learning outcome has two main purposes: (a) To define the skill or ability that a well prepared candidate should be able to exhibit in the examination. (b) To demonstrate the approach likely to be taken in examination questions. The learning outcomes are part of a hierarchy of learning objectives. The verbs used at the beginning of each learning outcome relate to a specific learning objective, e.g. Calculate the break even point, profit target, margin of safety and profit/volume ratio for a single product or service. The verb calculate indicates a level three learning objective. The following tables list the verbs that appear in the syllabus learning outcomes and examination questions. xi

12 CIMA VERB HIERARCHY CIMA place great importance on the definition of verbs in structuring Objective Test Examinations. It is therefore crucial that you understand the verbs in order to appreciate the depth and breadth of a topic and the level of skill required. The Objective Tests will focus on levels one, two and three of the CIMA hierarchy of verbs. However they will also test levels four and five, especially at the management and strategic levels. You can therefore expect to be tested on knowledge, comprehension, application, analysis and evaluation in these examinations. Level 1: KNOWLEDGE What you are expected to know. VERBS USED List State Define DEFINITION Make a list of. Express, fully or clearly, the details of/facts of. Give the exact meaning of. For example you could be asked to make a list of the advantages of a particular information system by selecting all options that apply from a given set of possibilities. Or you could be required to define relationship marketing by selecting the most appropriate option from a list. Level 2: COMPREHENSION What you are expected to understand. VERBS USED Describe Distinguish Explain Identify Illustrate DEFINITION Communicate the key features of. Highlight the differences between. Make clear or intelligible/state the meaning or purpose of. Recognise, establish or select after consideration. Use an example to describe or explain something. For example you may be asked to distinguish between different aspects of the global business environment by dragging external factors and dropping into a PEST analysis. xii

13 Level 3: APPLICATION How you are expected to apply your knowledge. VERBS USED DEFINITION Apply Calculate For example you may need to calculate the projected revenue or costs for a given set of circumstances. Level 4: ANALYSIS Put to practical use. Ascertain or reckon mathematically. Demonstrate Prove with certainty or exhibit by practical means. Prepare Reconcile Solve Tabulate Make or get ready for use. Make or prove consistent/compatible. Find an answer to. Arrange in a table. How you are expected to analyse the detail of what you have learned. VERBS USED Analyse Categorise Compare/ contrast Construct Discuss Interpret Prioritise Produce DEFINITION Examine in detail the structure of. Place into a defined class or division. Show the similarities and/or differences between. Build up or compile. Examine in detail by argument. Translate into intelligible or familiar terms. Place in order of priority or sequence for action. Create or bring into existence. For example you may be required to interpret an inventory ratio by selecting the most appropriate statement for a given set of circumstances and data. xiii

14 Level 5: EVALUATION How you are expected to use your learning to evaluate, make decisions or recommendations. VERBS USED DEFINITION Advise Evaluate Counsel, inform or notify. Appraise or assess the value of. Recommend Propose a course of action. For example you may be asked to recommend and select an appropriate course of action based on a short scenario. xiv

15 PRESENT VALUE TABLE Present value of 1.00 unit of currency, that is ( 1+ r ) n where r = interest rate; n = number of periods until payment or receipt. Periods Interest rates (r) (n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Periods Interest rates (r) (n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

16 Cumulative present value of 1.00 unit of currency per annum, Receivable or Payable at the end of each year for n years Periods (n) n 1 (1+ r ) r Interest rates (r) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Periods (n) Interest rates (r) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

17 E1 ORGANISATIONAL MANAGEMENT Syllabus overview E1 focuses on the structuring of organisations. It covers the structure and principles underpinning the operational functions of the organisation, their efficient management and effective interaction in enabling the organisation to achieve its strategic objectives. It lays the foundation for gaining further insight into both the immediate operating environment and long-term strategic future of organisations, which are covered in E2 and E3. Summary of syllabus Weight Syllabus topic 25% A. Introduction to organisations 15% B. Managing the finance function 15% C. Managing technology and information 15% D. Operations management 15% E. Marketing 15% F. Managing human resources

18 E1 A. INTRODUCTION TO ORGANISATIONS (25%) Learning outcomes On completion of their studies, students should be able to: Indicative syllabus content Lead Component 1 discuss the different types of structure that an (a) discuss the different purposes of organisations Ownership: organisation may adopt. private sector, public sector. Motive: for-profit, non-profit. Mission and vision: shared values and beliefs. Creating value for stakeholders: control and coordination of resources to achieve goals and outcomes efficient production of goods and services facilitating innovation. (b) explain the different structures organisations Organisational configuration (Mintzberg): may adopt technical core technical support administrative support top and middle management. Organisational configuration, contextual dimensions, the effect of: technology environment culture. Structural dimensions, influence of: size formalisation specialisation organisation type e.g. sole-trader, partnership, company, multinational. Structural organisation: functional divisional matrix geographical.

19 Learning outcomes On completion of their studies, students should be able to: Indicative syllabus content Lead Component (c) explain the various forms and functional Closed and open systems. boundaries of the organisation including Vertical and horizontal structures. externalisation, shared service centres (SSC) Outsourcing. and business process outsourcing (BPO). Alliances. Virtual network structure. 2 discuss relationships between internal and external sources of governance, regulation and professional behaviour. (a) discuss the purpose and principles of good corporate governance, the ethical responsibilities of the organisation and individuals, and ways of achieving corporate social responsibility. Corporate governance, including expectations of stakeholders and the role of government. Creating an ethical organisation. Principles of corporate social responsibility (CSR). Developing business-government relations. The impact of regulation on the organisation. Role of institutions and governance in economic growth. Personal business ethics and the fundamental principles (Part A) of the CIMA Code of Ethics for Professional Accountants.

20 E1 B. MANAGING THE FINANCE FUNCTION (15%) Learning outcomes On completion of their studies, students should be able to: Indicative syllabus content Lead Component 1 discuss the purpose of the finance function and its relationships with other parts of the organisation. (a) demonstrate the contribution the finance function makes to the sustainable delivery of the organisation s strategies in a range of contexts (b) analyse the components of the finance function (financial and management accounting, treasury, company secretarial and internal audit) (c) discuss the potential for conflict within the role of the finance function. Stewardship and control of physical and financial resources within the organisation. Interpreting and reporting the financial position of the organisation for external stakeholders (including statutory requirements) and internal management. Collating and providing information to enable efficient asset management and cost effective operation of the organisation. Comparing the current position with forecast/budget expectations and indicating where and how differences have occurred. Providing this in a timely and accurate manner. Assisting and interacting with other functions in providing solutions to variances. Financial accounting ensuring accurate asset values, efficient working capital management, statutory reporting. Management accounting operational reporting (profit and loss) cost control, variance analysis. Treasury management sourcing finance, currency management, effective taxation administration. Company secretarial. Internal audit ensuring compliance, fraud detection and avoidance. Potential conflicts: interdependence/independence. short-term/long-term. capital/revenue.

21 Learning outcomes On completion of their studies, students should be able to: Indicative syllabus content Lead Component 2 explain how the finance function supports the (a) explain the activities fundamental to the role of Preparation of statutory reports. organisation s strategies and operations. the finance function (accounting operations, Preparation of plans, forecasts, budgets. analysis, planning, decision making and control) Working capital reporting and control, inventories, receivables, payables, cash. Provision of analysis to support decisions. Performance reporting, budget/actuals. Cost reporting, product/process. Ensuring systems in place to provide timely and accurate control information. (b) explain the contemporary transformation of the finance function. Reconfiguration: bureaucratic to market oriented. Shared services: outsourced market orientation. Business Process Re-engineering: roles of process working. Relocation: retained/near-shore/off-shore. Segregation of the finance function: transactional/transformational activities. Business partners: support involvement.

22 E1 C. MANAGING TECHNOLOGY AND INFORMATION (15%) Learning outcomes On completion of their studies, students should be able to: Indicative syllabus content Lead Component 1 demonstrate the purpose of the technology and information function and its relationships with other parts of the organisation. 2 explain how information systems support the organisation s strategies and operations. (a) demonstrate the value of information systems in organisations (b) demonstrate ways of organising and managing information systems in the context of the wider organisation. (a) explain the technical components and options for information technology system design (b) explain the role of emerging technologies e.g. Big Data, digitisation and their uses. The role of information systems in organisations. Emerging information system trends in organisations. The networked enterprise, organisational benefits, customer relationship management systems. Information technology enabling transformation; the emergence of new, more virtual forms of organisation, technology infrastructure. Geographically dispersed (virtual) teams; role of information systems in virtual teams and challenges for virtual collaboration. Managing knowledge, enhancing internal and external relationships. Ethical and social issues associated with information systems. Evaluating costs and benefits of information systems. The internet, intranet, wireless technology, cloud technologies. Privacy and security. Overview of systems architecture and data flows. Big Data information management: large volumes of data complexity and variety of data velocity, real time data. Enhancing decision making support using Big Data and analytics: identifying business value relating to customer requirements developing organisational blueprint building capabilities on business priorities ensuring measurable outcomes.

23 Learning outcomes On completion of their studies, students should be able to: Indicative syllabus content Lead Component Information system implementation as a change management process; avoiding problems of nonusage and resistance. System changeover methods (i.e. direct, parallel, pilot and phased). Information system outsourcing (different types of sourcing strategies; client-vendor relationships). E-commerce, digital markets, social media, digital goods. Remote working, hot desking. Big Data and digitisation: addressing customer needs effective and speedy decisions.

24 E1 D. OPERATIONS MANAGEMENT (15%) Learning outcomes On completion of their studies, students should be able to: Indicative syllabus content Lead Component 1 demonstrate the purpose of the operations function and its relationships with other parts of the organisation. 2 apply tools and techniques of operations management. (a) demonstrate the contribution of operations management to the efficient production and delivery of fit-for-purpose goods and services (b) demonstrate how supply chains can be established and managed. (a) apply the tools and concepts of operations management to deliver sustainable performance Overview of operations strategy and its importance to the firm. Procurement as a strategic process in supply chain management. Development of relationships with suppliers, including the use of supply portfolios. Supply chains in competition with each other; role of supply networks; demand networks as an evolution of supply chains. Design of products/services and processes and how this relates to operations and supply. The concept of CSR and sustainability in operations management. Process design. Product and service design. Supply network design. Forecasting. Layout and flow. Process technology: CNC, Robots, AGV, FMS, CIM decision support systems expert systems. Work study. Capacity planning and control, inventory control.

25 Learning outcomes On completion of their studies, students should be able to: Indicative syllabus content Lead Component (b) explain how relationships within the supply chain Supply chain planning and control: can be managed. lean synchronisation contractual/relational approaches material requirement planning quality planning and control statistical process control operational improvement, total quality management (TQM), Kaizen, Six Sigma, Lean thinking reverse logistics.

26 E1 E. MARKETING (15%) Learning outcomes On completion of their studies, students should be able to: Indicative syllabus content Lead Component 1 demonstrate the purpose of the marketing function and its relationships with other parts of the organisation. (a) apply the marketing concept and principles in a range of organisational contexts The marketing concept as a business philosophy. The marketing environment, including societal, economic, technological, political and legal factors affecting marketing (PESTEL). The role of marketing in the business plan of the organisation. Marketing in public sector and not-for-profit organisations e.g. charities, non-governmental organisations, etc. (b) apply the elements of the marketing mix. The 7 Ps: product place price promotion processes people physical evidence. Theories of consumer behaviour (e.g. social interaction theory), as well as factors affecting buying decisions, types of buying behaviour and stages in the buying process. Social marketing and CSR. Social media and its effect on the organisation.

27 Learning outcomes On completion of their studies, students should be able to: Indicative syllabus content Lead Component 2 apply tools and techniques to formulate the (a) apply the main techniques of marketing Market research, including data gathering organisation s marketing strategies, including techniques and methods of analysis. the collection, analysis and application of Big Segmentation and targeting of markets, and Data. positioning of products within markets. How business to business (B2B) and business to government (B2G) marketing differs from business to consumer (B2C) marketing in its different forms: consumer marketing services marketing direct marketing interactive marketing E-marketing internal marketing. Promotional tools and the promotion mix. The service extension to the marketing mix. Devising and implementing a pricing strategy. Internal marketing as the process of training and motivating employees to support the firm s external marketing activities. Relationship marketing. Not-for-profit marketing. Experiential marketing. Postmodern marketing.

28 Learning outcomes On completion of their studies, students should be able to: Indicative syllabus content Lead Component (b) explain the role of emerging technologies and Big Data analytics and its use in the marketing media in marketing. process: predicting customer demand improving the customer experience monitoring multi-channel transactions identifying customer preferences. Marketing communications, including viral, guerrilla and other indirect forms of marketing. Distribution channels and methods for marketing campaigns, including digital marketing. Brand image and brand value. Product development and product/service lifecycles. The differences and similarities in the marketing of products, services and experiences. Product portfolios and the product mix. Marketing sustainability and ethics.

29 E1 F. MANAGING HUMAN RESOURCES (15%) Learning outcomes On completion of their studies, students should be able to: Indicative syllabus content Lead Component 1 demonstrate the purpose of the HR function and its relationships with other parts of the organisation. (a) explain the contribution of HR to the sustainable delivery of the organisation s strategies The concept of HRM and its influence on organisational processes and performance. The psychological contract and its importance to retention. The relationship of the employee to other elements of the business. HR in different organisational forms, project based, virtual or networked firms and different organisational contexts. (b) apply the elements of the HR cycle. Acquisition: identify staffing requirement recruitment selection. Development: training evaluation progression. Maintenance: monetary and non-monetary benefits. Separation: voluntary and involuntary. 2 apply the tools and techniques of HRM. (a) demonstrate the HR activities associated with Practices associated with recruiting and developing employees developing appropriate abilities including recruitment and selection of staff using different recruitment channels: interviews assessment centres, intelligence tests, aptitude tests psychometric tests competency frameworks.

30 Learning outcomes On completion of their studies, students should be able to: Indicative syllabus content Lead Component Issues relating to fair and legal employment practices (e.g. recruitment, dismissal, redundancy, and ways of managing these). The distinction between training and development, and the tools available to develop and train staff. The design and implementation of induction programmes. Practices related to motivation including issues in the design of reward systems: the role of incentives the utility of performance-related pay arrangements for knowledge workers flexible work arrangements. (b) demonstrate the role of the line manager in the The importance of appraisals, their conduct and implementation of HR practices. their relationship to the reward system. Practices related to the creation of opportunities for employees to contribute to the organisation including; job design, communications, involvement procedures and principles of negotiation. Problems in implementing HR plans appropriate to a team and ways to manage this. Preparation of an HR plan. Forecasting personnel requirements: retention, absence and leave, employee turnover. Ethical code and the interface with HR practice.

31 chapter 1 The different purposes of organisations Chapter learning objectives Lead A1. Discuss the different types of structure that an organisation may adopt. Component (a) Discuss the different purposes of organisations. 1

32 The different purposes of organisations 1 Introduction Chapters 1 to 3 focus on Section A of the syllabus, Introduction to Organisations. All organisations will have a unique set of goals and we are going to introduce this syllabus area by focusing on the different purposes of organisations. In Chapter 2, we go on to explain the different structures that organisations may adopt in pursuit of the goals set and in Chapter 3 we will discuss governance, regulation, ethics and corporate social responsibility. 2 Organisations and the reasons they are formed 2.1 What is an organisation? Defining an organisation is difficult as there are many types of organisations which are set up to meet a variety of needs, such as clubs, schools companies, charities and hospitals. What they all have in common is summarised in the definition produced by Buchanan and Huczynski. Organisations are social arrangements for the controlled performance of collective goals. What is an organisation? Consider the three aspects of Buchanan and Huczynski s definition in more detail: (a) Collective goals organisations are defined by their goals. The main goal of a school is to educate pupils. It will therefore be organised differently to a company that aims to make profits. (b) Social arrangements someone working alone cannot be classed as an organisation. Organisations are structured to allow people to work together towards a common goal. Usually, the larger the organisation, the more formal its structures. 2

33 chapter 1 (c) Controlled performance an organisation will have systems and procedures in place to ensure that group goals are achieved. For a company this could involve setting sales targets, or periodically assessing the performance of staff members. It is worth noting that a major similarity between most organisations is that they are mainly concerned with taking inputs and transforming them into outputs. For a manufacturing company, this could involve taking raw materials and transforming them into a finished product that can be sold onto its customers. An accountancy training firm will also take inputs (students and syllabuses) and transform them into outputs (qualified accountants). Illustration 1 Football team A football team can be described as an organisation because: It has a number of players who have come together to play a game. The team has an objective (to score more goals than its opponent). To do their job properly, the members have to maintain an internal system of control to get the team to work together. In training they work out tactics so that in play they can rely on the ball being passed to those who can score goals. Each member of the team is part of the organisational structure and is skilled in a different task: the goalkeeper has more experience in stopping goals being scored than those in the forward line of the team. In addition, there must be team spirit, so that everyone works together. Players are encouraged to do their best, both on and off the field. 2.2 Why do we need organisations? Organisations enable people to: Share skills and knowledge this can enable people to perform tasks that they would be unable to achieve on their own. Knowledge can also be shared between all the people within the organisation. 3

34 The different purposes of organisations Specialise individual workers can concentrate on a limited type of activity. This allows them to build up a greater level of skill and knowledge than they would have if they attempted to be good at everything. Pool resources whether money or time. This results in synergy where organisations can achieve more than the individuals could on their own. Objective test questions E1 will be examined in a computerised objective test (OT) exam. A large number of objective test questions (OTQs) have been included in this text. It is important to practise as many questions as possible. The actual exam questions will be in a range of different formats. The main types will be multiple choice, multiple response, number entry, drag and drop, hot spot and drop down. Test your understanding 1 OTQ Jared is organising a social event. Which of the following would be benefits of him forming a committee to manage the planning process and the event itself? (i) (ii) It would help to overcome his limitations, by bringing on board other people with different skills to him. It would save time through the joint efforts of everyone on the committee. (iii) It would help to satisfy Jared s social needs. (iv) All members of the committee would have to be skilled in all aspects of managing the social event. A B C D (i), (ii) and (iii) only (i), (iii) and (iv) only All of the above None of the above 4

35 chapter 1 3 Different types of organisation As we have discussed, different organisations have different goals. We can therefore classify them into several different categories. 3.1 Profit versus not for profit (NFP) Profit seeking organisations Profit seeking (or commercial) organisations see their main objective as maximising the wealth of their owners. There are three common forms that a commercial company can take: Sole traders the organisation is owned and run by one person. Partnerships the organisation is owned and run by two or more individuals. Note that in both of these organisations, the owner of the business is not legally separate from the business itself. If a partnership is sued by a customer, the customer is actually suing the owner of the business. Limited liability companies a company has a separate legal identity to its owners (who are known as shareholders). The owner s liability is limited to the amount they have invested into the company. 5

36 The different purposes of organisations In the UK, there are two types of limited company: Private limited companies (with Ltd after their name) these tend to be smaller businesses, often owned by a few shareholders. Shares cannot be offered to the general public. Public limited companies (with plc after their name) these can be much larger businesses. Shares can be offered to the general public, meaning that there can be millions of different shareholders. This makes it easier for the company to raise finance, enabling further growth. Not for profit organisations Not for profit organisations (NFPs) do not see profitability as their main objective. Instead, they seek to satisfy the particular needs of their members or the sectors of society that they have been set up to benefit. Illustration 2 NFP examples NFPs include the following: government departments and agencies (such as HM Revenue and Customs) schools hospitals charities (such as the Red Cross, Oxfam and Doctors Without Borders) clubs. The objectives of different NFPs will vary significantly: Hospitals exist to treat patients. Councils may see their mission as caring for their communities. Government organisations usually exist to implement government policy. A charity may have provision of relief to victims of disasters as its main objective. 6

37 chapter Public versus private sector organisations Public sector organisations The public sector is the part of the economy that is concerned with providing basic government services and is controlled by government organisations. Illustration 3 Public sector organisations The organisations that make up the public sector vary from country to country, but generally include: police military public transport primary education healthcare for the poor Private sector organisations The private sector consists of organisations that are run by private individuals and groups rather than the government. Illustration 4 Private sector The private sector will therefore normally include: businesses non governmental organisations charities and clubs. Within these will be both profit seeking and not for profit organisations. 7

38 The different purposes of organisations Note on question style A number of the test your understandings included in this text do not represent the style of question that you will be presented with in the operational level exams (i.e. either OTQs or case style questions). However, they are included for learning purposes and should serve to enhance your knowledge and understanding of the subject. It is important to work through these questions before sitting the exam. Test your understanding 2 Many schools run fund raising events such as fêtes, where the intention is to make a profit. This makes them profit seeking. Is this statement: A B True False Non governmental organisations (NGOs) A non governmental organisation is one which does not have profit as its primary goal and is not directly linked to the national government. NGOs often promote political, social or environmental change within the countries they operate. Illustration 5 NGOs Some of the largest NGOs operate in the humanitarian sphere and include: Oxfam the Red Cross World Vision Amnesty International. Expenditure by these NGOs can exceed the GDP of some countries. 8

39 chapter 1 NGOs could operate as partners with firms in lobbying government for change or as opponents if the firm s activities are at odds with the NGO s mission. There are two types of NGO: Operational NGOs seek to achieve change directly through projects such as community development. Oxfam is an example of an operational NGO. Campaigning NGOs seek to achieve change indirectly through the use of lobbying and public relations (PR) programmes to influence government. Amnesty International is an example of a campaigning NGO. Another type of NGO is a QUANGO (quasi autonomous non governmental organisation). They are private organisations to which the government has devolved authority for running public services. An example in the UK is the school inspection body, Ofsted. Illustration 6 QUANGOs In 2010, the UK government announced the axing of a large number of QUANGOs, including British Nuclear Fuels, the UK Film Council and Cycling England. There is nothing controversial about QUANGOs they have been around for a long time and some of Britain s best known organisations (including the Forestry Commission and many national museums and galleries) are QUANGOs. However, the problem according to the government was the sheer number of QUANGOs and how much they cost to run. 3.3 Co operatives Co operatives (or mutuals) are organisations that are owned and democratically controlled by their members the people who buy their goods or services. They are organised solely to meet the needs of the member owners, who usually share any profits. Illustration 7 Co operatives In the UK, the largest example of a co operative is the Co operative Group, which has over 5.5 million members and operates in diverse markets, such as banking, travel and groceries. 9

40 The different purposes of organisations Test your understanding 3 OTQ Which of the following are usually seen as the primary objectives of companies? (i) (ii) To maximise the wealth of shareholders To protect the environment (iii) To make a profit A B C D (i), (ii) and (iii) (i) and (ii) only (ii) and (iii) only (i) and (iii) only Test your understanding 4 OTQ Which one of the following organisations is most likely to be classified as part of the public sector? A B C D A charity A social club A school A public limited company 4 Mission, vision and objectives We have already discussed the different objectives of organisations. We are now going to introduce two important terms regarding objectives. 4.1 Mission Mission is the most generalised type of objective and can be seen as an expression of the organisation s reason for being. Mission is neither quantifiable or within time constrained targets. 10