CIMA E2 Course Notes Chapter 1 Introduction to Organisations by CIMA under the CIMA code of ethics. 6
1. Organisations Introduction An organisation is a social group of people that is organised and managed in a way that aims to follow a corporate goal or need. All types of businesses follow a structure that is controlled by management who determine how the business performs particular activities and the key roles and responsibilities of it's members. 2. Types of organisation The economy of a country can generally be split into two sectors: the private sector and the public sector. Organisations within these sectors can be profit seeking or not for profit. Profit seeking organisations Profit seeking organisations operate to maximise returns for owners or shareholders. Therefore, profitability is their primary objective. Such organisations can be split into two main groups which are distinguished by the extent of liability the owners have for company debts. Unincorporated the business owners and the business itself hold the same legal identity. This means the owners are held personally responsible for the debts a company 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: by CIMA under the CIMA code of ethics. 7
Sole trader one sole owner of the business (wholly liable for debts) Partnership a collection of owners working together (jointly liable for debts) Incorporated the business owners and the business itself have a separate legal identity. This means the owners are not held personally responsible for the debts a 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 shares cannot be issued to the public. Often a smaller company such as a market town retailer. However, can be larger companies looking to retain a high degree of control. For example: Walkers Snack Foods Ltd and New Look Retail Ltd Public limited companies shares can be issued to the public. Usually larger companies who wish to increase funding for business ventures through a public share offering. For example: Tesco Plc and British Airways Plc Not for profit organisations Not for profit organisations do not set out to make a profit for their owners. This does not mean that they are unprofitable, but their aim is to provide a service to their members and subscribers rather than maximise returns for owners. Like profit seeking companies they aim to operate efficiently and to be cost effective. Not for profit organisations include trade unions, charities, co-operatives, mutual organisations, clubs and societies and educational establishments. Not for profit organisations exists in both the public and private sector: Public sector - owned by the state and are responsible to the government for their business activities. Public sector organisations can be in the form of a state owned industry or a government run department. For example, The NHS and The Forestry Commission Private sector 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 surround profit maximization, rather focus on other goals such as ethical standards and service delivery. For example, Oxfam and Cancer Research UK. 3. Dimensions of Organisations There are two different types of dimensions in organisational design; structural and contextual. Structural dimensions describe the internal characteristics of an organisation, whereas contextual dimensions focus on everything that shapes the structure of the organisation. Both types of by CIMA under the CIMA code of ethics. 8
dimensions have a number of factors that impact the design structures of organisations: Structural Dimensions: Specialisation Specialisation focuses on grouping. Organisations often split into departments and this is done through specialisation. Specialisation encourages efficiency because it may require less training to become an efficient worker, thus encouraging an increase in productivity. Formalisation Formalisation is about the number of rules, policies and procedures that a business follows. Formalisation is more commonly found in highly regulated working environments such as hospitals and nuclear power stations where health and safety is at a high risk. Whilst formalisation ensures that the organisation is following legal standards and safety regulations, it can mean that the organisation is restricted to change. Organisation Type The type of an organisation may affect the way that the organisation is structured. For example, Size The structure of an organisation can be highly dependent on the size of the organisation itself. Smaller company's such as as single retail store or a restaurant tend to hold a rather simple structure. Larger organisations tend to acquire a more formal structure where tasks are highly specialised and detailed rules and leadership influence work procedures. As a result, the basic design dimensions of larger organisations are generally formalised, specialised, standardised and complex. Contextual Dimensions: Technology Technology can play an important role in the structure of an organisation, in addition to determining how work flows through a business. With the introduction of computer networking, businesses encouraged their employees to work as groups. As a result, employees were not restricted to work in the same room or even the same building. Technology is also impacting businesses in a way that can eliminate unnecessary jobs such as file clerks, saving valuable time and money to businesses. At the same time, this also means that there is a need for IT technicians as a department to maintain and grow the computer network. As technology proceeds to take by CIMA under the CIMA code of ethics. 9
over many jobs in the workplace, the form of organisational structure also changes within it. Environment The business environment may have an impact on a company's organisational structure. Environments can be described as either stable or dynamic: Stable Environment In a stable environment, there are minimal or subtle changes. The business is able to predict the organisational performance and may feel confident with the consumers' wants and needs because they are likely to remain consistent for a long period of time. An example of an organisation that may be in a stable environment is a manufacturer of cleaning products such as Nicols. Dynamic Environment In a dynamic environment, the organisation performance tends to be less predictable. Customers' desires are continuously changing, resulting in great difficulty for businesses to keep up with such high demands. It is important for businesses in dynamic environments to keep technology up-to-date, in order to maintain some control. An example of an industry that functions in a dynamic environment is electronics. With technology continuously developing, the competition for electronics industries continues to build competitive pressures, a long with the changing desires of customers. Generally, organisations operating in stable environments tend to use a more automated structure. This approach ensures efficiency, to cope with the minimal changes that will benefit the long-term performances. In contrast, organisations operating in dynamic environments are more likely to use a more integrated structure because it allows the organisation to respond to change much more productively. Culture Business culture is a key element in business relating to the behaviour, ethics, etiquette, communication, social media and more. It can have a strong impact on the organisational structure and strategic direction of a business. Culture plays a significant role in management decisions and choices, along with business functions. Businesses using a hierarchical structure, will reflect a culture where freedom is discouraged. On the other hand, if a company's organisational structure is decentralised, the culture is likely to be more independent and personalised as a result of the shared power and authority. by CIMA under the CIMA code of ethics. 10
4. Organisational Structures Organisational structure is the arrangement of roles, responsibilities and reporting relationships within an organisation. This arrangement is designed to ensure the most efficient and beneficial coordination of activities, management of people and measurements and control, according to the activities of the organisation. There are four main types of organisational structures: Functional Functional organisational structure is a structure where the organisation is grouped into functional areas, such as IT, marketing and human resources. A functional structure allows employees to focus on their most knowledgeable and skilled subject. It can be argued that functional structures allow greater operational efficiencies whereby employees with shared skills and knowledge are grouped together. Divisional Divisional organisational structure like functional structures, consists of several teams (divisions) focusing on a single product, service line, geographical area or customer type. However, it differs from a functional structure because divisions are more independent than departments. Geographical Geographic organisational structure is typically used in companies with operations that are distributed over a large region. For example, national or international offices. Regional managers are given complete authority over their region. Matrix Where the organisation is divided into multiple reporting lines; or a structure where individuals may have more than one superior is classified as a matrix structure. For example, a manufacturer of consumer goods may have three divisions: foods, personal care and cleaning products. It may also be divided into three structural divisions such as sales, marketing and distribution. Each employee will therefore work in two divisions, one functional and one product. In this case, an employee might be a unit of the sales division as well as the foods division, both of which are controlled by two different managers. by CIMA under the CIMA code of ethics. 11
5. Forms and Functional Boundaries Vertical and Horizontal Structures As explained earlier, an organisations structure determines how roles are allocated, how work is divided and who is in position of authority. Evidently, there are a number of different structures that a business can adopt. To explain further, the structure that a business chooses to operate in can depend on the business goals and objectives. Most companies operate with a vertical structure, however some may favour the horizontal structure. Vertical Vertical organisational structures focus on a strict hierarchical layering system, meaning that power of authority remains at the top of the system. This may apply to the organisation as a whole or to a specific project, team or department within the company. Employees in this type of structure report to the person directly above them. Advantages of Vertical Structures: Efficient Decisions can be made quickly Responsibility is in the hands of the person in the highest chain of command. Clearly defined duties Specialised tasks: less need to learn new tasks and skills Disadvantages: Strict: many rules to follow Employees may feel that their input isn't important. Horizontal Horizontal organisational structures allow employees across horizontal lines to have similar input into how the organisation is run. This means that the organisation holds a less-defined chain of command where employees have no set duties; instead employees might work in teams where equal input is encouraged. Instead of employees reporting to a single person of authority, there is the option to report to several supervisors. Advantages: Fewer rules-based by CIMA under the CIMA code of ethics. 12
Employees have more power: encouraging employee satisfaction Employees feel a stronger sense of identification: part of a team. Disadvantages: Less efficient A lot of time and resources spent making decisions Bigger need to learn skills: high stress levels for employees Closed and Open Systems Systems are generally described as a group of interacting units or elements that have a common purpose. Systems in organisations can be classified as open or closed systems: Open systems Open systems interact with other systems or the outside environment. Open systems have open boundaries that allow feedback exchanges from inside and outside the business. The controllers of open systems concentrate on their external and internal environment and customer needs and reactions. Unlike closed systems, open systems are not restricted to one specific way to accomplish goals and they can reach similar results with different conditions and operations. Closed systems Closed systems are not determined by external influences like the environment, external resources, competition and suppliers to name a few. This type of system allows managers and organisational theorists to analyse problems through examination of the internal structure of a business with little influence of the external environment. by CIMA under the CIMA code of ethics. 13
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