RK051801 - 2 Assignments

Organisations and management

accounting

About this free course

This free course is an adapted extract from the Open University course B292 Management accounting http://www.open.ac.uk/courses/modules/b292

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Contents Introduction 5 Learning Outcomes 6 1 What is an organisation? 7

1.1 Mintzberg’s five components of organisation 7 1.2 Why do organisations exist? 8 1.3 What types of organisation are there? 9

2 What is organisational structure? 11 2.1 Principles of organisational structure 12 2.2 Tall versus flat organisations 14

3 Forms of organisational structure 16 3.1 Functional structure 16 3.2 Product or service structure 17 3.3 Geographical structure 17 3.4 Matrix structure 18 3.5 Project teams 19 3.6 Hybrid structure 20 3.7 Recent trends in organisational design 21

4 Organisational departments and functions 22 4.1 Typical business organisation departments and functions 22 4.2 The Production function 22 4.3 The Research and Development function 23 4.4 The Purchasing function 24 4.5 The Marketing function 24 4.6 The Human Resources function 26 4.7 The Accounting and Finance function 27

5 Decentralisation and centralisation 27 5.1 Advantages of decentralisation 27 5.2 Disadvantages of decentralisation 28 5.3 Responsibility centres 29 5.4 The divisionalised organisation 31 5.5 Line and staff relationships 31

6 The organisational environment 32 6.1 Political and legal environment 32 6.2 Economic environment 33 6.3 Demographic and social trends impacting on organisations 33 6.4 Sociological factors 34 6.5 Technology and its impact 36

Conclusion 37 Keep on learning 37 Glossary 38

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References 42 Acknowledgements 43

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Introduction Management accounting is concerned with providing information and analysis to managers to help them plan, evaluate and control activities, in order to achieve an organisation’s objectives. Whereas financial accounting is concerned with reporting on the past financial performance of an organisation, management accounting is essentially concerned with improving its future performance. In order to understand the concepts and principles of management accounting it is necessary first to have some appreciation of what managers do! This, in turn, requires an understanding of the organisations in which managers work – and of the external environment in which these organisations exist and operate. This OpenLearn free course, therefore, looks at the nature of organisations, specifically their objectives and structure. Organisational objectives and structure are key elements of organisations and they determine management functions and responsibilities within the organisation. The course also considers the main environmental factors (economic, social, political, legal and technological) that impact on organisational behaviour. This OpenLearn course is an adapted extract from the Open University course B292 Management accounting. Tell us what you think! We’d love to hear from you to help us improve our free learning offering through OpenLearn by filling out this short survey.

Introduction

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Learning Outcomes After studying this course, you should be able to: l understand the nature and purpose of different types of organisations (commercial, voluntary, public sector and

so on) l describe the different ways in which organisations may be structured l understand basic concepts of organisational structure l describe the main departments or functions of a business organisation l explain the advantages and disadvantages of centralised and decentralised organisations.

1 What is an organisation? An ‘organisation’ is a group of individuals working together to achieve one or more objectives. Although organisations have been defined differently by different theorists, virtually all definitions refer to five common features:

1 they are composed of individuals and groups of individuals 2 they are oriented towards achieving collective goals 3 they consist of different functions 4 the functions need to be coordinated 5 they exist independently of individual members who may come and go.

1.1 Mintzberg’s five components of organisation Mintzberg (1979, p. 24) suggested that all organisations consist of five components, as shown in Figure 1.

Figure 1 Mintzberg’s five parts of the organisation

At the top of the organisation is a Strategic apex the purpose of which is to ensure the organisation follows its mission and manages its relationship with its environment. The

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individuals comprising the apex, for example, the Chief Executive Officer (CEO), are responsible to owners, government agencies, unions, communities and so on. Below the apex is the Middle line, a group of managers who are concerned with converting the objectives and broad plans of the Strategic apex into operational plans that can be carried out by the workers. As organisations grow and become more complex, they usually develop a separate group of people who are concerned with the best way of doing a job, specifying output criteria (e.g., quality standards) and ensuring that personnel have appropriate skills (e.g., by organising training programmes). This group of analysts is referred to by Mintzberg as the Technostructure. The organisation also adds other administrative functions that provide services to itself, for example legal advice, public relations, mailroom, cafeteria and so on. These are the Support staff. Finally, at the bottom of the organisation, is the Operating core. These are the people who do the basic work of producing the products or delivering the services. Mintzberg’s generic organisational model also illustrates an important principle of organisation structure: the separation of direction and management, whereby those people who decide the mission and general direction of the organisation are different (other than in a very small organisation) from those who handle the implementation of plans and subsequent controlling of operations to ensure that objectives are met. Senior managers (the Strategic apex) will establish long-term organisational objectives and policies through which goals are to be achieved. Middle managers (the Middle line) will be responsible for translating the necessarily broad and general strategic plans into detailed action plans, specifying managerial responsibilities for particular tasks and how resources are to be allocated. These middle managers will also be responsible for monitoring activities and taking action to ensure that resources are being used efficiently and effectively to achieve organisational objectives.

Efficiency refers to the relationship between inputs and outputs. An activity or process is efficient, if it produces a given output with the minimum of inputs necessary. Effectiveness refers to the extent to which goals/objectives are actually achieved.

Other important principles of organisational structure are discussed later in Sections 2 and 3.

1.2 Why do organisations exist? Organisations exist because groups of people working together can achieve more than the sum of the achievements which the individuals in the organisation could produce when working separately. For example, one person might struggle all day to carry a piano upstairs, whereas a team of four people, each taking one corner, may need to put in much less than a quarter of the effort of one person to complete the task (Coates et al., 1996, p. 19). Although such cooperation is beneficial, if individuals pull in different directions, the result is counter-productive. Thus coordination is necessary and this is a fundamental role of management, as will be discussed in a later section of this session. It can also be argued that organisations exist as a result of the impact of transaction costs, because they can arrange transactions between their different parts at a lower total cost than that available in the open market. In crude terms, it may be cheaper to make or do something ‘in house’ because this cuts out the time consuming process of negotiating

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terms – and renegotiating them every time your requirements change. Before the Industrial Age, it was common for artisans/craftsmen to work individually from home, producing various products, which merchants would purchase from these individuals and sell to consumers. All transactions were conducted through market exchange without the need for formal organisations. As economic development gained pace, however, it became clear that it was more efficient to organise production internally within a firm rather than undertake each transaction externally through the market. The latter process involved substantial costs in terms of time that had to be spent investigating suppliers, detailing specifications, negotiating/renegotiating contracts, checking that agreed terms had been met and so on.

1.3 What types of organisation are there? Organisations can be classified in different ways. One way is according to their over- arching purpose, or primary objective. Broadly, organisations may be classified as ‘for- profit’ (i.e., commercial) or ‘not-for-profit’ entities. ‘For-profit’ (commercial) organisa- tions may have several different objectives. For a very long time, it was generally accepted that maximising the wealth of the owners and continuing in existence were the primary objectives of profit seeking organisations. However, as organisations also aim, for example, to provide goods and services to customers and employment to employees, it is perhaps more reasonable to suggest that increasing, rather than maximising the wealth of owners, is a more fitting objective. ‘Not-for–profit’ organisations comprise a large variety of organisations including charities, clubs, cooperative firms/social enterprises and public sector organisations. Public sector organisations are owned, funded and run by central or local government. They include:

l public hospitals l the armed forces (military) l most schools and universities l government departments.

These organisations exist to provide services which, for various reasons, it is considered impractical or undesirable for the commercial sector to provide. Whereas commercial organisations, charities and social enterprises must generate sufficient funds from their activities to sustain themselves on a continuing basis, public sector organisations are funded by government. Nevertheless, constraints on government expenditure mean that resources are limited. Consequently, economic scarcity requires that virtually all organisations be run effectively and efficiently. As a result, many of the management principles employed by the commercial sector are also employed in the not- for-profit sector, requiring extensive use of management accounting in all sectors. A traditional view of differences between sectors is illustrated in Figure 2. However, these distinctions are becoming blurred, as indicated by the overlapping circles. Commercial organisations are increasingly pursuing social responsibility objectives, while not-for- profit organisations are increasingly adopting commercial criteria to ensure the sound financial management of scarce resources.

Maximisation of shareholder value has long been the publicly stated objective of most business enterprises. It is likely, however, partly as a result of the global financial crises

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that began in 2008, that the publicly stated objectives will be expanded to embrace more stakeholders, such as employees and the local community.

Figure 2 Organisations highlighting differences between sectors

Activity 1 Think of an organisation that you know well.

l In which sector or sectors from Figure 2 do you feel your organisation most comfortably fits?

l Which factors (profit, accountability, commitment) exert pressure on it or influence its objectives?

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Provide your answer...

Discussion You may have decided that your organisation sits clearly inside one of the circles or, more likely, you will have sited it in an intermediate position – operating for commercial purposes, but anxious to satisfy other criteria such as accountability to a wider public. For example, there has been a rise in the number of investment companies which use not only financial but also ethical criteria to decide in which organisations to invest. Such criteria could include the environmental impact of the production processes used by the companies in question, or the working conditions and wages of their employees. Another example of the mixture of the pressures that can affect organisations could be taken from the social care sector: a organisation in this sector might be keen to provide an excellent service to local people, but it could also have to operate on commercial principles in managing costs in order to compete with more cost effective providers.

2 What is organisational structure? The term organisational structure refers to the relationships between the various functions and positions in an organisation. Structure determines authority and responsibility for particular tasks/activities. It also specifies the routes of communication between different parts of the organisation. Organisational structure therefore has important implications for the design of management accounting systems. For example, some organisations are highly decentralised, with decision making authority delegated to relatively junior managers at lower levels in the organisational hierarchy. In this case, a major role of the organisation’s management accounting system will be to monitor the outcomes and provide feedback to senior managers about the performance of those who have the decision making authority. Such a role will not be necessary in a highly centralised organisation, where senior managers make all the important decisions.

Theories of organisational structure With the emergence of large industrial enterprises in the nineteenth century, management theorists began to consider how organisations should be designed and managed. As you will read later in this session, early organisational theorists such as Henri Fayol (1949) attempted to derive universal prescriptions for the optimal design of organisations. More recently, theorists have emphasised the contingent nature of optimal organisational design – depending on variables such as size, production technology, degree of stability in the organisation’s business environment, nature of competition in the industry and so on. These factors are assumed to influence, for example, whether organisations are ‘tall’ or ‘flat’, centralised or decentralised in terms of decision making and so on. (These terms are discussed later.)

Ultimately, organisational structure is a means of influencing and controlling the behaviour of the individuals who work in the organisation. Structure is used to assign authority and responsibility to individuals and hold them accountable for the achievement of specific tasks or objectives (Emmanuel et al., 1990, p. 38). Management accounting is an

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important part of this process as it provides managers with the information to carry out the various activities for which they are responsible. It also measures and monitors their performance to ensure that the organisation achieves its objectives.

A good example of a management accounting technique employed widely for organisational planning and control purposes is budgeting.

The sort of information managers need to undertake various activities and the way their performance is measured/monitored will depend on the way in which the organisation is structured.

2.1 Principles of organisational structure Certain principles are basic to the operation of any organisation:

Specialisation The work of the organisation is divided up into separate activities or tasks and particular individuals concentrate on specific tasks or activities. This enables the application of specialised knowledge and so improves organisational efficiency and effectiveness.

Coordination If an organisation’s activities are to be separated into different areas or operations, it will be necessary to ensure that the various actions are coordinated, that is, consistent with each other and working towards the same organisational objectives. This is a very important task of management. The management hierarchy or ‘chain of command’ facilitates the coordination of various departments and their activities.

Management principles of the hierarchy of authority Management theorists (notably Henri Fayol, 1949) have, over the years, developed several principles relating to the hierarchy of authority for coordinating activities. Some of the most important are:

l Unity of Command. Every person should receive orders and be accountable to one and only one superior. If people receive orders from more than one superior, conflict and confusion may well result.

l The Scalar Chain. There should be a clear line of authority from top to bottom, linking all managers at all levels.

l The Responsibility and Authority Principle. If an organisational member is allocated responsibility, then that person should also be given the necessary authority to carry out the tasks necessary – including the right to ask other people to undertake particular tasks. A manager should not be given responsibility without the necessary authority, but conversely delegation of authority implies responsibility and the need for accountability.

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Span of control refers to the number of subordinates directly reporting to a manager or supervisor.

l Span of Control. There is a limit to the number of activities or people that can be supervised effectively by one person. What constitutes an effective span of control will be determined by a number of factors, including:

l the similarity of tasks/functions undertaken (the more similar, the greater the potential effective span of control)

l the proximity of the tasks to each other and to the supervisor (the closer the proximity, the greater the potential effective span of control)

l the complexity of the tasks (the more complex, the smaller the potential effective span of control)

l the direction and control needed by subordinates (the more direction and control needed, the smaller the potential effective span of control).

Activity 2 Consider the organisation where you (or a close friend or relative) work or have worked.

l What is the span of control of your immediate manager? l What is the span of control of her or his manager? l Do you think they are appropriate, bearing in mind the ability of either person to

monitor what is going on in the organisation?

Provide your answer...

Discussion The appropriateness of a span of control may depend on the extent of the delegation that can be exercised by managers (i.e., entrusting the responsibility for tasks to someone else) and also on reporting mechanisms within the organisation. Many organisations have introduced systems of regular meetings between managers and staff at which SMART objectives are set and monitored. SMART objectives are:

l Specific l Measurable l Achievable l Realistic l Time-bound (i.e., have a defined time scale associated with their achievement).

If objectives are SMART, managers should be able to tell whether or not they have been achieved. The appropriateness of the span of control will then be related to the number of people who can realistically be monitored in this way and the frequency with which monitoring takes place.

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2.2 Tall versus flat organisations Where there is a large number of levels in the management hierarchy, the organisation is said to be ‘tall’. This will tend to result in narrow spans of control. Where there is a small number of levels in the hierarchy, the organisation is said to be ‘flat’. Flat organisations will tend to have wide spans of control. Figure 3 shows a comparison of tall and flat organisation structures.

Figure 3 Tall and flat organisations

In recent years, there has been a trend towards delayering, whereby tall organisations have tended to become flat organisations by the removal of various levels in the hierarchy. This has been facilitated by:

(a) Information technology, which has reduced the need for many middle management jobs, which were largely concerned with processing information to facilitate control within the organisational hierarchy.

(b) The management philosophy of empowerment, whereby people at lower levels have been delegated authority to take actions and make decisions which would previously have been the domain of middle managers

Changes in organisation structures have led to changes in approach to management and vice versa.

The advantages of delayering are:

(a) A significant reduction in costs as middle managers’ salary costs are removed. (b) Increased motivation as people at lower levels are given power/discretion to make

decisions. Improved performance is likely to be a consequence of increased motivation.

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(c) Improved, faster communication between senior management and operational levels – increasingly important in a faster changing, more uncertain and increasingly competitive external environment.

There are also disadvantages to delayering, the principal one being a possible loss of control. Middle managers are often necessary to translate the inevitably broad and general plans of senior management into operational plans and actions that can be implemented. Senior managers may have only a hazy understanding of what is going on at the operational level and much is thereby entrusted to relatively junior people (Coates et al., 1996, p. 116).

Activity 3

l How will a tall organisational structure, in contrast with a flat one, impact on the span of control and the speed of information flows through the organisation?

l What do you think are the advantages and disadvantages of flat organisations?

Provide your answer...

Discussion In tall organisations, managers have smaller spans of control (i.e., fewer people reporting directly to them). This reduces the number of people they have to manage, but means it takes longer for information to travel through the layers of the organisation. In flat organisations, the opposite is true: communication can be quicker because of fewer layers, but the spans of control are larger. In recent years, tall organisations have tended to be associated with large bureaucracies. Communication will be formal and middle managers may be in a position to use information as a device to retain control. On the other hand, smaller spans of control may mean that managers have more time to manage. Furthermore, there are more explicit career paths, with opportunities for promotion. In flat organisations, the opposite is true: communication can be quicker because of fewer layers, but the spans of control are larger. In recent years, tall organisations have tended to be associated with large bureaucracies. Communication will be formal and middle managers may be in a position to use information as a device to retain control. On the other hand, smaller spans of control may mean that managers have more time to manage. Furthermore, there are more explicit career paths, with opportunities for promotion. Flat organisations have developed because there is a belief that communication is impaired by additional levels of management. Flatter organisations are thought to be able to react to change more quickly. Managers may be forced to delegate if their span of control is enlarged. This can be motivating for those to whom work is delegated. On the other hand, career paths are less explicit: employees may have to look sideways or even outside the organisation for career development opportunities.

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3 Forms of organisational structure It is no easy task to design and develop a structure. Many organisations continuously debate whether to structure around products, geography, common tasks or information. It is, however, possible to distinguish six important forms of organisational structure:

1 functional structure 2 product or service structure 3 geographical structure 4 matrix structure 5 project team 6 hybrid structure

Each of these forms is now explained in turn.

3.1 Functional structure As you can see from Figure 4, in a functional structure people are grouped according to the type of job they do.

Figure 4 A functional structure

This structure may be appropriate when people within functional departments need to communicate regularly with each other. For example, in a marketing department, the marketing director will coordinate the activities of marketing specialists in fields such as promotion, advertising, product design, market research, and packaging. Although there is a need for communication with all the other parts of the company, the bulk of the information exchange and communication is likely to be within the functional areas, so it makes sense to group these people together. Functional structures, however, can have disadvantages.

l Career paths tend to develop through functions and this can reduce managers’ awareness of other issues facing the organisation. The organisation will not develop many generalists this way (e.g., people who know about marketing and operations or finance and HR). This will expose the organisation to significant risks, as managers will not have an overview of its operations.

l Staff may work for the benefit of their department and not the organisation as a whole.

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l Many members of staff may never meet an external customer and may not therefore have a customer service orientation.

3.2 Product or service structure

Figure 5 Product and service structures

At first glance this looks similar to the functional structure, but here staff members are grouped together on product or service lines. This very often happens in larger organisations. For example, a big accountancy firm may group staff by the industry served or a public education department may group staff around different areas of work (e.g., pre- school children, primary, secondary and special needs). Each product or service group will have its own production and service people and also its own accounting and personnel staff. A product or service structure can be more responsive to customer needs and better at motivating staff. However, there is a danger of creating independent units, which can be difficult to manage as they assume the attitude, ‘we know what the customer wants, so stop interfering!’. It can also mean that professional expertise becomes fragmented. For example, if each product line has its own small accounting team (perhaps just one person) this may reduce career opportunities for specialists.

3.3 Geographical structure

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Figure 6 A geographical structure

A variation on the product or service structure is to group staff by physical location – for example, by region, country or continent. This has advantages for international organisations because there are likely to be big differences in markets, languages and cultures. National issues are usually best identified locally. However, there are several disadvantages to structuring by location:

l information flows between staff in different locations can be costly and problematic l there may be duplication of activities, typically, support functions such as accounting,

human resources and information technology l it may be difficult to achieve integrated strategies across a number of different

countries.

3.4 Matrix structure We have seen that functional, product or service, and geographical structures all have disadvantages. In a matrix structure, each person has two reporting lines: (i) to the functional head; and (ii) to a project, product, service or region manager. These dual reporting lines are permanent. Advocates of matrix structures believe that they combine the advantages of both functional and product or service structures. Figure 7 is an example of a matrix structure.

Figure 7 An example of how a matrix structure might work

In Figure 7, there is a Finance function and everyone in it will report to the Finance Director. However, each product (1, 2, 3, 4) will have its own independent finance team who also will report to the relevant product or service manager. Hence each group has two people to whom they report – a functional manager and a product/service manager. There are, however, problems associated with a matrix structure. First, heads of reporting lines may need to meet regularly to decide how to apportion each person’s time. What

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happens if the Finance Director and the Service 1 manager disagree about what the Service 1 finance team should be doing? Staff may feel uncomfortable with the change and uncertainty implicit in a matrix structure. In practice, matrix structures can be very difficult to manage. Dual reporting can lead to conflict, confusion, and overlapping responsibilities. This can then result in loss of accountability. There could be a number of people who are responsible if Service 1 budgets are delivered late. The person responsible could be the Finance Director who changed the format, or the Service 1 manager who would not agree a sales budget, or the Service 1 finance team who took advantage of the conflict between the Finance Director and the Service 1 manager to get more time to do the task. Matrix structures can suffer from low responsiveness, slow decision making and high levels of internal political conflict. On the other hand, they can offer a way of forcing people to work flexibly across functional boundaries (which can result in some productivity benefits for the organisation and outweigh the potential disadvantages). Organisations such as Texas Instruments, Shell, NASA, NCR, ITT and Monsanto Chemical have attributed some of their success to the matrix structure, which, in their opinion, helped them respond rapidly to customers’ needs.

3.5 Project teams Some organisations carry out the bulk of their work through project teams, which are often set up to react to changing circumstances and allow the organisation to respond quickly. They are an example of what are called organic structures, as distinct from the mechanistic structures that have been described so far. Project teams draw staff from across the organisation, seconded on a full or part time basis. The latter can be very stressful for the individual, who effectively gets two jobs usually for the life of the project. An example of how this might work can be seen in Figure 8. This looks very like the matrix structure you have just looked at – and in a way it is. Clearly, those serving on project teams also have two reporting lines: to their functional head and to the project manager. The main difference is that the project teams are not permanent groupings like the Service 1, 2, 3, 4 groupings we saw in the matrix structure in Figure 7. Instead, these project teams only last as long as the projects on which they are working. This can lead to problems of control but, on the other hand, it can generate a tremendous sense of excitement as project goals are achieved. Also, fast moving changes can be implemented as a result of the flexibility and speed of response that this sort of structure can give an organisation.

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Figure 8 An example of project teams working across a functionally structured organisation

3.6 Hybrid structure In practice, organisations evolve and changes to their structure should occur as and when necessary. This evolutionary process can produce structures that are well adapted to meeting the particular needs of the moment. A hybrid (mixture) of functional and product or service structures is common, and Figure 9 illustrates how this might look. Here we see that the sales function is structured along product lines.

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Figure 9 The organisational structure of a department store as a typical hybrid of product and function.

A hybrid structure might include functional departments, the work of which is primarily internal (e.g., finance and HR), with the rest of the company organised on a product, service, geographic or project basis, as required to meet best the needs of the customer (as in Figure 9).

3.7 Recent trends in organisational design In response to a dynamic, fast changing and competitive environment, flexibility and speed of decision making have become increasingly important in modern organisations. This has led to a number of trends in recent years:

1 The flattening of structures to remove levels in the organisational hierarchy. This shortens the chain of command and thereby increases the speed of decision making.

2 The establishment of multi-functional project teams and an empowered, multi-skilled workforce to increase flexibility.

3 A customer service orientation rather than an inward, internal process orientation. 4 The emergence of the ‘flexible firm’. In an increasingly competitive environment,

continuous reduction of costs is essential. Organisations have responded by replacing full time, permanent, salaried staff with temporary and part time contract labour. This allows greater flexibility, as labour can be readily taken on/laid off as demand conditions fluctuate. It also provides substantial savings in pension, health insurance and holiday pay costs. Such organisations consist of a small core of permanent full time salaried professional staff, who organise and direct the

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organisation’s affairs, supplemented by various levels of contract staff. Some of these will be professionals contracted for particular projects, but the majority are likely to be the flexible workforce that carries out the routine operations of the organisation.

4 Organisational departments and functions Business organisations typically consist of a number of departments or functions and it is important to have an appreciation of the purpose and activities of these departments/ functions in order to understand the role of management accounting in the organisation. After all, management accounting is concerned with providing managers at all levels with information to help them undertake their various activities and to monitor/report on the impact of these activities on the organisation. A well designed management accounting system must be based on an understanding of what various managers actually do.

Management accountants are increasingly acting as ‘business partners’ to teams in other functional areas of the organisation. If they are to be accepted within these decision making teams, it is essential they understand the operations and technology of the organisation.

4.1 Typical business organisation departments and functions A typical business organisation may consist of the following main departments or functions:

l Production l Research and Development (often abbreviated to R&D) l Purchasing l Marketing (including the selling function) l Human Resource Management l Accounting and Finance.

4.2 The Production function The Production function undertakes the activities necessary to provide the organisation’s products or services. Its main responsibilities are:

l production planning and scheduling l control and supervision of the production workforce

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l managing product quality (including process control and monitoring l maintenance of plant and equipment l control of inventory l deciding the best production methods and factory layout.

Close collaboration will usually be necessary between Production and various other functions within the organisation, for example:

l Research and Development, concerning the implications of product design for production methods and cost

l Marketing, concerning desired product functionality, appearance, quality, durability and so on

l Finance, concerning the availability of funds for purchase of new equipment and the acceptability of inventory levels.

l Human Resource Management, concerning staff motivation implications of job design and production methods.

Service organisations Although many of the principles of good management in a manufacturing environment also apply in organisations that provide services (rather than manufacture products), service businesses, such as banking and professional firms of accountants and solicitors, do have a number of distinctive features which have implications for how they are managed.

1 Services are less easily standardised than manufactured products and so service quality tends to be more variable. This makes human resource management and motivation more critical.

2 Services are often ‘intangible’ (i.e., something that cannot be precisely measured or assessed) and multi-dimensional – what exactly is the ‘service’ being offered by a bank, a private hospital or educational establishment? This can make attracting customers more difficult as it often depends on promoting an intangible item.

3 Unlike manufactured products, services cannot be stored, but must be consumed as they are produced or they are wasted. This creates additional problems matching productive capacity with customer demand. This is reflected in, for example, the common practice of commercial airlines offering very cheap flights based on marginal cost to fill empty seats – a plane flying empty to New York is a service provided but wasted!

4 Ascertaining the cost of individual services is often also problematic, as the cost structure of many service businesses is such that costs are often shared among different services. This makes, among other things, pricing and the analysis of profitability of different services more difficult than with most manufactured goods.

4.3 The Research and Development function The Research and Development (R&D) function is concerned with developing new products or processes and improving existing products/processes. R&D activities must be

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closely coordinated with the organisation’s marketing activities to ensure that the organisation is providing exactly what its customers want in the most efficient, effective and economical way.

4.4 The Purchasing function The Purchasing function is concerned with acquiring goods and services for use by the organisation. These will include, for example, raw materials and components for manufacturing and also production equipment. The responsibilities of this function usually extend to buying goods and services for the entire organisation (not just the Production function), including, for example, office equipment, furniture, computer equipment and stationery. In buying goods and services, purchasing managers must take into account a number of factors – collectively referred to as ‘the Purchasing Mix’, namely, Quantity, Quality, Price and Delivery.

l Quantity. Buying in large quantities can attract price discounts and prevent inventory running out. On the other hand, there are substantial costs involved in carrying a high level of inventory.

l Quality. There will usually be a trade-off between price and quality in acquiring goods and services. Consequently, Production, R&D and Marketing Functions will need to be consulted to determine an acceptable level of quality which will depend on how important quality is as an attribute of the final product or service of the organisation.

l Price. Other things being equal, the purchasing manager will look for the best price deal when procuring goods and services, although price must be considered in conjunction with quality and supplier reliability, in order to achieve best value, rather than lowest price only.

l Delivery. The time between placing an order and receiving the goods or services, the lead time, can be critical for production planning and scheduling and also has implications for inventory control. Suppliers must therefore be evaluated in terms of their reliability and capability for on time delivery.

In short, the ‘purchasing mix’ can be considered as making sure that the organisation has the right amount, of the right quality, at the right price, in the right place at the right time!

4.5 The Marketing function Marketing is concerned with identifying and satisfying customers needs at the right price. Marketing involves researching what customers want and analysing how the organisation can satisfy these wants. Marketing activities range from the ‘strategic’, concerned with the choice of product markets (and how to compete in them, for example, on price or product differentiation) to the operational, arranging sales promotions (e.g., offering a 25 per cent discount), producing literature such as product catalogues and brochures, placing advertisements in the appropriate media and so on. A fundamental activity in marketing is managing the Marketing Mix consisting of the ‘4Ps’: Product, Price, Promotion and Place.

l Product. Having the right product in terms of benefits that customers value. l Price. Setting the right price which is consistent with potential customers’ perception

of the value offered by the product.

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l Promotion. Promoting the product in a way which creates maximum customer awareness and persuades potential customers to make the decision to purchase the product.

l Place. Making the product available in the right place at the right time – including choosing appropriate distribution channels.

In order to be successful, a business enterprise must either have a lower price than its competitors, or a product that is in some way superior – or both! A competitive strategy based on low price is known as a cost leadership strategy. A competitive strategy based on developing a superior product is known as a differentiation strategy.

The historical evolution of marketing Several writers (e.g., Harrison, 1978) have argued (and it is now widely accepted among management theorists and practitioners) that there have been three distinct eras in the history of advanced capitalist countries, such as the UK, which have affected the status, role and responsibilities of the Marketing function. These were:

1 The Production Era (pre–1930). This refers to a period of time during which products (and services) were relatively scarce (thereby constraining consumer choice) and the most important function of business was that of production. Marketing, in so far as it existed, was considered the least important function.

2 The Sales Era (1930–50). This refers to an era characterised by a shift in emphasis of business management from the production function to that of selling. With continued industrial development and innovations, many new consumer oriented products became available and a much more competitive selling environment resulted. This made it necessary to seek out customers and make significant use of advertising, promotion and personal selling.

3 The Marketing Era (1950–present). This period marked another significant change in the attitude of senior management towards the status and responsibilities of marketing. This change, referred to by many writers as the Marketing Concept (Kotler, 1967), meant a departure from the previous concept of marketing as being the sales function of a business, to one where marketing had a much greater responsibility in total company policy formation and operation. Under the Marketing Concept, marketing was placed at the beginning of the process of determining the products (services) which were needed by the market, the price at which they should be sold and the way in which they were to be distributed.

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Figure 10 ‘We produce an inferior line of goods. That’s why we’re looking for a real first class marketing man.’

4.6 The Human Resources function The Human Resources function is concerned with the following:

l Recruitment and selection. Ensuring that the right people are recruited to the right jobs.

l Training and development. Enabling employees to carry out their responsibilities effectively and make use of their potential.

l Employee relations. Including negotiations over pay and conditions. l Grievance procedures and disciplinary matters. Dealing with complaints from

employees or from the employer. l Health and Safety matters Making sure employees work in a healthy and safe

environment. l Redundancy procedures Administering a proper system that is seen to be fair to all

concerned when deciding on redundancies and agreeing redundancy payments.

Organisations are dependent on their employees. Consequently, their recruitment and selection require careful management.

In recent years, the Human Resources function has attained a more important status as there has developed an increasing need (especially in service organisations) to ‘get the most’ from employees, in terms of customer service, for the benefit of the organisation.

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4.7 The Accounting and Finance function The Accounting and Finance function is concerned with the following:

l Financial record keeping of transactions involving monetary inflows or outflows. l Preparing financial statements (the income statement, balance sheet and cash

flow statement) for reporting to external parties such as shareholders. The financial statements are also the starting point for calculating any tax due on business profits.

l Payroll administration Paying wages and salaries and maintaining appropriate income tax and national insurance records.

l Preparing management accounting information and analysis to help managers to plan, control and make decisions.

5 Decentralisation and centralisation Centralisation describes a situation where decision making authority is held predomi- nantly by senior managers within an organisation. Such a situation is common within smaller businesses where the owner/manager takes all the important decisions. Centralisation, however, is not only found in such organisations, as a number of very large organisations, such as banks and some large retailers, are also highly centralised. Little, if any, discretion is given to branch managers, who must simply run their branches in accordance with the procedures established by Head Office. Decentralisation describes the situation where the authority to make decisions is delegated to people at lower levels of the organisation. This often occurs where growth in size and increased complexity make the delegation of significant decision making authority necessary. Decentralisation is a matter of degree and is usually present to varying degrees in most organisations.

Effective delegation has benefits for managers, staff and the organisation as a whole.

5.1 Advantages of decentralisation Coates et al. (1996, pp. 115–6) identify the advantages of decentralisation as follows:

l Specialisation. Managers can develop more detailed and specialised knowledge by concentrating on a limited aspect of the organisation’s operations. This should result in better quality decisions.

l Timeliness. Quicker decisions are possible if it is not necessary to pass decisions up through the hierarchical chain of command. In addition, senior managers’ time is then available for more important decisions affecting the future of the whole organisation.

l Motivation. Having authority to make decisions usually results in greater motivation and commitment and hence improved performance.

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l Human resource development. Less experienced managers can ‘learn their trade’ without their mistakes jeopardising the entire organisation. The impact of mistakes/ misjudgements is likely to be confined to a limited aspect of the organisation’s operations.

l Organisational segment performance comparison. By dividing the organisation into separate segments, it is possible to evaluate which aspects of operations are performing well and which are not – something not usually possible when the inputs/ outputs are at a more aggregate level.

5.2 Disadvantages of decentralisation Coates et al. (1996, pp. 115–6) also identify the disadvantages of decentralisation as follows:

l Dysfunctional decision making. This occurs where managers take actions which improve the measured performance of their organisational segment, but damage the organisation as a whole. For example, a manager in one department may keep costs down in his/her own department in ways which have an impact on the quality of service provided to other departments.

l Loss of control. There is a danger that senior management may lose control of the organisation, as they become far removed from the detail of underlying operations and unaware of the decisions being made by lower level managers.

l Increased cost of control. Costly management information systems may be necessary to monitor the performance of lower management levels to ensure that delegated decision making authority is being used in the best interests of the organisation.

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Figure 11 ‘In the interest of overcoming my reluctance to delegate, starting Monday I want you to do all of my worrying for me.’

5.3 Responsibility centres Decentralisation results in the creation of separate responsibility centres – aspects/ areas of the organisation’s operations for which a particular manager is responsible. The main types of responsibility centre in common use are as follows. Cost centre. The manager is assumed to be able to influence significantly the level of cost incurred and will be judged according to how well costs are controlled. There may or may not be revenues associated with the particular aspect of operations concerned, but if there are, the manager is assumed to have no control over these. Managers of cost centres will need regular information to be provided by the accounting system, concerning how individual cost items compare with budget – that is, budget variance and, of course, budgetary planning information, for example, cost targets to be achieved. Revenue centre. The manager is assumed to be able to influence significantly the level of revenue earned and will be judged on the basis of this. Revenue centres are principally intended to be applied to sales operations, where the manager’s responsibilities relate to the generation of income, whether or not there are attributable costs. Managers will need information concerning targets for individual revenue generating units (e.g., products), and also regular feedback information on actual versus budgeted revenues. Profit centre. The manager is assumed to be able to influence significantly both costs and revenues and is judged on the basis of the level of profit generated by the particular aspect of operations concerned. The term profit centre is usually limited to the situation where the manager does not have responsibility for the level of investment in the centre (this decision being made by more senior management). Managers need information concerning both revenues and costs, for example, which products/services are profitable.

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Investment centre. This is a type of profit centre, but one for which the manager also has significant influence over investment decisions. In such cases, it would be expected that, in addition to the normal profit centre measures (e.g., Return on Sales), profit would be related to the capital invested (e.g., Return on Investment). Managers need the same information as for profit centres and in addition, detailed appraisals of potential investments and control information concerning the level of investment (e.g., working capital levels, namely, inventory, receivables and payables) at any particular point in time.

Activity 4 What do you think would be the appropriate type of responsibility centre for each of the following functions/departments?

l A marketing department l A research and development department l A machinery service and repair department of a factory l The German manufacturing and distribution division of a large multinational

company l A regional sales office of a US company

How would you measure the performance of the manager/s of each centre?

Provide your answer...

Discussion In some organisations, which are departmentalised on the basis of product groups, each product group department will have its own marketing activities. Where, however, an organisation is departmentalised on a functional basis and has a separate marketing department serving all its product groups, this department will incur expenditure on behalf of the whole organisation, but will not have its own revenues. It is likely then to be a cost centre. The same is true of a research and development and a service and repairs department. Research and development is difficult to measure, but this is attempted in many firms by use of such measures as number of patents registered, percentage of sales from recently introduced products and so on. The German manufacturing division of a large multinational company is likely to earn revenues (the level of which it can presumably influence) and incur costs (the level of which it can also influence). It is likely to be a profit centre, or even an investment centre. A regional sales office is likely to be able to influence the level of revenue generated, but the main elements of cost (e.g., sales personnel salaries) are likely to be the result of decisions made by more senior (Head Office) managers. It is likely to be a revenue centre. Responsibility centres should be evaluated according to financial performance (comparison of budgeted and actual costs, revenues and profits as appropriate). It will probably be desirable also to measure various non-financial indicators that are important for each centre achieving its goals – for example, in the case of the service and repairs department, average response time for machine breakdowns, and in the

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case of the research and development department, the number of new product or process innovations, and so on.

5.4 The divisionalised organisation The ultimate form of decentralisation occurs when an organisation is separated into a number of investment centres that operate almost as independent businesses, each with its own profit responsibility. The basis of divisionalisation may be according to product (or service), geographical area and so on. Such a divisional structure is illustrated by the common legal form of groups with subsidiary companies. Each division in the organisation will typically have its own functional structure.

5.5 Line and staff relationships The existence of an organisational structure implies that authority and control are exercised from above and pass down through the hierarchy. The relationships that result are known as line relationships. In any organisation, there should be a clear line of authority and responsibility from the top to the bottom of the hierarchy: the ‘scalar chain’ which indicates the line relationships. By contrast, staff relationships exist when a manager gives/receives advice from another organisational member. For example, the Accounting and Finance manager will provide information and analysis to help the Marketing and Production managers make decisions and control their respective operations.

Activity 5 This activity draws together some important ideas you have considered concerning organisation structure. Consider the organisation in which you work, or one with which you are familiar. (Focus on the part of the organisation with which you are most familiar.)

l What is the span of control? l How many layers or levels of management are there? Is your organisation tall or

flat? l Is authority centralised or decentralised? l How clear is the definition of jobs? Do some of them overlap? l To how many people do employees report? Are there single or dual lines of

control?

You may find it difficult to answer these questions, especially if there are dual responsibilities or reporting lines in some areas.

Provide your answer...

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6 The organisational environment Organisations exist in an environment – everything that surrounds the organisation physically and socially. The constituents of the organisation’s environment are likely to have an important impact on the management of the organisation. An organisation’s management must systematically analyse its environment in formulating plans to achieve organisational objectives. The major environmental factors impacting on an organisation can be grouped under four headings: political/legal, economic, social/demographic and technological (reflected in the acronym: PEST analysis).

6.1 Political and legal environment Clearly, there are laws that must be complied with, emanating from a number of sources, of which the organisation must be aware. These cover areas such as:

l ways of doing business (e.g., included within contract law); professional negligence (included within the law of tort)

l protection of consumers (e.g., Sale of Goods Act 1979, Consumer Credit Act 1974, 2006)

l safe working environment for employees (health and safety legislation) l confidentiality and use of information held concerning customers or employees (Data

Protection Act 1998) l duties of directors and financial reporting requirements (company law, in particular,

the Companies Act 2006) l minimum wage, equal opportunities and unfair dismissal rules (employment law)

pollution, waste disposal (environmental legislation) l tax liabilities (tax law).

In recent years, the European Union (EU) has become increasingly important for member states in terms of international trade rules. In addition to requiring the removal of trade barriers, the EU requires that:

l there be free movement of capital between countries l governments do not discriminate between companies in different EU countries in

awarding government contracts l financial services can be provided in any EU country l telecommunications organisations be opened up to greater competition l qualifications awarded in one country are recognised in the others.

In addition to the legal framework, government impacts directly on many organisations in a number of ways:

l via taxes or subsidies to discourage/encourage particular activities (e.g., alcohol consumption)

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l national and, in particular, European, regulations have impacted on organisations in ways such as product standardisation, anti-discrimination legislation, workers’ rights, etc.

l location incentives (often funded by the European Union) to encourage businesses to locate in particular areas

l by providing barriers to entry (e.g., the requirement to obtain a license to operate) and thus restricting competition in a particular field

l the government may be a major customer l anti-monopoly, competition legislation l as a supplier of infrastructure (e.g., roads), government can influence competition

(e.g., road versus rail freight).

Political change, for example, wars, expropriation or nationalisation, political instability and so on, can also present a major threat to organisational plans.

6.2 Economic environment Economic variables such as inflation, interest rates, savings patterns, economic growth, exchange rates, the levels of taxation and government spending all influence the amount of money people have to spend. This is likely to have an impact on most organisations. Businesses will experience, for example, varying levels of demand for their products or services and charities will experience varying levels of donations, as the amount of money people have to spend fluctuates in response to variations in major economic variables.

6.3 Demographic and social trends impacting on organisations Demography is concerned with the study of data relating to the population and groups within it – births, deaths, diseases and so on – as indicators of the conditions of life in communities. Recent trends in the UK include a fall in the number of young people entering the labour market and an increase in the number of retired people. Such data are used by organisations, especially in the identification of consumer markets, but they are also important for human resource management too. Organisations must monitor demographic changes in their HR planning, especially with regard to recruitment. These changes must be taken into account in considering the best ways to tap into the future talent pool. It will be necessary to assess the current and future labour requirements in terms of both the level and the type of labour. The area from which the labour force is to be drawn must be identified. Once the labour force recruitment area is identified, the size and composition of the available labour force can be determined. The next step then involves a comparison of need as opposed to supply. In view of recent demographic changes, it is likely to be necessary to tap into currently under-utilised labour resources such as older workers and women returning to work after long periods spent bringing up children. HR policies need to be geared towards these requirements, for example, by providing training (e.g., in IT skills), part time working and child care facilities.

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6.4 Sociological factors A number of factors concerning the way society is structured will also be of relevance to many organisations.

Social class An important component of social structure is social class. Social class refers to the hierarchical distinction between individuals or groups in society. The factors that determine class vary from one society to another. The most obvious meaning of this term used to be in relation to the stratum of society into which one was born (aristocratic, middle class, working class) and class still means this to many people. In contemporary capitalist societies, it is common to define class in terms of income, status, education or profession, or a combination of these. An important implication of the existence of such a class structure is that social class can create different customer groups. It is therefore a tool for market segmentation. The social classes are widely used to profile and predict different customer behaviour. Identifying a segment, in which customers share certain characteristics, such as level of income, is useful when developing products for those customers.

Culture Culture refers to a set of shared attitudes, values, goals and practices that characterise a society or a social group within it. Cultural factors also have a significant impact on customer behaviour as culture is the most fundamental influence on a person’s wants and behaviour. As with social class, culture can create customer groups and is therefore important for marketing. For example, there has been a cultural shift towards greater concern about health and fitness, which has created opportunities for serving customers who wish to buy:

l low calorie foods l health club memberships l exercise equipment l activity- or health-related holidays.

Similarly, the increased desire for leisure time has resulted in increased demand for convenience products and services such as microwave ovens, ready meals and direct marketing service businesses such as telephone banking and insurance. Each culture contains sub-cultures – particular groups of people with shared values. Sub- cultures can include nationalities, religions, and racial groups of people sharing the same geographical location. Sometimes a sub-culture will create a substantial and distinctive market segment of its own. For example, the ‘youth culture’ or ‘club culture’ has quite distinct values and buying characteristics from the much older ‘grey generation’.

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Figure 12 ‘This looks good. It’s a six hour special on how society is becoming too sedentary.’

Cultural shifts also impact on other functions within an organisation. For example, there has been a dramatic increase in the number of women participating in the workforce and this raises a number of potential (and actual) discrimination issues, for instance, in terms of promotion and seniority and sexual harassment. HR policies must attempt to guard against these. Many organisations are responding by, for example:

l introducing flexible working hours to help women cope with the demands of career and family responsibilities

l providing education and training for managers and the workforce to encourage equal opportunities and discourage discrimination.

Another important cultural shift is the increasing concern for the physical environment among organisations’ various stakeholders (employees, customers, investors, local community and so on). Organisations are responding in a number of ways:

l by introducing ‘green products’ to exploit the opportunity, for example, environmen- tally friendly deodorants, washing powder and cleaning agents

l by exercising greater care in disposing of industrial waste l by reducing their carbon footprint by, for example, sourcing raw materials locally,

not using air freight, using video conferencing instead of executive travel, using energy efficient appliances, etc.

l by social and environmental reporting. Increasingly, large companies are providing information (which is not currently required by law or accounting regulations) on environmental policies in their annual financial reports.

Many companies now present a corporate social responsibility report, although the content varies greatly between companies. This report is usually posted on the company’s website.

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In addition to such voluntary responses based on enlightened self-interest, organisations are increasingly needing to familiarise themselves with environmental legislation and direct government action, for example:

l the congestion charge in inner London l fines for breaching pollution guidelines l the landfill tax on hazardous waste.

6.5 Technology and its impact In recent years, information systems (IS) and information technology (IT) have had a profound impact on most organisations. So pervasive is IT that IT skills are now essential for employees in virtually all organisations. IT has:

l facilitated flatter organisations and wider spans of control l made possible faster, more accurate processing of larger volumes of data l provided access to more – and more up to date – information for managers l provided computer modelling (e.g., simulations) which can improve the quality of

planning and decision making l made possible the provision of control information to senior managers in real time l improved customer service by provision of electronic data interchange (EDI)

between organisations, customer databases, extranets and so on.

Perhaps even more dramatic than the improvements in information processing are the improvements in communications that IT has provided. E-mail provides instant worldwide messaging; online conferencing enables collaboration between people in geographi- cally distant locations; voice mail allows communication between people whose working time schedules do not coincide; video conferencing allows face to face meetings without the need for expensive travel. IT has also changed the relationship between employers and employees and the nature of work, for example in terms of:

l home working (telecommuting) is commonplace, providing more flexible working arrangements and reducing the time and cost of travelling to work

l greater visibility provided to management, allowing increased monitoring and control.

Activity 6

(a) Explain (spend no more than about ten minutes on this) why it is necessary for an organisation to undertake a PEST analysis.

(b) Give three examples of actions that might result from such an analysis.

Provide your answer...

Discussion Environmental changes may have a significant impact on the organisation’s ability to achieve its objectives, including, possibly, survival. Major environmental changes,

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however, can often be anticipated if the environment is systematically monitored and analysed, and appropriate action can be taken to safeguard against threats and/or exploit opportunities arising. Examples of possible actions in response to an environmental analysis include:

l developing a new product range based on emerging technology ahead of the competition

l developing staff education and training programmes in anticipation of future skills shortages in the local labour market

l planning a programme of redundancies based on anticipation of a serious economic downturn.

Conclusion This course has provided an introduction to the nature of organisations. You should now have an appreciation of the way in which different organisations are structured and of the different components within an organisation. You should also have an understanding of the main environmental factors that impact on organisations, including political/legal, economic, social/demographic and technological factors.

Keep on learning

Conclusion

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Glossary anti-monopoly, competition legislation Laws which seek to maintain the benefits of competition (in order to protect con- sumers), by preventing the emergence of monopolies in a particular market.

balance sheet An accounting report summarising an organisation’s assets and liabilities.

barriers to entry Factors that prevent competitors from entering a particular market.

carbon footprint The total amount of carbon emissions (greenhouse gasses), that result from an organisation’s activities.

cash flow statement

Glossary

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An accounting report showing the principal types of cash inflows and outflows during a period and any cash surplus or deficit arising.

cooperative firms/social enterprises Organisations which are typically engaged in commercial activity, but whose primary purpose is social (for example, to provide employment) rather than earning profit for the owner/s. Such organisations are typically owned by their employees and/or customers.

Cost centre. A production or service location, function, activity or item of equipment for which costs are accumulated.A responsibility centre (e.g. division, department) where local man- agement has responsibility for and is called to account on the basis of costs (or expenses) only.

Culture The set of shared attitudes, values, goals and practices that characterise a society or social groups within it. Culture is a term which describes the psychology, attitudes, experiences, beliefs and values of an organisation. It has also been defined as the specific collection of values and norms that are shared by people and groups in an organization and that control the way they interact with each other and with stake- holders outside the organisation.

databases A computer-based store of organised data, structured so that it can be used to deliver information to more than one application.

delayering The process of removing layers in the management hierarchy, so that ‘tall’ organisations become flatter, with fewer hierarchical levels.

Demography The study of data relating to the population, for example, birth and death rates and population age profiles.

divisionalisation The process of dividing an organisation into a number of separate investment centres/ business segments (divisions) that operate almost as independent businesses.

effectively Achieving the specified outcomes; the extent to which specified outcomes are achieved.

efficiently Achieving specified outputs with the minimum necessary inputs (for a given quality specification).

electronic data interchange (EDI) The exchange of information directly between separate information systems (usually in different organisations). It is the basis of electronic commerce.

empowerment Giving employees power, in order to increase their self-confidence and motivation in order to improve their performance in pursuing organisational objectives.

extranets A form of intranet, accessible by specified individuals who may be outside a particular organisation, for example as customers or suppliers.

‘For-profit’ (commercial) organisations Commercial organisations whose primary purpose is to earn profit for the owner/s.

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income statement An accounting report summarising revenues earned, expenditure incurred and any surplus/deficit of revenue over expenditure during a certain period.

Investment centre. A type of profit centre for which the manager also has significant influence over the amount of capital investment and is therefore also responsible for profit in relation to capital employed.

lead time The time between a customer placing an order and the product or service being delivered.

line relationships The vertical relationships (in the organisational hierarchy) between managers and subordinates.

Marketing Concept The combination of factors which marketing managers take into account when marketing a product or service, namely: product, price, promotion and place.

mechanistic structures Tall, hierarchical, bureaucratic organisation structures, with centralisation of authority, formalisation of procedures and high levels of specialisation.

Middle line The group of middle managers whose role is to convert the objectives and broad plans of the Strategic Apex into operational plans that can be carried out by the organisation's workers.

‘Not-for–profit’ organisations Organisations that exist to pursue a particular social objective rather than to earn profit for the owner/s.

online conferencing A computer based communication system which enables collaboration between people in geographically distant locations.

Operating core The people who do the basic work of providing the products or delivering the services.

organic structures Flat organisation structures, with decentralisation of authority and low levels of specialisation.

PEST analysis An analysis of the organisation’s Political/legal, Economic, Social/demographic and Technological environment factors (hence the acronym PEST). This analysis is undertaken as part of the organisation's long- term planning process.

Profit centre. A division or department where local management has responsibility for revenue and costs, and is called to account on the basis of the difference between them (e.g. profit, loss, surplus, deficit).

Purchasing Mix The combination of factors which purchasing managers take into account when procuring goods or services, namely: quantity, quality, price and delivery.

responsibility centres

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An organisational segment such as a department or a function which a particular manager is accountable for.

Return on Investment Profit expressed as a percentage of the capital invested in an enterprise.

Return on Sales Profit earned expressed as a percentage of sales revenue.

Revenue centre. An organisational segment for which a particular manager is held accountable in terms of revenue earned.

social and environmental reporting The provision of information about an organisation’s social and environmental policies in its annual financial report.

social class The hierarchical distinction between individuals or groups in society. In contemporary capitalist society, it is common to define class in terms of income, education or profession –or a combination of these.

social responsibility objectives Objectives of an organisation relating to wider needs (for example, protecting the environment, provision of employment) rather than just the needs of the owners/ providers of funds.

staff relationships The horizontal relationship between a manager and another organisational member to/ from whom the manager gives or receives information or advice.

stakeholders Individuals or groups who have an interest in the activities of an organisation (they may be influenced by it) and may also have the power to influence the future course of the organisation (such as shareholders or employees). However, stakeholders will differ greatly in their degree of interest and/or influence.

Strategic apex The highest management level in an organisation, whose purpose is to ensure that the organisation follows its mission and manages its relationship with its environment.

Support staff The administrative personnel whose purpose is to provide services to other parts of the organisation.

Technostructure The group of technical/professional staff concerned with the best way of doing a job, specifying output criteria and ensuring that personnel have appropriate skills.

telecommuting Working from home, facilitated by information technology enabled communication with colleagues.

transaction costs The costs of engaging in economic activity resulting from an organisation’s relationship to the market.

video conferencing People in distant locations conducting conferences, through the use of computer networks to transmit audio and video data.

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working capital A measure of a company's liquidity and financial health. It encompasses short term assets (stock, debtors, cash) as well as less short term liabilities (creditors) by which they are financed; often referred to as net current assets. Working capital is generally calculated as: Working capital = current capital - current liabilities.

References Table of statutes Great Britain Companies Act 2006. Elizabeth II. Chapter 46. (2006) London: The Stationery Office. Great Britain. Consumer Credit Act 1974. Elizabeth II. Chapter 39. (1974) London: The Stationery Office. Great Britain. Consumer Credit Act 2006. Elizabeth II. Chapter 14.(2006) London: The Stationery Office. Great Britain. Data Protection Act 1998. Elizabeth II. Chapter 29. (1998) London: The Stationery Office. Great Britain. Sale of Goods Act 1979. Elizabeth II. Chapter 54.(1979) London: The Stationery Office. Publications Anthony, R.N. (1965) Planning and Control Systems: A Framework for Analysis, Boston, MA, Division of Research, Harvard Graduate School of Business. Bentley, T.J. (1998) Managing Information: Avoiding Overload, London, Chartered Institute of Management Accountants, Kogan Page. Chandler, A.D. (1962) Strategy and Structure, Boston, MA, MIT Press. Coates, J.B., Rickwood, C. and Stacey, R.J. (1996) Management Accounting for Strategic and Operational Control, Oxford, Butterworth-Heinemann. Davenport, T.H. and Prusak, L. (1997) Working Knowledge, Boston, MA, Harvard Business School Press. Emmanuel, C., Otley, D. and Merchant, K. (1990) Accounting for Management Control (2nd edn), London, Chapman and Hall. Fayol, H. (1949) General and Industrial Management, London, Pitman. Harrison, G.L. (1978) ‘The role of the management accountant in the marketing function of business: case observations and analyses’, Research paper no. 157, School of Economics and Financial Studies, Macquarie University. Johnson, H.T. and Kaplan, R.S. (1987) Relevance Lost: The Rise and Fall of Management Accounting, Boston, MA, Harvard Business School Press. Kotler, P. (1967) Marketing Management, Englewood Cliffs, NJ, Prentice Hall. Mintzberg, H. (1978) ‘Patterns in Strategy Formation’, Management Science, vol. 24, no. 9, pp. 934–48. Mintzberg, H. (1979) The Structuring of Organisations, Englewood Cliffs, NJ, Prentice Hall. Porter, M.E. (1985) Competitive Advantage: Creating and Sustaining Superior Perfor- mance, New York, Free Press.

References

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Rockart, J.F. (1979) ‘Chief executives define their own data needs’, Harvard Business Review, vol. 57, no. 2, pp. 238–41.

Acknowledgements This course was written by Dr Mike Lucas. Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 Licence. The material acknowledged below is Proprietary and used under licence (not subject to Creative Commons Licence). Grateful acknowledgement is made to the following sources for permission to reproduce material in this course: Course image: Ken Teegardin in Flickr made available under Creative Commons Attribution-ShareAlike 2.0 Licence. Images Figure 1: Mintzberg, H. (1979) ‘Five basic parts of organisations’, The Structure of Organizations, Pearson Education, Inc. Illustrations Section 4.5: © John Morris, www.CartoonStock.com Section 5.2: © Mike Shapiro, www.CartoonStock.com Section 6.4: © Mike Shapiro, www.CartoonStock.com Every effort has been made to contact copyright owners. If any have been inadvertently overlooked, the publishers will be pleased to make the necessary arrangements at the first opportunity. Don't miss out: If reading this text has inspired you to learn more, you may be interested in joining the millions of people who discover our free learning resources and qualifications by visiting The Open University - www.open.edu/openlearn/free-courses

Acknowledgements

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Business and Business Environment/Support/Organisations_and_business environment(2).pdf