KnS Institute of Business studies CHAPTER 1// BUSINESS ORGANISATIONS AND THEIR STAKEHOLDERS

F1 Accountant in Business
CHAPTER
Business
organisations
and their
stakeholders

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KnS Institute of Business studies CHAPTER 1// BUSINESS ORGANISATIONS AND THEIR STAKEHOLDERS

Organisation
An organization is: a social arrangement that is structured and managed to pursue collective goals, which
controls its own performance and which has a boundary separating it from its environment.
Examples of organisations.
A multi-national company (eg Unilever) An accountancy firm (eg Ernst & young)
A Charity (eg Edhi Trust) A local authority (eg KMC)
A Cricket team

Q: Which of the following would be considered to be an organisation?

i) A sole trader
ii) A tennis club
iii) A hospital
A (i), (ii) and (iii)
B (i) and (ii) only
C (ii) and (iii) only
D (i) and (iii) only

Q: Which of the following defines an organisation?

A A social arrangement which pursues collective goals, which controls its own performance and
which has a boundary separating it from its environment
B A social arrangement which exists to make a profit, controls its own performance and which
operates within certain boundaries

Why do we need organisations?

Organisations can achieve results which individuals cannot achieve by themselves.
(a) Overcome people's individual limitations.
(b) Enable people to specialise in what they do best.
(c) Save time due to multi-tasking
(d) Accumulating and sharing knowledge.
(e) Enable Synergy (1+1=11)

Q: Which of the following is NOT a benefit that organisations have over individuals?
A They allow the sharing skills and knowledge
B They enable people to perform tasks they would be unable to achieve on their own
C They enable synergy to be achieved
D They speed up the time taken to make decisions

Q: Jared is organising a social event. Which of the following would be benefits of him forming a committee
to manage the planning process and the event itself?
i) It would help to overcome his limitations, by bringing on board other people with different skills to him.
ii) It would save time through the joint efforts of everyone on the committee.
iii) It would help to satisfy Jared’s social needs.
iv) All members of the committee would have to be skilled in all aspects of managing the social event.
A (i), (ii) and (iii) only
B (i), (iii) and (iv) only
C All of the above
D None of the above

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KnS Institute of Business studies CHAPTER 1// BUSINESS ORGANISATIONS AND THEIR STAKEHOLDERS

Factors that differentiate organisations:

Organisations also differ in many ways. Here are some possible differences.
a) Ownership: Some organisations are owned by private owners or shareholders. These are private
sector organisations. Public sector organisations are owned by the government.
b) Control: Controlled by the owners themselves or by people working on their behalf and some are
controlled by government appointed regulators.
c) Activity: Organisations could be manufacturing or service organisation.
d) Motive: Some businesses exist to make a profit. Others, for example the army, are not profit oriented.
e) Legal status: Organisations may be limited companies or partnerships.
f) Size: The business may be a small family business or a big multinational corporation.
g) Sources of finance: Business can raise finance by borrowing from banks or government funding or
issuing shares.
h) Technology: Businesses have varying degrees of technology use. For example, high use of technology
or very low use.

Activities of an organisation
Organisations do many different types of work. Here are some examples.

Industry Activity
Agriculture

Manufacturing

Extractive/raw materials

Energy

Retailing/distribution

Service industries
T A: THE BU
Types of Organisations O
Profit oriented/ Commercial organisations are organisation whose primary goal is to maximize profit of
the company and to provide maximum gains to the investors. (eg Nestle, Engro)
Non Profit oriented organisations are organisations whose primary goal is to provide goods and services to
the general public or the intended beneficiary. (eg Edhi Foundation)

Private sector organisations Organizations that are owned by private individuals or general public are
known as private sector organizations.

Q: A private sector organisation is one owned or run by:

A Central government
B Local government
C Government agencies
D None of the above

Private sector organizations may have a different legal status for example a sole proprietorship, a partnership
or a limited liability company
Sole traders – the organisation is owned and run by one person.

Partnerships – the organisation is owned and run by two or more individuals.

In both of these organisations, the owner of the business is not legally separate from the business.

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KnS Institute of Business studies CHAPTER 1// BUSINESS ORGANISATIONS AND THEIR STAKEHOLDERS

Limited companies
A limited company has a separate legal personality from its owners (shareholders) and they have limited
liability.
The ownership and control of a limited company are legally separate.
a) Owners: Shareholders are the owners of the company. They provide capital and receive a return.
b) Control: Directors are the agents of shareholders appointed by shareholders to run the company. The
board of directors controls the management and staff of the company, and is accountable to shareholders.
i) Executive directors participate in the daily operations of the organisation.
ii) Non-executive directors are invited to join in an advisory capacity, usually to bring their
particular skills or experience to the discussions of the board to exercise some overall
guidance.
c) Operational management are recruited to operate the business, and are accountable to the board.

Types of limited company

In the UK, limited companies come in two types: private limited companies (eg X Limited) and public
limited companies (eg X plc). They differ as follows.
Private company Public compsny
a) Number of shareholders

b) Transferability of shares

c) Directors as shareholders

d) Sources of Capital

Q: Which of the following statements regarding types of business is correct?

A Partnerships are owned and run by one or more people
B Private limited companies can sell shares to the public
C Shareholders in companies typically have limited liability
D The owners of sole traders typically have limited liability

Advantages and disadvantages of limited companies

Advantages
a) More money available for investment.
b) Reduces risk for investors
c) Separate legal personality.
d) Ownership is legally separate from control.
e) No restrictions on size.
Disadvantages
a) Legal compliance costs are high.
b) Shareholders have little practical power, other than to sell their shares.

Q: Which of the following are usually seen as the primary objectives of companies?
i) To maximise the wealth of shareholders
ii) To protect the environment
iii) To make a profit A

A (i), (ii) and (iii)

B (i) and (ii) only
C (ii) and (iii) only
D (i) and (iii) only

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KnS Institute of Business studies CHAPTER 1// BUSINESS ORGANISATIONS AND THEIR STAKEHOLDERS

Public sector organisations are owned and controlled by the government. Such organisations often exist to
provide a good or service. (eg PIA, Pakistan steel mill).

Characteristics of the public sector

(a) Accountability, ultimately, to Parliament
(b) Funding. The public sector can obtain funds in three main ways.
(i) Raising taxes
(ii) Making charges
(iii) Borrowing
(c) Demand for services. In the public sector demand for many services is practically limitless.
(d) Limited Resources. Despite the potentially huge demand for public services, constraints on
government expenditure mean that resources are limited and that demand cannot always be met.

Q: Which of the following organisations is most likely to be classified as part of the public sector?
A A charity
B A social club
C A school
D A public limited company

Advantages
a) Fairness. The public sector can ensure that everyone has access to the services.
b) Filling the gaps left by the private sector by providing public goods such as street lighting.
c) Public interest. It is believed that the public interest can be best served if certain services are ran
by the state.
d) Economies of scale. Costs can be spread if everything is centralised.
e) Cheaper finance. Taxes or borrowing backed by government guarantees might be cheaper than
borrowing at commercial rates.
Disadvantages
a) Accountability. Inefficiency may be ignored as taxpayers bear losses.
b) Interference. Politicians may not be familiar with the operation of a business and yet political
pressures and indecision may influence adversely the decision making process.
c) Cost. Public demand as perfect a service as possible but will not wish to bear the cost.

Non-governmental organisations (NGOs):

 A non-governmental organizations is a legally constituted organization of people working together
independently from any form of government.
 NGOs are organizations where the primary purpose is not a commercial one but to serve a particular
cause.
 NGOs are not necessarily charities and although they have political aims but they are not political
parties.
 NGOs need to engage in fund raising and mobilisation of resources (donations, volunteer labour,
materials).
Features of NGOs:
The following are some organisational features of NGOs.
o Staffed by volunteers as well as paid employees
o Finance through donations, grants or contracts.
o Skills in media and public relations
o Planning and budgeting expertise.

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KnS Institute of Business studies CHAPTER 1// BUSINESS ORGANISATIONS AND THEIR STAKEHOLDERS

Q: GreenWatch is an independent environmental charity set up to lobby the government for improved
environmental regulation on business. What type of organisation is GreenWatch most likely to be classed as?

A Public sector
B Co-operative
C Non-governmental
D Commercial

Co-operative societies
Co-operatives are businesses owned by their workers or customers, who share the profits.
Features of cooperatives
a) Open membership
b) Democratic control (one member, one vote)
c) Distribution of the surplus in proportion to purchases
d) Promotion of education.

Q: Businesses owned by their workers or customers who share the profits are called
A Limited companies C Co-operatives
B Private limited companies D Partnerships

Mutual associations are similar to co-operatives in that they are 'owned' by their members rather than
outside investors.

Stakeholders

Definition:
 Stakeholders are those individuals or groups who are affected by the company’s operations and can
affect company’s operations. It is a bi-directional relationship.
 These individuals or groups have some kind of interest in what organization does
There are three broad types of stakeholder in an organisation, as follows.
Internal stakeholders (employees, management)
Connected stakeholders (shareholders, customers, suppliers, financiers)
External stakeholders (the community, government, pressure groups)

Internal Stakeholders:
Internal stakeholders are those stakeholders that are internal to the organization for example managers and employees.
Their interests in organization are continuation and growth of organization and their individual interests.

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KnS Institute of Business studies CHAPTER 1// BUSINESS ORGANISATIONS AND THEIR STAKEHOLDERS

Q: Which one of the following are examples of internal stakeholders?

A Shareholders C Suppliers
B Employees D Financiers

Internal stakeholder Interests to defend

Manager and employees

Connected Stakeholders:
 Connected stakeholders are those that are connected to organization with some kind of legally binding
contract or have a contractual relationship with the organization for example suppliers, banks,
shareholders and customers.

Connected stakeholder Interests to defend

Shareholders
Bankers
Suppliers
Customers

Q: Which of the following would not be described as a connected stakeholder?

A shareholders
B customers
C suppliers
D managers

External Stakeholders:
 External stakeholders are those that are external to the organization for example government, local
authorities, professional bodies, community at large and pressure groups.

External stakeholder Interests to defend

Government
Pressure groups
Professional bodies

Q: Which of the following would be described as an external stakeholder?

A customer
B supplier
C trade union
D competitor

Note: Stakeholders may also be categorized as follows:

Primary stakeholders are those who have contractual relationship with organization that includes connected
and internal stakeholders while those who are not contractually related are secondary stakeholders that
includes external stakeholders.
Q: There are a number of different ways of classifying stakeholders, including:
(i) Internal
(ii) Connected
(iii) Primary
(iv) Secondary

Which two of the above categories would suppliers fall into?

A (i) and (iii) B (i) and (iv)
C (ii) and (iii) D (ii) and (iv)

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KnS Institute of Business studies CHAPTER 1// BUSINESS ORGANISATIONS AND THEIR STAKEHOLDERS

Stakeholder conflict
An organisation can have many different stakeholders, all with different needs. Inevitably, these needs of some
stakeholders will come into conflict with the needs of others.
Some of the most common conflicts include:

Stakeholders Conflict

Employees versus managers Jobs/wages versus bonus (cost efficiency)

Customers versus shareholders
General public versus
shareholders
Managers versus shareholders
Product quality/service levels versus
profits/dividends
Effect on the environment versus
profit/dividends
Growth versus independence

In the event of conflict, an organisation will need to decide which stakeholder’s needs are more important.
This will commonly be the most dominant stakeholder (in other words, the one with the most power).

Stakeholder mapping: power and interest

Mendelow’s matrix
Mendelow suggests that stakeholders may be positioned on a matrix whose axes are power held and
likelihood of showing an interest in the organisation’s activities. These factors will help define the type of
relationship the organisation should seek with its stakeholders.
The Mendelow Framework

Power Is the stakeholder’s ability to influence objectives

Interest Is how much the stakeholders care
Influence = Power x Interest
However, it is very hard to effectively measure each stakeholder’s power and interest. The ‘map’ is not static;
changing events can mean that stakeholders can move around the map

 High Power and High Interest = Stakeholders that fall into this quadrant are Key players
 High Power and Low Interest = Stakeholders that fall into this quadrant should be kept satisfied
 Low Power and High Interest = Stakeholders that fall into this quadrant should be Kept informed

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 Low Power and Low Interest = Stakeholders that fall into this quadrant require minimal effort.
Q: Stakeholders can move from quadrant to quadrant within Mendelow's matrix.
A true
B false

Q: If a stakeholder has low interest but high power, then according to Mendelow's matrix the strategy
management should follow in relation to that stakeholder is:
A minimal effort
B keep satisfied
C keep informed
D fully consider the stakeholder, I.e. a key player

Q; A plc has a large number of shareholders. The largest is H, a pension company. H owns 35% of A’s
share capital. None of the other shareholders own more than 10% of the share capital each. H has
stated that it is happy with A’s strategy and dividends and has no intention of intervening in A. If A
prepares Mendelow’s matrix, which quadrant would H fall into?

A Minimal effort
B Keep informed
C Keep satisfied
D Key player
Q: According to Mendelow's matrix, stakeholders in segment C (low interest, high power) should be kept
informed. Is this true or false?

The strategic value of stakeholders

 An organization can make strategic gains by managing stakeholder relationships.
 Following correlations have been identified over the years between stakeholder relationships and
strategic success
a) It has been seen that customer and employee loyalty results in repeat business
b) Continuity and stability in relationship with customers, suppliers and employees aids an organization
in tackling and managing change necessary for sustained business activity.
c) Responsibilities towards customers are mainly those of providing a product or service of a
quality that customers expect, and of dealing honestly and fairly with customers.
d) Responsibilities towards suppliers are expressed mainly in terms of trading relationships.
i) Prompt payment to the suppliers
ii) Confidentiality of information of supplier

Measuring stakeholder satisfaction

We have already considered ways in which stakeholders may be classified and given some instances of their
probable interests. Measuring the success the organisation achieves in satisfying of stakeholder interests is
likely to be difficult, since many of their expectations relate to qualitative rather than quantitative matters.
It is, for example, difficult to measure good corporate citizenship. On the other hand, some of the more
important stakeholder groups do have fairly specific interests, the satisfaction of which should be fairly
amenable to measurement. Here are some examples of possible measures.
Stakeholder group Measure
Shareholders

Government

Supplier

Customers

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KnS Institute of Business studies CHAPTER 1// BUSINESS ORGANISATIONS AND THEIR STAKEHOLDERS

Business organisations and their stakeholders

1.1 An organisation is a social arrangement which persues collective ……………. Which controls its
1.2 own performance and which has a boundary separating it from its environment.’ Which of the
following words best completes this sentence?
A Profits B Stakeholders
C Goals D Tactics (2 marks)

1.2 What is the term given to the idea that the combined output of a number of individuals
working together will exceed that of the same individuals working separately?
A Sympathy B Specialisation
C Synergy D Systems thinking (2 marks)

1.3 Which of the following statements is true?

A Limited company status means that a company is only allowed to trade up

to a predetermined turnover level in any one year.
B For organisations that have limited company status, ownership and control are
legally separate.
C The benefit of being a sole trader is that you have no personal liability
for the debts of your business.
D Ordinary partnerships offer the same benefits as limited companies but are
usually formed by professionals such as doctors and solicitors. (2 marks)

1.4 An organisation is owned and run by central government agencies. The organisation is best
described as which of the following statements?
A A voluntary sector organisation B A private sector organisation
C A local authority organisation D A public sector organisation (2 marks)

1.5 Which of the following groups may be considered to be stakeholders in the activities of a
nuclear power station?
The government
Friends of the Earth
Employees
Local residents
A (i), (iii) and (iv)
B (i), (ii), (iii) and (iv)
C (iii) only
D (i) and (iii) only (2 marks)

1.6 Secondary stakeholders is another term for which group of stakeholders?

A Internal stakeholders B Connected stakeholders
C External stakeholders D Contractual stakeholders (2 marks)
CCOUNTANT IN BUSINES
1.7 Which of the following organisations would rely most heavily on value for money
indicators and efficiency rather than information on performance and profitability?
A A private accountancy college
B A local authority
C A small retailer
D A pension fund (2 marks)

1.8 ADB is a business which is owned by its workers. The workers share the profits and they
each have a vote on how the business is run.
Which of the following best describes ADB?
A Public sector
B Private sector
C Not-for-profit
D Co-operative

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