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P A R T
Business organisations
I
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C H A P T E R
Organisations and
organisational theories
1
Learning objectives
After studying this chapter, students should be able to describe:
■ what an organisation is;
■ the ways in which organisational theories differ;
■ the organisational and management ideas of the classical
thinkers;
■ the development and principles of scientific management;
■ the concept of bureaucracy;
■ the human relations’ theories and the work of Elton Mayo;
■ the essentials of systems thinking as it pertains to organisations;
■ what is meant by contingency theory and how it relates to
organisations.
1.1 What is an organisation?
The origins of organisations can be traced back to ancient civilisations
where various groupings of individuals, such as armies and civic admin-
istrations, were designed as social structures that would facilitate col-
laborative activities to achieve the desired goals.
The industrial revolution in the nineteenth century triggered rapid
economic and manufacturing growth, with emerging businesses radic-
ally altering the pattern of working life from individual or family run
cottage industries. New methods of running businesses were required
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4 Business organisations Part I
and, although all organisations can exhibit similar characteristics, the
evolutionary path for individual businesses is determined by such fac-
tors as size, diversity, ownership, nature of the business and the com-
plexity of the business environment.
Talcott Parsons (1960)1 described the development of organisations
as the principal mechanism by which things get done in a highly dif-
ferentiated society and that goals can be achieved that are beyond the
reach of individuals.
In studying the nature and functions of organisations, it is worth
starting with a working definition and Buchanan and Huczynski (2003)2
suggested the following:
‘Organisations are social arrangements for the controlled performance
of collective goals.’2
This definition, concise though it is, shows us the two most important
features of organisations: they are social arrangements and they exist to
perform. We can say the following general things about the organisations:
■ They all contain people (although it may be argued that some nat-
ural groupings of animals in the wild may also be organisations).
■ The people in the organisation perform a role and their con-
tinued membership of the organisation is dependent upon
such performance.
■ The organisation has a collective goal to which all members
subscribe.
■ All of the roles, taken together, help the organisation achieve
its collective goal.
■ Different tasks according to their expertise, interest or
specialism.
■ There is a clearly defined hierarchy of authority so that each mem-
ber of the organisation is aware of where he or she ‘fits in’.
■ The limits or borders of an organisation are usually clearly defined.
This means that there is usually no doubt whether a particular
person is ‘inside’ or ‘outside’ of the organisation.
Question 1.1
According to the definition discussed above, decide whether the following collectives
are organisations or not:
■ The United Nations
■ Chartered Management Institute
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1.2 Why do organisations exist?
Why is it that people form themselves into organisations in order to carry
out business activities? Why do they not simply act alone to fulfil their indi-
vidual objectives? The answer is that the format of an organisation offers
many advantages over the other option which is many people acting alone.
Firstly, organisations facilitate synergy. Synergy refers to the benefits that
can be gained when people work together rather than apart. Something
can be said to be synergistic when the whole is greater than the sum of the
parts. More popularly, synergy can be expressed as ‘2 2 5’. On a sim-
ple level, two people together lifting heavy logs onto a lorry can achieve
far more work than two people lifting logs separately. A rally team of
two enables the team to win a race if they work together with one driv-
ing and one navigating. If the two were to work separately, then each
person would have to drive and navigate at the same time.
Secondly, organisations facilitate the division of labour. Our two work-
ers lifting logs are both performing the same task, but the rally team is
divided into two separate but complementary jobs – a division of labour.
It is quite possible, and may be even preferable, for the navigator to not
even hold a driving licence, but if he or she is a good mapreader, the
rally team is greatly strengthened. Similarly, the driver does not need
to know how to read maps, provided he or she can take instructions
from the navigator and drive well. The two specialists working together
do not only produce synergy, but they also enable a task to be accom-
plished that neither member could accomplish alone.
Thirdly, adopting the format of an organisation enables increased
performance owing to the establishment of formal systems of responsibility
and authority. When such systems are implemented, they enable all mem-
bers to fully understand how roles are divided, and to accept and respect
both responsibility and authority. They facilitate synergy and an effective
division of labour by co-ordinating activities so that individuals act in
concert to the overall benefit of the organisation.
Chapter 1 Organisations and organisational theories 5
■ Robbie Williams Fan Club
■ IBM Ltd
■ Caledonian Business School
■ Royal Navy
■ Nationwide Building Society
■ National Union of Students
■ A school of whales.
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6 Business organisations Part I
1.3 An overview of organisational theories
Now that we have come to broad understanding of what an organisa-
tion is, we turn to a discussion of the various theories that have been
put forward to analyse organisations and explain how and why organ-
isations ‘work’.
We can all readily appreciate that organisations differ. Some are big
and ‘bureaucratic’ whilst others are small, ‘lean and mean’. Furthermore,
the way that organisations are managed also varies widely. Some man-
agement styles are highly regimented within formal structures whilst
others are laissez faire and ‘laid back’.
These differences have led to a diversity of individuals’ experience at
work. Academics have sought to help explain the reasons for these dif-
ferences in management style and how organisations work, through the
use of organisational theories. It is impossible to say that ‘good man-
agement is …’ or that ‘an organisation should be managed in this way’.
It all depends upon the context of the organisation, its purpose and the
type of people that work in it. Over the course of the past century, aca-
demics have evolved theories which aid our understanding and hence
our ability to explain, how organisations ‘work’.
The theories can be grouped under four broad convenient headings.
They are presented in chronological order and we will examine each
in turn:
■ classical theories,
■ human relations’ theories,
■ systems theories,
■ contingency theories.
1.4 Classical theories
Definition
We use the word classical in various ways during normal conversation.
For example, it can be used to describe the study of ancient Greek or
Roman culture or to denote widely acknowledged works of lasting sig-
nificance and excellence, such as music by Beethoven or paintings by
Van Gogh.
The principles that underpin classical scholarly activities were
adopted by the earliest theorists of management in organisations at the
start of the twentieth century and their influence continues to the
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present day. The classical management thinkers emphasised the pur-
pose of organisations and viewed them as formal structures through
which a hierarchy of management could achieve organisational goals
and objectives. They believed that effective management could be dis-
tilled down into rules, guidelines or principles, which, within limits,
would be transferable to all managerial contexts.
Broadly speaking, classical theorists focused on an organisation’s
output and productivity rather than the individuals in the organisation.
Thus, many were concerned with the methods by which the human
resources could deliver the greatest output at least cost.
An underlying assumption of classical theories is that the human
being, as a social and working being is relatively predictable in his or her
responses to given situations. This assumption of predictability underlies
the work of all of the classical theorists. Put simply, it states that if a cer-
tain managerial style or set of conditions is applied to the working envi-
ronment, then individuals will respond in a predictable way. The theories
we consider later in this chapter make the assumption that man is some-
what a more complex being than the classical thinkers realised.
‘Classical’ as a title, conceals a broad range of theories. Within this cat-
egory, there are many important thinkers who have advanced differing
techniques and philosophies for managing organisations. We will exam-
ine the contributions of the most important thinkers, dividing our dis-
cussion into three categories: the work of Henri Fayol, the Scientific
Management school and the concept of the Bureaucratic organisation.
Henri Fayol
Fayol (1841–1925) was a French industrialist who spent his entire work-
ing life with a coal mining company. His main contribution to organ-
isational theory was his attempt to break down the management job
into its component parts. He defined management as follows:
‘To manage is to forecast and plan, to organise, to command, to
co-ordinate and to control.’
His work is best remembered for his ‘six activities’ and his ‘fourteen prin-
ciples’ (Table 1.1). He developed these from his own experiences as a
manager and he worked them out in his own working life, with benefi-
cial effects.
Chapter 1 Organisations and organisational theories 7
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8 Business organisations Part I
Fayol’s ‘six activities’ are those he considered to be the principal
areas of concern to an organisation:
■ technical activities,
■ commercial activities,
■ financial activities,
■ security activities,
■ accounting activities,
■ managerial and administrative activities.
The tribute to the influence of Fayol’s work is that his activities
roughly describe the duties of the modern board of directors. We would
use different names today, but the tasks are essentially as Fayol described.
Table 1.1
Fayol’s fourteen principles of management
Principle Meaning
Division of work One man, one job; specialise work
Authority Manager must be able to give orders and be
sure they will be carried out
Discipline Respect and order throughout the workplace
Unity of command Remove confusion by having one employee
report to only one boss
Unity of direction One boss is responsible for the planning and
direction
Subordination of individual Employees should be prepared to put the
interests to the general company first
good of the company
Fair pay Pay should be fair to the employee and
acceptable to the organisation
Centralisation Management authority and responsibility
ultimately rests with the centre
Scalar chain The observance of an orderly hierarchy line of
authority from bottom to the top
Order Housekeeping, tidiness, order in the work
environment
Equity Fairness and a sense of justice
Stability of tenure As far as possible, provide job security
Initiative Staff should be encouraged to show initiative
Esprit de corps Encourage and develop teams and a friendly
working environment
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Fayol established ‘fourteen principles’ that, in his opinion, provided
the elements of good organisational management. He himself applied
them and found them to work.
Again, when we consider the list, we will see that many of them are
still considered today to form the basis of good management practice.
Fayol’s ‘general tenets of management’ can be summarised as follows:
■ specialisation promotes efficiency,
■ low employee turnover promotes efficiency,
■ good morale increases productivity,
■ employees should be treated equitably,
■ unified goals co-ordinated efforts,
■ authority carries responsibility.
Chapter 1 Organisations and organisational theories 9
Question 1.2
Find out the composition of a typical board of executive directors in a modern company.
You will probably arrive at five or six ‘job titles’. To start you off, one of them will prob-
ably be the marketing director.
Scientific management
Scientific management is so called, not because it is used for managing
scientific activities, but rather that it assumes a scientific model of man
working in organisations. If quantitative methods are employed to aid
management processes, then, it is argued, efficiency gains can be made.
For a given work input, more output can be gained when work is organ-
ised using measurement, feedback and refinement.
Among the earliest records of attempts to time work and establish
standard times for production are the attempts of a Frenchman called
Jean Radolphe Perronet who studied the manufacture of pins to improve
efficiency of their manufacture. By the start of the twentieth century,
with the industrial revolution in full swing, we can see the impact of
Robert Owen’s work on layout and method at the New Lanark Mills
running in concert with his pioneering work on social and welfare con-
ditions for employees. He is credited with being the first to recognise
that fatigue and the working environment could have adverse affects on
workers’ productivity. By raising the living standards of his workers, via
housing, medical care and schooling for children, he was able to attract
and retain better employees than his competitors.
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10 Business organisations Part I
We can now look at the pioneering contributors to the school of sci-
entific management: Frederick Winslow Taylor, Frank and Lilian Gilbreth,
Henry Gantt and Charles Bedaux.
Frederick Winslow Taylor
Frederick Winslow Taylor (1856–1917) was one of the earliest of all the
organisational management theorists. He worked for the Bethlehem
Steel Company in the USA, and it was here that he developed his the-
ories of scientific management. In 1909, he published his Principles of
Scientific Management – a treatise on this subject arising from his own
experience as an industrialist and the outcomes of his early research.
He was the first to propound the idea of applying quantitative methods
to management problems. This evolved into ‘work study’ – the analysis of
work methods and the rate of work. His theories were quite revolution-
ary in a day when it was believed that increased productivity arose from
simply taking on more people and making them work harder.
Taylor introduced the idea of comparing employee performance
against a standard. This involved finding the optimum way for a given
job to be done and determining the expected ‘standard’ times for
elements of the job. He also emphasised the need to ensure that the
workplace ergonomics (i.e. the man–machine interface, layout and
lighting) were best suited for the tasks to be performed. The term ‘time
study’ can be attributed to him as observations of worker performance
were made with the use of a stopwatch, measure actual performance
against the expected standard. In this way rewards or punishment would
be determined by management via a system known as ‘piece-rates’ –
in crude terms the more produced by workers, the more earned or
vice versa.
In one notable piece of research, Taylor demonstrated his principles
by showing the relationship between work output and the size of
labourers’ shovels. In a study at the Bethlehem Steel plant in the USA,
it is reported that he used a man who was reputed to be a good worker
and who placed a high value on monetary reward. The initial size of
shovel was capable of carrying an average load of 38 pounds and this
resulted in the labourer shifting 25 tonnes of pig iron in a day. When a
smaller shovel size was used, the daily load rose to 30 tonnes. A 25
pounds shovel produced even higher daily loads. The worker, in add-
ition enjoying the praise of his observers, was also promised extra-
financial reward as an incentive to move more pig iron per shift. The
end result was that the work that was formerly done by 500 men could
be achieved by just 140 and labourer’s wages rose by as much as 60%.
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The principles of scientific management can be summarised as follows:
■ development of optimum organisation structure via time and
motion study and ergonomic design;
■ development of scientific methods to replace the old ‘rule of
thumb’ practices;
■ scientific selection and training of employees;
■ motivation by money.
It should be noted that some criticisms can be made of scientific man-
agement techniques and what has been termed ‘Taylorism’:
■ it ignores the psychological needs of workers,
■ the subjective side of work is neglected,
■ there is an assumption that money is the only motivator,
■ adopting a simplistic view of productivity,
■ group processes are ignored,
■ collective bargaining and trade unions do not have a role.
However, Taylor’s legacy lies in the development of work design, work
measurement and production control which changed the nature of industry
with the creation of such functions as work study, personnel, maintenance
and quality control.
Frank and Lillian Gilbreth
Frank and Lillian Gilbreth were associates of Taylor but, with experience
of unionised organisations, they demonstrated less enthusiasm for tim-
ing jobs and developed laws of human motion from which developed
the principles of motion economy. In Frank’s early career he was interested in
standardisation and ‘method study’, and an example of his work stemmed
from his observations of the variety of methods employed by different
bricklayers on construction sites where he worked. He set about estab-
lishing a standard work method with a resultant increase in output from
1000 to 2700 bricks per day.
It was Gilbreth who coined the term ‘motion study’ to cover their field of
research and as a way of distinguishing from those involved in ‘time study’.
Henry Gantt
Henry Gantt is best remembered for his development of the ‘Gantt
chart’. He argued that time could be used more effectively if tasks in an
operation were carefully planned in sequence and resources were appor-
tioned accordingly. This would have the advantage of management
Chapter 1 Organisations and organisational theories 11
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12 Business organisations Part I
having more control over events and it would prevent time ‘leaking’ in
fruitless or unnecessary jobs. Gantt charts are used today in a wide variety
of planning and control processes.
The Gantt chart is a project planning tool which helps plan the use of
resources within a limited time period. It is constructed with consecutive
activities plotted in a horizontal direction with time along the x-axis. It
offers the advantage that the project manager can see at any one time
what should be going on and which activities will follow on from com-
pleted activities. With a simple modification, the chart can be made to
highlight which activities, if any, are critical. Critical activities are those
which directly influence the finishing time of the overall project.
Charles Bedaux
Charles Bedaux introduced the concept of ‘rating assessment’ in timing
work. He adhered to Gilbreth’s introduction of a rest allowance to
allow recovery from fatigue. Although crude and poorly received at
first, his range of techniques proved significant in the development of
work study, particularly that of value analysis.
Production assembly line
Rapid developments in technology, machinery and the improvement of
materials in the early twentieth century paved the way for the arrival of
‘the moving assembly line’. In particular the internal combustion engine
had been invented, leading to the development of the motorcar.
Streamlined production was required to meet demand and the first
assembly line method of manufacture can probably be attributed to Sears
and Roebuck in the USA. A famous example of the change to modern
assembly line techniques can be found in Henry Ford’s introduction of ‘the
moving assembly line’. Before the changes the productivity measure was
that of a car chassis assembled by one man taking about 13 hours, but
8 months later, following the application of standardisation and division of
labour the total labour time had been reduced to 93 minutes per car.
Max Weber
Bureaucracy
The words bureaucracy and bureaucratic have, over recent years, become
understood as being synonymous with ‘red tape’, ‘officialdom’ and the
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general impersonality of large and inefficient organisations. Such a
conception of bureaucracy, whilst understandable, is a rather cynical
description of some of the negative features of this otherwise highly
effective method of organisational management.
The concept of bureaucracy was first put forward by the German aca-
demic and sociologist, Max Weber (1864–1920). His research, which was
translated into English in 1947, sought to establish the reasons why indi-
viduals acted in certain ways in organisations and why they obeyed those
in authority over them. Put simply, Weber found that people obeyed
those in authority over them because of the influence of three types of
authority:
■ Traditional authority is that which subordinates respond to
because of their traditions or customs;
■ Charismatic authority occurs when subordinates respond to the
personal qualities of a charismatic (‘gifted’) leader;
■ Rational–legal authority is authority brought about solely by a
manager’s position in an organisation. Implicit in rational–legal
authority is that subordinates obey a superior because the super-
ior is in seniority over them in the organisational hierarchy.
Weber, whilst recognising the importance of the first two in some
areas of life, was primarily concerned with rational–legal authority in his
study of organisations. This form of obedience is the prominent form
in modern organisations: Weber termed this bureaucracy. He continued
to argue that the authority structures in bureaucracies could be a
highly efficient organisational form, and that a proliferation of bureau-
cracies could result in gains in efficiency for organisations and in the
country as a whole.
Chapter 1 Organisations and organisational theories 13
Question 1.3
In which contexts might we encounter traditional and charismatic authority?
According to Weber, bureaucracies could be described by certain char-
acteristics. Underlying these characteristics were the dual themes of
administration based on expertise (‘rules of experts’) and administra-
tion based on discipline (‘rules of officials’). Laurie Mullins explains
these characteristics as follows:3
■ Tasks of the organisation are allocated as official duties among
the various positions.
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14 Business organisations Part I
■ There is an implied clear-cut division of labour and a high level
of specialisation.
■ A hierarchical authority applies to the organisation of offices
and positions.
■ Uniformity of decisions and actions is achieved through for-
mally established systems of rules and regulations. Together with
a structure of authority this enables the co-ordination of vari-
ous activities within the organisation.
■ An impersonal orientation is expected from officials in their deal-
ings with clients and other officials. This is designed to result
in rational judgements by officials in the performance of their
duties.
■ Employment by the organisation is based on technical qualifi-
cations and constitutes a lifelong career for the officials.
Stewart (1986) summarised the four main features of bureaucracy as
follows:
■ Specialisation applies primarily to the job rather than the job
holder. The specialisation of roles ‘belongs to’ the organisation
so that the specialisation can continue if any given specialists
leave the employment of the organisation.
■ Hierarchy of authority stresses a strict demarcation between man-
agement and workers. Within each strata of the organisation,
there should be clearly defined levels of authority and seniority.
■ System of rules is intended to engender an efficient and imper-
sonal operation in the organisation. The system of rules should
normally be stable and continuous, and changes in the rules
should be in exceptional circumstances only.
■ Impersonality means that the exercise of authority and the
extension of privileges should be carried out strictly in accord-
ance with the laid down system of rules. No partiality should
be given to any individual on personal grounds.
Critics of bureaucracy argue that rigid hierarchical structures and con-
trols can stifle initiative and actually reduce effectiveness in the drive for
efficiency.
Question 1.4
In what ways might bureaucracy be advantageous to an organisation and in what ways
might it be disadvantageous?
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1.5 Human relations’ theory
Human relations’ theory
The objectives of the classical and human relations’ theorists are essen-
tially the same – to achieve the maximum organisational efficiency. The
difference can be seen in the modus operandi by which they propose to
bring this about. We saw previously that the classical theorists proposed
a rational model that assumes a high degree of human predictability.
The human relations’ theories proposed that because organisations are
composed of humans, focusing on human needs and motivation is the
way to bring about optimal organisational output.
Central to human relations’ theory is the belief that people are the
key resources of an organisation. Harnessing and cultivating their poten-
tial and eliciting their willing contribution are therefore the most effect-
ive ways of increasing organisational efficiency.
Critics of the human relations’ theory claim that it tends to promote
employee satisfaction over organisational goals and encourages a soft
or paternalistic style of management.
Elton Mayo
The work of Elton Mayo (1880–1949) and his experiments at the
Hawthorne plant of the Western Electric Company in Chicago are gen-
erally thought of as the principal foundations for human relations’ the-
ories of management in organisations. Mayo, a Harvard University
professor, was primarily concerned with people’s experience at work
and accordingly, his researches at the Hawthorne plant between 1927
and 1932 focused on the worker rather than on the work itself (which
is in contrast to the work of Taylor).
The Hawthorne studies centred on the study of individuals and their
social relationships at work. Divided into several stages, Mayo and
his colleagues varied the conditions under which workers operated and
then studied output to analyse the correlation between the two. Social
arrangements in the workplace were varied – the numbers of people
who worked together, their seating arrangements, etc. – and the work out-
put was measured as each variable in working condition was changed.
The findings suggested that individuals at work produced a higher
output when management took into account their social relationships.
They found that a feature of people at work is that they form groups. It
seemed that people felt more comfortable in groups and this could be
used by the organisation to produce greater productivity.
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16 Business organisations Part I
Hawthorne findings
In summary, the findings of the Hawthorne experiments were as follows:
■ An individual’s identity is strongly associated with his or her
group. They should be considered less as individuals and more
as members of the group.
■ An individual’s affiliation and sense of belonging to the group
can be more important to him or her than monetary rewards
and other working conditions.
■ Groups can be formal (set up by the organisation) or informal
(chance social groupings). Both can exercise a strong influ-
ence over the behaviour of individuals at work.
■ Managers and supervisors would do well to take this group
behaviour into account when seeking to extract the maximum
amount of work from their subordinates.
The lasting influence of Mayo can readily be seen in most of today’s
organisations. Most employees are organised into teams, groups, task
forces, etc. More modern developments have included briefing groups,
quality circles and ‘buzz’ groups. Management have, over the interven-
ing years, made attempts to influence the norms of groups in order to
make them act in accordance with the general objectives of the organ-
isation. When this can be achieved, groups can become ‘self-policing’
and when a high degree of cohesion is achieved; a lower level of super-
vision will be needed.
Question 1.5
Do you know what briefing groups and quality circles are? If not, find out. You should
find them in any good quality management or operations management textbook.
One way in which group thinking has been found to enhance output
over recent years is to reconfigure production lines specifically to
increase an individual’s opportunity for social interaction. Figures 1.1
and 1.2 show one such example of this. In Figure 1.1, the person sitting
at station C on the production line has the opportunity to interact
meaningfully with only two people: the people at stations B and D.
When the line is ‘bent round’, however (Figure 1.2), the same person
has his or her potential interactions increased from two people (B and
D) to five people (B, D, H, G and F).
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Chapter 1 Organisations and organisational theories 17
Work stations
Flow of work
A B C D E F G H I
Figure 1.1
Straight production
line.
Flow of work
A B C D
E
FGHI
Figure 1.2
‘Bent’ production
line to facilitate
more social
interaction.
Input Output
Conversion
Figure 1.3
An open system.
1.6 Systems theories
Definition
The distinguishing feature of systems’ theories is that whereas classical
theories see organisations in essentially scientific terms, and human
relations’ theorists view them in terms of the individuals working in
them, systems theorists contend that the most realistic view is to see an
organisation as a total system. This view, they contend, transcends both
of the former theories and takes into account the more holistic context
both inside and outside an organisation.
An organisation is an example of what has been termed an open system.
An open system is one which must necessarily have a high degree of inter-
action with its environment (Figure 1.3). This is in contrast to a closed sys-
tem – one in which there is no interaction with the external environment
(a diver’s underwater breathing apparatus, e.g. approximates to a closed
system). An open system of any sort has three stages: inputs, conversion
and outputs. All three are essential for the normal workings of the system.
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18 Business organisations Part I
As such the model includes inputs from the environment, the con-
version or transformation of inputs to finished goods, and the output
of those finished goods into the environment. This involves an inter-
related set of elements functioning as a whole. Interdependent sub-
systems, like finance and personnel, work toward synergy in an attempt
to accomplish an organisational goal that could not otherwise be
accomplished by a single sub-system.
Organisations and organisms
The organisation as a body
It may aid our understanding of this concept to consider a simple
example. The human body is an example of an open system. It requires
several essential inputs, such as air, food, heat, shelter and water. The
body converts these in its normal functioning and then produces its
outputs, such as energy, work, exhaled air products and excretions. The
body is utterly dependent upon its environment – it would not take long
for a lack of air to have a profound effect on the body. A further cate-
gory of system quickly becomes apparent in this example – that of sub-
systems in the body. The reasons why the total system of the body can
perform the conversions in question are because it contains a nervous
system, a renal system, a biochemical respiratory system and many oth-
ers. Each of these sub-systems has its own inputs, conversions and out-
puts. They are equally interactive with their own respective environments.
It was the analogy between the biological body and the body corporate
which first gave rise to a systems understanding of organisations. The con-
cept that both types of bodies contained a number of interrelated and
interdependent sub-systems was noticed in 1951 by the biologist Ludwig
von Bertalanffy. His General Systems Theory5 was further explored and devel-
oped by Miller and Rice, also both biologists, who likened corporate bodies
to biological organisms.6 The complexity of both biological and corpo-
rate bodies, and their interrelationships with their environments sug-
gested that management of such systems required an understanding that
all parts of the body were essential to normal and productive functioning.
Socio-technical systems
The systems theorists, in the light of their comparing of organisations
to organisms, rejected the simplistic views of the classical and human
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relations’ theorists. Classical theories, they argued, emphasised the
technical requirements of the organisation and its productivity needs –
‘organisations without people’. In contrast, human relations’ theories
focused too much on the psychology and interaction of people – ‘people
without organisations’.
In reality, organisations comprise both the technical features of
such things as work study (classical theories) and the human input
emphasised by Mayo. Systems theory thus holds that organisations are
socio-technical systems. In a socio-technical system, it cannot be said that
people are more important than an organisation’s technology, struc-
ture, work methods or any other visible or tangible feature. Both are
equally necessary and, importantly, both are subject to influence from
the organisation’s external environment (in the context of an open sys-
tem). A failure of any sub-system in the organisation, be it a human or
a technical failure, will harm the normal working of the organisation.
The pursuit of thought in this area led later writers in systems theory
(adopting a holistic view of organisations) to devise a list of four key vari-
ables which, it was suggested, were the major determinants of output:
■ people and social groups,
■ technology,
■ organisational structure,
■ external environment.
Readers should note that this list includes both ‘social’ and ‘technical’
determinants of organisational performance.
Social groups and technology
The relationships between social groups and their employment of tech-
nology were also studied by the systems theorists. The implicit suggestion
of classical theories is that technology, if properly applied, is the source of
increased productivity and conversely, the human relations’ theorists
would have said that output is essentially a function of social groupings.
The Tavistock Institute of Human Relations in London, working in the
1940s and later, conducted research which showed the difficulties of
linking output to just technology or social arrangements. One of the
most important researches in this regard was the ‘long-wall’ study.
Prior to the introduction of mechanisation in British coal mines in
the 1940s, miners worked in small teams in a localised area of the seam.
The teams developed a high degree of interpersonal cohesion over the
years. They worked together on shifts – possibly going for hours without
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20 Business organisations Part I
encountering other teams. Members shared out jobs and this resulted
in individuals becoming multi-skilled but non-specialised (‘jack of all
trades, master of none’). As the teams worked on only a small part of
the coalface at any one time, this method of working was termed the
‘short-wall’ approach.
When mechanisation was introduced, a change in working practices
was necessitated wherein:
■ a much longer area of the coal seam could be worked on at
any one time (the long-wall method of working);
■ the earlier small teams were disbanded and replaced in a shift
with a much larger group, all working together on the long wall;
■ shifts became specialised in that, on a three shift system, one
shift would work the face, another would clear up the debris
and move the coal away from the face and the third would
move the wall along the seam to an unworked area;
■ shifts, because they involved many more workers together,
were supervised.
To the surprise of the pit management, it was found that the introduc-
tion of mechanisation and the long-wall methods actually caused a
reduction in output. Furthermore, conflicts arose within and between
shifts. Absenteeism increased, morale noticeably decreased and shifts
frequently blamed others for poor work.
These findings led Trist, et al.7 of the Tavistock Institute to conclude
that effective work arose from an interdependence of social conditions
and technology. It involved taking into account the technology used, its
layout, ease of use, etc. and the fact that individuals seemed to produce
more work in groups in which they felt comfortable.
The problems at the coalface were eventually overcome when the com-
posite long-wall method was introduced. This was an arrangement which
allowed small groups to work together and still make efficient use of the
new technologies of the time. The long-wall study is seen as a vindication
of the socio-technical systems approach taken by systems theorists.
1.7 Contingency theories
Definition
The contingency approach to organisational management had its
roots firmly in the systems theory, and in most respects, the two are
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arguably indistinguishable. The essence of the contingency approach
is that the manner in which an organisation should be managed depends
upon the wide range of variables which may apply to that organisation
at any point in time. We can readily appreciate that the environmental
conditions, the types of technology employed and the level of human
motivation varies over time, according to organisational context. This
approach suggests that it is impossible to prescribe any one type of
management in all internal and external conditions. It rejects an abso-
lutist approach to behaviour and management and puts forward, in its
place, a relativist proposal (we may describe Taylor, Fayol and Mayo as
essentially absolutist). The contingency theorists did not reject earlier
ideas, in fact they recognised the utility of the philosophies, but only in
certain circumstances. Scientific management and the human relations’
theories each have their place when the environmental conditions
were conducive to their use.
Contingency theory argues that organisational design, management
and control structures should be tailored to fit the needs of individual
organisations. Factors in organisational design will be dependent upon
ownership, the environment, size, technology and the particular nature
of the work.
Burns and Stalker
The study by Burns and Stalker (1966)8 centred around 20 British com-
panies in what they considered to be five broad environmental condi-
tions, ranging from ‘stable’ to ‘least predictable’. Among this sample
of organisations, they also identified two extremes of management
practice in the organisations: mechanistic and organic practice. It was sug-
gested that both of these approaches are equally correct and rational in
their appropriate environmental and organisational circumstances.
Mechanistic management systems are rigid in nature. The study showed
that these work best in organisations that experience stable environ-
mental conditions. Mullins contends that
■ the characteristics of mechanistic management are similar to
those of bureaucracy;
■ tasks are specialised;
■ clearly defined duties and procedures;
■ clear hierarchical structure;
■ knowledge and expertise centred at the top of the organisation;
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■ clear instructions and decisions from superiors as methods of
control over organisational activity;
■ insistence on loyalty of employees to the organisation and to
their superiors.
Conversely, it was suggested that organic organisations were most
appropriate in changeable environmental conditions. The ‘surprises’
inherent to a changeable business environment necessitated a more
flexible and less rigid organisational philosophy than that provided by
the inflexibility of a mechanistic organisation. Organic organisations
have the following characteristics:
■ The importance of special knowledge, skills and experience
to the success of the organisation.
■ A continual redefinition of tasks as the environment changes.
■ A network, rather than a hierarchical structure of control and
authority (characterised by an increased importance of cross-
functional rather than hierarchical relationships).
■ Superior knowledge is not necessarily related to a person’s
authority in the organisation.
■ Communication is more lateral than up-and-down, reflect-
ing an emphasis on information rather than instructions and
commands.
■ A widespread commitment of employees to the overall tasks
and goals of the organisation.
■ An emphasis on the contribution of individuals within the
organisation.
Burns and Stalker contended that organic organisations were best suited
to a changeable business environment, which is of course in contrast to
the roles of the mechanistic organisation. It is important to appreciate
that there are shades-of-grey between the two mechanistic and organic
extremes, and that which is best depends, or is contingent upon the envir-
onmental conditions.
Lawrence and Lorsch
Lawrence and Lorsch,9 worked from Harvard University in the 1960s.
They were concerned with two key variables in organisations: structure
(of the organisation) and environment. Their study involved examining
organisations in relatively unstable, or changeable environments and
others in stable ones. Within these organisations, they sought to see
22 Business organisations Part I
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which managerial practices were different and which were the same in
the two types of environments. They borrowed terms from mathemat-
ics to describe differences in management practice.
Differentiation
Differentiation refers to the degree to which management practices,
attitudes and behaviour vary (or differ) from manager to manager
within the organisation. In particular, the differences refer to:
■ the varying orientation to certain organisational goals (e.g. cost
reduction is felt more keenly by accountants and production
managers than sales people and engineers);
■ the varying time perspectives and time orientations (e.g.
research and development (R&D) people tend to work on
much longer time scales than sales and administrative people);
■ the varying degrees of interpersonal orientation (e.g. sales
people tend to be more relationship oriented than produc-
tion people);
■ the varying formality of functional department structures
across the organisation (e.g. production departments tend to
have ‘taller’ and more complex structures when compared to
the relative informality of R&D departments).
Integration
Integration refers to the degree to which management attitudes and
practices are common among managers in an organisation and the
extent of collaboration that exists between managers. This is the oppos-
ite of differentiation.
Conclusions
The Lawrence and Lorsch study analysed the sample of organisations
for the degree of integration and differentiation that makes for suc-
cessful business performance in the different business environments.
They arrived at a number of conclusions:
■ Companies in highly changeable business environments per-
form better when there is a high degree of both integration
and differentiation in the organisation.
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24 Business organisations Part I
■ Companies in relatively stable business environments per-
form better when there is a lesser degree of differentiation
but a high degree of integration.
■ One drawback of differentiation is that it is harder to resolve
conflict in a highly differentiated organisations.
■ Conflict resolution is done better in well-performing com-
panies than in their poorly performing competitors.
■ In unstable and uncertain environments, integration is more
common among mid- and lower levels of management. In more
stable environments, the senior levels exhibit more integration.
Again we see that the most appropriate management practices for an
organisation depend upon its environment. Both differentiation and
integration ‘work’ in their respective contexts.
Assignment 1.1
Choose one of the following statements and discuss its merits with reference to man-
agement and organisational theory:
■ Good management is about whipping subordinates into submission.
■ If you want people to work harder, you have to be nice to them.
■ Strict rules, lavish rewards and swift punishments are the key to organisational
success.
References
1 Parsons, T. (1960). Structure and Process in Modern Societies. Glencoe, IL:
Free Press.
2 Buchanan, D.A. and Huczynski, A.A. (2003). Organisational Behaviour An
Introductory Text, 5th edn. London: Prentice Hall.
3 Mullins, L.J. (2004). Management and Organisational Behaviour, 7th edn.
London: FT Prentice Hall.
4 Stewart, R. (1986). The Reality of Management. London: Pan Books.
5 von Bertalanffy, L. (1951). Problems of general systems theory: a new
approach to the unity of science. Human Biology 23(4): 302–312.
6 Miller, E.J. and Rice, A.K. (1967). Systems of Organisation. London:
Tavistock Publications.
7 Trist, E.L., et al. (1963). Organisational Choice. London: Tavistock Publications.
8 Burns, T. and Stalker, G.M. (1966). The Management of Innovation.
London: Tavistock Publications.
9 Lawrence, P.R. and Lorsch, J.W. (1969). Organisation and Environment.
London: Irwin.
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Further reading
Buchanan, D.A. and Huczynski, A.A. (2003). Organisational Behaviour An
Introductory Text, 5th edn. London: Prentice Hall.
Clegg, S.R., et al. (2004). Managing and Organizations: An Introduction to Theory
and Practice. London: Sage Publications Ltd.
Cole, G.A. (2003). Management Theory and Practice, 6th edn. London:
Thomson Learning.
Dawson, S. (1996). Analysing Organisations. London: Macmillan Press.
Dixon, R. (1991). Management Theory and Practice. Oxford: Butterworth
Heinemann.
Fayol, H. (1949). General and Industrial Management. London: Pitman.
Johns, G. (1996). Organisational Behaviour. Understanding and Managing Life at
Work, 4th edn. Harper Collins.
Lawrence, P.R. and Lorsch J.W. (1969). Organisation and Environment. Irwin.
Mullins, L.J. (2004). Management and Organisational Behaviour, 7th edn.
London: FT Prentice Hall.
Naylor, J. (2004). Management, 2nd edn. Harlow: FT Prentice Hall.
Pettinger, R. (1996). An Introduction to Organisational Behaviour. London:
Macmillan Press.
Taylor, F.W. (1998). The Principles of Scientific Management. Toronto: General
Publishing Company Ltd.
Weber, M. (1964). The Theory of Social and Economic Organization. London:
Collier Macmillan.
Worthington, I. and Britton, C. (2004). The Business Environment, 4th edn.
Harlow: FT Prentice Hall.
Chapter 1 Organisations and organisational theories 25
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C H A P T E R
Organisational and
business objectives
2
Learning objectives
After studying this chapter, students should be able to describe:
■ mission, vision and values of an organisation;
■ the purpose of an organisation’s mission statement;
■ the complex nature of defining business goals and objectives;
■ the most important business objective;
■ the stakeholders;
■ the view that stakeholder coalitions determine the business
objectives;
■ the view that an organisation’s principals essentially determine
the business objectives.
2.1 Vision
This is an aspirational view of the desired state of the organisation at a
point in the future. The timeframe is dependent on the nature of the
organisation and its environment but a typical vision would be set for 3–5
years ahead and reviewed annually in line with actual results and chan-
ging circumstances. The vision is in effect a statement of strategic intent
that serves to focus the energies of the organisation management towards
the setting and achievement of specific goals and objectives. Its aspir-
ational nature means that it is consistently revised, as each set of goals are
achieved, and further stretching future situations are established.
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Chapter 2 Organisational and business objectives 27
2.2 Mission
The mission of an organisation is a general expression of the overall pur-
pose of the organisation or, more simply, a broad description of the busi-
ness it is in – its raison d’être. It broadly defines the scope and boundaries
of the organisation, which should be in line with the expectations and
values of major stakeholders.
Mission statements
Some organisations find it helpful to provide a concise and clear writ-
ten statement of their broad objectives. Whilst such statements are
called different names, most find the term mission statement to be the
most suitable. They have increased in popularity over recent years, and
more and more organisations have come to appreciate their advan-
tages. In particular, recent years have seen an increased realisation that
public as well as private sector organisations should establish clearly
defined objectives. It has thus become increasingly common for insti-
tutions like universities, hospitals and schools to construct mission
statements.
Why have a mission statement?
There are a number of advantages to having a clearly set-out and written-
down statement of wider objectives:
■ It clearly communicates the objectives and values of the organisa-
tion to the various stakeholders groups. This theoretically
prevents people from misunderstanding the purposes of the
business.
■ In the normal operation of an organisation, it is important that
all members work towards the same ends. Clearly stated objectives
facilitate this, especially if the organisation is decentralised or
where the employees tend to work independently of each other.
There is great value in all parts of the organisation working
together and coherence is encouraged when overall objectives
are clearly understood.
■ It can serve to influence the actions and attitudes of employees
in the company. This is important when the company has
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28 Business organisations Part I
clearly defined objectives and the co-operation of employees
is necessary to ensure that strategies and plans are implemented.
The rationale for having a mission statement is perhaps encapsulated
in the words of the Cheshire cat in Lewis Carroll’s Alice in Wonderland
‘If you don’t know where you’re going, it doesn’t matter which way
you go.’
What does a mission statement contain?
The style and content of mission statements, as we might expect, varies
enormously. Some are long and detailed whereas others are short
and to the point. There are no ‘rights’ or ‘wrongs’ of how it should be
presented or what it should contain – it all depends upon the organisa-
tion and its culture. In practice, mission statements usually contain the
following:
■ Some indication of the industry or business the organisation is
mainly concerned with. In many cases this will be obvious from
the company name (e.g. Imperial Chemical Industries plc – ICI)
but in others, some elucidation may be of value (e.g. the name
GlaxoSmithKline conceals the fact that the company makes
pharmaceuticals and health-care products).
■ An indication of the realistic market share or market position
the organisation should aim towards. This may be stated
as ‘we aim to become the leading supplier …’ or ‘to become a
major company in the textiles industry’. Most statements of
this type in mission statements are reasonably realistic as man-
agement realise that an unreachable objective may demotiv-
ate the workforce or bring ridicule from outside observers.
■ A brief summary of the values and beliefs of the organisation.
Such a statement may be actual (as it is) or aspirational (as
management want it to become). Phrases like ‘caring com-
pany’, ‘friendly staff’, ‘valued employees’ and ‘working as a
team’ are examples of the company putting across its values
in a mission statement.
■ Specific and highly context-dependent objectives are sometimes
expressed in the mission statement. This type of statement
will obviously vary greatly from organisation to organisation
and some mission statements contain no expressions of this
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Chapter 2 Organisational and business objectives 29
type. It may refer to a particular competitive environment or
uniquely to the industry in which the organisation competes.
Examples of some mission statements:
Mission statement – British Telecommunications plc
British Telecommunications (BT), as a very large company, expresses its objectives in a rel-
atively brief document which is designed to communicate its objectives to its wide rang-
ing and disparate types of employee and stakeholder. The document is divided into two
parts. The first part is its vision and the second, its mission.
Vision
to become the most successful worldwide telecommunications group.
Mission
■ to provide world class telecommunications and information products and services,
■ to develop and exploit our networks at home and overseas, so that we can
– meet the requirements of our customers,
– sustain growth in the earnings of the group on behalf of our shareholders,
– make a fitting contribution to the community in which we conduct our business.
Source: BT plc web site.
Mission statement – Easyinternet café
To be the world’s leading Internet café that is the cheapest way to get online.
Source: Easyinternet café web site.
Mission statement – Psion plc
Our mission is to grow rapidly and profitably through innovation in mobile Internet. In
pursuing this mission, we will deliver value:
■ To shareholders through superior returns.
■ To customers through solutions and devices that enhance their quality of life and
personal effectiveness.
■ To staff through a stimulating environment that encourages innovation.
Source: Psion plc web site.
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30 Business organisations Part I
Question 2.1
■ Examine the above examples of mission statements and describe your perceptions
of what messages each of the organisations are trying to convey.
2.3 Organisational goals
Goals
Organisational goals represent broad-based intentions that derive from
the overall mission, and provide a sense of direction which leads to the
achievement of its aspirational (visionary) and challenging position at
some point in the future.
The broadly stated goals usually require further sub-division into man-
ageable components (i.e. objectives) which provide the focus for man-
agers who have specific roles and responsibilities to deliver the desired
outcomes. The overall objectives are then translated into specific activ-
ities that cascade through the organisation to the workforce who actu-
ally perform the day-to-day tasks that produce the finished goods and
services. Goals can be qualitative or quantitative in nature and provide
the key elements in achieving the organisation’s vision.
More precise statements in the form of objectives cascade from the
goals and these are translated into targets, or quantifiable outcomes, for
employee activities and tasks the direction is set for the achievement of
the vision over the desired timeframe.
Objectives
Objectives are key elements for the organisations success and it is
essential that they meet robust criteria. A useful aide-memoir for setting
Mission statement – J Sainsbury plc
Our mission is to be the consumer’s first choice for food, delivering products of out-
standing quality and great service at a competitive cost through working ‘faster, simpler
and together’.
Source : J Sainsbury plc web site.
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Chapter 2 Organisational and business objectives 31
effective objectives can be found in the mnemonic SMART:
■ Specific explicit statement of required outcomes.
■ Measurable means of assessing results against plan.
■ Achievable within the capabilities of people and resources
employed.
■ Realistic practical and sensible assessment of capabilities.
■ Time related completion date and interim milestone dates
where appropriate.
Targets
Business targets are quantified and time-based objectives that define
the measurable outputs. They can be expressed in financial or numer-
ical terms.
Objectives: implicit and explicit
The question, ‘why does a particular organisation exist?’ or ‘what are the object-
ives of this organisation?’ at first glance, may seem rather straightforward.
We may assume, for example, that a private business such as a brewery
primarily seeks to make a profit whilst a hospital exists to provide health
care. We will see in the course of this chapter that such simplistic defin-
itions sit uncomfortably alongside the complexity of influences that are
brought to bear upon an organisation, and that organisations may have
many objectives at the same time.
To simplify our discussion, we can seek to divide objectives into two
broad categories: those which are expressly stated by an organisation,
and those which are not, but which we can safely presume to be the case.
We can readily imagine that a large company such as the car manufac-
turer Nissan, as a private company, exists to make a profit. The company
states this publicly: ‘…we aim to build profitably the highest quality car sold in
Europe.’ Similarly, a hospital trust, such as the University College Hospitals
group in London, exists primarily to provide a service that is health
care. Again, the trust states this publicly; to ‘maintain and develop a local,
national and international role as a provider of comprehensive, safe, accessible
and high quality care for patients’. We can consider these objectives to be
explicit, because they are perhaps obvious and (often) stated publicly by
the organisation.
The activities of such organisations suggest to us that their primary
objectives, important though they are, are not the only objectives they
pursue. Many organisations, for example, seek to be fair and to act
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32 Business organisations Part I
Question 2.2
Suggest what you consider to be the primary (most important) objectives of the follow-
ing organisations:
■ Microsoft
■ easyJet
■ Body Shop
■ KFC
responsibly towards their employees and customers in the belief, per-
haps, that such sub-objectives support their explicit goals. Such objectives
are said to be implicit because they are implied by the organisation’s policies
and activities. Implicit objectives do not oppose the primary objective;
they usually complement it and help towards its accomplishment.
Case: ‘Out of this World’
A new concept in retailing was launched
in late 1995 when 2000 individuals united
behind a shared vision of shops that would
present a direct challenge to destructive
consumerism. The Creative Consumer Co-
operative Ltd (a registered industrial and
provident society – a type of co-operative
owned by its members – see Chapter 5) was
formed and its members invested money
to establish shops under the trading name
of Out of this World. The shops sell the usual
wide range of consumer products that you
might find in your regular ‘conventional’
supermarket. What is unique about Out
of this World is that it only sells a product
when it is satisfied that both the products
sold and the producers meet certain ethi-
cal or environmental criteria. Based in
Newcastle upon Tyne, Out of this World
currently has shops in Leeds, Nottingham
and Newcastle upon Tyne itself.
Aimed at people who care about the
way that products are produced and the
behaviour of the producer companies,
one the core values Out of the World’s
core values is Fair Trade and it sells a wide
range of organic products which some-
times cost a little more than foods pre-
pared from conventional sources. This is
due to the extra costs involved in produc-
ing some organic products.
The shops themselves are said by the
company to be an ‘experience’ rather than
a conventional shopping environment.
Each shop has a database which gives shop-
pers information on suppliers (e.g. in the
Third World) and products to assist them
in their choices. Shops are designed not
only to provide an enjoyable shopping
experience, but also an educational one.
All types of products sold in the shops
are carefully chosen for their contribu-
tion to:
■ the promotion of personal health;
■ human welfare;
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Chapter 2 Organisational and business objectives 33
Different types of business objectives
There are a huge number of objectives which businesses may pursue in
addition to their primary objectives. Some of these will be quantitative in
nature and some qualitative.
Quantitative objectives are those whose achievement can be measured
using numerical or financial criteria. They can be specific and accurately
measured. It follows that the successful achievement of quantitative
objectives can be easily seen and it is equally visible when they are not
achieved. Examples of quantitative objectives might include:
■ targets for market share;
■ target accounting or financial performance (e.g. profit
margins);
■ target levels of year-on-year growth;
■ target levels of productivity or efficiency;
■ number of new product launches (i.e. two new products this
year);
Question 2.3
Suggest as clearly as possible what the primary objective of Out of this World might be.
■ environmental sustainability;
■ fair trade (the name given to trading
relationships which do not exploit or
take economic advantage over the
producer, often in the Third World);
■ community and local development;
■ animal welfare.
So what are the objectives of Out of this
World? In its share prospectus, the com-
pany give the following explanation:
Is profit a dirty word? Profit is important to
Out of this World. It is not a primary objective
but it is an essential condition of success. It is a
word that we will use … not as an incentive to
personal gain or greed but as the test of the organ-
isation’s efficiency and sustainability. Profit,
for Out of this World, is a significant aspect of
business terminology, not a raison d’être.
It follows from the above explanation
that profit is not the primary motive of the
company but a necessary prerequisite that
enables it to fulfil its primary objective.
In 2002, Out of this World won the
award of the UK’s ‘Best Established Retail
Store’.
Source : Out of this World web site, 2004.
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34 Business organisations Part I
■ buy a subsidiary in France to exploit European markets;
■ to gain a quality accreditation certificate.
Qualitative objectives are more difficult to measure because they are not
based on a numerical indicator. This does not mean they are any less
important than quantitative objectives – types of objectives will vary from
business to business. Examples include:
■ to attain a public perception of being a ‘good employer’;
■ to be seen as a responsible ‘environmental’ or ‘green’
organisation;
■ to improve the quality of management;
■ to improve customer satisfaction;
■ to improve staff training.
Such objectives are essentially intangible in nature and as such, it is hard
to know the exact point at which the objective is satisfactorily realised.
If, for example, an organisation wishes to improve its employee skills,
we can see that this is a broad qualitative objective. We cannot tell from
this by how much it wants to improve them or at what point we will be
able to say that the objective will have been accomplished.
2.4 The prime objective
There is one objective which applies to all businesses without excep-
tion. It is the highest and the clearest objective, and it is so obvious that it
is rarely articulated. It is universally presumed to apply in all cases. The
prime objective in business is to survive – to stay in business.
The individuals in organisations may differ on some other business
objectives. It may be the case, for example, that management wish to
increase profitability and that the trade union representing the workers
wants a pay increase – potentially conflicting objectives. On this and many
other examples, there will be debate over business objectives. Over the
issue of survival, however, there is no debate.
If the company does not survive, then:
■ employees and management lose their jobs;
■ shareholders lose their investment;
■ suppliers do not get paid for the goods they have supplied;
■ customers must look elsewhere for their supplies;
■ the government does not benefit from tax revenues from
employees and from tax on profits.
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Chapter 2 Organisational and business objectives 35
2.5 Who sets business goals and
objectives? Two viewpoints
The question, ‘who sets the objectives of a business?’ is a more complex
one than it might at first appear. This question raises the issue of power –
power enables individuals or groups to impose their wills upon the
organisation. The party with the greatest exertable power will tend to
impose more of their purposes upon the company’s objectives.
There are two broad approaches to the issue of who sets organisational
objectives. They are partially in conflict and partly complementary. The
first approach, stakeholder analysis contends that objectives are arrived
at by many interested parties in coalition, whilst the simpler model of
principal–agent analysis argues that the objectives of a business are to be
determined by the company’s owners and directors alone. In other texts,
this dual approach is described as the stakeholder–stockholder dichotomy.
2.6 The integrated journey from mission
to vision
The journey from an organisation’s mission to the achievement of its
vision requires an appropriate structure in which management roles
and responsibilities are defined with ownership of the organisation’s
functions co-ordinated via clearly articulated goals and objectives. The
relationship is shown in a simplistic fashion in Figure 2.1. This particu-
lar model, on the left-hand side, shows a downward cascade from the
mission though roles, responsibilities and specific objectives. To meet
the daily ongoing work, these objectives are organised and delegated
though a series of activities which in turn are sub-divided into actual
tasks (units of work). This example shows a situation where it has been
judged that one of the goals will need manageable performance improve-
ments over 3 years. Specific objectives have been set, leading to year-
on-year targets.
2.7 Stakeholders
What is a stakeholder?
A stakeholder can be defined as ‘any person or party that has an inter-
est in, or affected by, the activities of an organisation, however, strong
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36 Business organisations Part I
or weak that interest may be. The interests of stakeholders may or may
not be primarily financial in nature.
It immediately becomes apparent that many parties, including share-
holders, community members and regulators fit into this broad def-
inition. Some stakeholders have an urgent and vital interest in the
organisation whilst others have only a slight concern and that from a
considerable distance. A broad and general list of possible stakehold-
ers would include the following parties:
■ shareholders/owners;
■ management;
■ employees;
■ competitors;
■ employees’ families and dependants;
■ suppliers;
■ customers;
■ workers’ (trade) unions;
Figure 2.1
Schematic relationships of mission and management activities to achieve vision.
Mission Vision
Goals
Responsibilities
Strategy
Policy/Plans
Year 1
Tasks
Targets
Year 2
Year 3
Roles
Objectives
Activities
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Chapter 2 Organisational and business objectives 37
■ bankers;
■ moneylenders other than banks (e.g. some individuals lend
cash to businesses);
■ communities served by the organisation;
■ near geographical neighbours (i.e. ‘next-door’ neighbours);
■ pressure groups and opinion formers;
■ financial auditors (in the case of limited companies);
■ regulatory authorities (e.g. Health and Safety Executive and
regulatory QuANGOs);
■ other businesses in the locality (e.g. the local newsagent, pub).
In addition to the above list, there are many parts of the state which
may have an interest in an organisation:
■ The Inland Revenue collects direct taxes from a private sector
business;
■ Her Majesty’s Customs and Excise collects indirect taxes;
■ Local government collects local taxes from businesses within
its area;
■ The Department of Social Security collects employers’ National
Insurance contributions and must pay unemployment benefit
to individuals if the company becomes insolvent;
■ The Department of Trade and Industry;
■ The Department for Education and Employment benefits from
businesses as both sources of students and employers of its
school leavers and graduates.
Hence we see a complex picture of interests emerging. We can also
see that not all stakeholders want the same things for any given busi-
ness organisation. Whilst some stakeholders will be in concurrence,
others may profoundly disagree over the objectives of the organisation
in question.
Question 2.4
Attempt to generate a list of the specific stakeholders in the following organisations:
■ the university or college at which you are studying;
■ your local authority;
■ a local sole trader such as your local window cleaner;
■ mobile telecommunications company.
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38 Business organisations Part I
Stakeholder coalitions
According to the theory of stakeholder analysis, the objectives of a busi-
ness depend upon the relative strengths of the various stakeholders.
The stakeholders who can exert the most powerful influence over the
organisation will have most input into the objective-setting of the busi-
ness. Similarly, stakeholders with little influence, strong though their
interest may be, will have little influence over the company’s objectives
(e.g. the pub which benefits from lunchtime business from a nearby large
employer has an intense interest in the large employer, but clearly has
little or no influence over it).
According to this theory of objective-setting, the predominant object-
ive of the business will be those of the most powerful shareholders or,
the objectives of the most powerful coalition (purposeful grouping) of
stakeholders. It is clear that some stakeholders on their own could not
bring any meaningful influence upon an organisation, but when they
act in concert with other stakeholders, their aggregate influence natur-
ally increases in power.
Whilst it is uncommon for any given stakeholder to want exactly the
same as any other, they often have sufficient in common to mount a com-
mon assault on one small area of objective-setting within an organisation.
A conflict in stakeholder interests – Sellafield nuclear complex
The Sellafield nuclear fuels complex was opened by British Nuclear Fuels in 1957.
Situated just north of Whitehaven in West Cumbria, the Sellafield site includes a number
of nuclear reprocessing plants, the Calder Hall nuclear power station and the Thermal
Oxide Reprocessing Plant (ThORP). The collective plants in the Sellafield complex
employ, between them, around 7000 people with another 1000 contractors being con-
tinually used on site. Sellafield is Cumbria’s largest employer and it is estimated that
30% of all jobs in West Cumbria are dependent, either directly or indirectly, on the
complex. These jobs are seen as being particularly important as West Cumbria is an area
of high unemployment with a relatively depressed economy.
A stakeholder analysis of the Sellafield situation reveals some interesting conflicts and
two opposing stakeholder coalitions.
The ‘for’ coalition
Some stakeholders feel the plants are of enormous importance and must be protected and,
if possible, expanded. The government considers nuclear energy to be a vital part of its
overall energy strategy. Electricity can be produced from coal, gas, oil and other sources,
but it is considered wise to spread production across as many fuels as possible. This should
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Chapter 2 Organisational and business objectives 39
Stakeholder ‘mapping’
The extent to which any stakeholder is able to influence the objectives
of an organisation depends upon two variables: the stakeholders’ inter-
est and power.1
■ stakeholder interest refers to the willingness to influence the
organisation. In other words, interest concerns the extent to
which the stakeholder cares about what the organisation does.
mean that a drop in the supply of one input would not have too bad an effect on the
overall production of electricity in the country. The employees and their unions support
the plants as they are a vital source of employment for the communities. The same attitude
is taken by the local authorities in the area for similar reasons. Sellafield’s customers are
spread across the world. Power generators send their used nuclear materials to Sellafield
or ThORP and it is returned to them in a form which enables it to be re-used at a cheaper
price than sourcing ‘virgin’ materials. A plant the size of the Sellafield complex necessar-
ily has many suppliers – local engineering companies, catering businesses, laundries,
etc. and it follows that they, too, have vested interest in seeing the plant prosper.
The ‘against’ coalition
Just when you think that the Sellafield complex is an unmitigated blessing, it should be
remembered that there are some particularly vocal stakeholders who have misgivings
about the plants, some of whom would rather see it closed down completely. Environ-
mental pressure groups argue strongly that nuclear power should not form a part of the
UK’s energy policy owing to the risks of radiation leaks during use and the problems
with disposing of spent nuclear fuel once it has come to the end of its useful life (some
nuclear fuels can remain radioactive for 10,000 years). In addition, some health pro-
fessionals and researchers have suggested that the plants are a source of harmful radia-
tion, both to the workers and to the surrounding population. Evidence has been put
forward that may suggest that there is a higher incidence of leukaemia and other seri-
ous diseases in the locality of the plants. Concern has also been expressed that radiation
from the plant may have teratogenic effects (causing problems in pregnancy and birth
defects). The Government of the Republic of Ireland is also concerned about the com-
plex. Ireland is separated from Sellafield by the Irish Sea and some citizens of the
Republic believe that harmful effects from the plants may affect parts of their country.
Whilst the controversy over Sellafield has been notable and well publicised, the collec-
tive weight of the ‘for’ coalition has outweighed the ‘againsts’. It seems that the ‘againsts’,
however, convincing their arguments may be to some people, will have to remain as a vocal
but somewhat impotent coalition whilst the economic forces for keeping Sellafield
remain as convincing as they are.
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40 Business organisations Part I
■ stakeholder power refers to the ability to influence the organ-
isation.
■ coalitions of stakeholders can significantly shift the balance of
power.
It follows from this that the actual influence that a stakeholder has will
depend upon where the stakeholder is positioned with respect to ability
to influence and willingness to influence. A stakeholder with both high
power and high interest will be more influential than one with low
power and low interest. We can map stakeholders by showing the two
variables on a grid comprising two intersecting continua (Figure 2.2).
By examining the stakeholders or stakeholder coalitions of any organ-
isation, we can visibly see which stakeholders are the most powerful. We
could also use the map, for example, to assess which stakeholder is likely
to exert the most influence upon the organisation’s objectives. It would
enable us to see any potential conflicts which may arise if, for example,
we see two conflicting stakeholders in the same area of the map that is two
conflicting stakeholders with the same degree of power and interest.
The managing director and the board of directors are examples of
stakeholders with both high power and high interest. This is because
they not only manage the business but also depend upon it for their
jobs. The bar to which employees retire after or during the day’s work
is an example of a stakeholder with high interest but low power.
Figure 2.2
The stakeholder
map.
Stakeholder interest
St
ak
eh
ol
de
r p
ow
er Lo
w
H
ig
h
HighLow
Least
influential
Most
influential
Question 2.5
Suggest examples of stakeholders who may fit into each section of the grid. Concentrate
on the categories of low interest, low power and low interest, high power.
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Chapter 2 Organisational and business objectives 41
Two views of stakeholder theory
We might ask the question ‘why’ should organisations be influenced in
their objectives by their various stakeholder groups. We have seen that
the stakeholders may vary in their aspirations for the organisation and
so managing the various views may be a bit tricky to say the least. There
are two approaches that organisations can take in respect of managing
stakeholder aspirations (although academic authors have identified a
more complex picture).2
The instrumental view of stakeholder theory says that organisations
take stakeholder opinions into account only inasmuch as they are con-
sistent with the objective of profit maximisation (or other conventional
indicators of success). Accordingly, it may be that a business modifies
its objectives in the light of environmental concerns but only because
this is the best way of optimising profit or achieving success. If the
loyalty or commitment of an important stakeholder group (e.g. cus-
tomers) is threatened, it is likely that the organisation will modify its
objectives because not to do so would threaten to reduce its profits.
It follows from the instrumental stakeholder approach that an organi-
sation’s values are guided by its stakeholders’ opinions – it may not
have any inherent moral values of its own except for the over-riding
profit motive.
The normative view of stakeholder theory takes a ‘Kantian’ view of busi-
ness ethics (derived from the German philosopher Immanual Kant,
1724–1804). Kant emphasised the notion of duty and good-will in civil
matters and in relationships. Underpinning his ethical philosophy is the
notion of respect for the moral duty that one party or person should
have towards another. Extending this argument to stakeholder theory,
the normative view states that organisations should accommodate stake-
holder aspirations not because of what the organisation can ‘get out of
it’ for its own profit, but because it observes its duty to each stakeholder.
The normative view sees stakeholders as ends in themselves and not as
merely instrumental to the achievement of other ends.
2.8 Agents and principals
The argument that the principals of an organisation are the only sig-
nificant influences on objective-setting is one of the foundational and
fundamental principles of capitalism. The principals of an organisa-
tion are those parties that own it – either directly (stockholders) or
indirectly (the government in public sector organisations).
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This concept is perhaps a simplification of the notion of stakeholder
analysis. It suggests that as the owners of a business, the shareholders,
are the only party who have a legitimate right to determine its objectives
and policies. The agents of an organisation are the directors or those
individuals which the principals have placed in charge of the affairs of the
organisation. Objectives are conveyed to the agents and once received;
the agents do not need to take cognisance of any other concerns in the
execution of their duties. Put simply, according to this concept, the
principals say to the agents ‘I appoint you and pay your remuneration;
therefore you will carry out my agenda for the organisation.’ The agents,
according to this viewpoint, would be acting irresponsibly if they were
not to obey their principals.
What are the objectives of agents and principals?
If this theory is to be given credence, then we ought to see in practice
the objectives of shareholders taking pre-eminence in commercial organ-
isational objective-setting. The supreme objective of ordinary share-
holders is twofold: to receive the maximum dividend per share and to
enjoy capital growth on the market value of the share. Both of these can
only be maximised when the business is enjoying a period of high prof-
itability. Hence, the primary objective of the shareholder is for the agents
to maximise profit above all other objectives. As most shareholders are
not in regular contact with the agents, they will usually be indifferent
to the concerns of other stakeholders and will directly oppose any
stakeholders who wish the company to increase its costs for any reason
whatsoever.
The basis of market economics is that individuals will place their
money where they believe they will receive the maximum return on it.
Most shareholders would consequently be displeased if they heard that
the agents of their investment (the directors) were paying too much
attention to the desires of other stakeholders in a way that would reduce
the return on shareholders’ investment. In such circumstances, they may
have the right to say ‘what do you think you are doing with my money?’
Agents must manage a much more complex set of variables than
their principals. It is the agents’ job to balance the many calls upon
the business and to take a longer-term view than the shareholders. The
shareholder will certainly not enjoy the same level of knowledge on the
market conditions of the business and must therefore, to a large extent,
trust the agents in the vast majority of their decisions and actions. It must
be remembered though, that the maximisation of profitability is very
42 Business organisations Part I
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Chapter 2 Organisational and business objectives 43
much in the agents’ interests as well as the shareholders’. A failure to
maintain high levels of profitability will usually precipitate a fall in the
share price and a lower level of dividends to shareholders. Not only will
such actions of directors make them vulnerable to being voted off the
Board by the shareholders (thus losing their job), but an unattractive
share falls in value and makes the company vulnerable to takeover (which
may also mean the agents being replaced). In addition, directors often
have a profit-linked element in their reward packages, meaning that a
higher profit enables a higher level of remuneration to be achieved.
Assignment 2.1
Select an organisation of your choice, from private, public, or voluntary sector (If you pre-
fer, you can create a fictional organisation). Using the template at Figure 2.1 above, pre-
pare a worked example of the model that includes details for the following elements:
■ A brief mission statement.
■ Write a vision statement and select one component of it which can be used for the
creation of a goal.
■ Set a goal that feeds directly to the visionary element.
■ Establish the role of the manager who will have ownership of this part of the organ-
isation’s strategic intent.
■ Identify one of his/her responsibilities directly related to the goal in question.
■ Set an objective plus relevant and realistic targets for the current year and each of
the three subsequent years.
■ Identify a related activity and associated task(s).
References
1 Johnson, G. and Scholes, K. (1993). Exploring Corporate Strategy, Text and
Cases, 3rd edn. Englewood Cliffs, NJ: Prentice Hall (adapted from
Mendelow, A. (1991). Proceedings of 2nd International Conference on
Information Systems, Cambridge, MA.
2 Donaldson, T. and Preston, L.E. (1995). The stakeholder theory of the
corporation: concepts, evidence and implications. Academy of
Management Review 20(1): 65–91.
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44 Business organisations Part I
Further reading
Boddy, D. (2002). Management an Introduction, 2nd edn. Harlow: FT Prentice
Hall.
Johnson, G. and Scholes, K. (2002). Exploring Corporate Strategy, Text and Cases,
6th edn. Harlow: FT Prentice Hall.
Mullins, L.J. (2004). Management and Organisational Behaviour, 7th edn.
London: FT Prentice Hall.
Naylor, J. (2004). Management, 2nd edn. Harlow: FT Prentice Hall.
Needle, D. London: Business in Context, 4th edn. London: Thomson Learning.
Scott, W.R. (2003). Organizations Rational, Natural and Open Systems
(International), 5th edn. New Jersey, USA: Prentice Hall.
Useful web sites
Fair Trade Foundation: www.fairtrade.org.uk
Tearfund: www.tearfund.org
Traidcraft: www.traidcraft.co.uk
Cafedirect: www.cafedirect.co.uk
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C H A P T E R
Non-incorporated
organisations
3
Learning objectives
After studying this chapter, students should be able to describe:
■ what is meant by an non-incorporated organisation;
■ what is meant by a legal entity or juristic personality;
■ what is meant by a sole proprietor;
■ what are the advantages and disadvantages of holding sole
proprietor status;
■ what is meant by a partnership;
■ what are the advantages and disadvantages of holding part-
nership status?
3.1 Non-incorporated organisations
There are two broad categories of privately owned business organisa-
tions, that is, those not owned by the state. The distinction rests upon
the status of the organisation in the eyes of the law (the legal status). In
this chapter, we will discuss one of these categories, non-incorporated
organisations, whilst in Chapter 4, we will examine the second category –
limited companies or incorporated organisations.
The distinction between these categories revolves around the rather
odd question: What is a person? This question does not refer to the biol-
ogist’s definition of a person, but the legal definition. In business, a
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46 Business organisations Part I
person (or a legal entity) may be a biological person, or it can be a col-
lection of people.
We shall see in Chapter 4 that incorporated organisations are unique
in that the law primarily recognises the organisation as a legal entity
in its own right, and not the employees of it. This is not the case in
unincorporated organisations.
What is a ‘legal entity’?
In legal and business studies, the concepts of human and legal person-
ality can be different. That which legal people call a juristic personality is
any party that the law recognises as a single entity (‘person’), in that the
state will enforce contracts made by that ‘person’. A legal entity has
certain rights:
■ to make contracts;
■ to carry out business transaction;
■ to own property;
■ to employ people;
■ to sue and be sued for breach of contract.
In the case of the simplest form of business – the sole proprietor, the
law does not recognise the business entity of ‘the sole proprietor’, but
it does recognise the human person who is the sole proprietor.
The issue becomes a little more complex when we consider limited
companies (see Chapter 4). The law recognises the company as the legal
personality in its own right. Hence, it is the entity of the company which
makes contracts. The employees of the company who are empowered to
make contracts on the company’s behalf are called its agents. These are usu-
ally senior or specialised employees of the company.
Business organisations
Non-incorporated
organisations
Incorporated
organisations
Partnerships Public limited
companies
Sole
proprietors
Private limited
companies
Figure 3.1
Taxonomy of private
sector business
organisations.
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Chapter 3 Non-incorporated organisations 47
The two major types of business enterprise we shall consider in this
chapter are essentially individual ‘human’ legal entities, and, as we shall
see, this has some important implications for the individuals concerned.
3.2 Sole proprietors
What is a sole proprietor?
The sole proprietor or sole trader is the simplest form of business
arrangement. Such a person is usually, but not necessarily, a sole per-
son carrying out some sort of business. As there is no legal requirement
to declare oneself as a sole trader, nobody knows exactly how many
there are, but it is thought that there are well over 1 million such busi-
nesses in the UK. There is no formal setting-up procedure for sole
traders – they simply begin in business. Furthermore, apart from keep-
ing records for tax purposes, there is no requirement to keep records
of any kind.
Most sole proprietors are one-person concerns, but others employ a few
staff as helpers. Some, albeit in exceptional circumstances, may employ
up to 100 staff. Most ‘self-employed’ people operate as sole proprietors,
common examples of which include:
■ trades people (joiners, plasterers, electricians, painters, roofers
etc.);
■ market stall holders;
■ small independent retailers (e.g. fish and chip shops, news-
agents, greengrocers etc.);
■ ‘cottage industry’ proprietors (e.g. craft workshops);
■ farmers;
■ window cleaners.
The nature of the sole proprietor means that setting-up costs are
limited to the tools or premises required to carry out normal business
activities. Whilst this can be reasonably sizeable (e.g. for a shop or a
milk-round), in most cases, it is relatively small. Consider the cost, for
example, of setting-up as a window cleaner: the price of a ladder, a
mop and a bucket. Many sole proprietors carry out business on an
occasional business (e.g. when they have no income from any other
source), whereas others spend all of their working lives in this form of
business arrangement.
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As we might expect, sole proprietors enjoy some advantages from
their status in law, and some disadvantages.
Advantages of holding sole proprietor status
■ As there are no legally required setting-up procedures, it costs
nothing to begin trading as a sole proprietor, apart from the
necessary capital costs. It follows that it is also quick, with no
approvals or complicated forms to fill in.
■ The sole proprietor, as the owner of the business (or more
correctly as the business – the sole proprietor is the business),
has total claim on all the business’s earnings. All profits and
earnings belong directly to him or her.
■ The owner is ‘his own boss’ as the only employee of the busi-
ness. This has several advantages. Firstly, decisions can be made
quickly as he has nobody else to consult. Secondly, he has total
autonomy to organise his work as he sees fit. Thirdly, he is inde-
pendent of any other working partner – he can please himself.
■ With the exception of tax returns, there is no requirement placed
upon sole proprietors to submit formal documentation annually as
limited companies must (see Chapter 4). This saves a lot of
time and cost that other forms of business entity must spend
on book-keeping and auditing. It also means that confiden-
tiality can be preserved – nobody except the tax authorities
need ever find out how much the sole proprietor earns or
how much he has ‘saved for a rainy day’.
Disadvantages of holding sole proprietor status
■ The very nature of the business as a small or one-person con-
cern means that all of the tasks in the business must be performed by
the owner/manager. Such tasks include the operations (e.g. the
window cleaning or the plumbing work), selling and advertis-
ing (if appropriate), invoicing and collecting debts, filling in
48 Business organisations Part I
Question 3.1
In addition to the examples given above, can you think of any other businesses which
are usually carried out by sole proprietors?
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tax documentation and so on. This necessarily puts pressure
on the workload of the sole proprietor.
■ The skills and abilities that the business has access to are limited to
those of the owner. If the owner is particularly poor at any skill,
the skill deficiencies are to the detriment of the business. This
is usually a key consideration as the owner, although he may
be proficient in his trade, may be poor at administration, sell-
ing or any number of important business functions.
■ The work of a sole proprietor is usually labour intensive. This
means that when the sole proprietor is not working, no money is
coming in. This tends to mean that ‘luxuries’ like holidays, sick
days and other reasons for ‘time off ’ may be a rare occurrence,
especially if there is pressure to keep working to bring in money.
■ The small size of the sole proprietor business means that they
usually suffer from poor economies of scale. This means that the
sole proprietor has little buying power, and will consequently
pay a higher price per unit of material (e.g. per nail, piece of
wood, tin of paint, etc.) than larger businesses who are more
likely to buy in bulk.
■ A sole proprietor suffers from what is known as unlimited
liability. This is a major disadvantage of all forms of non-
incorporated business. As the sole proprietor is a human legal
entity, he does not benefit from limited liability. In practice, his
means that the owner of the business (the sole proprietor)
is liable for any or all of the business’s losses from his own
personal reserves, without limit.
Chapter 3 Non-incorporated organisations 49
Unlimited liability – a sad story
Johnny Banana is a sole proprietor who specialises in decorating and plumbing. He
accepted a contract to work in a large country mansion, with a focus on redecorating
and replumbing in and above the art gallery. The art gallery in the mansion was of inter-
national renown and housed several rare Renoir’s, Picassos and a few valuable Lowry’s.
What the owner of the mansion didn’t realise was that Johnny was not very good at his
job. On arriving at the house, Johnny decided to start with the plumbing. He re-routed
several water and sewage pipes above the gallery and re-housed some channels under
the expensive tiled floor. After this, on the second day, Johnny started to repaint the
walls on which the expensive paintings were hung.
Things started to go wrong when he removed a Picasso from the wall to paint behind
it. Laying it on the floor, he kicked over a can of paint and unfortunately most of it
landed on the painting. Whilst furiously trying to wipe the paint off with some rags, one
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3.3 Partnerships
What is a partnership?
The second major form of unincorporated business is the partnership.
The Partnership Act 1890, defines a partnership as,
… the relationship which subsists between persons carrying on a
business with a view to profit.
This definition is a little unclear and it does leave room for some inter-
pretation. It will therefore come as no surprise to learn that a number
of different partnership arrangements have been employed by busi-
ness people over the years.
A partnership is like a sole proprietor in some respects and unlike it in
others. Like a sole proprietor, a partnership is not incorporated and
therefore suffers from unlimited liability. In contrast to the sole proprietor,
partnerships are a legally acknowledged and recognised form of busi-
ness organisation.
By definition, there must be at least two partners in a partnership.
There is no legal upper limit, but in practice, they rarely exceed twenty.
Partnership arrangements are occasionally found in the ‘trades’ (such
as electricians or builders), but are more common among professional
concerns such as:
■ surveyors;
■ architects;
50 Business organisations Part I
of the pipes above the gallery ruptured allowing sewage to dribble onto one of the
Renoir’s. Leaving the Picasso to rush to the sewage pipe, he nudged the ladders, top-
pling over another tin of paint, which also landed on the unfortunate Picasso. By now,
the dribbling foul water was causing irreparable damage to the Renoir. The copious
expletives uttered by Johnny caused the mansion’s owner to enter the gallery.
The two paintings were judged to have been ruined. Johnny was advised that he owed
a total of £14 million in respect of the two paintings. As Johnny was a sole proprietor,
the entire value of the demand had to be met from his personal reserves. His total
worth was comprised of the value of his house: £30,000, and the value of his van: £500.
Johnny was declared bankrupt – a situation which meant that he could not take advan-
tage of mortgages or any other loans, thus he lost his home and his business with little
prospect of rebuilding either of them again.
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■ accountants;
■ management consultants;
■ lawyers and solicitors;
■ general practitioners.
Partnership agreements
Partnerships are usually set up by all partners signing a legally bind-
ing partnership agreement. This is a simple and cheap procedure,
which requires the services of a solicitor or a similarly appointed legal
professional.
A legally binding agreement is meant to avoid two possible unpleas-
ant situations arising.
■ Partners are equal in their positions in the partnership unless
the other partners agree to elevate one of their number to
the position of senior partner. All profits ensuing from the
business of the partnership are equally divisible between all
partners (unless it is agreed that senior partners should
receive more). Without a legal agreement, there would be
nothing to prevent some of the other partners ‘ganging-up’
on one partner (who they may perceive as having done little
work) to not give him his rightful share of the partnership’s
profits.
■ We have already seen that partnerships do not enjoy limited
liability. In the event that the partnership has to absorb a loss,
the amount must be made good from the personal reserves of
the partners. In such a circumstance, some partners may be
tempted to say ‘I am not a part of this organisation, I was just help-
ing out. Therefore I am not liable for any of these losses’. This would
leave the other partners ‘carrying the can’. A formal declar-
ation of partnership leaves no doubt as to who the partners
are, thus preventing this situation from arising.
Advantages of holding partnership status
■ The fact that there are more people in a partnership than a
sole proprietor means that more capital can be raised. This will
enable the business to benefit from a higher capacity than a
Chapter 3 Non-incorporated organisations 51
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smaller business. It follows that the more partners take part
in the venture, the more capital may be invested.
■ In common with all non-incorporated business organisations,
there is no need to submit accounts as limited companies have to.
This saves time and costs, particularly the costs of having
accounts externally audited (a compulsory requirement of
limited companies).
■ The partners, as the sole owners of the business, are entitled to
distribute all of the profits among themselves. There are no compli-
cated ownership structures to take account of, which is some-
times the case with incorporated organisations.
■ The fact that there are several people in the partnership means
that there is likely to be a breadth of skills and abilities from
which the business can benefit. This is in marked contrast to
the predicament of the sole proprietor, who only has his own
skills to call upon.
■ Organisations which benefit from the labour inputs of more
than one person can divide up tasks between individuals. This
means that there can be a degree of specialisation and no sin-
gle partner need shoulder too much of the workload. One
partner may specialise, for example, in the administration of
the business whilst others perform the operational tasks.
■ Whilst the business has unlimited liability, the fact that there
are more individuals involved means that any losses can be
shared equally among the partners. This reduced the burden of
risk that any single partner must endure.
Disadvantages of holding partnership status
■ In common with all non-incorporated organisations, partner-
ships have unlimited liability. Furthermore, the situation of losses
can be somewhat more complex than losses for a sole
trader as the losses must be borne by all the partners, even if
they are caused by the defective actions of just one (although
this may be modified by the terms of the partnership
agreement).
■ The need to set up a legal partnership agreement incurs a nom-
inal charge.
■ The nature of a partnership in contrast to a sole proprietor
means that decisions must be arrived at by consultation and
52 Business organisations Part I
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agreement between partners. This usually makes for slower
decision-making than in sole trader arrangements, and opens
up the possibility of conflict between partners.
■ The individual independence of the sole trader is lost. An
equal partner in a partnership does not of himself have the
authority to decide on time off, the types of work carried
out, the standards of quality observed and so on. Such deci-
sions must normally be taken in consultation with the other
partners.
■ The nature of the partnership agreement is such that if one
partner leaves the partnership for any reason (e.g. a ‘bust-up’
or death), then the partnership is automatically dissolved.
Most partnerships make a special clause in their agreement to
account for this possibility.
Except for the statutory requirements that the business should keep
records for tax purposes, a partnership, like the sole proprietor, need
not keep or publish any other financial information (unlike limited
companies). Due to this, it is possible for partnerships to keep financial
details secret (such as the magnitude of their total sales). This feature
may be of value in some competitive circumstances.
Whereas most sole proprietors remain as relatively small businesses,
some partnerships grow to be of considerable size. The large accountancy-
auditing firms are partnerships (such as Price Waterhouse, Spicer and
Oppenheim, etc.) as are some multinational surveying and architects’
practices.
Chapter 3 Non-incorporated organisations 53
Assignment 3.1
You have a friend who has just received a bequest of £15,000 from the will of his recently
departed grandmother. When you ask him what he intends to do with the money, he
informs you that he intends to open a coffee bar and to run it himself. He says that he
intends to run it as a sole proprietor but then suggests that you may be interested in
joining him as a partner in the venture.
You are required to do the following:
■ Advise your friend about the pros and cons of running a coffee bar in the legal form
of a sole proprietor.
■ Discuss the merits of joining your friend as a partner in the coffee bar business.
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Further reading
Cole, G.A. (2004). Management Theory and Practice, 6th edn. London:
Thomson.
Worthington, I. and Britton, C. (2003). The Business Environment, 4th edn.
Harlow: FT Prentice Hall.
Useful web sites
The Chartered Management Institute: www.managers.org.uk
UK Government departments’ pathway: www.gateway.gov.uk
The Industrial Society: www.indsoc.co.uk
54 Business organisations Part I
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C H A P T E R
Limited companies
4
Learning objectives
After studying this chapter, students should be able to describe:
■ the different types of incorporation;
■ the nature of shares and shareholding;
■ the differences between public and private limited
companies;
■ the legal requirements for limited companies;
■ the meaning of limited liability;
■ the advantages and disadvantages of limited company status;
■ the nature of holding companies;
■ the roles of a company’s senior officers.
4.1 Introduction
An organisation as a legal entity
In the case of a sole proprietor, we saw in Chapter 3 that the law recog-
nises the human person carrying out business with a view to profit.
Similarly, for partnerships, the law recognises the partners as individuals,
albeit working together under a legal agreement. The type of organi-
sations we shall consider in this chapter is quite different from those we
considered in the previous chapter.
4.2 Corporations
English law recognises three ways in which new corporations can ori-
ginate either by charter, statute or by registration – and a corporation exists
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until it is formally dissolved. Corporations have similar rights and priv-
ileges as humans and, while companies may be corporations, it should
be noted that there are different types of corporation.
Corporation by charter
The crown can create any corporation it chooses, and this route of
incorporation is usually used by public bodies, such as a university. As
the royal charter does not state the precise details of the legal powers
of this type of corporation, any contracts it makes cannot be declared
void on the grounds of ‘ultra vires’ (i.e. acting beyond one’s powers).
This is a clear distinction with other types of corporations.
Corporation by statute
Corporations can be created by Acts of Parliament, as evidenced in the
case of the boards of nationalised industries and as such corporations’
powers are defined by statute they are liable to the rule of ‘ultra vires’ and,
if necessary, contracts falling into that category may be deemed void.
Corporation by registration
This process applies to companies registered under the Companies Act
and probably corresponds most closely to the common use of the term
‘corporation’.
4.3 Limited company
A limited company is a separate legal entity created by incorporation at
Companies House that entails the issue of a certificate and company reg-
istration number. The registration is in effect the company’s ID and
although the company name can be changed at any time the registra-
tion number can be retained. The profits, losses, assets and liabilities
belong to the company which is owned by its members, the shareholders,
and run by managing directors (MDs). This gives the directors limited
liabilities and, if the company should fail, the personal assets of the
directors are protected. As a company has a life of its own the business
56 Business organisations Part I
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can continue to trade despite the death or resignation of any directors
or shareholders.
A limited company, or an incorporated organisation, is one wherein
the law primarily recognises the organisation as a person and an
‘organisational person’ acts just like a human person in law (as we saw
in Chapter 3):
■ to make contracts,
■ to carry out business transactions,
■ to own property,
■ to employ people,
■ to sue and be sued for breach of contract.
Hence, when customers, suppliers or employees deal with a limited com-
pany, the contracts they make are with the company and not with the
employees they deal with. The juristic personality, in this case, is a lim-
ited company.
Contrast this with registered unlimited companies where the company
members are liable for all debts incurred by the company. Unlimited
companies are classed as ‘private’ for share trading purposes and as
such their shares cannot be offered for sale to the public.
Limited liability
The need for a form of business organisation other than the ones we
have so far considered first arose not long after the beginning of indus-
trialisation in the nineteenth century. Clearly, for a business to grow in
order to allow it to benefit from economies of scale and meet market
demand, more investment would be needed than just a few people
could provide. The problem was that investors would be reluctant to
invest in business if they could be personally pursued for losses, espe-
cially if the investor did not intend to take an active role in managing
the business. To answer these disincentives to invest, the idea of limited
liability was developed.
Limited liability allows many people to invest in a business which
is good for the business’s growth and development. If the business
succeeds, the investors benefit from a share of the business’s profits (as
a return on their investment). If, however, the business fails or incurs large
losses, the investors will not be liable for anything other than the value of
their initial investment. It is said that their liability is limited to the value
of the money invested in the business. Of course, business failure means
that shareholders lose this money investment, but they would not be
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pursued for money from their own personal wealth, as is the case in
non-incorporated businesses.
How limited liability works
Limited liability, in its simplest sense, works as follows:
■ The founders, on behalf of the entity of the company announce
that it intends to carry out business activity and that investors
are welcomed. The mechanism by which this happens varies
from the informal (‘do you want to invest in my business
idea?’) to the highly formal, such as the when a public com-
pany (see later in this chapter) publishes a ‘prospectus’.
■ The value of the business (either its actual or its proposed
value) is divided up into small ‘chunks’, typically of between
25 pennies and £1. Each of these ‘chunks’ is called a share.
■ Individuals buy a number of shares in the business and in
doing so, become shareholders.
■ In exchange for the use of individuals’ investment, the agents
(see below) of the company make certain commitments. Pre-
eminent among these is that they will manage the company for
the benefit of the shareholders and will, to the best of their abil-
ity, provide an acceptable financial return on the shareholding.
■ The company’s agents use the shareholders’ money to buy
equipment and stock to use in the normal course of business.
If the company succeeds, the value of shareholders’ funds will
grow as demand for the shares drives the share price upwards.
If the company fails, the shareholders lose the entire value of
their investment.
■ Under no circumstances, can shareholders be pursued for
more than the value of their shareholding. Parties owed
money at the time of company failure can only make claims
against the value of the assets of the company.
Limited liability partnerships
A limited liability partnership (LLP) shares many of the features of a
normal partnership, but it also offers reduced personal responsibility for
business debt. Unlike members of ordinary partnerships, an LLP itself is
responsible for any debts that it incurs and not the individual partners.
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Chapter 4 Limited companies 59
Agency
A very important concept in the context of limited companies is that of agency. In
simple business organisations such as the sole proprietor, it is obvious who has the
power to act on behalf of the business – the person who is the business. When the busi-
ness itself is the juristic personality, it is harder to decide who can act on behalf of the
company. The law recognises an important category of human person who is empow-
ered to by the shareholders to act on their behalf in respect of the company – the
agents. A company’s agents are usually its directors who are empowered to make con-
tracts on behalf of the company. The shareholders to whom the agents report, and are
accountable, are called the company’s principals. The principals, collectively oversee the
work of the agents and may replace agents if they feel they are incompetent or are not
acting in the principals’ best economic interests.
4.4 Shares
At one time, shareholding was the almost total purview of insurance
companies, banks and other institutional investors. Changes in the
structure of industry in the 1980s, including the privatisation of many
former state monopolies (see Chapter 10), made it more likely that
many thousands of individual people would hold shares. This meant
that as well as buying your water services from AWG plc (parent com-
pany of Anglian Water), you could also hold shares in the company, and
hence be one of its owners.
The number of shares that a company issues is known as the share
volume. Larger companies obviously have larger share volumes than
smaller ones due to the larger company value that is divided into
shares.
Question 4.1
Find out the share volumes for the following companies. You will find this information
in the share pages of a broadsheet newspaper, such as the Financial Times:
■ Marks and Spencers plc.
■ Diageo plc.
■ British Telecommunications plc.
■ EasyJet plc.
■ HBoS plc.
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Types of shares
Shares are not all the same. Companies in the UK issue three types of
share:
■ Preference shares give their holders rights that other sharehold-
ers do not enjoy. Preference shareholders are usually guaran-
teed a dividend whatever the financial results of the company. If
the company is unable to pay a dividend, it is be carried over
to the subsequent year where the shareholder is paid for the
2 years – a principle known as cumulative dividend payment. In
many cases, preference shareholders are entitled to, in the event
that the company is wound up, repayment of their investment
in preference to ordinary shareholders. Against the benefits of
preference shares is the drawback that dividends are often fixed
in advance and do not vary. If the company has a good year, it is
possible that the ordinary shareholders will receive more than
preference shareholders.
■ Ordinary shares are by far the most common type. The precise
rights of ordinary shareholders depend upon the company’s
articles of association (see later). In most cases, ordinary shares
entitle the holder to attend and vote at the company’s Annual
General Meeting (AGM). In addition, they may expect a vari-
able dividend, dependent upon the level of profits made in any
given financial year. Unlike preference shares, ordinary shares
do not carry a right to a dividend. In the event that the company
is wound up, ordinary shareholders are usually last in the ‘peck-
ing order’ and will only receive any cash if there is anything
left once all the operational debts have been settled. Ordinary
shares carry with them the possibility of high return but also
more risk than preference shares. This is due not only because
of the variable dividend but also because of the almost certain
loss in the event of company failure.
■ Deferred shares are very rarely used, but are worthy of note.
Sometimes issued to the founders or employees of a limited
company, they receive dividends only if there is cash available
after preference and ordinary shareholders. However, once
the other shareholders have been paid, the deferred share-
holders may be the beneficiaries of the rest of the profit, divided
between them.
■ Share options are not shares as such, but represent a right to
buy shares at a certain pre-determined price. Usually granted
60 Business organisations Part I
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to a company’s managers and directors, they are designed to
act as an incentive to achieve higher productivity and profitabil-
ity. It may be that an executive director is offered a share option
at £1. If the share price is below £1, the director has no finan-
cial incentive to exercise his or her share options. If, however,
the share price rises to £2 per share, the director can buy
shares at £1 and then sell them immediately at £2 (the current
market value). In doing so, he or she makes a profit of £1 per
share with no risk and no investment (unless the director
decides to hold the shares for sometime in anticipation of future
rises in share price). Executive share options are described by
the number of shares that the executive can buy at the fixed
price. Senior directors are usually granted more share options
than others.
Shares and control
Shareholders
Shareholders are the people and organisations who ultimate own the
company. By owning a part of the ‘stock’ of the company, they necessarily
have an important say in the affairs of the company. The objectives of
shareholders, in most cases, can be described as follows:
■ They want to see a return on their investment in the form of a
dividend. Dividends are paid as a percentage of the profits that
the company makes. It follows that the higher the profits, the
higher the dividend per share.
■ They want the value of their shares to rise. A shareholder will
buy the shares at a certain price and it would be advantageous
if a profit could be made when the shares are sold. Growth in
the market value of shares is called capital growth.
Shareholders, as a group, have control over the company by their vot-
ing rights. Each single share endows the owner with a single vote on
company affairs, so the weight of a shareholders influence is directly
proportional to the number of shares held. Votes can be cast at the
AGM of the company and at any Extraordinary General Meetings (EGMs)
that the company may call from time to time.
Both of the central shareholder objectives mentioned above are served
by profit-making. It follows that shareholders are principally concerned
with the company, not as an employer or a producer of goods, but as a
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source of profits. This attitude has a knock-on effect on the other con-
trolling influences upon the organisation.
The way in which shares are distributed can determine the overall
control of the company. Ordinary shares, as we have seen, give their
holders the right to vote on resolutions at company meetings. It follows
that the higher the shareholding, the greater the degree of power over
the company’s affairs. Any single shareholder who holds 51% or more
of the company’s ordinary (voting) shares has, by definition, absolute
control over the company. It may also be the case that a shareholder with
a lesser holding has a high degree of power, depending on the structure
of the rest of the shareholding. If one single shareholder has, say, 40%,
but no other shareholder has more than 1%, it follows that the larger
shareholder has a great deal of influence even although he or she may
not have overall control.
Companies limited by share and by guarantee
Limited by share
When a company is formed by the investment of share capital, it is said
that the company is limited by share. This means that, as we have seen, the
share capital is the limit of the investors’ liability. In the unfortunate
event of company failure, the creditors will seek payment from the com-
pany’s assets, including, if necessary, the share capital. If the company’s
assets and its share capital runs out before all of the creditors have been
paid in full, then it is unfortunate for the creditors.
62 Business organisations Part I
Case: Railtrack plc
The privatisation of British Rail resulted in
separate companies responsible for differ-
ent aspects of the railways industry. The
national rail network infrastructure (i.e.
track, signalling, bridges, tunnels and sta-
tions) is owned and operated separately
from the running of trains. In 1994, own-
ership and operation of the network were
taken over by Railtrack plc and the com-
pany was floated on the stock market in
1996 with a share price of £3.80. By 1998,
the 515 million issued shares had hit a high
value of £17.68 per share. However, the
company experienced serious difficulties
with huge investment requirements of
modernising the ageing network, exacer-
bated in the aftermath of fatal accidents
at Southall in October 1998 and Hatfield
in October 2000. Railtrack posted its first
loss of £534 million in May 2001, and faced
a deepening crisis following another fatal
accident at Ladbroke Grove in June 2001.
The company requested government fund-
ing support of £700 million by December
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Limited by guarantee
A much less common type of limited company is that limited by guaran-
tee. It relies not on investors buying shares, but on individuals agreeing
to underwrite part of the company’s debt if it fails. Companies limited
by guarantee are uncommon because unlike those limited by share, they
have no way of raising capital from shareholders. The individuals guar-
anteeing the company do not inject capital but agree to accept some of
the liability. In most cases, the amount of money guaranteed by the guar-
antors is small, sometimes as little as £1. Any profits that the company
makes are re-invested in the company, as there is no requirement to pay
dividends to shareholders.
Since the guarantors are required to provide money (in the event of
failure) for no return, such companies typically tend to be organisa-
tions engaged in non-profit making, benevolent or charitable pursuits,
such as social clubs, research associations, community businesses or
professional bodies. However, a major exception can be found in
Network Rail which is a private company limited by guarantee, formed
to manage and revitalise Britain’s railways, in the aftermath of the
collapse of Railtrack plc.
Chapter 4 Limited companies 63
Example: Network Rail Limited
Network Rail is a private company limited by guarantee, responsible for the operation,
maintenance and renewal of Britain’s rail infrastructure. As a company limited by guar-
antee, it runs along commercial lines but without shareholders. It aims to make surpluses
from its operations, and instead of paying dividends, profits are re-invested in improve-
ments in the infrastructure. Network Rail is run by a board of directors but is owned by
members who are drawn from two general categories: that is, industry members and public
of that year, rising to £1.7 billion by March
2001 but the government refused to put
any more money into the struggling com-
pany and by the end of October 2001
Railtrack plc was placed into administration.
The first day of share trading after going
into administration showed the Railtrack
share price at just £2.24. After initially
refusing to offer anything, the government
promised to offer compensation of
between £2.45 and £2.55 per share, with
the first instalment in January 2003. Under
the terms of the agreement, the company
agreed to abandon plans to sue the gov-
ernment over the decision not to support
the funding requirements as the cost and
length of the litigation was unlikely to
improve the position for shareholders.
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4.5 Public and private limited companies
There are two broad types of limited companies. The distinction rests
upon the access to the company’s shares.
The private limited company is denoted by the term ‘Limited’ – often
abbreviated to ‘Ltd’ – and is the most common form of limited com-
pany (such as Campbell and Craig Limited). The shares in this type of
business are held by private individuals who, in many cases, also work
for the company (e.g. the MD). The shares in private companies are
not generally available to the public. If an individual wishes to buy
shares in the company, they must approach a shareholder directly and
seek his or her consent to transfer the shares upon payment of an
agreed sum. It may be the case that share transfers must be approved
by other shareholders in the company as well.
In a public limited company, denoted by the term ‘plc’ (such as British
Telecommunications plc). Anybody can buy shares in a plc and such
access is the key distinction between a public and a private company,
where the public at large do not have general access to the shares. The
shares in a public limited company are freely bought and sold through
a stock exchange – a central point which manages all public share deal-
ings. In Britain, we have the London Stock Exchange, located near to the
Bank of England in the City of London. The London Stock Exchange
is one of the world’s most important financial institutions and handles
more transactions in shares than any other exchange in the world.
It is usually, but not necessarily the case that larger companies tend
to be plcs. During the growth of a company, which almost always starts
off as a private limited company, successful trading brings the need to
make larger investment in the business. By making the privately held
64 Business organisations Part I
members, selected from a wide range of stakeholder organisations and members of the
public. In addition the Strategic Rail Authority (SRA) is a member of Network Rail. In
total there are 116 members, the majority of whom are public members with similar
rights to those of shareholders in a public company, except that they have no financial
or economic interest in Network Rail, such as rights to a dividend or any other form of
payments. The role of the members is to hold the board accountable for its manage-
ment of the business and to ensure that Network Rail is managed with high standards
of corporate governance. The members have a duty to act in the best interests of the com-
pany, not their own or the organisations they represent. There is no government guar-
antee but, in certain circumstances and where Network Rail is unable to raise any further
finance, the company can make use of ‘stand-by loans’ provided by the SRA.
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shares publicly available, that is, by turning it into a plc, cash can be
generated for such purposes. This change in share structure is called
floatation, because its shares are ‘floated’ on the stock exchange. (Note:
The suffix ‘plc’ is shown as ‘ccc’ in Wales.)
4.6 Qualifications for limited liability
The state considers the extension of limited liability to a business,
something of a privilege. It is, after all, possible, in the worst circum-
stances, for a company to cease trading leaving debts unpaid and share-
holders out-of-pocket. In exchange for the granting of limited liability
status, the law makes certain demands on a company, contravention of
which would result in the privilege being withdrawn.
A limited company must:
■ upon its inception, file its articles of association at Companies
House;
■ upon its inception, file its memorandum of association at
Companies House;
■ annually, without exception, file audited accounts of the busi-
ness at Companies House.
Companies House is an executive agency of the state which is charged
with the job of maintaining records on all limited companies. It must
retain all records and ensure that all audited accounts are received
from each company annually. All information in Companies House is
publicly available, so anybody can inspect the articles, memorandum or
accounts of any company at their leisure. For companies in England
and Wales, Companies House is based in Cardiff and for Scottish com-
panies, it is based in Edinburgh.
The articles of association
This document, which is deposited with the Registrar of Companies, sets
out the internal procedures of a registered company and particularly
includes:
■ the identities of the shareholders (if a private limited company);
■ the company status as private or public;
■ the process for electing directors;
■ the names and home addresses of the directors of the company;
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■ the identity of the company secretary;
■ the name of the accountant or accountancy practice who will
be the auditors of the company’s annual accounts;
■ the powers and responsibilities of the above-mentioned
directors;
■ the rules regarding the calling of meetings of shareholders
(which will include the AGM).
Throughout the life of the company, many of these statements will
change. The company can modify its articles of association at any time
subject to shareholder approval. Alternatively, the company can choose
to adhere to one of the model articles which form part of the Companies
Acts (1985 and 1989).
The memorandum of association
These documents include:
■ The trading name that the company intends to adopt or has
adopted. This must not be a direct copy of any other company
name (e.g. if an existing company is called J Smith Ltd, a new
company would not be allowed to adopt that name; it could,
however, call itself J D Smith Ltd).
■ The address of the company’s head office (called the ‘regis-
tered office’ and whether it is to be registered in England,
Scotland or Wales).
■ The broad purpose of the company. Most companies inten-
tionally make this reasonably broad to allow them to diversify
into other activities if appropriate.
■ A statement that the ‘members’ (shareholders) are claiming
limited liability in accordance with the relevant companies
legislation.
■ The value of the company’s share capital.
■ The types of shares issued and the numbers of each.
■ The distribution of the shares (e.g. ‘Mr J Smith, Director, has
30,000 ordinary shares’).
■ A ‘declaration of association’ in which the shareholders and
agents state their intention to form a company and to take up
shares in it.
Again, the memorandum of association can, with shareholder consent,
be amended from time-to-time as becomes necessary.
66 Business organisations Part I
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Annual audited accounts
The accounts of a limited company are a record of its financial state at a
particular date (the ‘year end’) and a summary of its financial perform-
ance over the previous year. There are strict financial rules which dic-
tate how they should be constructed to prevent misrepresentation and so
that comparisons can be fairly made between companies (the financial
reporting standards (FRSs) and the statements of standard accounting practice
(SSAPs)). We will examine these statements in some detail in Chapter 11.
The accounts must contain three separate documents:
1 The profit and loss account (or income statement) provides a
summary of the performance of the business over the year. It
gives the company’s total sales, a breakdown of its costs, and
hence it profit figure. This statement also discloses how much of
the profit must be paid in tax and how much is being retained
or repaid to the shareholders as dividends.
2 The balance sheet is a summary of the company’s financial state
on the last day of the accounting year (the same day that the
profit and loss statement is produced). The statement is called a
balance sheet because it contains two ‘sides’ which, by defini-
tion, equal each other. In simple terms, the first side describes
where the company has obtained its assets – the amounts from
shareholders, from loans, from retained profits, etc. The sec-
ond side describes what the company has used its assets – how
much it has invested in plant and buildings, in stocks, in exter-
nal investments, in cash at the bank, etc. Hence, it is not ‘magic’
when the balance sheet balances, unless something has been
forgotten, it simply has to.
3 The cash-flow statement describes the net cash movements in and
out of the company over the course of the financial year. The
important feature of the cash-flow statement is that, as its name
suggests, it records the inward and outward net movements
of cash.
After each of the statements has been prepared, the accounts must be
audited. This involves an independent firm of accountants coming into
the company and checking that all of the information in the accounts
is correct. They will look at the company’s records behind the accounts
to make sure that the accounts represent a true and fair view of the
company’s financial position on the year-end date.
Once the accounts have been prepared and audited, they must be
submitted to Companies House.
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68 Business organisations Part I
4.7 Limited companies: advantages
and disadvantages
We have seen that the organisation known as a limited company is sig-
nificantly more complex than those of the sole proprietor and the part-
nership. There are several conditions that they must meet. Yet it is the
case that the vast majority of businesses in the medium-to-large sectors
are limited companies. In this section, we will identify the major advan-
tages and disadvantages of opting for this legal form of business.
Advantages
■ By taking on limited company status, the owners of the com-
pany can benefit from limited liability. No matter what the com-
pany’s agents do and regardless of the size of the losses made,
the shareholders liability (or risk) is limited to the value of his
or her shares.
■ The fact that most limited companies – even small ones – have
several shareholders, means that more capital is likely to be avail-
able for the business than would be the case for a sole trader or
a partnership. If necessary, the company can create new shares
for sale to the market as a means of raising extra finance.
Disadvantages
■ The setting up and running of a limited company is decidedly
more cumbersome than that of an unincorporated business.
There are several legal constraints and procedures, which must be
observed and these invariably involve both cost and expensive
management commitment.
■ The fact that the business benefits from limited liability may
make some organisations reluctant to lend money under some
circumstances. If a bank knows that any outstanding debts can
only be paid from company assets, then a weak asset base may
make some lenders wary. This is a particular problem for
smaller companies or those that are already in heavy debt.
■ In the cases of both sole traders and partnerships, the man-
agers of the business are also its owners. Hence, their investors
have total say as to the distribution of profits and can, if they
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wish, pay all profits out to themselves. The fact that limited com-
panies are run by shareholders’ agents means that investors
are not automatically entitled to all the profits of the business and
may have little say in how the operation is run (unless you are
a majority shareholder). Agents rarely pay out all of the profits
as dividends because it is the shareholders’ longer-term inter-
ests to retain some profit for future investment.
4.8 Holding companies
A holding company is a special example of a limited company, and as the
name implies this is essentially a ‘dormant’ company whose primary func-
tion is to hold, and if necessary, maintain an asset. Typical examples would
be share portfolios, intellectual property rights and physical property. The
use of a holding company will often make the transfer of the underlying
assets much simpler, as a straightforward share transfer in the holding
company can be affected rather than transferring title of individual assets.
We have seen that any party which owns 51% or more of a company’s
shares by definition has control over the owned company. This is because,
assuming the shares owned are voting shares, the shareholder can
impose his or her will and policies upon the owned company. If more
than 51% of the shares were owned by the shareholder, say 100%, this
would not give the shareholder any more power, but he or she would
obviously be entitled to more payment in terms of dividends.
Company shares can be owned by either individual people or by other
organisations. Some companies, however, exist solely to own other
companies – by buying a controlling shareholding in the business.
These are holding companies.
Holding companies, in one respect, do not do anything directly.
Usually based around a single head office, all holding company activity
occurs in its subsidiaries. The term ‘holding’ derives from the fact that
the head office ‘holds’ the shares of other companies. The head office
may buy and sell entire companies or they may build the companies
they own by investing in them and enjoying the dividends from their
activities. By virtue of the nature of their business activity, holding com-
panies tend to be larger organisations and many of the UK’s most impor-
tant companies have opted for this form of organisation. Most are also
plcs and perhaps understandably, the name of the holding company
tends to be less well known, or provides any indication of the companies
owned. For example, Diageo plc owns many famous brands, such as
Guinness, Smirnoff vodka, Johnny Walker whisky and Gordon’s gin.
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Shareholders who invest in a holding company are actually investing,
indirectly in several companies rather than just one. Some investors
take the view that this is a lower risk investment than putting money into
a single company that does not have the breadth of interests of a hold-
ing company.
In all legal respects, holding companies are the very same as any other
limited company. They must file their articles and memorandum of asso-
ciation and must produce an annually audited set of accounts, although
we might expect their corporate purposes – set out in the memorandum
of association – to differ from an ‘ordinary’ company.
70 Business organisations Part I
Owned and owning companies: some terminology
Accountants attach different names to companies owned by holding companies, depend-
ing upon the percentage of the shares owned. Generally speaking, we refer to the hold-
ing as the parent company – referring to its role as guardian and senior. For the owned
company, accountants use three terms:
1 If the parent owns in excess of 50% of (and therefore has control over) the owned
company, the owned company is called a subsidiary of the parent.
2 If the parent owns between around 20% and 50% of the owned company, the owned
company is called an associate of the parent.
3 If the parent owns less than around 20% of the smaller company, the smaller com-
pany is called a related interest of the parent.
Holding companies and the creation of wealth
The mechanism by which a normal business creates wealth is easily
understandable. It produces an output which is of value to the market
and in selling products, the company reinvests profits and grows. As
holding companies do not themselves produce anything, it must increase
in value through the activities of its subsidiaries.
There are two essential ways in which a holding company can increase
its wealth:
■ It can extract profits, in the form of dividends, from its sub-
sidiaries. By having majority voting rights, the parent can
determine the dividend, which on some occasions may involve
overturning the recommendations of the subsidiary’s board.
■ It can buy a company for one price, increase its value and sell
it off at an increased price. This can sometimes take the form
of buying an existing group of companies and gaining a cash
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Chapter 4 Limited companies 71
Figure 4.1
The general
structure of a
limited company.
Shareholders
Chairperson
Chief executive officer (CEO)
Executive and non-executive
directors
Mid-management and employees
Company
secretary
Board of directors
surplus by splitting the group up and selling the member com-
panies individually.
See Chapter 21 for a full description of a typical holding company
structure.
4.9 Control and management of
limited companies
The internal controls of a limited company are the responsibility of the
senior management group (as is the case in all other forms of organisa-
tion). The form that this grouping takes varies according to the type of
organisation. In small businesses, overall control may be exercised by a
single person, but in most organisations, this task is entrusted to a group.
In limited companies, this grouping takes the form of a board of direc-
tors. The way in which limited companies are managed has been the sub-
ject of some discussion over recent years. This area of management
thought has been labelled corporate governance.
The governance of a limited company is guided by a number of influ-
ences, some of which are statutory (i.e. required by law) and some which
are advisory (see also Chapter 25). A generalised ‘hierarchy’ is shown in
Figure 4.1.
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It becomes clear that there are a number of people and groups
involved in controlling the activity in a limited company. We will exam-
ine each one in turn.
72 Business organisations Part I
The chairperson
The chairperson of a company is technically its most senior employee,
but in many cases, his or her role will be primarily presidential (i.e. he or
she presides) rather than operational. In the USA, this role is reflected
in the job title where a chairperson is referred to as the company pres-
ident. This means that the chairperson, especially in the case of larger
companies, will not be involved in the day-to-day decision making of the
organisation. The chairperson has two primary roles:
■ To chair the meetings of the board of the directors, the AGM and
any extraordinary meetings that are held. As the chairperson
is answerable and accountable to the shareholders only, he or
she must ensure that at all times, the shareholders’ interests
are pre-eminent in all company decisions.
■ To report to, and if necessary, liaise with the shareholders of the
company. The chairperson is the ‘go-between’ who is ultimately
answerable to the shareholders on behalf of the company.
The chairperson’s statutory requirements include the important task of
reporting in a formal document to the shareholders. The Chairman’s
Statement will appear in the front of the company’s annual audited
Directors and managers: what is the difference?
The role of a director in a limited company is quite unique. Directors have responsibil-
ities unique to their office that other managers do not have.
■ A manager is responsible only to his or her immediate superior, whilst a director, in
addition to being responsible to a superior, is also responsible, en masse with the
other directors, to the shareholders (in their role as agents).
■ A manager’s contract is usually ‘permanent’. Most directors must offer themselves for re-
election every 3 years (depending upon the internal rules of the company). This
means that if their performance has not been to the liking of the shareholders, his
or her contract is not renewed resulting in the loss of the job.
■ A manager is only responsible for the area of work under his or her direct com-
mand. Also, any member of the board, in addition to his or her own functional
responsibility, is usually made collectively responsible for the total organisation.
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accounts and, if the company produces one, also in the 6-monthly
interim accounts.
The chief executive officer
The chief executive officer (CEO) is sometimes called the MD or general man-
ager (GM) and is responsible for actually managing the business. This is
in contrast to the job of the chairperson who may assume an overseeing
or advisory role but would be unlikely to ‘get involved’ in the operations
of the company. Reporting to the chairperson, the CEO is the chief stew-
ard of the shareholders’ assets and must act in such a way as to achieve
maximum return on shareholders’ funds.
Among the CEOs duties, the most important duties will be the following:
■ to manage the company with the objective of achieving the
maximum financial benefit of the shareholders;
■ to ensure that all aspects of company activity are within the law;
■ to sign the annual accounts of the company as being a ‘true and
fair view’ of the company’s finances at the time;
■ to formulate strategies suitable for the company and to implement
them in conjunction with the other members of the board;
■ to be responsible for the resources of the organisation and to see
that all resource allocations are equitable and in the interest
of the shareholders;
■ to approve all major investments made by the company.
Executive and non-executive directors
In addition to the chairperson and the CEO, the board will also have a
number of executive and non-executive directors (NEDs).
Executive directors
Executive directors are full-time employees of the company and report
to the CEO who he or she falls into this category. In most companies,
each executive director will be charged with oversight of a specific part of
the company’s activities. In some cases, each director will be responsible
for a function, such as the marketing function (a marketing director),
the financial function (a finance director) or similar. In other cases, for
example in the case a company which controls a chain of hotels, each
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director will be responsible for a hotel. It all depends upon the type
and structure of the company in question.
Non-executive directors
NEDs are directors who are not full-time employees of the company, but
are expected to provide a strong, independent and objective element to
Board discussions. Their involvement can vary from attendance only at
board meetings to some degree of involvement as consultants, carrying
out special projects for the company. Although NEDs receive a salary for
their contributions, it is usually less than their executive colleagues:
■ they may have a unique knowledge or expertise of the industry or
products produced;
■ they may have a large number of business or political contacts
that the company can benefit from;
■ they may, by their very presence on the board, bring credibil-
ity to the company which would be beneficial in their particular
industry;
■ it may be that an important stakeholder insists upon the appoint-
ment. A good example of this might be an appointment as NED
of a senior employee of the company’s bankers;
■ companies may appoint NEDs to comply with the Combined
Code of Best Practice in Corporate Governance (see Chapter 25).
Company secretary
The company secretary is the most senior administrative officer in the
company. Whilst the occupant of this office is not usually a director
(although it is possible to combine the offices), he or she will usually
be privy to all board business. British company law requires that there
are at least two offices in a limited company: one director and one com-
pany secretary – such is the importance that the law attaches to the job.
The company secretary should not be confused with the traditional
view of a secretary as a personal assistant. It is considered to be an impor-
tant senior management position and it is rewarded with a senior
management salary.
The statutory responsibilities of the company secretary include the
following:
■ he or she is the one who is primarily responsible for the sub-
mission of audited accounts – even although it is the directors
who sign them;
74 Business organisations Part I
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■ he or she is charged with ensuring that the company complies
with the law in all respects. This includes company law, con-
tract law and other areas like Health and Safety laws. For this
reason, many company secretaries have some legal training.
Chapter 4 Limited companies 75
Assignment 4.1
A friend asks your advice about investing in (buying shares in) a company called ABC
plc. In its last corporate report, the following statement was included:
ABC plc has complied with the Combined Code except for the following provisions:
■ the company’s CEO and chair reside in the same person;
■ the company has no audit, nominations or remunerations committee;
■ the directors do not retire by rotation and all directors are on permanent contracts;
■ directors emoluments are not disclosed.
Advise your friend about the wisdom of such an investment considering the implications
of each of the areas in which it has failed to comply with the Combined Code (see
Chapter 25).
Further reading
Bain, N. and Band, D. (1996). Winning Ways through Corporate Governance.
London: Macmillan Press.
Cole, G.A. (2004). Management Theory and Practice, 6th edn. London: Thomson.
Solomon, J. and Solomon, A. (2003). Corporate Governance and Accountability.
John Wiley & Sons Ltd.
Worthington, I. and Britton, C. (2004). The Business Environment, 4th edn.
London: Pitman.
Useful web sites
The Chartered management Institute: www.managers.org.uk
UK Governments departments’ pathway: www.gateway.gov.uk
Confederation of British Industry: www.cbi.org.uk
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C H A P T E R
Other business
organisations
5
Learning objectives
After studying this chapter, students should be able to describe:
■ why some business organisations do not readily fit into the
‘incorporated/not-incorporated’ distinction;
■ what is meant by a not-for-profit organisation;
■ the features of charities, quasi-autonomous non-governmental
organisations (QuANGOs) and public sector organisations which
make them good examples of not-for-profit organisations;
■ the purpose of the National Council for Voluntary Organisations
(NCVO);
■ the idea of a co-operative and explain how co-operatives work;
■ what is meant by franchising and describe the features of such
a business relationship.
5.1 Introduction
In Chapters 3 and 4 we saw that most business organisations can be
divided into two categories: incorporated businesses (i.e. limited com-
panies) and unincorporated businesses. We shall see in this chapter that
some organisations do not readily fit into either of these categories.
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Chapter 5 Other business organisations 77
5.2 The profit motive
An underlying assumption of the two types of organisation we have
considered so far is that they exist primarily to make profits. This is not
to say that they do not have other important objectives, but that with-
out the prospects of making profit, they could not exist. Profits are
used to reinvest in the business to enable it to grow, prosper and to
repay the investors. We can easily understand that a motorcar manu-
facturer does not exist primarily to make cars per se, important though
that is, but to make cars in order to make money and profits.
Other organisations exist which do not have profit as a primary motive.
This is not because they do not need money, but because profits are
necessary only to enable them to pursue other, more important (to them)
objectives. We shall examine three examples of such organisation. For
obvious reasons, this category of organisation is said to be in the not-
for-profit sector.
What do for-profit and not-for-profit organisations
have in common?
These two categories of enterprise share certain common features:
■ they all require revenues with which to carry out their operations;
■ they all incur expenditure in the execution of their operations;
■ they all need people to perform the many and varied duties
involved;
■ they all produce a product or service of some description in that it
has an output which its customers or beneficiaries value;
■ they all have consumers of the organisational output – customers,
clients, or individuals (or plants and animals!) they aim to pro-
vide the product or service for;
■ they must all be managed to enable organisational objectives to
be achieved.
In many ways, the management and administration of for-profit and not-
for-profit organisations will be similar. Hence, management skills and
techniques may be largely transferable between the two sectors. In this
chapter, we will examine three types of not-for-profit organisations and
two ‘other’ types of business.
The not-for-profit organisations we will look at are:
■ charities,
■ government organisations,
■ QuANGOs.
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78 Business organisations Part I
The ‘other’ forms of business organisation are:
■ co-operatives,
■ business franchises.
5.3 Charities
Charities are characterised by their primary objective of a wish to pro-
vide a product or service to a specific target group rather than to extract
money in exchange for goods and services. Such a product or service is
usually, but not always, charitable in nature, a term which implies that it
is provided from a benevolent motive (the word charity is an old English
word meaning love).
The beneficiaries of charities are many and varied. We are all famil-
iar with those which seek to provide relief from human suffering, such
as Oxfam, Christian Aid and World Vision, but many others exist.
Medical charities aim to support sufferers of certain illnesses which
include support groups and those which carry out research into dis-
eases, such as the Multiple Sclerosis Society and the Cancer Research
Campaign. Other charities include animal protection societies, environ-
mental groups and religious organisations (e.g. churches).
Not-for-profit terminology
Not-for-profit organisations use different terms to describe ‘profits’ and ‘losses’. If a for-
profit has excess money left over at the end of an accounting period, it is called a profit
because it is assumed to profit (bring benefit to) the owners. Similarly, a shortfall of
money is termed a loss, because the owners must endure the loss if reserves are not
available to cover it.
Not-for-profit organisations, because they have different ownership arrangements,
refer to excess money as surpluses and shortfalls as deficits. Surpluses are carried over to the
subsequent accounting period to be used by the organisation and deficits are expected
to be made up from subsequent donations or other cash injections.
Charities and tax
The state recognises the works that charities do and allow them exemp-
tion from the taxation that would apply to normal for-profit businesses. Tax
benefits apply to charities on both donations and in regard to surpluses.
Taxpayers who make a commitment to pay regularly to a certain charity
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Chapter 5 Other business organisations 79
may fill in a covenant form. The covenant enables the charity to claim back
the tax (up to the standard rate) that has already been paid on the money
earned by the donor. Secondly, whereas for-profit organisations must pay
tax on their profits, this requirement is not made of charities. It is
assumed that charity surpluses are not used to benefit the owners, but to
be re-used by the charity in the pursuance or its benevolent objectives.
Charities and people
Like their for-profit counterparts, charities can vary in size from the
very small to the reasonably large. As such organisations exist primarily
for a charitable purpose, they are understandably reluctant to spend
large sums on staff remuneration. Whilst some staff in charities enjoy
salaries and terms comparable to employees in the for-profit sector,
many of the more important people fall into two unique categories:
■ Some charities make extensive use of volunteers. A volunteer
by definition gives his or her time and energies free-of-charge,
and they would only do this if they were in broad agreement
with the objectives of the charity. Such volunteers may be
those who assist in ‘doing the books’ for a charity, people who
help in the local Oxfam shop or the organist at the local
parish church.
■ Professionals sometimes supply their labour and expertise to
charities at a rate of pay below the market rate they would
enjoy in the for-profit sector. These may be individuals who use
the later part of their careers to invest their efforts in charita-
ble work or skilled people who believe so firmly in the charity’s
objectives that they are willing to forego monetary reward.
Both of these employee types enable charities to operate on a much
lower cost base than for-profit enterprises. Lower operating costs mean
that the majority of income can be used for providing the charity for
which the organisation exists (Tables 5.1 and 5.2).
Business in the Community
Business in the Community (BITC) is an independent charity set up in
the early 1980s, and now has some 700 member companies, with the
commitment to continually improve their positive impact on society.
BITC also runs the PerCent Club, which is an initiative that encourages
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80 Business organisations Part I
Table 5.1
The UK’s top ten fund-raising charities, by total income (2002)
Name of charity Financial year ended 2002
income (pounds in million)
National Trust 251
Cancer Research UK 225
Oxfam 189
Salvation Army 183
British Red Cross Society 160
Barnardo’s 142
British Heart Foundation 115
Save the Children 110
RNLI 105
NSPCC
Table 5.2
UK’s top ten fund-raising charities: FTSE 100 charity givers ranked
by percentage of pre-tax profit donated in the year 2002
Company % of pre-tax Cash Gifts in kind
profit (pounds in (pounds in
thousands) thousands)
Reuters 12.7 6400 13,700
Northern Rock 5.0 14,800 –
Kingfisher 4.6 1400 –
Unilever 3.4 8826 256
Smith & Nephew 3.3 423 182
Legal & General 3.1 1670 52
Rio Tinto 2.8 15,724 620
Shell Transport & 2.3 58,620 –
Trading
Cadbury 2.0 1094 227
Schweppes
Amersham 2001 2.0 184 8
Source: Keynotes.
Source: The Guardian giving list/the PerCent Club.
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Chapter 5 Other business organisations 81
companies to donate at least 1% of their pre-tax profit to charity. The
PerCent Club also identifies the full value of companies’ social invest-
ment by including a monetary value of employees’ time, skills and
resources as well as their cash donations.
NCVO
NCVO is the umbrella body for the voluntary sector in England, with
sister councils in Scotland, Wales, and Northern Ireland. NCVO has a
growing membership of over 3000 voluntary organisations, ranging
from large national bodies to community groups, volunteer bureaux,
and development agencies working at a local level.
Research in 2003, commissioned by NCVO, suggested that the def-
inition of charity was not clear to many members of the public. Current
English charity law is based on a 400-year old statute that deems organ-
isations carrying out religious, educational or poverty work to be worthy
of ‘charitable status’. However the law excludes many other organisations
that people think of as charities, such as Amnesty International. In 2003,
The Charities Bill Coalition, which includes NCVO, Amnesty International
UK, Cancer Research UK, British Heart Foundation, British Red Cross,
NSPCC and many others was established to campaign for statutory meas-
ures which would make charitable status dependent on evidence of
public benefit.
5.4 Government organisations
Government organisations in the form of central departments and local
authorities comprise the administrative part of the state (see Chapter 8
for a detailed discussion of these organisations). As such, they are funded
mainly through taxation revenues which are channelled to the organ-
isations by Her Majesty’s Treasury. As they are funded by the taxpayer,
it is assumed that they exist primarily for the collective taxpayers’ ben-
efit. The goods and services provided by such departments are those
which, it is argued, cannot or would not be reliably or adequately
supplied by the private sector.
Local government is located in town halls, civic centres and county
halls, and is intended to manage some government functions at the
local level. By having this part of government ‘closer to the people’, it
is assumed that local responsibility and accountability will be greater.
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82 Business organisations Part I
What do government departments and
local authorities provide?
The goods and services provided by these organisations fall into two
broad categories:
■ Public goods are goods and services that are provided for the
population in general. They tend to be things that are needed
by everybody, regardless of the individual’s specific need. Among
them are:
– defence,
– police,
– transport infrastructure (in the most part).
■ Merit goods are provided by the state to be taken advantage of
as and when the population has need of them. Whilst we all
benefit from the protection offered by the police and defence
services, we only use merit goods in certain circumstances.
Common examples are:
– health service (used when we are ill);
– social security and unemployment benefits (e.g. when we
are unemployed);
– education (when we are young or wish to increase our
learning in later life).
Question 5.1
There are over 20 central government departments. Find out the names of each of
these departments.
You could try the governmental publications section of your university at library or
at the web site: www.cabinet-office.gov.uk
Governments as not-for-profit organisations
Neither central nor local government is designed to make a profit in
the same way that a private sector company is. The emphasis is there-
fore not on profits, but rather on achieving value for money and on
reducing costs. Each part of government (each department or local
authority) is apportioned a budget which is more-or-less fixed for any
given financial year. Hence, government ministers and local council-
lors must provide all the necessary services required of them within the
strict cash-limit set (although some services will be charged for).
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Chapter 5 Other business organisations 83
Increases in efficiency and productivity are generally encouraged by
senior politicians, and the effect of such efficiency drives is often felt by
individual public-sector employees, such as nurses and teachers.
5.5 QuANGOs
What are QuANGOs?
The word QuANGO stands for quasi-autonomous non-governmental
organisation. As the name suggests, they have a unique role.
Quasi-autonomous means that the organisations act largely auton-
omously (under their own supervision). The term quasi refers to the fact
that whilst on a day-to-day basis they are autonomous, their objectives
and operational briefs are set by the government or individuals acting
on its behalf. They are entrusted with carrying out certain tasks on behalf
of the government but are given a high degree of autonomy in how they
actually carry out their duties.
Non-governmental refers to the feature of these organisations that they
are not part of the government itself. They do however implement many
parts of government policy and spend a lot of government money.
What do QuANGOs do?
The government sets up a QuANGO when it needs to carry out part of
the government’s policy but does not feel that it should be carried out
directly by a government department. It is assumed that appointees to
the QuANGO will bring an objective, independent and informed view-
point over an area. This, it is thought, is preferential to having the area
overseen by a government minister who may be seen as carrying out
policy for political advantage.
The range and remit of QuANGOs are many and varied. The best-
known examples include the British Broadcasting Corporation (BBC)
and the regulatory bodies that control the prices of utilities such as
gas, electricity and water. Others include the Business and Technical
Education Council (BTEC) and many regional development bodies,
charged with spending government money in a politically impartial way
to encourage industrial investment in the regions. If you are studying
in England, the university at which you are studying will be funded in
large part by a QuANGO called the HEFCE (Higher Education Funding
Council for England) which is charged with spending the higher
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84 Business organisations Part I
education budget (a figure of several billion pounds) independently
of government for the benefit of the university sector. In Scotland this is
covered by the Scottish Higher Education Funding Council (SHEFC).
QuANGOs are staffed by specialists in the respective fields, thus bringing
an expertise and independent view on their administration and spending.
Criticisms of QuANGOs
Some criticism has been levelled against QuANGOs on the grounds
that they spend billions of pounds of taxpayers’ money and that they
are electorally unaccountable. This means that whereas government
ministers remain accountable to Parliament regarding their actions
and policies, those that work in QuANGOs do not. The increased use
of QuANGOs in the implementation of government policy over recent
years has given rise to the somewhat critical term quangocracy (rule by
QuANGOs). It should be born in mind that such criticisms are preva-
lent amongst those groups who feel that they have had a ‘raw deal’
from a QuANGO or who feel that government money should be spent
by those who are directly electorally accountable. QuANGOs do how-
ever have a number of distinct advantages:
■ As QuANGOs are quasi-autonomous, they act largely as they
see fit, regardless of which government is in power. If their
roles were taken by government ministers, the politicians may
be more open to the charge that actions were influenced for
party political advantage (e.g. by inordinately increasing the
funding to a university in a marginal constituency).
■ QuANGOs are generally staffed by individuals who have expert-
ise in the field over which the QuANGO has control. This the-
oretically means that their performance will be optimal, which
may not be the case in the tasks undertaken were carried out by
‘generalist’ politicians, who may not have expertise in the field
(imagine if the BBC was directly controlled by the government).
Evidence to the fact that QuANGOs do not favour an incumbent gov-
ernment can be found when it is remembered that QuANGOs are often
critical of government policy. The former head of one QuANGO, the
Chief Inspector of Prisons, Judge Stephen Tumim, was at times highly
critical of government policy with regard to his area of responsibility.
Such criticism could not have conceivably been made if such a task was
not delegated to an independent person in that you wouldn’t expect a
government minister to criticise his own government’s prisons policy.
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Chapter 5 Other business organisations 85
5.6 Co-operatives
What is a co-operative?
After the industrial revolution of the late 1700s, the ownership of busi-
ness became largely concentrated in the hands of a relatively few indus-
trialists and entrepreneurs. The ‘ordinary’ people of the day had a
number of criticisms of the shops that they bought their goods and serv-
ices from, and it was thought that by collectively owning a shop they
could achieve certain objectives:
■ members could enjoy a share of the surpluses made by the shop;
■ members could control the quality of goods sold in the shop;
■ ownership of the shop would be devolved to those who actually
used it.
In response to these concerns, the idea of shared ownership of a
business by its customers was introduced in the 1840s in Rochdale,
England. The traditional co-operative is both a for-profit and a not-for-
profit organisation at the same time. It is for-profit, in that goods and
services are sold to its members at a price that includes a ‘mark-up’
against cost, but if it is not-for-profit, in that all profits are allocated
according to the wishes of the co-operative’s members and not used to
benefit already wealthy shareholders.
In addition to consumer co-operatives like the formation of a shop
co-op, producers also found it helpful to join together in the same way.
Such producer co-operatives were intended to provide farmers and
other small producers of goods and services by pooling their output
into a jointly owned business. This gave each small producer the ability
to sell produce with the pricing and distribution power of a larger busi-
ness. Producer co-operatives were and are used to enable members to
compete more effectively with larger competitors. Some farming com-
munities adopt this business format to distribute their products. One
such co-op, Milk Marque, is a major UK producer of milk.
How do co-operatives work?
We have seen that co-operatives are founded upon the basis that profits
should be shared out, not to distant shareholders, but to the members –
customers or producers, depending on the type of co-operative. The
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86 Business organisations Part I
principle of the co-operative is that at the financial year end, the amount
of money that would be paid out in dividends to shareholders if it were a
conventional limited company is paid out instead to the co-operative
members in proportion with the amount they have spent in the shop or
the amount they have produced (and hence the co-operative dividend
is proportional to the amount they have contributed to the profits).
Those wishing to form or join a co-operative are asked to buy a share.
The value of the share is usually nominal and members rarely buy more
than one share (this is because multiple shares do not entitle members to
an increased share of the surplus or greater voting power). Each member
of the co-operative is entitled to use one vote when voting on matters con-
cerning the management of the business. This control structure ensures
that no single member becomes so powerful so as to influence or control
the business that may act to the detriment of the majority of members.
The cash raised from the share issue is used as the initial capital to obtain
premises and stock. Surpluses are then paid to the members as dividends
in proportion to their total purchase values or production volumes.
In the earliest days of co-operatives, every purchase by members was
logged by an ingenious mechanical device involving a ball, troughs
and pulleys. Latterly, this mechanism was updated to the use of trading
‘stamps’ which were issued in proportion to the value of the purchase.
Trading stamps could then be exchanged for goods in the co-operative
shop or in some cases, claimed as monetary dividend. Co-ops of the trad-
itional type are rare today, but the principle has been carried on by
some companies whose shares are owned by its employees (‘employee-
owned’ or ‘workers’ co-operative’ companies). Some coal mines and
bus companies, for example, have been bought from the former owners
by their employees and have been subsequently run as employee-owned
businesses.
Both consumer and producer co-operatives can be registered as lim-
ited companies but they can also opt for registration as Industrial and
Provident Societies under the Industrial and Provident Societies Acts
1965 to 2002.
5.7 Franchises
What is a franchise?
Suppose you have good idea for a business. You may well gain some
start-up capital and, after some time and a good deal of effort, the busi-
ness becomes a success. The most obvious thing for you then to do is to
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Chapter 5 Other business organisations 87
increase the size of your business by expansion, which will typically
involve opening new premises from which to operate a second outlet.
As your initial business worked, there is a high probability that the sec-
ond outlet will be similarly successful. At this point in your business’s
expansion, you have a choice:
■ obtain the necessary capital yourself, open the second outlet
and manage it yourself;
■ offer the opening of the second and subsequent outlets as
franchises.
To franchise a business means to allow somebody else to operate
your business idea as their own business. In exchange for his or her use
of your successful idea, the franchisee will pay you some money, while
he or she manages the outlet and takes on the full financial risk of the
outlet. The franchisee will gain the use of your company name, your
logo, products, etc. and you, the franchisor, enjoy the financial rewards
of the enterprise without doing any of the work or taking any of the
risk. The franchisor will usually impose strict conditions upon a fran-
chisee in exchange for the franchise. If the parent business observes a
certain way of doing things, a certain code of dress or similar, this will
apply to the franchised outlet in order to protect the image of the enter-
prise as a whole.
As a mechanism of business growth, franchising seems to work best
in the area of retailing. This is because ‘High Street’ presence rests
greatly upon brand images and immediately identifiable shop facias.
In addition, retail consumers have traditionally placed a premium on
buying from a trusted and proven shop or chain of shops.
Question 5.2
Find examples of five well-known franchised operations in the UK.
Pros and cons of franchising
For the franchisor
The advantages of this form of business arrangement are that financial
returns can be made from the business idea with little drain on the
head-office management resource. In addition, whilst the business is seen
to expand, no financial responsibility is assumed by the head-office.
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88 Business organisations Part I
Whilst the franchisor will benefit from a number of payments from
the franchisee (typically a signing-on fee, an annual fixed payment and
an agreed percentage of sales or profits), these will not amount to the
total that would be realised if the new outlet were operated centrally.
In exchange for the benefits, the franchisor thus foregoes some finan-
cial income and must endure a loss of direct control over the business.
For the franchisee
The franchisee, who is usually a small businessperson, benefits from a
ready-made business proposal. This has a number of advantages, not
least being that the risk of failure is significantly lower than if he were to
launch his own ‘cold’ idea. In addition, he will probably find that loan
capital is more forthcoming from banks and other lending institutions.
The franchisor is usually available to give advice and consultancy as an
experienced operator in the field. This may be helpful when deciding
where to locate and how to arrange to interior of the outlet.
The disadvantages for the franchisee include the fact that the costs of
taking and maintaining the franchise are likely to make a sizeable dent
in the profits. The franchisor will usually lay down strict rules of conduct,
dress and behaviour which, as well as incurring cost for the franchisee,
reduces his or her independence as a business manager. Failure to
observe the franchiser’s rules may well result in the loss of the franchise.
Assignment 5.1
As we have seen above, many UK organisations make substantial donations to charitable
causes:
■ Suggest reasons why should they choose to do so.
■ Including the data for year 2002 shown above, identify the top 10 donors for each of
the 5 years till the latest published results.
■ Find reasons for changes in their relative positions.
Further reading
Carlton, I. (ed.) (2000). The Guide to Public Bodies: Quangos. London: Carlton
Publishing and Printing Ltd.
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Chapter 5 Other business organisations 89
Manley, K. (1994). Financial Management for Charities and Not for Profit Organisa-
tions. London: ICSA Publishing Ltd.
Ross, C. (ed.) (2004). Charities Digest 2004. London: Waterlow Professional
Publishing.
Useful web sites
Department of Trade and Industry: www.dti.gov.uk
Oxfam: www.oxfam.org.uk
Tearfund: www.tearfund.org
Office for National Statistics: www.statistics.gov.uk
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C H A P T E R
The location of
a business
6
Learning objectives
After studying this chapter, students should be able to describe:
■ what is meant by the various dimensions of business location
(micro- and macro-decisions);
■ the principal factors that determine where a business is located;
■ the relative significance of these factors for some types of
industry.
6.1 What is a business location?
This may seem a very straightforward question. The location of a busi-
ness refers, in this context to its physical location; literally referring
to the ground upon which the organisation mainly operates. We can
examine this matter on a macro- or a micro-scale, the relevance of
which will be different for different types of business.
Macro-decisions are those concerning the location and physical organ-
isation of a business in ‘big’ terms. For some companies, this will mean
determining the countries, or even the continents in which the busi-
ness will operate. For others, it may refer to which parts of this country
the business should operate in. Such matters are generally considered
to be strategic as they can have a significant effect on the success or fail-
ure of the business.
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Chapter 6 The location of a business 91
Micro-decisions, as the name suggests, refer to location decisions
taken once the macro-decisions have been made. It might be that a
company decides to build a factory in Europe (the macro-decision),
but it then needs to be decided which European country and which city
in the chosen country is most suitable. For smaller companies, micro-
decisions would concern the street on which to locate, or even which
part of a given street.
Macro-decisions in business location: GlaxoSmithKlinePlc
GlaxoSmithKline was formed in January 2001 as a result of a merger between
GlaxoWelcome and SmithKline Beecham. It is headquartered in the UK with operations
in the USA. It is one of the industry leaders with an estimated 7% of the world’s pharma-
ceutical market. Prior to this merger, Glaxo had undergone a programme of significant
geographical expansion. Whilst its activities had previously been centred on Western
Europe and North America due to the buying power of health services and individuals
in those regions, several moves were made towards other regions of the world. Some
parts of the world were showing signs of growth, both in economic and population
terms, and it was seen fit to make investments in such countries to take advantage of these
favourable conditions. In consequence, Glaxo established centres in parts of South
America, Eastern Europe and China. The micro-decisions, important though they would
become, were less important at the outset than just ‘being there’.
Micro-decisions in business location: retail outlets
It has been said that there are three important aspects of retailing: location, location
and location. Whilst this is an obvious simplification, it underlines the importance of
the location decision. A retail outlet must be located where it is most convenient for its
customers to reach it whilst also catering for the customers’ sensibilities and wants.
Such is the importance of the micro-decision in retailing that whilst one part of a street
in a city may be ideal for the business, another part of the same street may be useless.
This is for two reasons.
Shops cater for a certain type of person (the demographic profile of the customer, see
Chapter 28) and must be located at a point of easy access for the target customer group.
One need look no further than the main high street stores to see that they are located
where the target profile group is in high concentration. Shops like Marks and Spencer
would usually seek a location that provides easy access to the shop for a strong concentra-
tion of quality conscious people, with high levels of disposable income, who are
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92 Business organisations Part I
prepared to pay a premium price for quality products and service. In contrast, ‘budget’
chains like Aldi and Kwik Save are usually located out-of-town centres in suburbs pre-
dominantly populated by individuals and families who are principally concerned with
prices and optimising their spending power via ‘no frills’ organisations.
The second aspect of retail location is the volume of traffic that will regularly pass the
shop. Traffic, in this context, does not mean cars and buses, but the number of individu-
als in the target market segment who will pass the shop frequently or who will find the
shop convenient to get to.
6.2 Factors in business location
With the foregoing in mind, we must now turn our attention to the fac-
tors that a business takes into account when deciding where to locate.
These factors will be equally applicable for both macro- and micro-
location decisions, depending upon the individual business.
There are a number of factors that can help to determine business
location. The contribution that each factor has will naturally vary from
case to case. The most significant factors are shown in Figure 6.1.
Business
location
Proximity to customers
and suppliers
Availability of grant
support
Transport and other
infrastructure
Personal inclinations
of the owners
Location of other
organisations
Level of local
authority taxation
Room for growth
and expansion
Land-use restrictions
Availability of
appropriate labour
Land costsFigure 6.1
Factors that
determine business
location.
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Chapter 6 The location of a business 93
6.3 Proximity to customers and suppliers
If is obvious that the success of a business relies heavily on customers
having straightforward access to the business’s output. This factor is
more important when the nature of the supplier–customer relationship
is one which involves frequent personal contact and where customers
buy little and often from the business. It becomes less significant as a
deciding factor when business is conducted largely on a mail-order or
telecommunications basis. Hence, this factor is one of the pre-eminent
factors when deciding upon the location of a retail business (shop) but
less important when locating a catalogue mail-order business.
It is also a major factor in cases where transportation represents a sig-
nificant cost to a business when, for example, the products are bulky or
perishable in nature. It is common to locate near to the largest concen-
tration of customers in this case or to operate a distribution outlet for
the business in close proximity to the customers.
The importance of proximity to customers and suppliers:
just-in-time supply
The just-in-time (JIT) manufacturing philosophy is one which, among other things,
stresses the sourcing of incoming materials little and often rather than in bulk (we exam-
ine JIT in some detail in Chapter 24). The advantage of this for the JIT customer is that
low stocks are held and this helps cash flow significantly. In consequence, materials must
be supplied to the customer at very short notice and often in relatively small quantities.
For this reason, suppliers, particularly those who supply the majority of their output to
one big customer, often set up close to the customer. When the large Nissan development
began in Tyne and Wear in the early 1980s, the JIT operation at Nissan demanded fre-
quent supply of car components. Many suppliers located new plants close to the Nissan
plant and one supplier even installed an internal rail linkage to the Nissan plant over the
short distance to the car production line.
Proximity to suppliers (and other inputs)
Proximity to suppliers is the other side of the same coin to proximity to
customers. We would consequently expect this factor to assume greater
importance when goods are expensive or inconvenient to transport. We
usually, for example, find large installations, such as oil refineries on
the coast at a point near to the oil-field. This is because the transport costs
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94 Business organisations Part I
Proximity to customers and suppliers – a summary
Proximity to customers will be an important factor when:
■ customers buy little and often;
■ a single customer (or small group of customers) buys a large proportion of a busi-
ness’s output;
■ the business operates on a personal contact basis with its customers;
■ the business’s goods are perishable or expensive to transport;
■ the business’s major customers operate a low stock manufacturing policy (e.g. JIT).
Proximity to suppliers will be an important factor when:
■ the business has a large requirement for material (tangible) inputs;
■ the business buys little and often;
■ material inputs to the business are bulky or expensive to transport;
■ there are few choices of suppliers (i.e. supply is highly concentrated);
■ goods inputs to the business are perishable;
■ the business employs a low stock manufacturing policy (e.g. JIT).
The location of other parts of the organisation or similar
organisations
Some types of organisation benefit or suffer from close proximity to partner divisions of
the same organisation or organisations of similar type (‘suffer’ in the case of some organ-
isations’ proximity to their competitors). We can sometimes observe the various depart-
ments or subsidiaries of the same organisation concentrating in one region or town or a
‘cluster’ of businesses in the same industry. In some decisions, the location of a depart-
ment will be an obvious decision if there is unused land or buildings on the main com-
pany site. For other location decisions, there may be more operational reasons for the
location decision. We can observe, for example, a concentration of government depart-
ments around Whitehall whilst Teesside has a high concentration of chemical companies.
This factor may assume some importance when:
■ there is the likelihood of a high degree of personal contact between the different
sites;
■ there is special ‘earmarked’ land for a particular type of business or where one part
of the organisation has spare capacity (e.g. land) on its site that another part of the
same business would be cheaper to occupy than to build a new plant elsewhere;
of oil via pipeline are relatively expensive. Similarly, we typically find fish
processors near to the quays at which fish are landed. In this case, the
location is decided by the perishability of the product.
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Chapter 6 The location of a business 95
■ it would be of commercial advantage to be located in close proximity to each other (e.g.
so that customers can visit more then one shop in one trip to a retail park);
■ when transport costs could be reduced by the location (e.g. distribution points may
be located near to the manufacturing plant to avoid transport costs).
6.4 Availability of appropriate labour
Labour, as one of an organisation’s key inputs, is necessarily an import-
ant factor in location. The key consideration here is the availability of
appropriate labour rather than the availability of labour per se.
Some businesses in, for example, heavy industries (e.g. shipbuilders,
steelworks, etc.) require relatively large numbers of skilled and semi-
skilled workers. Furthermore, in practice, much of this labour is male.
It follows that businesses of this type would be located in regions where
the key labour input is plentiful. Of course, one could plausibly argue
that the employer attracts the key labour input to its vicinity. Other
types of business require staff with key intellectual skills, such as science,
computing or accountancy. This is one reason for the concentration of
banking and finance in the City of London.
In addition to the availability of labour inputs, business location is
sometimes influenced by government regulation. Some organisations are
guided in their choice of country of location by the degree of regulation
of the workforce in the country. In some countries, employers must, by
law, make more provisions for employees than in others. Countries
with less regulation of the workplace may attract more relocation than
those with more. This is one of the reasons why the UK government
refused to subscribe to the terms of the Social Chapter of the Treaty on
European Union 1992 (Maastricht Agreement) – a charter increasing
employee rights in the workplace.
6.5 Access to transport links
For some organisations, the need for transport links assumes great
importance in location decisions. In this context, transport infrastruc-
ture includes suitable road networks in the vicinity, rail connection,
seaports and airports.
This factor is especially important for businesses that rely heavily on
the transport of goods to and from their plants. For this reason, most
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96 Business organisations Part I
manufacturing industry is centred on areas of the country which are
well supplied by motorways and rail-freight termini. Local authorities
are aware of the importance of this factor for manufacturers when they
seek to encourage companies to invest in their locality. The first step in
setting up a local business park is often to upgrade the roads linking
the park to the nearest motorway or trunk road.
For some industries, this may be the single most important factor. It
is obvious, for example, that shipbuilders must locate on a major water-
way as ships cannot be transported overland once completed. Similarly,
nuclear power generators are usually located on the coast, as the power
generation process requires a large amount of circulating water.
6.6 Access to energy and utilities
All organisations have some requirement for utilities, such as gas, elec-
tricity and water. It follows that this is a factor to businesses in the same
way as it would be for an individual looking to buy a house. Whilst all
main centres of population are well served by the utilities, some out-
lying areas are not. This is particularly true of gas supplies which are
somewhat more expensive to carry to remote areas than electricity.
In addition to utilities, some businesses have a high dependency on
modern telecommunications networks. The rapid advances in telecom-
munications technology in the 1990s have enabled many organisations
to develop their activities in parts of the world that would not have
been previously possible.
6.7 Costs of land
The cost of land varies significantly across the UK according to the dif-
ferences between the supply (of land) and its demand. It has histor-
ically been the case, for example, that land is more expensive in the south
east of England than in say, the far north of Scotland. The reasons for
the disparity are not difficult to understand. The higher population
density in the London area (see Chapter 11) means that there will be
a higher demand for land, which is subject to finite supply (i.e. there is
so much and no more). The highland region of Scotland has much lower
land prices resulting from supply being plentiful and demand being rela-
tively (compared to London) low.
Some businesses, particularly those involved in manufacturing, have
the need for a lot of land. Whereas many service businesses can operate
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Chapter 6 The location of a business 97
from a small suite of offices, a manufacturer may require land space for
warehousing and production in addition to offices. High land costs are
thus bound to affect such businesses more than others. For this reason,
manufacturers do not tend to locate in areas of very high land cost
unless there is some other very compelling reason for doing so.
6.8 Local authority taxation and grants
In order to support local authority services, local government charges
residents and businesses in their area with local taxation. The amount
charged to each business will depend upon both the level of expend-
iture of the local authority and the amount of grant money from central
government. It follows that not all local authorities charge the same
level of local council tax.
Areas with lower local authority taxation will obviously be more
attractive to businesses than areas with higher local tax.
Availability of grants
Funding is available from a number of sources to stimulate business
activity in certain areas of the country. Assisted areas are selected for their
need for industrial investment to offset higher-than-average unemploy-
ment. Grants are offered to encourage new business investment, and to
encourage existing companies to grow and expand within the same
locality. The regions which qualify for grant support are chosen accord-
ing the levels of unemployment that the areas suffer.
The Department of Trade and Industry (DTI) identifies three cat-
egories of assisted area:
■ development areas (DAs);
■ intermediate areas (IAs)that offer different types of assistance
to DAs);
■ Northern Ireland (seen as a special case due to its singular prob-
lems in attracting businesses to locate into the region).
DAs are mainly those which have suffered from decline in traditional
industries, such as mining, shipbuilding, steel and other heavy engin-
eering businesses. Accordingly, DAs are centred on Clydeside, Tyneside,
Teesside, South Wales, Merseyside, South Yorkshire and parts of the West
Midlands. An IAs, which attract a lower level of grant support, include
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98 Business organisations Part I
Example – assistance for business development
Following the demise of traditional industries, such as steel, coal mining and shipbuild-
ing, the UK government provided financial and material inducements to attract foreign
technical companies to locate premises in the UK that would help regenerate local
economies and provide job opportunities. Large electronics companies like International
some outlying areas of the country which have been unable to attract
as high a level of investment as more central regions.
With effect from 1 April 2004, the DTI replaced Regional Selective
Assistance (RSA) and Enterprise Grants (EG) in England with a new
product called ‘Selective Finance for Investment in England’ (SFI).
The assistance product is delivered by Regional Development Agencies
and is aimed at securing growth in productivity, measured by Gross
Value Added (GVA) per Full Time Equivalent (FTE) employee compared
to the sector and national averages; and higher skills, with the majority
of jobs required to be at NVQ level 2 (or equivalent) and above. Most
manufacturing businesses are eligible to apply, as are businesses in
service industries that supply a national rather than local market.
Applicants can be companies, partnerships or sole traders. Grants are
not available simply for transferring jobs from one part of the country
to another and assistance can be provided to:
RSA can be provided to:
■ establish a new business;
■ expand, modernise or rationalise an existing business;
■ set up research and development facilities;
■ enable businesses to take the next step from development to
production.
European Commission restrictions apply in some sectors, including
steel, coal, synthetic fibre, vehicles, and agricultural products.
Restrictions also apply where support for projects would simply
displace or reduce existing jobs in similar businesses elsewhere.
Investment in assisted areas is available from sources other than the
DTI. Regional quasi-autonomous non-governmental organisations
(QuANGOs), such as development agencies, are often instrumental in
attracting new business to the areas in which they operate. In addition
to non-repayable grants, loans at preferential rates are available from
European institutions, such as the European Central Bank and the
European Coal and Steel Community.
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Chapter 6 The location of a business 99
Business Machines (IBM) and Motorola were attracted to Scotland and by the 1980s
there was a big enough concentration of electronics firms in Scotland’s central belt – a
50 mile high-tech corridor stretching from Glasgow to Edinburgh – that earned the nick-
name ‘Silicon Glen’. By 1996, the new electronics sector producing 35% of Europe’s
personal computers (PCs), 12% of the world’s semi-conductors and employed some
55,000 people. However, by the early twenty-first century the sector had gone into sharp
decline – a fall of about one-third in 2002 alone.1
The root causes can be traced back to the aggressive marketing for foreign investment
in the 1980s and 1990s when Original Equipment Manufacturers (OEMs) – builders, on
behalf of brand name companies, of high-tech hardware (such as PCs and mobile phones)
were attracted to the country. Despite the apparent permanence of their factories and
warehouses, these companies proved to be highly cost sensitive with short life-cycle
products and low-yielding manufacturing operations that could easily be relocated to
more economical parts of the world. By 2003, the government’s development agency,
Scottish Enterprise, had shifted its policy from attracting OEMs (or relatively simplistic
assembly plants) to firms higher up the technological chain, such as software develop-
ment (Figure 6.2).2
6.9 Restrictions on land use
Restrictions on land use can be imposed by both central and local gov-
ernment. An example of land-use restriction includes the imposition
of a ‘greenbelt’ around a major conurbation. In this case, special plan-
ning permission is required for any development in the greenbelt – a
measure designed to ensure that cities do not simply continue to expand
into surrounding countryside.
Figure 6.2
Scottish electronics exports3.
Scottish electronics exports
0
2
4
6
8
10
12
1995 1996 1997 1998
Year
1999 2000 2001 2002
Po
un
ds
in
b
illi
on
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100 Business organisations Part I
Local authorities may also impose restrictions. Some left-leaning
local authorities have made their areas ‘nuclear-free zones’ – a ban on,
among other things, businesses based on the use of nuclear technologies.
In some cases, the quality of the land itself (i.e. the soil) may be import-
ant, as might the quality of drainage, the risks of subsidence, etc.
6.10 Personal preferences of the owners
The personal preferences of business owners regarding location is a
particularly important factor when the business is run by an
owner–manager. Businesses run in this way are usually relatively small.
In most cases, it is common for small businesses to be set up in the
region in which the owners and their families are already established.
It may be traumatic, for example, to uproot a family, away from friends,
schools, etc. for reasons of locating a business in a region which may be
in closer proximity to suppliers, customers or whatever.
There may be business as well as personal reasons for ‘staying’ in a
locality with which the owner is familiar. Owners of small businesses
tend to build up business contacts over the years, which may be used to
advantage when carrying out business activities.
6.11 Room for expansion
As part of their strategic planning, some businesses locate in a specific
location because the site in question has land around it which offers
the opportunity for future expansion. Such businesses tend to be ambi-
tious and may be relocating as part of a market development strategy
(see Chapter 7 for a discussion of market development).
This is one reason why manufacturing businesses tend to be located
on the peripheries of towns and cities. By constructing a plant adjacent
to ‘spare’ land, the opportunity remains for new building work to take
place if needed without having to demolish other buildings first. Local
authorities vary in their willingness to grant permission for business
expansion into adjacent land and this is another important factor in
some business location decisions (although central government can over-
rule a local authority).
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Chapter 6 The location of a business 101
Assignment 6.1
Choose a business from the following list:
■ a road haulage company,
■ a soft-drinks manufacturer,
■ a call centre,
■ a mail-order company,
■ a retail supermarket.
Assume the business is considering relocating or establishing a part of the business to
the town or city in which your college or university is located. Prepare a report for the
senior managers of the business discussing the advantages and disadvantages of the
area for a business of the type in question. This will involve you examining the factors
that would be most important to a business of the type you have chosen and then find-
ing out the ‘state of play’ of these factors in your area.
Once you have researched the issues and written the report, make a final
recommendation to the senior management (i.e. should it or should not it relocate into
the area?).
Your report should be approximately 2000 words in length.
References
1 news.bbc.co.uk (2003).
2 Business week (2002).
3 Scottish Executive (2003).
Further reading
Birkin, M. et al. (2002). Retail Geography and Intelligent Network planning.
London: John Wiley and sons Ltd.
Burstiner, I. (2001). How to Start and Run Your Own Retail Business. London:
Citadel Press.
Salvaneschi, L. (ed. Howell, B.) (2002). Location, Location, Location: How to
Select the Best Site for Your Business, 3rd edn. London: Entrepreneur
Press.
Schiller, R. (2001). Dynamics for Property Location. London: Routledge.
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102 Business organisations Part I
Useful web sites
Office for National Statistics: www. statistics.gov.uk
Business Link: www.businesslink.gov.uk
Department for Transport: www.dft.gov.uk
Department of Trade and Industry: www.dti.gov.uk
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C H A P T E R
Growth in
organisations
7
Learning objectives
After studying this chapter, students should be able to describe:
■ Ansoff’s generic product–market expansion grid and its
contents;
■ market, product development and diversification;
■ what is meant by internal growth and why it is adopted as a
growth strategy;
■ the meaning of external growth and why it is adopted as a
growth strategy;
■ types of mergers and acquisitions (integrations).
7.1 Trends in business growth
A potted history
Prior to the industrial revolution in the late eighteenth century, busi-
nesses were locally based and usually very small. Often located around
agricultural communities, such businesses were typically engaged in
crafts and simple service industries. The dawn of automation and
increased urban demographic concentration brought about a com-
pletely new climate in the external business environment. For the first
time, businesses were able to make much greater quantities of their
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104 Business organisations Part I
products and increased demand provided the economic incentive for
businesses to gear up for higher production levels. In consequence,
the first large businesses appeared, employing hundreds or thousands
of people rather than just a few. The nineteenth century witnessed the
birth of a large number of businesses that eventually grew into large
companies, many of whom are still operating today.
The extent of business growth was limited by problems with com-
munications and transport between the businesses and their suppliers
and customers. Developments in the twentieth century, however,
reduced these limitations. The invention and refinements in both the
internal combustion engine and in air-flight made the transportation
of goods and people significantly easier. Running parallel with these
developments was the development of modern telecommunications
systems. The result was the removal of many of the factors that limited
business growth. Consequently, the twentieth century witnessed the
emergence of many very large businesses whose economic interests
encompassed the world. Today, the business world comprises all sizes of
organisations and businesses in all stages of growth and development.
Big is beautiful
It is usually assumed in business that growth is good and that bigger is
better than smaller. This view is held for a number of reasons:
■ Bigger companies, by increasing their sales, have the oppor-
tunity to earn more profits (although not necessarily a higher
percentage of profits against sales).
■ Bigger companies enjoy a higher market share than smaller
companies. Higher market shares allow the larger business to
have more of an influence over the market price of a product –
an opportunity to increase profit.
■ Bigger companies are usually more robust than smaller ones.
This means that size renders a business more able to cope
with economic trauma, such as a sudden decline in sales or a
sudden change in government policy.
■ Bigger companies have the opportunity to benefit from
increased economies of scale – the reduction of unit costs
resulting from increases in size and buying power.
This chapter is concerned with the ways in which businesses seek to
gain the advantages of larger size.
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7.2 Ansoff ’s growth and expansion matrix
The American academic H. Igor Ansoff,1 in seeking to distil the com-
plex patterns of business growth into simplified directions, arrived at
his product–market expansion matrix. He found that although busi-
nesses take many and varied routes to growth, all of these can be sim-
plified to one of four simple generic growth strategies. It is usually
shown in the form of a simple two-by-two matrix (Figure 7.1).
Chapter 7 Growth in organisations 105
Figure 7.1
The Ansoff ’s
product–market
expansion matrix
Ansoff’s matrix provides a simple but effective focus for considering
different options for growth, and provokes debate about whether to
find new customers for existing products. According to the matrix,
businesses have essentially only four generic mechanisms of growth,
but the ways that organisations actually follow the four directions will
vary (Table 7.1).
Table 7.1
A summary of Ansoff ’s product–matrix expansion grid
Market penetration Same markets Same products
Market development New markets Same products
Product development Same markets New products
Diversification New markets New products
Market penetration
Diversification
Product development
Market development
NewPresent
Pr
es
en
t
N
ew
Product
M
ar
ke
t
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Market penetration
Business expansion which involves the organisation growing by the use of
existing products in existing markets is known as market penetration. It is
said that the organisation further penetrates the market which it already
serves. It thus involves the organisation increasing its market share –
attracting more customers in the market to use the existing products.
Market penetration is an appropriate strategy when:
■ the existing market has growth potential and is currently
profitable;
■ other competitors are leaving the market, thus reducing the
competition in supplying the market;
■ the company has a great deal of experience in the market
which it can take advantage of in understanding what the
market wants;
■ the company is unable to pursue a strategy involving entering
new markets, due to such things as insufficient resources or
inadequate knowledge.
There are several ways that a business can attract more market share.
The essence of market penetration is to make the business’s products
more attractive than its competitors’ products:
■ The business can reduce the price of its products. Depending on
the price elasticity of demand (see Chapter 17), lower price
may attract a higher volume of sales. Price reductions can usu-
ally only be maintained over a protracted period of time if it
can also reduce its operating costs accordingly.
■ Quality can be improved. By making products better match the
requirements of the customer; the buyers will tend to have
more confidence in the products.
■ The products can be differentiated. By giving the products a
unique or distinctive quality, customers may switch brands to
the differentiated product.
■ Product distribution can be widened. By selling the products
through more outlets, more customers will be able to access
the business’s output.
■ Production can be increased by means of operational investment.
Increased output may increase market share if customers are
prepared to purchase the extra volume.
■ Advertising and other marketing promotions, by making more
customers aware of the products, can increase market share.
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■ A business can increase its market share by acquisition. The
purchase of a competitor making similar products instantly
increases a business’s market share.
Market development
Market development is growth by means of placing a business’s exist-
ing products into new market sectors. It is said that businesses that
pursue this option develop new markets for their products. It involves
‘transplanting’ products into market sectors which are ‘new’ for the
products. By doing this, the business sells more of the product by
spreading its output across different market segments.
In this context, new markets can be completely new geographical
markets (e.g. a different region or country), or a different segment of
the same geographical market (see Chapter 28 for a discussion of mar-
ket segments). The key to market development is that although mar-
kets are increased, products remain essentially unchanged. It follows
that the key to successful market development is the transferability of
the product. Some products transfer well to other markets, whilst others
are specific for one segment only.
It is said that the product is repositioned as a player in a new market.
An example of market development on a grand scale is the reposition-
ing of the McDonald’s fast-food chain from its domestic ‘home’ in
North America to appear as a symbol of western culture in Eastern
Europe and Russia.
Product development
Growth by product development occurs when an organisation increases
sales in its existing markets by launching new products aimed at the same
market segment. In this context, the term ‘new products’ can mean
several things:
■ it can mean completely new products such as when a manufac-
turer of vacuum cleaners starts producing washing machines;
■ it can mean the development of additional models of existing
products, such as television sets with ‘standard’ viewing features
or ‘home cinema packages’ or integrated ‘free to air’ facilities;
■ it can mean the creation of different quality versions of the same
product, such as the ‘lead-in’, or basic model of a car, through
a series of different specifications (and prices) to the ‘top of
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range’ model that offer choices to different groups of pur-
chasers in the market.
The product development approach is common among businesses that
feel they understand their customers and can thus supply more of their
wants and needs. The principal reasons for pursuing this approach to
growth include:
■ the company already holds a high share of the market and
feels that it could strengthen its position by the launch of new
products;
■ there is growth potential in the market thus providing the
opportunity of a good economic return on the costs of a new
product launch;
■ changing customer preferences demand new products if they
are not to desert the company for a competitor’s products;
■ as a means of ‘keeping up’ with competitors who have already
launched new products.
There are several ways that product development can be accomplished.
Many companies develop new products through their research and
development functions (which in some organisations are called ‘design’
departments). In some cases, organisations increase their product offer-
ing by buying a company which currently offers different products to
the same customers.
Diversification
Under some business circumstances, organisations elect to make a
complete change. Growth by diversification involves approaching new
markets with new products. It follows that in most cases, this strategy
represents a higher risk of failure than any other of the three we have
considered previously, due to the potential lack of knowledge among
management about the new situation. Again, this growth strategy can
be achieved by the internal development of new products or by the
acquisition of a business already in the new market.
Diversification is appropriate when:
■ current products and markets no longer provide a financial
return that satisfies the shareholders or principals of the
organisation;
■ the organisation has ‘spare resources’ after it has pursued its
requisite expansion exploiting existing products and markets;
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Chapter 7 Growth in organisations 109
■ the organisation wishes to broaden its portfolio of business
interests across more than one product/market segment;
■ the organisation wishes to make greater use of any existing
distribution systems in place, thus diluting fixed costs and
increasing returns;
■ the organisation wishes to take advantage of any ‘downstream
opportunities’ such as the use of by-products from its core
business activities.
Ansoff’s general strategies can be achieved in two different ways. We
now need to turn to these two mechanisms: internal growth and exter-
nal growth.
7.3 Internal growth
Internal growth occurs when a business grows by reinvesting its profits
back into the same business entity. By buying new plant, equipment
and by taking on more people to operate them, the business increases
its capacity (the volume of output it can produce). With an increased
capacity, the business can meet higher demand and accept a higher
market share, thus increasing its financial income. The business usually
continues to invest its profits over many years, thus consolidating its posi-
tion. This method of growth is sometimes referred to as organic growth
due to its effects on the numbers of people that the business employs.
Internal growth has been the prominent method of growth since mod-
ern business began during the industrial revolution. Many of the ‘big
names’ in business today began as relatively humble small businesses, but
which wisely invested profits over the years to arrive at their current size.
To rely wholly on internal growth as a means of business expansion
has both advantages and disadvantages. The advantages include the
possibilities of the building of long-term working relationships which
lead to a strong team culture and a sense of security, and even pride in
the organisation. Disadvantages include the potential limitations on skills
and expertise that may come to light if the organisation continually
rejects growth by external means.
7.4 External growth
The second mechanism by which organisations can grow is by external
growth. Whereas internal growth occurs by investing profits in the
same business, external growth involves using the business’s money to
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invest in other businesses. This is achieved by one of two mechanisms:
mergers and acquisitions (M&A).
M&A: what are they?
From time to time, major M&A are reported on the national or inter-
national news. For example, the year 2000 started with the £112 billion
merger of Britain’s the biggest company Vodafone with the German con-
glomerate Mannesmann. At the time it was seen as the biggest merger
in corporate history but was over-shadowed later that year by the merger
of American Online and Time Warner. Also, by December 2000 Glaxo
Wellcome and SmithKline Beecham were two companies that had grown to
their respective sizes via M&A over a number of years. In the year 2000
they merged to form the pharmaceutical giant GlaxoSmithKline – valued
at £120 billion it is the world’s largest drugs company. There is also the
interesting case of Rolls-Royce Motors, which was part of the Rolls-Royce
company until its floatation as a separate entity in 1973. The motor com-
pany built cars under the Bentley brand at its Crewe factory until it was
bought by Vickers plc in 1980 who subsequently sold it to Volkswagen in
1998. Although the motor company had been sold, the rights to the
Rolls-Royce marque (i.e. the iconic ‘Spirit of Ecstasy’ ) were retained by the
aero engine manufacturer Rolls-Royce plc until 1998 when the rights to
the marque were granted to the BMW group, with whom there had been
long history of collaboration on aero engine projects. This gave birth
to Rolls-Royce Motors plc, although it was agreed that Volkswagen would
continue to build cars wearing the Spirit of Ecstasy marque at Crewe
until the end of 2002.
Whilst such ‘big money’ acquisitions may be less frequent, less grand
M&A activity are very common occurrences in most sectors of business.
Mergers
A merger occurs when two separate companies agree, usually by
mutual consent, to come together, not unlike in a marriage of two peo-
ple. Such an arrangement can obviously only come about by the consent
of the two companies’ respective shareholders. In most cases, the share-
holding in one of the companies is simply commuted to shares
in the new business entity, albeit possibly at a slightly different share
price.
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The issues raised by business mergers are similar to those experi-
enced when two people ‘merge’. They frequently involve:
■ the surrendering of independence previously enjoyed by the
two individual businesses;
■ the possibility of a clash of cultures as the two businesses
realise they have different ways of doing things and of think-
ing about things (culture is discussed in Chapter 22);
■ the shedding of labour as the two participants seek to save
money by economies of scale (e.g. the merged company will
require fewer managers and operations can be combined,
thereby eliminating duplication of activities);
■ taking on a new identity as a result of the merger which some-
times involves upsetting people who have an understandable
affection for their former business identity.
The potential benefits of a successful merger are, however, quite com-
pelling. The synergies (i.e. the whole being greater than the sum of the
parts) that can result from two parties working together, rather than
against each other, can be marked. In addition, the larger size of the
organisation means that greater economies of scale can be enjoyed
with the resulting reduction in unit costs.
Mergers are usually entered into with a great deal of negotiation and
careful thought, because once merged, it soon becomes difficult to
demerge. Notwithstanding the undoubted intensity of discussion and
negotiation prior to most mergers, the research seems to indicate that
the majority are unsuccessful. The management consulting firm
McKinsey & Co. made a study in 1986 of mergers involving 200 large
businesses. The findings showed that only 23% of the mergers were
successful as measured by an improvement in business performance
and an increased value to shareholders.
However, recent years have, if anything, seen increased merger activ-
ity in some business sectors. In particular Britain’s banks and insurance
companies have gone through an unprecedented period of consolida-
tion, as they faced up to increased competition from internet-based
companies, such as Smile and Egg. At the start of 2000 The Bank of
Scotland was unsuccessful in its bid for The National Westminster Bank
which, after a bitter battle, was taken over by The Royal Bank of Scotland.
The Bank of Scotland then became a target for Halifax. The merger of
Halifax and The Bank of Scotland, now trading as HBOS, is a prime exam-
ple of the drive towards ‘big is beautiful’ in this sector as more
branches, cash machines and lending power facilitates a better service
to customers. The intensification of competition for mortgages and
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lending customers together with a need to reduce costs has been the
main motivator behind the merger activity in the banking sector.
Acquisitions
If a merger is a marriage, an acquisition is a takeover. By purchasing
a shareholding (of voting shares) of over 50%, a company can control
another and impose its will upon it. There are two broad types of
acquisition:
■ A friendly takeover occurs when the board of the acquired com-
pany recommends that the shareholders sell their shares to
the acquirer. A company’s directors, as agents of the share-
holders, are legally required to act in the shareholder’s best
economic interests. By examining the proposals put forward
by the acquirer, the board have come to the conclusion that
the acquisition would benefit the shareholders.
■ A hostile takeover is when the directors of the acquired com-
pany do not wish to become part of the acquirer. They believe
that the acquisition is not in the best interests of the company
or the shareholders and they thus resist the offer and advise
shareholders to reject the price offered. However, the dir-
ectors’ legal obligation to act in the best interests of the share-
holders sometimes means that if the acquirer offers a price
for the shares in excess of the market’s expectations for the
share price, the directors recommend that shareholders accept
the price. This obligation remains the case even although they
may personally oppose the takeover. Major hostile takeovers
in the last few years have included the £4.9 billion takeover of
the Forte hotel group by Granada in 1995 and the Argos cata-
logue store chain by GUS plc in 1998.
The arguments in favour of acquisition are similar to those for mergers.
The increase in size gives the acquirer synergies and increased economies
of scale. In addition, acquisitions can be selectively made to pursue any
of Ansoff’s generic growth strategies.
The track record of acquisitions is not particularly impressive as many
end in divestment after a failure on the part of the acquirer to success-
fully manage the strategy of the acquired business. Prof Michael Porter
of Harvard Business School conducted a study of merger behaviour
among 33 large US-based businesses between 1950 and 1980. He found
that 53% of related acquisitions and 74% of unrelated acquisitions were
subsequently divested (the terms related and unrelated are defined later).
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Types of M&A
Both M&A (‘integrations’, meaning ‘becoming one’) can be divided
into sub-categories depending upon the relationship of the two com-
panies involved. These distinctions aid our understanding and are
shown in Figure 7.2.
Chapter 7 Growth in organisations 113
Vertical
integration
Horizontal
integration
Conglomerate
integration
Concentric
integration
Backward
vertical
integration
Forward
vertical
integration
M&A
(integrations)
Unrelated
integrations
Related
integrations
Figure 7.2
Types of merger and
integration.
Related integration
M&A are said to be related when the two companies involved in the
integration are in the same industry. It is important, however, to define
what we mean by ‘industry’ in this context. In its broadest sense, an
industry comprises all parts of the supply chain for a good or service.
In the brewing industry, for example, the ‘industry’ includes brewers,
their suppliers of malt, hops, etc., their customers (bars, off licences, etc.)
and their competitors. This is shown in the schematic in Figure 7.3.
The form of Figure 7.3 shows us that related integration can occur in
one of two directions: horizontally or vertically:
■ Horizontal integration is growth by acquisition of, or merger
with a competitor.
■ Vertical integration is acquisition of or merger with a business
backwards or forwards of the organisation in the supply chain.
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There are thus two vertical directions:
– backward vertical integration – integration with a supplier,
– forward vertical integration – integration with a customer.
114 Business organisations Part I
CompetitorCompetitor
Ba
ck
w
ar
d
ve
rti
ca
l
di
re
ct
io
n
Horizontal direction
Fo
rw
ar
d
ve
rti
ca
l
di
re
ct
io
n
Organisation
Customer
Supplier
Figure 7.3
Horizontal and
vertical integrations.
Horizontal integration
This approach, as we have established, involves two competitors join-
ing forces which have previously supplied the same goods and/or ser-
vices to the same market. The result of horizontal integration (by merger
or acquisition) is thus to increase the concentration of supply. The
acquirer immediately gains the market share of the acquired business
and thus avoids the arduous task of winning it in open competition
which would be the task facing the business if it adopted an internal
growth strategy. Ansoff would identify this strategy as an example of mar-
ket penetration.
Horizontal integration offers a relatively low risk expansion strategy
to an organisation. This is mainly due to the transferability of manage-
ment expertise. The main advantages of pursuing this approach rest
upon the increased market presence:
■ Economies of scale can be gained as the larger (combined)
business can exercise greater buying power over its suppliers.
The fact that the business now buys higher quantities of com-
mon inputs means that it will be able to negotiate lower unit
prices. This will obviously contribute to a lower unit cost for
the organisation enabling higher profits to be made.
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■ The greater market share may enable the organisation to
have a greater control over prices in the market. The closer
supply comes to a monopoly, the greater, the control of prices
results. If, by enhancing market presence a business can
increase or maintain prices, an opportunity clearly exists to
increase profit.
Vertical integration
The logic behind vertical integration lies in ‘locking in’ the forward or
backward links in the supply chain.
Backward vertical integration enables an organisation to gain con-
trol over one of its suppliers. This offers the following advantages:
■ guaranteeing supply which may be important for some inputs
which are subject to shortages;
■ prices to competitors (if competitors are existing customers)
can be maintained whilst the integrated organisation gains
goods at a preferable transfer price.
Forward vertical integration enables an organisation to gain control
over one of its customers. This mechanism of growth offers the follow-
ing advantages:
■ it guarantees an outlet for the company’s output which
means the production and sales can be forecast with greater
certainty;
■ in controlling the customer, the organisation can ensure that
the customer gives priority to inter-group sales. This means that
the customer’s buying power can be used to favour its group
partner at the expense of competitors.
Both strategies, in addition to the advantages above, obviously also
serve to increase group sales and hence total profits. They also have
the beneficial effect of broadening an organisation’s portfolio as new
products and markets are brought under the organisation’s umbrella.
Unrelated integration
M&A are said to be unrelated when the two companies involved in the
process are in different industries. According to Prof Ansoff,1 this type
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of business growth can be described as diversification (i.e. new prod-
ucts and new markets).
It follows from our discussion of related integration that the two parties
do not compete with each other in any part of their business and that
they do not supply or buy from each other. This does not however
mean that the two companies have nothing in common. There are two
types of unrelated integration depending upon how much the two par-
ties have in common.
Concentric diversification
Some diversifications occur between organisations which are not in the
same industry but nevertheless do have something in common in that
some skills are transferable between the two companies. Such integra-
tions are said to be concentric.
Companies who pursue concentric diversification see the advantage
that they can expand their product and market portfolios without
completely ‘jumping ship’. This can mean that the integration is less of
a risk than a complete move into new products and new markets. Exam-
ples of this growth strategy include mergers or acquisitions between
businesses which share common technologies, common marketing
approaches or manufacturing plants that can be merged together. It
might be, for example, that a television manufacturer acquires a man-
ufacturer of audio equipment. Although the two businesses serve dif-
ferent markets, their common core competencies of the design and
manufacture of electronic equipment and marketing consumer goods
to the retail markets should mean that the acquisition has a higher
probability of success.
Conglomerate diversification
In contrast to concentric diversification, conglomerate diversification
is characterised by merger or acquisition into a business sector which
has no obvious links with existing products or markets. It follows that
no organisational competencies or operational expertise is directly
transferable between the two businesses. This necessarily introduces a
more pronounced element of risk into the integration, but, conversely,
it represents the most effective mechanism of widening the total prod-
uct and market portfolio.
Many of the world’s largest and most important holding companies
are highly conglomerate diversified (hence they are sometimes called
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Chapter 7 Growth in organisations 117
Case: Hanson plc
In 1964 Hanson Trust was created in the
UK, out of the former Wiles Group, by
James Hanson and Gordon White and, as
Hanson plc, went on to become one of
the world’s largest companies with a strat-
egy of growth through acquisition. In
the 1970s and 1980s Hanson became a
multi-national concern with interests across
the world ranging from chemical facto-
ries in the US to electricity supply in the
UK and gold mines in Australia. Hanson
produced cigarettes, batteries, timber, toys,
golf clubs, jacuzzis, cod liver oil capsules
and cranes.
By the 1990s the environment in which
Hanson operated was changing as investors
began to look beyond the ‘traditional’ big
conglomerate to companies focused on sin-
gle sectors. In 1996 it was decided to change
the strategy from a diversified industrial
conglomerate into a focused heavy build-
ing materials business. The distinct busi-
nesses of Imperial Tobacco, The Energy
Group, and Millennium (the US chemi-
cals business) were de-merged and subse-
quently became quoted companies in their
own right. The companies remaining with
Hanson were the major building materials
operations of American Red Cross (ARC),
Hanson Brick and Cornerstone. From 1997
to 2000 the remaining non-core businesses
were sold while considerable money was
spent on acquisitions plus substantial cap-
ital investment on plant upgrades to build
up the existing businesses.
Early in 1999, to highlight the fact that
Hanson was now a unified company, the
names of all the operating companies were
changed as follows: ARC became Hanson
Quarry Products Europe; Cornerstone,
Hanson Building Materials America and
Hanson Brick, Hanson Bricks Europe. The
company’s business in Southeast Asia
became Hanson Pacific.
Acquisitions continued, particularly in
the US, and the company was developed
into a global player with the acquisition in
2000 of the Australian construction mate-
rials business ‘Pioneer International’. In
January 2002 Hanson created an inte-
grated building materials business in
Europe by combining its quarry products
and bricks operation.
By early 2004, Hanson was the largest
producer of aggregates and the third
largest producer of ready mixed concrete
in the world. With a worldwide turnover
of £4000.5 million and an operating profit
of £433.3 million, Hanson had more than
28,000 employees involved in operations
in 17 countries across four continents.
Source : Hanson plc web site.
conglomerates). Whilst some large companies like Imperial Chemical
Industries plc (ICI) are essentially concentrically diversified comp-
anies (i.e. entirely in the chemicals sector), others like the UK-based
industries Hanson plc and BAT are conglomerates.
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118 Business organisations Part I
Assignment 7.2
You have just joined the board of directors of a company involved in the manufacture
and distribution of beer. It is a smaller regional brewer which does not own any outlets
such as pubs and is a one-site business.
At your first board meeting, the financial director puts forward some proposals on
the expansion of the business. ‘As a result of our recent successful rights issue’, he
began, ‘we have sufficient funds to pursue a number of possible options’. He went on
to explain that he has analysed the possibilities of both an acquisition and a joint ven-
ture. ‘There are a number of possible acquisition targets’, he continued. ‘I have had
contact with a number of companies. One makes beer in another part of the country to
our present location, one makes Scrumpy, and another is a farming complex in Kent
which produces hops and barley malt whilst another still is a chain of off-licences. The
one ‘outsider’ chance we have is to buy up a paint company in Hull. On the joint ven-
ture front, there is scope for a joint licensing agreement with a German lager producer.
This would involve us brewing and marketing their lagers over here whilst they would
do the same for our range of English real ales over there in Germany’. The financial
director concluded that the final option was to put the money on deposit at the bank
and let it accumulate interest. ‘At least we know the money is safe in the bank’, he
mused, ‘even although we might make a lower return on it’.
You are required to do the following:
■ Identify each of the financial director’s options according to the growth strategies
described in this chapter.
■ What factors should the board consider in evaluating each of the options?
■ Given that the company is relatively small with a limited management resource,
which course of action would seem to be the most appropriate?
■ Which options should definitely not be pursued?
Assignment 7.1
Identify an example of a merger in the last 3 years and compare the merged company’s
performance with the respective company positions for the 3 years prior to the merger,
in terms of:
■ shareholder value,
■ market share,
■ economies of scale (e.g. number of managers, employees, accommodation, etc.).
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Reference
1 Ansoff H. Igor (1988). Corporate Strategy (revised edition). London:
Penguin Books.
Further reading
Campbell, D., et al. (2002). Business Strategy, an Introduction, 2nd edn. Oxford:
Butterworth Heinemann.
Cartwright, S. and Cooper, C.L. (1996). Managing Mergers, Acquisitions and
Strategic Alliances. Oxford: Butterworth Heinemann.
Johnson, G. and Scholes, K. (2002). Exploring Corporate Strategy, 6th edn.
Harlow: FT Prentice Hall.
von Krogh, G., et al. (1993). The Management of Corporate Acquisitions, Inter-
national Perspectives. London: Macmillan.
Useful web sites
Confederation of British Industry: www.cbi.org.uk
Department of Trade and Industry: www.dti.gov.uk
European Commission: http://europa.eu.int/comm/competition
Office for National Statistics: www.statistics.gov.uk
The Competition Commission: www.competition-competition.org.uk
Chapter 7 Growth in organisations 119
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