BUSINESS TECHNOLOGY

Study Text
Chapter 1: Features of Business Organisations

Chapter 2: Stakeholders

Chapter 3: The External Environment: Political and Legal Factors

Chapter 4: The External Environment: Macroeconomic Factors

Chapter 5: The External Environment: Microeconomic Factors

Chapter 6: The External Environment: Social and Demographic Factors

Chapter 7: The External Environment: Technological Factors

Chapter 8: The External Environment: Environmental and Sustainability Factors

Chapter 9: The External Environment: Competitive Factors

Chapter 10: The Formal and Informal Business Organisation

Chapter 11: Business Organisational Structures

Chapter 12: Business Organisation Functions

Chapter 13: Committees

Chapter 14: Organisational Culture

Chapter 15: Corporate Governance

Chapter 16: Sustainable Business Practices

Chapter 17: Accounting and Finance Functions

Chapter 18: Accounting’s Relationship to Other Functions

Chapter 19: Accounting Regulation

Chapter 20: Financial Information

Chapter 21: Financial Systems and Internal Controls

Chapter 22: IT in Accounting, IT Security, and Technological Advances

Chapter 23: Fraud and Money Laundering

Chapter 24: Leadership, Management, and Supervision

Chapter 25: Individuals, Groups, and Teams

Chapter 26: Motivation

Chapter 27: Learning and Development at Work

Chapter 28: Performance Appraisal

Chapter 29: Personal Effectiveness

Chapter 30: Communication in Business

Chapter 31: Professional Ethics

About this Study Text

This Study Text has been specifically written for the Association of Chartered Certified
Accountants' Foundations in Accountancy examination Foundations in Business and
Technology and the ACCA examination Business and Technology.

How to Use This Study Text

You should start by reading through the syllabus and study guide to familiarise yourself
with the content of this exam.
The chapters which follow include the following features:

These are the learning outcomes relevant to the chapter,

Syllabus Coverage
as published in the ACCA Study Guide.

A diagram of the concepts and the relationships

Visual Overview
addressed in each chapter.

Terms are defined as they are introduced. Groups of

Definitions
terms are set out in a Terminology section.

These are to be read as part of the text. Any solutions to

Examples
numerical Examples are provided.

Exhibits These extracts of external content are presented to

reinforce concepts and should be read as part of the
text.

These should be attempted as you work through the

Activities
chapter.

Attention is drawn to fundamental rules, underlying

Key Points
concepts and principles.

These comments relate the content to relevance in the

Exam advice
examination.

Chapter Summary A summary of the main points of each chapter.

Answers to the Activities are presented at the end of

Activity Solutions
each chapter.
CHAPTER 1: Visual Overview

Syllabus Coverage

This chapter covers the following Learning Outcomes.

A. The business organisation and its external environment

1. The purpose and types of business organisation
1. Define ‘business organisations’ and explain why they are formed.
2. Describe common features of business organisations.
3. Describe how business organisations differ.
4. List the sectors in which business organisations operate.
5. Identify the different types of business organisation and their main characteristics:
1. Commercial
2. Not-for-profit
3. Public sector
4. Non-governmental organisations
5. Cooperatives

Visual Overview
 1.1. Attributes of Business Organisations

Definitions

Business Organisation – A social arrangement to achieve collective goals through controlled

performance.
An organisation has three main components:

Component Description Not-for-profit Organisation Business Organisation

Social A group of more than one  Charities  Companies

arrangement person.  Government  Partnerships
 Cooperatives  Joint ventures
The formal and informal  Political parties
relationships within the  Associations
 group.
 Professional bodies

A common objective that

Almost any objective: To maximise the wealth of
the organisation wants to
owners.
achieve.  Healthcare
Collective  Education This is the primary
The purpose of the
goals  Entertainment objective of business
organisation.
 Public services organisations.

 Service operations Business operations:

 Fund-raising  Service operations
Structured operations of  Profit-generating activities  Manufacturing
the organisation.  Other activities  Distribution
Controlled A not-for-profit organisation  Marketing and sales
How an organisation
activities may have commercial  Other commercial
achieves its objectives.
activities. activities

1.2. Purpose of Forming Business Organisations

The primary purpose of forming a business organisation is to operate beyond the

capacity and capability of a single individual.
Business organisations have advantages over an individual operating alone:
Attribute Description Example

A bakery meets the demand for its goods

Having more by having investors contribute capital for
asset expenditure (money to buy ovens,
 people (person-hours)
supplies, etc.)
 resources (capital)
than an individual, enabling The bakery’s workforce consists of
a larger volume of tasks can several people, bakers, administration
be performed. executives, distribution staff, customer
service personnel, etc.
Being larger enables the
division of labour, This allows the bakery to generate much
encouraging specialisation more profit and returns than an individual
and potential synergy. operating alone.
Capacity (Size)

Division of labour enables

Individuals and groups to A bakery can develop individuals to be
become specialists in their highly skilled and knowledgeable in their
activity. position:
Specialists (experts) deliver  A baker will develop specialist baking
a higher standard of work knowledge and techniques, improving
and operate more efficiently. the quality and production speed.
 Customer service personnel will learn
Allows individuals to work in
the needs and requirements of their
the role they are most suited
customers and develop approaches to
for and motivated to do.
Specialisation serve them better.

A bakery organises itself into

departments, which are highly efficient in
their speciality.
 The baking (manufacturing)
department focuses on producing
high-quality output as efficiently as
possible.
 The customer service and
The total output of a group is
administration personnel can focus on
higher than the sum of each
efficiently adapting to
individual working
customer ;needs without taking on
independently.
baking roles.
Individual specialisation The synergy between the bakery’s
organisational structure departments allows for much more output
enables greater collective at a higher quality than the sum of each
Synergy “2 + 2
output. individual working alone.
> 4”
 The bakery may be arranged as a limited
company, which limits owners’ potential
losses if the business fails.
In the bakery, a baker would be
Operations risk is
responsible only for the activity he
shared among more
specialises in; he would not be
individuals, reducing each
accountable for issues occurring in other
individual’s risk.
departments.
An individual operating
alone must accept all the Asset expenditure can be shared among
business risks by himself. several investors, reducing individual risk.
Reduced Risk

2.1. Common Features of Business Organisations

 Stakeholders
All business organisations interact with various stakeholders, such as:
o Customers (purchasers of the organisation’s goods and services)
o Suppliers (sellers of goods and services to the organisation)
o Regulators (Authorities that have jurisdiction over the organisation’s
environment)
o Owners
o Employees perform the organisation’s activities. Their relationship with the
organisation varies according to the terms of their employment.
 Assets (Capital)
Business organisations may have assets to perform their operations.
This includes materials, vehicles, property, machines, etc.
Attribute Description Example

The capacity and resources of the

organisation:
 Number of employees
 Available capital
 Net assets
 Revenue Business organisations may range from small
Size  Number of operating locations partnerships to vast multi-national enterprises.

Different ownership structures

Several individuals may form a partnership to
exist:
formalise their share of the business and
 Sole trader govern the distribution of profits.
 Partnerships
Public limited companies may have thousands
 Private limited companies
of individual owners that hold company shares.
 Public companies
Ownership  Cooperatives This is discussed in detail later in the chapter.

The capital structure of business

organisations differs, usually a mix
of: Business organisations may raise funds by:
 Debt  Borrowing from banks (debt)
Funding  Equity  Selling shares to investors (equity)

Organisations perform different

activities to earn profits:
 Service provision
A bakery earns revenue primarily through
 Sale of goods
selling its baked (manufactured) goods.
They may also have various
supporting activities, such as A bank earns revenue on interest from
administration, marketing, etc. disbursed loans and banking fees.
Activities

A small partnership may have a few employees

in a flat structure.
How the organisation is formally
organised. A multinational corporation may have
thousands of employees deployed in divisions
 Flat or tall
that may operate independently.
Organisational  Wide or narrow
structure  Centralised or decentralised This is discussed in detail in Chapter 11

A business organisation may be profitable by

delivering output at a low cost.
Business organisations generate
profits in the market by applying a Another business organisation might focus on
business strategy. having niche expertise to deliver unique
(differentiated) services.
 Cost leadership
Strategy  Differentiation This is discussed in detail in chapter 9

A bank may have a traditional, risk-averse,

The collective understanding within hierarchical culture and expects its employees
an organisation. to dress formally and come to work at the
office.
“How we do things around here.”
A software development company may have a
 Leadership style
more relaxed, informal culture that encourages
 Operating environment
All business organisations operate within a business environment, which includes
aspects such as:
o Political
o Economic
o Social
o Technological
o Environmental (ecological)
o Legal
The business environment is discussed in future Chapters 3 to 9.
 Managed activities
All business organisations have managed and controlled activities to achieve their
primary purpose.
These activities will have inputs and outputs and operate within an environment.

For example, a bakery may have a manufacturing activity to produce output for sale.
Its operations are controlled to produce goods of sufficient quality and quantity
efficiently.

2.2. How Business Organisations Differ

Example 1 Reflection

Think about a local business organisation from knowledge or experience.

 What size is it? How is its size measured?
The size of a business organisation can be measured in several different ways:
o The amount of income or revenues the company earns.
o The value of assets (such as buildings, machinery or land) it owns.
o The number of people working there.
 What does the organisation do – what are its activities?
What the company produces and sells, whether to individuals or other companies, defines its activ
 Example 1 Reflection

For example, a company that extracts copper ore from the ground is a mining company.
3.1. Commercial Sectors

Business organisations produce various goods and services and serve a variety of markets. They ma
classified into sectors according to their output or market.
A common market or output defines each sector, and organisations within these sectors would have
similar characteristics.
Sectors help investors compare organisations. Organisations within the same sector would be expect
have similar risks, opportunities, and challenges.
 Example 1 Reflection

Example 2 Defining Sectors

There are two approaches to defining commercial sectors:.

 Production-oriented
Sectors are defined by what their component companies produce.
For example, a company that produces a tool will be classified in a different sector from a compa
that provides a service, even if they serve the same customers.
A production-oriented approach aims to define available supply in a market, usually for the produ
of industrial statistics, to inform economic policy.
The North American Industry Classification System (NAICS) is a production-oriented approach w
divides the economy into 20 sectors.
 Market-oriented
Sectors are defined by the markets component companies serve.
For example, companies serving the energy markets would be classified in the energy sector.
Market-oriented classification enables investors to classify companies meaningfully for activities
as portfolio allocation (proportion of investment in each sector).
There are several popular market-oriented approaches, such as
o Global Industry Classification Standard (GICS)
o Industrial Classification Benchmark (ICB)
The list of sectors under GICS are:
o Consumer Discretionary
o Consumer Staples
o Energy
o Materials
o Industrials
o Healthcare
o Financials
o Information Technology
o Real estate
o Communication Services
o Utilities
Activity 1 Classification by Sector

Classify the business organisations by the given sectors:

 Manufacturing
 Construction
 Financial services
 Mining and extraction
 Agriculture and commodities
Business organisation Sector
 Example 1 Reflection

Bank

Insurance company

Accountancy firm

Stock exchange

Cocoa grower

Rubber producer

Cattle farmer

Salmon fishery

Gold mine

Oil and gas extraction company

Stone quarry

Soft drinks producer

Chemical plant

Clothing factory

Shoemaker

Housebuilder

Road builder
 Example 1 Reflection

Cement supplier

Business organisation Sector

Bank Financial services

Insurance company Financial services

Accountancy firm Financial services

Stock exchange Financial services

Cocoa grower Agriculture and commodities

Rubber producer Agriculture and commodities

Cattle farmer Agriculture and commodities

Salmon fishery Agriculture and commodities

Gold mine Mining and extraction

Oil and gas extraction company Mining and extraction

Stone quarry Mining and extraction

Soft drinks producer Manufacturing

Chemical plant Manufacturing

Clothing factory Manufacturing

Shoemaker Manufacturing
 Example 1 Reflection

Housebuilder Construction

Road builder Construction

Cement supplier Construction

1.4.1 Sole Traders, Partnerships, and Companies

4.1. Sole Traders, Partnerships, and Companies

A commercial organisation has the collective goal of increasing owners’ wealth.

4.1.1. Sole Trader

A sole trader is an individual that operates a business. Legally, the business and the individual ar
same entity.
The key feature of a sole trader is that the owner has unlimited liability, meaning the owner is person
liable for the business’s debts. This means a creditor can seize the owner’s personal assets in the ev
of a default.
A sole trader may hire employees and purchase assets to support his operations.

4.1.2. Partnerships
A partnership is a group of individuals that jointly own a business. A partnership agreement sets the te
of the partnership, including each partner’s share of ownership and profits.
There are a few types of partnerships:
 Unlimited (general) partnership
The partners are personally liable for the debts of the business.
 Limited partnership
Has two types of partners: general and limited.
General partners operate the business and are liable for the debts of the business.
Limited partners do not participate in business operations, and their liability for debts is limited to t
initial investment.
 Limited liability partnership
All partners can participate in business operations, and their liability for business debts is limited to
their initial investment.
Some jurisdictions may have limits on the number of partners in a partnership. They may require limit
liability partnerships to file documents and financial results annually (annual return) with a regulator.

4.1.3. Companies
 Example 1 Reflection

Owners (shareholders) will own shares in a company.

 The critical feature of a company is the limited liability of owners. The owners' liability for the company's
is limited to their investment in the company.
 Companies also have a separate legal identity from their owners. This means a company may enter into
contracts as its own legal person.
 Most jurisdictions require companies to file documents and financial results to a regulator annually (ann
return) and pay corporate tax.
 Owners do not have a direct claim on the company’s profits. Profits may be disbursed to owners as dividen
 It is not necessary for owners to participate in the management of the business. Owners often recruit
professional managers as employees to manage the business’s operations.
 Companies that meet specific requirements may go public, meaning their shares are listed on a stock exch
and publicly traded. Public-listed companies must maintain compliance with strict listing requirements and
governance rules.
The following is a summary of commercial entities:
Feature Sole trader partnership Company

Two or more individuals.

Most jurisdictions require a
minimum of 2 individuals to be Shareholders. These m
Owners An individual. partners. individuals or other enti

General partnership: unlimited.

The partners are personally
liable.
Limited liability partnership:
Unlimited. limited. Limited.
Liability for the The owner is The partners’ liability is limited to A shareholder’s liabili
business’s debts personally liable. their investment. limited to its investme

Professional manage
may operate the com
Shareholders may als
Usually owner- Usually managed by one or more decide to manage the
Managers managed. partners. company directly.

Employees may be
recruited for business Employees may be recruited for Employees may be recr
Employees operations. business operations. for business operations
 Example 1 Reflection

Feature Sole trader partnership Company

General partnership: the

partners and the business are
the same legal entity.
The owner and the Limited liability partnership: the The company is its own
business are the same partnership may have its own entity, separate from its
Legal status legal entity. legal identity owners.

The owners do not ha

direct claim on profits
The owner is entitled to The partners are entitled to all the The company may dis
all the profits of the partnership profits per the profits to owners as
Claim on profits business. partnership agreement’s terms. dividends.

5.1. Not-For-Profit Organisations (NFPO)

The primary objective of a not-for-profit organisation (NFPO) is the main difference compared to a
commercial organisation. An NFPO’s primary objective is something other than profit.
NFPOs may have myriad primary objectives, ranging from arranging social activities to providing soci
services and regulating professionals. ACCA is an example of an NFPO.
NFPOs may have commercial operations and fund-raising activities to help them generate the cash
needed to run their operations.
For example, a homeless charity may operate as follows:

Objective To reduce the number of people living on the streets in its area.

 Operating a homeless shelter

 Raising awareness of the plight of the homeless
Activities  Lobbying for action on the root causes of homelessness, such as mental illness
poverty.

Managers and  Trustees hold overall responsibility.

employees  Full-time employees manage operations, assisted by individual volunteers willin
contribute time and effort.

Funding  Donations
 Example 1 Reflection

 Government grants
 Commission from salaries of formerly homeless individuals
 Sales of donated goods

5.1.1. Value-for-Money (3Es)

As NFPOs do not have profit as a primary objective, their performance must be evaluated in other wa
A common approach is to examine the 3Es:

 Economy
The financial performance of the NFPO.
NFPOs that spend more money than they receive would incur deficits; repeated deficits will cause
NFPO to run out of funds to operate.
NFPOs that generate more income than expenditure will have surpluses that can be used to expa
operations.
 Efficiency
How efficiently an NFPO uses its resources.
For example, if a meal costs Soup Kitchen A $4.00 and Soup Kitchen B $3.50, it may be argued th
Soup Kitchen B is more efficient at providing meals.
 Effectiveness
The extent to which an NFPO achieves its objectives.
For example, if a homeless charity’s objective is to reduce the number of people living on the stree
measure of effectiveness would be a year-on-year comparison of the number of people living on th
 Example 1 Reflection

streets.
Comparison table of NFPOs and commercial organisations:

Attribute NFPO Commercial organisation

Primary objective Non-profit objective Maximise the wealth of owners

 Registered society
 Association
 Company
 Regulatory body  Sole trader
Organisational  Charity  Partnership
structure  Public sector entity  Company
 Cooperative  Cooperative

Indicators or the growth of owner’s w

Value for money: including:
Measure of  Efficiency  Profitability
performance  Economy  Return on investment
 Effectiveness.  Share price increase

Activities  Varied, may include commercial  Varied, may include non-commercia

activities to fund operations activities as part of social responsib

 The board of trustees holds

Management and responsibility.  It may be run by professional manag
employees  May have employees to run responsible to owners.
operations, supported by volunteers.  Will have employees to run operatio

5.2. Public Sector and Non-Governmental Organisations

The public sector is NFPOs that provide government services. They are owned and operated by th
government.
A public sector business organisation is a business organisation that is owned and run by the
government.
A non-governmental organisation (NGO) is an NFPO that operates independently from the
government and usually has a social or political purpose. This purpose sometimes involves business
activities.
Attributes of these types of NFPOs are set out in the table below.
 Example 1 Reflection

Attribute Public sector organisation Non-governmental organisation (N

Varies.
Trustees usually govern it.
Owners The government

Varies.
Funding may come from governmen
donations from other organisations o
Sources of
individuals.
funding The government

To provide a public service.

The organisation may be expected to
generate a surplus or at least not to
Not-for-profit. The aim of the organis
overspend its budget.
Aim/objective has a social or political purpose.

Any state-owned organisation, such as a

national railway in some countries.
Examples include the World Wide F
State ownership of business varies
for Nature, the Red Cross and Amne
between countries.
Examples International.
Some state-owned organisations do not have a profit-making objective (for example, the police and a
forces and state-run health service), while others do (such as a stateowned oil company).
Public sector organisations that don’t have a profit motive have a duty to provide ‘value for money’ to
ensure that limited taxpayers’ funds are used to the best effect.
Some public-sector organisations include an element of private funding – public/private partnerships.
These may be for infrastructure projects such as roads and airports, where the private sector can
contribute to a public-sector project.
Some non-governmental organisations may serve business purposes. An example is the Internationa
Organization for Standardization (ISO), which has developed internationally-accepted standards for s
aspects of trade and commerce.

5.3. Cooperatives

A cooperative is jointly owned and democratically controlled by its members. The purpose of the
cooperative is to meet the particular needs of its members.
Each member has a vote in decisions that are made for the business.
 Example 1 Reflection

Some cooperatives are operated to make a profit, with the profits shared between members. Others a
utilised for a not-for-profit purpose.
An example of a cooperative is a farming cooperative, where several farmers join together to help eac
other with their farms. They may share farming equipment, help each other with their harvest work an
also collectively negotiate prices for their crops.

The individual members of the cooperative are the owners. Individuals are invite
join.
Ownership In the farming cooperative, the farmers are the owners.

A cooperative aims to meet the needs of its members through cooperation and
effort. It will earn profits for its members, which is returned to them by a dividend
payment.
For example, if the farming cooperative makes a commercial profit, this may be
Aim/objective back to the farmers as dividends.

A small cooperative organisation is likely to be managed democratically, with

significant decisions taken by all the members together. In a small cooperative,
members are likely to be involved in day-to-day activities.
Activities and For example, all the farmers may be involved in the management and activities
management farming cooperative.

Forming a cooperative allows individuals to share their resources and skills.

For example, an individual farmer may be unable to afford an expensive piece o
farming machinery. However, a farming cooperative may have enough money t
Advantages the machine that all the farmers can share.

Activity 2 Types of Organisation

For each description, select appropriate organisation:

 Company
 Partnership
 Public sector organisation
 Charity
 Cooperative
Organisation
Description type
 Example 1 Reflection

A profit-making organisation that is owned by members but often managed by professional

managers

A children’s welfare organisation that is supported by voluntary donations

A group of independent shopkeepers who combine to buy goods from suppliers at lower
prices than they would otherwise obtain independently

A local government organisation that aims to provide a service to local people

Six individuals were set up in business as a taxi service. They operate the business
themselves, but they have not created a company.

*Please use the notes feature in the toolbar to help formulate your answer.

CHAPTER 2: Visual Overview

 Example 1 Reflection

Syllabus Coverage

This chapter covers the following Learning Outcomes.

A. The business organisation and its external environment.

2. Stakeholders in business organisations
1. Define stakeholders and explain the agency relationship and how it may vary in different types of business
organisations.
2. Define internal, connected and external stakeholders and explain their impact on the organisation.
3. Identify the main stakeholder groups and the objectives of each group.
4. Explain how the different stakeholder groups interact and how their objectives may conflict with one anothe
5. Compare the power and interest of various stakeholder groups and how their needs should be accounted f
such as under the Mendelow matrix.

Visual Overview
 Example 1 Reflection

1.1. Definition

Definition

Stakeholder – An entity that can affect or be affected by an organisation

Stakeholders would include:
 Example 1 Reflection

 Entities with a commercial relationship to the organisation, including customers, shareholders, suppliers, an
employees.
 Entities interested in the organisation’s activities, including regulators, local residents, and special interest
groups.
 “Silent” entities that may not have a voice, including the environment and society.
Example 1: Reflection

In a large company, who has more influence over its activities – its shareholders or senior
managers?
Consider what the shareholders or senior managers might think.
The relative importance and influence of a company’s shareholders and managers vary at different
companies. However, in a large company with many shareholders, its managers are likely to have m
influence and power than the shareholders because they manage the business’s day-to-day operatio

2.1. Concept of Agency

An agency relationship is between a principal and an agent.

An agent is someone who is given the authority to act on behalf of a principal. The principal provides
agent with the power to act on their behalf.
An example is the relationship between the managers and owners of a business. The owners (princip
give the managers (agents) authority to run the company on their behalf.
Agents have a fiduciary (contractual) duty to act in good faith and protect the interests of the principal
Some examples of an agency relationship are:
 Owners and directors
Owners or shareholders (principals) appoint directors (agents) to run the company on their behalf.
directors must act in good faith and protect the owners’ interests.
The owners authorise the directors to control the company and make any necessary decisions
regarding its operations.
 Shareholders and auditors
Shareholders (principals) appoint the auditors (agents) who report to them on the financial statem
produced by the directors. Auditors are accountable to the shareholders for their work.
 Example 1 Reflection

In practice, the directors may appoint the auditors, but the shareholders will approve the appointm
at the following annual general meeting.
 Directors and employees
Directors (principals) employ managers and other members of staff (agents) to carry out the
company’s day-to-day operations. The staff are accountable to their immediate managers (and
managers to the directors) for the work delegated to them.
Corporate governance is implemented to reduce the risk of excessive agency costs (where agents ta
action in their interest instead of principals’).

3.1. Internal, Connected, and External Stakeholders.

3.1.1. Internal Stakeholders

Internal stakeholders in a company are employed by and perform most of the company’s activities.
Internal stakeholders include the directors, managers and other employees.

3.1.2. Connected Stakeholders

Connected stakeholders in a company are individuals or organisations that have a contractual

relationship with the company. They may have invested in the company or have direct dealings with
 Example 1 Reflection

Connected stakeholders include shareholders, lenders, customers and suppliers.

Key Point

Internal and connected stakeholders are often called primary stakeholders. Their existence is essential for the
survival of the company.

3.1.3. External Stakeholders

External stakeholders are individuals, groups or organisations that are not directly involved in the
company and its activities but may be interested in what the company does.
External stakeholders include the government, local communities, environmental pressure groups an
general public.

Key Point

External stakeholders are often called secondary stakeholders.

Activity 1: Reflection

Yadset Synthetics is a company manufacturing plastic bottles for various customers, such as drinks
companies, milk producers and baby food suppliers.
1. Who might be an internal stakeholder in Yadset Synthetics?
2. Who might be considered a connected stakeholder in Yadset Synthetics?
3. Who might be considered an external stakeholder in Yadset Synthetics?
*Please use the notes feature in the toolbar to help formulate your answer.
1. Who might be an internal stakeholder in Yadset Synthetics?
Internal stakeholders include people who work inside the company and carry out its activities. The
would consist of directors, managers and other workers.
2. Who might be considered a connected stakeholder in Yadset Synthetics?
Connected stakeholders include people and organisations who are either investors in the compan
have direct dealings with it. These will consist of shareholders, lenders (banks and other financial
organisations), suppliers and customers who buy the company’s products.
3. Who might be considered an external stakeholder in Yadset Synthetics?
Examples of external stakeholders might be the local community, who are interested in jobs at the
factory; environmentalists, who might be concerned about pollution produced by the plant; local
government officials, who are interested in the plant’s contribution to the local economy.
 Example 1 Reflection

4.1. Internal Stakeholders

Internal stakeholders are within the company and perform the company’s operations.

4.1.1. Board of Directors and Senior Management

The board of directors is the primary decision-making body of a company. They are agents of the own
(shareholders) authorised to manage the company’s day-to-day operations.
They have a fiduciary (contractual) duty to manage the company in good faith to maximise the owner
wealth.
Their interests would include appropriate remuneration, potential ownership interests, and job security
They significantly influence the company’s operations and assets, so their actions must be effectively
governed.
This is discussed in detail in Chapter 16

4.1.2. Managers and Employees

Employees are individuals employed by the company for its operations. Managers are employees
responsible for the performance of individuals and processes.
Their interests include appropriate remuneration, job security, career advancement, work-life balance
a healthy work environment.
If their interests are not met, potential results are poor work performance, resignation (leaving the
company), and collective action such as strikes.

Example 2: Internal Stakeholders

The following are examples of Yadset Synthetics’s internal stakeholders:

As a company director, I am mainly interested in ensuring the company is operati
efficiently and profitably, fulfilling its objectives, and providing a return to the owne
(shareholders).
I also have long-term views about the company’s future, such as how it should ex
and earn more money.
Femi (Director)

Jahanara As a manager in the company, I am concerned with organising the workforce to

(Manager) ensure that the company’s activities – making plastic bottles for various customer
are carried out efficiently.
 Example 1 Reflection

Example 2: Internal Stakeholders

If I do this properly, the company will do well, and my job will be safe. I will continu
earn a good salary, and there may be a possibility of promotion.

As a worker in the factory, my main concern is getting the work done as well as
possible to ensure that my job is safe and that I have a secure income.
Nasir
I want to see the company do well so it continues in business and I keep my job.
(Employee)

4.2. Connected Stakeholders

Connected stakeholders have a contractual relationship with the company.

4.2.1. Shareholders
Shareholders are owners of the company.
Their primary interest would be to maximise the value of their investment. They may also have other
interests, such as ensuring the company is sustainable and has good ethical standing.
Shareholders may actively influence the company by managing it themselves or hiring managers and
directors aligned with their interests. They will scrutinise the performance of the company’s senior
management and may adjust their exposure to the company by buying or selling the company’s share

4.2.2. Providers of Finance (Lenders)

Providers of finance have invested in the company by lending money to it.
Their primary interest is ensuring that the agreed-upon interest and capital are repaid.
They will closely scrutinise the company’s performance and manage their exposure accordingly. If the
deem the company as having a high risk of default, they may not provide further financing and may e
initiate bankruptcy proceedings in the event of default.

4.2.3. Customers
Customers purchase the company’s goods and services.
Their interest is that the company’s products are fit for purpose and will continue to exist in the future
 Example 1 Reflection

support them.
Unsatisfied customers may give negative feedback on the company to their contacts and the public a
do business with competitors. They may also organise boycotts of the company’s products and take l
action against the company if there is a significant breach of the terms of sale.

4.2.4. Suppliers
Suppliers provide the inputs for the company’s operations.
Their interest is that they are promptly paid for provided supplies and to maintain a profitable long-term
relationship with the company.
If suppliers are not paid promptly, they may withdraw credit facilities and even cease to supply.

Example 3: Connected Stakeholders

The following are examples of Yadset Synthetics’s connected stakeholders:

As a shareholder, I want the value of my investment in the company to grow to
obtain a good return on my investment.
Like many shareholders, I expect the company to provide me with regular divide
Imena
payments out of profits, so I want the company to be profitable.
(shareholder)

As a lender, I want the company to pay me back the money they have borrowed
time and with interest.
I am interested in the company’s profitability and also its cash position. (Profitab
companies may have a shortage of cash.)
Sharif (Lender)

As a customer, I expect the company to provide goods or services that I want to

and give me value for the money I spend.
I may be dissatisfied if the company increases its prices or reduces the quality o
Shreya
products or services.
(Customer)

As a supplier to the company, the company is my customer. I want the company

buy my goods at a price and on terms that give me a satisfactory profit.
I expect the company to pay for its purchases promptly, at the agreed time.
Ajay (Supplier)
 Example 1 Reflection

4.3. External stakeholders

External stakeholders do not have a direct link to the company.

4.3.1. Government
The government rules the company’s region and enforces laws and regulations. It represents the peo
interest in the region.
The government’s interest would be to ensure the company’s operations are legitimate and comply w
applicable laws and regulations, provide jobs to the people, and ensure the appropriate corporation ta
paid.
There are various penalties and punishments for breaches of regulations, including criminal prosecuti
individual directors.

4.3.2. Special Interest (Lobby) Groups

Special interest groups promote a cause, including social, environmental, or political agendas.
Their interest would influence the company’s operations to support or further their cause.
Their activities may range from awareness campaigns to promote their agenda and lobbying for
government intervention to direct action against companies, including legal suits, protests, disruption
company operations, and boycotts.

4.3.3. Local Communities and General Public

A company exists within a local community, which will want to ensure their way of life, rights, environm
jobs, and other interests are protected.
The general public will be interested in the prevailing trends, including climate change and ethical
business conduct.
Activity 2: Reflection

1. What would be a manager’s main concerns about his employment?

 Example 1 Reflection

2. What would be an employee’s interests and expectations?

*Please use the notes feature in the toolbar to help formulate your answer.
1. What would be a manager’s main concerns about his employment?
Managers of a company are employees, as is the workforce. Managers will want to be paid well
(‘remuneration’). Many will also be thinking about promotion (career progression) and status.
Some may want to become successful in business themselves. Others may be concerned about j
security – whether they can keep their job. All managers will be interested in the company doing w
and being successful – then they will be more secure, and there will be better pay increases and
promotion prospects.
2. What would be an employee’s interests and expectations?
Employees below management levels are likely to want a fair wage or salary, good working condit
and job security.
They will also be concerned that the company should be successful so that their jobs are secure a
they can earn extra money for overtime (extra work outside normal hours).

5.1. Stakeholder Objectives, Conflicts, and Interactions

A company’s directors and senior managers may have difficulty keeping all stakeholders satisfied, as
some stakeholders’ interests may conflict with others’ interests. The problem can be severe when the
company’s business is going through a challenging period.
For example, when a company borrows money from a bank, the shareholders will want it to do so as
cheaply as possible so that profits, and therefore their dividends, are maximised. On the other hand, t
bank will want to charge a rate of interest that gives it a fair return for the risk it is taking in lending the
money.
Activity 3: Conflicts

Match the conflict of interest with the stakeholder groups involved.

Conflict of interest Stakeholder groups

Retaining profit for investment vs Paying dividends Employees and managers vs

Shareholders
Job security for part-time employees vs Job cuts to save
money Management vs General public

Growing the business vs Protecting the environment Employees vs Management

More wages and salaries vs Higher dividends Management vs Shareholders

 Example 1 Reflection

*Please use the notes feature in the toolbar to help formulate your answer.
Conflict of interest Stakeholder groups

Retaining profit for investment vs Paying dividends Management vs Shareholders

Job security for part-time employees vs Job cuts to save

money Employees vs Management

Growing the business vs Protecting the environment Management vs General public

Employees and managers vs

More wages and salaries vs Higher dividends Shareholders

There are other potential conflicts of interest between stakeholders.

For example, the government may want companies to employ more people, but company managers m
want to invest in automation. Customers wish to have prices lowered, while management wants to rai
prices.
Directors and senior management need to decide how to respond to the conflicting demands of
stakeholder groups.

Example 4: Responding to Conflict

1. A group of workers demand a pay rise.

What options are available to the manager?
A. Refuse the demand
B. Agree to the demand
C. Negotiate and agree to higher wages in return for productivity improvement measures.
2. Shareholders demand an increase in dividend payments.
How should the board of directors respond?
A. Refuse and say the company can’t afford it
B. Agree to the demand
C. Refuse the demand but indicate future dividend growth plans.
There is no correct answer to these questions. The circumstances surrounding each conflict are diffe
a manager must evaluate the situation carefully to decide on an appropriate response.

6.1. Power and Influence

 Example 1 Reflection

Definitions

Power – The ability to control another entity’s actions.

Influence – The ability to affect another entity’s thinking, decisions, and actions.
Stakeholders have certain levels of power and influence on a company.
For example, directors hold high power and influence on a company’s operations, whereas sharehold
generally do not.
However, shareholders can remove and appoint directors, and certain investors or investor groups ha
significant influence over directors.

Key Point

Power may be challenging to exercise, especially if collective action is required.

For example, shareholders have the power to remove and appoint directors. However, it may be
challenging to coordinate sufficient votes to do so.
 Example 1 Reflection

Example 5: Power and Influence

1. Who can decide where the cement factory should be built?

The directors have the power to decide where the factory will be built.
2. How are customers influencing the decision?
The customers can influence where the new factory should be built because they can get their ce
from another supplier if the new factory location is not convenient for them.
In this case, the influence of the customers comes from their ability to switch to an alternative sup
If the customers cannot switch suppliers, the customer will have less influence on the decision.

6.2. Exercising Power and Influence

The management of a company must consider two aspects of how their stakeholders might impact th
decisions:
 Example 1 Reflection

1. The possible actions the stakeholder might take in response to a decision/action.

2. What impact these actions might have on the organisation.
For example, customers may buy less of a company’s products if prices are raised. This decision may
hurt the company’s profits.
A company may need to estimate the probability of a stakeholder’s response and quantify its impact.

6.2.1. Internal Stakeholders

Internal
stakeholders What they might do Effect on the organisation

 Resign
 Lose motivation  Loss of staff
Junior managers  Be reluctant to do what their managers  Loss of efficiency
want  Loss of control

 Take strike action  Strike action could result in lost out

 Resign and sales
Workers  Go slow at work  Loss of staff
 Resist change  Other actions would reduce efficien

6.2.2. Connected Stakeholders

Connected
stakeholders What they might do Effect on the organisation

 Use their voting powers, for

example, the power to dismiss
directors
 Refuse to provide additional  Directors’ jobs may be at risk
Shareholders funding when the company  The board of directors may not get the extra
needs more money money it needs

 Take legal action if the company

falls behind with payments  If the company is in financial difficulty, lende
Lenders  Refuse to lend more money have considerable powers. The future of the
when the company needs it business may be at risk.

Customers  Stop buying the company’s

goods or services  Loss of sales and loss of profit

Suppliers  Refuse to supply the company  Actions by important suppliers could disrupt
with any more goods or services business through loss of supplies
 Demand immediate payment on  Adverse consequences for cash flows and p
 Example 1 Reflection

delivery
 Raise their prices

6.2.3. External Stakeholders

External
stakeholders What they might do Effect on the organisation

 Increased cost of compliance with laws

 Less retained profit for investment
Government  Make new laws  Restrictions may reduce
 Raise taxes effectiveness/competitiveness

 Attract publicity in the media, for  May lead to management deciding to cha
example, by demonstrating business practices
 Raising the awareness of other  Loss of revenue and profit if customers s
Pressure groups stakeholders, such as customers or buying the goods or services
suppliers  Business disruption caused by lack of su

7.1. The Mendelow (Power-Interest) Matrix

Management has limited time and resources and cannot completely satisfy the interests of all
stakeholders.
To support management in prioritising which stakeholders it should respond to, Mendelow proposes u
a power-interest matrix.
The amount of effort management takes to satisfy the needs of a stakeholder depends on the
stakeholder’s power and interest relative to other stakeholders.

7.1.1. Interest
A stakeholder’s level of interest in the company depends on its circumstances.
Activity 4: Level of Interest

Determine whether the stakeholder has a high or low interest in the company.
Level of interest (Hi
Stakeholder or Low)
 Example 1 Reflection

A shareholder owns 75 per cent of the shares in a company.

A customer buys a company’s products occasionally. The product is not expensive.

An investor owns a few shares in the company. She also owns shares in a large
number of other companies.

A full-time employee is the only wage-earner in his family, and his wages are just
enough to pay for the family’s living costs.

A supplier to the company sells 30 per cent of its total output each year to the
company.

*Please use the notes feature in the toolbar to help formulate your answer.
7.1.2. The Mendelow Power-Interest Matrix
Stakeholders are classified into four quadrants, depending on their power level and interest in the
company.

Quadrant Description

Key Players When stakeholders have a high level of interest and power, they are key players, and their v
High power will strongly influence management decisions. Close attention should be paid to these
and interest stakeholders.

Keep
If stakeholders have much power that they could use, but their interest in the organis
satisfied
is low, management should seek to keep them satisfied without involving them much
High power,
low interest Management would need to monitor issues that would increase their level of interest
 Example 1 Reflection

Quadrant Description

turn them into key players.

Suppose stakeholders are interested in what the organisation does, but their power
In that case, management should seek to keep the stakeholders informed as they m
alert issues to stakeholders with more power and influence. The stakeholders thems
Keep
are likely to have little impact on decisions.
informed
Low power, Management should monitor situations where these stakeholders may gain power o
high interest the company.

If stakeholders have little interest in the organisation and little power, there is no rea
Minimal
for management to concern themselves much with them.
effort
Low power Management should monitor prevailing trends and issues that might cause these
and interest stakeholders to increase their power and interest in the company.

Activity 5: Mendelow Matrix

Classify the stakeholder with the appropriate quadrant on the Mendelow Matrix:
 Key player
 Keep satisfied
 Keep informed
 Minimal effort
Stakeholder Quadrant

Founder of the company, who owns 80 per cent of the shares

Environmental pressure group

A bank that has made a small loan to the company.

Occasional customer

*Please use the notes feature in the toolbar to help formulate your answer.
Stakeholder Quadrant Notes

Founder of the company, Key player The company’s founder is a key player: they own 80% of the
 Example 1 Reflection

who owns 80 per cent of shares. So they have high power over the company’s activities
the shares and interest in the outcomes.

The pressure group has a low level of power because it cannot

directly change company policies but a high level of interest
because the company’s policies are important to the pressure
Environmental pressure Keep group. The pressure group could lobby more influential
group informed stakeholders for reforms.

A bank that has made a The bank that has made a small loan to the company has a high
small loan to the Keep level of power – the loan must be repaid – but a low level of
company. satisfied interest as the loan is small and unimportant to the bank.

The occasional customer has only a low level of power. Their

Minimal custom is of low importance to the overall business and may have
Occasional customer effort low interest because they may already use other companies.

Summary and Quiz

 A stakeholder is an entity that can affect or be affected by an organisation.
 An agent is someone who is given the authority to act on behalf of a principal. The principal provides the ag
with the power to act on their behalf.
 Internal stakeholders in a company are employed by and perform most of the company’s activities.
 Connected stakeholders in a company are individuals or organisations that have a contractual relationship
the company. They may have invested in the company or have direct dealings with it.
 External stakeholders are individuals, groups or organisations that are not directly involved in the company
its activities but may be interested in what the company does.
 A company’s directors and senior managers may have difficulty keeping all stakeholders satisfied, as some
stakeholders’ interests may conflict with others’ interests.
 Power is the ability to control another entity’s actions.
 Influence is the ability to affect another entity’s thinking, decisions, and actions.
 The amount of effort management takes to satisfy the needs of a stakeholder depends on the stakeholder’s
power and interest relative to other stakeholders.
 A stakeholder’s level of interest in the company depends on its circumstances.
 Mendelow’s matrix classifies stakeholders into four quadrants, depending on their power level and interest
company.
Example 1 Reflection