Chapter 1

Business Organizations and their Stakeholders.

Purpose, Type and Reasons for Existence of

Organizations:
 Organizations can achieve results which individuals cannot achieve by
themselves
 Definition of Organization: A social arrangement which pursues collective
goals, controls its own KEY performance and has a boundary separating it from
its environment.
 The common characteristics of organizations are as follows:
 They work towards a variety of objectives and goals
 There are several people who do different things resulting in specialization in
one activity.
 Organizations target to achieve good performance by working on improvements
of standards or meeting target goals in the best possible way.
 Organizations are based on formal, documented systems and procedures which
help them control their tasks.
 Mostly organizations are obtaining inputs like raw materials to process them
into saleable outputs which others can buy.
 Organizations are different from each other due to several reasons:
Sectors in which Organizations Operates:
1. Agriculture: To Produce and process food
2. Manufacturing: Acquiring raw materials using labor and technology to
convert raw material acquired into a product (e.g., a car)
3. Extractive/raw materials: This includes Extraction and refining of raw
materials (e.g., mining)
4. Energy: This includes Converting of one resource (e.g., coal) into another (e.g.,
electricity)
5. Retailing/distribution: To Deliver goods to the end consumer
6. Intellectual production: Involve in Production of intellectual property (e.g.,
software, publishing, films, music)
7. Service industries: This involves different areas like retailing, distribution,
transport, banking, various business services (e.g., accountancy, advertising)
and public services such as education, medicine

Organizations are categorized into different types

including:
1. Commercial
2. Not for profit
3. Public sector
4. Charities
5. Trade unions
6. Local authorities
7. Non-governmental organizations (NGOs)
8. Co-operative societies and mutual association

Areas of differentiate between Profit and Non-

Profit Organizations:
Public Sector vs Private Sector:
Organizations which are owned and run by the government fall under the public sector. Apart from these
all the others are part of the private sector.

Limited Liability Companies

 These companies are denoted by X Ltd or X plc in the UK
 These companies hold the status of separate legal entity that means they are
separate from their owners (shareholders).
 This means that the shareholder’s liability is limited to the amount they have
invested in that company, which is the key benefit.
 Main advantages include:
 More money is available for investment from different shareholders
 These organizations can easily raise capital from banks and other lenders
 Ownership and control are legally separated, investors need not run the
company
 However, there are some drawbacks for such companies which include:
 Greater administrative burden and cost, especially for listed entities
 Lack of privacy as financial statements are publicly available
 In UK, there are 2 types of limited companies:
1. Private limited companies (e.g., X Limited)
Co-operative Societies and Mutual Associations
 Owned by their workers or customers, who share the profits
 Some common features include:
 Open membership
 Democratic control (one member, one vote)
 Distribution of the surplus in proportion to purchases
 Promotion of education
 However, unlike limited companies there is some measure of democratic
control, this is based on one share, one vote which means:
 No shareholder can dominate a co-operative.
 Mutual associations are organizations that exist for the mutual benefit of their
members. Such as:
 Savings and loan organizations (building societies in the UK) in which the
members are the savers who deposit their savings in the organization.
 As there are no external shareholders to pay dividends to, the profits of the
organization are enjoyed by members in the form of more favorable interest
rates.
 A person or group of people who have a stake in the organization.

Stakeholders
Agency Relationship:

 Managers of the organizations are the agents for the stakeholders.

 Agency relationship refers to the concept of separation between an
organization’s owners (the shareholders) as the ‘principal’, and those managing
the organization on their behalf (the company directors) as their “agent”.
Primary vs Secondary Stakeholders

 Primary stakeholders:
 They are the shareholders or the partners of the proprietor.
 Their major stake/interest is the money invested in the business.
  Therefore, they expect a return on their investment so that their wealth
increases either in terms of growing profits or increasing share value.
 Secondary stakeholders:
All other parties apart from primary stakeholders who have a stake/interest in the business fall under this
category.

 Usually owned by a small number of people (family members), and their shares
are not easily transferable usually

1. Public limited companies (X plc)

Stakeholders  What is at stake? What is expected out of them from the

business?

Directors/managers  Livelihoods 
employees and trade unions
 Careers
 Reputations
 Fair and growing
remuneration
 Career progression
 Safe working
environment
 Training
 Pension

Customers  Their custom 

 Products/services
that are of good
quality and value
 Fair terms of trade
 Continuity of
supply
Suppliers and other business  The items they 
partners
supply
 Fair terms of trade
 Prompt payment
 Continuity

Lenders Money lent A return on their investment:

 Interest
 Repayment of capital

Government & it’s agencies  National 

infrastructure used
by business
 The welfare of
employees
 Tax revenue
 Reasonable
employment and
other business
practices
 Steady or rising
stream of tax
revenue

The local community and  National Reasonable employment and other business
public at large practices
infrastructure used
by business
 The welfare of
employees
 The natural environment  The environment Reasonable environmental and other
business practices
shared by all

Types of Stakeholders by Johnson & Scholes (2005):

As per this model internal and connected falls under “primary stakeholders” category whereas external is
part of “Secondary stakeholders”.

Stakeholder Conflict
 As the interests of different stakeholders may be widely different, conflict
between stakeholders may exist.
 Potential for such conflict should be considered by managers while policy
setting
 Managers must be prepared to deal such scenarios with their effecting
organization’s performance.
 Most commonly occurring conflict is usually between managers and
shareholders. The relationship gets disputed when the managers’ decisions
focus on maintaining the organization as a vehicle for their managerial skills
whereas the shareholders are pleased to see changes which will enhance their
dividend stream and increase the value of their shares.
 These conflicts can be seriously damaging to the company’s stability.
 Shareholders may force resignations and divestments of businesses
 Managers may try to preserve their empire and provide growth at the same
time by undertaking risky policies.
  Managers despite their willingness need to acknowledge that the
shareholders have the major stake as owners of the company and its assets
therefore focus shall be paid on profit maximizations and increasing worth
of the company’s shares
 This may happen at the expense of long-term benefit of the company
resulting in hijacking of long-term strategic plans of the company as focus is
on a particular year profitability compromising other prospects.

Mende Low’s Matrix

 Stakeholders can be mapped on Mende low’s Matrix in terms of:
 How interested they are in the company’s strategy (would they want or resist it)
 How much power they have over the company’s strategy (would they be able to
resist it)
 The matrix can be used to:
 Track the changing influences between different stakeholder groups over
time.
 This can act as a trigger to change strategy as necessary
 Assess the likely impact that a strategy will have on different stakeholders’
group
 Its aim is to assess:
 Whether stakeholders’ resistance is likely to inhibit the success of the
strategy
 What policies or actions may ease the acceptance of the strategy

Conclusion:
If an organization effectively manages its stakeholder’s relationship it can make strategic gains. For this
purpose, it may have to measure the level of satisfaction of its stakeholders which can be achieved by
having qualitative and quantitative measures though it’s not a straightforward task.