Business Organisations and their Stakeholders, The Business Environment

Question 1

CHAPTER 1 : BUSINESS ORGANISATIONS AND THEIR STAKEHOLDERS

Answer 1

CHAPTER 1 : BUSINESS ORGANISATIONS AND THEIR STAKEHOLDERS

Question 2

A1 The purpose and types of business organisation

(a) Define ‘business organisations’ and explain why they are formed.
(b) Describe common features of business organisations.
(c) Outline how business organisations differ.
(d) List the industrial and commercial sectors
in which business organisations operate.

Answer 2

(e) Identify the different types of business organisation and their main characteristics:

(i) Commercial
(ii) Not-for-profit
(iii) Public sector
(iv) Non-governmental organisations
(v) Co-operatives

Question 3

A2 Stakeholders in business organisations

(a) Define stakeholders and explain the agency relationship in business and how it may vary in different types of business organisation.
(b) Define internal, connected and external stakeholders and explain their impact on the organisation.

Answer 3

(c) Identify the main stakeholder groups and the objectives of each group.
(d) Explain how the different stakeholder groups interact and how their objectives may conflict with one another.
(e) Compare the power and influence of various stakeholder groups and how their needs should
be accounted for, such as under the Mendelow framework.

Question 4

EXAM FOCUS POINT :
This chapter lays the foundation for an understanding of what organisations are and how they are
controlled.

Answer 4

According to the Study Guide, it is not sufficient to simply understand these topics – you must also be able to apply your knowledge.

Question 5

1. Purpose of Business Organisations

Answer 5

1. Purpose of Business Organisations

Question 6

What all organisations have in common 1

An organisation is: ‘a social arrangement which pursues collective goals, which controls its own performance
and which has a boundary separating it from its environment’.

Answer 6

Here are some examples of organisations.
 A multinational car manufacturer (eg Ford)
 A local authority
 An accountancy firm (eg Ernst & Young)
 A trade union (eg Unison)
 A charity (eg Oxfam)
 An army

Question 7

What all organisations have in common 2

The common characteristics of organisations are as follows.
(a) Organisations are preoccupied with performance, and meeting or improving their standards.

(b) Organisations contain formal, documented systems and procedures which enable them to control
what they do.

Answer 7

(c) Different people do different things, or specialise in one activity.
(d) They pursue a variety of objectives and goals.

(e) Most organisations obtain inputs (eg materials), and process them into outputs (eg for others to
buy) .

Question 8

Why do organisations exist?

Organisations can achieve results which individuals cannot achieve by themselves.

(a) Organisations overcome people’s individual limitations, whether physical or intellectual.
(b) Organisations enable people to specialise in what they do best.
(c) Organisations save time, because people can work together or do two aspects of a different task at the same time.

Answer 8

(d) Organisations accumulate and share knowledge.
(e) Organisations enable synergy: by bringing together two individuals their combined output will exceed their output if they continued working separately.

In brief, organisations enable people to be more productive.

Question 9

How organisations differ 1

The common elements of organisations were described earlier, but organisations also differ in many
ways. Here are some possible differences.

(a) Ownership
Some organisations are owned by private owners or shareholders. These are private sector
organisations. Public sector organisations are owned by the government.

(b) Control
Some organisations are controlled by the owners themselves but many are controlled by people
working on their behalf. Some are indirectly controlled by government-sponsored regulators.

Answer 9

(c) Activity
What organisations actually do can vary enormously. They could be manufacturing organisations,
for example, or they could be a healthcare service.

(d) Profit or non-profit orientation
Some businesses exist to make a profit. Others, for example the army, are not profit orientated.

Question 10

How organisations differ 2

(e) Legal status
Organisations may be limited companies or partnerships.

(f) Size
The business may be a small family business or a multinational corporation.

Answer 10

(g) Sources of finance
Businesses can raise finance by borrowing from banks or government funding or issuing shares.

(h) Technology
Businesses have varying degrees of technology use. For example, computer firms will have high
use of technology but a corner shop will have very low use.

Question 11

What the organisation does

Organisations do many different types of work. Here are some examples. (Industry/Activity) :

Agriculture : Producing and processing food

Manufacturing : Acquiring raw materials and, by the application of labour and technology,
turning them into a product (eg a car)

Extractive/raw materials : Extracting and refining raw materials (eg mining)

Answer 11

Energy : Converting one resource (eg coal) into another (eg electricity)

Retailing/distribution : Delivering goods to the end consumer

Intellectual production : Producing intellectual property (eg software, publishing, films, music)

Service industries : Including retailing, distribution, transport, banking, various business services (eg accountancy, advertising) and public services such as education, medicine

Question 12

2. Types of Business Organisation

Answer 12

2. Types of Business Organisation

Question 13

Profit vs not-for-profit orientation

An important difference in the list above is between profit orientated (‘commercial’) and not for profit
orientated (‘non-profit’) organisations.

The basic difference in outlook is expressed in the diagram below. Note the distinction between primary
and secondary goals. A primary goal is the most important: the other goals support it.

Answer 13

Diagram OneNote 1

Question 14

Private vs public sector

 Private sector.
Organisations not owned or run by central or local government, or government agencies

Answer 14

 Public sector.

Organisations owned or run by central or local government or government agencies

Question 15

Private sector commercial business organisations

A commercial business organisation exists to make a profit. In other words, the costs of its activities
should be less than the revenues it earns from providing goods or services. Profits are not incidental to its activities but the driving factor.

Answer 15

Business organisations come in all different shapes and sizes, and there is a choice of legal structure.

Question 16

Private sector commercial business organisations -
Legal status

Someone setting up a business can choose to go into business alone, take on one or more partners who
also share the profits of the business, or set up a limited company.

Answer 16

no note

Question 17

Private sector commercial business organisations -
Limited companies 1

A limited company has a separate legal personality from its owners (shareholders). The shareholders
cannot normally be sued for the debts of the business unless they have given some personal guarantee.
Their risk is generally restricted to the amount that they have invested in the company when buying the
shares. This is called limited liability.

Answer 17

Whereas sole traderships and partnerships are normally small or medium-sized businesses, limited company status is used for businesses of any size.

Question 18

Private sector commercial business organisations -
Limited companies 2

The ownership and control of a limited company are legally separate even though they may be vested in
the same individual or individuals.

(a) Shareholders are the owners but have limited rights, as shareholders, over the day to day running of the company. They provide capital and receive a return. Shareholders could be large institutional investors (such as insurance companies and pension funds), private individuals, or employees.

Answer 18

(b) Directors are appointed by shareholders to run the company. In the UK, the board of directors controls management and staff, and is accountable to the shareholders, but it has responsibilities towards both groups – owners and employees alike.
(i) Executive directors participate in the daily operations of the organisation.
(ii) Non-executive directors are invited to join in an advisory capacity, usually to bring their particular skills or experience to the discussions of the board to exercise some overall guidance.
(c) Operational management usually consists of career managers who are recruited to operate the
business, and are accountable to the board.

Question 19

Private sector commercial business organisations -
Types of limited company

In the UK, limited companies come in two types: private limited companies (eg X Limited) and public
limited companies (eg X plc). They differ as follows.

(a) Number of shareholders. Most private companies are owned by only a small number of shareholders. Public companies generally are owned by a wider proportion of the investing public.
(b) Transferability of shares. Shares in public companies can be offered to the general public. In
practice this means that they can be traded on a stock exchange. Shares in private companies, on the other hand, are rarely transferable without the consent of the shareholders.
(c) Directors as shareholders. The directors of a private limited company are more likely to hold a substantial portion of the company’s shares than the directors of a public company.

Answer 19

(d) Source of capital
(i) A private company’s share capital will normally be provided from three sources.
(1) The founder or promoter
(2) Business associates of the founder or employer
(3) Venture capitalists
(ii) A public company’s share capital, in addition, can be raised from the public directly, or through institutional investors, using recognised markets.

Many companies start in a small way, often as family businesses which operate as private companies, then grow to the point where they become public companies and can invite investors to subscribe for shares. The new capital thus made available enables the firm to expand its activities and achieve the advantages of large scale operation.

Question 20

Private sector commercial business organisations -
Advantages and disadvantages of limited companies

Advantages
 More money is available for investment.
 Risk is reduced for investors thanks to limited liability.
 They have a separate legal personality. A company can own property, make contracts etc.
 Ownership is legally separate from control. Investors need not get involved in operations.
 No restrictions on size apply. Some companies have millions of shareholders.
 They offer flexibility. Capital and enterprise can be brought together.

Answer 20

Disadvantages
 Legal compliance costs. Because of limited liability, the financial statements of most limited companies have to be audited, and then published for shareholders.
 Shareholders have little practical power, other than to sell their shares to a new group of managers, although they can vote to sack the directors.

Question 21

The public sector

The public sector comprises all organisations owned and run by the government and local government.

Here are some examples.
 The armed forces
 Government departments
 Most schools and universities

Answer 21

Public sector organisations have a variety of objectives.

 The UK Pensions Service administers part of the social security system relating to pensions, benefits and retirement information.
 The Post Office makes a profit from mail services, although it does have a social function too.

Question 22

The public sector - Key characteristics of the
public sector

(a) Accountability, ultimately, to Parliament
(b) Funding. The public sector can obtain funds in three main ways.
(i) Raising taxes
(ii) Making charges (eg for prescriptions)
(iii) Borrowing

Answer 22

(c) Demand for services. There is a relationship between the price charged for something and the ‘demand’. In the public sector demand for many services is practically limitless.
(d) Limited resources. Despite the potentially huge demand for public services, constraints on government expenditure mean that resources are limited and that demand cannot always be met.

Question 23

The public sector - Advantages

(a) Fairness. The public sector can ensure that everyone has access to health services.
(b) Filling the gaps left by the private sector. This can be done by providing public goods, such as street lighting.
(c) Public interest. Governments once believed the public interest was best served if the state ran certain services.

Answer 23

(d) Economies of scale. Costs can be spread if everything is centralised.
(e) Cheaper finance. Taxes or borrowing backed by government guarantees might be cheaper than
borrowing at commercial rates.
(f) Efficiency. The public sector is sometimes more efficient than the private sector. The UK’s National Health Service, despite its well-publicised problems, has lower administration costs and serves more of the population than the private sector does in the US.

Question 24

The public sector - Disadvantages

(a) Accountability. Inefficiency may be ignored as taxpayers bear losses.
(b) Interference. Politicians may not be familiar with the operation of a business and yet political pressures and indecision may influence adversely the decision-making process. Pressures to get elected may lead to the deferral of necessary but unpopular decisions.

Answer 24

(c) Cost. There can be conflict between economy of operation and adequacy of service. The public will demand as perfect a service as possible but will not wish to bear the cost involved

Question 25

Non-governmental organisations

A non-governmental organisation (NGO) is a legally constituted organisation of people acting together
independently from any form of government. Non-governmental organisations (NGOs) are bodies which are not directly linked with national government. The description ‘NGO’ generally applies to groups whose primary aim is not a commercial one, but within this the term is applied to a diverse range of activities, aimed at promoting social, political or environmental change. However, NGOs are not necessarily charities and, although they may have political aims, they are not political parties.

Answer 25

NGOs need to engage in fund raising and mobilisation of resources in order to ensure that they are
operating effectively and efficiently (for example in terms of donations received, volunteer labour or
materials). This process may require quite complex levels of organisation. The following are some
organisational features of NGOs.
 Staffing by volunteers as well as full-time paid employees
 Finance from grants or contracts
 Skills in advertising and media relations
 Some kind of national ‘headquarters’
 Planning and budgeting expertise

It can be seen, therefore, that NGOs may need to possess an efficient level of organisation structure,
much in the same way as a traditional commercial undertaking.

Question 26

Co-operative societies and mutual associations

Co-operatives are businesses owned by their workers or customers, who share the profits. Here are some
of the features they have in common.
 Open membership
 Democratic control (one member, one vote)
 Distribution of the surplus in proportion to purchases
 Promotion of education

Answer 26

Although limited companies also have some measure of democratic control, this is on the basis of one share, one vote. So one shareholder could dominate a company if they hold a majority of shares. This would not happen in a co-operative.

Question 27

Co-operative societies and mutual associations -
CASE STUDY

A major example of a co-operative in the UK is the Co-operative Retail Store network. In addition there is the Co-operative Wholesale Society and the Co-operative Bank.

Answer 27

Mutual associations are similar to co-operatives in that they are ‘owned’ by their members rather than
outside investors.
(a) Some financial companies used to be mutual associations. However, building societies in the UK
such as the Halifax converted from being mutual associations to being banks. The Nationwide
Building Society has held out against this, so far citing the lower interest rates it can offer to borrowers.
(b) Credit unions are examples of mutual associations. They are financial institutions owned and controlled by their members.

Question 28

Co-operative societies and mutual associations -
QUESTION (Legal Form)

Florence Nightingale runs a successful and growing small business as a sole trader. She wishes to expand the business and has her eyes on Scutari Ltd, a small private limited company in the same line. After the acquisition, she runs the two businesses as if they were one operation making no distinction between them.

What is the legal form of the business she is running?

Answer 28

ANSWER
This is quite a tricky question. For example, if suppliers have contracts with Scutari Ltd, the contract is with the company, and Florence is not legally liable for the company’s debts. If their contracts are with Florence, then they are dealing with her personally. Florence has to make a choice.
(a) She can run the entire business as a sole trader, in which case Scutari Ltd’s assets must be
transferred to her.
(b) She can run her entire business as a limited company, in which case she would contribute the
assets of her business as capital to the company.
(c) She can ensure that the two business are legally distinct in their assets, liabilities, income and
expenditure.

Question 29

3. Stakeholder Goals and Objectives

Answer 29

3. Stakeholder Goals and Objectives

Question 30

Managers are not completely free to set objectives: they have different groups of stakeholders to
consider. The managers act as agents for the stakeholders, whose influence varies from organisation to organisation.

The agency relationship in business therefore refers to the separation between an organisation’s owners
(the shareholders) as the ‘principal’, and those managing the organisation on their behalf (the company directors) as their ‘agents’.

Answer 30

Those running the company should do so in a way that best serves the interests of shareholders (rather
than pursuing their own interests). It is important that management interests are aligned with the organisation’s goals, so that they act in a way that benefits shareholders and other stakeholders.

The concept of agency is particularly relevant for large organisations, where there is a large separation
between company ownership and its management.

Question 31

Stakeholders are those individuals or groups that, potentially, have an interest in what the organisation
does. These stakeholders can be within the organisation, connected to the organisation or external to the organisation.

Answer 31

There are three broad types of stakeholder in an organisation, as follows.

 Internal stakeholders (employees, management)
 Connected stakeholders (shareholders, customers, suppliers, financiers)
 External stakeholders (the community, government, pressure groups)

Question 32

Internal stakeholders: employees and management

Because employees and management are so intimately connected with the company, their objectives are likely to have a strong influence on how it is run. They are interested in the following issues.

(a) The organisation’s continuation and growth. Management and employees have a special interest
in the organisation’s continued existence.
(b) Individual interests and goals. Managers and employees have individual interests and goals which can be harnessed to the goals of the organisation.

Answer 32

Internal stakeholder : Managers and employees

Interests to defend :
 Jobs/careers
 Money
 Promotion
 Benefits
 Satisfaction 

 Response risk :
 Pursuit of 'systems goals' rather than
shareholder interests
 Industrial action
 Negative power to impede implementation
 Refusal to relocate
 Resignation

Question 33

Connected stakeholders 1

If management performance is measured and rewarded by reference to changes in shareholder value then shareholders will be happy, because managers are likely to encourage long-term share
price growth.

Answer 33

Connected stakeholder : Shareholders (corporate
strategy)

Interests to defend :
 Increase in shareholder wealth, measured by profitability, P/E ratios, market capitalisation, dividends and yield
 Risk

Response risk :
 Sell shares (eg to predator) or boot out management

Question 34

Connected stakeholders 2

Connected stakeholder : Bankers (cash flows)

Interests to defend :
 Security of loan
 Adherence to loan agreements

Response risk :
 Denial of credit
 Higher interest charges
 Receivership

Answer 34

Connected stakeholder : Suppliers (purchase
strategy)

Interests to defend :
 Profitable sales
 Payment for goods
 Long-term relationship

Response risk :
 Refusal of credit
 Court action
 Wind down relationships

Question 35

External stakeholders 1

External stakeholder groups – the government, local authorities, pressure groups, the community at large, professional bodies – are likely to have quite diverse objectives.

Answer 35

External stakeholder : Government

Interests to defend :
 Jobs
 Training
 Tax

Response risk :
 Tax increases
 Regulation
 Legal action

Question 36

External stakeholders 2

External stakeholder : Interest/pressure groups

Interests to defend :
 Pollution
 Rights
 Other

Response risk :
 Publicity
 Direct action
 Sabotage
 Pressure on government

Answer 36

External stakeholder : Professional bodies

Interests to defend :
 Members’ ethics

Response risk :
 Imposition of ethical standards

Question 37

Another approach

Stakeholders may also be analysed by reference
to whether they have a contractual relationship with
the organisation. Stakeholders who have such a relationship are called primary stakeholders,
while those who do not are known as secondary stakeholders.

Answer 37

The primary stakeholder category thus includes
internal and connected stakeholders, while the secondary stakeholder category equates to external
stakeholder status.

Question 38

Stakeholder conflict 1

Since their interests may be widely different, conflict between stakeholders can be quite common.
Managers must take the potential for such conflict into account when setting policy and be prepared to
deal with it if it arises in a form that affects the organisation.

Answer 38

A relationship in which conflict between stakeholders is vividly characterised is that between managers
and shareholders. The relationship can run into trouble when the managers’ decisions focus on maintaining the corporation as a vehicle for their managerial skills while the shareholders wish to see radical changes so as to enhance their dividend stream and increase the value of their shares. The shareholders may feel that the business is a managerial corporation run for the benefit of managers and employees without regard for the objectives of the owners. The conflict in this case can be seriously detrimental to the company’s
stability.

Question 39

Stakeholder conflict 2

(a) Shareholders may force resignations and divestments of businesses, while managers may seek to preserve their empire and provide growth at the same time by undertaking risky policies.

Answer 39

(b) In most cases, however, managers cannot but acknowledge that the shareholders have the major
stake as owners of the company and its assets. Most companies therefore focus on making profits and increasing the market value of the company’s shares, sometimes at the expense of the long-term benefit of the company. Hence long-term strategic plans may be ‘hijacked’ by the need to make a sizeable profit in one particular year; planning horizons are reduced and investment in long-term business prospects may be shelved.

Clearly, each stakeholder group considers itself in some way a client of the organisation, thus broadening the debate about organisation effectiveness

Question 40

Stakeholder mapping: power and interest 1

Mendelow (1991) suggests that stakeholders may be positioned on a matrix whose axes are power held
and likelihood of showing an interest in the organisation’s activities. These factors will help define the type of relationship the organisation should seek with its stakeholders.

Answer 40

Diagram OneNote 2

Question 41

Stakeholder mapping: power and interest 2

(a) Key players are found in segment D: strategy must be acceptable to them, at least. An example would be a major customer. These stakeholders may even participate in decision-making.
(b) Stakeholders in segment C must be treated with care. While often passive, they are capable of
moving to segment D. They should therefore be kept satisfied. Large institutional shareholders might fall into segment C.
(c) Stakeholders in segment B do not have great ability to influence strategy, but their views can be important in influencing more powerful stakeholders, perhaps by lobbying. They should therefore be kept informed. Community representatives and charities might fall into segment B.
(d) Minimal effort is expended on segment A.

Answer 41

A single stakeholder map is unlikely to be appropriate for all circumstances. In particular, stakeholders may move from quadrant to quadrant when different potential future strategies are considered.

Stakeholder mapping is used to assess the significance of stakeholder groups. This in turn has implications for the organisation.
(a) The framework of corporate governance should recognise stakeholders’ levels of interest and power.
(b) It may be appropriate to seek to reposition certain stakeholders and discourage others from
repositioning themselves, depending on their attitudes.
(c) Key blockers and facilitators of change must be identified.

Question 42

Stakeholder mapping: power and interest 3

Each of these groups has three basic choices.
 Loyalty.
They can do as they are told.

 Exit.
For example by selling their shares, or getting a new job.

 Voice.
They can stay and try to change the system. Those who choose voice are those who can, to varying degrees, influence the organisation. Influence implies a degree of power and willingness to exercise it.

Answer 42

Existing structures and systems can channel stakeholder influence.
(a) They are the location of power, giving groups of people varying degrees of influence over strategic
choices.
(b) They are conduits of information, which shape strategic decisions.
(c) They limit choices or give some options priority over others. These may be physical or ethical
constraints over what is possible.
(d) They embody culture.
(e) They determine the successful implementation of strategy.
(f) The firm has different degrees of dependency on various stakeholder groups. A company with a cash flow crisis will be more beholden to its bankers than one with regular cash surpluses.

Question 43

Stakeholder mapping: power and interest 4

So, different stakeholders will have their own views as to strategy. As some stakeholders have negative
power, in other words power to impede or disrupt the decision, their likely response might be
considered.

Answer 43

EXAM FOCUS POINT :
There is an article on the ACCA website entitled “Communicating core values and mission” that is
relevant to material in this section.

Question 44

The strategic value of stakeholders

The firm can make strategic gains from managing stakeholder relationships. Over the years various
theories and studies have revealed the following correlations.
(a) A correlation between employee and customer loyalty (eg reduced staff turnover in service firms
generally results in more repeat business).
(b) Continuity and stability in relationships with employees, customers and suppliers is important in
enabling organisations to respond to certain types of change, necessary for business as a sustained activity

Answer 44

Responsibilities towards customers are mainly those of providing a product or service of a quality that
customers expect, and of dealing honestly and fairly with customers.

Responsibilities towards suppliers are expressed mainly in terms of trading relationships.
(a) The organisation’s size could give it considerable power as a buyer. One ethical guideline might
be that the organisation should not use its power unscrupulously.
(b) Suppliers might rely on getting prompt payment in accordance with the terms of trade negotiated
with its customers.
(c) All information obtained from suppliers and potential suppliers should be kept confidential.

Question 45

Measuring stakeholder satisfaction

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

Answer 45

Stakeholder group : Employees
Measure : Staff turnover; pay and benefits relative to market rate; job vacancies

Stakeholder group : Government
Measure : Pollution measures; promptness of filing annual returns; accident rate; energy efficiency

Stakeholder group : Distributors
Measure : Share of joint promotions paid for; rate of running out of inventory

Question 46

4. Question and Answer

Answer 46

4. Question and Answer

Question 47

1 Which of the following defines an organisation?
A A social arrangement which pursues collective goals, which controls its own performance and which has a boundary separating it from its environment
B A social arrangement which exists to make a profit, controls its own performance and which
operates within certain boundaries

Answer 47

A This is the definition of an organisation. Not all organisations exist to make a profit.

Question 48

2 A private sector organisation is one owned or run by:
A Central government
B Local government
C Government agencies
D None of the above

Answer 48

D None of the above. A public sector organisation is owned or run by central or local government.

Question 49

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

Answer 49

C Co-operatives are owned by their workers or customers.

Question 50

4 Which one of the following are examples of internal stakeholders?
A Shareholders
B Employees  
C Suppliers
D Financiers

Answer 50

B The others are all connected stakeholders.

Question 51

5 According to Mendelow’s matrix, stakeholders in segment C (low interest, high power) should be kept
informed. Is this true or false?

Answer 51

False. Stakeholders in this segment should be kept satisfied.

Question 52

Attempt the questions below from the Practice Question Bank

Q1, Q2,

Answer 52

Q3, Q4

Question 53

CHAPTER 2 : THE BUSINESS ENVIRONMENT

Answer 53

CHAPTER 2 : THE BUSINESS ENVIRONMENT

Question 54

A3 Political and legal factors affecting business
(a) Explain how the political system and government policy affect the organisation.
(b) Describe the sources of legal authority, including supranational bodies, national and regional governments.
(c) Explain how the law protects the employee and the
implications of employment legislation for the
manager and the organisation.
(d) Identify the principles of data protection
and security.

Answer 54

(e) Explain how the law promotes and protects health and safety in the workplace.
(f) Recognise the responsibility of the individual and organisation for compliance with laws on data protection, security and health and safety.
(g) Outline principles of consumer protection, such as sale of goods and simple contract.

Question 55

A6 Social and demographic factors

(a) Explain the medium- and long-term effects of social and demographic trends on business outcomes and the economy.
(b) Describe the impact of changes in social structure, values, attitudes and tastes on the organisation.
(c) Identify and explain the measures that governments may take in response to the medium and long-term impact of demographic change.

Answer 55

A7 Technological factors
(a) Explain the potential effects of technological change on the organisation structure and strategy:
(i) Downsizing
(ii) Delayering
(iii) Outsourcing
(b) Describe the impact of information technology and
information systems development on business processes and the changing role of the accountant in business as a result of technological advances..

Question 56

A8 Environmental factors
(a) List ways in which the business can affect or be affected by its physical environment.
(b) Describe ways in which businesses can operate more efficiently and effectively to limit damage to the environment.
(c) Identify the benefits of economic sustainability to
stakeholders.

Answer 56

A9 Competitive factors

(a) Identify a business’s strengths, weaknesses, opportunities and threats (SWOT) in a market and the main sources of competitive advantage.
(b) Identify the main elements within Porter’s value chain and explain the meaning of a value network.
(c) Explain the factors or forces that influence the level of competitiveness in an industry or sector using Porter’s five forces model.
(d) Describe the activities of an organisation that affect its competitiveness:
(i) Purchasing
(ii) Production
(iii) Marketing
(iv) Service

Question 57

1. Analysing the Business Environment

Answer 57

1. Analysing the Business Environment

Question 58

Whatever the overall strategic management method used, no organisation is likely to achieve its aims if
it fails to take into account the characteristics of the environment in which it operates.
The environment is everything that surrounds an organisation, physically and socially.
Environmental analysis is one of the inputs to the strategy-making process. Johnson and Scholes suggest the following procedure:

Answer 58

Step 1 Assess the nature of the environment (eg is it changing?).

Step 2 Identify those influences which have affected the organisation in the past or which are
likely to do so in future.

Step 3 Prepare a structural analysis identifying the ‘key forces at work in the immediate or competitive environment’.

Question 59

These steps should identify important developments.

Then the following questions should be asked.

Answer 59

Step 4 What is the organisation’s position in relation to other organisations?

Step 5 What threats and/or opportunities are posed by the environment?

Question 60

An organisation’s environment may be examined in a number of ways.
(a) Global/local. Some organisations operate worldwide. However, they still have to be sensitive to
the local requirements of the countries or markets they operate in or export to. Some companies are much more exposed to global competition than others.

Answer 60

(b) General/task: this is the method we will use.
(i) The general (or macro) environment covers all those factors influencing all organisations indirectly, for example: general economic trends, population growth, new technology. These factors are abbreviated to PEST (political-legal, economic, social-cultural,
technological) factors.
(ii) The task (or micro) environment includes those areas which have a direct impact on the organisation, such as its ability to acquire raw materials, its competitors and its customers. Porter (1980) analyses the task environment into five competitive forces,
which are discussed in Section 13.

Question 61

The distinction is not hard and fast, and is drawn for convenience only.

Diagram OneNote 3

Answer 61

EXAM FOCUS POINT :

PEST analysis is a useful tool to employ as an initial survey of conditions and options.

Question 62

The environment is a source of uncertainty. In other words, decision-makers do not have sufficient
information about environmental factors, and many things are out of their control. The overall degree of
uncertainty may be assessed along two axes: simplicity/complexity and stability/dynamism.

(a) Simplicity/complexity
(i) The variety of influences faced by an organisation. The more open an organisation is, the greater the variety of influences. The greater the number of markets the organisation operates in, the greater the number of influences to which it is subject.

Answer 62

(ii) The amount of knowledge necessary. Some environments, to be handled successfully, require knowledge. All businesses need to have knowledge of the tax system, for example, but only pharmaceuticals businesses need to know about mandatory testing procedures for new drugs.

(iii) The interconnectedness of environmental influences causes complexity. Importing and
exporting companies are sensitive to exchange rates, which themselves are sensitive to interest rates. Interest rates then influence a company’s borrowing costs. Scenario-building and modelling are ways of dealing with complexities to develop an understanding of environmental conditions.

Question 63

(b) Stability/dynamism
(i) An area of the environment is stable if it remains the same. (For example, investors get nervous about a change in government.) Firms which can predict demand face a stable environment.
(ii) An unstable environment changes often. The environment of many fashion goods is unstable.

Answer 63

As a rule of thumb, use the following checklist for uncertainty.
 Simple (few environmental influences to worry about) and stable: low uncertainty
 Complex and stable: low to moderate uncertainty
 Simple and unstable: moderate to high uncertainty
 Complex and unstable: high uncertainty

Question 64

The changing environment 1

Changes in the business environment have been driven by a number of developments. Here are some of the changes that have happened.

(a) Globalisation of business – increased competition and global customers as domestic markets become saturated, with companies able to compete easily anywhere in the world
(b) Science and technology developments, especially in communications (the internet) and transport (particularly air travel)
(c) Mergers, acquisitions and strategic alliances
(d) Changing customer values and behaviour

Answer 64

(e) Increased scrutiny of business decisions by government and the public
(f) Increased liberalisation of trade, and deregulation and co-operation between business and government easing access to foreign markets
(g) Changes in business practices – downsizing, outsourcing and re-engineering
(h) Changes in the social and business relationships between companies and their employees, customers and other stakeholders

Question 65

The changing environment 2

As companies have become exposed to more international competition, at the same time as having
greater access to international markets, their preferred choice of organisational structure has been affected. This has been evident, as discussed earlier, in the shift away from mechanistic and bureaucratic organisations towards flatter structures with more flexible operating arrangements. Network forms of organisation and ‘virtual’ organisations are another manifestation of this trend. The need for strategic international alliances has increased with the need to understand and access foreign markets. The development of communications technology (email, the internet) is the key factor that has made such relationships possible.

Answer 65

Some firms have been changing the structure of their workforces for the sake of greater flexibility in
responding to competitor activity or customer needs. This so-called ‘flexible firm’ comprises a core of
full-time permanent staff who possess the key skills, and peripheral part-timers and temporary or contract workers. This workforce can be flexed in a number of ways to meet changes in the market.

Question 66

2. The Political and Legal Environment

Answer 66

2. The Political and Legal Environment

Question 67

Government policy influences the economic environment, the framework of laws, industry structure and certain operational issues. Political instability is a cause of risk. Different approaches to the political
environment apply in different countries. International trade is subject to a further layer of international
law and regulation.

Answer 67

The political environment affects the firm in a number of ways.
 A basic legal framework generally exists.
 The Government can take a particular stance on an issue of direct relevance to a business or industry.
 The Government’s overall conduct of its economic policy is relevant to business.

Question 68

The political and legal environment 1

Laws come from common law, parliamentary legislation and government regulations derived from it, and
obligations under treaties such as those establishing the European Union.

Legal factors affecting all companies (Factor/Example)

General legal framework - contract, tort, agency
: Basic ways of doing business, negligence proceedings

Answer 68

Criminal law : Theft, insider dealing, bribery, deception

Company law : Directors and their duties, reporting requirements, takeover proceedings, shareholders’ rights, insolvency

Employment law : Trade Union recognition, Social Chapter provisions, minimum wage, unfair dismissal, redundancy, maternity, Equal Opportunities

Question 69

The political and legal environment 2

Health and safety : Fire precautions, safety procedures

Data protection : Use of information about employees and customers

Marketing and sales : Laws to protect consumers (eg refunds and replacement, ‘cooling off’ period after credit agreements), what is or isn’t allowed in advertising

Environment : Pollution control, waste disposal

Tax law : Corporation tax payment, collection
of income tax (PAYE) and National Insurance contributions, sales tax (VAT)

Answer 69

Some legal and regulatory factors affect particular industries, if the public interest is served. For
example, in the UK, electricity and gas, telecommunications, water and rail transport are subject to regulators who have influence over market access, competition and pricing policy (can restrict price increase). These UK bodies are called Ofgem, Ofcom, Ofwat and ORR respectively. Other countries will have similar regulators.

This is because:
 The industries are, effectively, monopolies
 Large sums of public money are involved (eg in subsidies to rail companies)

Question 70

The impact of government 1

Porter notes several ways whereby the Government can directly affect the economic structure of an
industry. They are explained below.

Capacity expansion -
Government policy can encourage firms to increase or cut their capacity.
(a) The UK tax system offers ‘capital allowances’ to encourage investment in equipment.
(b) A variety of incentives, funded by the EU and national governments, exist for locating capacity in a particular area.
(c) Incentives are used to encourage investment by overseas firms.

Answer 70

Demand -
 The Government is a major customer.
 Government can also influence demand by legislation, tax reliefs or subsidies.

Divestment and rationalisation -
In some European countries, the state takes many decisions regarding the selling off or closure of businesses, especially in sensitive areas such as defence.

Question 71

The impact of government 2

Emerging industries -
Can be promoted by the Government or damaged
by it.

Entry barriers -
Government policy can discourage firms from entering an industry, by restricting investment or competition or by making it harder, by use of quotas and tariffs,
for overseas firms to compete in the domestic market.

Answer 71

Competition -
(a) The Government’s purchasing decisions will have a strong influence on the strength of one firm relative to another in the market (eg armaments).
(b) Regulations and controls in an industry will affect the growth and profits of the industry – eg minimum product quality standards.
(c) As a supplier of infrastructure (eg roads), the Government is also in a position to influence competition in an industry.
(d) Governments and supra-national institutions such as the EU might impose policies which keep an industry fragmented, and prevent the concentration
of too much market share in the hands of one or two producers.

Question 72

The impact of government 3

In some industries, governments regulate the adoption of new products. This is well illustrated by the
pharmaceuticals industry, where new drugs or medicines must in many countries undergo stringent
testing and obtain government approval before they can be marketed.

National and EU institutions also affect the operating activities of some organisations, for example:
 Anti-discrimination legislation
 Health and safety legislation
 Product safety and standardisation (especially EU standards)
 Workers’ rights (eg unfair dismissal, maternity leave)
 Training and education policies (which can determine the ‘standard’ of recruits)

Answer 72

QUESTION : Government impact
How do you think government policy affects the pharmaceutical industry in your country?

ANSWER
Using the example of the UK.
(a) The Government must authorise most new drugs (eg for safety before they can be sold).
(b) The UK Government is a major purchaser of pharmaceuticals for the national health service, and
so has significant buying power.
(c) Health education policies affect consumer demand.
(d) Funding of universities affects the science base for recruitment.
(e) Employment practices, such as working hours, are influenced by EU employment directives.

Question 73

Influencing government

Businesses are able to influence government policies in a number of ways.

(a) They can employ lobbyists to put their case to individual ministers or civil servants.
(b) They can give MPs non-executive directorships, in the hope that the MP will take an interest in all legislation that affects them.
(c) They can try to influence public opinion, and hence the legislative agenda, by advertising.

Of particular importance is the need to influence the decision-making processes of the European
Commission. EU regulations, for practical purposes, take priority over national law. They are arrived at
after a great deal of negotiation, and for this reason alone, are difficult to change. It is therefore much
better to influence the drafting process of new regulations than to try to get them changed once they
have been implemented.

Answer 73

The EU will have an increasing role in the conduct of European businesses in:
 Product standards
 Environmental protection
 Monetary policy (a European Central Bank might set interest rates)
 Research and development
 Regional policy
 Labour costs (wages, pensions)

In addition, an EU-Africa Business Forum has been set up to improve investment and the business
climate in Africa.

Question 74

Political risk and political change

Changes in UK law are often predictable. A government will publish a green paper discussing a proposed change in the law, before issuing a white paper and passing a bill through Parliament. Plans should be formulated about what to do if the change takes place.

Answer 74

However, it is political change which complicates the planning activities of many firms. Many economic
forecasts ignore the implications of a change in government policy.
(a) At national level, political influence is significant and includes legislation on trading, pricing, dividends, tax and employment as well as health and safety (to list
but a few).
(b) Politics at international level also has a direct bearing on organisations. EU directives affect all
countries in the EU.

The political risk in a decision is the risk that political factors will invalidate the strategy and perhaps
severely damage the firm. Examples are wars, political chaos, corruption and nationalisation.

Question 75

International trade

The political environment is of particular importance in international trade. Such trade is governed by an
extra layer of legislation contained in treaties and agreements and is potentially subject to a higher level
of political risk. This may be manifested in a variety of ways, such as taxation law, labour regulation and
economic policy on such matters as ownership. At worst, there is a threat of expropriation or nationalisation. Failure to repress lawlessness and corruption are further complicating factors, as is open
or covert refusal to consider international bidders for government contracts.

Answer 75

The European Union

The European Union operates a single European market, allowing for the free movement of labour, goods and services, and free competition.

The EU single market programme has involved areas as diverse as harmonising technical standards,
opening up areas such as telecommunications to competition, consumer protection, mutual recognition
of professional qualifications, and so on.

Question 76

International trade liberalisation: the World Trade Organisation (WTO)

The World Trade Organisation was set up to promote free trade and resolve disputes between trading
partners.

Answer 76

The theory of comparative advantage suggests that free trade is the best way to promote global economic growth and, by implication, domestic prosperity. In other words, people should be free to buy and sell goods and services anywhere in the world.

Question 77

3. Employment Protection

Answer 77

Much legislation has been aimed at the idea of ‘employment protection’. As a result, all forms of
termination of employment must be treated with great care.

Question 78

Retirement

In the UK, many employees are taking early retirement perhaps as a result of corporate downsizing, but
many people still search for work at an older age and there are pressure groups seeking to ban ageism in
recruitment. Retirement ages for men and women are being equalised.

Answer 78

Organisations encourage retirement for a variety of reasons.
 Promotion opportunities are created for younger workers.
 Early retirement is an alternative to redundancy.
 The age structure of an organisation may become unbalanced.
 The cost of providing pensions rises with age.

Question 79

Resignation

People resign for many reasons, personal and occupational. Employees who are particularly valuable
should be encouraged to stay. Particular problems the employee has been experiencing (eg salary) may
be solvable, though not always in the short term.

In any case, an exit interview, when the leaver explains the decision to go, is a valuable source of information.

Answer 79

The period of notice required for the employee to leave should be set out in the contract of employment, but some leeway may be negotiated on this.

Question 80

Dismissal

There are three forms of termination that constitute dismissal under UK law (Employment Rights Act
1996, (TSO, 1996)).
(a) The termination of an employee’s contract by the employer
(b) The ending of a fixed-term contract without renewal on the same terms: in effect, there is no
such thing as a fixed-term contract of employment
(c) Resignation by the employee where the employer’s conduct breaches the contract of employment: this is constructive dismissal

Answer 80

The statutory minimum period of notice to be given is determined by the employee’s length of continuous service with the employer. Longer periods may be written into the contract, at the employer’s discretion, and by agreement. Either party may waive their right to notice, or accept payment in lieu of notice. An employee is entitled to a written statement of the reasons for dismissal.

Question 81

Wrongful dismissal

Wrongful dismissal is dismissal that breaches the contract of employment. An example would be failure
to give the contractual period of notice (assuming the circumstances did not justify summary dismissal).
Wrongful dismissal relates to the method of
dismissal.

Answer 81

Disciplinary procedures

The use of a disciplinary system can be evidence in certain situations that an employee has not been
dismissed unfairly.

Question 82

Unfair dismissal

The legal concept of unfair dismissal gives protection to the employee against arbitrary dismissal; that
is, dismissal without good reason. A dismissal need not be wrongful to be unfair. The basic principle is
that any dismissal is potentially unfair. Under employment protection legislation, the employee has to prove that they have been dismissed.

Answer 82

The onus is then on the employer to prove that the dismissal was fair. Examples of dismissals that would be unfair would be dismissing an employee who has legitimately ‘whistleblown’ on unethical practices or dismissal as a result of an employee joining a trade union.

Question 83

Redundancy

Redundancy is dismissal under two circumstances.
(a) The employer has ceased to carry on the business at all or in the place where the employee was
employed.
(b) The requirements of the business for employees to carry out work of a particular kind have ceased or diminished or are expected to.

Compensation is a legal entitlement, and encourages employees to accept redundancy without damage
to industrial relations.

Answer 83

The employee is not entitled to compensation in three circumstances.
(a) The employer has made an offer of suitable alternative employment and the employee has
unreasonably rejected it.
(b) The employee is of pensionable age or over, or has less than two years’ continuous employment.
(c) The employee’s conduct merits dismissal without notice.

There are certain legal minima for compensation offered, based on age and length of service.

Question 84

Redundancy - Procedure for handling redundancies

From a purely humane point of view, it is obviously desirable to consult with employees or their
representatives. Notice of impending redundancies is a legal duty for redundancies over a certain
number.

The impact of a redundancy programme can be reduced in several ways.
 Retirement of staff over the normal retirement age
 Early retirement of staff approaching normal retirement age
 Restrictions on recruitment to reduce the workforce over time by natural wastage
 Dismissal of part-time or short-term contract staff
 Offering retraining and/or redeployment within the organisation
 Seeking voluntary redundancies

Answer 84

Where management have to choose between individuals doing the same work, they may dismiss the
less competent or require people to re-apply for the job. The LIFO principle may be applied, so that newcomers are dismissed before long-serving employees.

Many large organisations provide benefits in excess of the statutory minimum with regard to consultation
periods, terms, notice periods, counselling and aid with job search, training in job-search skills, and so on.

Many firms provide advice and outplacement counselling to help redundant employees find work
elsewhere.

Question 85

4. Data Protection and Security

Answer 85

Privacy is the right of the individual not to suffer unauthorised disclosure of information.

Privacy is the right of the individual to control the use of information about them, including information
on financial status, health and lifestyle (ie prevent unauthorised disclosure).

Question 86

Why is privacy an important issue?

In recent years, there has been a growing fear that the ever-increasing amount of information about
individuals held by organisations could be misused.

In particular, it was felt that an individual could easily be harmed by the existence of computerised data
about them which was inaccurate or misleading and which could be transferred to unauthorised third
parties at high speed and little cost. In the UK the current legislation covering this area is the Data Protection Act 2018.

Answer 86

The Data Protection Act 2018

The (UK) Data Protection Act 2018 protects individuals about whom data is held. Both manual and computerised information must comply with the Act.

The Data Protection Act 2018 (TSO, 2018) is an attempt to protect the individual. The terms of the Act
cover data about individuals – not data about corporate bodies. (Remember that you will not be
examined on the details of the UK’s Data Protection Act but the syllabus states that you must be able to identify the principles of data protection and security). The Act embodies the main aspects of the EU’s
General Data Protection Regulation (GDPR) but extends the protection by establishing a wider
framework of regulations.

Question 87

Why is privacy an important issue?

In recent years, there has been a growing fear that the ever-increasing amount of information about
individuals held by organisations could be misused.

In particular, it was felt that an individual could easily be harmed by the existence of computerised data
about them which was inaccurate or misleading and which could be transferred to unauthorised third
parties at high speed and little cost. In the UK the current legislation covering this area is the Data Protection Act 2018.

Answer 87

The Data Protection Act 2018

The (UK) Data Protection Act 2018 protects individuals about whom data is held. Both manual and computerised information must comply with the Act.

The Data Protection Act 2018 (TSO, 2018) is an attempt to protect the individual. The terms of the Act
cover data about individuals – not data about corporate bodies. (Remember that you will not be
examined on the details of the UK’s Data Protection Act but the syllabus states that you must be able to identify the principles of data protection and security). The Act embodies the main aspects of the EU’s General Data Protection Regulation (GDPR) but extends the protection by establishing a wider
framework of regulations.

Question 88

Definitions of terms used in the Act

In order to understand the Act it is necessary to know some of the technical terms used in it.

 Personal data is information about a living individual, including expressions of opinion about
them. Data about organisations is not personal data.

 Data users are organisations or individuals who control or process personal data and the use of
personal data.

 Data controllers determine the purpose and means of processing personal data.

 Data processors are responsible for processing personal data on behalf of a controller.

 Data subjects are individuals who are the subject of personal data.

Answer 88

The data protection principles 1

The UK Data Protection Act includes six Data Protection Principles with which data users must comply.

(principle/description)

Lawfulness, fairness and transparency :
Data can only be held if there are valid grounds to do so. Data can only be used fairly and with clarity, openness and honesty in how the data is used from the start.

Purpose limitation :
Data subjects must be made aware of the purpose for recording the data from the time it is first collected. This purpose must be specified, explicit and legitimate. Should data need to be used for a different purpose
in future then consent from the data subject must be obtained unless there are legal grounds to do so otherwise.

Question 89

The data protection principles 2

Data minimisation :
Data held must be adequate (sufficient to fulfil the purpose), relevant (connected to the purpose for holding it) and not excessive (the minimum needed to fulfil the purpose).

Accuracy :
Data held must be accurate and not misleading. Reasonable steps should be taken to ensure there are no inaccuracies. Any data that is found to be
inaccurate or misleading must be corrected.

Storage limitation :
Data must not be held for longer than is needed for the purpose it was collected and processed. There should be a justifiable data retention policy that can be
justified. Data that is not needed must be deleted or anonymised.

Answer 89

The data protection principles 3

Integrity and confidentiality (security) :
Appropriate security measures regarding the risks that might arise in connection with the data must be taken.

The Act has two main aims:
(a) To protect individual privacy. Previous UK law only applied to computer-based information. The 2018 Act applies to all personal data, in any form.

(b) To harmonise data protection legislation so that, in the interests of improving the operation of the single European market, there can be a free flow of personal data between the member states of the EU.

Question 90

The data protection principles - The rights of data subjects 1

The Act establishes the following rights for data subjects. (Right/Description)

To be informed : Data subjects must be informed about how their personal data is collected and used. Information that must be shared includes (for example) the purposes that their data is used for, what the retention period is and who the information is shared with. Individuals must be given this information at the
time that their personal data is collected or within a month if the data was collected from another source.

Answer 90

Access : Individuals have the right to request information held about them either verbally or in writing. The requested information must be supplied within one month, and (in most circumstances) there should be no charge for it.

Rectification : Data subjects can request inaccurate or misleading information held about them to be rectified. Incomplete information must be made complete. The
request can be made verbally or in writing and it must be completed within one month. Only in limited circumstances can the request be refused.

Question 91

The data protection principles - The rights of data subjects 2

Restrict processing : Data subjects can have restrictions placed on the processing of their data or
have it suppressed altogether. The data can still be held, but it must not be processed. They can request the restriction verbally or in writing. The right only applies in certain circumstances and the individual must be given a response within one month.

Erasure : This is known as the right ‘to be forgotten’. Data subjects may request information held about them be destroyed. This request can be made
verbally or in writing. This right only applies in certain circumstances and a reply must be sent to the data subject within one month.

Answer 91

Data portability : Data subjects can request to be sent the data held about them so they can reuse it in a different service. For example, data held by an online banking app can be requested and transferred to another app that can make use of it (such as a money manager type app).

To object : Data subjects can object to the processing of their data. Where the data is used in connection with direct marketing there is an absolute right to object. Where the data is used for other purposes, this right can be refused if there is a compelling reason to do so. The objection can be made verbally or in
writing and a reply must be sent to the data subjection within one month.

Question 92

The data protection principles - The rights of data subjects 3

Automated decision making and profiling :
Other data protection rights are granted to data subjects where data held about them is used to make automated decisions about them, or where data evaluation about them is automated. For example where decisions are made by bank computer systems as to whether or not to lend money to an individual. The uses of data in this way is limited and the individual must be given information about the processing. They also have the right to request human intervention or to challenge decisions made following such processing.

Answer 92

QUESTION : Data protection
Your managing director has asked you to recommend measures that your company, which is based in
the UK, could take to ensure compliance with data protection legislation. Suggest what measures should
be taken.

ANSWER
Measures could include the following.
 Obtain consent from individuals to hold any sensitive personal data you need.
 Supply individuals with a copy of any personal data you hold about them if so requested.
 Consider if you may need to obtain consent to process personal data.
 Ensure you do not pass on personal data to unauthorised parties.

Question 93

5. Health and Safety

Answer 93

People should be able to be confident that they will not be exposed to excessive risk when they are at
work. This means that risk and danger must be actively managed.

Question 94

Importance of maintaining health and safety at work

 An employer has legal obligations under UK and EU law.
 Accidents and illness cost the employer money.
 The company’s image in the marketplace and society may suffer.

Answer 94

The major legislation in the UK covers a number of Acts of Parliament. EU law will become more
important in the future. The most important piece of legislation in this area in the UK is the Health and
Safety at Work Act 1974 (HMSO, 1974). Remember that UK law will not feature in the exam but you do need to be aware of health and safety best practices.

Question 95

Employers’ duties

A senior manager must be specified as responsible for ensuring that problems are solved and rules observed.

(a) All work practices must be safe.
(b) The work environment must be safe and healthy.
(c) All plant and equipment must be maintained to the necessary standard.
(d) Information, instruction, training and supervision should encourage safe working practices. Employers must provide training and information to all staff.
(e) The safety policy should be clearly communicated to all staff.
(f) Employers must carry out risk assessments, generally in writing, of all work hazards. Assessment should be continuous. They must assess the risks to anyone else affected by their work activities.

Answer 95

(g) They must share hazard and risk information with other employers, including those on adjoining
premises, other site occupiers and all subcontractors coming onto the premises.
(h) They must introduce controls to reduce risks.
(i) They should revise safety policies in the light of the above, or initiate safety policies if none were in place previously.
(j) They must identify employees who are especially at risk.
(k) They must employ competent safety and health advisers.

The Safety Representative Regulations provide that a safety representative may be appointed by a
recognised trade union, and for safety committees to be set up at the request of employee representatives. Safety representatives are entitled to paid time off work to carry out their duties.

Question 96

Employee duties

(a) Take reasonable care of themselves and others
(b) Allow the employer to carry out their duties (including enforcing safety rules)
(c) Not interfere intentionally or recklessly with any machinery or equipment

Answer 96

(d) Inform the employer of any situation which may be a danger (this does not reduce the employer’s responsibilities in any way)
(e) Use all equipment properly

Question 97

Accident and safety policies 1

Accidents are expensive.
(a) Time is lost by the injured employee and other staff.
(b) Costs caused by disruption to operations, for example repair costs and production ‘downtime’
following damage to equipment.
(c) Compensation payments or fines resulting from legal action and increased insurance premiums.
(d) Output from the injured employee on return to work is often reduced.
(e) Recruiting and training a replacement for the injured worker will have its own cost.

Answer 97

An employee who is injured as a result of either the employer’s failure to take reasonable care or a
breach of statutory duty can sue.
(a) An employee is not deemed to consent to the risk of injury because they are aware of the risk. It
is the employer’s duty to provide a safe working system.
(b) Employees can become inattentive or careless in doing work which is monotonous or imposes
stress. This factor too must be allowed for in the employer’s safety precautions.
(c) The employer should encourage and insist on proper use of safety equipment.
(d) Many dangers can be caused by carelessness or other fault of an otherwise competent employee,
possibly by their mere thoughtlessness.

Question 98

Accident and safety policies 2

Reducing the frequency and severity of accidents

(a) Develop safety consciousness among staff.
(b) Develop effective consultative participation.
(c) Give adequate instruction in safety rules and measures.
(d) Materials handling should be minimised.
(e) Good maintenance pays dividends.
(f) Implement in full the code of practice for the industry.
(g) Safety inspections should be carried out
regularly.

Answer 98

Accident reporting systems

(a) Accidents should be reported on an accident report form and records kept.
(b) Statistical trends should be monitored to reveal areas where recurring accidents suggest the need
for special investigation, but only more serious incidents will have to be followed-up in depth.
(c) Follow-up should be clearly aimed at preventing recurrence – not placing blame.
(d) Risk audit or sampling should be carried out regularly to prevent accidents.
(e) There should be a procedure for reporting ‘near-misses’, anonymously if necessary, to encourage
openness.

Question 99

Health and safety policy

In order to enhance safety awareness, promote good practice and comply with legal obligations, many
employers have a health and safety policy for their staff. Such a policy will have a number of features.
(a) Statement of principles
(b) Detail of safety procedures
(c) Compliance with the law
(d) Detailed instructions on how to use equipment
(e) Training requirements

Answer 99

Senior managers must set a good example.

(a) Visibly reacting to breaches of the policy (eg if the fire doors are blocked open, remove the blockage).
(b) Ensuring that the policy is communicated to staff (eg memoranda, newsletters).
(c) Setting priorities for operations.
(d) Involving staff in the health and safety process.

Question 100

6. Consumer Protection

Answer 100

We will now look at those aspects of law and regulation which apply to consumer protection, including contract law and the sale of goods. All countries have their own legislation dealing with these topics. These are the general principles.

Question 101

What is a contract?

A contract is a legally binding agreement.
A contract is a legally binding agreement. In all areas of life we make contracts. If you buy or sell a house,
a contract is made and ‘exchanged’. When you start a job, you will probably have a contract of employment. When you go into a shop and buy something, you have entered into an agreement with the shopkeeper – you agree that the shopkeeper will give you the goods and you will give them the money. Under contract law, the money that you give in exchange for the goods is referred to as the ‘consideration’. For a contract to take place, there must be agreement between the parties. This requires an offer made by one party, acceptance by the other party and, in England and Wales (but not Scotland), some consideration passing between them. An important point about contracts is that they do not have to be written. They do not even have to be spoken. A customer picking up something in a supermarket and walking to the checkout is making an offer to the shop, and that offer is implied by their behaviour.

Answer 101

Any business buying and selling goods is continually making and discharging (completing) contracts.
Probably none of the parties involved give much thought to the legal aspect of what they are doing until
something goes wrong. When one party to a contract fails to carry out his part of the agreement, the other party can take legal action against them for breach of contract. So if a business has a customer who is failing to pay, they can take them to court. Where one party makes a misrepresentation to the other, the contract is considered void. For example, A sells goods to B, who sells them on to C. B then fails to pay A for the goods and disappears without trace. If A can demonstrate that they were genuinely mistaken as to the identity of B and would not have dealt with them had they known who B really was, then A can recover the goods which were subject to the original contract from C. This is because the law takes the view in such a situation that the original contract between A and B was no contract at all. Therefore C, who was an innocent third party acting in good faith, has to return the goods to A and either bear the loss or find and sue B.

Question 102

Sale of goods and services

An important area of contract law is the law concerning the sale of goods. UK legislation also covers contracts where the supply of services is the major part of the contract. For example, contracts of repair, where the supply of goods may be incidental to the provision of a service.

Answer 102

Imagine that you are about to enter into a contract for the purchase of some goods. What might you be
concerned about?
 You may want the goods delivered for a particular occasion or date.
 Are the goods stolen, ie does the seller have a right to sell the goods?
 You would expect the goods to be the same type and quality as the description or any sample.
 The goods should be of reasonable quality and suitable for their purpose.

The UK’s Consumer Rights Act 2015 (TSO, 2015) legislation covers these matters and a number of
other important issues. We will use UK legislation as an example in the following sections. Its provisions
are regarded as implied terms of most contracts for the sale of goods.

Question 103

Sale of goods and services - Implied terms

A sale of goods is subject to the following provisions.
 Title, or the seller’s right to sell the goods
 Description of the goods
 Quality of the goods
 Fitness of the goods for the purpose for which they are supplied

Answer 103

Sale of goods and services - Time of performance

If goods arrive too late, they may be useless.
The terms of the contract will determine whether a particular timescale is a condition of performance. If
it is, a breach of such terms entitles the injured party to treat the contract as discharged. In commercial contracts for the supply of goods for business or industrial use, it will be assumed that time is of the essence, even where there is no express term to
that effect.

Question 104

Sale of goods and services - Seller’s title

You cannot sell something that is not yours to sell.
It is an implied condition that the seller has a right to
sell the goods, or will have, at the time of sale.
If the seller delivers goods without having the right to sell, the buyer does not get to own the goods, which is the essential basis of the contract. If the buyer subsequently has to return the goods to the real
owner, they may recover the entire price from
the seller.

Answer 104

Sale of goods and services - Example: Seller’s title

R bought a car from D, which D had unknowingly bought from a thief. When this was discovered, the
car was returned to the true owner. R sued D for the return of the full purchase price (as damages). The
court decided that, although R had used the car for several months, they had not had ownership of it,
which is what they had paid for. D therefore had to repay the full amount.

Question 105

Sale of goods and services - Goods to correspond with contract description

If you have agreed to buy certain goods on the basis of the description (whether the buyer’s or the seller’s), you expect the goods to correspond to the description. This is implied, under the Act, in any contract for sale of goods ‘by description’. The description may be of ingredients, components, age, date of shipment, packing, quantity etc.

Answer 105

Sale of goods and services - Example: Sale by description

A seller advertised a secondhand reaping machine, describing it as new the previous year. The buyer
bought it without seeing it. When it arrived they found that it was much more than a year old and rejected it. The seller sued for the price. It was held that this was a sale by description, the goods had not corresponded to the description, and the buyer was therefore entitled to reject the goods.

Question 106

Sale of goods and services - Satisfactory quality

All goods supplied under a contract for the sale of goods in the course of a business must be of
‘satisfactory quality’. They should meet the standard that a reasonable person would regard as
satisfactory, taking account of any description of the goods, the price and other relevant circumstances.

In deciding whether goods are of satisfactory quality, the following should be taken into account.

(a) Fitness for all the purposes for which goods of the kind in question are commonly supplied. A hot water bottle that deteriorated when filled with hot water, for example, would not be of satisfactory quality. A bucket needs to hold a variety of substances, and be handled in a variety of ways, without leakage, damage, immediate deterioration, and so on.

Answer 106

(b) Appearance and finish. Previous to 1994, goods with superficial damage, but which operated properly in the main, could be of merchantable quality. Satisfactory quality includes freedom from dents, marks, scratches, and so on – unless they have clearly been allowed for in the description and price.
(c) Freedom from minor defects.
(d) Safety.

(e) Durability. They have to remain of satisfactory quality for a period which could be expected by a
reasonable person.

Question 107

QUESTION : Refund

Peter buys an electronic keyboard from his local catalogue store. He pays $199 for it. He returns to the
store the next day complaining that, although the main keys work, none of the pre-set rhythm buttons seem to function. He demands an immediate refund. The sales assistant refuses to given him a refund or take back the goods, and instead gives him a card with the name and address of the manufacturer, suggesting that Peter contacts them to obtain a refund or a replacement.
(a) Was the sales assistant legally justified in refusing to give a refund? Yes/No
(b) Give briefly a reason for your answer.

ANSWER
(a) No
(b) Contracts of sale are between the buyer and the seller, not between the buyer and the
manufacturer.

Answer 107

Sale of goods and services - Fitness of goods for a disclosed purpose

If you tell a seller (explicitly or by implication) that you intend to use goods for a particular purpose, you
expect the goods supplied to be reasonably fit for that purpose.

This is an implied term, under the Act, unless it can be shown that the seller may not have known whether the goods were suitable for a purpose which was not familiar to them and the buyer may have been in a better position to tell.

Like ‘satisfactory quality’, this condition only applies to goods sold in the course of a business.

Question 108

7. Social and Demographic Trends

Answer 108

7. Social and Demographic Trends

Question 109

Population and the labour market

Population affects an organisation’s supply of labour and hence its policies towards recruiting and
managing human resources.

This section uses the example of the UK.
Growing populations offer a larger labour market.
 Increasing birth rates mean more young people.
 Falling death rates mean more elderly people – some of these will continue working.

The changing age structure of the labour force. Fewer young people might mean that young people will
become more expensive. The number of 16 year olds entering the labour force peaked in the late
1970s, but has been falling ever since.

Answer 109

Women are increasing their participation in the labour force.

The increasing participation of women occurs for four reasons.
 More part-time jobs
 Rising male unemployment as many industries which employed men have declined
 The growth of the service sector
 An increase in the average age at which women have children

Question 110

Implications for employers

How organisations can cope with these demographic and educational trends

(a) Establish the labour market the organisation is in (eg young people, part-time workers). In other words, ‘Who do we want to recruit?’
(b) Discover the organisation’s catchment areas (ie location of potential recruits).
(c) Discern the supply side trends in the catchment area labour force (eg how many school leavers are expected? What is the rate of growth/decline of the local population?).

Answer 110

(d) Examine education trends in the area.
(e) Assess the demand from other employers for the skills you need (eg if there is a large concentration of, say, electronics companies in the region, then they will be interested in hiring people with similar skills).
(f) Assess whether some of your demand can be satisfied by a supply from other sources.

Organisations will need proper resourcing strategies to make sure their demand for labour is properly
met.

Question 111

Family life cycle

An example of a use of demography by marketing people is family life cycle (FLC). This is a summary of
demographic variables.
 It combines the effects of age, marital status, career status (income) and the presence or absence
of children.

Answer 111

 It is able to identify the various stages through which households progress. It is clear that particular products and services can be marketed to people at specific stages of the life cycle.

Question 112

Social structures and class

Social class: Society can be divided into broad groups, whose members share common features, such
as occupation, income level and education background. These groups are known as social classes.

In sociological terms, a class is more than a group of people with various things in common, however.
Classes fit into a social structure, in which some classes have advantage over others.
 Access to power
 Inherited wealth
 Educational attainment
 Status or esteem
 Income

Answer 112

It is possible to infer shared values, attitudes and behaviour within a social class as distinct from those
of a higher or lower class: some research has been able to relate consumption behaviour to class standing. (This makes social class an attractive proposition for market segmentation.)

Question 113

Socio-economic position, income and wealth

While there are some real differences between the groups, ‘social class’ for marketing or planning
purposes should be used with caution. Sometimes people’s lifestyles are a reflection of their economic
condition in society, not the reason for their position.

Answer 113

Socio-economic status

QUESTION : Socio-economic status
‘Comparing people’s income is a simple matter. All you need to do is compare income after direct tax
and social security contributions to see how well off people are.’ Do you agree with this statement?

ANSWER
Unfortunately the issue is not that simple. Firstly, there is indirect taxation (for example, sales tax). Households on different incomes are more or less exposed to this. Secondly, there is the issue of mortgage interest relief which is available in some countries. It is not available to people renting their accommodation. Thirdly, there are additional social benefits such as education. It is difficult to combine these factors.

Question 114

Buying patterns

Buying behaviour is an important aspect of marketing. Many factors influence the buying decisions of
individuals and households. Demography and the class structure are relevant in that they can be both
behavioural determinants and inhibitors.

(a) Behavioural determinants encourage people to buy a product or service. They include the
individual’s personality, culture, social class, and the importance of the purchase decision (eg a necessity such as food or water, or a luxury).
(b) Inhibitors are factors that make the person less likely to purchase something (eg low income).

Answer 114

Socio-economic status can be related to buying patterns in a number of ways, both in the amount people have to spend and what they spend it on. It affects both the quantity of goods and services supplied and the proportion of their income that households spend on goods and services.

Question 115

8. Cultural Trends

Answer 115

Organisations are part of the wider social environment.

Examples of how cultural trends can change organisations are given in this section.

Question 116

Health and diet issues

There have been significant changes in some countries in attitudes to diet and health.

Some people are slowly moving to a healthier diet. In addition, there has been an increase in
vegetarianism, and ‘green consumerism’.

Answer 116

This includes a concern with ‘organic food’ now found in many supermarkets.

Question 117

Impact of health and diet on businesses

Growing market. There is a growing market for sports-related goods (even though, as is the case with
running shoes, sporting goods might be purchased as fashion accessories).

Employee health. Employers are concerned with the effect of ill-health on productivity. Some employers
provide gyms and physical recreation facilities. Others offer counselling programmes to employees who
may be struggling with stress or health problems.

New foods. The health food and supplement market has grown significantly over the past decade. Some
foods and supplements claim health benefits including improved mental focus and concentration.

Answer 117

Convenience food. There is a market for new sorts of convenience food.

Organic foods. Organic foods (grown without artificial pesticides, hormones etc) are more popular. This
could lead to a healthier workforce, or on the other hand may increase days lost to issues of food health
(eg food poisoning).

Question 118

Women in work

Over the past few decades, in most countries the number of women in the workforce has increased
significantly. A related trend is an increase in part-time working and flexible working. In the UK, more
than five times as many women as men are part-timers. There was once widespread discrimination against women.
 Overt discrimination is where one group is treated less favourably than another.
 Indirect discrimination makes it harder for somebody of a particular group to fulfil requirements.

Answer 118

Environmentalism

Issues relating to the effect of an organisation’s activities on the physical environment have come to the
fore in recent years. This will be dealt with in detail later in this chapter.

Question 119

The business response

(a) ‘Green products’. Companies like The Body Shop have cleverly exploited ecological friendliness as
a marketing tool. Supermarkets now stock cleaning products which are supposed to be kind to nature.
(b) Changed practices. Bad publicity has led to improvements. A consumer campaign to boycott
tuna from companies whose methods of fishing endangered the lives of dolphins has led to
changed fishing techniques
(c) Limits. There may be a limit to how much consumers are prepared to alter their lifestyles, or pay,
for the sake of ecological correctness.

Answer 119

(d) Education and confusion. Consumers may be imperfectly educated about environmental issues.
For example, much recycled paper has simply replaced paper produced from trees from properly
managed (ie sustainably developed) forests. There is widespread confusion as to green labelling.
(e) Environmental impact assessments. Companies review not just the finished product but their
production processes too.

As far as pollution goes, it is likely that government will take an increased interest in this area. Companies might have to face a variety of measures designed to deal with pollution.

Question 120

9. The Impact of Technology on Organisations and Accountants

Answer 120

9. The Impact of Technology on Organisations and Accountants

Question 121

Organisation structure

Information systems and information technology have played a significant role in the development of the
modern business environment, including encouraging the flattening of organisation hierarchies and
widening spans of control.

Information systems and information technology have played a significant role in the development of the
modern business environment. For example, modern communications technology makes decentralised
organisations possible, allowing decision-making to be passed down to ‘empowered’ workers or
outsourced to external companies.

Answer 121

There is a trend towards smaller, more agile companies. Flexibility and speed are increasingly seen as
the key to competitive advantage. Advances in IT have allowed complex operating processes to be
accelerated and made feedback information available almost immediately.

Question 122

Organisation structure - Span of control

Span of control, or ‘span of management’, refers to the number of subordinates responsible to a superior.
If a manager has five subordinates, the span of control is five.

Business automation and rationalisation, and improved management information systems, have often
resulted in reduced staffing levels. In particular, layers of middle management have been removed in
many organisations. This has been termed ‘delayering’. Managers or staff ‘lower down’ the hierarchy have been empowered to make decisions previously made by middle managers. Information technology
has therefore had the effect of flattening organisation hierarchies and widening spans of control.

There is no universally ‘correct’ size for the span of control. The appropriate span of control will depend
on:

Answer 122

(a) The ability of the manager. A good organiser and communicator will be able to control a larger number. The manager’s workload is also relevant.
(b) The ability of subordinates. The more experienced, able, trustworthy and well-trained subordinates are, the easier it is to control larger numbers.
(c) The nature of the task. It is easier for a supervisor to control a large number of people if they are all doing routine, repetitive or similar tasks.

(d) The geographical dispersal of subordinates. A manager may be able to manage a larger group
(wider span of control) more easily if subordinates are located together, for example in the same building as the manager.

(e) The availability of good quality information. Relevant, timely information reduces uncertainty and may enable a manager to manage a larger group.

Question 123

Organisation structure - Tall and flat organisations

An information system, such as an intranet, can help provide organisation unity and coherency in flat,
decentralised organisations.

The trend towards flatter structures is evidenced by talk of an ‘e-lance economy’, characterised by
shifting coalitions of small firms collaborating on particular projects.

Answer 123

Organisation structure - Organisation structure and information systems

The structure of an organisation and the way in which the organisation’s information system is arranged
are related issues.
Centralised systems means holding and processing data in a central place, such as a computer centre at
head office. Data will be collected at ‘remote’ (ie geographically separate) offices and other locations and sent in to the central location.
Decentralised systems have the data/information processing carried out at several different locations,
away from the ‘centre’ or ‘head office’.

Question 124

Effects of technological advances on the role of the accountant and on organisations

Some effects of technological advances on the role of the accountant and on organisations include:
 Routine processing (bigger volumes, greater speed, greater accuracy)
 Digital information and record keeping
 New skills required and new ways of working
 Reliance on IT

Answer 124

 New methods of communication and of providing customer service
 Interoperability (encourages collaboration across organisation boundaries) and open systems
 The view of information as a valuable resource
 The view of information as a commodity which can be bought, sold or exchanged (‘information market’)

Question 125

Effects of technological advances on the role of the accountant and on organisations - Routine processing

Information technology enables business to process larger volumes of data, at greater speed and with
greater accuracy.

Answer 125

It allows an accountant to process more transactions in a shorter space of time, freeing their time up to work on value-adding services such as providing business advice, rather than information processing.

Question 126

Effects of technological advances on the role of the accountant and on organisations - Digital information and recordkeeping 1

In most businesses, information storage and transmission is digital rather than paper-based. This means that there is greater focus on accountants backing up information on networks as opposed to information sitting in filing cabinets However, some people continue to prefer ‘hard copies’ and print out information as required.

Answer 126

The nature and quality of management information has also changed.
 Managers have access to more information – for example from an Executive Support System.
Information is also likely to be more timely, accurate, reliable and up to date.
 More detailed planning is possible through the use of models (eg spreadsheets).
 Information for control should be more readily available.
 Decision-making should improve as a consequence of better quality information.

Question 127

Effects of technological advances on the role of the accountant and on organisations - Digital information and recordkeeping 2

The role of accountants is developing and there is an increased need for IT literacy and flexibility in working methods to meet the needs of the client and employer. They are increasingly required to have IT skills (such as in data science and computer coding) as well as traditional accounting skills.

Later in our studies we shall see in detail how digital information has affected the role of the accountant,
however, some examples of the impact that technological advances are having on the role of
accountants include:

Answer 127

(a) Cloud accounting – allows accountants to work more collaboratively together and with their
clients.
(b) Automation and artificial intelligence – supports the automatic and intelligent processing of transactional data to free the accountant to work on value-adding services.
(c) Big data and data analytics – allow predictive analytics to assist the auditor in targeting key
business risks to improve their audit work.
(d) Distributed ledger technology – allows asset ownership to be easily verified, reducing the need
for auditors to audit all transactions.

Question 128

Effects of technological advances on the role of the accountant and on organisations - Employment issues

The infiltration of IT into almost every area of business means that the vast majority of employees
(including accountants) are now expected to utilise information technology. As we saw above, IT skills
are required and new ways of working have emerged.

Answer 128

Effects of technological advances on the role of the accountant and on organisations -
Technological change

A reliance on information technology commits an organisation to continual change. Systems are likely to
be superseded after a few years. Accountants must continually update their knowledge and expertise to
keep pace with this change.

Question 129

Effects of technological advances on the role of the accountant and on organisations - Customer service

Information technology has enabled organisations to provide better customer service. Customer databases, EDI, extranets, websites and data mining can all be applied to improving service levels. As the role of the accountants moves away from data processing and verification, they will focus their time on providing advice and support to their customer. For example, an accountant in practice could help clients by providing greater insight into the effectiveness of an organisation’s strategy.

Answer 129

Effects of technological advances on the role of the accountant and on organisations - Information markets

The term ‘information market’ reflects the growing view that information is a commodity which can be
bought, sold or exchanged.

There has been a growing realisation that information is a resource and that it has many of the characteristics of any other resource. A key theme of this syllabus is the benefits which information, properly managed and used, can bring to an organisation.

Question 130

Effects of technological advances on the role of the accountant and on organisations - Developments in communications

Communications technology is probably having a greater impact on organisational life than computers
are at present. Email provides a quick and efficient means of communicating worldwide.

Mobile and WiFi technology allow flexibility in communication. Short Message Service (SMS) messages, often referred to as ‘text messages’, provide another option for short, concise, instant communication. Computer Telephony Integration (CTI) systems can route incoming calls (they can be frustrating, particularly for callers with non-standard enquiries). CTI also enables information about callers
to be gathered and stored, allowing personalised communication.

Answer 130

Computer conferencing systems and organisation-wide intranets and bulletin boards encourage communication – both formal and informal.

Video-calls (for example Skype) and videoconferencing facilitate virtual face-to-face contact between
people who are spread widely across the world. Together with cloud accounting, the accountant is not
always required to work on-site with their client or employer.

Question 131

IT and the employee/employer relationship

The widespread use of information technology in the workplace has affected the relationship between
employers and employees.
 Reduced need to follow the chain-of-command
 Information overload
 Nature of work
 Close business relationships regardless of geographical location
 More flexible working arrangements
 Greater monitoring and control

Answer 131

Delayering has gone hand in hand with a trend towards downsizing whereby large numbers of managers
and staff have been made redundant.

Question 132

Homeworking and supervision

Advances in communications technology have, for some tasks, reduced the need for the actual presence
of an individual in the office. This is particularly true of tasks involving computers.
(a) The employee can, for example, do tasks involving data entry at home.
(b) The keyed-in data can be sent over a telecommunications link to head office.
(c) Some firms see benefits in employing the services of a pool of freelance workers, when there is a
demand. This approach is being adopted in publishing and journalism.

This is sometimes known as homeworking (or, occasionally, telecommuting if it involves IT). The
practice is not new in itself, but it is relatively new to the management of the office.

Answer 132

Outsourcing

Outsourcing is the contracting out of specified operations or services to an external vendor. There are
various outsourcing options available, with different levels of control maintained 'in-house'. Outsourcing
has advantages (eg use of highly skilled people) and disadvantages (eg lack of control). 

Outsourcing is the contracting out of specified operations or services to an external vendor.

Question 133

Outsourcing - Types of outsourcing
(Classification/Comment)

Ad hoc : The organisation has a short-term requirement for increased IS/IT skills. An example would be employing programmers on a short-term contract to help with the programming of bespoke software.

Answer 133

Project management : The development and installation of a particular IS/IT project is outsourced; for example, a new accounting system.

Partial : Some IT/IS services are outsourced. Examples include hardware maintenance, network management or ongoing website management.

Total : An external supplier provides the vast majority of an organisation’s IS/IT services, eg third party owns or is responsible for IT equipment, software and staff.

Question 134

Outsourcing - The advantages and disadvantages of outsourcing 1

The advantages of outsourcing are as follows.
(a) Outsourcing can remove uncertainty about cost, as there is often a long-term contract where
services are specified in advance for a fixed price. If computing services are inefficient, the costs
will be borne by the FM company. This is also an incentive to the third party to provide a high
quality service.
(c) Outsourcing can bring the benefits of economies of scale. For example, a FM company may
conduct research into new technologies that benefits a number of their clients.
(d) A specialist organisation is able to retain skills and knowledge. Many organisations would not
have a sufficiently well-developed IT department to offer IT staff opportunities for career development. Talented staff would leave to pursue their
careers elsewhere.

Answer 134

(e) New skills and knowledge become available. A specialist company can share staff with specific
expertise between several clients. This allows the outsourcing company to take advantage of new
developments without the need to recruit new people or retrain existing staff, and without the cost.

(f) Flexibility (contract permitting). Resources may be able to be scaled up or down depending on demand. For instance, during a major changeover from one system to another the number of IT staff needed may be twice as large as it will be once the new system is working satisfactorily. An outsourcing organisation is more able to arrange its work on a project basis, whereby some staff
will expect to be moved periodically from one project to the next.

(b) Long-term contracts (maybe up to ten years) encourage planning for the future.

Question 135

Outsourcing - The advantages and disadvantages of outsourcing 2

Some possible drawbacks are outlined below.

(a) It is arguable that information and its provision is an inherent part of the business and of management. Unlike office cleaning, or catering, an organisation’s IT services may be too important to be contracted out. Information is at the heart of management.
(b) A company may have highly confidential information and to let outsiders handle it could be seen as risky in commercial and/or legal terms.
(c) If a third party is handling IS/IT services there is no onus on internal management to keep up with new developments or to suggest new ideas. Consequently, opportunities to gain competitive advantage may be missed. Any new technology or application devised by the third party is likely to be available to competitors.

Answer 135

(d) An organisation may find itself locked in to an unsatisfactory contract. The decision may be very
difficult to reverse. If the service provider supplies unsatisfactory levels of service, the effort and
expense the organisation would incur to rebuild its own computing function or to move to another provider could be substantial.

(e) The use of an outside organisation does not encourage awareness of the potential costs and
benefits of IS/IT within the organisation. If managers cannot manage in-house IS/IT resources effectively, then it could be argued that they will not be able to manage an arrangement to outsource effectively either.

Question 136

10. Environmental Factors

Answer 136

There is increasing concern about businesses’ relationship with the natural environment. Businesses may suffer significant costs and a loss of reputation if problems arise.

Question 137

Significance of environmental effects

There is a general issue for society of whether environmental problems, such as climate change, actually exist. There are some who believe that environmental changes are just natural events in the lifecycle of the planet. If environmental problems do exist, the issue is how serious are they? There is an additional issue of whether business activities have contributed to environmental change. Clearly there are
concerns which need to be closely examined.

Answer 137

Impact on environment of economic activities 1

Environmental footprint is the impact that a business’s activities have on the environment, including its
resource environment and pollution emissions.
At an individual firm or business level, environmental impact can be measured in terms of environmental
costs in various areas. Much business activity takes place at some cost to the environment. Examples of
impacts on the environment include:

Question 138

Impact on environment of economic activities 2

 Depletion of natural resources
 Noise and aesthetic impacts
 Residual air and water emissions
 Long-term waste disposal (exacerbated by excessive product packaging)
 Uncompensated health effects
 Change in the local quality of life (through for example the impact of tourism)

Answer 138

CASE STUDY
Plastic shopping bags are widely recognised as a blight on the environment. Supermarkets now charge
customers for plastic bags, in an attempt to:
 Encourage customers to reduce their bag usage by changing from single use carrier bags to
reusable bags
 Raise monies for environmental projects to counterbalance the adverse impact of the bags and
other aspects of supermarket operations

Question 139

Impact on organisation of environmental costs 1

In addition, an IFAC report listed a large number of costs that a business might suffer internally.
Direct or indirect environmental costs
 Waste management
 Remediation costs or expenses
 Compliance costs
 Permit fees
 Environmental training
 Environmentally driven research and development
 Environmentally related maintenance

Answer 139

 Legal costs and fines
 Environmental assurance bonds
 Environmental certification and labelling
 Natural resource inputs
 Record keeping and reporting

Question 140

Impact on organisation of environmental costs 2

Contingent or intangible environmental costs
 Uncertain future remediation or compensation costs
 Risk posed by future regulatory changes
 Product quality
 Employee health and safety
 Environmental knowledge assets
 Sustainability of raw material inputs
 Risk of impaired assets
 Public/customer perception

Answer 140

Clearly failing to take sufficient account of environmental impact can have a significant impact on the
business’s accounts as well as the outside world.

EXAM FOCUS POINT
You may be asked about the main impacts on the environment that a particular organisation’s activities
are likely to have. You will need to use a little imagination, but hopefully the ideas we suggest in this
chapter will help you come up with suggestions.

Question 141

Social impacts of activities

Partly because of the publicity generated by reports, there is now significant focus on the environmental
impact of businesses’ activities. However, corporate social responsibility does not start and end with the
environment. Organisations need to consider other aspects of corporate social responsibilities such has
how people in developing countries are treated.

Answer 141

Social impacts of activities - Stakeholder expectations

Pressures on organisations to widen the scope of their corporate public accountability come from
increasing expectations of stakeholders and knowledge about the consequences of ignoring such
pressures.

Stakeholders in this respect include communities (particularly where operations are based), customers
(product safety issues), suppliers and supply chain participants and competitors. Issues such as plant
closures, pollution, job creation, sourcing, etc can have powerful social effects for good or ill on these
stakeholders.

Question 142

Social impacts of activities - Reputation risk

Increasingly a business must have the reputation of being a responsible business that enhances longterm shareholder value by addressing the needs of its stakeholders – employees, customers, suppliers,
the community and the environment.

Answer 142

Corporate social responsibility and risk management

Corporate social responsibility (CSR) can be described as an organisation monitoring its activities to
ensure its active compliance with the spirit of the law, ethical standards and international norms. The
goal of CSR is to get the organisation to take responsibility for its actions and to encourage a positive impact on the environment, consumers and stakeholders generally. CSR can provide value to an organisation through risk management by encouraging the organisation to ‘do the right thing’. CSR can also help a business to think about sustainability; for example in its use of resources. Raw materials may be purchased from renewable sources, or the business may decide to switch to ‘green’ energy, such as wind or solar power. In order to publicise its CSR policies, the organisation may include a customised report on CSR with its financial statements eg as part of the directors’ report or as a separate statement.

Question 143

11. Competitive Forces

Answer 143

11. Competitive Forces

Question 144

SWOT analysis

A method of environmental analysis which looks at an organisation’s internal strengths and weaknesses
as well as external opportunities and threats is
known as SWOT analysis.

Answer 144

SWOT analysis - Internal appraisal: strengths and weaknesses

An internal appraisal will identify:

(a) The areas of the organisation that have strengths that should be exploited by suitable strategies
(b) The areas of the organisation that have weaknesses which need strategies to improve them

The strengths and weaknesses analysis is intended to shape the organisation’s approach to the external
world. For instance, the identification of shortcomings in products could lead to a programme of product
development.

Question 145

SWOT analysis - External appraisal: opportunities and threats

The external appraisal identifies opportunities that can be exploited by the organisation’s strengths and
also to anticipate environmental threats against which the company must protect itself.

Opportunities
(a) What opportunities exist in the business environment?
(b) What is their inherent profit-making potential?
(c) Can the organisation exploit the worthwhile opportunities?
(d) What is the comparative capability profile of competitors?
(e) What is the company’s comparative
performance potential in this field of opportunity?

Answer 145

Threats

(a) What threats might arise to the company or its business environment?
(b) How will competitors be affected?
(c) How will the company be affected?

Question 146

Using a SWOT analysis

The SWOT analysis can be used in one of two ways.

(a) The organisation can develop resource-based strategies which enable the organisation to extend
the use of its strengths. This is common in retailing, for example, as supermarket chains extend their own brands from food to other areas.

Answer 146

(b) The business can develop positioning-based strategies. In other words, identifying what opportunities are available and what the firm has to do exploit them.

Question 147

12. Converting Resources: the Value Chain

Answer 147

The value chain describes those activities of the organisation that add value to purchased inputs.
Primary activities are involved in the production of goods and services. Support activities provide
necessary assistance. Linkages are the relationships between activities. Managing the value chain,
which includes relationships with outside suppliers, can be a source of strategic advantage.
The value chain model of corporate activities offers a bird’s eye view of the firm and what it does.
Competitive advantage arises out of the way in which firms organise and perform activities to add value.

Question 148

Value activities

Value activities are the means by which a firm creates value in its products.

Activities incur costs and, in combination with other activities, provide a product or service which earns
revenue.

Answer 148

Example 1

Let us explain this point by using the example of a restaurant. A restaurant’s activities can be divided
into buying food, cooking it, and serving it (to customers). There is no reason, in theory, why the
customers should not do all these things themselves, at home. The customer, however, is not only
prepared to pay for someone else to do all this but also pays more than the cost of the resources (food,
wages, and so on).

Question 149

Example 2 cont’

The ultimate value a firm creates is measured by the amount customers are willing to pay for its products or services above the cost of carrying out value activities. A firm is profitable if the realised value to customers exceeds the collective cost of performing the activities.

(a) Customers purchase value, which they measure by comparing a firm’s products and services with
similar offerings by competitors.
(b) The business creates value by carrying out its activities either more efficiently than other
businesses, or by combining them in such a way as to provide a unique product or service.

Answer 149

QUESTION : Value activities
Outline different ways in which the restaurant can create value.
ANSWER
Here are some ideas. Each of these options is a way of organising the activities of buying, cooking and
serving food in a way that customers will value.
(a) It can become more efficient, by automating the production of food, as in a fast food chain.
(b) The chef can develop commercial relationships with growers, so he or she can obtain the best
quality fresh produce.
(c) The chef can specialise in a particular type of cuisine (eg Nepalese, Korean).
(d) The restaurant can be sumptuously decorated for those customers who value atmosphere and a
sense of occasion, in addition to a restaurant’s purely gastronomic pleasures.
(e) The restaurant can serve a particular type of customer (eg celebrities).

Question 150

The value chain 1

Porter’s Value Chain (Porter, 1985) groups the various activities of an organisation into a value chain.
Here is a diagram.

Answer 150

Diagram 4 OneNote

Question 151

The value chain 2

The margin is the excess the customer is prepared to pay over the cost to the firm of obtaining resource
inputs and providing value activities. It represents the value created by the value activities themselves
and by the management of the linkages between them.

EXAM FOCUS POINT
This diagram is worth committing to memory, as the terms may be referred to in an exam question.

Answer 151

Primary activities are directly related to production, sales, marketing, delivery and service.

Inbound logistics : Receiving, handling and storing inputs to the production system: warehousing,
transport, inventory control, and so on.
Operations (production) : Convert resource inputs into a final product. Resource inputs are not only materials. People are a resource, especially in service industries.
Outbound logistics : Storing the product and its distribution to customers: packaging, testing,
delivery, and so on.
Marketing and sales : Informing customers about the product, persuading them to buy it, and enabling them to do so: advertising, promotion, and so on.
Service : Installing products and \ or the act of performing the service for the client or customer. Includes all aspects of post-sales service delivery.

Question 152

The value chain 3

Support activities provide purchased inputs, human resources, technology and infrastructural functions
to support the primary activities.

Procurement (purchasing) : Acquire the resource inputs to the primary activities (eg purchase of materials,
subcomponents equipment).
Technology development : Product design, improving processes and/or resource utilisation.
Human resource management : Recruiting, training, developing and rewarding people.
Firm infrastructure : Planning, finance, quality control: Porter believes they are crucially important to an
organisation’s strategic capability in all primary activities.

Answer 152

Linkages connect the activities of the value chain.

(a) Activities in the value chain affect one another. For example, more costly product design or better quality production might reduce the need for after-sales service.
(b) Linkages require co-ordination. For example, Just In Time requires smooth functioning of operations, outbound logistics and service activities such as installation.

Question 153

Value network 1

Activities and linkages that add value do not stop at the organisation’s boundaries. For example, when a
restaurant serves a meal, the quality of the ingredients – although they are chosen by the cook – is
determined by the grower. The grower has added value, and the grower’s success in growing produce of
good quality is as important to the customer’s ultimate satisfaction as the skills of the chef.

According to Johnson et al, (2005), an organisation’s value chain is connected to the value chains of
suppliers, distributors and customers in what may be referred to as a value network.

Answer 153

Diagram 5 OneNote

A value network generates value through exchanges between two or more organisations. Exchanges may
include both tangible (for example goods) and intangible (for example knowledge such as collaborative
design).

Question 154

Value network 2

QUESTION Primary activity
BCD Co is a large trading company. Steve is the administration manager and is also responsible for legal and compliance functions. Sheila is responsible for after-sales service and has responsibility for ensuring that customers who have purchased goods from BCD Co are fully satisfied. Sunny deals with suppliers and negotiates on the price and quality of inventory. He is also responsible for identifying the most appropriate suppliers of plant and machinery for the factory. Sam is the information technology manager and is responsible for all information systems within the company. According to Porter’s value chain, which of the managers is involved in a primary activity as opposed to a support activity?
A Steve C Sunny
B Sheila D Sam

Answer 154

ANSWER

B The word ‘administration’ indicates that Steve is in a support role and that ‘information technology’ indicates that Sam is in a support role. Sunny’s responsibilities describe procurement which is also a support role.

Question 155

13. Competitive Advantage – Porter’s Five Forces Model

Answer 155

13. Competitive Advantage – Porter’s Five Forces Model

Question 156

The competitive environment is structured by five forces: barriers to entry; substitute products; the
bargaining power of customers; the bargaining power of suppliers; competitive rivalry.

Answer 156

In discussing competition, Porter (Porter, 1980) distinguishes between factors which characterise the
nature of competition.
(a) In one industry compared with another (eg the chemicals industry compared with the clothing
retail industry), some factors make one industry as a whole potentially more profitable than another (ie yielding a bigger return on investment).
(b) Factors within a particular industry lead to the competitive strategies that individual firms might
select.

Question 157

Five competitive forces influence the state of competition in an industry, which collectively
determine the profit (ie long-run return on capital) potential of the industry as a whole. Learn them.
 The threat of new entrants to the industry
 The threat of substitute products or services
 The bargaining power of customers
 The bargaining power of suppliers
 The rivalry amongst current competitors in
the industry

Answer 157

Diagram 6

Question 158

The threat of new entrants (and barriers to entry to keep them out)

A new entrant into an industry will bring extra capacity and more competition. The strength of this threat
is likely to vary from industry to industry and depends on two things.
 The strength of the barriers to entry. Barriers to entry discourage new entrants.
 The likely response of existing competitors to the new entrant.

Answer 158

The threat from substitute products

A substitute product is a good or service produced by another industry which satisfies the same
customer needs.

CASE STUDY
The Channel Tunnel
Passengers have several ways of getting from London to Paris, and the pricing policies of the various
industries transporting them there reflects this.
(a) ‘Le Shuttle’ carries cars in the Channel Tunnel. Its main competitors come from the ferry companies, offering a substitute service. Therefore, you will find that Le Shuttle sets its prices with reference to ferry company prices, and vice versa.
(b) Eurostar is the rail service from London to Paris/Brussels. Its main competitors are not the ferry
companies but the airlines.

Question 159

The bargaining power of customers

Customers want better quality products and services at a lower price. Satisfying this want might force down the profitability of suppliers in the industry. Just how strong the position of customers will be depends on a number of factors including:
 How much the customer buys
 How critical the product is to the customer’s own business
 Switching costs (ie the cost of switching supplier)
 Whether the products are standard items (hence easily copied) or specialised

Answer 159

 The customer’s own profitability: a customer who makes low profits will be forced to insist on low
prices from suppliers
 Customer’s ability to bypass the supplier (or take over the supplier)
 The skills of the customer purchasing staff, or the price awareness of consumers.

When product quality is important to the customer, the customer is less likely to be price-sensitive, and so the industry might be more profitable as a consequence.

Question 160

The bargaining power of suppliers

Suppliers can exert pressure for higher prices. The ability of suppliers to get higher prices depends on
several factors.
 Whether there are just one or two dominant suppliers to the industry, able to charge monopoly or oligopoly prices
 The threat of new entrants or substitute products to the supplier’s industry
 Whether the suppliers have other customers outside the industry, and do not rely on the industry for the majority of their sales

Answer 160

 The importance of the supplier’s product to the customer’s business
 Whether the supplier has a differentiated product which buyers need to obtain
 Whether switching costs for customers would be high

Question 161

The rivalry amongst current competitors in the industry

The intensity of competitive rivalry within an industry will affect the profitability of the industry as a
whole. Competitive actions might take the form of price competition, advertising battles, sales promotion
campaigns, introducing new products for the market, improving after-sales service or providing guarantees or warranties.

Answer 161

Competition can stimulate demand, expanding the market, or it can leave demand unchanged, in which case individual competitors will make less money, unless they are able to cut costs.

Question 162

QUESTIONS

1 Environmental analysis is relevant when undertaking the strategy-making process. Is this true or false?
2 Give four types of legal factor affecting a company.
3 How can businesses influence government policy?
4 Which of the following types of dismissal relates to the method of dismissal?
A Unfair dismissal
B Wrongful dismissal
C Forced dismissal

Answer 162

ANSWER

1 True. The environment is everything that surrounds an organisation and so understanding it is one of
the key inputs to the strategy-making process.
2 Four from:
General legal framework (eg contract) Data protection
Criminal Marketing and sales
Company Environment
Employment Taxation
Health and safety
3 Employ lobbyists; hand out non-executive directorships; try to influence public opinion.
4 B Wrongful dismissal relates to the method of dismissal. Unfair dismissal is dismissal without good reason.

Question 163

QUESTIONS

5 An individual who is the subject of personal data is a data ……………. .
6 How can senior managers promote health and safety awareness?
7 Information technology has encouraged which three of the following?
A Flattening of organisation hierarchies
B Widening spans of control
C Smaller volumes of routine processing
D More flexible working arrangements

Answer 163

ANSWER

5 An individual who is the subject of personal data is a data subject.
6  Visibly reacting to policy breaches
 Setting priorities
 Ensuring that the policy is communicated
 Involving staff in the health and safety
process
7 A, B, D. Information technology means that greater volumes of data can be processed more quickly and
with greater accuracy.

Question 164

QUESTIONS

8 Downsizing can reduce capacity. Is this true or false?
9 What are the five competitive forces?
10 Which one of the following is a primary activity in the value chain?
A Technology department
B Procurement
C Human resources management
D Marketing and sales
11 The purpose of value chain analysis is to understand customer price and quality preferences. True or
false?

Answer 164

ANSWER

8 True. It can make organisations leaner and more flexible, but also can reduce capacity.
9  Threat of new entrants 
 Bargaining power of suppliers
 Threat of substitute products 
 Rivalry amongst current competition
 Bargaining power of customers
10 D Marketing and sales
11 False. The main purpose is to understand how the company creates value from its various activities.

Question 165

PRACTICE

Attempt the questions below from the Practice Question Bank
Q5
Q6
Q7

Answer 165

Q8
 Q9
 Q10
 Q11
 Q12

Question 166

TOTAL 165, 166 CARDS

Answer 166

TOTAL 165, 166 CARDS