HeadStart BT (F1)

Professional Accountancy Services Section A

Section A: The Business Organisation, Its Stakeholders and the External Environment
Business organizations
Definition: 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'
Organisations exist:
• to satisfy social needs • to pool knowledge and ideas
• to overcome the individuals’ limitations • to pool expertise
• to enable individuals to specialise • to provide synergy.
• to save time through joint effort

Types of Business Organizations:

❖ Commercial organisations: Commercial (or profit-seeking) organisations see their main
objective as maximising the wealth of their owners. They are mainly of three types:
➢ Sole traders – the organisation is owned and run by one person. In this type of organisation
the owner is not legally separate from the business itself. If a sole trader’s business is sued by
a customer, the customer is actually suing the owner themselves.
➢ Partnerships – the organisation is owned and run by two or more individuals.
➢ Limited liability companies – a company has a separate legal identity to its owners (who
are known as shareholders). The owner’s liability is limited to the amount they have invested
into the company. They are mainly of two types:
– Private limited companies (with ‘Ltd’ after their name) – these tend to be smaller
businesses, often owned by a few shareholders. Shares cannot be offered to the general
public.
– Public limited companies (with ‘plc’ after their name) – these can be much larger
businesses. Shares can be offered to the general public, meaning that there can be millions
of different shareholders.

❖ Not for profit organisations - Not-for-profit organisations (NFPs or NPOs) do not see
profitability as their main objective. Instead, they seek to satisfy the particular needs of their
members or the sectors of society that they have been set up to benefit. NFPs include the
following:
• government departments and agencies. • schools
• charities (such as the Red Cross) • hospitals
• clubs.

❖ Public sector organisations - The public sector is the part of the economy that is concerned with
providing basic government services and is controlled by government organisations. These
includes: police, military, public transport, primary education, healthcare for the poor

❖ Private sector organisations - The private sector consists of organisations that are run by
private individuals and groups rather than the government.

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❖ Non-governmental organisations (NGOs) - A non-governmental organisation is one which

does not have profit as its primary goal and is not directly linked to the national government.

❖ Co-operatives - Co-operatives are organisations that are owned and democratically controlled
by their members
– the people who buy their goods or services. Each member usually gets a single vote on
key decisions
– unlike companies where shareholders get one vote for each share that they own. They
are organised solely to meet the needs of the member-owners, who usually share any
profits.

Sectors in which organisations operate:

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 Extracting and refining raw materials (eg mining)
materials
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

Stakeholder goals and objectives

Definition: 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.
There are three broad types of stakeholder in an organisation, as follows.
• Internal stakeholders - These are any stakeholders that are within the organisation itself. Their
objectives are likely to have a strong influence on how it is run. (employees, management)
• Connected stakeholders - Connected stakeholders either invest in or have dealings with the
firm. (shareholders, customers, suppliers, financiers)
• External stakeholders - These stakeholders tend to not have a direct link to the organisation
but can influence or be influenced by its activities. ( community, government, pressure groups)

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Mendelow’s matrix for prioritising stakeholders:

High Power Low

High
C
A Consult / Inform
Involve E.g. Local community, pressure group,
local media, local government (may be in
E.g. key customer, active major box A), individual shareholders (may
shareholder, trade unions, secured lender be in box D), supplier, individual
customers
Risk of influencing opinion of those in boxes A and
B
Interest
B D
Keep satisfied Ignore?

E.g. Central Government, passive major
shareholder, national media
Risk of movement to A above
Low
E.g. Individual householders living nearby
Risk of them joining up? This may move them
into box C

Stakeholder Objectives
Directors/Senior Managers Maximise remuneration, security of tenure, maximisation of power and
influence
Employees Maximise remuneration, security of tenure, career development,
training
Shareholder Share price maximisation, dividend maximisation, earnings growth,
maintenance of control
Lenders Certainty of payment, security of capital, further loans
Customers VFM, high quality, reliable service, Innovation
Suppliers Certainty of payment, further business

The interaction between different stakeholders will vary depending upon the particular stakeholders
and their objectives. As can be seen above, different stakeholders will have different objectives and
some of these may not be consistent e.g. maximising the dividend and maximising the directors’
remuneration; the more the directors are paid, the less that is left to pay out as a dividend.
Cyert and March (the consensus theory of company objectives) argue that objectives emerge as
a consensus of the differing views of the stakeholders of the organisation.

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PEST analysis
PEST analysis is concerned with the “environmental” (i.e. outside world) influences on a business.
The acronym stands for the Political/legal, Economic, Social and Technological issues that could
affect the strategic development of a business.
***The examiner may refer to PESTEL. This is PEST with Environmental and Legal tacked on the end.
Identifying PEST influences is a useful way of summarising the external environment in which a
business operates. To be effective, the analysis should be followed up by consideration of how a
business can respond to these influences.

Political and legal factors

The political system and government policy affect the organisation in the following ways:
• Setting the legal framework e.g. minimum wage levels
• Managing the economy
Common Law
• The UK Legal system was based largely on judge-made law ("common law" or “case-law”) until
around the seventeenth century.
• Since that time, new laws and law reform have increasingly been brought about through Acts of
Parliament.
Legislation
If created by Acts of Parliament, the law is “primary” legislation. The Courts cannot overrule primary
legislation.

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Parliamentary sovereignty
Parliament can:
• Repeal earlier legislation
• Overrule case law
• Make new law
Under the Treaty on the Functioning of the EU (TFEU, formerly the Treaty of Rome), Parliament is
obliged to bring UK law into line with the Treaty of Rome and with any directives issued by the
European Union. The UK is obliged to apply regulations issued by the EU as they have the force of law
in member states.
Supranational bodies
A number of supranational organisations and bodies have been created which provide mechanisms
whereby disputes between states may be avoided, discussed or resolved, e.g. through arbitration or
mediation.
Examples include:
• The European Union (EU)
• The United Nations (UN)
• The World Trade Organisation (WTO)

Employment law
Law protecting employees built upon the employment contract, which can be oral or written.
The main terms of employment must be supplied to employee within two months of commencing
employment.
Terms should contain the following:
• Names of employee and employer
• Date of commencement
• Job title
• Notice period
• Whether service with a previous employer forms part of the employee’s continuous period of
employment
• Hours of work, including normal working hours
• Holidays and holiday pay
• Arrangements for sick leave, sick pay
• Disciplinary and grievance procedures or reference to where they can be found

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(a) Common law duties of employee and employer

(b) Statutory duties

(i) Pay
• Minimum wage
• Itemised payslip
• Statutory sick pay, but not sick pay from employer’s own funds
• Statutory maternity and paternity pay.

(ii) Hours of work

• Working time regulations, 48-hour maximum over a 17-week average, employee over 18 can
opt out in writing.
• Right to request flexible working arrangements, not to be unreasonably refused.

(iii) Discrimination
• Unlawful to discriminate on grounds of age, sex, sexual orientation, marital status,
nationality, race, religion, or disability unless a genuine occupational qualification exists
under the Equality Act 2010.
• Employers must make reasonable adjustments to accommodate disabled employees taking
into account practicality and cost.
• Direct discrimination is the legal term that applies if a person treats someone less favourably
than they would another because of protected characteristic they have (e.g. race, religion,
age and sex).
• Indirect discrimination occurs when an organisation makes a decision, or puts in place a
particular policy or practice, which, on the face of it appears to treat everyone equally, but
which in practice leads to people from a protected group being treated less favourably than
other people.

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For example, an employer who requires staff to commit to working from 8pm to11pm every evening
indirectly discriminates against women, who are more likely to be primary carers of children.

• Victimisation occurs when you treat someone badly because they have made a claim or complaint
of discrimination (under the Equality Act).
• Harassment is when a member of staff behaves inappropriately towards another member of staff,
for example, behaving aggressively or using abusive language. Employers should protect
employees from harassment at work

( c ) Termination of contract
(i) Wrongful dismissal
• If employer breaches contract, e.g. by dismissing employee without giving sufficient notice,
employee can claim damages for breach.
• Damages usually calculated by reference to difference between actual andcontractual notice
period.
• No minimum period of employment required.

(ii) Unfair dismissal (minimum 24 months’ employment required)

• To avoid a claim for unfair dismissal the employer must act “reasonably”.
• Reasonableness includes giving reasons for dismissal in writing.
• `What constitutes fairness will depend on the size and resources of the employer.

Fair reasons for dismissal include:

• Lack of capability or qualifications e.g. the loss of a driving licence.
• Misconduct, e.g. assault, immorality, habitual drunkenness.
• Redundancy, provided reasons for selection are fair.
• Following fairly applied grievance or disciplinary procedure.
• Failing to carry out a reasonable order from the employer.

Unacceptable reasons for dismissal

• If related to trade union activities - automatically unfair
• Pregnancy - automatically unfair
• Unfair selection for redundancy

(d) Redundancy
• Fair dismissal if employer ceases or intends to cease trading at that location or needs fewer
workers at that location.
• Minimum two years’ service since reaching 18 years of age.
• Not available if employee unreasonably refuses alternative employment offer from employer.

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Data protection
The Data Protection Act 2018 regulates how personal information is used and protects individuals
from misuse of personal details. It is the UK’s implementation of the EU General Data Protection
Regulation (GDPR).
The Act protects individuals rather than companies and applies to regulated data. It provides a
common-sense set of rules which prohibit the misuse of personal information without stopping it
being used for legitimate or beneficial purposes.

Data Protection Principles (taken from the Act)

These require regulated personal information on individuals to be:
• Not kept longer than necessary
• Adequate, relevant and not excessive
• Fairly and lawfully processed and used
• Processed and used for limited purposes
• Accurate and up to date
• Not transferred abroad without adequate protection
• Kept secure

Health and Safety at Work Act 1974

This Act states that it is the duty of employers, as far as it is practicable, to ensure the health, safety
and welfare of employees. This includes:
• Statement of policy
• Insure against risks
• Assess risk
• Adequate information, training and supervision
• Safe systems, equipment and place of work
• Adequate access
• Healthy environment
It is the responsibility of both the individuals within an organisation and the organisation as a whole
to ensure that the laws on data protection, security and health and safety are complied with. Overall
responsibility stays with the directors.
Sale of Goods Act 1979
This Act imposes conditions relating various aspects of the sale agreement, including:
• The seller’s right to sell,
• The condition and fitness for purpose of goods sold,
• Goods sold must correspond to any description of the goods that has been provided.
Consumer Rights Act 2015
This Act gives consumers protection in contracts for sale. Retailers must sell goods to consumers that
are fit for purpose, so retailers must give refunds for faulty items. Note that this is the duty of the
retailer, not the manufacturer of the good. (The retailer would have recourse to the manufacturer
under the terms of their agreement.)

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