BO - Merge Notes

Pakistan Institute of Public Finance Accountants (PIPFA) Business Organization (L-4) Notes
Syllabus Reference 1
Principles of Good Governance
Governance: The process of decision- making and the process by which decisions are implemented (or not
implemented). Governance can be used in several contexts such as corporate governance, internatio na l
governance, national governance and local governance.
Corporate Governance: Corporate governance is the system of rules, practices, and processes by which a firm
is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many
stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the
government, and the community.
 Since corporate governance provides the framework for attaining a company's objectives, it encompasses
practically every sphere of management, from action plans and internal controls to performance
measurement and corporate disclosure.
Corporate Governance is the interaction between various participants (shareholders, board of directors, and
company’s management) in shaping corporation’s performance and the way it is proceeding towards. The
relationship between the owners and the managers in an organization must be healthy and there should be no
conflict between the two. The owners must see that individual’s actual performance is according to the standard
performance. These dimensions of corporate governance should not be overlooked.
Corporate Governance deals with the manner the providers of finance guarantee themselves of getting a fair return
on their investment. Corporate Governance clearly distinguishes between the owners and the managers. The
managers are the deciding authority. In modern corporations, the functions/ tasks of owners and managers should
be clearly defined, rather, harmonizing.
Corporate Governance deals with determining ways to take effective strategic decisions. It gives ultima te
authority and complete responsibility to the Board of Directors. In today’s market-oriented economy, the need
for corporate governance arises. Also, efficiency as well as globalization are significant factors urging corporate
governance. Corporate Governance is essential to develop added value to the stakeholders.
Corporate Governance ensures transparency which ensures strong and balanced economic development. This also
ensures that the interests of all shareholders (majority as well as minority shareholders) are safeguarded. It ensures
that all shareholders fully exercise their rights and that the organization fully recognizes their rights.
Good Governance: Good governance has 12 major characteristics. It is

 Participation, Representation, Fair Conduct of Elections
 Responsiveness
 Efficiency and Effectiveness
 Openness and Transparency
 Rule of Law
 Ethical Conduct
 Competence and Capacity
 Innovation and Openness to Change
 Sustainability and Long-term Orientation
M. Bilal Kamran Page 1

 Sound Financial Management

 Human rights, Cultural Diversity and Social Cohesion
 Accountability
It assures that corruption is minimized, the views of minorities are taken into account and that the voices of the
most vulnerable in society are heard in decision-making. It is also responsive to the present and future needs of
society.
Why is good governance important?

 To preserve and strengthen stakeholder confidence – nothing distracts an organisation more than having
to deal with a disgruntled stakeholder group caused by a lack of confidence in the governing body. And on
the positive side, a supportive stakeholder base can generate benefits for the organisation though social and
emotional support, intangible but very valuable attributes that all organisations should strive to achieve and
sustain;
 To provide the foundation for a high-performing organisation – the achievement of goals and
sustainable success requires input and support from all levels of an organisation. The Board, though good
governance practices, provides the framework for planning, implementation, and monitoring of performance
and without a foundation to build high performance upon, the achievement of this goal becomes
problematic. Achievement of the best performance and results possible, within existing capacity and
capability, should be an organisation’s on-going goal. Good governance should support management and
staff to be “the best they can be”; and
 To ensure the organisation is well placed to respond to a changing external environment –business
today operates in an environment of constant change. Technology has created an information age that has
transformed our world, and for business to both survive and remain profitable to enable it to fulfil its mission
and achieve its vision, a system must be in place to assist an organisation to identify changes in both the
external environment and emerging trends. This process of understanding our changing world does not
happen by chance, it requires leadership, commitment, and resources from the governing body to establish
and maintain such a system within the organisation. Change generally does not happen “overnight”, it is
there for all to see if they have in place a system for looking. Governing bodies, as the ultimate leaders of
an organisation, should take prime responsibility for this activity.
Principles of Good Governance
Principle 1 – Participation, Representation, Fair Conduct of Elections

Participation by both men and women is a key cornerstone of good governance. Participation could be either
direct or through legitimate intermediate institutions or representatives. It is important to point out that
representative democracy does not necessarily mean that the concerns of the most vulnerable in society would be
taken into consideration in decision making. Participation needs to be informed and organized. This means
freedom of association and expression on the one hand and an organized civil society on the other hand.
 Local elections are conducted freely and fairly, according to international standards and national
legislation, and without any fraud.

 Citizens are at the centre of public activity and they are involved in clearly defined ways in public life at
local level.
 All men and women can have a voice in decision-making, either directly or through legitimate
intermediate bodies that represent their interests. Such broad participation is built on the freedoms of
expression, assembly and association.
 All voices, including those of the less privileged and most vulnerable, are heard and taken into account in
decision-making, including over the allocation of resources.
 There is always an honest attempt to mediate between various legitimate interests and to reach a broad
consensus on what is in the best interest of the whole community and on how this can be achieved
 Decisions are taken according to the will of the many, while the rights and legitimate interests of the few
are respected.
Principle 2 – Responsiveness
Good governance requires that institutions and processes try to serve all stakeholders within a reasonable
timeframe.
 Objectives, rules, structures, and procedures are adapted to the legitimate expectations and needs of
citizens.
 Public services are delivered, and requests and complaints are responded to within a reasonable timefra me.
Principle 3 – Efficiency and Effectiveness

Good governance means that processes and institutions produce results that meet the needs of society while
making the best use of resources at their disposal. The concept of efficiency in the context of good governance
also covers the sustainable use of natural resources and the protection of the environment.
 Results meet the agreed objectives.
 Best possible use is made of the resources available.
 Performance management systems make it possible to evaluate and enhance the efficiency and
effectiveness of services.
 Audits are carried out at regular intervals to assess and improve performance.
Principle 4 – Openness and Transparency

Openness and Transparency means that decisions taken and their enforcement are done in a manner that follows
rules and regulations. It also means that information is freely available and directly accessible to those who will
be affected by such decisions and their enforcement. It also means that enough information is provided and that
it is provided in easily understandable forms and media.
 Decisions are taken and enforced in accordance with rules and regulations.
 There is public access to all information which is not classified for well-specified reasons as provided for
by law (such as the protection of privacy or ensuring the fairness of procurement procedures).
 Information on decisions, implementation of policies and results is made available to the public in such a
way as to enable it to effectively follow and contribute to the work of the local authority.

Principle 5 – Rule of Law

Good governance requires fair legal frameworks that are enforced impartially. It also requires full protection of
human rights, particularly those of minorities. Impartial enforcement of laws requires an independent judiciar y
and an impartial and incorruptible police force.
 The local authorities abide by the law and judicial decisions.
 Rules and regulations are adopted in accordance with procedures provided for by law and are enforced
impartially.
Principle 6 – Ethical Conduct

 The public good is placed before individual interests.
 There are effective measures to prevent and combat all forms of corruption.
 Conflicts of interest are declared in a timely manner and persons involved must abstain from taking part
in relevant decisions.
Principle 7 – Competence and Capacity

 The professional skills of those who deliver governance are continuously maintained and strengthened in
order to improve their output and impact.
 Public officials are motivated to continuously improve their performance.
 Practical methods and procedures are created and used in order to transform skills into capacity and to
produce better results.
Principle 8 – Innovation and Openness to Change

 New and efficient solutions to problems are sought and advantage is taken of modern methods of service
provision.
 There is readiness to pilot and experiment new programmes and to learn from the experience of others.
 A climate favourable to change is created in the interest of achieving better results.
Principle 9 – Sustainability and Long-Term Orientation

 The needs of future generations are taken into account in current policies.
 The sustainability of the community is constantly taken into account.
 Decisions strive to internalise all costs and not to transfer problems and tensions, be they environmenta l,
structural, financial, economic or social, to future generations.
 There is a broad and long-term perspective on the future of the local community along with a sense of
what is needed for such development.
 There is an understanding of the historical, cultural and social complexities in which this perspective is
grounded.
Principle 10 – Sound Financial Management

 Charges do not exceed the cost of services provided and do not reduce demand excessively, particular ly
in the case of important public services.
 Prudence is observed in financial management, including in the contracting and use of loans, in the
estimation of resources, revenues and reserves, and in the use of exceptional revenue.
 Multi-annual budget plans are prepared, with consultation of the public.

 Risks are properly estimated and managed, including by the publication of consolidated accounts and, in
the case of public-private partnerships, by sharing the risks realistically.
 The local authority takes part in arrangements for inter-municipal solidarity, fair sharing of burdens and
benefits and reduction of risks (equalisation systems, inter- municipalco-operation, mutualisation of
risks…).
Principle 11 – Human Rights, Cultural Diversity and Social Cohesion

 Within the local authority’s sphere of influence, human rights are respected, protected and implemented,
and discrimination on any grounds is combated.
 Cultural diversity is treated as an asset, and continuous efforts are made to ensure that all have a stake in
the local community, identify with it and do not feel excluded.
 Social cohesion and the integration of disadvantaged areas are promoted.
 Access to essential services is preserved, in particular for the most disadvantaged sections of the
population.
Principle 12 – Accountability
Accountability is a key requirement of good governance. Not only governmental institutions but also the private
sector and civil society organizations must be accountable to the public and to their institutional stakeholders.
Who is accountable to whom varies depending on whether decisions or actions taken are internal or external to
an organization or institution. In general an organization or an institution is accountable to those who will be
affected by its decisions or actions. Accountability cannot be enforced without transparency and the rule of law.
 All decision- makers, collective and individual, take responsibility for their decisions.
 Decisions are reported on, explained and can be sanctioned.
 There are effective remedies against maladministration and against actions of local authorities which
infringe civil rights.
Benefits of Corporate Governance

 Good corporate governance creates transparent rules and controls, provides guidance to leadership, and
aligns the interests of shareholders, directors, management, and employees.
 It helps build trust with investors, the community, and public officials.
 Corporate governance can provide investors and stakeholders with a clear idea of a company's direction
and business integrity.
 It promotes long-term financial viability, opportunity, and returns.
 It can facilitate the raising of capital.
 Good corporate governance can translate to rising share prices.
 It can lessen the potential for financial loss, waste, risks, and corruption.
 It is a game plan for resilience and long-term success.
Issues in Corporate Governance

1. Remuneration and Reward of Directors
 Directors being paid excessive bonuses and salaries have been identified as significant corporate abuses
for a large number of years.

 It is, however, unavoidable that the corporate governance codes have been targeted this significant issue
2. Board’s Responsibility for Risk Management & Internal Control

 If the board does not arrange the regular meetings in order to consider the organizational activities
systematically show that the board is not meeting their responsibilities.
 It results in the poor system that may unable to report and measure the risks associated with business
3. Reliability of Financial Reporting & External Auditors

 Financial reporting and auditing issue are seen more critical to corporate governance by the investors
because of their main consideration in ensuring management accountability.
 It is the reason that they have been must debated and the focus of serious litigation.
4. Duties of Directors
 The corporate governance reports have aimed to build on the directors’ duties as defined in statutory and
case law duties of directors.
 These include the fiduciary duties to act in the best interests of the company, use their powers for a purpose,
avoid conflicts of interest and exercise a duty of care.
5. Shareholders’ Rights and Responsibilities

 Shareholders’ role and rights is subject of particular importance.
 They should be informed about all those information that are material to them because these informa tio n
may influence their amount of investment.
 They should also be given the right to vote on policies affecting the governance of organization
6. Separation of the roles of CEO & chairperson

 It is now increasingly being realized that the practice of combining the role of chairperson with that of the
CEO leads to conflicts in decision making and too much concentration of power in one person resulting in
unsavory consequences.
7. Corporate Social Responsibility & Business Ethics

 The lack of mutual decision and sense of responsibility for businesses and stakeholders has unavoidab ly
turned out the business ethics and social responsibility a significant part of corporate governance debate.

Rights and Responsibilities of Stakeholders

and
Components of Organization Governance Framework
Guiding Principles of Corporate Governance
1. The board approves corporate strategies that are intended to build sustainable long-term value; selects a
chief executive officer (CEO); oversees the CEO and senior management in operating the company’s
business, including allocating capital for long-term growth and assessing and managing risks; and sets the
“tone at the top” for ethical conduct.
2. Management develops and implements corporate strategy and operates the company’s business under the
board’s oversight, with the goal of producing sustainable long-term value creation.
3. Management, under the oversight of the board and its audit committee, produces financial statements that
fairly present the company’s financial condition and results of operations and makes the timely disclosures
investors need to assess the financial and business soundness and risks of the company.
4. The audit committee of the board retains and manages the relationship with the outside auditor, oversees
the company’s annual financial statement audit and internal controls over financial reporting, and oversees
the company’s risk management and compliance programs.
5. The nominating/corporate governance committee of the board plays a leadership role in shaping the
corporate governance of the company, strives to build an engaged and diverse board whose compositio n
is appropriate in light of the company’s needs and strategy, and actively conducts succession planning for
the board.
6. The compensation committee of the board develops an executive compensation philosophy, adopts and
oversees the implementation of compensation policies that fit within its philosophy, designs compensatio n
packages for the CEO and senior management to incentivize the creation of long-term value, and develops
meaningful goals for performance-based compensation that support the company’s long-term value
creation strategy.
7. The board and management should engage with long-term shareholders on issues and concerns that are of
widespread interest to them and that affect the company’s long-term value creation. Shareholders that
engage with the board and management in a manner that may affect corporate decisionmaking or strategies
are encouraged to disclose appropriate identifying information and to assume some accountability for the
long-term interests of the company and its shareholders as a whole. As part of this responsibility,
shareholders should recognize that the board must continually weigh both short-term and long-term uses
of capital when determining how to allocate it in a way that is most beneficial to shareholders and to
building long-term value.
8. In making decisions, the board may consider the interests of all of the company’s constituencies, includ ing
stakeholders such as employees, customers, suppliers and the community in which the company does
business, when doing so contributes in a direct and meaningful way to building long-term value creation.

Key Corporate Actors

 The board of directors has the vital role of overseeing the company’s management and business
strategies to achieve long-term value creation. Selecting a well-qualified chief executive officer (CEO) to
lead the company, monitoring and evaluating the CEO’s performance, and overseeing the CEO succession
planning process are some of the most important functions of the board. The board delegates to the CEO —
and through the CEO to other senior management—the authority and responsibility for operating the
company’s business. Effective directors are diligent monitors, but not managers, of business operations.
They exercise vigorous and diligent oversight of a company’s affairs, including key areas such as strategy
and risk, but they do not manage—or micromanage—the company’s business by performing or
duplicating the tasks of the CEO and senior management team. The distinction between oversight and
management is not always precise, and some situations (such as a crisis) may require greater board
involvement in operational matters. In addition, in some areas (such as the relationship with the outside
auditor and executive compensation), the board has a direct role instead of an oversight role.
 Management, led by the CEO, is responsible for setting, managing and executing the strategies of the
company, including but not limited to running the operations of the company under the oversight of the
board and keeping the board informed of the status of the company’s operations. Management’s
responsibilities include strategic planning, risk management and financial reporting. An effective
management team runs the company with a focus on executing the company’s strategy over a meaningful
time horizon and avoids an undue emphasis on short-term metrics.
 Shareholders invest in a corporation by buying its stock and receive economic benefits in return.
Shareholders are not involved in the day-to-day management of business operations, but they have the
right to elect representatives (directors) and to receive information material to investment and voting
decisions. Shareholders should expect corporate boards and managers to act as long-term stewards of their
investment in the corporation. They also should expect that the board and management will be responsive
to issues and concerns that are of widespread interest to long-term shareholders and affect the company’s
long-term value. Corporations are for-profit enterprises that are designed to provide sustainable long- term
value to all shareholders. Accordingly, shareholders should not expect to use the public companies in
which they invest as platforms for the advancement of their personal agendas or for the promotion of
general political or social causes.
 Some shareholders may seek a voice in the company’s strategic direction and decision making—areas that
traditionally were squarely within the realm of the board and management. Shareholders who seek this
influence should recognize that this type of empowerment necessarily involves the assumption of a degree
of responsibility for the goal of long-term value creation for the company and all of its shareholders.
Effective corporate governance requires dedicated focus on the part of directors, the CEO and senior manageme nt
to their own responsibilities and, together with the corporation’s shareholders, to the shared goal of building long-
term value.
Key Responsibilities of the Board of Directors and Management

An effective system of corporate governance provides the framework within which the board and manageme nt
address their key responsibilities.
Board of Directors
A corporation’s business is managed under the board’s oversight. The board also has direct responsibility for
certain key matters, including the relationship with the outside auditor and executive compensation. The board’s
oversight function encompasses a number of responsibilities, including:

 Selecting the CEO. The board selects and oversees the performance of the company’s CEO and oversees
the CEO succession planning process.
 Setting the “tone at the top.” The board should set a “tone at the top” that demonstrates the company’s
commitment to integrity and legal compliance. This tone lays the groundwork for a corporate culture that
is communicated to personnel at all levels of the organization.
 Approving corporate strategy and monitoring the implementation of strategic plans. The board
should have meaningful input into the company’s long-term strategy from development through
execution, should approve the company’s strategic plans and should regularly evaluate implementation of
the plans that are designed to create long-term value. The board should understand the risks inherent in
the company’s strategic plans and how those risks are being managed.
 Setting the company’s risk appetite, reviewing and understanding the major risks, and overseeing
the risk management processes. The board oversees the process for identifying and managing the
significant risks facing the company. The board and senior management should agree on the company’s
risk appetite, and the board should be comfortable that the strategic plans are consistent with it. The board
should establish a structure for overseeing risk, delegating responsibility to committees and overseeing
the designation of senior management responsible for risk management.
 Focusing on the integrity and clarity of the company’s financial reporting and other disclosures
about corporate performance. The board should be satisfied that the company’s financial statements
accurately present its financial condition and results of operations, that other disclosures about the
company’s performance convey meaningful information about past results as well as future plans, and
that the company’s internal controls and procedures have been designed to detect and deter fraudule nt
activity.
 Allocating capital. The board should have meaningful input and decision making authority over the
company’s capital allocation process and strategy to find the right balance between short-term and long-
term economic returns for its shareholders.
 Reviewing, understanding and overseeing annual operating plans and budgets. The board oversees
the annual operating plans and reviews annual budgets presented by management. The board monitors
implementation of the annual plans and assesses whether they are responsive to changing conditions.
 Reviewing the company’s plans for business resiliency. As part of its risk oversight function, the board
periodically reviews management’s plans to address business resiliency, including such items as business
continuity, physical security, cybersecurity and crisis management.
 Nominating directors and committee members, and overseeing effective corporate governance. The
board, under the leadership of its nominating/corporate governance committee, nominates directors and
committee members and oversees the structure, composition (including independence and diversity),
succession planning, practices and evaluation of the board and its committees.
 Overseeing the compliance program. The board, under the leadership of appropriate committees,
oversees the company’s compliance program and remains informed about any significant compliance
issues that may arise.
CEO and Management

The CEO and management, under the CEO’s direction, are responsible for the development of the company’s
long-term strategic plans and the effective execution of the company’s business in accordance with those strategic
plans. As part of this responsibility, management is charged with the following duties.

 Business operations. The CEO and management run the company’s business under the board’s oversight,
with a view toward building long-term value.
 Strategic planning. The CEO and senior management generally take the lead in articulating a vision for
the company’s future and in developing strategic plans designed to create long-term value for the
company, with meaningful input from the board. Management implements the plans following board
approval, regularly reviews progress against strategic plans with the board, and recommends and carries
out changes to the plans as necessary.
 Capital allocation. The CEO and senior management are responsible for providing recommendations to
the board related to capital allocation of the company’s resources, including but not limited to organic
growth; mergers and acquisitions; divestitures; spin-offs; maintaining and growing its physical and
nonphysical resources; and the appropriate return of capital to shareholders in the form of dividends, share
repurchases and other capital distribution means.
 Identifying, evaluating and managing risks. Management identifies, evaluates and manages the risks
that the company undertakes in implementing its strategic plans and conducting its business. Management
also evaluates whether these risks, and related risk management efforts, are consistent with the company’s
risk appetite. Senior management keeps the board and relevant committees informed about the company’s
significant risks and its risk management processes.
 Accurate and transparent financial reporting and disclosures. Management is responsible for the
integrity of the company’s financial reporting system and the accurate and timely preparation of the
company’s financial statements and related disclosures. It is management’s responsibility—under the
direction of the CEO and the company’s principal financial officer—to establish, maintain and
periodically evaluate the company’s internal controls over financial reporting and the company’s
disclosure controls and procedures, including the ability of such controls and procedures to detect and
deter fraudulent activity.
 Annual operating plans and budgets. Senior management develops annual operating plans and budgets
for the company and presents them to the board. The management team implements and monitors the
operating plans and budgets, making adjustments in light of changing conditions, assumptions and
expectations, and keeps the board apprised of significant developments and changes.
 Selecting qualified management, establishing an effective organizational structure and ensuring
effective succession planning. Senior management selects qualified management, implements an
organizational structure, and develops and executes thoughtful career development and succession
planning strategies that are appropriate for the company.
 Business resiliency. Management develops, implements and periodically reviews plans for business
resiliency that provide the most critical protection in light of the company’s operations.
o Risk identification. Management identifies the company’s major business and operational risks,
including those relating to natural disasters, leadership gaps, physical security, cybersecurity,
regulatory changes and other matters.
o Crisis preparedness. Management develops and implements crisis preparedness and response
plans and works with the board to identify situations (such as a crisis involving senior
management) in which the board may need to assume a more active response role.
Board Structure
Public companies employ diverse approaches to board structure and operations within the parameters of
applicable legal requirements and stock market rules. Although no one structure is right for every company.

Board Composition
 Size. In determining appropriate board size, directors should consider the nature, size and complexity of
the company as well as its stage of development. Larger boards often bring the benefit of a broader mix
of skills, backgrounds and experience, while smaller boards may be more cohesive and may be able to
address issues and challenges more quickly.
 Composition. The composition of a board should reflect a diversity of thought, backgrounds, skills,
experiences and expertise and a range of tenures that are appropriate given the company’s current and
anticipated circumstances and that. collectively, enable the board to perform its oversight functio n
effectively.
o Diversity. Diverse backgrounds and experiences on corporate boards, including those of directors
who represent the broad range of society, strengthen board performance and promote the creation
of long-term shareholder value. Boards should develop a framework for identifying appropriately
diverse candidates that allows the nominating/corporate governance committee to consider
women, minorities and others with diverse backgrounds as candidates for each open board seat.
o Tenure. Directors with a range of tenures can contribute to the effectiveness of a board. Recent
additions to the board may provide new perspectives, while directors who have served for a number
of years bring experience, continuity, institutional knowledge, and insight into the company’s
business and industry.
 Characteristics. Every director should have integrity, strong character, sound judgment, an objective
mind and the ability to represent the interests of all shareholders rather than the interests of particular
constituencies.
 Experience. Directors with relevant business and leadership experience can provide the board a useful
perspective on business strategy and significant risks and an understanding of the challenges facing the
business.
 Independence. Director independence is critical to effective corporate governance, and providing
objective independent judgment that represents the interests of all shareholders is at the core of the board’s
oversight function. Accordingly, a substantial majority of the board’s directors should be independent,
according to applicable rules and regulations and as determined by the board.
o Definition of “independence.” An independent director should not have any relationships that
may impair, or appear to impair, the director’s ability to exercise independent judgment. Many
boards have developed their own standards for assessing independence under stock market
definitions, in addition to considering the views of institutional investors and other relevant groups.
o Assessing independence. When evaluating a director’s independence, the board should consider
all relevant facts and circumstances, focusing on whether the director has any relationships, either
direct or indirect, with the company, senior management or other directors that could affect actual
or perceived independence. This includes relationships with other companies that have significa nt
business relationships with the company or with not-for-profit organizations that receive
substantial support from the company. While it has been suggested that long-standing board
service may be perceived to affect director independence, long tenure, by itself, should not
disqualify a director from being considered independent.
 Election. Directors should be elected by a majority vote for terms that are consistent with long term value
creation. Boards should adopt a resignation policy under which a director who does not receive a majority
vote tenders his or her resignation to the board for its consideration. Although the ultimate decision
whether to accept or reject the resignation will rest with the board, the board and its nominating/corpo rate

governance committee should think critically about the reasons why the director did not receive a majority
vote and whether or not the director should continue to serve. Among other things, they should consider
whether the vote resulted from concerns about a policy issue affecting the board as a whole or concerns
specific to the individual director and the basis for those concerns.
 Time commitments. Serving as a director of a public company requires significant time and attention.
Certain roles, such as committee chair, board chair and lead director, carry an additional time commitme nt
beyond that of board and committee service. Directors must spend the time needed and meet as frequently
as necessary to discharge their responsibilities properly. While there may not be a need for a set limit on
the number of outside boards on which a director or committee member may serve—or for any limits on
other activities a director may pursue outside of his or her board duties—each director should be
committed to the responsibilities of board service, and each board should monitor the time constraints of
its members in light of their particular circumstances.
Board Leadership
 Approaches. some combine the positions of CEO and chair while others appoint a separate chair. No one
leadership structure is right for every company at all times, and different boards may reach differe nt
conclusions about the leadership structures that are most appropriate at any particular point in time. When
appropriate in light of its current and anticipated circumstances, a board should assess which leadership
structure is appropriate.
 Lead/presiding director. Independent board leadership is critical to effective corporate governance
regardless of the board’s leadership structure. Accordingly, the board should appoint a lead director, also
referred to as a presiding director, if it combines the positions of CEO and chair or has a chair who is not
independent. The lead director should be appointed by the independent directors and should serve for a
term determined by the independent directors.
 Lead directors perform a range of functions depending on the board’s needs, but they typically chair
executive sessions of a board’s independent or non-management directors, have the authority to call
executive sessions, and oversee follow-up on matters discussed in executive sessions. Other key functio ns
of the lead director include chairing board meetings in the absence of the board chair, reviewing and/or
approving agendas and schedules for board meetings and information sent to the board, and being
available for engagement with long-term shareholders.
Board Committee Structure

 An effective committee structure permits the board to address key areas in more depth than may be
possible at the full board level. Decisions about committee membership and chairs should be made by the
full board based on recommendations from the nominating/corporate governance committee.
 The functions performed by the audit, nominating/corporate governance and compensation committees
are central to effective corporate governance; however, no one committee structure or division of
responsibility is right for all companies.
 The responsibilities of each committee and the qualifications required for committee membership should
be clearly defined in a written charter that is approved by the board. Each committee should review its
charter annually and recommend changes to the board. Committees should apprise the full board of their
activities on a regular basis.
 Board committees should meet all applicable independence and other requirements as to membership
(including minimum number of members) prescribed by applicable law and stock exchange rules.

Board Committees
Audit Committee
 Financial acumen. Audit committee members must meet minimum financial literacy standards, and one
or more committee members should be an audit committee financial expert, as determined by the board
in accordance with applicable rules.
 Over boarding. With the significant responsibilities imposed on audit committees, consideration should
be given to whether limiting service on other public company audit committees is appropriate. Policies
may permit exceptions if the board determines that the simultaneous service would not affect an
individual’s ability to serve effectively.
 Outside auditor. The audit committee is responsible for the company’s relationship with its outside
auditor, including:
o Selecting and retaining the outside auditor. The audit committee selects the outside auditor;
reviews its qualifications (including industry expertise and geographic capabilities), work product.
independence and reputation; and reviews the performance and expertise of key members of the
audit team. The committee reviews new leading partners for the audit team and should be directly
involved in the selection of the new engagement partner. The committee oversees the process of
negotiating the terms of the annual audit engagement.
o Overseeing the independence of the outside auditor. The committee should maintain an ongoing,
open dialogue with the outside auditor about independence issues. The committee should identify
those services, beyond the annual audit engagement. that it believes the outside auditor can provide
to the company consistent with maintaining independence and determine whether to adopt a policy
for preapproving services to be provided by the outside auditor or approving services on an
engagement-by-engagement basis.
 Financial statements. The committee should discuss significant issues relating to the company’s financ ia l
statements with management and the outside auditor and review earnings press releases before they are
issued. The committee should understand the company’s critical accounting policies and why they were
chosen, what key judgments and estimates management made in preparing the financial statements, and
how they affect the reported financial results. The committee should be satisfied that the financ ia l
statements and other disclosures prepared by management present the company’s financial condition and
results of operations accurately and are understandable.
 Internal controls. The committee oversees the company’s system of internal controls over financ ia l
reporting and its disclosure controls and procedures, including the processes for producing the
certifications required of the CEO and principal financial officer. The committee periodically reviews with
both the internal and outside auditors, as well as with management, the procedures for maintaining and
evaluating the effectiveness of these systems. The committee should be promptly notified of any
significant deficiencies or material weaknesses in internal controls and kept informed about the steps and
timetable for correcting them.
 Risk assessment and management. Many audit committees have at least some responsibility for risk
assessment and management due to stock market rules. However, the audit committee should not be the
sole body responsible for risk oversight, and the board may decide to allocate some aspects of risk
oversight to other committees or to the board as a whole depending on the company’s industry and other
factors. A company’s risk oversight structure should provide the full board with the information it needs
to understand all of the company’s major risks, their relationship to the company’s strategy and how these
risks are being addressed. Committees with risk-related responsibilities should report regularly to the full

board on the risks they oversee and brief the audit committee in cases where the audit committee retains
some risk oversight responsibility.
 Compliance. Unless the full board or one or more other committees do so, the audit committee should
oversee the company’s compliance program, including the company’s code of conduct. The committee
should establish procedures for handling compliance concerns related to potential violations of law or the
company’s code of conduct, including concerns relating to accounting, internal accounting controls,
auditing and securities law issues.
 Internal audit. The committee oversees the company’s internal audit function and ensures that the
internal audit staff has adequate resources and support to carry out its role. The committee reviews the
scope of the internal audit plan, significant findings by the internal audit staff and management’s response,
and the appointment and replacement of the senior internal auditing executive and assesses the
performance and effectiveness of the internal audit function annually.
Nominating/Corporate Governance Committee

 Director qualifications. The committee should establish, and recommend to the board for approval,
criteria for board membership and periodically review and recommend changes to the criteria. The
committee should review annually the composition of the board, including an assessment of the mix of
the directors’ skills and experience; an evaluation of whether the board as a whole has the necessary tools
to effectively perform its oversight function in a productive, collegial fashion; and an identification of
qualifications and attributes that may be valuable in the future based on, among other things, the current
directors’ skill sets, the company’s strategic plans and anticipated director exits.
 Succession planning. The committee, together with the board, should actively conduct succession
planning for the board of directors. The committee should proactively identify director candidates by
canvassing a variety of sources for potential candidates and retaining search firms. Shareholders invested
in the long-term success of the company should have a meaningful opportunity to nominate directors and
to recommend director candidates for nomination by the committee, which may include proxy access if
shareholder support is broad based and the board concludes this access is in the best interests of the
company and its shareholders. Although the CEO meeting with potential board candidates is appropriate,
the final responsibility for selecting director nominees should rest with the nominating/corpo rate
governance committee and the board.
o Background and experience. In connection with renomination of a current director, the
nominating/corporate governance committee should review the director’s background,
perspective, skills and experience; assess the director’s contributions to the board; consider the
director’s tenure; and evaluate the director’s continued value to the company in light of current
and future needs. Some boards may undertake these steps as part of the annual nomination process,
while others may use a director evaluation process.
o Independence. The nominating/corporate governance committee should ensure that a substantia l
majority of the directors are independent both in fact and in appearance. The committee should
take the lead in assessing director independence and make recommendations to the board regarding
independence determinations. In addition, each director should promptly notify the committee of
any change in circumstances that may affect the director’s independence (including but not limited
to employment change or other factors that could affect director independence).
o Tenure limits. The committee should consider whether procedures such as mandatory retirement
ages or term limits are appropriate. Other practices, such as a robust director evaluation process,

may make these tenure limits unnecessary, but they may still serve as useful tools for ensuring
board engagement and maintaining diversity and freshness of thought. Many boards also require
that directors who change their primary employment tender their resignation so that the board may
consider the desirability of their continued service in light of their changed circumstances.
 Board leadership. The committee should conduct an annual evaluation of the board’s leadership structure
and recommend any changes to the board. The committee should oversee the succession planning process
for the board chair, which should involve consideration of whether to combine or separate the positions
of CEO and board chair and whether events such as the end of the current chair’s tenure or the appointme nt
of a new CEO may warrant a change to the board leadership structure.
 Committee structure. Annually, the committee should recommend directors for appointment to board
committees and ensure that the committees consist of directors who meet applicable independence and
qualification standards. The committee should periodically review the board’s committee structure and
consider whether refreshment of committee memberships and chairs would be helpful.
 Board oversight. The committee should oversee the effective functioning of the board, including the
board’s policies relating to meeting agendas and schedules and the company’s processes for providing
information to the board (both in connection with, and outside of, meetings), with input from the lead
director or independent chair.
 Corporate governance guidelines. The committee should review annually the company’s corporate
governance guidelines, if any, and make recommendations about changes in those guidelines to the board.
 Shareholder engagement. The committee may oversee the company’s and management’s shareholder
engagement efforts, periodically review the company’s engagement practices, and provide to senior
management feedback and suggestions for improvement. The committee and the full board should
understand the company’s efforts to communicate with shareholders and receive regular briefings on such
communications.
 Director compensation. The committee also may oversee the compensation of the board if the
compensation committee does not do so, or the two committees may share this responsibility.
Compensation Committee
 Authority. The compensation committee has many responsibilities relating to the company’s overall
compensation philosophy, structure, policies and programs. To assist it in performing its duties, the
compensation committee must have the authority to obtain advice from independent compensatio n
consultants, counsel and other advisers. The advisers’ independence should be assessed under applicable
law and stock market rules, and the compensation committee should feel confident and comfortable that
its advisers have the ability to provide the committee with sound advice that is free from any competing
interests.
 CEO and senior management compensation. A major responsibility of the compensation committee is
establishing performance goals and objectives relating to the CEO, measuring performance against those
goals and objectives, and determining and approving the compensation of the CEO. The compensatio n
committee also generally approves or recommends for approval the compensation of the rest of the senior
management team.
 Alignment with shareholder interests. Executive compensation should be designed to align the interests
of senior management, the company and its shareholders and to foster the long-term value creation and
success of the company. Compensation should include performance-based elements that reward the

achievement of goals tied to the company’s strategic plan but are at risk if such goals are not met. These
performance goals should be clearly explained to the company’s shareholders.
 Compensation costs and benefits. The compensation committee should understand the costs of the
compensation packages of senior management and should review and understand the maximum amounts
that could become payable under multiple scenarios (such as retirement; termination for cause; terminatio n
without cause; resignation for good reason; death and disability; and the impact of a transaction, such as
a merger, divestiture or acquisition). The committee should ensure that the proper protections are in place
that will allow senior management to remain focused on the long-term strategies and business plans of the
company even in the face of a potential acquisition, shareholder activism, or unsolicited takeover activity
or control bids.
 Stock ownership requirements. To further align the interests of directors and senior management with
the interests of long-term shareholders, the committee should establish stock ownership and holding
requirements that require directors and senior management to acquire and hold a meaningful amount of
the company’s stock at least for the duration of their tenure and, depending on the company’s
circumstances, perhaps for a certain period of time thereafter. The company should have a policy that
monitors, restricts or even prohibits executive officers’ ability to hedge the company’s stock and requires
ongoing disclosure of the material terms of hedging arrangements to the extent they are permitted.
 Risk. The compensation committee should review the overall compensation structure and balance the
need to create incentives that encourage growth and strong financial performance with the need to
discourage excessive risk-taking, both for senior management and for employees at all levels. Incentives
should further the company’s long-term strategic plans by looking beyond short-term market value
changes to the overall goal of creating and enhancing enduring value. The committee should oversee the
adoption of practices and policies to mitigate risks created by compensation programs, such as a
compensation recoupment, or clawback, policy.
 Director compensation. The compensation committee may also be responsible, either alone or together
with the nominating/corporate governance committee, for establishing director compensation programs,
practices and policies.
Board Operations
 General. Serving on a board requires significant time and attention on the part of directors. Certain roles,
such as committee chair, board chair and lead director, carry an additional time commitment beyond that
of board and committee service. Directors must spend the time needed and meet as frequently as necessary
to discharge their responsibilities properly.
 Meetings. The board of directors, with the assistance of the nominating/corporate governance committee,
should consider the frequency and length of board meetings. Longer meetings may permit directors to
explore key issues in depth, whereas shorter, more frequent meetings may help directors stay current on
emerging corporate trends and business and regulatory developments.
 Over boarding. Service on the board of a public company provides valuable experience and insight.
Simultaneous service on too many boards may, however, interfere with an individual’s ability to satisfy
his or her responsibilities as a member of senior management or as a director. In light of this, many boards
limit the number of public company boards on which their directors may serve. Business Roundtable does
not endorse a specific limit on the number of directorships an individual may hold, recognizing that
decisions about limits on board service are best made by boards and their nominating/governa nce
committees in light of the particular circumstances of individual companies and directors.

 Executive sessions. Directors should have sufficient opportunity to meet in executive session, outside the
presence of the CEO and any other management directors, in accordance with stock exchange rules. Time
for an executive session should be placed on the agenda for every regular board meeting. The independent
chair or lead director should set the agenda for and chair these sessions and follow up with the CEO and
other members of senior management on matters addressed in the sessions.
 Agenda. The board’s agenda must be carefully planned yet flexible enough to accommodate emergenc ies
and unexpected developments, and it must be structured to maximize the use of meeting time for open
discussion and deliberation. The board chair should work with the lead director (when the company has
one) in setting the agenda and should be responsive to individual directors’ requests to add items to the
agenda.
 Access to management. The board should work to foster open, ongoing dialogue between manageme nt
and members of the board. Directors should have access to senior management outside of board meetings.
 Information. The quality and timeliness of information that the board receives directly affects its ability
to perform its oversight function effectively.
 Technology. Companies should take advantage of technology such as board portals to provide directors
with meeting materials and real-time information about developments that occur between meetings. The
use of technology (including e-mail) to communicate with and deliver information to the board should be
accompanied by safeguards to protect the security of information and directors’ electronic devices and to
comply with applicable document retention policies.
 Confidentiality. Directors have a duty to maintain the confidentiality of all nonpublic informa tio n
(whether or not it is material) that they learn through their board service, including boardroom discussio ns
and other discussions between and among directors and senior management.
 Director compensation. The amount and composition of the compensation paid to a company’s non-
employee directors should be carefully considered by the board with the oversight of the appropriate board
committee. Director compensation typically consists of a mix of cash and equity. The cash portion of
director compensation should be paid in the form of an annual retainer, rather than through meeting fees,
to reflect the fact that board service is an ongoing commitment. Equity compensation helps align the
interests of directors with those of the corporation’s shareholders but should be provided only through
shareholder-approved plans that include meaningful and effective limitations. Further, equity
compensation arrangements should be carefully designed to avoid unintended incentives such as an
emphasis on short-term market value changes. Due to the potential for conflicts of interest and the duty
of directors to represent the interests of all shareholders, directors or director nominees should not be a
party to any compensation related arrangements with any third party relating to their candidacy or service
as a director of the company, other than those arrangements that relate to reimbursement for expenses in
connection with candidacy as a director.
 Director education. Directors should be encouraged to take advantage of educational opportunities in the
form of outside programs or “in board” educational sessions led by members of senior management or
outside experts. New directors should participate in a robust orientation process designed to familia r ize
them with various aspects of the company and board service.
 Reliance. In performing its oversight function, the board is entitled under state corporate law to rely on
the advice, reports and opinions of management, counsel, auditors and expert advisers. Boards should be
comfortable with the qualifications of those on whom they rely. Boards are encouraged to engage outside
advisers where appropriate and should use care in their selection. Directors should hold advisers

accountable and ask questions and obtain answers about the processes they use to reach their decisions
and recommendations, as well as about the substance of the advice and reports they provide to the board.
 Board and committee evaluations. The board should have an effective mechanism for evaluating its
performance on a continuing basis. Meaningful board evaluation requires an assessment of the
effectiveness of the full board, the operations of board committees and the contributions of individ ua l
directors on an annual basis. The results of these evaluations should be reported to the full board, and there
should be follow-up on any issues and concerns that emerge from the evaluations. The board, under the
leadership of the nominating/corporate governance committee, should periodically consider what method
or combination of methods will result in a meaningful assessment of the board and its committees.
Common methods include written questionnaires; group discussions led by a designated director,
employee or outside facilitator (often with the aid of written questions); and individual interviews.
Senior Management Development and Succession Planning

 Succession planning. Planning for CEO and senior management development and succession in both
ordinary and emergency scenarios is one of the board’s most important functions. Some boards address
succession planning primarily at the full board level, while others rely on a committee composed of
independent directors (often the compensation committee or the nominating/corporate governance
committee) to address this key area. The board, under the leadership of the responsible committee (if any),
should identify the qualities and characteristics necessary for an effective CEO and monitor the
development of potential internal candidates. The board or committee should engage in a dialogue with
the CEO about the CEO’s assessment of candidates for both the CEO and other senior manageme nt
positions, and the board or committee should also discuss CEO succession planning outside the presence
of the CEO. The full board should review the company’s succession plan at least annually and periodically
review the effectiveness of the succession planning process.
 Management development. The board and the independent committee (if any) with primary
responsibility for oversight of succession planning also should know what the company is doing to develop
talent beyond the senior management ranks. The board or committee should gain an understanding of the
steps the CEO and other senior management are taking at more junior levels to develop the skills and
experience important to the company’s success and build a bench of future candidates for senior
management roles. Directors should interact with up-and-coming members of management, both in board
meetings and in less formal settings, so they have an opportunity to observe managers directly and begin
developing relationships with them.
 CEO evaluation. Under the oversight of an independent committee or the lead director, the board should
annually review the performance of the CEO and participate with the CEO in the evaluation of members
of senior management in certain circumstances. All nonmanagement members of the board should have
the opportunity to participate with the CEO in senior management evaluations if appropriate. The results
of the CEO’s evaluation should be promptly communicated to the CEO in executive session by
representatives of the independent directors and used in determining the CEO’s compensation.
Relationships with Shareholders and Other Stakeholders

Corporations are often said to have obligations to stakeholders other than their shareholders, including employees,
customers, suppliers, the communities and environments in which they do business, and government. In some
circumstances, the interests of these stakeholders are considered in the context of achieving long-term value.

Shareholders and Investors

 Shareholder outreach. Regular shareholder outreach and ongoing dialogue are critical to developing and
maintaining effective investor relations, understanding the views of shareholders, and helping
shareholders understand the plans and views of the board and management.
o Know who the company’s shareholders are. The nominating/ corporate governance committee
and the board should know who the company’s major shareholders are and understand their
positions on significant issues relevant to the company.
o Role of management. Members of senior management are the principal spokespersons for the
company and play an important role in shareholder engagement. This role includes serving as the
main points of contact for shareholders on issues where management is in the best position to have
a dialogue with shareholders.
o Board communication with shareholders. When appropriate and in consultation with the CEO,
directors should be equipped to play a part from time to time in the dialogue with shareholders on
topics involving the company’s pursuit of long-term value creation and the company’s governance.
Communications with shareholders are subject to applicable regulations (such as Regulation Fair
Disclosure) and company policies on confidentiality and disclosure of information. These
regulations and policies, however, should not impede shareholder engagement. Direct
communication between directors and shareholders should be coordinated through—and with the
knowledge of—the board chair, the lead independent director, and/or the nominating/corpo rate
governance committee or its chair.
 Annual meeting. Directors should be expected to attend the annual meeting of shareholders, absent
unusual circumstances. Companies should consider ways to broaden shareholder access to the annual
meeting, including webcasts, if requested by shareholders.
 Shareholder engagement. Companies should engage with long-term shareholders in a manner consistent
with the respective roles of the board, management and shareholders. Companies should mainta in
effective protocols for shareholder communications with directors and for directors to respond in a timely
manner to issues and concerns that are of widespread interest to long-term shareholders.
 Board duties. Shareholders are not a uniform group, and their interests may be diverse. Although boards
should consider the views of shareholders, the duty of the board is to act in what it believes to be the long-
term best interests of the company and all its shareholders. The views of certain shareholders are one
important factor that the board evaluates in making decisions, but the board must exercise its own
independent judgment. Once the board reaches a decision, the company should consider how best to
communicate the board’s decision to shareholders.
 Shareholder voting. While some shareholders may use tools such as third-party analyses and
recommendations in making voting decisions, these tools should not be a substitute for individualized
decisionmaking that considers the facts and circumstances of each company. Companies should conduct
shareholder outreach efforts where appropriate to explain the bases for the board’s recommendations on
the matters that are submitted to a vote of shareholders.
 Shareholder proposals. The federal proxy rules require public companies to include qualified
shareholder proposals in their proxy statements. Shareholders should not use the shareholder proposal
process as a platform to pursue social or political agendas that are largely unrelated and/or immater ial to
the company’s business, even if permitted by the proxy rules. Further, a company’s proxy statement is not
always the best place to address even legitimate shareholder concerns. Shareholders with concerns about
particular issues should seek to engage in a dialogue with the company before submitting a shareholder

proposal. If a shareholder submits a proposal, the company’s board or its nominating/corpo rate
governance committee should oversee the company’s response. The board should consider issues raised
by shareholder proposals that receive substantial support from other shareholders and should communicate
its response to all shareholders.
Employees
 General. Treating employees fairly and equitably is in a company’s best interest. Companies should have
in place policies and practices that provide employees with appropriate compensation, including benefits
that are appropriate given the nature of the company’s business and employees’ job responsibilities and
geographic locations. When companies offer retirement, health care, insurance and other benefit plans,
employees should be fully informed of the terms of those plans.
 Misconduct. Companies should have in place and publicize mechanisms for employees to seek guidance
and to alert management and the board about potential or actual misconduct without fear of retributio n.
As part of fostering a culture of compliance, companies should encourage employees to report compliance
issues promptly and emphasize their policy of prohibiting retaliation against employees who report
compliance issues in good faith.
 Communications. Companies should communicate honestly with their employees about corporate
operations and financial performance.
Communities, the Environment and Sustainability

 Citizenship. Companies should strive to be good citizens of the local, national and internatio na l
communities in which they do business; to be responsible stewards of the environment; and to consider
other relevant sustainability issues in operating their businesses. Failure to meet these obligations can
result in damage to the company, both in immediate economic terms and in its longer-term reputation.
Because sustainability issues affect so many aspects of a company’s business, from financial performance
to risk management, incorporating sustainability into the business in a meaningful way is integral to a
company’s long-term viability.
 Community service. A company should strive to be a good citizen by contributing to the communities in
which it operates. Being a good citizen includes getting involved with those communities; encouraging
company directors, managers and employees to form relationships with those communities; donating time
to causes of importance to local communities; and making charitable contributions.
 Sustainability. A company should conduct its business with meaningful regard for environmental, health,
safety and other sustainability issues relevant to its operations. The board should be cognizant of
developments relating to economic, social and environmental sustainability issues and should understand
which issues are most important to the company’s business and to its shareholders.
Government
 Legal compliance. Corporations, like all citizens, must act within the law. The penalties for serious
violations of law can be extremely severe, even life threatening, for corporations. Compliance is not only
appropriate—it is essential. The board and management should be comfortable that the company has a
robust legal compliance program that is effective in deterring and preventing misconduct and encouraging
the reporting of potential compliance issues.
 Political activities. Corporations have an important perspective to contribute to the public policy dialogue
and discussions about the development, enactment and revision of the laws and regulations that affect

their businesses and the communities in which they operate and their employees reside. To the extent that
the company engages in political activities, the board should have oversight responsibility and consider
whether to adopt a policy on disclosure of these activities.

Organizational Design and Reporting Structure
Definition of Organisation: Organization can be seen as the process of dividing up activities in an efficient and
effective manner to enable a system of co-operative activities of two or more persons. These activities would
collectively lead to the completion of common objectives and goals of a company or group of people.
Organization exists to allow accomplishment of work that could not be achieved by people working
independently.
Distinguish Features of Organisation:

Each type of organisation has features that distinguishes one from the other.
a) Purpose: They have different purposes. Business organisations exist to make a profit. Public sector
organisations exist to provide a benefit to the public, such as good government or key services such as health,
education, a police force, national defence, and so on.
b) Ownership: They have different types of owner. Companies are owned by their shareholders, whereas public
sector organisations are owned by the government (as the representative of the general public). Co-operatives are
owned by members.
c) Funding: Business organisations obtain the funds they need to operate from a variety of sources. A stock
market company, for example, obtains its long-term funds from a mixture of reinvesting profits in the business,
issuing new shares and borrowing. Charities rely on a mixture of government grants and private donations for the
money they need. Public sector organisations obtain their money from the government, which in turn gets its
money from taxation.
d) Accountability: The management of an organisation is accountable to its owners for the performance and
achievements of the organisation. The directors of a company, for example, are accountable to the shareholders
for the financial performance of the company. This is the main reason why companies produce their annual report
and accounts.
Classification of Organisations:
a. Business organisations: This type of organization engages in commercial and industrial activities, with the
purpose of making a profit.
The main types of business organisation are:
i. Sole trader: A sole trader is an individual who owns and operates his or her own business, but might employ
a small number of people. There are no legal formalities needed to set up as a sole trader. Any profit made after
tax belongs to the owner. The owner is in complete control and is free to make decisions. The independence is
one of the key attractions of running a business as a sole trader.
ii. Partnership: A partnership exists when the ownership of a business is shared by at least two people. In most
cases, the maximum number of partners is 20, although there are some exceptions, e.g. accountants and solicitors.
iii. Limited companies: The Limited Partnership Act (1907) allows a business to become a limited partnership
if some partners provide capital but take no part in the management. These partners have limited liability, which
means that they can only lose the amount of money that they have invested in the business. The main feature of
a limited company is that it has a separate legal identity from that of its owners. The owners of a company all

have limited liability. If the company collapses, they cannot be forced to use personal funds to pay off business
debts. They only lose the amount that they originally invested in the company.
iv. Clubs and societies: These non-profit making organisations, e.g. sports and social clubs, exist because their
members are drawn together by a common interest. The assets of clubs and societies are the property of the
members and most income comes from member’s subscriptions. Clubs and societies produce income and
expenditure accounts, rather than profit and loss accounts which show either a surplus or deficit of income over
expenditure, as they do not aim to make a profit.
b. Not-for-profit organisations: This type of organizations do not seek to make a profit, although they must
operate within the limits of the funding and financial resources that is available to them. They can be divided into
two main types:
i. Public sector organisations: these are government organisations that are funded by the government to achieve
social indicators of the country. Examples quality education to all, availability of basic health facility, ensuring
clean drinking water for all citizens, etc.
ii. Non-government organisations: these are not-for-profit organisations that are partly or wholly funded from
non-government sources. Examples are charities, clubs and societies.
What are stakeholders?

A stakeholder is an individual or group who has an interest in what the organisation does, or who affects, or can
be affected by, the organisation’s actions. It is vital for managers to understand the varying needs of the different
stakeholders in their organisation. Failure to do so could mean that important stakeholders do not have their needs
met, which could be disastrous for the company.
a. Internal stakeholders:
Shareholders/owners: In large companies, the main shareholders are not usually involved in the day-to-day
management (although there are some exceptions). Shareholders in a large company are usually investors, seeking
to earn a return on their investment in the form of dividends and a higher share price.
Shareholders leave the management of their company to the board of directors and executive management team.
However, they might become more closely involved in the company, and try to influence the decisions of the
directors, when they feel that their interests are threatened. For example, shareholders might express their
concerns about any of the following:
a) Falling profits and a falling share price
b) Lower dividend payments
c) A proposal to invest in a major project where the business risk is high
d) A proposed takeover bid for another company or from another company.
When shareholders feel that their interests are threatened, they might try to become more actively involved in the
company. Major shareholders can discuss their concerns with the company chairman and other senior directors.
Executive directors and senior managers: A board of directors might consist of executive directors and non-
executive directors. Executive directors are usually full-time employees of the company (whereas non-executives
are not).
As executives and full-time employees, executive directors are involved in the management of the company.
Their interests are therefore often similar to the interests of other senior executives, who do not have a position
on the board of directors.
The interests of executive directors and senior managers are affected by matters such as:
a) their remuneration, which consists of basic salary, pension rights, cash bonuses and share incentive schemes
b) power and status
c) career prospects

d) job security.
Other managers and employees: Managers in the middle and junior ranks of a management hierarchy might
have ambitions to become senior managers. However, their interests and concerns are different. Often, junior
managers and other employees share common interests, such as:
a) pay
b) working conditions
c) job security
d) job satisfaction
e) quality of life.
b. External stakeholders
Business organisations, particularly large organisations, have a large number of external stakeholders. These
include:
Lenders: Lenders to a company include banks and bondholders. (Companies might issue bonds or debentures in
order to raise finance. Interest is paid on the bonds, which represent a debt that the company must eventually
repay.) The main concerns of lenders are that the borrower should be able to repay the debt, with interest, on
schedule. Lenders might therefore be concerned about heavy borrowing by a business organisation, because when
a borrower gets into heavy debt, the risks increase that it will not be able to meet all the claims for interest and
debt repayment, especially if profitability falls.
Suppliers: Business organisations buy goods and services from suppliers. Suppliers will usually agree to allow
their customers some credit (time to pay) but their main interests are that:
a) a customer will pay what is owed and will not become a bad debt
b) customers will continue to buy from them
c) customers will treat them fairly, and deal with them in an ethical way.
Government: The government has an interest in all business organisations, but especially large organisations,
for a wide range of reasons.
a) Businesses pay tax on profits, so government has an interest in company profitability.
b) The government should want to create and maintain a strong economy. This depends partly (or largely) on new
investments by business. Government might therefore want to encourage business investments.
c) The government should want to achieve low levels of unemployment. Businesses are major employers.
d) The government regulates many different aspects of business activity: employment law, environmental law,
health and safety regulations and company law are just a few examples.
Customers: Customers have a stake in a business organisation because they expect to obtain value from the goods
or services that they buy.
Local communities: In some cases, local communities might be stakeholders in a business organisation,
especially when the organisation is a major employer in the area and the local economy depends on the work and
business activity that the organisation brings to the area. The concerns of a local community might be very strong
when a business organisation proposes to close down operations in the area, and make its employees redundant.
Business shut down by a major employer in an area has a knock-on effect for other businesses, which will lose
trade and income.
The general public: The general public might consider that it has a stake or interest in major companies, because
the actions of these companies can affect society as a whole. Public concerns might be expressed by action groups
or pressure groups. Areas of public concern might include:
a) public health, especially in the case of food manufacturers and manufacturers of drugs and medicines
b) protection of the environment, reducing pollution, and creating ‘sustainable businesses’

c) corruption in business practices (such as bribery)

d) the exploitation of the consumer through mis-selling and misleading descriptions of goods
e) the monopolisation of a market by one or a small number of companies. (In the UK for example there is public
concern about the dominance of supermarket chains in the retail market, and the shift of retailing from town
centres to out-of-town locations.)
Non-executive directors
Oddly, perhaps, non-executive directors are external stakeholders in a company. Although they are members of
the board of directors, they are not full-time employees, and they are usually appointed to a company’s board
because:
a) they bring experience and knowledge to the board that they have gained outside the company, and which
executive directors often do not have
b) their interests are different from those of executive directors and senior executives: they are not affected by
concerns about remuneration (bonuses and performance incentives), power and status or job security.
Appointing independent non-executive directors to the board of directors of a company is good corporate
governance practice, because independent NEDs can help to prevent a company from being dominated by the
personal interests of the executive directors.
c. Connected stakeholders
Other stakeholder groups, other than the directors, senior management and the shareholders, might influence the
decisions that directors and senior management make. The term ‘connected stakeholder’ means a stakeholder
who:
a) is not a decision-maker, or
b) is not a part of the permanent (full-time) infrastructure of the organisation, but
c) is nevertheless very influential in shaping the future of the organisation and the decisions of its leaders.
The main connected shareholders in a company are usually:
a) non-executive directors
b) employees
c) key suppliers
d) key customers.
The main connected stakeholders in a business organisation must have some power that they are able to use to
influence decisions. Some sources of power, and the stakeholders who might have them, are listed below:
Source of power: External Example

Legal rights Shareholders have some legal voting rights under company law.
Lenders have legal rights under the terms of their lending agreements: for
example a lender has a right to take action in the event of default by a
borrower.
Publicity, and ability to influence Pressure groups and protest groups might be influential. These include
customers or legislators environmental protection groups, human rights protection groups, and
animal welfare activists.
Control over key resources A major supplier could exert influence by controlling the supply of a key
resource to the organisation.

Buying power Customers can exert influence collectively through their buying power.
If they do not like what a business organisation is doing, they can switch
to buying from competitors.
Position power Individual employees might be in a position of power within the
organisation, perhaps because of special expertise that they possess. Top
consultants and investment bankers are examples.
Claim on resources Power might arise from a claim or control that exists over particular
resources of the business. For example the power of employees or trade
union representatives might come from their ability to withhold labour in
the event of a dispute with management.
Personal charisma or influence Some individuals might exercise considerable influence through their
personal qualities and charisma.
Stakeholder mapping: Mendelow’s power/interest matrix

The managers of a business organisation should manage its stakeholders, particularly those with the greatest
influence. Stakeholder mapping is a technique that can help senior managers to assess their main stakeholders,
and consider what should be done (if anything) to win the support of particular stakeholders for particular
decisions.
One approach to stakeholder mapping is to evaluate each stakeholder group using a 2 × 2 matrix. One such matrix
is a stakeholder power/interest matrix. This is sometimes called a Mendelow matrix, named after the person
who ‘invented’ it.
The matrix can be used to identify the position of each group of stakeholders in a matter affecting the organisation.
The matrix compares:
a) the amount of interest that the stakeholder has in a particular issue, on a scale ranging from not at all interested
(0) to very interested (+10), and
b) the relative power of the stakeholder, on a scale from very weak (0) to very powerful (+10).
The recommended approach to dealing with the stakeholder group is indicated in each quadrant of the matrix.
The key stakeholders are those who have considerable power or influence, and also a keen interesting the matter
or decision that management is considering.
a) If a stakeholder has very little power and very little interest in a matter, minimal effort is needed trying to keep
the stakeholder informed about the matter or satisfied.
b) If a stakeholder has very little power but a strong interest in a matter, the appropriate way to deal with them is
to keep them informed about what is happening and why. The stakeholder should be kept informed even if they
oppose what the organisation is doing.
c) If the power of a stakeholder is strong but the stakeholder has very little interest in the matter, it is important
to keep the stakeholder satisfied. It is essential to avoid any course of action that will increase the stakeholder’s
interest, and persuade the stakeholder to exercise its power.
d) The most significant stakeholders are those with a large amount of power and a high level of interest in a
matter. These stakeholders are key players and it is essential to obtain and keep their support.

Organizational Structure:
An organizational structure is the formal arrangement within an organization that defines how activities and tasks
are formally divided and how processes and information would flow within this structure.
The purpose of having an organizational structure is that it:
• Divides work to be done into specific jobs and departments.
• Assigns tasks and responsibilities associated with individual jobs.
• Coordinates diverse organizational tasks.
• Clusters jobs into units.
• Establishes relationships among individuals, groups, and departments.
• Establishes formal lines of authority.
• Allocates and deploys organizational resources.
Types of Organisation structures:

Organisation structures differ between entities. The organisation structure for an entity should be appropriate for
the size of the entity, the nature of its operations, and what it is trying to achieve. Most important, the organisation
must enable the entity to develop plans and implement them effectively. There are several different types of
organisation structure. Within a single entity, particularly a large entity, there might be a mixture of different
organisation structures, with different structures in different parts of the entity.
1. Entrepreneurial Organisation: An entrepreneurial organisation is an entity that is managed by its
entrepreneurial owner. The main features of an entrepreneurial organisation are usually that:
a) the entrepreneur takes all the main decisions, and does not delegate decision-making to anyone
else
b) the entity is therefore organised around the entrepreneur and there is no formal management
structure
c) operations and processes are likely to be simple, and the entity will probably sell just a small
number of products or services.
An entrepreneurial structure is appropriate when an entity is in the early phase of its life. As it grows
larger, however, an entrepreneurial structure will become inefficient, and a formal management structure
is needed.
2. Functional organisation: A functional organization groups together people who have comparable skills
and perform similar tasks. This form of organization is fairly typical for small to medium-size companies,
which group their people by business functions: accountants are grouped together, as are people in finance,
marketing and sales, human resources, production, and research and development. Each unit is headed by
an individual with expertise in the unit’s particular function. Examples of typical functions in a business
enterprise include human resources, operations, marketing, and finance. Also, business colleges will often
organize according to functions found in a business.
There are a number of advantages to the functional approach. The structure is simple to understand and
enables the staff to specialize in particular areas; everyone in the marketing group would probably have
similar interests and expertise. But homogeneity also has drawbacks: it can hinder communication and
decision making between units and even promote interdepartmental conflict. The marketing department,
for example, might butt heads with the accounting department because marketers want to spend as much
as possible on advertising, while accountants want to control costs.
3. Divisional Organizations: Large companies often find it unruly to operate as one large unit under a
functional organizational structure. Sheer size makes it difficult for managers to oversee operations and

serve customers. To rectify this problem, most large companies are structured as divisional organizations.
They are similar in many respects to stand-alone companies, except that certain common tasks, like legal
work, tends to be centralized at the headquarters level. Each division functions relatively autonomously
because it contains most of the functional expertise (production, marketing, accounting, finance, human
resources) needed to meet its objectives. The challenge is to find the most appropriate way of structuring
operations to achieve overall company goals. Toward this end, divisions can be formed according to
products, customers, processes, or geography.
• Product division: means that a company is structured according to its product lines. General
Motors, for example, has four product-based divisions: Buick, Cadillac, Chevrolet, and GMC.
Each division has its own research and development group, its own manufacturing operations, and
its own marketing team. This allows individuals in the division to focus all their efforts on the
products produced by their division. A downside is that it results in higher costs as corporate
support services (such as accounting and human resources) are duplicated in each of the four
divisions.
• Customer Division: Some companies prefer a customer division structure because it enables them
to better serve their various categories of customers. Thus, Johnson & Johnson’s two hundred or
so operating companies are grouped into three customer-based business segments: consumer
business (personal-care and hygiene products sold to the general public), pharmaceuticals
(prescription drugs sold to pharmacies), and professional business (medical devices and
diagnostics products used by physicians, optometrists, hospitals, laboratories, and clinics).
• Process Division: If goods move through several steps during production, a company might opt
for a process division structure. This form works well at Bowater Thunder Bay, a Canadian
company that harvests trees and processes wood into newsprint and pulp. The first step in the
production process is harvesting and stripping trees. Then, large logs are sold to lumber mills and
smaller logs are chopped up and sent to Bowater’s mills. At the mill, wood chips are chemically
converted into pulp.
• Geographical Division: enables companies that operate in several locations to be responsive to
customers at a local level. Adidas, for example, is organized according to the regions of the world
in which it operates. They have eight different regions, and each one reports its performance
separately in their annual reports.
4. Matrix organisation structure: A matrix organisation has been defined as: any organisation that employs
a multiple command system that includes not only a multiple command structure but also related support
mechanisms and an associated organisational culture and behaviour pattern. Matrix organisations and
project organisation structures were both first used in the defence and aerospace industries, where
companies were required to carry out major projects for customers, such as building a quantity of aircraft
for a government customer.
In this way, a dual command structure was created. In a matrix organisation, the traditional vertical
command structure has an overlay of horizontal authority or influence. The difference between a matrix
organisation structure and a project organisation is that with a project organisation, the project
management comes to an end when the project ends. With matrix organisation, the matrix structure of
authority and command is permanent.

Building Blocks:
Chain of Command: One of the most basic elements of an organizational structure, chain of command is exactly
what it sounds like: an unbroken line of authority that extends from the top of the organization (e.g. a CEO) all
the way down to the bottom. Chain of command clarifies who reports to whom within the organization.
Span of Control: Span of control refers to the number of subordinates a superior can effectively manage. The
higher the ratio of subordinates to superiors, the wider the span of control.
Span of control depends on:
• Managers capabilities (physical & mental limitations)
• Nature of manager’s workload
• Nature of work undertaken (how routine it is)
• Geographical dispersion of subordinates
• Level of cohesiveness within the team.
a) Tall-narrow. In this type of structure, each manager has a small number of subordinates reporting directly to
him. As a result, in a large organisation, there are many layers of management from the top down to supervisor
level. The span of control is narrow, and the shape of the organisation structure is tall, because of the many layers
of management.
b) Wide-flat. In this type of structure each manager has a large number of subordinates reporting directly to him.
As a result, even in a large organisation, there are only a few layers of management from the top down to
supervisor level. The span of control is wide, and the shape of the organisation structure is flat, because of the
small number of management levels.
The tall-narrow structure often has the following characteristics.

a) Formality in relationships between managers and subordinates.
b) Close supervision, with managers spending much of their time monitoring the work of subordinates and giving
them directions.
c) Task specialisation, with a small group of manager and subordinates specialising in a very narrow aspect of
the entity’s operations.
d) A strong cultural and procedural emphasis on formal roles, job titles and job descriptions.
e) Slow vertical communication. Because of the many levels of management, it can take a long time for
information to get from top to bottom of the management hierarchy, and from bottom to top. As a result, tall-
narrow organisations can be slow to react to change.
The wide-flat organisation structure often shows the following characteristics, where the work is fairly complex
and non-routine.
a) Greater egalitarianism. ‘Bosses’ and ‘subordinates’ will often respect each other for their skills and experience,
and will treat each other as equals.
b) Team-work and co-operation.
c) Greater delegation of responsibility to subordinates. Managers have too many subordinates to apply close
control. Managers must therefore trust subordinates to get on with their work, with relatively little supervision.
d) Flexibility. There is less emphasis on roles and job descriptions, and individuals are more willing to switch
from doing one type of task to another, as the demands of the work change.
e) There is rapid vertical communication and decision-making. Information travels quickly from top to bottom of
the organisation structure and from bottom to top.

Wider and flatter organisation structures have replaced tall bureaucratic structures in many organisations. The
reasons why wide-flat organisations are often preferred are as follows.
a) Wide-flat structures are more suitable to rapidly-changing business environments, where entities must respond
to changes quickly and with flexibility. An organisation in which information travels quickly and decisions can
be made quickly is more appropriate in these circumstances that a structure that is more formal and hierarchical.
b) Cost savings. It has been argued that in a tall-narrow organisation, managers spend too much time managing
each other, instead of adding value. If middle managers do not add value, they should be eliminated from the
organisation structure.
2.4 Organisational relationships and implementing strategy

Internal relationships: centralisation versus decentralisation
An important aspect of internal relationships is the extent to which decision-making is centralised, so that major
planning decisions are made (and implemented) by ‘head office’, or decentralised.
Centralization and Decentralization
Who makes the decisions in an organization? If decision-making power is concentrated at a single point, the
organizational structure is centralized. If decision-making power is spread out, the structure is decentralized. In
many situations, junior (‘local’) managers have much better knowledge than senior management about
operational conditions.
Tactical and operational decisions are probably better when taken by local management, particularly in a large
organisation. Giving authority to managers at divisional level and below helps to motivate the management team.
Decisions by management are more likely to be taken with regard for the corporate objectives of the entity as a
whole. There is a very strong argument in favour of making strategic decisions centrally. Decisions by
management should be co-ordinated more effectively if all the key decisions are taken centrally. In a crisis, it is
easier to make important decisions centrally.
By level of decision-making:
– Centralised – decisions are made by senior management (e.g. functional, entrepreneurial).
– Decentralised – decision-making is delegated to lower levels (e.g. matrix, geographical).
a) In a centralised organisation, senior management retain most (or all) of the authority to make the important
decisions.
b) In a decentralised organisation, the authority to take major decisions is delegated to the management of units
at lower levels in the organisation structure, such as strategic business units (SBU) managers, and divisional
managers.
The choice between a centralised and a decentralised organisation depends to some extent on the preference of
senior management. However, the size and complexity of the entity also influence the extent to which decision-
making, planning and control are centralised or decentralise (‘devolved’). It is difficult to control a large and
complex entity from head office, without delegating substantial amounts of authority to divisional managers.
Advantages of centralisation
Advantages of centralisation are as follows.
a) Decisions by management are more likely to be taken with regard for the corporate objectives of the entity as
a whole. There is a very strong argument in favour of making strategic decisions centrally.
b) Decisions by management should be co-ordinated more effectively if all the key decisions are taken centrally.
c) In a crisis, it is easier to make important decisions centrally.

Advantages of decentralisation/devolution of authority

Advantages of decentralisation are as follows.
a) In many situations, junior (‘local’) managers have much better knowledge than senior management about
operational conditions. Tactical and operational decisions are probably better when taken by local management,
particularly in a large organisation.
b) Giving authority to managers at divisional level and below helps to motivate the management team.
c) Decisions can be taken more quickly at a local level, because they do not have to be referred to head office.
d) In a large and complex organisation, many decisions have to be made – probably too many for senior
management at head office.
External relationships
An entity might use external relationships to deliver a particular strategy. These are relationships with other
entities, or with individuals who are not a part of the entity but are external to it. External relationships may take
the form of:
a) outsourcing of functions
b) virtual organisation
Outsourcing
An entity does not need to carry out operations itself. Instead, it can outsource work to a sub-contractor.
Outsourcing is common in certain industries, such as the construction industry. It is also common to outsource
‘noncore’ activities, such as the management of the entity’s fleet of motor vehicles, security services, some IT
work and some accountancy work (for example, payroll operations).
The size of an entity, and its organisation structure, will depend to some extent on how much of its operational
activities it chooses to outsource.
The reasons for outsourcing
Outsourcing is consistent with the view that an entity achieves competitive advantage by concentrating on its core
competencies. It does not achieve competitive advantage doing work that can be done just as well – if not much
better – by another entity.
a) The entity should therefore focus activities within the entity on core competencies, with the aim of gaining
more competitive advantage in these core areas.
b) The entity should outsource work to entities that have core competencies in these areas of work. They should
be able to add value more effectively than the entity would if it were to carry out the work internally instead of
outsourcing it.
c) The outsourced work might require specialist skills that the entity cannot employ internally, because it cannot
offer enough work or a career structure to full-time specialists. It therefore outsources its specialist work to
specialist firms.
Problems with outsourcing
The nature of the relationship with suppliers of outsourced work is critical to the successful implementation of
strategy.
A potential problem with outsourcing is the loss of control over the outsourced activities. This can be significant
when something goes wrong, and action performance does not meet expectations.

For example, a company might outsource its IT work and might commission a software company to write some
new software. The software, when written, might not function properly. The problem is then to manage the
external relationship with the software company, to find a satisfactory solution to the problem.
The virtual organisation
The virtual company or virtual organisation does not have an identifiable physical existence, in the sense that it
does not have a head office or operational premises. It might not have any employees.
A virtual organisation is operated by means of:
a) IT systems and communications networks – normally telephone and e-mail
b) business contacts for outsourcing all operations.
Contingency theory of organisation structure

Contingency theory of organisation structure is that the most effective organisation structure for an entity depends
on the circumstances. An entity should use the organisation structure that is best suited to its size, complexity and
strategies. Organisation structure will vary according to differences in organisational processes and internal and
external relationships.
The consequences of adopting the wrong organisational structure may at best be mere inefficiency and at worst
corporate failure.
Benefits of adopting an appropriate structure

a) Staff morale is high as employees embrace reporting lines and logistics
b) Employees understand their roles and objectives
c) Relationships and processes appear logical and well organised
d) The company’s operations are highly efficient and the structure helps to add value
e) Customers and clients receive quality products, on time and at fair prices
f) Decisions can be made quickly and by the right people
g) Inefficiencies such as redundant layers of management and delays in responding to customer queries are
minimised
Consequences of adopting a deficient structure

a) Staff can become frustrated through perceived overly bureaucratic processes
b) Decision making can be delayed as it may be difficult to identify or communicate with decision makers who
are not local to the customers. Furthermore, decisions made within a centralised organisation where cultural
variation is widespread may be inappropriate to sensitive customers.
c) There may be a lack of clarity of roles and responsibilities, particularly where multiple reporting lines exist in
matrix organisations
d) The operations may be inefficient – for example the delivery costs of adopting one large country-based central
warehouse may exceed the cost of operating three regional-based warehouses
e) Customers and clients lose out through delays and lower quality
f) Reputation and brand image could be damaged if the market concludes that an organisation has adopted the
wrong structure. This could ultimately impact (lower) the share price of listed companies which may then be at
risk of a corporate take-over. Many bought-out companies then go through a restructuring phase to streamline
operations and improve profitability.
g) Ultimately a ‘bad fit’ may result in significant loss of customers to competitors and overall corporate failure.

Burns and Stalker: mechanistic and organic structures

An example of contingency theory is the management study of Burns and Stalker. They identified two categories
of organisation structure, a mechanistic structure and an organic structure.
Mechanistic structure which is characterized by the following:
• Rigid task definition
• Vertical communication
• High degrees of formalization
• Authority-based influence
• Centralized control
• Complex differentiation
• High degree of co-ordination
Organic management structure is characterized by the following:
• Flexible task definition
• Lateral communication
• Low degrees of formalization
• Expertise-based influence
• Decentralized control
• Simple differentiation
• Low degree of co-ordination
The differences between the two types of structure are set out in the table below:
Mechanistic organisation Organic organisation
Authority is delegated through a hierarchical There is a network structure of control.
management structure. Power over decision-making is Individuals influence decisions on the basis of
obtained from a person’s position in the management their knowledge and skills, regardless of their
hierarchy. position in the organisation.
A bureaucracy. Control is cultural, not bureaucratic.
Communication is vertical, up and down the chain of There is much more horizontal communication
command. and free-flow of information.
Jobs are specialised, and individuals concentrate on their Specialist knowledge and expertise are shared,
specialist area. Doing the job is the main priority. and contribute to the ‘common task’ of the entity.
Contributing to the common task is the main
priority.
Job descriptions are precise. Job descriptions are less precise.
Tasks and operations are governed by instructions from Communications consist of information and
a superior manager. advice, rather than decisions and instructions
from a manager.
Burns and Stalker found from their research that one type of organisation is not necessarily better than the other.
However, they did find that:
a) an organic structure is better-suited to an entity that needs to be responsive to change in its products and
markets, and in its environment.
b) a mechanistic structure is better suited to an entity in a stable environment, where change is gradual.

Burns and Stalker also found that entities with an organisation structure better suited to their environment perform
better than entities whose structure is not well suited to their environment. For example, an entity with a
mechanistic structure performs better in a stable market than an entity with an organic structure.
Mintzberg’s five building blocks for organisational configurations

Mintzberg argues that an organisation structure exists to coordinate the activities of different individuals and work
processes, and to implement plans into action. The nature of the organisation structure varies with differences in
processes and internal and external relationships. He suggested that there are five elements or ‘building blocks’
in an organisation. The way in which an entity is organised most effectively depends on which of these elements
is dominant.
a) Strategic apex. This is the top management in the organisation.
b) Operating core. This represents the basic work of the organisation, and the individuals who carry out this
work.
c) Middle line. These are the managers and the management structure between the strategic apex and the
operating core.
d) Support staff. These are the people who provide support for the operating core, such as secretarial staff,
cleaning staff, repair and maintenance staff and IT staff.
e) Technostructure. These are staff without direct line management responsibilities, but who seek to standardise
the way the organisation works. They produce procedures and systems manuals that others are expected to follow.
Mintzberg argued that the group that has the greatest influence determines the way in which the entity is organised,
and the way that its processes and its relationships operate.
a) When the strategic apex is powerful, the organisation is entrepreneurial. The leaders give the organisation its
sense of direction and take most of the decisions.
b) When the technostructure is dominant, the organisation often has the characteristics of a bureaucracy, with
organising, planning and controlling prominent activities. The organisation continually seeks greater efficiency.
c) When the organisation is divisionalised and local managers are given extensive authority to run their own
division in the way that they consider best, the middle line is dominant.
d) Some organisations are dominated by their operating core, where the basic ‘workers’ are highly-skilled and
seek to achieve proficiency in the work that they do. Examples might be schools, universities, and hospitals,
where the teachers and doctors can have an exceptionally strong influence.
e) In a professional bureaucracy, such as a firm of accountants or lawyers, the middle line tends to be short (close
contact between the partners and staff). Unexpectedly, in view of the amount of standardised audit documentation,
the technostructure is small. This is because, although the documentation is extensive, the use of the
documentation is unique for each client. No two audits or law cases are the same, so standardisation must be
limited.
Mintzberg’s six organisational configurations

Mintzberg identified six different organisational configurations, each having a different mix of the five building
blocks. He suggested that the most suitable organisational configuration would depend on the type and complexity
of the work done by the entity. The six configurations are:
a) simple structure
b) machine bureaucracy

c) professional bureaucracy
d) divisionalised form
e) adhocracy
f) missionary organisation
Simple structure
This is found in an entrepreneurial company. The strategic apex exercises direct control over the operating core,
and there is no middle line. There is also little or no support staff or technostructure. The strategic apex might be
an owner-director of the company. This type of structure is very flexible, and can react quickly to changes in the
environment, because the strategic apex controls the operating core directly.
Machine bureaucracy
In a machine bureaucracy, the technostructure is the dominant element in the organisation. The entity is controlled
and regulated by a bureaucracy and the emphasis is on control through regulation. It is difficult for an entity with
this type of organisation to react quickly to environmental change. This structure is therefore more suitable for
entities that operate in a stable business environment.
Professional bureaucracy
In this type of structure, the operating core is the dominant element. Mintzberg gave the name ‘professional
bureaucracy’ to this type of structure because it is often found in entities where the operating core consists of
highly-skilled professional individuals (such as investment bankers in a bank, programmers in a software firm,
doctors in a hospital, accountants and lawyers in a professional practice, and so on).
Divisionalised form
In this type of structure, the middle line is the dominant element. There is a large group of powerful executive
managers, and the organisation structure is a divisionalised structure, each led by a divisional manager. In some
divisionalised structures, divisional managers are very powerful, and are able to restrict the influence of the
strategic apex on decision-making.
Adhocracy
Mintzberg identified a type of organisation that he called an ‘adhocracy’. This is an organisation with a complex
and disordered structure, making extensive use of teamwork and project-based work. This type of organisation
will be found in a complex and dynamic business environment, where innovation is essential for success. These
organisations might establish working relationships with external consultancies and experts. The ‘support staff’
element can therefore be very important.
Missionary organisations
In this type of organisation, all the members share a common set of beliefs and values. There is usually an
unwillingness to compromise or accept change. This type of organisation is only appropriate for small entities
that operate in simple and fairly static business environments.

Differences between the six organisational configurations

The differences between the six organisational configurations are summarised below. Note in particular how each
configuration is likely to be suitable for different types of business environment and different types of
organisational relationships. The main controlling and coordinating factor within each type of configuration also
differs.
Business Internal features Key organisational Main coordinating
environment element factor
Simple structure Simple and Small entity Strategic apex Direct control by
dynamic Simple tasks strategic apex
Machine Simple and static Large and well- Techno-structure Standardised procedures
bureaucracy established.
Regulated processes and
systems
Professional Complex but static Simple processes. Operating core Standardisation of skills
bureaucracy Control by the
professionals
Divisionalised form Fairly static Large and well- Middle line Standardisation of
Diverse activities established. outputs
Divided activities
Adhocracy Complex and Complex tasks. Support staff or Flexibility and adaptation
dynamic Young entity operating core
Missionary Simple and static Simple systems. - Standard beliefs and
organisation Fairly well established (not values
young)

Syllabus Reference 2 (d)

Management Accountability and Authority
Authority – ‘Authority’ means ‘Legal or rightful power, a right to command or to act’. Applied to the managerial
jobs, the power of the superior to command the subordinate to act or not to act in a particular manner, is called
the ‘authority’.
Responsibility – It is an obligation of a sub-ordinate to perform assigned duties. It is always bonded between
superior and sub-ordinate. When superior assigns any duty or work to sub-ordinate by his authority it becomes a
responsibility on the part of sub-ordinate to perform that duty.
Accountability – Accountability is the obligation to carry out responsibility and exercise authority in terms of
performance standards established. Accountability is most meaningful if standards for performances are
predetermined and if they are fully understood and accepted by the subordinates.
Difference between the Three Terms:

The three terms, Authority, Responsibility and Accountability are inter-related. Authority denotes granting of
power. Responsibility indicates to satisfactory completion of obligation and accountability refers to answerability
regarding one’s work and conduct.
Authority could be delegated, however, responsibility can be shared but cannot be delegated. Accountability
neither can be shared nor delegated. One has to answer about his work and conduct.
The three terms go together. Authority and responsibility follow each other. Responsibility without authority is
as meaningless as authority without responsibility. Both should be there. One alone cannot move. Similarly,
accountability follows responsibility.
The accountability arises only because there is an authority, the aim of which is to get the decision carried out
with fuller responsibility. Likewise accountability is needed because objectives are to be attained. Accountability
makes over conscious of his responsibilities without which one may go stray and shirk his responsibility.
Thus, it can be said that a man cannot reduce his responsibilities by delegation, he also cannot reduce his
accountability to higher authority through delegating. A man will still be accountable directly to his superior for
the authority he has delegated and for the tasks he has assigned to his subordinates.
Features of Authority:
1. It is the power to make the decisions and to see that they are carried out in the right time in the right way.
2. It is the relationship between two individuals i.e., superior and sub-ordinate.
3. Authority is exercised to achieve organizational goals.
4. It is a legitimate right and given to position i.e., formal.
5. Authority is key to the managerial job.
6. Authority can be delegated.
7. The exercise of authority is always subjective.
Kinds of Authority:
1. Line Authority: This authority is exercised by the managers by virtue of their position. It is the right to issue
orders, instructions and decisions to be implemented by the people down the hierarchy. Organizational objectives

can be achieved through this authority. It flows from top to bottom and creates superior- sub-ordinate relationships
(scalar chain).
2. Staff Authority: This authority is exercised by staff specialists who do not form part of the formal chain of
command. With increase in size of the organizations, line managers find it difficult to deal with every situation
on their own. Staff specialists, therefore, counsel, assist and advise the line managers on various matters.
3. Functional Authority: Every departmental head controls the activities of his department and is assisted by
various staff specialists in doing so. The staff specialists do not enjoy line authority over people of line
departments but they are experts in their area of specialization and exercise authority (over managers of other
departments), which is formalized on account of their expertise and competence. This is known as functional
authority.
Restrictions to Authority:
1. Legal Constraints: A manager’s authority is restricted by the enterprise goals, objectives, politics,
programmes and procedures etc. These all the governed by the articles and memorandum of association which
are governed themselves by the commercial and industrial laws of the country. Every manager, at any level in the
organization, must respect these laws, traditions and restrictions.
2. Natural or Biological Limitations: No sub-ordinate can be ordered to do a job which is impossible to be
performed due to biological limitations. For example, one can hardly order a person to walk up to side of a
building or do such impossible things.
3. Physical Limitations: Physical limitations such as climate, geography, chemical elements and so on put limits
on authority, for example, an order to make gold from copper will be ineffectual.
4. Technological Limitations: There are technological limits on authority too. Until and unless any performance
is technically possible, an order to do any such work would be finite.
5. Authority Delegation Limitations: They extend of delegation of authority also restricts the authority of a
manager. Generally, the authority to make decisions or the right to command decreases as it proceeds from the
highest to lowest level of any organization.
6. Social Constraints: Social factors impose restrictions on the exercise of authority by a manager. For instance,
the task assigned to employees must conform to the group’s fundamental social beliefs, norms, codes and customs.
7. Organizational Limitations: A manager’s authority is restricted by the objectives, policies, rules of the
organization as laid down in memorandum of association, trickles of association, partnership agreement, policy
manual etc.
8. Economic Constraints: Market forces and other economic conditions restrict managerial authority. A sales
manager cannot ask his sales persons to sell products at a higher price in a highly competitive market.
9. Limited Span: A manager’s authority is limited because there is a limit on the number of sub-ordinates which
he can effectively supervise. A manager cannot take decision about unlimited number of sub-ordinates.
Factors Affecting the Limits of the Authority:

External Factors:
1. Government rules and regulations
2. Collective bargaining and agreements
3. Dealer, supplier and customer agreements
4. Social beliefs, goals habits and customs
Internal Factors:
1. Corporate laws and organization chart

2. Budgets
3. Policies, rules and regulations
4. Position description
Responsibility:
It is an obligation of a sub-ordinate to perform assigned duties. It is always bonded between superior and sub-
ordinate. When superior assigns any duty or work to sub-ordinate by his authority it becomes a responsibility on
the part of sub-ordinate to perform that duty.
Features:
1. It can be assigned to human beings only not to non-living things such as machines.
2. It arises out of superior and sub-ordinate relationships.
3. It may be a continuing obligation on confined to the performance of a single person.
4. It may be defined in terms of functions or targets or goals.
5. Essence of responsibility is to perform duty assigned to him.
6. It is a derivative of authority.
7. It is an absolute and cannot be delegated.
8. It flows upward (i.e., sub-ordinate is responsible to his superior).
9. Accountability arises out of responsibility and the two go together.
Forms of Responsibility:
(i) Operating Responsibility – It is the obligation of an employee to carry out the assigned tasks.
(ii) Ultimate Responsibility – It is the final obligation of the manager who ensures that the task is done efficiently
by the employees.
Accountability:
It means to be responsible for explanation to any superior. When a subordinate works under a boss and he is
assigned some duties to be performed, he will be accountable for doing or not doing that work. Thus,
accountability is a derivative of responsibility. So accountability is the personal answerability for results.
Features:
1. It is in fact the legal responsibility.
2. It can neither be shared nor delegated.
3. It always to be assigned duties only.
4. It always from downward to upward.
5. It is different from responsibility.
6. It is unitary in nature i.e., a sub-ordinate under the principle of unity of command is accountable only to one
officer who has delegated authority to him. It avoids confusion and conflicts.
Meaning and Sources of Power:

Power may be defined as “the ability to exert influence. If a person has power it means that he is able to change
the attitude of other individuals”.

In any organization for sound organizational stability, power and right to do things must be equated, when power
and authority for a given person or position are roughly equated, we may call the situations as “Legitimate Power”.
Sources of Powers:
(i) Corrective Power: It is based on the influencer’s ability to punish the influence for not carrying out orders or
for not meeting requirements.
(ii) Expert Power: This power is based on belief that the influencer has some relevant expertise or special
knowledge that the influence does not have. For example, a doctor has expert power on his patients.
(iii) Legitimate Power: The power corresponds to the term authority. It exists when an influencer acknowledge
that the influencer is lawfully entitled to exert influence. In this the influence has an obligation to accept this
power.
(iv) Referent Power: It is based on the influencer’s, desire to identify with or imitate the influence. For example,
a manager will have referent power over the subordinates if they are motivated to emulate his work habits.
(v) Reward Power: This power is based on the influencer having the ability to reward the influence for carrying
out orders.
In having the study of power the role of the influence in accepting or rejecting the attempted influence is very
important. It must be noted that each of the five power bases is potentially inherent in a manager’s position and
his activities.
Relationship of Authority and Responsibility:

In every business unit, internal organization is necessary for its efficient and smooth running. Under internal
organization, duties are determined and distributed among the employees. All activities are combined and
coordinated. The lines of authority are to be determined, a well-recognized principle, to be followed for any
organization and management.
In the internal organization of any concern, there must be a proper assignment of duties among the various
personnel. This means that some people assign and some others have to perform those duties. The former people
have an authority. The latter are subordinates to the former. The relationship of authority and subordination among
the various personnel and groups should be properly determined.
In this sense, authority flows from the superior to the subordinate manager to whom certain duties are assigned
and responsibility is the obligation of the subordinate to accomplish these duties. Responsibility can be discharged
by a single action or it may be a continuous obligation.
Authority and Accountability:

The term ‘Accountability’ is used by a few writers in the field of management to indicate the managers’ liability
for the proper discharge of the duties by his subordinates. In the military, the concept of accountability is used to
indicate the duty and an officer to maintain accurate records and to safeguard public property and funds.
Thus, the three words confusingly used in varying sense in management literature are authority, responsibility
and accountability. A less confusing use would be to use the word ‘authority’ as referring to the power to get
something done, the word ‘responsibility’ as the liability of the individual for failing to discharge his
responsibility. One is thus accountable for failures to his boss.

Syllabus Reference 2 (e)

Performance Management and Incentives
Performance Management?
❖ Performance Management is a continuous and systematic approach that ensures the achievement of
organizational business goals by streamlining employee performance and efforts to match the set goals
efficiently.
❖ Performance management is defined as the process of continuous communication and feedback between
a manager and employee towards the achievement of organizational objectives.
Why is performance management important?

1. Performance management supplements the annual performance review: This prepares both employees
and managers about what to expect during the annual appraisal. It keeps both the manager and the employee in
the loop about ongoing changes to the performance management process, what both can do to streamline it, and
how performance overall can be improved.
2. To employees, continuous performance management indicates that managers value them: Employees
believe that their managers are interested in their work and care about their goals and any issues they may face in
the course of their job. They also become more open to receiving constructive feedback.
The Performance Management Cycle

1. Planning: This stage entails setting employees’ goals and communicating these goals with them. While these
goals should be disclosed in the job description to attract quality candidates, they should be communicated once
again when the candidate becomes a new hire. Depending on the performance management process in your
organization, you may want to assign a percentage to each of these goals to be able to evaluate their achievement.
2. Monitoring: In this phase, managers are required to monitor the employees performance on the goal. This is
where continuous performance management comes into the picture. With the right performance management
software, you can track your teams performance in real-time and modify and correct course whenever required.
3. Developing: This phase includes using the data obtained during the monitoring phase to improve the
performance of employees. It may require suggesting refresher courses, providing an assignment that helps them
improve their knowledge and performance on the job, or altering the course of employee development to enhance
performance or sustain excellence.
4. Rating: Each employees performance must be rated periodically and then at the time of the performance
appraisal. Ratings are essential to identify the state of employee performance and implement changes accordingly.
Both peers and managers can provide these ratings for 360-degree feedback.
5. Rewarding: Recognizing and rewarding good performance is essential to the performance management
process, as well as an important part of employee engagement. You can do this with a simple thank you, social
recognition, or a full-scale employee rewards program that regularly recognizes and rewards excellent
performance in the organization.

Types of Performance Management

1. General Appraisal- In this type of performance management there is continuous communication
between the manager and employee regarding the performance throughout the year. They communicate
about the pre-set goals, the objectives, the performance feedback, and set the new goals.
2. 360-Degree Appraisal- In 360-degree appraisal the feedback about the performance and behavior of the
employee is provided by peers and the manager of the employees.
3. Technological Performance Appraisal- This appraisal is totally based on the technical knowledge of
the employee. The technical expertise and capabilities of the employee are throughput and identified by
the manager.
4. Employee Self-Assessment- The employee compares their own performance with the standard
performance expected from them. The manager has discussions with employees about their performance
achievements or failure.
5. Manager Performance Appraisal- This system is designed for the appraisal of the manager. Here the
feedback from the team members and client is collected to evaluate the performance of the manager.
6. Project Evaluation Review- This is considered the best way to identify the performance of an
employee at work. After completion of each project, the performance of the employee is evaluated, and
based on the review another project is assigned to the employee.
7. Sales Performance Appraisal- A specific monthly or yearly sale target is assigned to the employee at
the beginning of the year. At the end of the financial year, the salesperson is judged on the set target and
the sales result of the employee. In this system, it is important to set a realistic sales target for the employee.
The objectives of the performance management system

• It enables the employee to achieve the work performance of set standards
• It helps to identify the skills and knowledge required to perform a job efficiently.
• It is a very important factor to motivate employees and boost employee empowerment
• It provides a communication channel between the team and supervisor. It makes the goal-setting process
more transparent.
• It identifies the issues which leads the low performance and also resolve the issues by providing suggestion
about development interventions.
• It provides data for several important decisions such as promotions, strategic planning, succession
planning, and performance-based compensation.
The purposes of the performance management system

1. Feedback Mechanism: The purpose of the performance management system is to develop a
systematic feedback mechanism. It creates a pathway through which the employees become aware of
their contribution to the organization in terms of performance. It also conveys to the employee the
improvement required in the performance to meet the set standards.
2. Development Concern: It addresses the development issues in the organization. It recognizes the
skill and knowledge development required in the organization and facilitates the training programs
which are appropriate.
3. Documentation Concern: It creates a database for the organization in which all the information
about the employees is collected. The information about the performance level, skills, knowledge,
expertise, and regular rewards received by the employee is maintained in this database.

4. Diagnoses of Organizational Problems: The up and down in the performance of the employee is
recorded using a performance management system. This record helps to diagnose the organizational
problems. It provides an idea about where the work is going wrong and what improvements are required
to improve the performance status of the organization.
5. Employment Decisions: Based on the performance management records various important decisions
are taken by the management. The decision includes an arrangement of training and
development programs, promotion, increase or decrease in compensation, hiring decisions, and many
more.
The advantages of the performance management system

1. Documentation: With the help of a performance management system you can generate a
performance document for every employee for the particular financial year. This paper can be
maintained in the employee file to cover the performance graph of the employee throughout the
working years.
2. Structure: It creates a formal structure for communication between supervisor and employee. It
makes it necessary for supervisors and employees to take out time and discuss the performance as well
as bring out a solution to improve performance.
3. Feedback: Employees are often interested to know the feedback about their performance in the
organization. Here performance management system makes it mandatory for the supervisor to provide
timely performance feedback to the employees.
4. Clarify Expectations: Using performance management system managers can clarify the
performance and behavior expectations that employees should understand.
5. Annual Planning: It plays a vital role in the annual planning of hiring, training and development
practices, and goal settings.
6. Motivation: As a part of a comprehensive compensation strategy the performance management
system is very helpful to motivate the employees to improve their performance.
The disadvantages of the performance management system are as follows:

1. Creates Negative Experience: The system can create a negative experience for the employees, if the
performance appraisal is not done in a fair way and feedback is conveyed in a wrong way.
2. Time-Consuming: It is very overwhelming for managers to evaluate and manage the performance of
hundreds of employees working in the organization. The process becomes time-consuming and not
worth it.
3. Natural Biases: As managers are responsible for several steps in the performance management
system a natural bias from the manager's end is expected. The natural biases can result in rater errors.
Performance management feedback

1. Areas to Improve: On a timely basis the management and the supervisor provide information to the
employee about the areas in which they can improve their performance. It includes tips, ways, and
coaching for performance improvement.
2. Game Plan for Improving: Motivation and direction is provided through feedback in order to create a
game plan to improve performance.
3. Achievements and Accomplishments: In a performance management system, the feedback includes
both positive and negative information about employee performance. Managers can declare the

achievements and accomplishments of the team member in public meetings or on the common
communication platform to motivate the performing employee. A one-to-one meeting is suggested to
convey the negative feedback to the employee.
4. Attitudes and Behaviors: The attitudes and behaviors of the employee are also addressed during
performance management. Through performance feedback, the managers put forward the favorable
behavior expected from the employee to make a teamwork success. The upbeat attitude of the employees
keeps the organization thriving and inspired.
5. Goals for Next Year: In the yearly feedback meetings the managers discuss with the employee about
the upcoming challenges and work responsibilities. New goals and objectives are set for the employees
for the next financial year. The standard performance expected of the employee is also conveyed in the
performance feedback meeting.

Risk Management Framework for Organization
Business Risk
Business risk is the exposure a company or organization has to factor(s) that will lower its profits or lead it to fail.
Anything that threatens a company's ability to achieve its financial goals is considered a business risk. There are
many factors that can converge to create business risk. Sometimes it is a company's top leadership or management
that creates situations where a business may be exposed to a greater degree of risk.
However, sometimes the cause of risk is external to a company. Because of this, it is impossible for a company
to completely shelter itself from risk. However, there are ways to mitigate the overall risks associated with
operating a business; most companies accomplish this through adopting a risk management strategy.
These threats could emerge from:

• The external business environment, including macroeconomic forces well outside the control of
management (like inflation, foreign exchange rates, or prevailing interest rates).
• Industry-specific risks, like the level of concentration in the industry, regulatory risk, barriers to entry, the
threat of disruption, and other factors.
• Company or firm-level concerns, like ineffective management, reputational risk, a toxic corporate culture,
and customer or supplier concentration risk.
Types of Business Risks

1. Compliance risk: A compliance risk is a risk to a company's reputation or finances that's due to a company's
violation of external laws and regulations or internal standards. A compliance risk can result in a company paying
punitive fines or losing customers.
Example: If a manufacturing company's employees don't follow government safety regulations while building
machines, their behavior can be a compliance risk for the company.
2. Legal risk: A legal risk is a specific type of compliance risk that occurs when a company fails to follow a
government's rules for companies. Legal risks can result in expensive lawsuits and a negative reputation for
companies. Here are a few types of legal risks for companies:
• Contractual risks: A contractual risk occurs when a company doesn't fulfill the obligation or liabilities
in a business contract.
• Dispute risks: A dispute risk happens when a legal conflict with a customer, stakeholder or community
member interrupts a business' processes.
• Regulatory risks: A regulatory risk can happen if a government regulator withdraws a company's license
to operate.
Example: If a factory fails to follow regulations for pollution or hazardous waste, it could receive a fine from the
government and experience a lower reputation among consumers, stakeholders and community members.
3. Strategic risk: A strategic risk occurs when a company's business strategy is faulty or its executives fail to
follow a business strategy at all. A company may fail to reach its goals due to strategic risks.

Example: If a pharmacy chain positions itself in its market as a provider of low-cost prescriptions and a
competitor begins selling prescriptions at a lower rate than the pharmacy chain, it puts the pharmacy chain at a
strategic risk of losing profits to a competitor.
4. Reputational risk: A reputational risk threatens a company's standing or public opinion. Reputational risks
can result in a profit decrease and lack of confidence among company shareholders.
Example: A clothing company prints an offensive image on a sweatshirt, and the story goes viral on social media,
causing a wave of negative news coverage. This bad press damages the company’s reputation and causes sales
to drop.
5. Operational risk: Operational risk occurs when a business' day-to-day activities threaten to decrease its profits.
Internal systems or external factors can cause operational risks for companies. Here are a few specific types of
operational risks:
• Employee errors: A business can experience a threat to its operations if employees make significant
mistakes at work.
• Damage to assets: A natural disaster can damage a company's physical assets, which is an operational
risk.
• External fraud: When a company experiences external fraud such as a theft by a third party, the theft
poses an operational risk to the company.
Example: If a retail fashion business fails to train its customer service representatives on its refund policy and
the representatives refuse refunds for customers with defective products, the company can experience an
operational risk.
6. Human risk: Human risks in business can arise from employees' failure to perform their essential duties in the
workplace. Human risks can arise from factors employees can't control, like health issues, or intentional actions
like theft or fraud. When a business faces human risks, it can experience a loss of profits.
Example: Alcohol abuse can cause employees to make mistakes at work, which can lower productivity. The lack
of productivity can cause the business to lose profits or even lead to legal risks if the alcohol abuse leads to a
workplace injury.
7. Security risk: A business can experience a security risk if it fails to create or follow cybersecurity strategies.
Ineffective training for employees, lack of software testing and insufficient policies for security updates can all
put a company's finances and reputation at risk.
Example: If an insurance company has a weak policy for employee passwords, this can pose a security risk for
the company. A hacker or disgruntled employee could take advantage of this policy to release sensitive data,
which can hurt the company’s reputation or impact profits.
8. Financial risk: Financial risks can occur when a company doesn't perform debt management or financial
planning tasks. Market changes or losses can threaten a company's financial standing. Here are a few types of
financial risks for businesses:
• Currency risk: A business can experience currency risks in international business dealings because a
foreign currency's value can depreciate unexpectedly.
• Default risk: Taking out a business loan with greater interest than a company can afford can put a
company at risk of defaulting, or not paying, the loan.

• Liquidity risk: A company faces a liquidity risk when it can't quickly convert its assets into cash.
Example: A marketing company takes out a high-interest loan in anticipation of growing its client base, but the
company doesn't grow as fast as its executives anticipated. The loan's high interest rate puts the marketing
company at risk of defaulting on the loan, which may negatively impact the company's financial operations.
9. Competition risk: A competition risk can happen when a competitor takes an increasing share of the market
for a product or service. It's sometimes called a comfort risk because it can result from a company's executives
becoming so comfortable with a company's performance that they fail to make continual improvements with the
company's products or services.
Example: Business A sells printers. Business A may experience a competition risk when a competitor, Business
B, uses technological innovations to sell printers with more capabilities to Business A's customers.
10. Physical risk: Physical risks are threats to a company's physical assets, like equipment, buildings and
employees. Causes of physical risks can include damage to buildings from a fire or natural disaster and lack of
training on proper equipment use. Businesses may need to pay for repairs to physical assets because of physical
risks.
Example: A media company owns a building that houses a newspaper staff and a printing plant. The building
can be prone to fires if employees of the printing plant fail to properly inspect and maintain printing equipment.
The lack of maintenance and inspections can pose a physical risk to the building, its equipment and the company's
employees.
How to Identify Business Risks

1. Analyze business processes: The first step to identifying business risks is to analyze processes. You can
perform a SWOT analysis to evaluate the company's performance in the following areas:
• Strengths: Identifying your company's strengths can help you learn what the company is doing well. You
can also expand on strengths to protect against business risks.
• Weaknesses: When you identify your company's weaknesses, you can develop strategies for
strengthening the company in those areas.
• Opportunities: You can perform market research to learn about your company's potential for growth or
other opportunities to improve.
• Threats: You can review internal and external factors that can threaten the business' bottom line, or its
risks.
2. Survey for risks at every level: After you analyze workflows and processes, you can look for risks at every
level of the business. Anonymously surveying employees from management to entry-level staff can help you
identify threats to each business area.
3. Identify common risks in your industry: You can perform market research to identify the strengths,
weaknesses and risks of your competitors in your industry or area. Looking for common risks for similar
businesses can give you ideas for policies and processes that reduce these risks.
4. Record risks: You can create a record for each risk to learn about recurring threats to the business' reputation
or profits. If a business experiences the same risks repeatedly, you can create policies that help protect the business
against the threat.

Ways to Minimize Business Risks

• Hire a business risk consultant. You can hire a risk consultant to help you identify areas of risk, calculate
their likelihood and help develop plans to address them.
• Hire an accountant. A certified public accountant can help your company avoid compliance and financial
risks.
• Develop a risk management strategy. After identifying risks, you can devise a plan for ways to mitigate
current and future risks to your business.
• Buy an insurance plan. You can research and purchase an insurance plan that can help protect your
business from risks.
• Perform research before committing to a loan. A business loan can be a financial risk to a business if
its interest or payment are too high. You can mitigate this risk by researching available loans and taking a
loan that is financially viable for your business' performance.
• Document all relevant financial information. Documenting finances can help you keep your records
organized and lower the risk of fraud or theft.
• Stay informed of all laws and regulations. Performing research on applicable corporate finance laws
and rules in your area can help you avoid compliance risks.
• Analyze the risks and rewards of your choices. You can quantify the potential risks of a business choice
and compare them to the potential rewards to help you mitigate risks and maximize rewards.
Enterprise Risk Management

Enterprise risk management (ERM) is the process of identifying and addressing methodically the potential events
that represent risks to the achievement of strategic objectives, or to opportunities to gain competitive advantage.
Enterprise risk management (ERM) is a methodology that looks at risk management strategically from the
perspective of the entire firm or organization. It is a top-down strategy that aims to identify, assess, and prepare
for potential losses, dangers, hazards, and other potentials for harm that may interfere with an organization's
operations and objectives and/or lead to losses.
Components of Enterprise Risk Management

ERM consists of eight interrelated steps based on senior management’s business decision-making and processes:
1. Objective Setting: Before determining whether a risk should be accepted or denied, you need to assess
your business goals. Management, in conjunction with the board of directors, must first establish the
company’s mission and success metrics to ensure that those objectives align with the decided risk appetite.
2. Risk Assessment: A risk assessment is the foundation of your ERM process. This systematic, step-by-
step, process involves risk identification, evaluation, and prioritization. It also includes determining the
likelihood and impact of each risk and analyzing your current security controls.
3. Risk Response: Once you establish the risks that could potentially affect your organization, you need to
align responses to your objectives. You can choose a strategy to avoid, accept, reduce, or share for each
significant risk. It’s also crucial to document the steps to risk mitigation (the actions that will be taken to
manage each risk.)
4. Internal Business Environment: Your company culture and code of conduct will influence the way your
employees deal with risks. The managerial skills of your leaders will drive a healthy risk-aware culture
and assure that critical risks are never overlooked.
5. Event Identification: After determining your risk tolerance and risk appetite, you must review any
potential event that can prevent your company from meeting its goals and business objectives. Whether

internal or external, all events must be classified as either opportunities or risks and then aligned to the
overarching business strategy.
6. Control Activities: Your risk response and event identification processes require the creation of robust
controls: policies, procedures, roles, responsibilities, and other “checks and balances” to implement the
quick and effective responses.
7. Information and Communication: Employee training and education about risks will improve awareness
beyond your leadership and compliance teams. Involving your employees in this process will help them
make decisions that will reduce the organization’s risk exposure.
8. Monitoring: ERM must be continuously monitored to stay on top of the evolving risk landscape through
internal audits, external audits, and as a part of ongoing management activities.
How to Implement Enterprise Risk Management Practices

ERM practices will vary based on a company's size, risk preferences, and business objectives. Below are best
practices most companies can use to implement ERM strategies.
• Define risk philosophy. Before implementing any practices, a company must identify how it feels about
risk and what its strategy around risk will be. This should involve strategic discussions between
management and an analysis of a company's entire risk profile.
• Create action plans. With a company's risk philosophy in hand, it is time to create an action plan. This
defines the steps a company must take to protect its assets and plans to protect the future of the
organization after a risk assessment has been performed.
• Be creative. When considering risks, ERM entails thinking broadly about the problems a company may
face. Though far-fetched, it is in a company's best interest to think of as many challenges it may face and
how it will respond (or decide to not respond) to should the event happen.
• Communicate priorities. A company may determine several high-important risks are critical to mitigate
for the continuation of the company. These priorities should be communicated and broadly understood
as the risks that should not be incurred under any circumstance. Alternatively, a company may wish to
communicate the plans if the event were to occur.
• Assign responsibilities. When an action plan has been devised, specific employees should be identified
to carry out specific parts of the plan. This may include delegating tasks to specific positions should
employees leave the company. This not only allows for all action items to be worked on but will hold
members responsible for their area(s) of risk.
• Maintain flexibility. As companies and risks evolve, a company must design ERM practices to be
adaptable. The risks a company faces one day may be different the next; the company must be able to
carry its current plan while still making plans for new, future risks.
• Leverage technology. ERM digital platforms may host, summarize, and track many of the risks of a
company. Technology can also be used to implement internal controls or gather data on how performance
is tracking to ERM practices.
• Continually monitor. Once ERM practices are in place, a company must ensure the practices are
adhered to. This means tracking progress towards goals, ensuring certain risks are being mitigated, and
employees are performing tasks as expected.
• Use metrics. As part of monitoring ERM practices, a company should develop a series of metrics to
quantifiably gauge whether it is meeting targets. Often referred to as SMART goals, these metrics keep
a company accountable on whether it met objectives or not.

Pros
• May make a company more prepared for risks and uncertainties
• May leave employees more satisfied with the future state of the company
• May result in greater customer service as companies are prepared for certain situations
• May result in efficient reporting to upper management that enhances decision-making
• May lead to more efficient company-wide operations
Cons
• May not accurately identify the risks a company is likely to experience
• May not accurately assess the financial impact or likelihood of an outcome
• Often requires time investment from a company in order to be successful
• Often requires capital investment from a company in order to be successful
What Types of Risks Does Enterprise Risk Management Address?

ERM can help devise plans for almost any type of business risk. Business risk threatens a company's ability to
survive, and these risks may be further classified into different risks discussed below. In general, ERM most
commonly addresses the following types of risk:
• Compliance risk threatens a company due to a violation of external law or requirement. An example of
compliance risk is a company's inability to produce timely financial statements in accordance with
applicable accounting rules such as GAAP.
• Legal risk threatens a company should the company face lawsuit or penalty for contractual, dispute, or
regulatory issues. An example of legal risk is a billing dispute with a major customer.
• Strategic risk threatens a company's long-term plan. For example, new market participants in the future
may supplant the company as the lowest-cost provider of a good.
• Operational risk threatens the day-to-day activities required for the company to operate. An example of
operational risk is a natural disaster that damages a company's warehouse where inventory is stored.
• Security risk threatens the company's assets if physical or digital assets are misappropriated. An example
of security risk is insufficient controls overseeing sensitive client information stored on network servers.
• Financial risk threatens the debt or financial standing of a company. An example of financial risk is
translation losses by holding foreign currency.
Roles and Responsibilities in Risk Management

Role:
▪ Provide a methodology to identify and analyze the financial impact of loss to the organization, employees,
the public, and the environment.
▪ Examine the use of realistic and cost-effective opportunities to balance retention programs with commercial
insurance.
▪ Prepare risk management and insurance budgets and allocate claim costs and premiums to departments and
divisions.
▪ Provide for the establishment and maintenance of records including insurance policies, claim and loss
experience.
▪ Assist in the review of major contracts, proposed facilities, and/or new program activities for loss and
insurance implications.
▪ In cooperation with General Counsel, maintain control over the claims process to assure that claims are
being settled fairly, consistently, and in the best interest of the entity.

Duties/Responsibilities:
• Conducts risk assessments, collecting and analyzing documentation, statistics, reports, and market trends.
• Establishes policies and procedures to identify and address risks in the organizations services and
departments.
• Reviews and assesses risk management policies and protocols; makes recommendations and implements
modifications and improvements.
• Recommends and implements risk management solutions such as insurance, safety and security policies,
business continuity plans, or recovery measures.
• Reviews and analyzes metrics and data such as cash flow, inventory, breakage, and employee activity that
could uncover fraudulent behavior.
• Drafts and presents risk reports and proposals to executive leadership and senior staff.
• Performs other duties as directed.
Required Skills/Abilities:
• Thorough understanding of policies and best practices of risk management.
• Excellent verbal and written communication skills.
• Excellent mathematical and critical thinking skills.
• Excellent analytical and problem-solving skills.
• Excellent organizational skills and attention to detail.
• Strong supervisory and leadership skills.
• Proficient with Microsoft Office Suite or related software to prepare reports and policies.

Components of Internal Control Reporting Framework
For companies to be profitable, they need their processes to run as efficiently and effectively as possible. For
obvious reasons, planning how companies perform these processes play a fundamental role in ensuring
profitability. However, just planning out their processes does not suffice. Companies must also have systems to
ensure their processes run according to the set plans. Therefore, these companies must have a system for internal
controls.
Internal Control
Internal controls are the processes and procedures implemented by a company to ensure the effective and efficient
running of its operations. The primary purpose of internal controls is to detect and prevent fraud and error in a
company. However, it may also have many other purposes. In the modern world, almost all companies around
the world have a system of internal controls for its operations.
For some companies, such as those with public-listed status, internal controls are statutory. Similarly, some other
jurisdictions may set laws and regulations based on which companies must establish a system of internal controls.
However, that does not mean other companies cannot have internal control systems. Companies that are exempt
from statutory requirements can still adopt internal controls voluntarily.
Objectives Of Internal Control

• Safeguard the assets of a company.
• Prevent and detect fraud and error.
• Ensure orderly and efficient conduct of business, including following its internal policies.
• Ensure the accuracy and completeness of internal accounting records.
• Ensure timely preparation of financial information.
• Ensure the high quality of both internal and external reporting.
• Ensure compliance with any applicable laws and regulations.
Why Internal Control Is Important?

• Internal controls can help reduce the risk of a company to a minimum.
• They can help address the assertions related to financial statements.
• They can help in the detection and prevention of fraud.
• Internal controls play a crucial role in the prevention of material misstatements in financial statements.
• They can play a critical role in setting the culture of a company.
• They ensure the preparation of timely and accurate financial statements.
Limitation of Internal Control

a. Unforeseen Circumstances: No matter how robust the internal controls of a company are, they still cannot
compensate for unforeseen circumstances. Usually, companies design their internal controls to cover a variety
of possible occurrences. These take into account different variables that can go wrong and account for them
in the internal control systems. However, when unforeseen circumstances occur which, the internal controls
failed to account for, the systems fail to compensate for them.
b. Frauds: Internal controls exist to detect and prevent fraud in a company. However, those in charge of carrying
out the internal controls can still manipulate the systems to their advantage. It makes internal control
susceptible to deliberate circumventions. In these cases, internal controls fail to operate or detect the fraud
properly.
c. Human Error: Sometimes, internal controls may fail due to human error as well. While internal controls
help companies prevent chances of fraud or error, they still cannot detect a human error. No matter how well-
designed internal controls are, as long as they require human input, they are susceptible to failure.
d. Management Intervention: The control environment of internal controls also plays a critical role in the
acceptance of internal controls in an organization. However, if the management believes internal controls are
extra formalities that they must go through or don’t apply to them, then internal control systems are of no use.
In the absence of an internal control environment, the limitations of internal controls significantly increase.
Components of Internal Control

The five components of internal control refer to the elements set by the COSO framework. The Committee of
Sponsoring Organizations (COSO) was established in 1985 to sponsor the national commission on fraudulent
reporting. Today, the committee provides and produces guidance for companies around the world regarding the
implementation of internal control systems. The COSO framework identifies five components of internal
controls that ensure proper controls in any business. These five components of the framework are helpful in the
review of the internal control systems of an organization.
1. Control Environment
• Exercise integrity and ethical values.
• Make a commitment to competence.
• Use the board of directors and audit committee.
• Facilitate management’s philosophy and operating style.
• Create organizational structure.
• Issue assignment of authority and responsibility.
• Utilize human resources policies and procedures.
2. Risk Assessment
• Create companywide objectives.
• Incorporate process-level objectives.
• Perform risk identification and analysis.
• Manage change.
3. Control Activities
• Follow policies and procedures.
• Improve security (application and network).
• Conduct application change management.
• Plan business continuity/backups.
• Perform outsourcing.
4. Information and Communication

• Measure quality of information.

• Measure effectiveness of communication.
5. Monitoring
• Perform ongoing monitoring.
• Conduct separate evaluations.
• Report deficiencies.
5 components 17 principles
Control environment 1. Demonstrates commitment to integrity and ethical values
2. Exercises oversight responsibility
3. Establishes structure, authority, and responsibility
4. Demonstrates commitment to competence
5. Enforces accountability.
Risk assessment 6. Specifies suitable objectives
7. Identifies and analyzes risk
8. Assesses fraud risk
9. Identifies and analyzes significant change
Control activities 10. Selects and develops control activities
11. Selects and develops general controls over technology
12. Deploys control activities through policies and procedures
Information and communication 13. Uses relevant information
14. Communicates internally
15. Communicates externally
Monitoring activities 16. Conducts ongoing and/or separate evaluations
17. Evaluates and communicates deficiencies
Components of Internal Control

Control environment
The control environment describes a set of standards, processes, and structures that provide the basis for carrying
out internal control across the organization. A control environment is the foundation on which an effective system
of internal control is built and operated in an organization that strives to
1) achieve its strategic objectives
2) provide reliable financial reporting to internal and external stakeholders
3) operate its business efficiently and effectively, 4) comply
with all applicable laws and regulations
5) safeguard its assets.

The control environment of a company describes its culture and ethics that provide the framework inside it to
work effectively. While the control environment relates to the overall company, it mainly refers to the behavior
of the top management of the company in implementing the controls in place.
The control environment relates to the management’s style and the way it delegates authority, organization of its
staff, and their commitment to the internal control policies. The more important the management places on the
internal controls and systems of a company, the more likely it is that the lower-level staff will also implement
them. In the absence of a proper control environment, even the best thought-out processes and procedures cannot
succeed.
Risk Assessment
The risk assessment forms the basis for determining how risks will be managed. A risk is defined as the possibility
that an event will occur and adversely affect the achievement of organizational objectives. Risk assessment
requires management to consider the impact of possible changes in the internal and external environment and to
potentially take action to manage the impact.
By evaluating the risks of a company, it understands how these risks relate to its objectives. Therefore, it can
identify and implement controls against these risks. However, the risks for every company differs based on several
factors, such as its nature, objectives, industry, etc. Therefore, to assess the risks of a particular company, it is
critical to understand these factors as well.
The goal of the risk assessment process is to identify risks, whether internal or external to the company, which it
faces due to its business. Both internal and external factors require attention when it comes to risk assessment.
However, external factors may require more analysis as these are outside the control of the company. Similarly,
based on whether risks are controllable or not, companies can decide on how to tackle them.
Control Activities
Control activities are actions (generally described in policies, procedures, and standards) that help management
mitigate risks in order to ensure the achievement of objectives. Control activities may be preventive or detective
in nature and may be performed at all levels of the organization.
Control activities define all the processes or procedures that companies implement against the identified risks.
Based on the type of risk, there are various control activities that companies can implement. Some commonly
used control activities include authorizations, approvals, reviews, physical and digital security measures,
verifications, reconciliations, segregation of duties, management, organization, etc.
Information and Communication

Information is obtained or generated by management from both internal and external sources in order to support
internal control components. Communication based on internal and external sources is used to disseminate
important information throughout and outside of the organization, as needed to respond to and support meeting
requirements and expectations. The internal communication of information throughout an organization also
allows senior management to demonstrate to employees that control activities should be taken seriously.
It refers to the flow of information of the control activities to the relevant authorities or personnel so that they can
implement those activities. Similar to the control environment, the implementation of control activities depends
on communication with personnel. In the absence of communication, control activities are futile. The quality of
the information systems of a company also plays a role in this component.

Monitoring
Monitoring activities are periodic or ongoing evaluations to verify that each of the five components of internal
control, including the controls that affect the principles within each component, are present and functioning.
around their products.
Once companies implement control activities and communicate them with the management, they should have
procedures in place to monitor the activities. Therefore, every company should have a reviewing and monitoring
process that it carries out regularly. Monitoring can also help companies identify deficiencies in the control
activities and find a solution for them.
Risk Assessment
A risk assessment determines the level of risk to the firm if a specific activity or process is not properly controlled.
Business managers working with information systems specialists can determine the value of information assets,
points of vulnerability, the likely frequency of a problem, and the potential for damage.
General Controls

Application Controls

Environment of Organization (PESTEL Analysis)
PESTEL Analysis
A PESTEL analysis or PESTLE analysis (formerly known as PEST analysis) is a framework or tool used to
analyse and monitor the macro-environmental factors that may have a profound impact on an organisatio n’s
performance. This tool is especially useful when starting a new business or entering a foreign market.
 PESTEL analysis is a structured approach to analysing the external environment of an entity. The
influences (current influences and possible future influences) of the environment on the entity are grouped
into categories. For each category of environmental influence, the main influences are identified.
There are six categories of environmental influence:
 P – Political environment
 E – Economic environment
 S – Social and cultural environment
 T – Technological environment
 E – Ecological influences
 L – Legal environment
1. Political Factors: The political environment consists of political factors that can have a strong influence on
business entities and other organisations.
Investment decisions by companies will be influenced by factors such as:
 The stability of the political system in particular countries
 The threat of government action to nationalise the industry and seize ownership from private business
These factors are all about how and to what degree a government intervenes in the economy or a certain industry.
This can include
 Government Policy
 Political Stability or Instability
 Corruption
 Foreign Trade Policy
 Tax Policy
 Labour Law
 Environmental Law
 Trade Restrictions.
These are all factors that need to be taken into account when assessing the attractiveness of a potential market.
2. Economic Factors: The economic environment consists of the economic influences on an entity and the effect
of possible changes in economic factors on future business prospects.
Economic factors are determinants of a certain economy’s performance. Factors in the economic environme nt
include
 The rate of growth in the economy
 The rate of inflation
 The level of interest rates, and whether interest rates may go up or fall

 Foreign exchange rates, and whether particular currencies are likely to get weaker or stronger
 Unemployment levels and the availability of skilled or unskilled workers
 Government tax rates and government subsidies to industry
 The existence or non-existence of free trade between countries, and whether trade barriers may be removed
 The existence of trading blocks of countries, such as the European community
Economic factors could affect a decision by a company about where to invest. Tax incentives, the availability of
skilled labour, a good transport infrastructure, a stable currency and other factors can all influence strategic
choices.
These factors may have a direct or indirect long term impact on a company, since it affects the purchasing power
of consumers and could possibly change demand/supply models in the economy. Consequently it also affects the
way company’s price their products and services.
3. Social Factors: An entity is affected by social and cultural influences in the countries or regions in which it
operates, and by social customs and attitudes. Some influences are more significant than others. Factors in the
social and cultural environment include the following:
 The values, attitudes and beliefs of customers, employees and the general public.
 Patterns of work and leisure, such as the length of the working week and popular views about what to do
during leisure time
 The ethnic structure of society
 The influence of religion and religious attitudes in society
 The relative proportions of different age groups in society
These factors are especially important for marketers when targeting certain customers. In addition, it also says
something about the local workforce and its willingness to work under certain conditions.
4. Technological Factors: The technological environment consists of the science and technology available to an
organisation (and its competitors), and changes and developments in science and technology.
Some aspects of technology and technological change affect virtually all organisations. Developments in IT and
computer technology, including the Internet, are the most obvious example. Business entities that do not respond
to changes in IT and computerisation risk losing their share of the market to competitors.
For strategic planning, companies need to be aware of current technological changes and the possible nature of
changes in the future. Technology could have an important influence, for example, on investment decisions in
research and development, and investment in new technology.
These factors pertain to innovations in technology that may affect the operations of the industry and the market
favorably or unfavorably. These factors may influence decisions to enter or not enter certain industries, to launch
or not launch certain products or to outsource production activities abroad. By knowing what is going on
technology-wise, you may be able to prevent your company from spending a lot of money on developing a
technology that would become obsolete very soon due to disruptive technological changes elsewhere.
5. Environmental Factors: For business entities in some industries, environmental factors have an important
influence on strategic planning and decision-making.
They have become important due to the increasing scarcity of raw materials, pollution targets and carbon footprint
targets set by governments. These factors include ecological and environmental aspects such as weather, climate,
environmental offsets and climate change which may especially affect industries such as tourism, farming,
agriculture and insurance.

In some countries, companies have seen a commercial advantage in presenting themselves as ‘environme nt-
friendly’, by improving their reputation with the general public. Several companies have adopted a policy of
becoming ‘carbon neutral’ so that they remove as much carbon dioxide from the atmosphere as they add to carbon
dioxide with emissions from their operating activities.
This has led to many companies getting more and more involved in practices such as corporate social
responsibility (CSR) and sustainability.
6. Legal Factors: The legal environment consists of the laws and regulations affecting an entity, and the
possibility of major new laws or regulations in the future. Laws and regulations vary between different countries,
although international regulation is accepted in certain areas of commercial activity, such as banking.
They include more specific laws such as
 Discrimination Laws
 Antitrust Laws
 Employment Laws
 Consumer Protection Laws
 Copyright and Patent Laws
 Health and Safety Laws
It is clear that companies need to know what is and what is not legal in order to trade successfully and ethically.
If an organisation trades globally this becomes especially tricky since each country has its own set of rules and
regulations. In addition, you want to be aware of any potential changes in legislation and the impact it may have
on your business in the future. Recommended is to have a legal advisor or attorney to help you with these kind of
things.
Summary
a) Political. The political environment includes taxation policy, government stability and foreign trade
regulations.
b) Economic. The economic environment includes interest rates, inflation, business cycles, unemployme nt,
disposable income and energy availability and cost.
c) Social. The social/cultural environment includes population demographics, social mobility, income
distribution, lifestyle changes, attitudes to work and leisure, levels of education and consumerism.
d) Technological. The technological environment is influenced by government spending on research, new
discoveries and development, government and industry focus of technological effort, speed of technologica l
transfer and rates of obsolescence.
e) Ecological environment. The ecological environment, sometimes just referred to as the ‘environme nt’,
considers ways in which the organization can produce its goods or services with the minimum environme nta l
damage.
f) Legal. The legal environment covers influences such as taxation, employment law, monopoly legislation and
environmental protection laws.

Practice Questions
Scenarios for PESTEL Analysis
Example 1: The environmental factors that might be affecting the strategic outlook for the railway industry
include the following:
a) Political
 The rail industry is subject to significant government influence. Rail transport companies receive
subsidies from the government, and pricing is partially controlled by the government.
 Rail transport companies must consider the risk that their licence to operate will not be renewed
when it comes to an end.
b) Economic
 Investment decisions will be affected to some extent by expectations of growth in the UK economy
and interest costs (= investment costs).
 An important economic factor for the rail transport industry is the relative cost of rail transport
compared with other forms of transport.
c) Social and cultural
 More individuals are now working from home rather than travelling into work each day.
 Even so, the number of people using rail services is increasing.
 Many individuals prefer to use their car rather than go by train.
d) Technological
 The rail industry is affected to some extent by new technology, such as highspeed trains and safety
technology (for example, safe signalling equipment).
 Rail companies need to consider when and whether they need to replace existing trains and
carriages with more modern equipment.
 The rail network might be reaching capacity. If so, this would restrict the strategic options available
for growth in rail traffic unless measures can be found to increase the capacity of the network.
e) Ecological
 Rail services are normally regarded as ecologically kind forms of transport, with relatively low
greenhouse gas emissions.
f) Legal
 Following a number of serious train crashes in recent years, rail transport companies are now
probably more alert to the risk of litigation in the event of another serious accident.
Scenario 1: Flavorsome, a US-based fast food chain has gained worldwide recognition due to unique taste,
exemplary ambiance and economy meals. It is considering to exploit an opportunity to expand its business in
major cities of Xanata. Xanata is a developing country where demand for fast food is ever increasing and during
the last decade, local as well as international fast food chains have enjoyed substantial profits. Despite widening
wealth gap, fast food has gained immense popularity among lower and middle class. However, social awareness
groups are pressurizing health ministry to revise public health policy by introducing stringent regulations on food
industry. The government is offering tax holiday to encourage foreign investment. This incentive is strongly being
opposed by local business community. In the past few years, Xanata has seen high inflation rate and the
government is considering to raise the minimum wage rate by 25%. Burger Buddy, a leading local fast food chain

is gaining popularity because of its social contributions, advanced technologies, use of social media/mob ile
application for promotional activities, etc.
Required: Identify the environmental factors relevant to the above situation and group them for the purpose of
PEST analysis.
Answer:
Political Factors:
 Foreign investment is encouraged by government by offering tax holidays.
 Strong opposition of existing tax incentives may pressurize government to reconsider the policy.
 Government is considering to raise minimum wage rate which would increase costs and may affect
the profitability of businesses.
Economic Factors:
 Demand for fast food is growing and fast food chains are enjoying substantial profits.
 There is a widening gap in terms of wealth distribution and demand for fast food items is mainly
from middle and lower class which might be affected as the gap further widens.
 Xanata is facing high rate of inflation which may have adverse impact on economy of the country
and customers’ ability to buy.
Social Factors:
 There is an increased trend on habits of eating fast food among middle and lower classes that may
comprise of major proportion of population of Xanata.
 There is a pressure on health ministry to revise health policy which may adversely impact the
business prospects of fast food chains.
 Social contributions are appreciated by consumers.
Technological Factors:
 There is a trend of using advanced technologies among fast food chains as reflected in the success
of Burger Buddy.
 Use of social media and mobile application for promotional activities is also on rise.
Scenario 2: Ryde is a rapidly growing transportation service provider. It is an app that connects users who are
interested in car pooling their way to work or around the city. People like its features such as easy accessibility
through the mobile app and sharing of commute. The company believes that it will provide easy commute to
people and also help address traffic congestion issues.
However, there are controversies such as minimum wage laws for drivers and bans by some authorities that make
it difficult to compete. Drivers have questions about its insurance policy in case of an accident, will the company:
 Hold the driver as accountable or,
 Take the blame on itself.
Moreover, businesses like Ryde have given rise to a ‘shared’ economy where there is no need to invest in physical
assets or hire a large workforce for the provision of service. A lot of factors come into play considering the
environment of Ryde’s business model. It is important to analyze the environmental factors of business.
Required: Suppose you are hired as a consultant to plan the launch of Ryde in Pakistan and are asked to study
the external business environment of Ryde? You may quote examples to support your findings.

Answer:
Political Factors
 Ryde has been an innovative service that is becoming popular. The governments in Pakistan are facing
the challenges of unemployment and bad civic services. Chances are that this business would be supported
by Governments of any ideology.
Economic Factors
 The industry that Ryde operates in is the sharing economy. It means that this industry is based on sharing
physical or intellectual resources. In this case, Ryde users register themselves to respond to customer
needs and drive them to a location. It’s often deemed cheaper than taxis and easier to schedule a ride since
it’s in the same vicinity.
 Ryde has grown at a rapid pace since its initial launch and its reach is increasing. But the countries may
debate restricting its services due to Ryde having an unfair competition against regular taxis or public
transportation. The increasing competition can also cause a drop in pay despite the new opportunities.
 People may consider whether this type of services bring new avenues to earn an income or takes away
livelihood from existing services (Ryde vs. traditional public transport). This gives rise to large part of the
workforce that is pushed out of business and adds to the unemployed population.
Social Factors
 Customers of Ryde enjoy its easy-to-access platform. The main target market of the company is the young
generation from upper middle class that wants convenient and fast service which is available on their
smart phones with a tap of the finger. These are tech-savvy people who are drawn towards fast and reliable
digital services and products.
 Another large part of the customers are women. Today more women are integrating in society as they
become more independent. The number of girls has increased in universities as well as workplaces. An
app like Ryde provides these women an easy and safe option to find their own commute.
 The cheaper price due to the use of technology and collaboration is also attractive to many.
Technological Factors
 Ryde has leveraged the power of social media in today’s age of technology and connectivity. Buyers are
searching for cheaper transportation options and Ryde fulfills this need using technology as an enabler.
 Consumers make schedule commutes through the app. An estimate for the ride cost can appear in the app
depending on many factors like drop off location, traffic density and weather. They can pay for the ride
up front, through a debit/credit card or through a digital wallet on the app. And drivers who are registered
and available in the area respond and pick up the passengers to take them to their destination.
 Technology also brings its inherent risks. The app is pivotal to Ryde. It can’t function if the app goes down
or suffers difficulties. The company must ensure everything is updated, reliable and ready to go. The
company must also maintain back up infrastructure such as data servers and networking. Many drivers
use 4G networks to connect to the app — it’s deemed critical to do their jobs.
Legal Factors
 Additionally, how the company is dealing with competition laws in the taxi industry as being the only
such service and taking the largest market share, and whether Ryde was abiding by these rules. Some
government officials also think that drivers require commercial licenses as well, since they are driving as
Ryde drivers they should have the additional documentation.

 Some major laws that the company must follow include labor and employee safety laws, competition and
monopoly laws and other laws related to road traffic (e.g. driver’s license and vehicle documentation) and
ownership of vehicles, etc.
 The company must also ensure that the vehicle being used are tested for road-worthiness and the users
have regularly filed vehicle taxes, etc.
Scenario 3: FROOT is a leading brand of fruit juice concentrates operating in local and international markets
such as the United States, Canada, UAE and Europe. Senior Management of FROOT is due to start working on
their next 5-year plan. The business environment of the beverages market keeps changing and the management is
of the view that a fresh environmental analysis should be carried out before embarking the next five-year plan.
The company has faced a lot of business issues and survived a difficult time during the recent COVID-19
pandemic.
Required: What factors in the business environment should be considered for a company like FROOT?
Answer:
Political Factors
 FROOT is a multinational and exports to multiple countries including the United States, Canada, UAE
and Europe, etc. Hence, the varied political factors like government policies and legislations etc. in
different countries could influence its operating business accordingly.
 The taxes and duties related to import and export also play a huge role. Even the production and
distribution policies can impact the strategies and its business model significantly. As FROOT is a juice
concentrate, the governments with pro-growers’ ideology would be more interested in protecting the
interest of growers. Similarly, governments with strong environmental commitments may make policies
on waste management and packaging.
 As the government is keen on increasing exports and wants to encourage such industries that produce high
quality products for the international market, FROOT can leverage on this factor to increase its sales and
profitability.
Economic Factors
 During the recent COVID-19 pandemic lockdown, the sale of longer shelf-life food products like that of
FROOT got impacted tremendously.
 As consumer spending got decreased and consumption worsened across the country as well as globally,
the brand might have a suffered a lot. With supply chains getting hampered and many distribution channels
like retail stores and markets, restaurants being shut down, the consumption and sale would have
decreased. But with the situation getting better now and restaurants, commercial places getting opened
once again, the consumers are again focusing on more consumption. This is an opportunity for FROOT
having high consumer appeal to position and market itself accordingly. It can increase its share over
different segments like carbonated drinks with its high fruit juice content.
Social Factors
 There are a lot of social factors which play a huge role in consumers eating and drinking choices. Factors
such as lifestyle, employment, education level, status, culture and the community impact the consumer
choices and decision-making process. Even the demographic factors such as age, gender, location and
income status have a major role in consumer buying decisions.

 Youngsters and children have an inclination towards beverages at home as well as restaurants. Pakistan
being a population with large young demography is a good market for FROOT.
 With the rising culture of dining out and urbanization, this brand has a huge potential to focus on its
competitive strategies.
 With rising technological innovations in product design, packaging, promotional channels, the beverage
industry is evolving in itself.
 As sales and distribution channels are increasing and making a shift to E-commerce platforms the
company should focus on increasing its distribution through unconventional channels as well besides the
regular stores.
 Apart from this, a lot of technological innovations are happening in terms of manufacturing and
operations. FROOT may need to invest in latest equipment and upgrade its assembly lines to become more
efficient.
 With the rising internet penetration among consumers, this brand can leverage the online digital marketing
for boosting its sales and other operations.
Legal Factors
 The beverage industry is regulated and controlled by several laws as any other industry. The company has
to deal with authorities which regulate many aspects like licensing, packaging, labeling and other
necessary permits.
 All legal factors which include health and safety laws, environment laws, consumer protection laws etc.
must be taken into consideration while formulating strategies.
Scenario 4: Hike is globally renowned brand that manufactures and distributes world class apparel and equipment
used in hiking and mountaineering sports. The company is headquartered in Italy serving all of Europe and North
America. Recently the GM Marketing of Hike visited the northern areas of Pakistan and saw that the country has
tremendous potential for adventure based tourism in Gilgit Baltistan. He also observed that a lot of local as well
as foreign tourists visit the northern areas for hiking expeditions and adventure sports. Upon his return to Italy,
he has suggested to his CEO that the company should enter the Pakistani market to sell their products. The CEO
has asked for a proposal before a final decision can be made.
Required: You are required to develop an external analysis as part of his proposal to launch in Pakistan. You
may quote examples to support your findings.
Answer:
Political Factor
 The political environment of Pakistan will have a huge impact on Hike’s business strategy as it is a
multinational company which would have to adapt to local environment.
 Moreover, the government wants to encourage tourism in Gilgit Baltistan and has taken measures to attract
foreigners as well as locals to explore the unique locations and opportunities for entertainment. There has
also been a lot of focus on hiking and mountaineering as Pakistan boasts some of highest peaks and
mountain ranges in the world.

 Similar to any other developing country in the region Pakistan has faced political instability in past.
However, in recent past the country has seen political stability. All political parties are reasonably
expected to support tourism, which is encouraging for planned venture.
Economic Factor
 According to the economic surveys, GDP of Pakistan has been growing at slow but steady pace. The
affordability of hiking equipment by good size of population is a critical question. Due to this uncertainty,
a large investment in hiking business in Pakistan would be a high risk venture.
Social Factor
 The population has a huge youth entering the workforce through which a stronger middle class is steadily
emerging. The country also has the advantage of an affordable and abundant workforce with fairly good
English speaking skills. Hike could tap on this potential to its advantage.
 Moreover, for last few years, with the improved tourism site in Pakistan, locals are visiting northern areas.
This could be an attractive segment for Hike, though hiking would be a new sporting activity for
Pakistanis.
 A very critical analysis of law and order situation, current and in near future, would be important to take
decision.
Technological Factor
 Hike would have to make provisions for the technology it needs to sell and distribute its products. Since
it is not going to manufacture in Pakistan, the advanced equipment and assembly lines would not be a
concern for now.
 Top social networking sites in Pakistan are Facebook, Twitter, Pinterest, Instagram, YouTube, and
LinkedIn have a substantial following that is good tool for Hike to use for promotional campaigns and
advertisements.
 The success of other global tech platforms like Careem and Uber have paved the way for brands like Hike
to utilize a market that is willing to accept technological change.
Legal Factor
 In terms of legal environment, Hike should keep an eye on the copyright of designs of its apparel and
equipment plans to sell in Pakistan.
 Other laws that Hike may want to study closely are laws relating to corporate taxes, employme nt,
minimum wages and incorporation of business and the ease of doing business in Pakistan.
Scenario 5: InfoTech is a manufacturer of spare parts of information and communication technology products
such as smart phones, computers and network devices. InfoTech is exploring new markets to diversify and expand
its business. Some planning experts have identified People’s Republic of Highland. Highland is also one of the
fastest growing countries in relation to technological advancement and adoption since it has a literacy rate of 70%
and most of the workforce are university graduates.
Highland remained under the shadows of its neighbor for a long time and remained more inclined towards a
communist political ideology. Only recently the country has started encouraging foreign companies to invest in
business and commercial infrastructure. The government of Highland wants to promote the booming IT industry
and therefore is keen to find out more about InfoTech and its business. Before the management of InfoTech makes
a decision, they want to analyse to business environment it will operate in.
Required: What are the elements of the business environment that InfoTech should focus on?

Answer:
Political Factors
 InfoTech would have to carefully consider how the politics of a country affects a foreign company entering
into the market. Most countries with a communist ideology want businesses that are closely controlled by
the government. A lot of government invention, in such countries, could affect smooth operations of the
company. Some countries encourage joint ventures with the local companies rather than independent
investments to have greater control over the business sector.
 The government may have higher taxes to curb certain business activity and businesses would not be
allowed to own assets independently.
Economic Factors
While considering Economic factors, InfoTech should monitor key economic indicators of Highland in the recent
years. These indicators may include;
 The Gross Domestic Product and its growth
 The levels of foreign direct investment
 International Trade and balance of payments
 Interest rate levels and monetary policy
 Cost of Products and services available in the country (Inflation)
 Unemployment levels and the availability of reasonable human resource
Social Factors
 Considering the social environment of Highland, it can be noted that the situation of Highland seems
favorable for companies like InfoTech. People in Highland are adopting technology at faster rate as
compared to other countries in Asia. They are open and willing to experience innovative products and
services.
 InfoTech should also consider education levels in Highland and especially the languages that are
commonly spoken as that will affect the products they manufacture. Literacy would affect the acceptanc e
of advanced technology amongst industrial and consumer markets.
 Youth is a primary target market for technology products. The larger the market, the more beneficial it
will be for InfoTech. It is important for InfoTech to study the demographics of Highland’s population in
terms of age, gender and social classes. This would give useful insight into the size of the market for
related technology related products.
 Although Highland has an advanced technological base, but InfoTech should study whether the
technologies it is working on have a market in Highland. It should also consider the ease of technology
transfer when entering a new country.
Legal Factors
As any other country Highland would have laws and regulations that foreign companies would be expected to
follow. Some specific laws that would need attention would be:
 Laws of incorporating a business
 Labour and Employment laws
 Copyright, patents and licenses
 Insurance and Regulatory costs
 International Trade regulations
 International payments regulations, etc.

Scenario 6: Airtite was set up in 2000 as a low cost airline operating from a number of regional airports in Europe.
Using these less popular airports was a much cheaper alternative to the major city airports and supported Airtite’s
low cost service, modeled on existing low cost competitors. These providers had effectively transformed air travel
in Europe and, in so doing, contributed to an unparalleled expansion in airline travel by both business and leisure
passengers. Airtite used one type of aircraft, tightly controlled staffing levels and costs, relied entirely on online
bookings and achieved high levels of capacity utilization and punctuality. Its route network had grown each year
and included new routes to some of the 15 countries that had joined the EU in 2004. Airtite’s founder and Chief
Executive, John Skyes, was an aggressive businessman ever willing to challenge governments and competitors
wherever they impeded his airline and looking to generate positive publicity whenever possible.
John is now looking to develop a strategy which will secure Airtite’s growth and development over the next 10
years. He can see a number of environmental trends emerging which could significantly affect the success or
otherwise of any developed strategy. Airtite has been its fuel costs continuing to rise reflecting the uncertainty
over global fuel supplies. Fuel costs currently account for 25% of Airtite’s operating costs. Conversely, the
improving efficiency of aircraft engines and the next generation of larger aircraft are increasing the operating
efficiency of newer aircraft and reducing harmful emissions. Concern with fuel also extends to pollution effects
on global warming and climate change. Coordinated global action on aircraft emissions cannot be ruled out, either
in the form of higher taxes on pollution or limits on the growth in air travel. On the positive side European
governments are anxious to continue to support increased competition in air travel and to encourage low cost
operators competing against the over-staffed and loss-making national flag carriers.
The signals for future passenger demand are also confused. Much of the increased demand for low cost air travel
to date has come from increased leisure travel by families and retired people. However families are predicted to
become smaller and the population increasingly aged. In addition there are concerns over the ability of countries
to support the increasing number of one-parent families with limited incomes and an ageing population dependent
on state pensions. There is a distinct possibility of the retirement age being increased and governments demanding
a higher level of personal contribution towards an individual’s retirement pension. Such a change will have a
significant impact on an individual’s disposable income and with people working longer reduce the numbers able
to enjoy leisure travel.
Finally, air travel will continue to reflect global economic activity and associated economic booms and slumps
together with global political instability in the shape of wars, terrorism and natural disasters. John is uncertain as
to how to take account of these conflicting trends in the development of Airtite’s 10-year strategy and has asked
for your advice.
Required: Using model where appropriate, provide John with an environmental analysis of the conditions
affecting the low cost air travel industry.
Answer:
Political Factors
 EU expansion – The number of states in the EU is continuing to rise and this offers growth opportunities
for Airtite. Airtite has already opened up routes to some of the countries that joined in 2004, and as
additional states join they provide additional potential destinations for Airtite to fly to.
 Competition policy – European governments are keen to support the competition low-cost airlines
provide for national flag carriers, so this reinforce the opportunities EU expansion offers the low-cost
airlines.
Economic Factors
 Reduced disposal incomes – Changes in general economic conditions and people’s disposable incomes
will have an impact on the demand for air travel. For example, the global financial crisis, rising infla tio n

and rising interest rates are squeezing disposable income levels. Coupled with lower levels of job security,
these economic conditions are likely to cause people to reduce their leisure spending, which in turn may
lead them to spend less on foreign holidays.
 Switching to lower cost brands – However, this desire to spend less on foreign holidays could be either
a threat or an opportunity for the low cost airlines. While some people may decide not to have a foreign
holiday at all, there are others who have previously flown with a national carrier who might now fly with
a low cost carrier instead. Business passengers will face similar choices. In an economic downturn,
companies are have to be more prudent with their spending, and so some may cut back on air travel
altogether, while others will redirect their spending from premium airlines to low cost airlines.
 Fuel costs – Fuel costs are continuing to rise over due to uncertainty over supplies and increasing global
demand. As fuel costs currently account for 25% of Airtite’s operating costs, changing fuel costs could
have a significant impact on its business. As with taxes discussed above, low cost airlines will be faced
with the dilemma of whether to pass on the increased costs to their consumers (thereby possibly reducing
demand) or to absorb the costs themselves leading to significantly reduced margins.
Social Factors
 Perception level of travel – The expansion in airline travel for both business and leisure passengers has
created an environment in which people are more willing and keen to travel than they historically have
been. People now perceive travelling by air to be easy, so this provides ongoing opportunities for the
growth of the industry. At the moment, the threat of terrorist activity does not appear to have had a major
impact on demand for air travel, but if the threat increases then demand is likely to suffer.
 New market segments – The relative ease and cheapness of low cost airline travel could allow the
industry to create new market segments. For example, an increasing number of people are now having
overseas stag parties or hen parties, which suggests that there are opportunities for growth in leisure travel
among young, single people, instead of the family market which has been a major source of growth
previously.
 Demographic changes – However, changing population structures could affect the demand for travel
overall. A significant part of the recent growth in the industry has come from leisure travel by families,
but the increasing number of one-parent families within limited incomes could jeopardize this growth.
Similarly, the increasing proportion of retired people in the population, dependent on state pensions, could
also limit the opportunities for further growth.
Technological factors
 Online bookings – The growth of e-commerce and online bookings are essential to Airtite’s business
model because it relies on online bookings. Therefore the spread of internet access, and in particular
broadband access to the internet, will increase the size of Airtite’s potential market and in turn its potential
revenues.
 Engine efficiency – One of the key challenges facing the industry is reducing aircraft emissions. In this
respect, technological advances are important because the improving efficiency of aircraft engines is
reducing harmful emissions. By implementing the reductions themselves, airlines may be able to reduce
the threat of political or environmental lobbyists calling for air travel to be subject to higher taxes.
Engine efficiency also has an important economic impact, because reduced fuel consumption will help the
airlines reduce their fuel costs. However, technological change may have some short term costs for the
airlines if it means they have to upgrade their fleets, and have to either buy or lease the next generation of
aircraft.
Environmental Factors

The analysis above shows that the European air travel industry is both complex and dynamic. A number of the
factors we have identified could be either opportunities or threats.
 The effect of this is to create a high level of uncertainty, which makes long-term strategic planning diffic ult.
Consequently, Airtite must remain alert to all the environmental factors which could affect them, and be
innovative and flexible in their responses to changes in those environmental factors.
 Experience in the industry is likely to be very important in assessing the importance of future
environmental developments, due to the complexity of the interactions between them.
Legal Factors
 Government legislation – If the potential government legislation to increase retirement age and to
demand a higher level of personal contributions to pension schemes goes ahead this will be a threat to the
travel industry. Both aspects of the legislation will lead to a demand for air travel because people will
either have less leisure time (reducing retirement age) or less disposable income (increasing pension
contributions).
 Environment and pollution – There is becoming increasing public awareness of the impact of pollutio n
and harmful emissions on the environment and the earth’s climate. While air travel companies should be
looking at ways of reducing their harmful emissions to display their corporate social responsibilities, the
level of concern about the environment means that coordinated government action to reduce emissions is
becoming increasingly likely.
 Taxes on aircraft emissions – Governments, globally, are looking at ways to control harmful aircraft
emissions, either by restricting the number of flights or by imposing higher taxes on pollution. If aircraft
taxes are increased, the low cost airlines will either have to pass these costs on to consumers – which could
see demand fall – or absorb the costs themselves, seeing their margins reduced.

Globalization: Global Environment Affecting International Trade and Finance
Globalisation
Globalisation refers to the growing interdependence of countries worldwide through increased trade, increased
capital flows and the rapid diffusion of technology.
Features of Globalisation
(a) The ability of individuals to enter into transactions with individ uals and organisations based in other countries.
(b) The increased importance of global economic policy relative to domestic policy.
(c) The rise of globally linked and dependent financial markets.
(d) The reduction in importance of local manufacturing.
(e) Reduced transaction costs through developments in communications and transport.
(f) The rise of emerging, newly industrialised nations.
On an organisational level, global production implies that an organisation's production planning is considered on
a global scale.
(a) Global manufacture: A company can manufacture components for a product in a number of differe nt
countries. China is becoming the workshop of the world.
(b) Global sourcing: Sub-components may be purchased from countries overseas.
Factors Encouraging the Globalisation of World Trade

(a) Financial factors such as Third World debt. Often, lenders require the initiation of economic reforms as a
condition of the loan.
(b) Country/continent alliances, such as the European Union, which foster trade and other phenomena such as
tourism.
(c) Legal factors such as patents and trademarks, which encourage the development of technology and design.
(d) Markets trading in international commodities. Commodities are not physically exchanged, only the rights to
ownership. A buyer can, thanks to efficient systems of trading and communications, buy a commodity in its
country of origin for delivery to a specific port.
Impact of Globalisation on Firms

(a) Relocation: Firms may need to relocate their operations to reduce costs, avoid tariffs and quotas, or to take
advantage of areas of industrial excellence.
(b) Markets: New markets may emerge as closed markets (such as China) open up or as nations become more
developed. Consumer tastes change and products become more homogenised and can therefore be sold in more
countries.
(c) Competition: Reduced trade barriers and advances in communications greatly increases the number of
competitors that a firm faces.
(d) Alliances: The opportunities for forming alliances or merging/acquiring other firms will also increase for the
same reasons.
(e) Economic divisions: Wealthy countries with access to modern communications technology will become
wealthier at the expense of poorer nations that cannot afford to make the necessary investment. Such nations may

also be pressured into producing goods for export rather than ensuring the production of goods and services
needed locally.
Forms of trade policies

National foreign policy: Each country interprets this policy to protect its economy and people's best interests.
This approach is aligned with a regional international strategy.
Bilateral trade policy: This agreement is established between two countries to govern trade and business ties.
Both countries ' national exchange strategies and their trade deal agreements are regarded in constructing
respective foreign policy.
International trade policy: Foreign economic bodies such as the Organization for Economic Co-operation and
Growth (OECD), the World Trade Organization (WTO) and the International Monetary Fund (IMF) describe the
principles of international trade policy. Policies protect established and emerging nations ' best interests.
Significant Types of Trade policies

The main principle of government regulation over international markets is to merge two separate forms of foreign
trade policy.
- Liberalization (free trade)
- Protectionism
Global Trade Policy considers the minimal state intervention in international exchange that formed based on
open-market supply and demand powers and under protectionism. The state policy protects the domestic economy
from global competition by the usage of tariff and non-tariff trade policy mechanisms. Such two forms of trade
policies describe state involvement in international trade.
Policy on liberalization: The primary concerns of international trade liberalization are,

- Expanded domestic employment
- Diversification for stability
- Security from dumping
- Inexpensive foreign labor-powe r
The aim of the trade policies, however, is to find the equilibrium between two trends: open trade and
protectionism. Each strategy has its advantages and drawbacks, based on the implementation conditions, period,
and location.
Unless, under the terms of liberalization policy, a simple international exchange authority is a sector, therefore
protectionism virtually eliminates free-market powers. Itis believed that growth capacity and competition vary in
different countries ' global economy. Thus, free-market mechanisms may be unprofitable for less industrialized
nations. Unlimited rivalry from more powerful states will result in economic inflation and dysfunctional economic
structure in protectionism policies in less developed countries.

Economic Environment
Macroeconomic Environment: The macroeconomic environment is concerned with factors in the overall
economy, for example interest rates, exchange rates and levels of demand and supply.
Microeconomic Environment: Microeconomic environment is concerned with economic circumstances of
individual industries or companies.
A government will usually have four main objectives for its macroeconomic policy.
 Economic growth
 Controlled inflation
 Employment
 A controlled balance of trade and exchange rate
These objectives are affected by macroeconomic policy, and in particular, fiscal and monetary policy.
Growth: Growth means the expansion of the economy and it is usually measured in percentage terms compared
to previous years. It is the product of a number of factors, the main factor being demand in the economy.
 Demand from consumers and the Government for goods and services stimulates business organisations to
increase production and sell more.
Growth can be measured using two figures, GDP and GNP.
 Gross Domestic Product (GDP) is the total value of a nation’s income produced by economic activity
from within its borders.
 Gross National Product (GNP) is a more complete figure than GDP because it also includes income
earned overseas but deducting income earned domestically by overseas residents.
 An effect of growth is that employment levels rise as more employees are required to produce the goods
and services, and those employed should enjoy increasing wages. This means the cycle of demand is
continued as consumer demand increases further.
 ‘Real’ growth is net of the nation’s inflation rate and therefore growth must exceed inflation for any
benefits to be created.
 Despite the positive aspects of growth, it is not without issues. If demand for goods cannot be met by what
can be produced within the economy, then the amount of imported goods will rise to fill the gap, worsening
the nation’s balance of trade. Growth may also increase the gap between the rich and the poor if its effects
are unevenly distributed across the population. The environment and the poor may be exploited by
businesses taking advantage of commercial opportunities.
 Finally, growth may occur in unwelcome areas, such as in the trade of illegal substances.
Inflation: Inflation is the increase in prices over time and, like growth, is measured in percentage terms compared
to previous years. Governments seek low, stable inflation for a number of reasons:
 Stable inflation creates certainty – the ideal condition for business investment.
 Low inflation levels are fairer to those on low or fixed incomes. If incomes increase at a lower rate than
the inflation rate then individuals will be worse off.
 If the inflation rate is greater than interest rates then savers will be worse off as they see the value of their
savings being eroded. Individuals are encouraged to spend rather than save.
 Higher prices reduce the amount of money individuals have to spend and therefore spending within the
economy falls. This may encourage savings to increase (the ‘real balance’ effect).

 Inflation acts to distort the price mechanism as prices are driven increasingly by cost rather than true
demand and supply factors.
 In extreme cases, soaring inflation rates, where prices rise on a daily basis, can create civil unrest.
Employment: Although some degree of unemployment within an economy is unavoidable (as some people are
unable to work and others will be between jobs), governments are keen to increase the overall level of employme nt
for a number of reasons.
 Large numbers of employment people can stifle economic growth because being on a low income means
an individual can afford to spend less and therefore demand within the economy falls.
 Welfare payments to those out of work have to be paid out of taxes collected from the working population
 High levels of unemployment increase the welfare bill, resulting in pressure to increase taxes and cut back
on other public services – both of which will harm economic growth.
 A number of societal problems, such as crime, poor health and the breakdown of family units are linked
to unemployment.
The balance of trade: A country's balance of trade is the difference, in financial terms between the value of its
imports and exports.
 If a country imports more than it exports there is a trade deficit, if it exports more than it imports there is
a trade surplus.
 National account balances measure the production, income and expenditure levels within an economy.
 The balance of trade forms part of the current account of a nation's national account balances.
Factors affecting the balance of trade

 Availability, price and quality of goods produced by local producers: If local producers are able to supply
the home market with high-quality, competitively priced goods, it will be difficult for overseas producers to
export to that market.
 Inflation: If a nation's inflation rate is higher than its competitors, producers in that country will face higher
costs which will cause the price of their products to rise.
 Exchange rates: If a nation's currency weakens against those which export to it, then the goods it imports
become more expensive.
 Trade agreements: Trade agreements affect the volume of imports and exports between nations. Nations are
more likely to be able to export competitively to nations they are on an ‘even playing field’ with.
 Taxes, tariffs and trade measures: Taxes and tariffs increase the price of imports, making them less
attractive to buy. Governments may attempt to help home producers with subsidies, although free trade
agreements mean this may be difficult (or lead to tit-for-tat retaliation).
 The business cycle: Nations looking for export-led growth require sufficient demand in overseas markets for
their products.
If producers in one country are able to produce something cheaper than producers in other countries, it is likely
they will export it. This improves the balance of trade in the country in which the producers are based.
On the other hand, if overseas suppliers are able to supply something cheaper than domestic producers can,
demand for imports will increase.

 A long-term trade surplus creates a positive national income because it represents the country making a
net inflow of funds. However, it may contribute to a rising inflation rate as demand within the economy
increases. This may contribute to reduced internatio nal competitiveness in the future, as firms face
increasing costs that must be passed on in their prices.
 On the other hand, a long-term trade deficit is a major problem because the country experiences a net
outflow of funds. A deficit has to be financed through a reduced national income account (see below) and
this will impact on the nation’s production capacity and future growth prospects as demand in the economy
falls.
National accounts
(a) Current account. This is made up of three sub-accounts.
(i) Production accounts – the value of the nation's output less the value of the goods and services used to create
it. The difference is the nation's gross domestic product (GDP).
(ii) Income accounts – the total income generated by production less government redistribution of tax and social
security benefits. The difference is the nation's disposable income.
(iii) Expenditure accounts – this records how the nation's disposable income is either spent or saved.
(b) Capital account. This records the total accumulation of the nation's non-financial assets and how they were
financed. The difference is the nation's net borrowing or lending.
(c) Financial account. This records the nation's net acquisition of financial assets and liabilities. The differe nce
between them is the change in the nation's financial position.
(d) Balance sheet. This records the nation's financial and non-financial assets and liabilities. The differe nce
between them is the nation's net worth.
Correcting a balance of payments deficit

a. Expenditure-reducing strategy: This strategy involves the government reducing overall demand within the
local economy, usually by increasing interest rates. By increasing interest rates, individuals and firms pay more
on their borrowing and therefore have less cash to spend on goods, therefore reducing demand. Whilst reducing
demand for local goods, it also may reduce demand imports and increase demand for exports (high interest rates
usually reduce inflation which makes exports cheaper).
However, this strategy may worsen the deficit as high interest rates can increase the value of a nation’s currency,
making exports more expensive and imports cheaper. It may also reduce investment in the nation as the cost of
borrowing is high. Unemployment may also increase as a consequence of this policy. Demand in the home nation
can also be reduced by contracting the money supply or increasing taxation.
b. Expenditure-switching strategy: This policy involves the government attempting to switch domestic
expenditure from imports to locally produced goods whilst increasing exports. Policies that can be used to achieve
this include:
 Import controls – such as tariffs and quotas on imports.
 Exchange controls – reducing the amount of foreign currency available to domestic consumers to buy imports
with.
 Currency devaluation/depreciation – to reduce demand for imports whilst making exports cheaper to
overseas countries.
 Subsidies – providing subsidies to exporters to help them compete in foreign markets.
 Export guarantees – reducing the risk to exporters seeking to sell their goods overseas.

Fiscal Policy
Fiscal policy refers to government policy on taxation and government spending.
 Direct taxes are levied on earnings or profits, for example income tax for individuals and corporation tax for
companies. Taxes may also be raised on unearned income such as dividends, or special one-off taxes may be
brought in for particular purposes. Direct tax is often viewed as progressive (as higher earners tend to pay
more tax), simple and easy to understand.
 Indirect taxes are levied on spending or expenditure. For example, Value Added Tax, specific sales taxes
such as those imposed on tobacco and petrol, import duties, road tax etc. Governments favour indirect taxation
as it is easy and cheap to collect. The tax is collected by sellers of goods and services and paid over to the
government. However, indirect taxes are often viewed by the public as regressive, unfair and difficult to
understand.
A key decision that governments need to make in their fiscal policy is what proportion of tax should be paid by
individuals rather than businesses.
 By mainly taxing individuals the Government risks stopping the economy growing as people do not have
enough disposable income to spend on goods and services, this will also reduce company profits and
reduce the level of corporation tax collected.
 If levels of corporation tax are too high then the country may become a less attractive place for foreign
companies to set up business and they may relocate their operations to other countries with a more
favourable tax regime. This may have an affect on the products and services available in the country as
well as on growth and unemployment levels.
Monetary Policy
Monetary policy refers to government policy on the money supply, the monetary system, interest rates, exchange
rates and the availability of credit.
 Monetary policy can be used as a means of achieving economic objectives for inflation, the balance of
trade and economic growth. Most economists believe that an increase in the money supply will increase
demand leading to increases in prices (inflation) and incomes.
Monetary policy focuses on three factors, interest rates, exchange rates
Interest Rates
The government may change interest rates (the price of money) in an attempt to influence the level of expenditure
in the economy and/or the rate of inflation.
A rise in interest rates increases the price of borrowing for both companies and individuals. If companies see the
rise as relatively permanent, rates of return on investments will become less attractive and investment plans may
be curtailed. Corporate profits will fall as a result of higher interest payments.
Companies will reduce inventory levels as the cost of having money tied up in stocks rises. Individuals should be
expected to reduce or postpone consumption in order to reduce borrowings, and should become less willing to
borrow for house purchases.
Although it is generally accepted that there is likely to be a connection between interest rates and investment (by
companies) and consumer expenditure, the connection is not a stable and predictable one. Interest rate changes
are only likely to affect the level of expenditure after a considerable time lag.

Exchange Rates
Exchange rates are often used in monetary policy for two reasons.
(a) If the exchange rate falls (or weakens), exports become cheaper to overseas buyers and so the nation becomes
more competitive in export markets. Imports will become more expensive and so less competitive against goods
produced by manufacturers at home. A fall in the exchange rate might therefore be good for the domestic
economy, by giving a stimulus to exports and reducing demand for imports.
(b) An increase (or strengthening) in the exchange rate will have the opposite effect, with dearer exports and
cheaper imports. If the exchange rate rises and imports become cheaper, there should be a reduction in the rate of
domestic inflation. A fall in the exchange rate, on the other hand, tends to increase the cost of imports and adds
to the rate of domestic inflation.
When a country's economy is heavily dependent on overseas trade it might be appropriate for government policy
to establish a target exchange value for the domestic currency. However, the exchange rate is dependent on both
the domestic rate of inflation and the level of interest rates. Targets for the exchange rate cannot be achieved
unless the rate of inflation at home is first brought under control.

Globalization: E-Commerce and Emerging Markets
E-commerce
E-commerce (electronic commerce) is the buying and selling of goods and services, or the transmitting of funds
or data, over an electronic network, primarily the internet.
Types of E-commerce
a) Business-to-business (B2B): Business-to-business e-commerce refers to the electronic exchange of
products, services or information between businesses rather than between businesses and consumers.
b) Business-to-consumer (B2C): Business-to-consumer is the retail part of e-commerce on the internet. It
is when businesses sell products, services or information directly to consumers.
c) Consumer-to-consumer (C2C): Consumer-to-consumer is a type of e-commerce in which consumer’s
trade products, services and information with each other online. These transactions are generally
conducted through a third party that provides an online platform on which the transactions are carried out.
d) Consumer-to-business (C2B): Consumer-to-business is a type of e-commerce in which consumers make
their products and services available online for companies to bid on and purchase. This is the opposite of
the traditional commerce model of B2C.
e) Business-to-administration (B2A): Business-to-administration refers to transactions conducted online
between companies and public administration or government bodies. Many branches of government are
dependent on various types of e-services or products. These products and services often pertain to legal
documents, registers, social security, fiscal data and employment.
f) Consumer-to-administration (C2A): Consumer-to-administration refers to transactions conducted
online between consumers and public administration or government bodies.
Advantages and Disadvantages of e-commerce

Advantages:
1. A Larger Market: E-Commerce allows individuals to reach customers all across the country and all
around the world. E-Commerce gives business owners the platform to reach people from the comfort of
their homes. The customers can make any purchase anytime and anywhere, and significantly more
individuals are getting used to shopping on their mobile devices.
2. Customer Insights via Tracking and Analytics: Whether the businesses are sending the visitors to their
e-Commerce website via PPC, SEO, ads, or a good old postcard, there is a way of tracking the traffic and
the consumers’ entire user journey for getting insights into the keywords, marketing message, user
experience, pricing strategy, and many more.
3. Fast Response to the Consumer Trends and the Market Demands: Especially for the business people
who do “drop ship,” the logistics, when streamlined, allow these businesses to respond to the market and
the trends of e-Commerce and demands of the consumers in a lively manner. Business people can also
create deals and promotions on the fly for attracting customers and generate more sales.
4. Lower Cost: With the advancement of the e-Commerce platforms, it has become very affordable and easy
to set up and run an e-Commerce business with a lower overhead. Business people no longer need to spend
a big budget on TV ads or billboards, nor think about personnel and real estate expenses.

5. More Opportunities for “Selling”: Business people can only offer a limited amount of information about
a product in a physical store. Besides that, e-Commerce websites give them the space to include more
information like reviews, demo videos, and customer testimonials for helping increased conversion.
6. Personalised Messaging: E-Commerce platforms give people in business the opportunity to provide
personalised content and product recommendations for registering customers. These targeted
communications can help in increasing conversion by showing the most relevant content to the visitor.
7. Increased Sales Along with Instant Gratification: For businesses selling digital goods, e-Commerce
allows them to deliver products within seconds of placing an order. This satisfies the needs of the
consumers for instant gratification and assists increase sales, especially for the low-cost objects that are
often known as “impulse buys.”
8. Ability to Scaling Up (Or Down) Quickly Also Unlimited “Shelf Space.”: The growth of any online
business is not only limited by the availability of space. Even though logistics might become an issue as
one’s business grows, it’s less of a challenge compared to running any brick-and-mortar store. E-
Commerce business owners can choose to scale up or down their operation quickly by taking advantage
of the non-ending “shelf space,” as a response to the market trends and demands of consumers.
Disadvantages:
1. Lack of Personal Touch: Some customers appreciate the personal touch they offer when visiting a
physical store by interacting with the sales associates. Such personal touch is especially essential for
businesses that sell high-end products as customers will want to buy the products and have an excellent
experience during the process.
2. Lack of Tactile Experience: No matter how good a video is made, customers still can’t feel and touch a
product. Not to mention, it’s never an easy task to deliver a brand experience that could often be includ ing
the sense of touch, taste, smell, and sound via the two-dimensionality of any screen.
3. Product and Price Comparison: With online shopping, customers can compare several products and
find the least price. This forces many businesses to compete on price and reduce their profit margin,
reducing the quality of products.
4. Need for Access to the Internet: This is obvious, but don’t forget that the customers do need access to
the Internet before purchasing from any business! As many e-Commerce platforms have the features and
functionalities which require a high-speed Internet connection for an optimal consumer experience, there’s
a chance that companies are excluding visitors who have slow internet connections.
5. Credit Card Fraud: Credit card frauds are a natural and growing problem for online businesses. It can
lead to many chargebacks, which result in the loss of penalties, revenue, and a bad reputation.
6. IT Security Issues: More and more organisations and businesses have fallen prey to malicious hackers
who have stolen information of the customers from their databases. This could have financial and legal
implications, but it also reduces the company’s trust.
7. All the Eggs in One Basket: E-Commerce businesses rely solely or heavily on their websites. Even just
some minutes of downtime or technology glitches could be resulting in a substantial revenue loss and
customer dissatisfaction.
8. Complexity in Regulations, Taxation, and Compliance: Suppose any online business sells to its
consumers in different territories. In that case, they’ll have to stick to the regulations in their own countries
or states and their consumers’ places of residence. This could be creating a lot of complexities in
accounting, taxation and compliance.

E-Marketing
Web marketing, digital marketing, internet marketing or online marketing; all of these words are synonymo us ly
used for E-Marketing. What it means is the marketing of products or services by using the internet. E-mails and
wireless marketing also fall into the category of e-marketing.
Advantages and Disadvantages E-Marketing

Advantages:
1. Instant Response: The response rate of internet marketing is instantaneous; for instance, you upload
something and it goes viral. Then it’d reach millions of people overnight.
2. Cost-Efficient: Compared to the other media of advertising, it’s much cheaper. If you’re using the unpaid
methods, then there’s almost zero cost.
3. Less Risky: When your cost is zero and the instant rate is high; then what one has to loos. No risk at all.
4. Greater Data Collection: In this way, you have a great ability to collect a wide range of data about your
customers. This customer data can be used later.
5. Interactive: One of the important aspects of digital marketing is that it’s very interactive. People can
leave their comments, and you’ll get feedback from your target market.
6. Way to Personalized Marketing: Online marketing opens the door to personalized marketing with the
right planning and marketing strategy, customers can be made to feel that this ad is directly talking to
him/her.
7. Greater Exposure of your Product: Going viral with one post can deliver greater exposure to your
product or service.
8. Accessibility: The beauty of the online world and e-marketing is that it’s accessible from everywhere
across the globe.
Disadvantages:
1. Technology Dependent: E-Marketing is completely dependent on technology and the internet; a slight
disconnection can jeopardize your whole business.
2. Worldwide Competition: When you launch your product online, then you face a global competitio n
because it’s accessible from everywhere.
3. Privacy & Security Issues: Privacy and security issues are very high because your data is accessible to
everyone; therefore, one has to be very cautious about what goes online.
4. Higher Transparency & Price Competition: When privacy and security issues are high, then you have
to spend a lot to be transparent. Price competition also increases with higher transparency.
5. Maintenance Cost: With the fast-changing technological environment, you have to be consistently
evolved with the pace of technology and the maintenance cost is very high.
Types of E-Marketing
a. Email Marketing: Email marketing is considered very efficient and effective because you already have
a database of your targeting customer. Now, sending emails about your product or service to your exact
targeted market is not only cheap but also very effective.
b. Social Media Marketing: Social media is a great source of directly communicating with your customers
to increase your product awareness. It could be done by any or all of the social media channels such as
LinkedIn, Facebook, Instagram, Twitter, Google, and YouTube. Some of the important advantages of
social media are as follows;

 Increase product awareness and reputation means more sales.

 Directly communicating with your customers can increase brand loyalty.
 You can increase the number of visits to your website and rank it up in the search engine.
 Targeting the exact audience will help you to know more about your customers’ needs.
c. Video Marketing: It is said that a picture is worth a thousand words, and a video is worth thousands of
pictures. You can catch the attention and emotions of your target market by showing them a video clip
about your product or service. Video marketing is very effective if it conveys the right message to the
right audience.
d. Article Marketing: Engaging quality content by providing valuable information to your targeted market,
what people are looking for over the internet to solve a certain problem? It is a consistent and ongoing
process of delivering quality content to your readers. It is not always about selling; you’re educating your
audience and helping them by adding some value in their lives.
e. Affiliate Marketing: Affiliate marketing is the process of promoting some products of certain brands and
earning your commission out of every sale. It works for everyone; win, win situation.
Impact of e-business on the Marketing Mix

1. Product: A wider range of products is made available.
 An opportunity to provide customised offerings is further created particularly as a result of
increased knowledge of the specific needs of the customer.
2. Price: Lower costs are incurred due to process automation which could in turn result in lower prices.
 Direct comparison with others puts further pressure to lower prices
 The web also offers the option of "differential" pricing - where different prices can be charged in
different parts of the world
3. Promotion: Opportunity are created to use other Web-sites to promote an organisation’s own web-site.
 Search Engine Optimisation has become a key Promotional tool.
4. Place: Elimination of the middle man and wider reach across a far reaching geographic base.
 Has enabled direct delivery of knowledge based products over the internet.
5. People/ Participants: Automation, reduces the need for front line personnel to generate sales.
 On the other, increased customer support is required.
6. Processes: Business Processes are pushed down to the consumer.
 Whilst business cost is reduced, this creates consumer frustration
7. Physical Evidence: A Web-site provides a first impression and hence becomes an ambassador for the
company which it represents.
Elements of E-Marketing ( Characteristics of e-marketing: the 6 ‘I’s)

1. Interactivity: This is the extent to which the website promotes a two way communication channel
between the customer and the supplier.
 This comes in many forms: forums, emails, polls, online chat, webinars etc
 Think of getting communication with the customer, or getting them to trial a product, or giving
feedback, or getting them to ask a question if they so wish (eBay does this for example)
E-marketing is ‘pull’ marketing in which the recipient of the marketing can participate in it – for example,
by chatting with a bot, or clicking on different links or entering search terms. This interactivity can lead
to greater intelligence.

2. Intelligence: This is the extent to which customer information can be collected to form meaningful
patterns & analysis;
 Every business can track who has been on their website, where they come from, how long they
stayed etc.
 Furthermore, sign up forms also give an opportunity for more information to be gathered
E-marketing tools can be used to gather much more information about a potential customer’s interests, by
recording click patterns for example, and determining at what point a customer loses interest. This helps
to inform future product decisions as a result.
3. Individualisation: This is the extent to which a web-site content is customised to the specific need of the
customer;
 Think of personalised content only being shown, with filters being applied so you only get shown what
you're interested in
This refers to the ability to aim marketing directly at different individuals. The use of customised home
pages or responsive advertising allows for this through technology and ensures the marketing is more
relevant to each, and therefore more likely to be successful. This can also be linked to the intellige nce
gathered through e-marketing.
4. Integration: Think here of booking something on the website and it is immediately updated on the
organisation’s back end systems.
Marketing can be linked to other activities – for example, ‘click here to buy’ or ‘see upgrade options’. It
can also allow the integration between companies – for example, book discounted services with partner
organisation.
5. Industry Structure: This is the extent and potential opportunities for disintermediation and
reintermediation;
E-marketing can lead to changes in an industry allowing for disintermediation and the growth of
consumer-to-consumer business models.
6. Independence of Location: Basically businesses are not restricted to their own locality anymore. It is not
called the world-wide web for nothing you know.
E-marketing can cover broad geographical boundaries and could actually allow for delivery of some
products or services – for example, online training courses, but companies still need to consider whether
their product is suitable for boundaryless marketing – for example, a large physical product with expensive
shipping may not lend itself to this.
Advantages of E-commerce to business

1. Faster buying process: Customers can spend less time shopping for what they want. They can easily browse
through many items at a time and buy what they like. When online, customers can find items that are available in
physical stores far away from them or not found in their locality. Advantages of e-business include helping one
to choose from a wide range of products and get the order delivered too. Searching for an item, seeing the
description, adding to cart – all steps happen in no time at all. In the end, the buyer is happy because he has the
item and didn’t have to travel far.

2. Store and product listing creation: A product listing is what the customer sees when they search for an item.
This is one advantage in ecommerce meant for the seller. This online business plus point is that you can
personalise your product listing after creating them. Sellers can add many images, a description, product category,
price, shipping fee and delivery date. So, in just one step you can tell the customer many things about the item.
Creating your listing shows the buyers what you have.
Rules for product listing
• Use high quality resolution images. Blurry images distract and confuse customers.
• Maintain image dimensions. Usually ecommerce marketplaces will recommend a resolution format.
• Provide multiple product views. Some sites even let you include a 360-degree view of items.
• When adding product variants – such as lipsticks in different shades – ensure each variant has its specific image.
Customising listings makes them attractive and appealing. Here the seller has full control over customisation, he
can mention offers available, discounts etc. Other advantages of e-business product listing are that it is free to
upload and fast.
3. Cost reduction: One of the biggest advantages of ecommerce to business that keep sellers interested in online
selling is cost reduction. Many sellers have to pay lots to maintain their physical store. They may need to pay
extra up-front costs like rent, repairs, store design, inventory etc. In many cases, even after investing in services,
stock, maintenance and workforce, sellers don’t receive desired profits and ROI.
4. Affordable advertising and marketing: Sellers don’t have to spend a lot of money to promote their items.
The world of ecommerce has several affordable, quick ways to market online. Ecommerce marketplaces are visual
channels – and sellers can really show off their product.
5. Flexibility for customers: An important advantage of ecommerce to business is that sellers can provide
flexibility to customers. One highlight is that the product and services are ready 24x7. The result is that seller can
offer his item any place, any time.
Customers are always present on an ecommerce marketplace - They are likely to return for repeat purchases online
because of the conveniences they get. These conveniences include free shipping (usually on a minimum cart
value), express order delivery, deals and discounts, subscription advantages.
They also share reviews on the things they buy. Good reviews result in two extra benefits of ecommerce. One is
that buyers gain trust in your store based on the number of positive reviews. The other is that it can help you
identify your best-selling items.
Sellers can leverage this customer flexibility to build their revenue. They can sell on an online marketplace
confidently knowing that there are plenty of buyers.
6. Product and price comparison: In ecommerce, sellers can compare the products using tools or on their own.
This gives them a good idea of product alternatives available, the standard rates, if a product need is unfulfilled.
Comparison is faster online and covers many products - It helps to save time when making this comparison, as
all details are available on the shopping site. In a physical store, sellers may not be able get access to so many
details –they only have better knowledge about their own inventory.
7. No reach limitations: A seller with a physical store may only be able to reach a certain number of buyers.
They can deliver to the customers’ homes but there can be distance limitations. Several e-commerce marketplaces
have their own logistics and delivery system.

Reaching out to more customers - Sellers that need to expand their reach to find new customers can benefit from
this. This applies to online-only sellers and those with a physical store.
Online-only sellers can save on the logistics costs and be rest assured of customers. Sellers with a physical store
begin selling their goods to local buyers.
8. Faster response to buyer/market demands: Every interaction is faster when you begin selling online.
Ecommerce marketplaces offer you a streamlined logistics or delivery system. What this means is that the buyers
order gets delivered efficiently. Product returns management is one more plus point that can be handled quickly
– you either refund the payments or give a replacement.
9. Several payment modes: Buyers like personalisation – the same goes for paying for their orders. Ecommerce
marketplaces permit multiple payment modes that include UPI, cash on delivery, card on delivery, net banking,
EMIs on credit or debit card and pay-later credit facility.
10. Enables easy exports: E-commerce exports assists sellers to directly sell to international customers in global
marketplaces, allowing them to transcend beyond national boundaries and expand abroad. With e-commerce,
sellers don’t have to invest in a physical setup to reach customers. Instead, they can use attractive product listing
and acquire new customers internationally with ease. For aspiring entrepreneurs and growing businesses, e-
commerce exports can be a very profitable model to adapt for global expansion and increased revenue.
Relationship between E-Commerce and Emerging Markets

E-commerce and the new emerging digital technologies and services can be tools for development and help
improve the livelihood of millions across the globe, by linking up remote regions and bringing together scientist,
administrators development professionals, managers, and people into projects and programmers to promote
economic and social development. The Internet revolution was really about people customer and fundame nta l
shift of market power from the seller to buyer. In the new economy customers’ expectations are very differe nt
than before. A company understanding of this difference and its ability to capitalize on it will be the key to
success. The web, the internet and emerging computing and communication technologies have redefined business
erasing traditional boundaries of time and geography and creating new virtual communities of customers and
suppliers with new demand to product and services. E-commerce only forms a fragment of e-business.
The internet revolution is really about customers, suppliers, groups, organisations, government, and the general
public. It has created fundamental shift of market power from the seller to buyer taking into consideratio ns
provisions guiding business transaction on the internet. In the new economy customers’ expectations are very
different than before. A company understanding of this difference and its ability to capitalise on it will be the key
to success. The web, the internet and emerging computing and communication technologies have redefined
traditional boundaries of business in relation to time, geography and creating new virtual communities of
customers and suppliers with new demand for products and services. Electronic commerce (EC) has been
recognized globally particularly in the developed markets as a mechanism for business organisations to reach
global markets and guiding a wide spread of customers in different geographical locations.
The adoption of e-commerce is widespread and also regarded as an essential tool for the efficient administra tio n
of any organisation and in the delivery of services to its clients. Electronic commerce has facilitated the emergence
of new strategies and business models in several industries in different countries. Significant changes are
happening in supermarket retailing with the introduction of online shopping, especially in terms of channel
development and coordination, business scope redefinition, the development of fulfillment centre model and core

processes, new ways of customer value creation, and online partnerships. In fact the role of online supermarket
itself has undergone some significant changes in the last few years. The electronic commerce segment of the retail
market has witnessed tremendous growth in terms of participation in the Nigerian economy in the last one year.
E-commerce involves conducting business using modern communication instrument: telephone, fax, e-payment,
money transfer systems, e-data inter-change and the internet. E-commerce is not only a new technology and a
new frontier for global business and trade, it is also still evolving. An emerging markets is a market that has some
characteristics of a developed market, but does not fully meet its standards. This includes markets that may
become developed markets in the future or were in the past.
Role of new intermediaries under E-Commerce

Four important roles of market intermediaries are:
a. Aggregate buyer demand and seller products to achieve economic scale or scope.
b. Protect buyer and seller from the opportunistic behavior of other participants in a market by becoming an
agent of trust.
c. Facilitate the market by reducing operating costs.
d. Matching buyer and seller.
Intermediaries in the electronic market are various intermediate organizations, mainly exists in the market,
regulating trade between producers, consumers and their information, products, services, thus making it become
a more convenient and cheaper economic organization. In an age where it is easy for any company to set up shop
with an e-commerce website, it may be tempting for a small business to eliminate intermediaries to maximize
profit. For a scaling business, however, this can create a lot of work in logistics and customer support. Unless
customers are buying a product directly from the company that makes it, sales are always facilitated by one or
more marketing intermediaries, also known as middlemen. Traditional physical markets are often brokered by
intermediaries that facilitate market transactions by providing intermediation service. For instance, the owner of
a shopping mall typically provides many intermediation services in the physical world. Four types of traditiona l
intermediaries include agents and brokers, wholesalers, distributors, and retailers.
Mobile Payments in Emerging Markets

Mobile payments have been a key driver of socio-economic development in emerging markets. Factors such as
advancements in technology, socioeconomic conditions, and the high penetration rate of mobile devices are
driving m-payment development in certain emerging markets. Mobile payments—payment services conducted
via a mobile device—have been a key driver of socioeconomic development in emerging markets. Factors such
as advancements in technology, socioeconomic conditions, and the high penetration rate of mobile devices are
driving m-payment development in certain emerging markets. Branchless banking, which involves a
distribution channel to deliver financial services without relying on bank branches, is appropriate for the
emerging markets.
Opening bank branches requires a huge investment in infrastructure, equipment, human resources, and security.
Branchless banking services, on the other hand, leverage local resources, infrastructure, skills, and equipment
(such as agent shops and mobile phones). M-payment is thus likely to benefit the bottom-of-the-pyr a mid
households. M-payment is much more convenient for consumers in the developing world, where financial and
banking services aren't easily accessible.
M-payment transactions currently occur in largely underdeveloped ecosystems. In many cases, underdevelo ped
infrastructures, immature standards, mobile phones with only primitive features, overloading and network
congestion, and outages have hindered the diffusion of m-payment services. There are also interoperability

issues. Cybercriminals have targeted unsuspecting m-payment users. This problem is especially critical in
emerging markets, where cybercrime-related legal frameworks and enforcement mechanisms aren't well
developed. There are instances of phishing attacks targeting mobile money users.
More serious effects of mobile malware are likely to be felt in the future, as cybercriminals find ways to
monetize mobile malware and increase the revenue-per- infection ratio for such malware. Emerging markets are
more likely to be victims of mobile malware, because their antivirus industry is less developed and their
antivirus products aren't as affordable, despite the fact that some mobile innovations are coming from these
markets.
The rapid growth of m-payment in emerging markets is driven by domestic rather than internatio na l
remittances. To understand the socioeconomic impact of m-payments, it's important to note that domestic and
international remittances correspond to different population segments. Payment models that rely on advanced
technology aren't appropriate for the developing world. In this regard, what differentiates M-Pesa from other
providers is its simple, low-tech mechanism for providing money transfers. To improve the m-payments
ecosystem, service providers, including banks and mobile operators, must increase collaborations and
partnerships with key value-chain partners, such as solution vendors, app developers, retailers, merchants,
handset and device vendors, and consumer associations. Even more importantly, the diffusion of m-payment
hinges on measures taken to increase consumers' awareness and willingness to adopt such services.
Differences between Traditional Marketing and Digital Marketing

Traditional Marketing: Traditional marketing is the old way of marketing Technique. It refers to a kind of
promotion, and advertisement includes flyers, billboards, TV ads, radio ads, print advertisements, newspaper ads,
etc. which companies used in the early period to market their product.
 The four phases of Traditional Marketing are Interest, Awareness, Desire, and Decision.
Digital Marketing: Digital Marketing is a modern way of marketing Technique. In which we promote, selling
products and services by online marketing. It also refers to the Marketing of any kind of business through digita l
media and devices such as Google, Facebook, Instagram, YouTube, etc.
 The four phases of Digital Marketing are Planning, Conversation, Content, and Sequels.
Traditional Marketing Digital Marketing
The promotion of products and services through TV, The promotion of products and services
Telephone, Banner, Broadcast, Door to Door, Sponsorship, through digital media or electronic mediums
etc. like SEO, sem, PPC, etc.
Traditional Marketing is not cost effective. Digital Marketing is more cost effective.
It is not so good for Brand building. It is efficient and fast for brand building.
Digital Marketing is easy to Measure with the

Traditional Marketing is difficult to Measure. help of analytics tools.

Traditional Marketing Digital Marketing
It is difficult to quantify return on investment in traditiona l It is simple to calculate in case of digita l

marketing. marketing.
Even after the posting of advertisement, it can

After the posting of the advertisement, it cannot be altered. be amended.
traditional Marketing includes. Digital Marketing includes..

 T.V. advertisement  Search engine optimization (SEO)
 Radio.  Pay-per-click advertising (PPC)
 Banner Ads.  Web design.
 Broadcast.  Content marketing.
 Sponsorship.  Social media marketing.
 print Ads.  Email marketing.
Users can even skip the ads if they lack

Users have no option except to watch the ads. interest.
The traditional type of marketing is having a

The traditional type of marketing is having local reach. global reach.
The targeting here is customized and relies on

There are standardized ways of targeting users. the type of user.
The methods opt in traditional marketing for market analysis Digital marketing gives quick results and thus
by a company leads to waiting for weeks or months to get helps in getting real-time marketing results
results. easily.
No real-time results are obtained in traditional marketing so The improvement in marketing strategy is
there is a need to draft a marketing strategy beforehand as it quite flexible as it can be changed according to
relies on marketing results. marketing results.
One-way communication occurs in traditional marketing

because of its rigid means to carry out the process of Two-way communication occurs that leads to
marketing. more customer satisfaction.

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Pakistan Institute of Public Finance Accountants (PIPFA) Business Organization (L-4) Notes

Good Governance: Good governance has 12 major characteristics. It is

M. Bilal Kamran Page 1

 Sound Financial Management

Why is good governance important?

Principles of Good Governance

Principle 1 – Participation, Representation, Fair Conduct of Elections

M. Bilal Kamran Page 2

Principle 3 – Efficiency and Effectiveness

Principle 4 – Openness and Transparency

M. Bilal Kamran Page 3

Principle 5 – Rule of Law

Principle 6 – Ethical Conduct

Principle 7 – Competence and Capacity

Principle 8 – Innovation and Openness to Change

Principle 9 – Sustainability and Long-Term Orientation

Principle 10 – Sound Financial Management

M. Bilal Kamran Page 4

Principle 11 – Human Rights, Cultural Diversity and Social Cohesion

Benefits of Corporate Governance

Issues in Corporate Governance

M. Bilal Kamran Page 5

2. Board’s Responsibility for Risk Management & Internal Control

3. Reliability of Financial Reporting & External Auditors

5. Shareholders’ Rights and Responsibilities

6. Separation of the roles of CEO & chairperson

7. Corporate Social Responsibility & Business Ethics

M. Bilal Kamran Page 6

Rights and Responsibilities of Stakeholders

Guiding Principles of Corporate Governance

M. Bilal Kamran Page 1

Key Corporate Actors

Key Responsibilities of the Board of Directors and Management

M. Bilal Kamran Page 2

CEO and Management

M. Bilal Kamran Page 3

M. Bilal Kamran Page 4

M. Bilal Kamran Page 5

Board Committee Structure

M. Bilal Kamran Page 6

M. Bilal Kamran Page 7

Nominating/Corporate Governance Committee

M. Bilal Kamran Page 8

M. Bilal Kamran Page 9

M. Bilal Kamran Page 10

M. Bilal Kamran Page 11

Senior Management Development and Succession Planning

Relationships with Shareholders and Other Stakeholders

M. Bilal Kamran Page 12

Shareholders and Investors

M. Bilal Kamran Page 13

Communities, the Environment and Sustainability

M. Bilal Kamran Page 14

M. Bilal Kamran Page 15

Distinguish Features of Organisation:

M. Bilal Kamran Page 1

What are stakeholders?

M. Bilal Kamran Page 2

M. Bilal Kamran Page 3

c) corruption in business practices (such as bribery)

Source of power: External Example

M. Bilal Kamran Page 4

Stakeholder mapping: Mendelow’s power/interest matrix

M. Bilal Kamran Page 5