Business & Finance

Certificate Level (CL)

Chaper-1: Introduction to Business

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♦Organization: Organization is a social arrangement for the controlled performance of
collective goals, which has a boundary separating it from its environment.

♦There are two types of organization:

i. Profit oriented organization

To maximize the wealth of its owners.
ii. Not for profit organization
To provide goods and services for its beneficiaries.

Organizations exist because they:

a) Overcome people's individual limitations.
b) Enable people to specialize.
c) Save time.
d) Accumulate and share knowledge
e) Pool their expertise (Combining Expertise)
f) Enable synergy: the combined output of two or more individuals working
together exceeds their individual output ('None of us is as smart as all of us').
g) In Brief, More Productive.

♦The common elements of organization are:

i.Social arrangement: individuals gathered together for a purpose.
ii.Controlled performance: performance is monitored against the goals and adjusted if
necessary, to ensure the goals are accomplished.
iii.Collective goals: the organization has goals over and above the goals of the people
within it.
iv.Boundary: the organization is distinct from its environment.

The organization may differ from each other in terms of:

i. Ownership- Public and Private.
ii.Control- private or government.
iii.Activity- Agriculture, Manufacturing, Extractive/raw materials, Energy,
Retailing/distribution, Intellectual production, Service industries.
iv.Profit or non-profit orientation- Profit making organization or charity.
v.Size- Small or large.
vi.Legal status- Company or proprietorship or partnership.
vii.Sources of finance- Borrowing, Government funding or share issue
viii.Technology- High tech user or low-tech user.

Types of work Organizations do:

➢ Agriculture
➢ Manufacturing
➢ Retailing/Distributing
➢ Energy
➢ Service industries
➢ Extractive/Raw materials
➢ Intellectual Productions.

Business: An organization (however small)

-that is oriented towards making a profit for its owners
-so as to maximize their wealth
-and that can be regarded as an entity separate from its owners.

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Stakeholder: A stakeholder is a person who has an interest of some kind in the business.

There are two types of stakeholders:

(i). Primary Stakeholders:
-Shareholders- in case of company (money Invested)
-Owners- in case of sole trader ship or partnership business. (money Invested)
(ii). Secondary Stakeholders:
1) Directors/ Managers; (Livelihoods, Careers and reputations)
2) Employees; (Livelihoods, Careers and reputations)
3) Customers; (Their Custom)
4) Suppliers and partners; (The Items they Supply)
5) Lenders; (Money lent)
6) Government and its agencies; (National infrastructure used by business,
The welfare of employees, Tax revenue)
7) The local community and The public at large(National infrastructure
used by business, The welfare of employees)
8) The natural environment. (The Environment shared by all)

Sustainability: Sustainability is the ability to meet the needs of present without

compromising the ability of future generation to meet their own needs.

Social responsibility: in business, also known as corporate social responsibility (CSR),

pertains to people and organizations behaving and conducting business ethically and with
sensitivity towards social, cultural, economic, and environmental issues. ♦

♦♦Business objectives:
i. Primary objective- financial objective of profit maximization so as to increase
shareholder’s wealth.
ii. Secondary objective:
• Market position-market share, sales growth, customer focus etc.
• Product development- new products, R &D in products etc.
• Technology- reduce cost per unit through technology
• Employees and management

♦♦Is wealth maximization always the primary objective?

Ans. Making as much profit as possible at acceptable risk, or wealth maximization, then, is
assumed to be the primary objective of business. We might expect that the wealth
maximization assumption would be close to the truth.

But Managers will not necessarily make decisions that will maximize shareholders wealth in
case of:
• Non-personal interest
• Lack of competitive pressure
• Profit satisficing- satisfactory profit for a short term ignoring the maximizing the
profit and wealth which is linked with the 'bounded rationality' by Herbert Simon
• Revenue maximization- to maximize revenue to increase the market share
• Multiple objectives- (Peter Drucker)
➢ Market standing
➢ Innovation
➢ Productivity
➢ Physical and financial resources

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➢ Profitability
➢ Manager performance and development
➢ Worker performance and attitude
➢ Social responsibility
Simon Expressed Constrain Theory that some business may take decisions without
referencing the wealth objectives at all. It can be seen clearly in the areas where ethical
constrains apply, such as stuff relations or environmental protection. It may also be seen in
the need to satisfy customers with quality goods or services which may lower profitability.

The overall framework for chart of planning and control system is as follows:

Comparison of On target-No
Objectives Plans and Actual performance corrective
standards performance with goals and action is
standards♦ required

Deviation
identified

Mission: A business’s mission is:

- its basic function in the society
- expressed in terms of how it satisfies its stakeholders.
In a nut shell/Overall, the main direction of business is set by its mission.

Mission includes the following characteristics/elements:

Elements of mission Comments

Purpose Why does the organization exist and for whom (e.g. Shareholders)
Strategy Mission provides the operational logic for the organization:
• What do we do?
• How do we do?
Policies and standards Mission should influence what people actually do and how they
of behavior behave. As example; the Mission of a hospital is to save lives and
this affects how doctors and nurses interact with patients.
Values What the organization believes to be important; its principles.

Some business also set-out their “Vision” of the future state of the industry or business when
determining what its Mission should be.

Vision: A vision is a vivid mental image of what you want your business to be at some
point in the future.

Goal means:
- A desired end result.
- The intentions behind decisions or actions.
- What an organization seek to accomplish.

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*The vision is what you want to accomplish. Mission is a general statement of how you will
achieve your vision. Strategies are a series of ways of using the mission to achieve
the vision. Goals are statements of what needs to be accomplished to implement the
strategy. Goals are set as a specific target that move you towards your vision.

There are two types of Goal.

i. Non-operational/ non-visible goal: a qualitative goals (Aims), for example; a

university’s aim may be— “to seek truth” (you would not see “increase truth by 5%).
ii. Operational/visible goals: A quantitative goals (Objectives), for example; “to
increase sales volume by 10%”.

Characteristics/Objectives of an operational goals:

Goals should be SMART which abbreviation is as follows:
• S-Specific
• M-Measurable
• A-Achievable
• R-Relevant
• T-Time-bound

Purposes of setting operational objectives in a business:

1. Implement the mission: by setting out what needs to be achieved.

2. Publicize the direction of the organization: to managers and the staff, so that
they know where their efforts should be directed.
3. Appraise the validity of decisions: by assessing whether these are sufficient to
achieve the stated objectives.
4. Assess and control actual performance: as objectives can be used as targets
for achievement.

Plans state what should be done to achieve the operational objectives.

Standards and Target specify a desired level of performance

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Managing a business (Chapter-2)

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Management means 'Getting things done through other people' (Stewart). Managers can
take resources (staff, money, materials, equipment) and create required outputs (goods,
services, reputation, profit)

Manager does the following tasks:

i. Setting Objectives.
ii. Monitor progress and results to ensure that objectives are met
iii. communicate and sustain corporate values, ethics and operating
principles.
iv. look after the interests of the organization’s owners and other stakeholders.

*Governance: Governance is the system by which businesses are directed and controlled
so that it’s objectives are achieved in an acceptable and sustainable manner.

Effective management Requires: PARADE

1. Power- The ability to get things done.

Six Types of Power according to French & Rave(Followed by Charles Handy)
• Coercive power
(Physical Force/Punishment)
• Reward (or resource) power
(Ability of rewarding individuals for compliance with one’s wishes)
• Legitimate (or position) power
(Formal position in the org)
• Expert power
(Based on Experience, qualifications or expertise)
• Referent (or personal) power
(Attractive/Unique Personality or Charisma)
• Negative power (Charles Handy)
(power to disrupt operations by industrial action, Refusal or sabotage)

2. Authority- The right to do something, or to ask someone else to do it and

expect it to be done. Authority is thus another word for position or legitimate power.
• Making decisions within the scope of authority given to the position
• Assigning tasks to subordinates

3. Responsibility- The obligation a person has to fulfil a task which s/he has
been given.

4. Accountability- A person's liability to be called to account for the fulfilment of

tasks s/he has been given by persons with a legitimate interest in the matter.

*One is thus accountable to a superior (or other persons with legitimate

interest) for a piece of work for which one is responsible

5. Delegation- a manager may make subordinates responsible for work, but

remains accountable to his or her own manager for ensuring that the work is done, that
s/he retains overall responsibility.
6.

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Types of manager may be classified on the basis of authority
i. Line manager: A line manager has authority over a sub-ordinate.
ii. Staff manager: A staff manager has authority in giving specialist advice to
another manager or department, over which they have no line authority.
iii. Functional manager: A functional manager has functional authority, a hybrid
of line and staff authority. Can direct or control activities of another department.
iv. Project manager: A project manager has authority over project team
members in respect of the project in progress. This authority is likely to be
temporary (for the duration of the project) and the project team is likely still to
have line managers who also have authority over them.

Management hierarchy:
i. Top managers
ii. Middle managers
iii. First-line managers
iv. Direct operational staff

Process of management: POLC

i. Planning; (business’s overall objective, mission & goals. direction of the works
to be done)
ii. Organizing; (Allocating time and effort in such a way that the objectives, plans
and targets are likely to be met)
iii. Leading. (generating effort & commitment towards meeting objectives,
including motivation of staff)
iv. Controlling; (monitor, Compare results with goals and take actions)

Managerial roles:
i. Informational role: Checking data received and passing it on to relevant
people, as well as acting as the “spokesperson” for his team in relation to other
teams or his own manager.
ii. Interpersonal role: Acting as leader for his own team, and linking with the
managers of other teams.
iii. Decisional role: It is in this role that managers actually “do” what we perceive
as managing in this role they:
a. Allocate resources to operations;
b. Handle disturbances;
c. Negotiate for what they need;
d. Solve problems that arise;
e. Act as entrepreneur.

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Culture: The common assumptions, values and beliefs that people share, “the way we do
things round here”.

Quinn emphasizes Two tensions that effect the type of culture a particular business
manifest.
• Tension between having flexibility and having control.
• Tension between whether the business is Inward looking or Outward looking.

The characteristics of 4 culture types, which may characterize entire businesses or

just parts of business:
i. Internal process culture- The business looks inwards, aiming to make its
internal environment stable and controlled. (public Sector Organizations)
ii. Rational goal culture- Effectiveness is defined as achieving goals that satisfy
external requirements. (Large Established businesses)
iii. Open systems culture- The external environment is a source of energy and
opportunity, but it is ever-changing and unpredictable. (a new business unit
working with fast-changing technology)
iv. Human relations culture- The business looks inwards, aiming to maintain its
existence and the well-being of staff. (Support service units)

Model: Model are used in management theory to represent a complex reality, such as a
client’s business, which is then analyzed and broken down into its constituent parts.
Handy points out that management models:
a. Help to explain the past, which in turn;
b. Helps us to understand the present, and thus;
c. To predict the future, leading to
d. More influence over future events, and
e. Fewer disturbances from the unexpected.

What includes in the internal process model of management: The internal process
model of management looks at - how the organization is doing things, not at why. In
business with an internal process model of management includes the following:
i. Rationality
ii. Hierarchical lines of authority
iii. Detailed rules and procedures
iv. Division of labour
v. Impersonality
vi. Centralization

Key Business functions:

i. Marketing, including sales and customer service
ii. Operations or production, including research and development (R&D), and
procurement
iii. Human resources
iv. Finance

Marketing: Marketing is the management process which identifies, anticipates and supplies
customer requirements efficiently & profitably.

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Market Segments: The division of the market into homogeneous groups of potential
customers who may be treated similarly for marketing purposes.
♦♦♦The marketing mix- The set of controllable marketing variables that a firm blend to
produce the response it wants in the target market (Kotler)
♦♦♦Presenting the marketing mix for tangible products is the four ‘P’s:
1. Product
2. Price
3. Promotion
4. Place (distribution)

In case of Service marketing mix, includes consideration of the 4 P’s above,

As well as three added extra ‘P’s:
5. People
6. Processes
7. Physical evidence

Product: A product is anything that can be offered to a market for attention, acquisition, use
or consumption that might satisfy a want or need.

There are three main elements of product:

1. Basic (or Core) product: a car
2. Actual product: a Ford focus
3. Augmented product: Ford focus with “0%” finance or extended warranty.
Added features or services to distinguish it from the same product offered by its
competitors.

General factors to be considered when taking a product from basic to actual and augmented
include the following:
a. Quality & reliability
b. Packaging
c. Branding
d. Aesthetics (smell, taste, appearance, etc)
e. Product mix
f. Servicing/associated services

♦Factors influence the pricing policy of the products of a business: Four Cs

1. Cost: Product should be priced above their total cost
2. Competitors: The price must be comparable to those of competitors.
3. Customers: Customer’s expectations
4. Corporate objectives: Possible pricing objectives are
▪ To maximize Profit
▪ To achieve a target return on investment. This results in an approach based on
adding something to the quantified cost to the business of providing the product
▪ To achieve a target revenue figure
▪ To achieve a target market share
▪ To match the competition, rather than leading the market, where the market is
very price-sensitive
▪ To drive competitors out of the market through predatory pricing with a view
to raising prices subsequently. (Predatory pricing is the illegal act of setting
prices low in an attempt to eliminate the competition.)

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Promotion: Promotion is all about communication, thus informing customers about the
product and persuading them to buy it.
There are four main types of promotion (“the communication mix”):
1. Advertising
2. Sales promotion (such as 'buy one, get one free' offers)
3. Public relations; and
4. Personal selling.
There are two elements in promotion:
1. PUSH: Ensuring products/services are available to consumers by encouraging
intermediaries, e.g. Sainsburys, to stock items.
2. PULL: Persuading the ultimate consumers to buy.

Operations management- Creating as required the goods or services that the business is
engaged in supplying to customers by being concerned with the design, implementation and
control of the business’s process so that inputs are transformed into output products and
services.
The way in which an operation will be organized and managed is affected by: four Vs
• Volume
• Variety
• Variation in demand
• Visibility

There are certain key decisions in operations management:

i. Forecasting demand far enough in advance.
ii. Deciding whether products should be made in-house or bought-in from outside
(“make or buy”).
iii. Deciding whether two operate in a “Just-In-Time basis”, or to hold
inventory.
iv. Deciding inventory levels and managing inventory efficiently.
v. Managing the supply chain, so inbound deliveries are tied in properly to the
production/operations plan in terms of timing and quality.
vi. Scheduling resources to meet the plan.
vii. Ensuring that the processes used in operations are managed efficiently.
viii. Ensuring quality.
ix. Eliminating waste efficiently.

Research And Development (R&D): involves

• Pure Research: Original research to obtain new scientific or technical knowledge or
understanding. There is no obvious commercial or potential end in view.
• Applied Research: Research which has obvious commercial or potential end in
view.
• Development: The use of existing scientific and technical knowledge to
produce/improve products or systems, prior to starting commercial production
operations.

Procurement: The acquisition of good and/or services at the best possible total cost of
ownership, in the right quality and quantity, at the right time, in the right place and form the
right source for the direct benefit or use of the business.
Procurement Mix elements:
• Quality
• Quantity
• Price
• Lead time
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♦♦Human resource management- 'The creation, development and maintenance of an
effective workforce, matching the requirements of the business and responding to the
environment' (Naylor).

♦Different approaches to HRM:

• Hard approach- The hard approach emphasizes the resources element of
HRM. It involves managing the functions of HRM to maximize employee
effectiveness and control staff costs.
• Soft approach- It is concerned with employee relations, the development of
individual skills and the welfare of staff.
Functions of HRM:
1. Personnel planning and control
2. Job design.
3. Recruitment and selection.
4. Training and development.
5. Performance appraisal.
6. Disciplining employees.
7. Remuneration. Designing
8. Grievances and disputes.
9. Compliance with legal and other standards.
10. Employee communication and counseling.
11. Personnel information and records.
12. Workforce diversity.

♦Four Cs model of HRM are:

1. Commitment
2. Competence.
3. Congruence. (common vision)
4. Cost-effectiveness

Organizational behavior: The study and understanding of individual and group behavior in
an organizational setting in order to help improve organizational performance and
effectiveness (Mullins).

♦Organizational Iceberg: (Hellriegel, Slocum and Woodman):

Formal aspects of a business which one can see ‘above the waterline’(Overt), there are
many Behavioral aspects which one cannot see(covert) which are very important.

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Organisational Metaphors: In order to help us understand the complex nature of life in
businesses, Morgan developed a range of metaphors, liking the business to a number of
different things in order to bring out certain characteristics of organizational behavior. View
the business as
• A machine
• An organism
• A Brain
• A Culture
• A political System
• A psychic prison
• Flux and transformation
• An instrument of domination.

Taylor's model: scientific management- stated that people were similar and could be
treated in a standardized fashion.

Taylor made three basic assumptions about human behaviour at work:

1. People are rational economic animals concerned with maximizing their
economic gain.
2. People respond as individuals, not groups.
3. People can be treated in a standardized fashion, like machines.

Taylor's conclusions were as follows:

1. Main motivator: high wages.
2. Manager's job: tell workers what to do.
3. Workers' jobs: do what they are told and get paid.

♦♦♦McGregor's model: Theory X and Theory Y

Theory X
• Individuals dislike work and avoid it where possible.
• Individuals lack ambition, dislike responsibility and.
• prefer to be led a system of coercion, control and punishment is needed to
achieve business objectives.
Theory Y
• Physical and mental effort in work is as natural as rest or play.
• Commitment to objectives is driven by rewards – self-actualization is the most
important reward.
• External control and threats are not the only way to achieve objectives – self-
control and direction.
• People learn to like responsibility.

Motivation giving and management should be done after identifying X or Y type.

♦♦Motivation: The degree to which a person wants certain behaviors and chooses to
engage in them.
Motivated workers are characterized by:
• Higher productivity
• Better quality work with less waste
• A greater sense of urgency
• More feedback and suggestions made for improvement
• More feedback demanded from superiors
• Works at 80-95% of their ability. Without motivation, 30%
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♦♦♦Maslow's content theory: the hierarchy of needs: Abraham Maslow (Motivation
and Personality (1954)) suggested a hierarchy of such needs to explain an individual's
motivation.
• Self-actualization needs- with what people think about themselves (ongoing
success and new challenges).
• Status/ego needs- to have the respect and esteem of others.
• Social needs- to belong to a group.
• Safety/security needs- physical safety and/or protection against
unemployment.
• Physiological needs - food, shelter, clothing etc.

Herzberg’s Two-Factor Principles:

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Group: A group behavior is a collection of people with the following characteristics:
1. Common sense of identify
2. Common aim or purpose
3. Existence of group norms (i.e. expected/accepted standards of behaviour)
4. Communication within the group
5. The presence of a leader.
Stages of group development- Tuckman
1. Forming. a collection of individuals who are seeking to define the purpose of
the group and how it will operate.
2. Storming. - preconceptions are challenged, and norms of attitude, behaviour
etc are challenged and rejected.
3. Norming- establishes the norms under which the group will operate establish
how the group will take decisions, behaviour patterns, level of trust and openness,
individuals' roles.
4. Performing- the group is capable of operating to full potential, since the
difficulties of adjustment, leadership contests etc should have been resolved.
Belbin Team Role:

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♦♦♦Likert’s Authoritative leadership style:

Likert's four characteristics of effective manager:

• Employee-Centered rather than work-oriented
• Set High standards but are flexible in terms of methods to use to achieve those
standards.
• Natural delegators with high level of trust
• Encourage Participative management

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Blake and Mouton managerial grid: Managers leadership style

• 9-9 -- Team Management: Participative, High productivity, integration of task and

human requirements.
• 9-1 -- Authority-Compliance: People are Treated like machines.
• 1-9 -- Country Club: keeps everyone happy, don’t worry about the task
• 5-5 -- Middle of the road: Average.
• 1-1 -- Impoverished (deprived of strength or vitality): No concern for either people or
getting the task done

♦♦♦Delegation: involves giving a subordinate responsibility and authority to carry out a

given task, while the manager retains overall responsibility. Delegation is a very important
means by which managers get things done.
Advantages of delegation:
1. Manager can be relieved of less important activities
2. It involves decisions to be taken nearer to the point of impact and without the
delays caused by reference upwards
3. It gives businesses a chance to meet changing condition more flexibly
4. It makes the sub-ordinate’s job more interesting.
5. It allows for career development and succession planning
6. It brings together skills and ideas.
7. Team aspect is motivational
8. It allows performance appraisal.
Problems caused by pore delegation:
1. Too much supervision can waste time and be demotivating for the sub-
ordinate
2. Too little supervision can lead to sub-ordinates feeling abandoned and may
result in an inferior outcome if they are not completely happy with what they are
doing.
3. Manager only delegates boring work
4. Manager tries to delegate impossible tasks because he can not do it himself.
5. Managers may not delegate enough because they fear their status is being
undermined, and they want to stay in control.
6. Sub-ordinates may lack the skills and training required.

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Organizational and business structure (Chapter-3)

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♦Organizational structure formed by the grouping of people into departments or sections
and the allocation of responsibility & authority. Organizational structure sets out how the
various functions (operations, marketing, HR, Finance, etc) are formally arranged.

Organizational structure is a framework intended to:

a. Link individuals in an established network of relationships so that authority,
responsibility & communications can be controlled.
b. Allocate the tasks to be done to suitable individuals or groups.
c. Give each individual or group the authority required to perform the allocated tasks,
while controlling their behavior and use of resources in the interest of the business as a
whole.
d. Coordinate the objectives and activities of separate groups, so that overall aims
are achieved without gaps or overlaps in the flow of work.
e. Facilitate the flow of work, information & other resources through the business.

♦Mintzberg’s Building Blocks:

Mintzberg suggests that all business can be analyzed into 6 “Building Blocks”: which are
shown below:

Sl # Building Block Function

Operating People directly involved in the process of obtaining inputs, and converting
1
core them into outputs, i.e. direct operational staff.
Middle Conveys the goals set by the strategic apex and controls the work of the
2
line operating core in pursuit of those goals, i.e. middle & 1st line managers.
Strategic Ensures the organization follows its mission. Manages the organization’s
3
apex relationship with the environment, i.e. Top managers.
Ancillary services such as PR, Legal counsel, the cafeteria & security
Support
4 staff. Support staff do not plan or standardize operations. They function
staff
independently of the operating core.
Analysts determine and standardize work processes & techniques.
Techno Planners determine & standardize & outputs (e.g. goods must achieve a
5
structure specified level of quality).
Personnel analysts standardize skills (e.g. through training programmes).
6 Ideology Values, beliefs and traditions, i.e. the business culture.

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Coordinating mechanisms integrate the building blocks into a cohesive unit, as follows:
i. Direct supervision: Giving of orders by a superior to a subordinate.
ii. Standardization of work: Laying down standard operating procedures.
iii. Standardization of skills: Requiring workers to have particular skills / qualifications.
iv. Standardization of outputs: Specification of results such as the setting of targets.
v. Mutual adjustment: Informal communication & self-government.

(Henri Fayol) 14 classical principles of organizational structure should be followed:

Sl# Principle Key words
1 Division of work Based on specialization
2 Scalar chain Chain of command, span of control
Correspondence of Enough Authority to carry out responsibilities
3
authority & responsibility
4 Appropriate centralization Decision taking from the top level
5 Unity of command One boss. Dual command is a disease (Fayol)
6 Unity of direction One head, one plan
7 Initiative Encouraging employees to use discretion
Subordination of individual
8 Value general interest of the org.
interests
9 Discipline Fair Disciplinary system
People and resources should reliably be
10 Order
where they are supposed to be
11 Stability of personnel Continuity of employment
12 Equity All employees should be treated equally
13 Remuneration Fair Rewards according to their effort
Harmony and Teamwork. A feeling of pride
14 Esprit de corps
and mutual loyalty shared by the members

Modern approaches to organizational structure:

i.Multi-skilling: Contrary to the idea of specialization, multi skilled teams (where
individuals are trained to perform a variety of team tasks, as required) enable tasks to
be performed more flexibly, using labor more efficiently.
ii.Flexibility: Arising from the competitive need to respond swiftly to rapidly-changing
customer demands & technological changes, organizations and processes are being
re-engineered to flexible structures such as the following:
◼ Smaller, multi-skilled, temporary structures. (i.e project or task-force teams)
◼ Multifunctional units, facilitating communication & coordination across
departmental boundaries. (i.e Matrix organization)
◼ Flexible deployment of the labor resource, (i.e part-time & temporary
working, contracting out tasks, flexi time, annual hours contracts)

Three main methods of communication the structure of the business.

a. Organization chart: Pictorial representation of the structure.
b. Organization Manual: Includes:
a) details about all positions in the organization.
b) Standard principles and working practices.
c. Job Description:
a) A result of job analysis
b) Includes responsibilities, authority and work involved
c) Typical descriptions:
• Job title, Department, Grade/Level, Duties & responsibilities,
Limits of authority, Superiors & sub-ordinates.

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Types of business structure:
Combining Mintzberg’s building blocks and Coordinating Mechanisms
S Organizational External Internal Key Building Key Co-ordinating
L Structure Type Environment Factors Block mechanism
1 Simple/ Simple Small Static apex Direct supervision
Entrepreneurial Dynamic young
structure Simple tasks
2 Functional/ Simple Large Technostructure Standardization of
Machine Static Old work
bureaucracy Regulated
3 Professional Complex Professional Operation Core Standardization of
bureaucracy Static Simple system skills
4 Divisional Simple Very Large Middle line Standardization of
Structure Static Old outputs
Diverse Divisible task
5 Matrix/Adhocracy/ Complex Young Operating Core Mutual adjustment
innovative Dynamic Complex task

The features of Entrepreneurial structure are:

i. Entrepreneur has specialist knowledge of
product/service
ii. Entrepreneur has total control over running of
the business.

Advantages of entrepreneurial structure:

i. Quick decisions can be made with skill & flair
ii. Goal congruence- the entrepreneur’s objectives are pursued exclusively
iii. Flexible/adaptable to change.
Disadvantage of entrepreneurial structure:
i. Can’t expand beyond a certain size (too many decisions need to be made &
too many people need to be managed).
ii. Can’t easily cope with diversification into new products/services about which
the entrepreneur does not have specialist skills / knowledge.
iii. Lack of career structure for lower level employees
iv. May be too centralized, i.e. too much decision-making power retained by
entrepreneur.
Features of Functional structure:
i. Jobs grouped by common features, e.g production, & ranked in hierarchy, e.g.
managers, supervisors, employees, etc.
ii. Clear lines of reporting & authority exist.
iii. Formal procedures and paperwork characterize this type of structure.
iv. The vertical flow of authority (scalar chain) can go up and down through the
structure from top to bottom.

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Advantage of functional structure:
i. Good career opportunities, employees can progress “up through the ranks”.
ii. Can be efficient as functional tasks as well known and understood by
individuals.
iii. Exploits specialist functional skill.

Disadvantages of functional structure

i. Structure is very rigid and unsuitable for:
• growth
• Diversification
ii. Tendency towards authoritative non-participative management style as clear
levels of authority are enforced.
iii. Poor decision/slow decisions which have to pass along a line of authority.
iv. Functional heads may build empires & inter functional disputes may result.

Divisional Structure: The division of a business into autonomous regions or product

businesses, each with its own revenues, expenditures & capital asset purchase
programmes, & therefore each with its own profit responsibility.

Features:
i. Business is split into divisions – division is usually by product or location.
ii. Divisions are typically given responsibility for their profits & assessed in terms of
profit (profit centre).
iii. In Bangladesh the typical approach is to use a holding company & subsidiaries (a
group structure).
Key conditions of a successful divisionalisation:
i. Each division must have properly delegated authority, & must be held
properly accountable to the group board (e.g. for profits earned)
ii. Each division must be large enough to support the quantity & quality of
management it needs.
iii. The division must not rely on Head Office for excessive management
support.
iv. Each division must have a potential for growth in its own area of operations.
v. There should be scope & challenge in the job for the management of each
division.
vi. If divisions deal with each other, it should be as “arm’s length” transactions.
Divisional structure is most suitable when;
i.there are larger, more diversified business
ii.there is diversity by product & /or location.
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Features of matrix structure:
i. Formalizes vertical & lateral lines of communication
ii. Managers appointed for projects or customers (projects or customer
managers) liaise with managers from each function (functional managers)
iii. May be temporary, i.e. for one–off contract.

Matrix structure is most suitable to:

i. Complex/hi-tech industries
ii. Educational establishments where there may be lecturers reporting to both
subjects & course heads.
iii. R & D (Research & Development) departments.

Advantages of matrix structure:

i. Reflects importance of project or customer, so may improve relationships &
sales.
ii. Business coordinated with regard to technology, information, etc.
Disadvantages of matrix structure:
i. Conflicting demands on staff time (staff has to serve two Bosses).
ii. Conflicting demands over allocation of other resources.
iii. Dilution (strength) of authority of functional heads.

Professional bureaucracy Structure:

Centralization: Centralized organization is one in which decision-making authority is

concentrated in one place, that is the strategic apex (top).

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Factors affecting decentralization:
i. Leadership style: If it is authoritative, the business will be more centralized
ii. Size of organization: As size increases, decentralization tends to increase.
iii. Extent of activity diversification: The more diversified, the more
decentralized.
iv. Effectiveness of communication: Decentralization will not work if information
is not communicated downwards.
v. Ability of management: The more able, the more decentralization.
vi. Speed of technical advancement: lower managers are likely to be more
familiar with changing technology, therefore decentralize.
vii. Geography of locations: If spread, decentralize.
viii. Extend of local knowledge needed: If required, decentralize.

*Centralization offers greater control & coordination, while decentralization offers greater
Flexibility as authority is delegated.

♦♦♦Span of control: The number of people (sub-ordinates) reporting to one person.

The classical Theorist Urwich held that:

• Need to be Tight managerial control downwards
• Usually restricted between 3 & 6 subordinates.
• Too wide(Too many subordinates) or Too narrow(Few subordinates) is bad.

♦♦♦Influence on Span of control:

i. A Manager’s capabilities limit the span of control.
ii. The nature of the manager’s workload
iii. The geographical dispersion of sub-ordinates.
iv. Sub-ordinates’ work.
v. The nature of problems that a manager might have to help sub-ordinates
with.
vi. The degree of interaction between sub-ordinates.
vii. The amount of support that supervisors receive from other parts of the
organization or from technology. (e.g. computerized work monitoring or ‘virtual
meetings’ with dispersed team members).

Scalar chain: The chain of command from the most senior to most junior.

Tall business: On which, in relation to its size, has a large number of levels in its
management hierarchy, normally because there are narrow spans of control.

Flat business: On which, in relation to its size, has a small number of hierarchical levels,
normally because there are wide spans of control.

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Difference between Mechanistic and Organic Organizational structure Defined by
Burns & Stalker:
Bureaucracies /Mechanistic Organic structure/
Factor
business/organization business/organization
Suit relatively static, slow-changing Suited to relatively dynamic
Suit
operating environments. operating environments.
The task Specified & broken down into sub-tasks Common task of the organization
Concerned with completing the task Concerned with the total situation
How the task
efficiently not overall organizational and tasks contributing to overall
fits in
effectiveness organizational effectiveness
Managers are responsible for People adjust and redefine their
Coordination
coordinating the tasks tasks themselves
Job Less precise. People do what is
Precise job and responsibility
Description necessary to complete the task
Legal Contract Vs
Hierarchical structure of control Network structure of control
common interest
Decisions Senior managers Can be from anywhere
Commitment to the business’s mission
Mission Concern and obedient to superiors
is more highly valued than loyalty

Characteristics of bureaucracy
Hierarchy of roles Uniformity in the performance of tasks
Specialization & training Rationality
Professional nature of employment Technical competence
Impersonal nature Stability

Businesses may take one of three basic legal forms:

i. Sole-proprietorship
ii. Partnership
iii. Companies

Sole-proprietorship: A single proprietor owns the business, taking all the risks and
enjoying all the rewards of the business.

Partnership: The relation which subsists between persons carrying on a business in

common with a view of profit.
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Two or more people who own a business, agreeing to take all the risks, co-operate to
advance their mutual interest and enjoy all the rewards of the business, are called a
partnership.
*Partnership act 1932 *Limited liability Partnership act 2008 (LLP) *No LLP in BD yet

Company: A legal entity registered as such under the Company’s Acts 1994
Advantages
i. The separate legal personality of the company.
ii. The limited liability of its members (share holders)
iii. Perpetual succession.
iv. Transferability of interests
v. Security for loans includes floating as well as fixed charges.
Disadvantages
i. Separation of ownership & control
ii. Ownership of assets
iii. Accounting records & returns
iv. Available Publicity
v. Regulations & expense

A business of whatever form may enter into various types of alliance with other
businesses, in the form of –

➢ Joint venture
➢ Licenses
➢ Strategic alliances
➢ Agents
➢ Groups

A joint venture (JV) is a business arrangement in which two or more parties agree to pool
their resources for the purpose of accomplishing a specific task.

A Licensing agreement is a permission to another company to manufacture or sell a

product, or to use a brand name.

A strategic alliance is an arrangement between two companies to undertake a mutually

beneficial project while each retains its independence.

Agents can be used as the distribution channel where local knowledge and contact are
important, eg exporting services, Financial services, sales of cosmetics, clothes etc.

An alliance group, then, is a collection of separate companies linked through collaborative

agreements. Not all the companies in a group have to be linked directly to all the others.
Some may be related only by virtue of their common ties to another network company or to
a single sponsoring company.

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