ACCA F1 Course Notes

F1 Course notes
CHAPTER 1
THE BUSINESS ORGANISATION, ITS

STAKEHOLDERS AND THE EXTERNAL
ENVIRONMENT
1.1 ACCA SYLLABUS GUIDE OUTCOME 1

THE PURPOSE AND TYPES OF BUSINESS ORGANISATIONS
Organisations are defined as:

social arrangements for the controlled performance of collective goals (Buchanan
and Huczynski)
There are different types of organisations, all of which, whether they are profit or non-
profit must concentrate on coordinating the above 3 points (Social Arrangement,
Collective Goals and Control of Performance).
The organisation is formed to have a good social arrangement made up of people

who are capable of working together, all of them willing to work around a set of
objectives or goals. The social arrangement should have a sound control.
Organisations can achieve results that cannot be produced by individuals on their
own. This is because organisations enable people to:
Share skills and

knowledge Specialise and
Pool resources
1.1.1 How does management formulate objectives?
A company goal can only become possible if it is SMART. This is a mnemonic which
stands for:
S Specific
M Measurable
A Attainable
R Realistic
T Time based
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DESCRIBE THE COMMON FEATURES OF BUSINESS ORGANISATIONS
The common features of a business organisation:
made up by a group of people who work together for the achievement of set
goals different people do different things or specialise in one activity
have business strategies to achieve goals/objectives
have a vision and a mission
have a culture which is formed by the organisational values
have structures (such as department, teams and divisions) and a sound
system i.e. systems and procedures
have inputs which are processed and provide an
output have customers besides other stakeholders

OUTLINE HOW BUSINESS ORGANISATIONS DIFFER
Size of the organisation (number of employees)

Number of organisational levels (tall or flat organisation)
Span of control (this refers to number of people directly under the
responsibility of one manager)
Centralisation versus decentralization (this refers to the extent to which
decision making power is delegated down the organisational hierarchy)
Criteria for departmentation (might include examples such as geography, by
product, by function etc)
Profit or non-profit making
Ownership some organisations are owned by private owners or
shareholders. These are private sector organisations. Public sector
organisations are owned by the government.
Technology for example, computer firms will have high use of technology but
a corner shop has very low use.

LIST THE INDUSTRIAL AND COMMERCIAL SECTORS IN WHICH
BUSINES ORGANISATIONS OPERATE
Industrial sector includes companies that manufacture parts as well as those that
assemble them into finished products. A number of specific industries fall under the
industrial umbrella, including automotive, aeronautics (aircraft building), textiles,
pharmaceutics, bioengineering and metal casting. Food refineries and packagers
generally fall under the industrial category because of the types of facilities
necessary for production.
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Commercial private sector industries are additionally subdivided in two ways. The
first is how they sell their product. Commercial industries who sell goods to the
general public are called retailers. This includes traditional outlets such as grocery
stores, specialty shops, department stores and drug stores, but also includes online
outlets such as online clothing stores or online book sellers.
Some commercial private sector industries buy from manufacturers and sell to
retailers. These corporations are called wholesalers. Not all commercial industries
involve wholesalers. In some cases, the retailer can buy directly from the
manufacturer. Industries that commonly use wholesalers include manufactured office
supplies and home goods.
In summary, the main industries in which organisations operate are: agriculture,

manufacturing, extractive raw materials, energy, retailing/distribution, intellectual
production and service industries.

IDENTIFY THE DIFFERENT TYPES OF BUSINESS ORGANISATION
1.5.1 Commercial organisations
A very important difference within the structure of organisations is the difference

between profit orientated (Commercial) and non-profit orientated organisations.
There is also a distinction between their primary and secondary goals. The
secondary goals exist to support the primary goal. The primary goal of a profit
making company is to maximise shareholders wealth.
Business organisations come in all different shapes and sizes including sole traders,
partnerships and LTD. A Limited company has a separate legal personality from its
owners (shareholders). The latter cannot normally be sued for the debts of the
business unless they have given some personal guarantee. Their risk is generally
restricted to the amount that they have invested in the company when buying the
shares (limited liability).
The owners of a limited company are shareholders. They provide capital and receive
return. Directors are appointed by shareholders to run the company. Executive
directors participate in the daily operations of the organisation and non-executive
directors are invited to join in an advisory capacity to exercise overall guidance.
1.5.2 Not-for-profit organisations
A non-profit organisation (NFP) works with a prime intention (primary goal) of

providing a good or a service to different sectors of society for which they are set up
to provide a benefit. For example, a school is set up to provide education. Charities,
such as, the Red Cross is set up to provide a medical service.
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1.5.3 Public Sector
Public Sector organisations are owned or run by the government. They are funded by
and accountable to the government. A major challenge that any government faces is
that of balancing their limited resources with a huge demand for public services.
Examples of a public sector organisation are:
Hospitals
Armed Forces
Centrally funded agencies
Most schools & Universities
Government Departments
1.5.4 Non-governmental organisations (NGO's)
A non-governmental organisation is an independent voluntary association of people

acting together for some common purposes. These organisations often support such
things as: conservation issues, environmental change etc.
1.5.5 Co-operatives
A co-operative is defined as an autonomous association of persons united voluntarily

to meet their common economic, social and cultural needs through a jointly-owned
and controlled enterprise. A cooperative may also be defined as a business owned
and controlled equally by the people who use its services or who work at it.
1.5.6 Mutual Associations
A mutual association or organisation is owned by the member/clients that such

organisation exists for. Generally mutual organisations deal with intangible products
such as financial services, example, ACCA
Refer to technical articles Non Profit organisation part 1 and part 2

at the back of the notes
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KEY POINTS
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5888 Objectives or goals must be identified by top managers in a SMART
way.
S specific
M measurable
A attainable R
realistic
T time based
5889 Profit oriented organisations are after maximising shareholders' wealth

whilst the prime goal of non-profit organisations is the provision of goods
and services from which different sectors of the society will benefit.
5890 The Public Sector is owned and run by government.
The Private Sector is composed of Limited Companies (LTD), partnerships

and sole traders.
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_________________________________________________________
QUESTION BANK
__________________
Question 1
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The primary goal in non-profit organisations is the
A. maximisation of profits
B. reward to its employees
C. shareholders' wealth
D. provision of goods/services
Question 2
Which of the following is an example of a mutual organisation?
0 Bank
1 Hospital
2 ACCA
3 Government Department
Question 3
What is the most appropriate goal of the firm?
0 Shareholder wealth maximisation

1 Profit maximisation
2 Stakeholder maximisation
Question 4
Which of the following statements is true?
0 Partnerships offer the same benefits as limited companies

1 Sole traders have no personal liability for business debts
2 Limited Companies are classed as a separate legal entity, therefore, the
shareholders are not personally liable for any debts of the business
3 A partnership can be made up of no more than 20 partners
Question 5
Which of the following are owners of a limited company?
A. Non-executive directors
0 Stakeholders
1 Shareholders
Question 6
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Which of the following is one of the key aspects of Buchanan and Huczynski's
definition of an organisation?
0 Shared profits
1 Regular reporting
2 Controlled performance
3 Clearly defined structure
Question 7
Which of the following does not fall within the definition of an organisation given by
Buchanan and Huczynski:
0 service companies
1 factories
2 retail companies
3 political parties
4 shareholders in a quoted company
5 charities
6 local councils
7 the army, navy and air force
8 schools
Question 8
How can a business organisation differ from one another? Which one is False
0 Size
1 Technology
2 Have inputs which are processed and provide an output
3 Ownership
Question 9
A private sector organisation is one owned or run by:
0 Central Government
1 Local Government
2 Government agencies
3 None of the above.
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ANSWER BANK
1. D
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23 C A bank is a commercial organisation, government departments fall under
public sector and a hospital can either be private or public.
24 A Profit maximization is important but ultimately it is the take home

shareholders wealth that has the most importance.
25 C There is no limit in the number of partners. Sole-traders have a personal

liability for business debts.
26 C Shareholders could be anyone who has an interest in the organisation

and non-executive directors are mostly in an advisory role.
27 C
28 E
29 C Any organisation irrelevant of the size, technology and ownership have an

input which is processed to provide an output.
30 D A public sector organisation is owned or run by central or local

government.
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STAKEHOLDERS IN BUSINESS
ORGANISATIONS

DEFINE STAKEHOLDERS AND EXPLAIN THE AGENCY RELATIONSHIP
IN BUSINESS AND HOW IT MAY VARY IN DIFFERENT TYPES OF
BUSINESS ORGANISATION
A stakeholder is a group or individual who has an interest in what the organisation

does, or an expectation of the organisation. It is important that an organisation
understands the needs of the different stakeholders.
The diagram hereunder lists some of the most important stakeholders of an

organisation. Stakeholders may be categorized as follows:
23 Internal stakeholders
24 External stakeholders
25 Connected stakeholders
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2.2 ACCA SYLLABUS GUIDE OUTCOME 2 AND 3
DEFINE INTERNAL, CONNECTED AND EXTERNAL STAKEHOLDERS
AND EXPLAIN THEIR IMPACT ON THE ORGANISATION
IDENTIFY THE MAIN STAKEHOLDER GROUPS AND THE OBJECTIVES
OF EACH GROUP
2.2.1 Internal Stakeholders
Internal stakeholders are intimately associated to the organisation and their

objectives are likely to have a strong influence on how it is run. The main two
examples of internal stakeholders are:
23 Employees
24 Management
Their interests to defend are jobs / careers, money, promotion prospects and
benefits.
2.2.2 Connected Stakeholders
Connected stakeholders can be viewed as having a contractual relationship with the

organisation. The objective of satisfying the shareholders needs to be fulfilled,
however, customers and finance objectives must be met if the company is to
succeed. Some examples of connected stakeholders may include:
23 Shareholders interested in shareholders wealth measured by profitability

24 Customers interested in the companys products
25 Suppliers interested in building long term relationship, on time payment of
goods and profitable sales
26 Finance providers - like banks interested in loan security
2.2.3 External Stakeholders
External stakeholders have quite diverse objectives and have varying ability to
ensure that the organisation meets its objectives. Some examples of external
stakeholders may include:
23 Community at large
24 Environmental pressure groups pollution etc.
25 Government interested in tax and employment opportunities
26 Trade unions interested in protecting their members.
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EXPLAIN HOW THE DIFFERENT STAKEHOLDERS GROUPS INTERACT
AND HOW THEIR OBJECTIVES MAY CONFLICT WITH ONE ANOTHER
The needs/expectations of the different stakeholders may conflict. Some of the

typical conflicts are shown below:
STAKEHOLDERS CONFLICT
employees versus managers jobs/wages versus bonus (cost efficiency)
customers versus shareholders product quality/service levels versus profit/dividends
general public versus shareholders effect on the environment versus profit/dividends
managers versus shareholders vehicle for exposing managerial skills vs dividend
stream and increase in the value of shares.

COMPARE THE POWER AND INFLUENCE OF VARIOUS STAKEHOLDER
GROUPS AND HOW THEIR NEEDS SHOULD BE ACCOUNTED FOR,
SUCH AS UNDER THE MENDELOW FRAMEWORK
2.4.1 Mendelow's power-interest matrix
By plotting each stakeholder according to the power they have over the organisation
and the interest they have in a particular decision, the dominant stakeholder(s), i.e.
the key players can be identified. The needs of the key players must be considered
during the formulation and evaluation of new strategies. Although the other
stakeholders, besides the key players, may be fairly passive, the managers must be
aware that stakeholder groups can emerge and move from quadrant to quadrant as a
result of specific events, so changing their position in the matrix.
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Potential examples
Key players a key customer.

Keep satisfied large institutional shareholders
Keep informed community representatives and charities.
Power within organisations can be derived in a variety of ways, any of which may
provide an avenue whereby the expectations of an individual or group may influence
company strategies. The following are the normally recognised sources of power:
23Hierarchy
24Influence
25Control of the environment
26Exercising discretion (power in being involved in decision making)
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KEY NOTES
__________________
1. A stakeholder is a group or individual who has an interest in what the
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organisation does, or an expectation of the organisation.
23 There are three types of stakeholders: -
23 Internal
24 External
25 Connected
24 Internal Stakeholders
Internal stakeholders are intimately associated to the organisation and their

objectives are likely to have a strong influence on how it is run. Examples may
include employees and management.
25 Connected Stakeholders
Connected stakeholders can be viewed as having a contractual relationship

with the organisation. E.g. shareholders, customers, suppliers and finance
providers.
26 External Stakeholders
External stakeholders have quite diverse objectives and have varying ability to
ensure that the organisation meets its objectives. E.g. community at large,
environmental pressure groups, government and trade unions.
27 Mendelows power-interest matrix
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QUESTION BANK
__________________
Question 1
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Which of the following would not be described as a connected stakeholder?
23 shareholders
24 customers
25 suppliers
26 managers
Question 2
Stakeholders can move from quadrant to quadrant within Mendelow's matrix.
5888 true
5889 false
Question 3
If a stakeholder has low interest but high power, then according to Mendelow's matrix
the strategy management should follow in relation to that stakeholder is:
23 minimal effort
24 keep satisfied
25 keep informed
26 fully consider the stakeholder, I.e. a key player
Question 4
Which of the following would be described as an external stakeholder?
5888 customer
5889 supplier
5890 trade union
5891 competitor
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ANSWER BANK
__________________
1. D Managers are internal stakeholders
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A This can happen as a result of specific events / outcomes.
C A, B and D are connected stakeholders.
CHAPTER 3
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POLITICAL AND LEGAL FACTORS
AFFECTING BUSINESS

EXPLAIN HOW THE POLITICAL SYSTEM AND GOVERNMENT POLICY
AFFECT THE ORGANISATION
The main components that an organisation should study in order to carry out an
external analysis (PEST analysis) are:
0 Political environment/ Legal environment
1 Economical environment/ Demographics
2 Social environment / Environmental environment
3 Technological environment
The environment is a source of uncertainty.

Decision makers do not have sufficient information
about the environments (PEST) therefore it is very
important to assess the overall degree of
uncertainty by using the following two measures:
0 Simplicity vs Complexity
1 Stability vs Dynamism
3.1.1 Political Environment
Organisational decisions are strongly affected by developments in the political

environment. The political environment has its own system or framework. It
regulates society therefore it regulates the system. A political environment will have
the following changes affecting a business:
0 Policies and Laws (for example laws regarding housing, education, defense,
healthcare, energy and environment)
1 Taxation
2 Local Councils
3 Authorities
4 Overall conduct of its economic policy
Management must be on the lookout for changes in government policies and

legislation which can change due to a change in government. Changes in
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government and policies will affect a society as a whole and will definitely influence
the operations of a market.
Businesses are able to influence government policies in a number of ways.
0 Employ lobbyists to put their case to individual ministers or civil servants

1 Give MPs non-executive directorships in the hope that the MP will take an
interest in all legislation that affects them.
2 They can try to influence public opinion and hence the legislative agenda by
advertising.
3.1.2 Legal Environment
Laws come from a number of sources. Common law, parliamentary and government
regulations are derived from it. The legal environment affects all companies, for
example:
Factors Examples
General legal framework Basic ways of doing business, negligence
Criminal law Theft, insider dealing, bribery, deception
Company law Directors & their duties, reporting requirements
Employment law Dismissal, minimum wage, equal opportunities
Health & Safety law Fire precautions, safety procedures
Data protection Use of information about employees/customers
Marketing & Sales Laws to protect consumers
Environment Pollution control, waste disposal
Tax law Corporation tax, income tax, sales tax

DESCRIBE THE SOURCES OF LEGAL AUTHORITY, INCLUDING SUPRA-
NATIONAL AND REGIONAL GOVERNMENTS
3.2.1 Sources of legal authority include the following:
SUPRA- NATIONAL
United Nations resolutions (can be either substantive or procedural)
International Court of Justice
Other international agreements that apply to signatories (e.g. The World Trade
Organisation sets rules on trade between member states)
European Parliament
European Courts
NATIONAL
0 National Governments through Acts of Parliament
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0 Senior Courts (e.g. House of Lords in UK, The Supreme Court in the USA)
1 Other major courts through the principles of case law and the setting of
precedents
REGIONAL
23 Regional/Federal Government (e.g. Welsh assembly in the UK, State
Government in the USA)
24 Local councils can issue by-laws in many countries (a law that is less
important than a general law or constitutional provision)
3.3 ACCA SYLLABUS GUIDE OUTCOMES 3

EXPLAIN HOW THE LAW PROTECTS THE EMPLOYEE AND
IMPLICATIONS OF EMPLOYMENT LEGISLATION FOR THE MANAGER
AND THE ORGANISATION
3.3.1 Retirement
In the UK, many employees are taking early retirement perhaps as a result of
corporate downsizing but many people still search for work at an older age and there
are pressure groups seeking to ban ageism.
3.3.2 Resignation
People resign for many reasons, personal and occupational. Employees who are
particularly valuable should be encouraged to stay. Particular problems the employee
has been experiencing (example salary) may be solvable, though not always in the
short term. In any case, an exit interview, when the leaver explains the decision to
go, is a valuable source of information.
3.3.3 Dismissal
There are 3 forms of dismissal, by employer, by the employee and a fixed contract
without renewal. The statutory minimum period of notice to be given is determined by
the employees length of continuous service in the employers service.
Wrongful dismissal is dismissal that breaches the contract of employment. Unfair

dismissal is dismissal without a good reason for which the legal concept protects the
employee.
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DENTIFY THE PRINCIPLES OF DATA PROTECTION AND SECURITY
Why is privacy an important issue?
There has been a growing concern that the ever-increasing amount of information
about individuals held by organisations could be misused. The fear was that by the
existence of computerised data about an individual, whether correct or incorrect,
could be transferred to unauthorised third parties at high speed and little cost.
In the UK, the current legislation covering that area is the DATA PROTECTION
ACT 1998
The Act has two main aims: (1) to protect individual privacy (and not that of
organizations) (2) to harmonise date protection legislation
3.4.1 The Principles of the Data Protection Act 1998
Schedule 1 of the act contains the data protection principles.

23 Personal data shall be processed fairly and lawfully and, in particular, shall not
be processed unless:
0 At least one of the conditions in Schedule 2 is met
23In the case of sensitive personal data, at least one of the conditions in
Schedule 3 is also met
24 Personal data shall be obtained only for one or more specified and lawful
purpose, and shall not be further processed in any manner incompatible with
that purpose or those purposes.
25 Personal data shall be adequate, relevant and not excessive in relation to the
purpose(s) for which they are processed.
26 Personal data shall be accurate and, where necessary, kept up to date.
27 Personal data processed for any purpose or purposes shall not be kept for
longer than is necessary for that purpose or those purposes.
28 Personal data shall be processed in accordance with the rights of data
subjects under this act.
29 Appropriate technical and organisational measures shall be taken against
unauthorised or unlawful processing of personal data and against accidental
loss or destruction of, or damage to, personal data.
30 Personal data shall not be transferred to a country or territory outside the
European Economic Area unless that country or territory ensures an adequate
level of protection for the rights and freedoms of data subjects in relation to
the processing of personal data.
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There are several possible risks to data at the place of work. These include:
23 Human error
24 Technical error
25 Catastrophic error
26 Malicious damage
27 dishonesty

EXPLAIN HOW THE LAW PROMOTES AND PROTECTS HEALTH AND
SAFETY IN THE WORKPLACE
3.5.1 The importance of maintaining health and safety at work
There are three important elements to health and safety at work:

5888 An employer has legal obligations under UK & EU law
5889 The accidents and illness cost the employer money
5890 The companys image in the marketplace and society may suffer
3.5.2 Employers Duties
0 All work practices must be safe.

1 The work environment must be safe and healthy.
2 All plant and equipment must be maintained to the necessary standard.
3 Information, instruction, training and supervision should encourage safe working
practices. Employers must provide training and information to all staff.
4 The safety policy should be clearly communicated to all staff.
5 Employers must carry out a risk assessment, generally in writing, of all work
hazards. Assessments should be continuous. They must assess the risks to
anyone else affected by their work activities.
6 They must share hazard and risk information with other employers, including
those on adjoining premises, other site occupiers and all subcontractors coming
onto the premise.
7 They must introduce controls to reduce risks.
8 They should revise safety policies in the light of the above, or initiate safety
policies if none were in place previously.
9 They must identify employees who are especially at risk.
10 They must employ competent safety and health advisers.
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RECOGNISE THE RESPONSIBILITY OF THE INDIVIDUAL AND
ORGANISATION FOR COMPLAINCE WITH LAWS ON DATA PROTECTION,
SECURITY AND HEALTH & SAFETY
People should be able to be confident that they will not be exposed to excessive risk
when they are at work. This means that risk and danger must be actively managed.
This is the main reason why security has become so important in today's world. Data
is protected by secured information technology apart from being secured by law.
The employee also has responsibilities when it comes to health and safety at work.
0 To take reasonable care of their own health and safety.

1 To take reasonable care not to put other people - fellow employees and
members of the public - at risk by what they do or don't do in the course of
their work.
2 To co-operate with the employer, making sure they get proper training and
understand and follow the company's health and safety policies.
3 Not to interfere with or misuse anything that is been provided for their health,
safety or welfare.
4 To report any injuries, strains or illnesses you suffer as a result of doing their
job.
5 To tell the employer if something happens that might affect their ability to
work.

OUTLINE PRINCIPLES OF CONSUMER PROTECTION SUCH AS SALE
OF GOODS AND SIMPLE CONTRACT
Consumer protection laws are designed to ensure fair trade competition and the
free flow of truthful information in the marketplace. The laws are designed to prevent
businesses that engage in fraud or specified unfair practices from gaining an
advantage over competitors and may provide additional protection for the weak and
those unable to take care of themselves. Consumer Protection laws are a form of
government regulation which aim to protect the rights of consumers.
3.7.1 Unfair Contract Terms
Unfair Contract Terms Act 1977 is an act of Parliament of the United Kingdom
which regulates contracts by restricting the operation and legality of some contract
terms. They are intended to provide broad protection for consumers, and business
practices which are likely to distort consumers' decisions regarding their purchases
generally fall within this act. Certain kinds of unfair term can have that distorting
effect, for instance through misleading consumers about their rights.
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Under contract law, the money you give in exchange for the goods is referred to as
the consideration. For a contract to take place there must be agreement between
the parties. This requires an offer made by one party and acceptance by the other
party.
An important point about contracts is that they do not have to be written. They do not
even have to be spoken. A customer picking up something in a supermarket and
walking to the checkout is making an offer to the shop, and that offer is implied by
his behaviour.
When one party to a contract fails to carry out his part of the agreement, the other
party can take legal action against him for breach of contract. So if a business has
a customer who is failing to pay, they can take him to court.
When one party makes a misrepresentation to the other, the contract is void.
3.7.2 The Sale of Goods Act 1979
The Sale of Goods Act 1979 is an act of the Parliament of the United Kingdom
which regulates English contract law and UK commercial law in respect of goods that
are sold and bought. The Sale of Goods Act performs several functions. The Act lays
down a small number of compulsory legal rules, but these restrictions are minimal:
the bulk of the Act is concerned with an array of presumptions and implied terms,
which aim to reflect the commercial expectations in the most commonly agreed sales
contracts. In the absence of contrary agreement these terms will govern a contract
within the Act's remit. The Act applies to contracts where ownership of goods is
transferred or agreed to be transferred for a monetary.
Imagine you are about to enter into a contract for the purchase of some goods. What
might you be concerned about?
You may want the goods delivered for a particular occasion or date
Are the goods stolen, i.e. does the seller have a right to sell the goods?
You would expect the goods to be the same type and quality as the
description or any sample
The goods should be reasonable quality and suitable for their purpose
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____________________________________________________________
KEY POINTS
__________________
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0 An external analysis or PEST analysis includes:
0 P olitical
1 E conomical
2 S ocial
3 T echnological
1 Some laws generated from the Political environment and that may affect an
organisation includes:
0 Criminal Law
1 Company Law
2 Employment Law
3 Health & Safety Law
4 Data Protection Law
5 Laws regarding the Environment
6 Tax Law
3.
Privacy is the right of the individual to control the use of information about him or
her, including information on financial status; health and lifestyle (ie prevent
unauthorised disclosure).
4.
The Data Protection Act 1998

The (UK) data protection act 1998 protects individuals about who data is held. Both
manual and computerised information must comply with the act.
23 Under contract law, the money you give in exchange for the goods is referred
to as the consideration.
24 For a contract to take place, there must be agreement between the parties.
This requires an offer made by one party and acceptance by the other party.
25 An important point about contracts is that they need do not have to be

written. They do not even have to be spoken.
26 When one party to a contract fails to carry out his part of the agreement, the
other party can take legal action against him for breach of contract.
27 When one party makes a misrepresentation to the other, the contract is

void.
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23 When someone is about to buy something there are things to consider and
so does the law; date, does the seller have a right to sell the goods,
quality as the description, reasonable quality and suitable for their
purpose
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_____________________________________________________________
QUESTION BANK
__________________
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Question 1
Which of the following types of new legislation would provide greater employment
opportunities in large companies?
23 New laws on health and safety

24 New laws to prevent discrimination in the workplace
25 New laws making it more difficult to dismiss employees unfairly
26 New laws on higher compensation for employer breaches of employment
contracts
Question 2
Which set of environmental factors does a lobby group intend to directly influence?
23 Political
24 Technological
25 Demographic
26 Economic
Question 3
When examining the external environment organisations might use PEST analysis.
What does PEST stand for?
23 Political, Environmental, Social and Technical

24 Physical, Environmental, Social and Technical
25 Physical, Emergent, Strategic and Turbulent
26 Political, Economic, Social and Technical
Question 4
Which of the following best describes PEST analysis?
A. Internal analysis
0 Micro analysis
1 External analysis
2 Macro analysis
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Question 5
Governments can influence firms through legislation and policy decisions in all
sections of the economy including Law and Order, Schools, Construction, Defense,
Town Planning, Oil, Gas, Coal and Nuclear Power, Agriculture, Planning Permission
and Foreign Policy
Is this statement true or false?

23 True
24 False
Question 6
When an organisation carries out an environmental scan, it analyses which of the

following?
23 strengths, weaknesses, opportunities and threats

24 political, economic, social and technological factors
25 strategic options and choice
26 inbound and outbound logistics
Question 7
Peter Wong was dancing on his desk one lunch time and tripped, injuring himself.
Who is responsible for the accident?
23 Peter
24 Peter's employer
25 Both Peter and his employer
Question 8
Which type of organisation would have the retail prices it charges to personal
consumers subject to close scrutiny by a regulator?
23 A multinational corporation
24 A multi-divisional conglomerate (a large corporation that has acquired several
other firms engaged in different industries)
25 A national utilities company (national or local monopolies)
26 A financial services provider
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Question 9
Employing lobbyists to put the organisation's case to ministers or civil servants is a

legitimate method of influencing governmental policy in the interests of a business.
23 True
24 False
Question 10
Which of the following is data protection legislation primarily designed to protect?
23 All private individuals and corporate entities on whom only regulated data is held
24 All private individuals on whom only regulated data is held
25 All private individuals on whom any data is held
26 All private individuals and corporate entities on whom any data is held
Question 11
The current legislation covering the data protection in the UK is:
23 The Data Protection Act of 2001

Question 12
Personal data shall be accurate and, where necessary, kept up to date. Does this
statement comply with Data Protection Act (UK)?
23 Yes
24 No
Question 13
The process of backing up data and keeping copies off-site in a fire-proof box is an
example of data protection?
23True
24 False
____________________________________________________________________
36
Question 14
An employee does not have an obligation to comply with the health & safety act it
is only the obligation of the employer.
23 True
24 False
Question 15
Jack started a new job today. He is 16 years of age and has no intention to continue
his studies. This is his first job with a building contractor. At 7am sharp he was at the
plant hoping to have some explanation regarding this job. None of the sort happened,
he found himself at a construction site with some other older colleagues in less than
half an hour. At around 3.30pm his boss arrived on site and started shouting at him
since he was not wearing neither a safety shoes nor a helmet. To make it worse,
none of the other employees were wearing such equipment though they had been
instructed by the company in various occasions.
Section A: As regards to Jack's case who is the one to be blamed?
23 Jack
24 The other employees
25 The employer
Section B: As regards to the other employees' case who is the one to be blamed?
23 Jack
24 The other employees
25 The employer
Question 16
Peter buys an electronic keyboard from his local catalogue store. He pays 199 for
it. He returns to the store the next day complaining that, although the main keys
work, none of the pre-set rhythm bottoms seem to function. He demands an
immediate refund. The sales assistant refuses to give him a refund or take back the
goods, and instead gives him a card with the name and address of the
manufacturer, suggesting that Peter contacts them to obtain a refund or a
replacement.
23 Was the sales assistant legally justified in refusing to give a refund (Y/N)
24 Give briefly a reason for your answer
____________________________________________________________________
37
Question 17
Environmental analysis is relevant when undertaking the strategy making process. Is

it true or false?
23 True
24 False
Question 18
An individual who is the subject of personal data is a data _______________
23 Mining
24 Subject
25 Figure
Question 19
Under which component of PEST analysis would an organisation analyse the media
through which segments of the youth market access new digital music products?
5888 Political
5889 Economic
5890 Social
5891 Technological
Question 20
Health and safety regulations cover a range of workplace health and safety issues.
Which of the following is covered by regulations?
0 Handling of chemicals
1 Computers
2 Pregnancy
3 All of the above
____________________________________________________________________
38
_____________________________________________________________
ANSWER BANK
__________________
____________________________________________________________________
39
23 B
24 A lobby groups are a legitimate way of influencing governmental bodies
25 D
26 C
27 A
28 B
29 A each and every employee is responsible for his/her health and safety
30 C
31 A
32 B legislation can never protect something which is not regulated
33 B
34 A
35 B
36 B
37 Section A C / Section B B
38 Section A No / Section B Contracts of sale are between the buyer and

seller, not between the buyer and the manufacturer
39 A - the environment is everything that surrounds an organisation and so

understanding it is one of the key inputs to the strategy-making process.
40 B
41 C the developments in digital music products may be analysed under

technological factors, BUT media consumption and buying patterns are socio-
cultural factors.
42 D
____________________________________________________________________
40
CHAPTER 4
MACRO-ECONOMIC FACTORS

DEFINE MACRO-ECONOMIC POLICY
4.1.1 Macro-economic policy / macroeconomics is concerned with the total

(aggregate) scenario of economic issues that determine a person's economic well-
being as well as that of one's family and everyone s/he knows. These issues involve
the overall economic performance of the nation, rather than that of particular
individuals.
23 Do citizens find it easy or difficult to find jobs? (Unemployment rate)

24 On average are prices rising rapidly, slowly, or not at all? (Concept of inflation)
25 How much total income is the nation producing, and how rapidly is total
income growing year after year? (Productivity)
26 Is interest rate charged to borrow money high or low?
27 Is the Government spending more than it collects in tax revenue?
(Government budget)
28 Is the nation as a whole accumulating assets in other countries or is it
becoming more indebted to them? (Foreign trade deficit)
Each of the above questions involve a central macroeconomic concept that affect the
factors of production land, labour, capital and entrepreneurship. The basic task of
macroeconomics is to study the behaviour of the policy objectives, namely economic
growth, inflation, unemployment and balance of payments and why each matter to
individuals and what the government can do (if anything) to improve macroeconomic
performance.
Thus, one can say that the study of economics can be divided into two
macroeconomics and microeconomics. Macroeconomics considers aggregate
behaviour, and the study of the sum of individual economic decisions.
Microeconomics is the study of the economic behaviour of individual consumers,
firms and industries.
____________________________________________________________________
41
EXPLAIN THE MAIN DETERMINANTS OF THE LEVEL OF BUSINESS
ACTIVITY IN THE ECONOMY AND HOW VARIATIONS IN THE LEVEL OF
BUSINESS ACTIVITY AFFECT INDIVIDUALS, HOUSEHOLDS AND
BUSINESSES
The economy is rarely in a stable state because of the various changing factors
which influence it. An interesting factor is the multiplier. A multiplier is basically a
factor of proportionality that measures how much an X variable changes in response
to a change in some Y variable.
4.2.1 Determinants of the level of Business Activity
23 Confidence
When consumers are confident, they tend to demand more whilst higher
business confidence results in higher investment. Confidence is generally put
at a threat when there is political instability, disasters, unemployment and high
inflation.
24 Aggregate Demand
AD = C + I + G + X M
23 AD Aggregate Demand
24 C Consumer Spending
25 I Investment by firms
26 G Government Spending
27 X Demand for exports
28 M Imports
Balance of Payments
Under the current method of presentation of the UK balance of payments statistics,

current account transactions are sub-divided into four parts.
5888 Trade in goods
5889 Trade in services
5890 Income
5891 Transfers.
When journalists on economists speak of the balance of payments they are usually
referring to the deficit or surplus on the current account.
The government of a country with a balance of payments deficit will usually be

expected to take measures to reduce or eliminate the deficit by one or more of the
following measures:
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42
23 A depreciation of the currency known as devaluation
24 Direct measures to restrict imports, such as tariffs or import quotas or
exchange control regulations
25 Domestic deflation to reduce aggregate demand in the domestic economy
The first two are expenditure switching policies which transfer resources and
expenditure away from imports and towards domestic products while the last is an
expenditure reducing policy.
5888 Capital - If firms raise their finance it will result in higher levels of
investment. Lower interest rates will make capital cheaper.
5889 Use of Resources - Advancements in technology results in efficient

work
practices and can improve productivity. A well-educated work force can also
result in better and more productive work.
5890 Government Policy - Government can affect aggregate demand

through fiscal policy (the blend of government spending and taxation). If
Government spending increases then the overall aggregate demand will
increase
5891 Exchange Rate Movements - A strengthening currency will make

exports of
a particular country more expensive and in that case imports will result to be
cheaper.
What are the impacts of having an appreciating (strengthening) currency?
23 Exports are hurt.
Most developing countries have economies based largely on exports that are
competitive in global markets because of low prices. A case in point nowadays is
China. When those countries currency gains in value, they are no longer able to
offer exports to the global market at the same low prices that they planned to. This
may cause importers (of other countries) to look elsewhere, to countries with lower
valued currency resulting in better prices. It may also be the case that the importers
will start ordering less from the said country having an appreciating currency.
5888 Repatriated profits from a countrys international economic activity are hurt.
Currency appreciation at home means that money made elsewhere wont stretch as
far in supporting the domestic economy
____________________________________________________________________
43
EXPLAIN THE IMPACT OF ECONOMIC ISSUES ON THE INDIVIDUAL,
THE HOUSEHOLD AND THE BUSINESS
4.3.1 Inflation
The inflation rate is the percentage rate of increase in the economy's average level
of prices. A high inflation rate means that prices on average are rising rapidly, while a
low inflation rate means that prices on average are rising slowly. In inflationary
periods, retired people or those about to retire are those of the biggest losers since
their hard-earned savings will buy less and less as prices go up. While a high
inflation rate harms those who have saved in the past, it helps those who have
borrowed. It is this capricious aspect of inflation, taking from some and giving to
others, that makes people dislike inflation. People want their lives to be predictable,
but inflation throws a monkey wrench into individual decision making, creating
pervasive uncertainty.
An inflationary gap exists in an economy when aggregate demand (total demand in

an economy) is greater than the full employment level of income.
One important measure of the general rate of inflation in the UK used over many
years has been the Retail Price Index (RPI). The RPI measures the percentage
changes month by month in the average level of prices of the commodities and
services, including housing costs, purchased by the great majority of households in
the UK. The items of expenditure within the RPI are intended to be a representative
list of items, current prices for which are collected at regular intervals.
4.3.2 Causes of inflation
23 Demand pull inflation
Demand pull inflation arises from excess demand over productive capacity of the
economy. It is a situation when demand exceeds supply and prices rise. Demand pull
inflation only exists when unemployment is low.
____________________________________________________________________
44
Considering the case scenario in the graph above, P1, that is price 1 was the original
price when national income was Y1. When demand pull takes place, the curve AD1
shifts to AD2 since demand increases (too much money chasing too few goods). As
a result, P1 increases to P2 reflecting inflation and Y1 increases to Y2 reflecting an
increase in national income.
When P1 decreases to P3, that means that demand decreased, shifting AD1 to AD3
resulting in a decrease in national income from Y1 to Y3.
In a situation when inflation is rising, demand side policy which is controlled by the
government would focus on reducing aggregate demand through tax rise, cuts in
government spending and higher interest rates. This is done in an effort to regularise
inflation to control it from continuing to rise.
5888 Cost-push inflation
This is a result of increases in the costs of production thus short-run aggregate

supply (SRAS) shifts from SRAS1 to SRAS2. Its effect leaves an increase in price
from P1 to P2. Thus, this increase in price is in fact inflation. Cost-push inflation
arises whether or not there is a demand for supply, for example, an increase in the
cost of wages.
23 Imported inflation
Cost of import rises regardless of whether there is a high demand for supply, for
example, an increase in oil prices. The same explanation sticks from point no. 2 case
scenario.
5888 Monetary inflation
Monetary inflation means an increase in the supply of money. There is a debate

whether an increase in money supply is a cause of inflation or whether an increase
____________________________________________________________________
45
in the money supply is a symptom of inflation. What happens is that the more supply
in money, the more people will buy thus demand will increase. As a result, if this
increase in demand occurs faster than the expansion in the supply of goods and
services, then, inflation will take place. Monetarists (supply side view) argue that a
good tool to fight such inflation is to decrease the supply of money and increase
interest rates.
23 Expectations effect
Once inflation has started to rise, there may be expectational inflation, that is,
people will start expecting inflation to rise even higher. A general held view of future
inflation therefore, sets for example, wages accordingly. This is known as the wage-
price spiral.
4.3.3 Unemployment
Unemployment rate is the number of jobless individuals who are actively looking for
work divided by the total of those employed and unemployed.
The higher the overall unemployment rate, the harder it is for each individual who
wants to find work. Everyone fears a high unemployment since it raises the chances
that they will be laid off from their present work, will be unable to pay their bills etc.
A government can try several options to create jobs or reduce unemployment.

5888 Spending more money directly on jobs
5889 Encouraging growth
5890 Encouraging training in job skills
5891 Offering grant assistance to employers
5892 Encouraging labour mobility
4.3.4 Types of unemployment
Category Comments
Real wage Caused when the supply of labour exceeds demand but real wages
unemployment do not fall. Caused by strong trade unions which resist a fall in wages.
Abolishing (put an end to) closed shop agreements and minimum
wage regulations are policies which may be directed at reducing real
wage to market clearing levels.
Frictional Difficulty in matching quickly workers with jobs. Possibly caused by
lack of knowledge of job opportunities. Usually temporary
Seasonal Especially in certain trades as farming etc
Structural Occurs during long-term change in conditions. For example, a long-
term change in a community that relies on one particular industry
Technological A form of structural that occurs then new technology arises.
Cyclical or Matches economic climate trends such as boom, decline, recession
demand- and recovery. Demand for labour fluctuates as demand rises and falls
deficient
____________________________________________________________________
46
4.3.5 Stagnation or Stagflation
This is a combination of unacceptably high levels of unemployment and

unacceptably high levels of inflation. During the 1970 in the UK a major rise in the
price of crude oil took place. This meant that the cost of energy rose and therefore
rendered some products unprofitable. National income fell and both prices and
unemployment rose. Any long term major increase in costs could have this effect.
4.3.6 International payments Disequilibrium
A fundamental disequilibrium exists when outward payments have a continuing

tendency not to balance inward payments. Disequilibrium may occur for various
reasons. Some may be grouped under the head of structural change (resulting from
changes in tastes, habits, institutions, technology, etc.). A fundamental imbalance
may occur if wages and other costs rise faster in relation to productivity in one
country than they do in others. Imbalance may also result when aggregate demand
runs above the supply potential of a country, forcing prices up or raising imports. For
example, a war may have a profoundly disturbing effect on a countrys economy
4.4 ACCA SYLLABUS GUIDE OUTCOMES 4 and 5
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47
DESCRIBE THE MAIN TYPES OF ECONOMIC POLICY THAT MAY BE
IMPLEMENTED BY GOVERNMENT AND SUPRA-NATIONAL BODIES
TO MAXIMISE ECONOMIC WELFARE
RECOGNISE THE IMPACT OF FISCAL AND MONETARY POLICY
MEASURES ON THE INDIVIDUAL, THE HOUSEHOLD AND
BUSINESSES
A macro-economic policy relates to economic growth, inflation,

unemployment and the balance of payments.
Economic policy objectives:

23 Achieve economic growth
24 Control price inflation
25 Achieve full employment
26 Achieve balance between import and export
4.4.1 Fiscal policy (Keynesian view)
Fiscal policy (Keynesian view) has to do with the governments decisions

about spending and taxes. This provides a method of managing aggregated
demand in the economy. There are several elements to the fiscal policy and
that of the budget:
23 Expenditure
The government spends money both nationally and regionally on such
things as health services, educational, roads, policing. It also provides
commercial incentives to the private sector through grants.
24 Revenues
To spend the money on public services the government needs an
income. The majority of the income comes from taxes although some
come from direct charges like National Health Service charges. A
regressive tax takes a higher proportion of a poor persons salary than
a rich persons. Example - road tax. A proportional tax takes the same
proportion of income in tax from all levels of income. A progressive tax
takes a higher proportion of income in tax as income rises. Example
Income tax.
25 Borrowing
Should a governments spending exceed its income then it must
borrow. The amount it must borrow is known as the PUBLIC SECTOR
NET CASH REQUIREMENT (PSNCR). This has a profound effect of
the fiscal policy as a whole.
4.4.2 Budget Surplus and Budget Deficit
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48
Should the government use its fiscal policy to influence demand in the
economy then it needs to choose either expenditure changes or tax changes,
as its policy instruments, or a combination of both. The government could:
Increase demand by directly spending more itself, for example, future

investment and spending on the health service or employing more people. If
the government was to influence demand by spending more, this would have
to be financed either through increasing taxes or borrowing. However, by
increasing taxes, organisations, households and individuals would have less
to spend.
Increase demand indirectly by reducing taxation - Tax cuts are often

followed by cuts in government spending. Therefore, total demand will not be
stimulated within the economy. Again, tax cuts could also be funded by an
increase in government borrowing. Should the government decide to lower
tax then organisations, households and individuals would have more money
after tax thus have the ability to spend more.
When the government is running a budget deficit it means that total public
expenditure exceeds revenue. As a result, the government has to borrow
through the issue of government debt. If the government sector is taking in
more revenue than it is spending, there is a budget surplus allowing the
government to repay some of the accumulated debt, of perhaps cut the
burden of tax or raise government expenditure.
4.4.3 Monetary Policy
Monetary Policy looks at the supply of money, the monetary system, interest
rates, exchange rates and the availability of credit. All of which are highly
important to organisations, households and individuals. Businesses can be
affected by governments' taxation policies outlined within the fiscal policy
AND equally affected by high interest rates set out within the monetary policy.
In the UK, the ultimate objective of monetary policy in recent years has been
principally to reduce the rate of inflation to a sustainable low level. The
intermediate objectives of monetary policy have related to the level of interest
rates, growth in the money supply, the exchange rate of sterling, the
expansion of credit and the growth of national income.
4.4.4 Money Supply within the Monetary Policy (Moneterists view)
This is an intermediate target and should be seen as a medium term target.

The argument is that by increasing money supply this will raise prices and
incomes and this will increase the demand for money to spend.
There are however three short-term unpredictable effects:
____________________________________________________________________
49
23 May cause erratic (sudden) interest rates
24 Time lag. It takes time to cut government spending!
25 Time lag before control over money supply alters expectations
4.4.5 Interest Rates within the Monetary Policy
There are suggestions that there is a direct relationship between interest

rates and the levels of expenditure in the economy or put simply, between
interest rates and inflation. A rise in interest rates will raise the price of
borrowing. This could lead to a reduction in investments through the
economy should organisations perceive the high rate to be relatively
permanent. Profits would fall due to higher borrowing rates and organisations
may have to consider a reduction in inventory levels. For individuals, there is
less likelihood of borrowing for house purchases. A strong reason for pursuing
an interest rate policy is that it can be implemented rapidly compared to other
target policies.
4.4.6 The Exchange Rate within the Monetary Policy
There are few reasons why the exchange rate plays an important part of the
monetary policy
23 If exchange rates fall, exports become cheaper to overseas buyers

and so more competitive in export markets. However, imports will
become more expensive. Therefore, a fall in exchange rates might be
good for a domestic economy, by giving a stimulus to exports and
reducing demand for imports.
24 An increase in exchange rates will have the opposite effect, with

dearer exports and cheaper imports. If this happens, there should be a
reduction in the rate of domestic inflation. However, the opposite would
happen with a fall in exchange rates therefore, adding to the rate of
domestic inflation.
Rates of domestic inflation need to be controlled prior to introducing a robust

target for the exchange rates due to some countrys being heavily dependent
on overseas trade
____________________________________________________________________
50
4.4.7 Monetary & Fiscal Policy
Monetary policy can act as a subsidiary to fiscal policy. As a budget is usually

a once a year event, the government may need to use non-fiscal measures to
control the economy. These are typically:
0 Low interest rates or lack of credit control to stimulate bank lending

1 High interest rates to stop bank lending
2 Strict credit control to reduce lending and reduce demand on the
economy
Supply-side economic policies are mainly designed to improve the supply-

side potential for an economy, make markets and industries operate more
efficiently and thereby contribute a faster rate of growth of real national
output. There are two broad approaches to the supply-side. Firstly policies
focused on product markets where goods and services are produced and
sold to consumers and secondly the labour market is bought and sold.
____________________________________________________________________
51
_____________________________________________________________
KEY POINTS
__________________
____________________________________________________________________
52
0 Macroeconomics considers aggregate behaviour, and the study of the
sum of individual economic decisions.
1 The main economic variables in the study of macroeconomics are:

0 unemployment rate
1 inflation rate
2 productivity
3 interest rate
4 government budget
5 foreign trade deficit
2 The above economic variables tend to have an effect on the factors of

production:
0 land
1 labour
2 capital
3 entrepreneurship
0 Microeconomics is the study of the economic behaviour of individual

consumers, firms and industries
1 Factors that influence the level of business activity are:
23 Aggregate Demand (AD = C + I + G + X M)
24 Capital (+Capital = +Investment / -interest rates = -value of capital)
25 Use of resources (+technology = +productivity / +technology =

-costs of producing)
26 Government policy (+government spending = +aggregate demand)
24 Exchange rate movements (Strong currency = exports more

expensive/imports cheaper)
5888 Inflation is the % rate of increase in the economy's average level of

price.
5888 An inflationary gap exists in an economy when aggregate demand

(total demand in an economy) is greater than the full employment
level of income.
5889 Those who lend are the ones that tend to loose when inflation takes
place (considering no interest is charged). Thus, those who borrow
are the ones that benefit from inflation cause the purchasing power
today is greater than when the money is returned to the lender.
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53
23 Causes of inflation:
24 demand pull
25 cost push
26 imported
27 monetary
28 expectational
5888 Unemployment is measured by:
Number of unemployed x 100%

Total workforce
11. Types of unemployment:
Frictional Structural Real Wage

Cyclical Seasonal
768
Stagnation/stagflation is a combination of unacceptably high
levels of unemployment and inflation.
769
International payments disequilibrium is a state where the
imports of a particular country exceed the exports. Thus, outward
payments will surpass inward payments.
____________________________________________________________________
54
_____________________________________________________________
QUESTION BANK
__________________
Question 1
____________________________________________________________________
55
Which of the following is not an objective of macroeconomic policy?
0 Economic growth
1 Control of inflation
2 Lower levels of taxation
3 A balanced balance of payments
Question 2
The factors of production are __________, labour, capital and

entrepreneurship
23 Area
24 Machinery
25 Fixed assets
26 Land
Question 3
Which of the following is not one of the four macroeconomic policy objectives
of governments?
23 economic growth
24 inflation
25 unemployment
26 balance of trade
Question 4
The total level of demand in the economy is made up of consumption,

_________, government expenditure, and net gains from international trade.
Which of the following correctly completes the sentence above.
23 Savings
24 Taxation
25 Investment
Question 5
If citizens are confident they tend to demand more for goods.

23 True
24 False
____________________________________________________________________
56
Question 6
Which one of the following would cause a fall in the level of aggregate
demand in an economy?
5888 a decrease in the level of imports

5889 a fall in the propensity to save
5890 a decrease in government spending
5891 a decrease in the level of income tax
Question 7
You are the Finance Director for ADC Co. Ltd., which is the Maltese agent for
BMW cars. In the last 6 months the mother company has experienced
substantial increases in the prices. As a result the cost per car to ADC Ltd.,
has increased drastically. What will you do in this case?
A. Stop importing
B. Increase prices
C. Keep the prices constant
D. Decrease prices
Question 8
Eventually the Finance Director had to increase prices accordingly (refer to

question 7). To which type of inflation is this case contributing?
A. Demand pull factors

B. Cost push factors
C. Import costs factors
D. Expectations and inflation
E. Money supply growth
____________________________________________________________________
57
Question 9
Martin is an experienced and fully trained shipbuilder, based in the western

European city. Due to significant economic change in supply and demand
conditions for shipbuilding in Martin's own country, the shipyard he worked for
has closed and he was made redundant. There was no other local demand
for his skills within his own region and he would have to move to another
country to obtain a similar employment, and could only find similar work
locally through undertaking at least a year's retraining in a related engineering
field. Which of the following describes the type of unemployment that Martin
has been affected by?
23 Structural
24 Cyclical
25 Frictional
26 Marginal
Question 10
In an economic environment of high price inflation, those who owe money will
gain and those who are owed money will lose.
5888 True
5889 False
Question 11
Cyclical unemployment refers to unemployment:
23 which occurs because of the seasonal nature of some industries

24 resulting from the long-term decline of an industry
25 which occurs at particular times of the year
26 which occurs during recessions
Question 12
An inflationary gap exists in an economy when:
5888 the government has a budget deficit

5889 aggregate demand is greater than the full employment level of income
5890 the money supply rising faster than national income
5891 the government increases its level of expenditure
____________________________________________________________________
58
Question 13
Structural unemployment is caused by:
0 long-term decline in demand for an industry's products

1 falling levels of aggregate demand
2 high level of inflation
3 a downturn in national economic activity
Question 14
Which of the following is an example of cyclical unemployment?
0 lay-offs amongst ski instructors in the summer months

1 automation of ticket sales at train stations resulting in the redundancy of
ticket officers
0 recession in the building industry
1 the restriction of employment in the car industry due to powerful trade
union keeping wages high
Question 15
Inflation has a number of causes and solutions. Which of the following

scenarios describes cost-push inflation?
0 the underlying cost of factors of production (raw material and labour)

increases and this is reflected in an increase in output prices as firms seeks
to maintain their profit margins
1 the national currency weakens increasing the cost of imports in a country
where imports are significant to the economy
2 demand for goods and services in the economy grows faster than the
ability of the economy to supply these goods and services (I.e. too much
money is chasing too few goods)
3 the money supply in the economy is increased boosting demand for
goods and services. The expansion in demand is however occurring faster
than the expansion in the supply of goods and services
____________________________________________________________________
59
Question 16
Northland, Southland, Eastland and Westland are four countries of Asia. The
following economic statistics have been produced for the year 2007.
Country Northland Southland Eastland Westland

Change in GDP (%) -0.30 +2.51 -0.55 +2.12
Balance of payments current account ($m) +5550.83 -350.47 -150.90 +220.39
Change in consumer prices (%) +27.50 +15.37 +2.25 +2.15
Change in working population employed (%) -4.76 +3.78 +1.76 -8.76
Which country experienced stagflation in the relevant period?
Northland
Southland
Eastland
Westland
Question 17
Which type of unemployment arises from a permanent reduction in demand

for the products supplied by a single industry or group of industries with
traditionally large workforces?
0 Frictional
1 Structural
2 Cyclical
3 Seasonal
Question 18
Which of the following would cause a fall in the level of aggregate demand in
an economy?
0 a decrease in the level of imports

1 a fall in the propensity to save
2 a decrease in government expenditure
3 a decrease in the level of income tax
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60
Question 19
Which one of the following is consistent with a government's policy objective

to expand the level of economic activity
A. an increase in taxation
B. an increase in interest rates
C. an increase in personal savings
D. an increase in public expenditure
Question 20
Which of the following would be part of a supply-side policy to reduce

unemployment in an economy?
0 Reducing the supply of imports by raising trade barriers

1 Increasing labour retraining schemes
2 Supplying government subsidies to declining industries
3 A reduction in the level of public expenditure
Question 21
A reduction in interest rate will reduce consumption.
0 True
1 False
Question 22
Which of the following are the likely consequences of a fall in interest rates?
23 rise in the demand for consumer credit

24 fall in investment
25 fall in borrowing
26 rise in the demand for housing
A. (a) and (b) only

B. (a), (b) and (c ) only
C. (a) and (d) only
D. (b), (c ) and (d) only
Question 23
A reduction in the interest rates will increase investment.
5888 True
5889 False
61
Question 24
If a government increased its expenditure and reduced levels of taxation the

effect would be to (a) ________ demand in the economy and to (b)
_________ the size of the Public Sector Net Cash Requirement (PSNCR)
Which words correctly complete this statement?
23 (a) reduce, (b) reduce

24 (a) stimulate, (b) reduce
25 (a) stimulate, (b) increase
26 (a) reduce, (b) increase
Question 25
Which of the following is one of the four typical governmental macroeconomic

policy objectives?
5888 maximising taxation revenues whilst sustaining economic growth

5889 reducing the gap between the highest and the lowest paid
5890 control of inflation
5891ensuring that every citizen has access to a minimum level of state
benefits
Question 26
Which of the following is one of the important generic (mainly economic)

factors that influence the level of business activity in an economy?
0 levels of immigration
1 rising stock markets
2 exchange rate movements
3 levels of unemployment
Question 27
Fiscal policy refers to the level of public expenditure and to the raising of that
expenditure via taxation; it is usually understood with the context of which of
the following:
0 supply side policies

1 classical policies (do nothing)
2 monetary policies
3 demand side policies
62
Question 28
Which of the following policies for correcting a balance of payments deficit is

an expenditure-reducing policy?
0 cutting the level of public expenditure

1 devaluation of the currency
2 the imposition of an import tax
3 the use of import quotas
Question 29
Which of the following would not correct a Balance of Payments Deficit?
0 re-valuing the currency

1 raising domestic interest rates
2 deflating the economy
3 imposing import controls
Question 30
A tax which takes a higher proportion of a poor persons salary than a rich
persons is:
0 proportional tax
1 regressive tax
2 progressive tax
3 indirect tax
Question 31
High rates of personal income tax are thought to have a disincentive effect.
This refers to the likelihood that the high rates of tax will:
0 encourage illegal tax evasion by individuals

1 lead to a reduction in the supply of labour
2 lead to a reduction in savings by individuals
3 discourage consumer spending and company investments.
63
Question 32
The government of Malta decides to introduce a new tax, which will involve a
flat rate levy of 300 on every adult of the population. This new tax can be
described as:
0 regressive
1 proportional
2 progressive
3 ad valoren.
Question 33
Which of the following will not be the immediate purpose of a tax measure by
government?
0 To discourage an activity regarded as socially undesirable

1 To influence interest rates
2 To protect a domestic industry from foreign competition
3 To price certain products go as to take into account their social cost
Question 34
Other things remaining equal, an increase in the money supply will tend to
reduce
23 Interest rates
24 The volume of bank overdrafts
25 Liquidity preference
26 Prices and incomes
Question 35
Which of the following is not likely to result from a fall in the exchange rate?
23 A stimulus to exports
24 An increase in the costs of imports
25 Reducing demand for imports
26 A reduction in the rate of domestic inflation.
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_____________________________________________________________
ANSWER BANK
__________________
65
23 C taxation is a tool not an object
24 D
23 D
24 C
25 A
26 C the government is the biggest spender in an economy
27 B
28 C
29 A
30 A
31 D
32 B
33 A
34 C
35 A
36 A
37 B
38 C
39 D
40 B
41 B
42 C
43 A
44 C PSNCR is the shortfall between public sector revenues and

expenditure
66
23 C
24 C
25 D
26 A
27 A
28 B
29 B the disincentive effect refers specifically to the disincentive of

individuals to work
30 A taking more from a poor persons salary
31 B interest rates are controlled by monetary policy
32 A
33 D a fall in exchange rate will make it more attractive for importers in

another country and more expensive to import locally. It will also
reduce the rate of domestic inflation.
67
CHAPTER 5
MICRO ECONOMICS FACTORS

DEFINE THE CONCEPT OF DEMAND AND SUPPLY FOR GOODS AND
SERVICES
5.1.1 Microeconomics
Microeconomics looks into the individual people and firms within the
economy. It tends to be more scientific in its approach than macro economics.
Analyzing certain aspects of human behavior (including groups and
organizations that have a two-way operation relationship with the business),
microeconomics shows how individuals and firms respond to changes in price
and why they demand what they do at particular price levels.
An organisations micro environment consists of itself and its current and

potential customers, suppliers and intermediaries. The competition also has a
key influence on the micro environment.
The 5 Ms refer to inputs that an organisation requires in order to function.

They are:
Materials
Money
Men (human
resources) Machines
Management
Utility is the word used to describe the satisfaction or benefit a person gets
from the consumption of goods. Total utility is the total satisfaction that people
derive from spending their income and consuming goods. Marginal utility is
the satisfaction gained from consuming one additional unit of a good or the
satisfaction forgone by consuming one unit less.
5.1.2 Demand for goods and services

Five main variables influence the quantity of each product that is
demanded by each individual consumer:
23 The price of the product creates a movement in the demand curve
24 The prices of other products creates a shift in the demand curve
25 The consumers income and wealth creates a shift in the demand
curve
68
23 Various sociological factors creates a shift in the demand curve
24 The consumers tastes creates a shift in the demand curve
A basic economic hypothesis is that the lower the price of a product, the
larger the quantity that will be demanded, other things being equal. This in
fact reflects a downward sloping curve as in below diagram.
A, B and C are points on the demand curve. Each point on the curve reflects
a direct correlation between quantities demanded (Q) and price (P). So, at
point A, the quantity demanded will be Q1 and the price will be P1, and so on.
The demand relationship curve illustrates the negative relationship between
price and quantity demanded. The higher the price of a good the lower the
quantity demanded (A), and the lower the price, the more the good will be in
demand (C).
5.1.3 Supply for goods and services
Four major determinants of the quantity supplied in a particular market are:

The price of the product creates a movement in the supply curve
The prices of factors of production creates a shift in the supply curve
The goals of producing firms creates a shift in the supply curve
The state of technology creates a shift in the supply curve
The amount of a product that firms are able and willing to offer for sale is
called quantity supplied. Supply is a desired flow; how much firms are
willing to sell per period of time, not how much they actually sell.
The quantity of any product that firms will produce and offer for sale is
positively related to the products own price, rising when price rises and falling
when price falls. This in fact reflects an upward sloping curve as in below
diagram.
69
A, B and C are points on the supply curve. Each point on the curve reflects a
direct correlation between quantities supplied (Q) and price (P). At point B,
the quantity supplied will be Q2 and the price will be P2, and so on.
5.1.4 Equilibrium
When supply and demand are equal (i.e. when the supply function and
demand function intersect) the economy is said to be at equilibrium. At this
point, the allocation of goods is at its most efficient because the amount of
goods being supplied is exactly the same as the amount of goods being
demanded. Thus, everyone is satisfied with the current economic condition.
At the given price, suppliers are selling all the goods that they have produced
and consumers are getting all the goods that they are demanding .
70
EXPLAIN ELASTICITY OF DEMAND AND THE IMPACT OF SUBSTITUTE
AND COMPLEMENTARY GOODS
5.2.1 Price Elasticity of Demand
If Pizza Hut raises its prices by ten percent, what will happen to its revenues?
The answer depends on how consumers will respond. Will they cut back
purchases a little or a lot? This question of how responsive consumers are to
price changes involves the economic concept of elasticity.
The most common elasticity measurement is that of price elasticity of

demand. It measures how much consumers respond in their buying
decisions to a change in price.
Price elasticity of demand (PED) is a measure of the extent of change in the

market demand for a good in response to a change in its price. The
coefficient of PED is measured as:
Percentage change in quantity demanded / Percentage change in price
Since demand usually increases when the price falls, and decreases when
the price rises, elasticity has a negative value. However it is usual to ignore
the minus sign and just describe the absolute value of the coefficient.
If we are measuring the responsiveness of demand to a large change in

price, we can measure elasticity between two points on the demand curve,
and the resulting measure is celled the arc elasticity of demand.
Example
Annual demand at 1.10 per unit is 700,000 units.

Annual demand at 1.20 per unit is 650,000 units.
Average quantity over the range is 675,000 units.
Average price is 1.15.
23change in demand = 50,000 x 100% = 7.4%

675,000
24change in price = 10c x 100% = 8.7%

115c
Price elasticity of demand = -7.4 = -0.85

8.7
Demand is INELASTIC over the demand range considered, because the

price elasticity of demand (ignoring the minus sign) is less than 1.
71
Price elasticity of demand is considered to be elastic. When the answer is
greater than 1 (ignore the minus sign).
5.2.2 Factors that determine the value of price elasticity of demand
23 Number of close substitutes within the market - The more (and closer)
substitutes available in the market the more elastic demand will be in
response to a change in price. In this case, the substitution effect will be quite
strong.
24 Luxuries and necessities - Necessities tend to have a more inelastic

demand, whereas luxury goods and services tend to be more elastic. For
example, the demand for cinema tickets is more elastic than the demand for
bus travel. The demand for vacation air travel is more elastic than the
demand for business air travel.
25 Percentage of income spent on a good - It may be the case that the

smaller the proportion of income spent, taken up with purchasing the good or
service, the more inelastic demand will be.
26 Habit forming goods - Goods such as cigarettes and drugs tend to be

inelastic in demand. Preferences are such that habitual consumers of certain
products become desensitized to price changes.
27Time period under consideration - Demand tends to be more elastic in

the long run rather than in the short run.
5.2.3 Income elasticity of demand
Income elasticity of demand = % change in quantity demanded %

change in income
Demand for a good is income elastic if income elasticity is greater than 1 and
it is inelastic between 0 and 1.
Goods whose income elasticity of demand is positive are said to be NORMAL

GOODS, meaning that demand for them will rise when household income
rises. If income elasticity is negative, the commodity is called an INFERIOR
GOOD since demand for it falls as income rises.
5.2.4 Cross elasticity of demand
Cross elasticity of demand = % change in quantity demanded of good A

23 change in the price of good B
72
Cross elasticity involves a comparison between two products. The concept is
a useful one in the context of considering substitutes and complementary
products.
Cross Elasticity Value

Perfect complements -1
Complements -ve
Unrelated products 0
Substitutes +ve
Perfect substitutes +1

EXPLAIN THE ECONOMIC BEHAVIOUR OF COSTS IN THE SHORT
AND LONG TERM
The short run is a period of time in which the quantity of at least one input is
fixed and the quantities of the other inputs can be varied. The long run is a
period of time in which the quantities of all inputs can be varied. There is no
fixed time that can be marked on the calendar to separate the short run from
the long run. The short run and long run distinction varies from one industry to
another."
In the long run, firms change production levels in response to (expected)

economic profits or losses, and the land, labour, capital and entrepreneurship
(factors of production) vary to reach associated long-run average cost.
The long run is associated with the long run average cost (LRAC) curve in
microeconomic models along which a firm would minimize its average cost
(cost per unit) for each respective long-run quantity of output. Long run
marginal cost (LRMC) is the added cost of providing an additional unit of
commodity from changing capacity level to reach the lowest cost associated
with that extra output. The concept of long-run cost is also used in
determining whether the long-run is expected to induce the firm to remain in
the industry or shut down production.
The long run is a planning and implementation stage. Here a firm may decide
that it needs to produce on a larger scale by building a new plant or adding a
production line. The firm may decide that new technology should be
incorporated into its production process. The firm thus considers all its long-
run production options and selects the optimal combination of inputs and
technology for its long-run purposes.
Long-run decisions are risky because the firm must anticipate what methods
of production will be efficient, not only today, but also for many years in the
future, when the costs of labour and raw materials will no doubt have
changed. The decisions are also risky because the firm must estimate how
73
much output it will want to product. Is the industry to which it belongs growing
or declining? Will new products emerge to render its existing products less
useful than an extrapolation of past sales suggest? Once the decisions are
made and implemented and production begins, the firm is operating in the
short run with fixed and variable inputs.
The short run is the conceptual time period in which at least one factor of
production is fixed in amount and others are variable in amount. Costs that
are fixed, say from existing plant size, have no impact on a firm's short-run
decisions, since only variable costs and revenues affect short-run profits. In
the short run, a firm can raise output by increasing the amount of the variable
factor(s), say labour through overtime.

DEFINE PERFECT COMPETITION, OLIGOPOLY, MONOPOLISTIC
COMPETITION AND MONOPOLY.
5.4.1 Perfect Competition
Perfect competition is characterised by many buyers and sellers, many

products that are similar in nature and, as a result, many substitutes. Perfect
competition means there are few, if any, barriers to entry for new companies,
and prices are determined by supply and demand. Thus, producers in a
perfectly competitive market are subject to the prices determined by the
market and do not have any influence. For example, in a perfectly competitive
market, should a single firm decide to increase its selling price of a good, the
consumers can just turn to the nearest competitor for a better price, causing
any firm that increases its prices to lose market share and profits.
5.4.2 Monopoly
A monopoly is a market form in which one firm has full control of the market.
5.4.3 Oligopoly
An oligopoly is a market form in which the dominance rests by a

small number of sellers
5.4.4 Monopolistic Competition
Monopolistic competition refers to a market structure that is a cross between

the two extremes of perfect competition and monopoly. The model allows for
the presence of increasing returns to scale in production and for differentiated
(rather than homogeneous or identical) products. However the model retains
many features of perfect competition, such as the presence of many firms in
the industry and the likelihood that free entry and exit of firms in response to
profit would eliminate economic profit among the firms. As a result, the model
74
offers a somewhat more realistic depiction of many common economic
markets. The model best describes markets in which numerous firms supply
products which are each slightly different from that supplied by its
competitors. Examples include automobiles, toothpaste, furnaces (ovens),
restaurant meals, motion pictures, romance novels, wine, beer, cheese,
shaving cream and many more.
Refer to technical article Introduction to

Microeconomic at the back of the notes
75
_____________________________________________________________
KEY POINTS
__________________
76
23 An organisations micro environment consists of itself and its current
and potential customers, suppliers and intermediaries. The competition
also has a key influence on the micro environment.
24 The 5 Ms refer to inputs that an organisation requires in order to

function. They are:
Materials
Money
Men (human
resources) Machines
Management
25 A basic economic hypothesis is that the lower the price of a product,

the larger the quantity that will be demanded, other things being equal.
This in fact reflects a downward sloping curve
26 The quantity of any product that firms will produce and offer for sale is
positively related to the products own price, rising when price rises
and falling when price falls. This in fact reflects an upward sloping
curve
27 Price elasticity of demand (PED) is a measure of the extent of change

in the market demand for a good in response to a change in its price.
The coefficient of PED is measured as:
Percentage change in quantity demanded / Percentage change in

price
28 Perfect competition is characterized by many buyers and sellers, many

products that are similar in nature and, as a result, many substitutes.
29 Imperfect competition is when a firm has too much control over the
market of a particular good or service and can therefore charge more
than its real market value. When the market for a certain good or
service does not have a lot of competitors, the few firms control the
market.
30 Monopolistic competition refers to a market structure that is a cross

between the two extremes of perfect competition and monopoly.
77
_____________________________________________________________
QUESTION BANK
__________________
78
Question 1
A demand curve is drawn on all except which of the following assumptions?
23 Incomes do not change

24 Prices of substitutes are fixed
25 Price of the good is constant
26 There are no changes in tastes and preferences
Question 2
A price ceiling set above the equilibrium market price will result in:
5888 Market failure

5889 Excess supply over demand
5890 Market equilibrium
5891 Excess demand over supply
Question 3
What is an inferior good?
23 A good of such poor quality that demand for it is very weak

24 A good of lesser quality than a substitute good, so that the price of the
substitute is higher
25 A good for which the cross elasticity of demand with a substitute
product is greater than 1
26 A good for which demand will fall as household income rises
Question 4
Which one of the following would normally cause a rightward shift in the
demand curve for a product?
5888 A fall in the price of a substitute product

5889 A reduction in direct taxation on incomes
5890 A reduction in price of the product
5891 An increase in the price of a complementary product
Question 5
If the cost of milk rises, and milk is a major ingredient in yoghurt, then the:
23 Demand curve for yoghurt shifts to the left

24 Supply for yoghurt curve shifts to the left
25 Supply curve for yoghurts shifts to the right
26 Demand and supply curves for yoghurt both shift to the right
79
Question 6
Indicate whether the following will cause a shift in the demand curve for a
normal good, a shift in its supply curve or neither:
23 An increase in household income
24 A rise in wage costs
25 A fall in the price of raw materials
26 A fall in the price of the goods
Shift in Shift in
demand supply Neither
Question 7
Supply of and demand of good A are initially in equilibrium
Price
S
P
D
B C D quantity
The government introduces a maximum price P. what effect will this have on
the quantity of good A purchased?
5888 It will rise from B to D

5889 It will rise from C to D
5890 It will fall from D to B
5891 It will fall from C to B
Question 8 D
1
D 2 4
D3 5 7
6 8
9
80
Point 5 represents equilibrium. If the government starts to pay a cash subsidy
to products of the commodity, what will the new equilibrium be?
23 Point 2
24 Point 4
25 Point 6
26 Point 8
Question 9
Match the correct labels to the numbers on this diagram
Price
3
5888 1
23
4
Quantity
23 Equilibrium price
24 Consumer surplus
25 Market supply
26 Market demand
27 Producer surplus
Question 10
Which of the following is not one of the notes performed by prices in a market
economy?
A signal to consumers
A signal to producers
A way of allocating resources between competing uses
A way of ensuring a fair distribution of incomes
81
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ANSWER BANK
__________________
82
C demand curves express the quantity demanded at each given market
price. Non-price determinants such as income must be held
constant when looking at the effect of price movements in isolation.
C if the price ceiling is above the equilibrium market price, it will not
interfere with the working of the price mechanism. The market
will not be forced from its current equilibrium. A price ceiling only
affects the workings of the price mechanism if it is set below the
equilibrium price
D inferior goods are defined in terms of the relationship between

quantity demanded and income. The issue of substitutes is not
relevant
B a reduction in income tax will increase real household income and so

demand for normal products will shift to the right, i.e. quantity
demanded will be greater at any given price
B Less will be supplied at any given price and so the supply curve will
move to the left
6. Shift in Shift in
demand supply Neither
X
x
x
x
D the demand will rise to point D but quantity supplied B will be

available and that is the amount that can be sold. Therefore from
the original point C, quantity will drop to point B.
D producers will be willing to produce more, shifting the supply curve to

the right.
A1
B 2 some consumers would have paid a higher price
C3
D4
E 5 some suppliers would have sold at lower price
D government may intervene for example through
83
CHAPTER 6
SOCIAL AND DEMOGRAPHIC FACTORS

EXPLAIN THE MEDIUM-AND LONG-TERM EFFECTS OF SOCIAL
AND DEMOGRAPHIC TRENDS ON BUSINESS OUTCOMES AND
THE ECONOMY
Key social and demographic issues include:

population
wealth
education and training
health
social structure, attitudes, values and tastes
6.1.1 Population
What causes population to grow?
Higher birth rates

Lower rates of death
Immigration
Due to improvement in technology and in particular the pharmaceutical area a

lower rate of death is resulting during the years. Also, education about
nutrition helped in extending the life expectancy for both males and females.
There is an improvement in the general social conditions like the conditions of
housing (or shelter).
A growing population offers a larger labour market or workforce. Therefore

an increase in modern day birth rate would mean younger people within the
workforce such as in the case of Ireland. This is compounded by a falling
death rate and more elderly people continuing to work.
6.1.2 Wealth
Economic growth often results in higher disposable incomes with the knock
an effect of greater demand for (most) products. The four fastest growing
economies in the world are the BRIC - Brazil, Russia, India and China.
6.1.3 Education and Training
An educated workforce is a key driver of economic growth, e.g. in China 99%
84
of the youth population in now literate compared to 70% in the 1980s.
Increasing standards of education and greater access to IT have made the
internet a major channel for selling and advertising.
6.1.4 Health
In many western countries the population is becoming increasingly

overweight. This places greater demands on healthcare providers. More than
12% of South Africans are infected by HIV. South Africa's declining life
expectancy (currently 51 years) is a major concern, especially as the
population structure has changed with fewer people in their middle ages. This
is normally the most economically active and skilled group who support the
elderly and younger groups.
6.1.5 Social structure, attitudes, values and tastes
Many countries are finding the demand for housing growing faster than
the population
An increasing concern about the ozone layer, testing on animals
Many women are back to work
Changes in public attitudes towards recycling have resulted in
opportunities for recycling firms
Changes in tastes and fashions can have a damaging effect on
organisations that fail to anticipate the changes
85
DESCRIBE THE IMPACT OF CHANGES IN SOCIAL STRUCTURE,
VALUES, ATTITUDES AND TASTES ON THE ORGANISATION
Impact of Organisations:
Topic Impact
Health & Diet Growing market for
sports related goods
Employee Health
Programmes
New foodsadded
vitamins etc
Demand for organic
foods
Women in Work Increase in Part-time
roles
The Sex Discrimination
Act
Equal Pay & Value
Promotion & Seniority
Equal opportunities
Environmental Media coverage fuels
public concern
World Disasters = Public
attention
The Business Response
Business Agenda Response

Green products Exploit ecological friendliness
as a marketing tool
Change working practices Knowledge leads to consumer
strength. Bad publicity has led
to improvements
Limits There may be limits to how
much consumers will change
their lifestyles
Education & Confusion Consumers wrongly educated.
Environmental Impact Assessments Review process and finished
product
86
IDENTIFY AND EXPLAIN THE MEASURES THAT GOVERNMENTS
MAY TAKE IN RESPONSE TO THE MEDIUM AND LONG-TERM
IMPACT OF DEMOGRAPHIC CHANGE
6.3.1 Measures undertaken by Governments
Governments of countries with low birth rates often introduce tax advantages
and other financial incentives to encourage women to have more children.
This is the case scenario in Singapore for example. Another common policy is
to encourage immigration. Both Canada and Australia have been promoting
this for over a decade.
Governments in countries with rapidly rising populations often put in place

policies to discourage large families, e.g. the one child policy adopted by
China.
The increasing percentage of the population aged over 65 is creating a

pensions crisis in many countries. The main concern is that the taxes
received from a smaller proportion of workers will be insufficient to meet the
pension demands of a growing retired population without huge increases tax
rates. Typical government responses include rising the retirement age and
encouraging private and occupational pension schemes.
The percentage of single-parent families in the UK rose from 7% in 1971 to

23% in 2005. The UK government has focused on enabling single parents to
return to work through a mixture of childcare vouchers and tax credits. Among
others this has created extra demand for childcare services and after-school
clubs.
Concerns over the effects of smoking have resulted in bans on tabacco

advertising on television in many countries and the ban from smoking in
public in-door areas. Concerns over obesity are giving rise to increasing
pressure on government to legislate in a similar way in the fast food industry.
In the South Africa the government has put in place many initiatives to raise
awareness to AIDS and sexual health. The global community is under greater
pressure to provide cheap drugs to help.
87
_____________________________________________________________
KEY POINTS
__________________
88
Key social and demographic issues include:
population
wealth
education and training
health
social structure, attitudes, values and tastes
The four fastest growing economies in the world are the BRIC - Brazil,
Russia, India and China.
Governments of countries with low birth rates often introduce tax

advantages and other financial incentives to encourage women to
have more children.
Governments in countries with rapidly rising popluations often put in place

policies to discourage large families.
The increasing percentage of the population aged over 65 is creating a

pensions crisis in many countries. Typical government responses
include, raising the retirement age and encouraging private and
occupational pension schemes.
89
_____________________________________________________________
QUESTION BANK
__________________
90
Question 1
The ageing population trend in many European countries is caused by an

increasing birth rate and an increasing mortality rate.
True
False
Question 2
Which of the following social trends will have a direct impact on businesses?
increase in single member households

falling birth rates
increasingly diverse populations
increasing attention paid by the general public to environmental issues
a and b only
a and d only
b, c and d only
a, b, c and d
Question 3
Which of the following is one of the four fastest growing economies?
USA
Russia
Japan
Question 4
In a country experiencing falling birth rates, a government can:
encourage emigration
encourage immigration
cut completely any children allowances
Question 5
If the percentage of the population aged over 65 is increasing in a particular

country and as a result it is creating a pensions crisis, what can a government
do to fight such situation?
discourage pension schemes

reduce the retirement age
raise the retirement age
91
_____________________________________________________________
ANSWER BANK
__________________
92
B an ageing population occurs when the median age of a country rises
due to rising life expectancy or declining birth rates.
B Brazil, Russia, India, China
93
CHAPTER 7
TECHNOLOGICAL FACTORS

EXPLAIN THE EFFECTS OF TECHNOLOGICAL CHANGE ON THE
ORGANISATION STRUCTURE AND STRATEGY
A change in technology has had a major impact on the structure and strategy
of organisations. This has encouraged the flattening of organisational
hierarchies and offering a wider span of control. More and more companies
are empowering employees or outsourcing, cutting out the need for middle
management
7.1.1 DOWNSIZING
Downsizing is the term used to refer to a situation when a company is

reducing the number of employees without necessarily reducing the work or
output.
7.1.2 DELAYERING
Many organizations have recently been delayering. Middle line jobs are
reducing. Organizations are increasing the average span of control, reducing
management levels and becoming flatter. Why? Information technology
reduces the need for middle managers to process information.
Empowerment - Many organisations, especially service businesses, are

keen to delegate authority down the line to the lowest possible level. Front
line workers are allowed to take decisions, which is often the best way to stay
flexible and responsive to customer demands.
7.1.3 OUTSOURCING
Outsourcing has to do with contracting out specific operations or services to

an external vendor. Outsourcing can help remove the uncertainty of costs and
replace it with a fixed price. It encourages planning as many of the
outsourced contracts are long-term. It also can benefit from economies of
scale. An outsourcing organisation can also share staff and expertise
between clients. It also gives both companies lots of flexibility. Outsourcing
can work on a project basis, for example a marketing company or PR
organisation helping to launch a particular product.
There are however, certain drawbacks of outsourcing that have to be

measured against the potential gains:
94
Confidentially of information or techniques
Competitive advantage
Locked into an unsatisfactory contract
Lethargy (not very productive) towards cost implications

DESCRIBE THE IMPACT OF INFORMATION TECHNOLOGY AND
INFORMATION SYSTEMS DEVELOPMENT ON BUSINESS
PROCESSES
Effects of IT and Information Systems on Business Processes

Routine Increase in volume, speed and accuracy
Processing
Digital Information People like to print stuff out!
& Record Managers have access to more information
Keeping More detailed planning is possible
Information for control possible
Better decision making due to better information
News Skills/Ways Employees to utilise IT
of Working New systems require new ways of working
Technological Commits an organisation to continual change
Customer Service Database, websites etc = better customer service
Information Organisations have had to look upon information as
Markets a commodity and to look more closely at how this
affects their business
Developments in Improvements and developments in communication
Communication are having a huge impact on businesses. Email is
quick and efficient, voice mail allows flexibility,
technology can route incoming calls and personalise
communication. Computer conferencing encourages
communication and video conferencing improve face
to face contact and reduce travel costs
IT & the Theres a reduced need to follow chains of
Employee/Employ command
er Relationship Information overload
Nature of Work
Close business relationship regardless of location
Flexible working arrangements
Greater monitoring and control
These are the same issues that are affected during
downsizing due to developments in communications
95
DISCUSS THE TYPES OF INFORMATION TECHNOLOGY AND
INFORMATION SYSTEMS USED BY THE BUSINESS
ORGANISATION
Information systems and technologies have become vital components of

successful businesses and organisations. An information system is an
organised combination of people, hardware, software, communications
networks and data resources that collects, transforms and disseminates
information in an organisation. Information systems provide an organisation
with support for business operations, managerial decision making and
strategic advantage.
7.3.1 Electronic data processing, transaction processing system and

management information system
Until the 1960s, the role of information systems was simple transaction
processing, record-keeping, accounting and other electronic data
processing (EDP) applications or transaction processing system (TPS).
Then, another role was added, as the concept of management information
systems (MIS) was conceived. This new role focused on providing
managerial end users with predefined management reports that would give
managers the information they needed for decision-making purposes.
7.3.2 Decision support systems
By 1970s, it was evident that the prespecified information products produced

by such management information systems were not adequately meeting
many of the decision-making needs of management. So the concept of
decision support systems (DSS) was born. The new role for information
systems was to provide managerial end users with ad hoc and interactive
support of their decision-making processes. This support would be tailored to
the unique decision-making styles of managers as they confronted specific
types of problems in the real world.
7.3.3 Executive information systems, expert support systems and

knowledge-based systems
In the 1980s, several new roles for information systems appeared. It became
evident that most top executives did not directly use either the reports of
information reporting systems or the mathematical analytical modeling
capabilities of DSS, so the concept of executive information systems (EIS)
was developed. These information systems attempt to give top executives an
easy way to get the critical information they want, when they want it, tailored
to the formats they prefer. Expert support systems (ESS) and other
knowledge-based systems forged a new role for information systems.
Today, expert systems can serve consultants to users by providing expert
96
advice in limited subject.
Finally, the rapid growth of the Internet, intranets, extranets in the 1990s has
dramatically changed the capabilities of information systems in business.
Such global internet work is revolutionising and supporting business
operations and management of different enterprises.

IDENTIFY THE DIFFERENT SOURCES OF INTERNAL AND
EXTERNAL INFORMATION
Information can be gathered either via internal or external sources.
7.4.1 Internal Information
A system needs to be devised to gather this information. The types of internal

information could be:
Accounting Records
HR & Personnel Information
Payroll
Production Information
The system should take into account such things as:
What data/information?
When?
By who?
What method?
Process, filed and communicated?
7.4.2 External Information
External information is gathered via a formal or informal collection of data

from outside sources. For example a formal process would read something
like this:
A companies HR department should gather information regarding changes in

employment law or indeed a marketing manager should periodically assess
the external market through market research etc to ensure all information is
gathered to make an informed decision.
7.4.3 Informal Information
Informal information gathering occurs naturally as employees become aware

of the environment around them.
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DESCRIBE THE MAIN FEATURES OF INFORMATION SYSTEMS
USED WITHIN THE ORGANISATION
Strategic Level Systems

Executive Support Systems (ESS)
Pools data from internal and external sources and helps form a strategic
picture. Needs flexibility, the ability to provide a quick response and to
analyse data.
Management Level Systems

Management Information Systems (MIS)
Converts mainly internal information and provides reports that enable
managers to make appropriate decisions. Needs to support structured
decisions, report on existing operations, internal focus and be relatively
inflexible.
Decision Support System (DSS)

Combines data and analytical models or data analysis tools to support
decision making. Needs flexibility, be user-friendly and offer alternatives.
Knowledge Level Systems

Knowledge Work Systems (KWS)
Integrate new knowledge into an organisation.
Office Automation Systems (OAS)

Designed to increase the productivity of data and information workers. These
include email, word processing etc.
Operational Level Systems

Transaction Processing Systems (TPS)
Performs and records routine transactions. For example, Sales orders,
purchasing orders, payroll, registration etc.
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_____________________________________________________________
KEY POINTS
__________________
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Downsizing takes place when less employees are employed but the
output of the organisation is generally left unchanged. This is held
possible through advanced technology.
Delayering is much related to downsizing. The resultant affect is the same

less employees. It is a process when the scalar chain is reduced,
that is employing less levels of middle management.
Outsourcing takes place when projects are assigned to other companies.

This is done either because the company does not have the internal
expertise or else the company would like to hold itself to a fixed cost
since generally outsourcing bounds companies with a LT contract.
The downside of outsourcing is that confidentiality is lost with the

outsourcing company and sometimes the result of the work they
produce is not exactly what you were expecting the performance is
not to an acceptable standard.
The roles of computer-based information systems have expanded over

time. These changes have made a positive impact on the end users
and the managers of an organisation.
The main steps in the evolvement of information systems are:

Transaction Processing Systems
Management Information Systems
Decision Support System
Executive Information System
Executive Support System
Information systems perform three vital roles in any type of organisation.

Support of its business processes and operations
Support of decision making by its employees and managers
Support of its strategies for competitive advantage
Primary Data is information that need to be gathered for a specific need,

generally known as tailor-made data. Once primary data is ready it
becomes secondary data.
Secondary data is information that exists. You might have once prepared
this data or else someone else might have done this work.
The main sources of secondary data are internal and external. Internal
sources include accounting records, sales records, employees records
etc. External data can include data from National Statistics Office, from
census and even from newspapers. External sources have
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become easily achievable after the explosion of the internet.
Quantitative data are records that are quantifiable, that is, they are in
number terms. Qualitative data is more detailed and gives an insight
into the quality of the information.
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_____________________________________________________________
QUESTION BANK
__________________
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Question 1
Outsourcing means introducing new work in your business.

True
False
Question 2
The following can be considered as a disadvantage of outsourcing
expertise of outsourcing company

objectivity of outsourcing company
use of special equipment of outsourcing company
confidentiality of outsourcer is lost
Question 3
Delayering is a process where the scalar chain is stretched.

True
False
Question 4
Downsizing is the process of removing layers of management.
true
false
Question 5
Outsourcing means contracting-out aspects of the work of the organisation,

previously done in-house, to specialist providers.
true
false
Question 6
Good quality information is always:
Certain
Produced quickly
Inexpensive
Relevant
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Question 7
Good quality information should always be detailed.
True
False
Question 8
Data that is capable of being measured numerically is known as ...............
Qualitative
Quantifiable
Quantitative
Question 9
Data that can be achieved from an organisation is __________ data.
External
Quantifiable
Internal
Question 10
The Financial Controller has sent you (Accounts Clerk) an email asking to
draft a report explaining in detail what exactly the other expenses stand for.
He asked to have this report printed and ready on his desk by not later than
Monday morning. What is the main information technology needed for this
transaction?
A. Executive Support System

B. Office Automated System
C. Decision Support System
D. Knowledge Work System
Question 11
Which of the following is the name given to a type of computer-based

information system that uses and combines mathematical models to assist
with finding solutions to management problems?
Management information system

Decision support system
Expert system
Executive information system
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Question 12
The system used by a company to record sales and purchases is an example

of which of the following?
a transaction processing system

a management information system
an office automation system
a decision support system
Question 13
__________ systems pool data from internal and external sources and make
information available to senior managers for strategic, unstructured decision
making. Which work or phrase correctly completes the above sentence?
Expert
Executive Information
Management Information
Decision Support
Question 14
A company uses a computer system for its middle management that can be
used to assist with working out possible solutions to management problems.
The system includes modelling and forecasting facilities, such as linear
regression analysis and statistical analysis.
MIS
Expert system
EIS
DSS
Question 15
Downsizing can reduce capacity. Is this True or False.
True
False
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_______________________________________________________
ANSWER BANK
__________________
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1 B outsourcing means giving out work
D A+B+C are all advantages
B de-layering is a process in which the scalar chain is reduced making

the organisation flatter.
B downsizing is the process of reducing the number of employees
D good information should be ACCURATE (Acronym)
B brief information can still be of a good quality
C quantitative - QUANTITY
A it can make organisations more flexible but may also reduce capacity
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CHAPTER 8
ENVIRONMENTAL FACTORS

LIST WAYS IN WHICH BUSINESSES CAN AFFECT OR BE
AFFECTED BY ITS PHYSICAL ENVIRONMENT
A country's territorial size, geographical location, natural resources, climate,

rivers, lakes and forests constitute its physical environment. Businesses are
mainly concerned with either systematic change in environmental conditions
such as global warning or a result of sudden and unexpected natural events
such as floods, storms and earthquakes. What is important for businesses is
to realise that business behavior must be adjusted to expected variations in
physical conditions. Just as companies successfully operate within an
envelope of changing economic conditions (economic growth, inflation,
unemployment) so they operate within an envelope of varying physical
conditions.
Businesses can mainly affect or be affected by the following:
Air pollution (emissions from industries)

Water pollution (discharges from industries)
Soil pollution (when waste is disposed ruthlessly it damages the soil)
Global warning
Ozone Depletion (the ozone layer protects the entry of harmful
ultraviolet rays from corning to the earth)

DESCRIBE WAYS IN WHICH BUSINESSES CAN OPERATE MORE
EFFICIENTLY AND EFFECTIVELY TO LIMIT DAMAGE TO THE
ENVIRONMENT
Store and handle hazardous substances safely

Prevent water pollution from site drainage
Separate hazardous waste from other waste types
Store and transport waste in suitable containers such as skips
Avoid causing a nuisance (irritation) from dust or noise emissions
Use an environment management system (An EMS will help the
business manage and control its activities, including emissions and
discharges, resource use, and waste in a planned way )
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IDENTIFY THE BENEFITS OF ECONOMIC SUSTANABILITY TO A
RANGE OF STAKEHOLDERS
Economic sustainability is the term used to identify various strategies that

make it possible to utilise available resources to best advantage. The idea is
to promote usage of those resources that is both efficient and responsible,
and likely to provide long-tem benefits. In the case of a business operation,
economic sustainability calls for using resources so that the business
continues to function over a number of years, while consistently returning a
profit.
Economic sustainability forces a company to look on the internal and external

implications of sustainability management. This means that managing
economic sustainability must consider:
the financial performance of a company;
how the company manages intangible assets;
its influence on the wider economy; and
how it influences and manages social and environmental impacts
There is some consensus that sustainability is desirable for individual

businesses to prevent the devastating and inefficient impacts of corporate
premature death, and to enable and protect social and environmental
initiatives, which tend to be the product of more mature businesses.
Economic sustainability can be seen as a tool to make sure the business
does have a future and continues to contribute to the financial welfare of the
owners, the employees, and to the community where the business is located.
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_____________________________________________________________
KEY POINTS
__________________
110
1. Businesses can mainly affect or be affected by the following:
Air pollution
Water pollution
Soil pollution
Global warning
Ozone Depletion
2. Businesses can operate more efficiently and effectively:
Store and handle hazardous substances safely

Prevent water pollution from site drainage
Separate hazardous waste from other waste types
Store and transport waste in suitable containers such as skips
Avoid causing a nuisance (irritation) from dust or noise emissions
Use an environment management system
Economic sustainability is the term used to identify various strategies that

make it possible to utilise available resources to best advantage.
Managing economic sustainability must consider:
the financial performance of a company;

how the company manages intangible assets;
its influence on the wider economy; and
how it influences and manages social and environmental impacts
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CHAPTER 9
COMPETITIVE FACTORS

IDENTIFY A BUSINESSS STRENGHTS, WEAKNESSES,
OPPORTUNITIES AND THREATS (SWOT) IN A MARKET AND THE
MAIN SOURCES OF COMPETITIVE ADVANTAGE
9.1.1 What is SWOT Analysis?
SWOT analysis is a basic, straightforward model that provides direction and

serves as a basis for the development of plans. It accomplishes this by
assessing an organisations strengths (what an organisation can do) and
weaknesses (what an organisation cannot do) in addition to opportunities
(potential favourable conditions for an organisation) and threats (potential
unfavourable conditions for an organisation). SWOT analysis is an important
step in planning and its value is often underestimated despite the simplicity in
creation.
9.1.2 Strengths and Weaknesses
A manager must begin to think in terms of what the firm can do well and
where it may have deficiencies. Strengths and weaknesses exist internally
within a firm, or in key relationships between the firm and its customers.
SWOT analysis must be customer focused to gain maximum benefit. Strength
is really meaningful only when it is useful in satisfying the needs of a
customer. At this point, the strength becomes a capability.
When writing down strengths, it is imperative that they be considered from

both the view of the firm as well as from the customers that are dealt with.
These strengths should be realistic and not modest. Weaknesses should also
be considered from an internal viewpoint. It is important that listing of a firms
weaknesses is truthful so that they may be overcome as quickly as possible.
Delaying the discovery of weaknesses that already exist within a company
will only further hurt the firm.
9.1.3 Opportunities and Threats
Managers who are caught up in developing strengths and capabilities may

ignore the external environment. A mistake of this magnitude could lead to an
efficient organisation that is no longer effective when changes in the external
environment prohibit the firms ability to deliver value to its targeted customer
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segments. These changes can occur in the rate of overall market growth and
in the competitive, economic, political/legal, technological, or socio-cultural
environments
9.1.4 The main sources of Competitive Advantage
Competitive advantage occurs when an organisation acquires or develops an

attribute or combination of attributes that allows it to outperform its
competitors. Competitive advantage is a key determinant of superior
performance and it will ensure survival and prominent placing in the market.
Some of the main sources of competitive advantage include:
Synergy
Effective leadership
Teamwork
Learning organization
Economies of scale
Differentiation
Cost leadership

DESCRIBE THE ACTIVITIES OF AN ORGANISATION THAT
AFFECT ITS COMPETITIVENESS
Competitive advantage or the competitiveness of an organisation can be

achieved by the way in which it organises and performs its activities. Value
activities are the activities by which an organisation creates value in its
products.
A Value chain describes the activities of the organisation that add value to
purchased inputs. Primary activities are those involved in the production of
goods or service. Support services supply assistance. The linkages are the
relationships between activities. Managing the value chain, which includes
relationships with suppliers, can be a source of strategic advantage over
competitors in the industry.
The best way to demonstrate this process is through the example of a

restaurant.
A restaurant has to buy food, cook it and then serve it to customers.
Customers purchase value. A customer compares your product with similar

competitors.
The business creates value by ensuring their product (food, effective service
etc) is either more efficient or that they are providing a unique product or
service.
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Porter developed his value chain to determine whether and how a firm's
activities contribute towards its competitive advantage.
Activity Comments
Inbound Logistics Receiving, handling and storing inputs to the production
system, warehousing, transport, inventory control etc
Operations Convert resources into final product. People are also a
resource in service industries
Outbound Logistics Storing the product & distributing products. Packaging,
testing, delivery etc
Marketing & Sales Informing customers about sales, persuading them to buy,
advertising, promotions etc
After Sales Service Installing products, repair, upgrading, spare parts etc
Procurement Buying the resources inputs to the primary activities
Technology Product design, improving processes and/or resource
Development utilisation
Human Resource Recruiting, training, development and rewarding people
Management
Firm Infrastructure Planning, finance, Quality control, Porter believes this can
to of great strategic importance for an organisation
Value Networks
Value networks represent technical and social resources from within or

coming from outside the organisation. This fosters personal growth and
increase value to the organisation
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EXPLAIN THE FACTORS OR FORCES THAT INFLUENCE THE
LEVEL OF COMPETITENESS IN AN INDUSTRY OR SECTOR
USING PORTERS FIVE FORCES MODEL
Michael Porter stated that a firm wishing to obtain a competitive advantage

over its rivals is faced with two choices:
Cost Leadership vs Differentiation OR Degree of Focus
9.3.1 Cost Leadership
With this strategy, the objective is to become the lowest-cost producer in the
industry. Many market segments in the industry are supplied with the
emphasis placed on minimising costs. If the achieved selling price can at
least equal (or near) the average for the market, then the lowest-cost
producer will (in theory) enjoy the best profits. This strategy is usually
associated with large-scale businesses offering "standard" products with
relatively little differentiation that are perfectly acceptable to the majority of
customers. Occasionally, a low-cost leader will also discount its product to
maximise sales, particularly if it has a significant cost advantage over the
competition and, in doing so, it can further increase its market share.
Example from the car industry Nissan, Ford, Honda
9.3.2 Differentiation
In a differentiation strategy, a firm looks for ways to be unique along some

dimensions that are widely valued by buyers. It selects one or more attributes
that buyers perceive as important and uniquely positions itself to meet those
115
needs and it is rewarded for its uniqueness with a premium price. One can
differentiate in design, brand image, customer service.
Example from the car industry BMW, Jaguar, Mercedes
9.3.3 Focus
A focused strategy chooses a segment or group of segments in the industry

and tailors its strategy to serving them at the exclusion of others. This
segment can be a particular buyer group, segment of the product line or
geographic market.
There are two variations to this strategy - a cost focus where a firm seeks a
cost advantage in its target segment and a differentiation focus where a firm
seeks differentiation in its target segment. The target segments must either
have buyers with unusual needs (differentiation focus) or the production and
delivery system that best serves the target segment must differ from that of
others industry segments. A cost focus exploits differences in cost behaviour
in some segments.
Example from the car industry Ferrari and Rolls Royce
9.3.4 Porter's 5 forces approach looks in detail at the firm's competitive

environment by analysing five forces.
Potential Entrants
Threat of
New
Entrants
Bargaining
Power of Industry Competitors
Suppliers
Suppliers Customers
Rivalry among Bargaining
Power of
existing firms
Customers
Threat of
Substitute
Products
of Services
Substitute
Together these forces determine the overall profit potential of the industry.
Looking at an individual firm, its ability to earn higher profit margins will be
determined by whether or not it can manage the 5 forces more effectively
than competitors.
116
9.3.5 The threat of new entrants (and barriers to keep them out)
A new entrant into an industry will bring extra capacity and more competition.
The strength of the threat and the new entrant will depend on two things:
Strength of the barriers of entry
The response of existing competitors in the marketplace
9.3.6 The threat from substitute products
A substitute product is a good product or service from another industry that

satisfies that customer need.
9.3.7 The bargaining power of customers
Customers require better quality products and service at a lower price. By

satisfying these, an organisation or industry may force down the profitability of
suppliers in the industry. How strong the customers position is, depends on a
number of factors:
How much the customer buys

How critical the product is to the customers business
Switching costs (switching from one supplier to another)
Are the products standard items (easily copied?)
The customers own profitability (low customer profits = lower prices from
suppliers)
Awareness of customers purchasing staff/price awareness
When the quality of the product is more important to the customer, the
customer is less likely to be price sensitive
9.3.8 The bargaining power of suppliers
Suppliers are able to exert pressure for higher prices however this depends
on several other factors:
Are they more than one or two dominant suppliers (charge monopoly
prices)
The threat of new entrants
Whether the supplier has other customers or substitute products
Importance of the suppliers product to the customers business
Has the suppliers got a differentiated product
Are the switching costs too high
9.3.8 The rivalry amongst current competitors
The intensity of competition within the industry will affect the profitability of the
industry. Competitive actions could be:
Price competition
117
Advertising battles
Sales promotion campaigns
Introducing new products
Improving sales aftercare
Providing guarantees or warrants
118
_____________________________________________________________
KEY POINTS
__________________
119
Cost leadership has to do with having an objective to become the lowest-
cost producer in the industry.
Differentiation is when a firm looks for ways to be unique and different

from other companies.
A cost focus where a firm seeks a cost advantage in its target segment
and a differentiation focus where a firm seeks differentiation in its
target segment.
Porter's 5 forces approach looks in detail at the firm's competitive

environment by analysing five forces:
0 Barriers to entry
1 Suppliers' power
2 Buyers' power
3 Close substitutes
4 Industry's competitors
A Value chain describes the activities of the organisation that add value to
purchased inputs.
Primary activities are those involved in the production of goods or

services.
Porter mentioned 5 Primary Activities in his Value Chain:

Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Services
Porter mentioned 4 Support Activities in his Value Chain:

Firm infrastructure
Human Resources management
Technology
Procurement
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_____________________________________________________________
QUESTION BANK
__________________
121
Question 1
Using Porter's five forces model to examine the profitability of an industry

which of the following will lead to higher profitability (assuming everything
else being equal)?
an increase in buyer power

a new entrant into the industry
a new supplier to the industry
the development of an alternative product which meets the needs of the
industries' customers
Question 2
Porter stated that a firm wishing to obtain a competitive advantage over its
rivals can do so by either through differentiation or cost leadership. Cost
leadership may be achieved by all the following except which one?
efficiency improvements
economy in purchasing
effectiveness in output
economies of scale
Question 3
Porter stated that a firm wishing to obtain a competitive advantage over its
rivals can do so by either through differentiation or cost leadership. Which of
the following is a technique of differentiation?
improving efficiency
economy in purchasing
improving customer service
removing product features
Question 4
Porter's five forces model identifies external factors that determine the
potential profitability and therefore attractiveness of a particular industry.
Which of the following is one of these forces?
bargaining power of buyers

government regulation of the industry
fiscal policy
Question 5
A focus strategy concentrates on a narrow segment and within that segment

seeks to achieve either a cost advantage or which one of the following?
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cost leadership
differentiation
price leadership
quality leadership
Question 6
Which of the following is one of Porter's five forces?
absence of economies of scale

high capital requirements
high switching costs
barriers to entry
Question 7
Which of the following is not a Generic Strategy as described by Michael

Porter:
cost focus
differentiation
diversification
differentiation focus
Question 8
Porter identified 9 types of value activity in a firm which he categorised into

two types: primary activities and support activities. Which of the following is a
support activity?
inbound logistics
procurement
service
marketing and sales
Question 9
Which of the following are ALL primary activities in the value chain?
Inbound logistics, operations, service

procurement, operation, marketing and sales
inbound logistics, outbound logistics, infrastructure
outbound logistics, technology development, service
Question 10
Which of the following are not examples of Support Activities as described

in Michael Porters Value Chain.
123
A. technology development
human resource management
procurement
firm structure
Question 11
Inbound logistics is the storing, distributing and delivering finished goods to

customers.
Is the above statement
True
False
Question 12
The bargaining power of customers in an industry will be greater in which of

the following circumstances?
A. There are one or two dominant suppliers in the industry

B. The product is highly important to the customers business
C. There are many customers in the industry
D. Switching costs are low.
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_____________________________________________________________
ANSWER BANK
__________________
125
C A+B+D can all pose challenges to the organisation
D if the switching costs to alternative suppliers is low, customers can

demand more from their suppliers. A+B+C tend to increase the power
of suppliers.
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CHAPTER 10
BUSINESS ORGANISATION STRUCTURE,

FUNCTIONS AND GOVERNANCE

EXPLAIN THE INFORMAL ORGANISATION AND ITS
RELATIONSHIP WITH THE FORMAL ORGANISATION
Organisational structure is a pattern of responsibilities showing the formal

connections between the individuals engaged in the collective activity and the
responsibilities of each of them. The field of organisational structure lends
itself to scientific treatment. Yet, such treatment appeared to have become
too formal, bearing the stamp of an engineering approach seeking scientific
precision and a logical form!
As a result, there has appeared a countervailing (offsetting) theory of

informal organisation which focuses attention on human relations and the
way in which the actions of the people in the organisation deviate from the
plan.
The formal organisation is one which logically groups activities, delineation of

authority and responsibility and the establishment of relationships to enable
people to work most effectively together in accomplishing the objectives of the
business. It is important to note that these formal relationships emerge from
the definition of the responsibilities attached to the holder of the post, for
example, a relationship between the labourer and the supervisor because he
is responsible for him.
Such formal relations can be set out in detail with as much precision as is
desired in the form of job specifications and the general nature of their inter-
relations can be set forth in an organisational chart.
However, there is the existence of the informal organisation which depends

on the personalities of the people occupying the various positions in the
organisational structure.

DESCRIBE THE IMPACT OF THE INFORMAL ORGANISATION ON
THE BUSINESS
Social forces of various types from the wider community outside the business
infiltrate into the organisation and influence the relationships of its members
127
and the way it works. It is obviously important that such informal relations
shall not conflict with those established by the formal structure.
Informal organisations can become detrimental or beneficial to the formal

organisation depending on how it is managed. Informal organisations are
loosely structured, flexible and spontaneous.
The benefits of an informal organisation can be:
Employee commitment
Knowledge sharing
Speed
Responsiveness
Co-operation
Managerial problems of informal organisation
Social groupings may act collectively against organizational

interests Morale-damaging rumors
Employees may suffer if they excluded from the social grouping
128
_____________________________________________________________
KEY POINTS
129
A formal structure is the way an organisation is organised in an effort to
achieve its objectives.
A formal organisation stipulates the responsibility of each employee and

who has the authority to do what
An informal structure develops in most organisation based on the reality of

the day-to-day interactions between the members of the organisation.
Sometimes the informal structure may conflict with the formal one. Where
this is the case, the organisation may become less efficient at meeting
its set objectives. However, in some cases the informal structure may
prove to be more efficient at meeting organisational objectives
because the formal structure was badly set out.
130
_____________________________________________________________
QUESTION BANK
__________________
131
Question 1
What are the two ways in which information is exchanged?
Formally and informally

Clearly and confusingly
Succinctly and verbosely
Internally and externally
Question 2
Which of the following is an advantage of a formal procedure?
Unusual transactions can be easily accommodated

Breaches of the procedure can be easily identified
Procedural documentation protects finance staff in the event of serious
breaches of procedure
Formal procedures enhance the reputation of the finance department
Question 3
Which of the following terms is used to describe the right to perform an

action in an organisation?
Responsibility
Authority
Influence
Power
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_____________________________________________________________
ANSWER BANK
__________________
133
A information is transmitted internally/externally whilst it is exchanged
formally/informally
B authority can be delegated but responsibility cannot be delegated
134
CHAPTER 11
BUSINESS ORGANISATION STRUCTURE

AND DESIGN

Describe Mintzbergs components of the organisation and explain
the different ways in which formal organisations may be
structured: (i) Entrepreneurial (ii) Functional (iii) Matrix (iv)
Divisional: (geographical, by product, or by customer type) (v)
Boundaryless: (virtual, hollow or modular)
Every organisation exists for the purpose of carrying out certain

predetermined objectives and its structure must be necessarily to promote
these objectives. Only in very exceptional cases does an organisation remain
structured on its foundation after it undergoes growth. Thus an organisational
structure is not fixed, it can change as the need requires. It is also important
to note that in different organisations one might find different organisational
structures whilst one may also find different structures in the same
organisation. In any given case the organisation structure owns much to the
historical background of the firm and to the personalities of those who
managed it in its formative years.
Other influences which are equally relevant and possibly more persistent in
determining organisation structure are the type of markets and customers to
which the business sells, the type of product sold and the system of
technology in use, to produce the product.
11.1.1 Henry Minzberg's organisational ideology
Henry Minzberg produced an organisational ideology divided into 5

organisational configurations that help in understanding better how an
organisation should be structured. It is important to add that these
configurations may not exist in real world but can be very helpful for someone
who would like to understand the realities of an organisational structure.
Strategic Apex drives the direction of the business through control over
decision-making. Strategic Apex has to do with the top management and
those who make the rules (decision makers)
Middle Line performs the managerial functions of control over resources,

processes and business areas.
Operating Core performs the routine activities of the organisation, also
135
known as the do-er's.
Technostructure drives efficiency through rules and procedures. These

are the people who guide the operating core in being efficient in their jobs.
Support Staff support all the companies' activities and provides expertise
and service to the organisation.
11.1.2 Methods of Grouping Activities
The process of dividing and grouping the tasks which have to be performed
into convenient units of management may be termed departmentalisation.
The board of directors and the chief executive must decide on the major
divisions of activity. The heads of each division will then have their own units,
sections, branches or departments.
a. By Product/Division/Department
This method is used when a firm decides to group according to the product in
question. This type of method is mainly used by for example, a department
store which sells soaps, hair products, feet products, makeup and fragrances.
When a variety of products of different types are being manufactured or sold
there is always a danger that some products or lines will receive too little
attention in selling and general promotional activities. This danger can be met
by forming an organisational structure on the basis of product groupings.
Advantages Disadvantages
Accountability Increases the overhead costs
Specialisation Fail to share resources
Co-ordination
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b. Geographical or by Territory
This method has a great deal in its favour where the organisation is based on
geographically scattered units. For example, the branches of a bank may be
grouped in this way under regional offices. Of great importance is the need for
securing due attention to local factors because a full appreciation is not
always possible at a distance.
Boards
Of
Directors
Regional Board Regional Board Regional Board

North East South West
c. Functional
Departmentalisation may take place on the basis of function. Some functions

may include Sales, Marketing, Purchasing and Research & Development.
Focus on processes & inputs not

Pools expertise
customers and outputs
Avoids duplication Communication problems
Helps recruitment, development etc Poor Co-ordination
Works well with centralised businesses Creates vertical barriers
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Managing
Director
Sales Marketing HR
Director Director Director
d. Matrix
A matrix structure organisation is formed by a team of people coming from

different sections of the organisation. This team is formed for a period of time
to work on an assigned project. The main advantage with a matrix structure is
that the best people are chosen for a specific project thus expecting better
results. A matrix structure is led by a project manager and all team members
have to report to him whilst working on this project. On the other hand, the
same members of this project have to report to their line manager when they
are doing their normal job (they report only issues that has to do with their
normal job). This situation may lead to a conflicting loyalty towards who is
really managing!
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e. Entrepreneurial
This type of structure is built around the owner manager and is typical with
small companies in the early stages of their development. The entrepreneur
often has specialist knowledge of the product or service.
f. Customer departmentation
An organisation may organize its activities on the basis of types of customer

or market segment.
g. Hybrid structures
Organisation structures are rarely composed of only one type of organisation.

Hybrid structures involve a mix of structures.
h. Boundaryless organizations
Boundaryless organisations tend to rise above all negative or restrictive

aspects that bureaucracy and divisional boundaries may get along. It
emphasises on adaptive and change behaviour to changing situations.
Informal management style is very much suited for Boundaryless

organisations.
In order to eliminate boundaries organisations may use virtual, modular or

hallow organisation structures.
A HOLLOW/NETWORK ORGANISATION tends to identify and focus on their

core processes and outsource their non-core. Such an approach will lead to
cost savings and drives focus on what the company is good at.
A MODULAR ORGANISATION orders different parts from different suppliers

and their main job is to assemble all parts together into a finished good. This
type of organisation results in efficiencies as it takes advantage of competition
beyond the organisation.
A VIRTUAL ORGANISATION involves the creation of an outside company to

respond to an exceptional market opportunity. Members are geographically
dispersed and the organisation usually only exists electronically on the
internet without any physical premises.
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11.1.3 The Shamrock Approach
Core Workers receive good promotion, security and status prospects

relative to others and are often managers, team leaders and professional
staff.
Interface Workers low skilled labour that are generally called when needed
for example part-time, seasonal staff these type of workers are becoming
more dominant and more demanded.
Suppliers temporary and self-employed with general skills as needed, for

example, consultants.

EXPLAIN BASIC ORGANISATIONAL STRUCTURE CONCEPTS
11.2.1 Separation of direction and management
Ownership and management of larger organisations are often separated. The

separation of ownership and management has proven enormously beneficial
to both owners and managers, since it brings together those who have capital
but not necessarily the skills or time to run a business and those who have
managerial skills but not necessarily the capital.
In order to ensure that managers are managing the business in the best
interests of the owners, many safeguards/controls are put in place, which will
lead to, for example, formal organisation structures being set up for an
organisation.
11.2.2 Span of control and Scalar chain
The term Span of Control refers to the number of employees/subordinates

directly responsible to a superior. Therefore, if a manager of a large
organisation has 10 subordinates, the span of control is 10.
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A number of factors influence a span of control:
Capabilities often limit the span of control (ability/inability to manage people)
Nature of the workload
Geographical. If over a wide area this becomes more difficult
Subordinates work. If they do a similar tasks
Nature of problems. If problems that take a lot of time to sort, it would
suggest a narrow span of control (less people to manage)
A good interaction between subordinates would suggest a wide span of
control as they are able to help each other
The level of support required
A scalar chain of command refers to all levels between the very top and the
lowest in the hierarchy. Fayol emphasised the need of having reporting
relationships from top executive to the ordinary shop operative or driver,
sensible, clear and understood.
Delayering
This is the process of reducing the number of management levels from the
bottom to the top. Therefore organisations are increasing the average span of
control, reducing management levels and becoming flatter.
11.2.3 Tall and Flat organisations
If the span of control is very limited, the number of organisational levels

(scalar chain) will increase, as the organisation grows in size, the
organisational structure becomes TALL. The fact that the number of
immediate subordinates is limited at each level tends to create close
supervision and increased dependence of the subordinate on his principal.
A FLAT organisation is one which has a smaller number of organisational

levels (scalar chain) and thus a wider span of control.

EXPLAIN THE CHARACTERISTICS OF THE STRATEGIC,
TACTICAL AND OPERATIONAL LEVELS IN THE ORGANISATION
IN THE CONTEXT OF THE ANTHONY HIERARCHY
Strategic Planning is applied by top managers. It is basically the planning for

the long-term future including the definition of where the organisation needs to
go and how to get there.
Tactical Planning looks at the medium term and is more of a specific nature
than the strategic planning. It looks at the departmental level and specifies
how to use resources.
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Operational Planning looks at the short term (day to day) and is very
detailed. This type of planning has a main concern of controlling what is set
for the short term.
Strategic plans will have to be translated into medium term tactical

plans which in turn need to be converted into detailed performance
targets and budgets.

EXPLAIN CENTRALISATION AND DECENTRALISATION AND LIST
THEIR ADVANTAGES AND DISADVANTAGES
Centralisation implies that there exists more than one level within an
organisation and that decisions are made only by the highest level. Therefore,
one may say that a centralised organisation has a central authority and no
decisions are made at lower levels.
Decentralisation encourages the existence of more than one centre of

decision-making. A decentralised company empowers lower levels within the
hierarchy to take decisions.
Advantages of Advantages of
Centralisation Decentralisation
Easy co-ordination of decision Decisions are delegated = less

stress for senior management
Wider view of consequences and Improves motivation
problems
Balance interests of different Greater awareness of local
functions problems
Quality of decisions better due to Quicker decision making
skill level of senior management
Cheaperless managers! Develops skill level of junior
managers
Crisis decisions taken quickly Separate responsibilities
Standardised procedures Decisions can be made locally
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DESCRIBE THE ROLES AND FUNCTIONS OF THE MAIN
DEPARTMENTS IN A BUSINESS ORGANISATION
11.5.1 Research & Development
This department has achieved great importance in today's competitive world.

Organisations are always on the look out to improve their products (process
research) or even to create portfolio innovation to be better and ahead of
competition (product research). The main roles of an R&D department
besides improving and inventing products is to anticipate customer needs
and this is why most of the time R&D falls under the umbrella of Marketing.
11.5.2 Purchasing
Purchasing is regarded as a very important management function in an

organisation. The main reason for this is that firms must be able to purchase
goods and services at an acceptable price and quality. The purchasing
manager has to obtain the best purchasing mix.
Quantity
Quality
Price
Delivery
11.5.3 Production or Operations
The main job of the production department is to convert raw materials into
finished goods. They are also after using the methods of production which are
the most efficient for the production in question. This is only made possible if
good planning is conducted prior to the implementation of production. Costs
are to be monitored all the time thus wastage should be avoided as much as
possible
11.5.4 Direct service provision
This department or function has to do with the delivery of a service directly to

the end consumer. For example an accountancy firm falls under this category.
To ensure the best service for all clients, good time management is to be
enforced. The salient characteristics of services are:
Intangibility
Inseparability (from service provider)
Variability
Ownership (you can never be an owner of a service)
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11.5.5 Marketing
The main concern in a marketing department is the consumer. This

department tries to identify customer needs and wants, try to accommodate
them in the best possible way and better then the competitors and in the case
of a profit making organisation, all this must be at a result of a profit. Many
people think that Marketing is purely sales. In fact, sales is only one area of
marketing. The main difference between a marketing oriented firm and a
sales oriented firm is that the latter generates profits through sales volumes
whilst marketing oriented firms incur profits by establishing long term
customer satisfaction.
11.5.6 Administration
The Administration department should support the other departments by

processing administrative requests such as correspondence, photocopying
etc. These people must have excellent communication skills to coordinate the
needs between the departments.
11.5.7 Finance
It is important that the finance department has continuous links with the other
departments. The main role of this department, though, is to manage the
finances of an organisation by monitoring income and expenditure. It is also
in charge of preparing the final accounts and to raise finances of the
company. This is generally done by either issuing shares or taking loans.
11.5.8 Human Resources
Human resources management (HRM) is in charge of recruiting and selecting

employees, motivating employees and making the most effective use of
human resources.

EXPLAIN THE ROLE OF MARKETING IN AN ORGANISATION
11.6.1 The Definition of Marketing
Marketing touches all of us every day of our lives. We wake up in the morning
and brush our teeth with Sensodyne toothpaste, shave with Gillette Sensor
razor and use Dove shower gel. We put on a pair of Guess jeans and Nike
running shoes whilst heading to the kitchen. We serve ourselves some
Kellogg's Special K cereal and drink a cup of Nescafe coffee. We go to work,
switch on the radio and most of the time we end up bombarded with ongoing
commercials.
Is Marketing all about selling?
144
NO although we all tend to be bombarded with different commercials
through different media channels, marketing is not only sales. The latter is
only the tip of the marketing iceberg.
11.6.2 Definitions of Marketing
Marketing was defined by the American Association as:

the process of planning and executing the conception, pricing, promotion and
distribution of ideas, goods, and services to create exchanges that satisfy
individual and organisational objectives
Philip Kotler defines Marketing as:
the analysis, planning, implementation and control of programmes designed

to bring about desired exchanges with target audiences for the purpose of
personal or mutual gain. It relies heavily on the adaptation and co-ordination
of product, price, place and promotion for achieving effective response
There are many accepted definitions of marketing and in fact there is no one
unified definition. All the above definitions are correct but because of the
difficulty of incorporating all the facets of marketing into a simple definition
some additional key points are important to be added.
Marketing focuses on the needs and wants of the marketplace
Marketing is concerned with satisfying the needs and wants
Marketing involves analysis, planning and control
Marketing focuses on achieving customer satisfaction to achieve its

business objectives, thus a marketing oriented firm is one that has
changed the marketing philosophy into an overall business philosophy
11.6.3 The Marketing Mix
The Marketing Mix also known as the 4 P's is comprised of:
Product
Price
Place
Promotion
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11.6.4 Product
A product is anything that can be offered to a market for attention, for

acquisition, use or consumption that might satisfy a want or a need. A product
can be either a good or a service that is perceived together with its tangible
and intangible attributes.
One might think the key product decision for a manufacturer of floor detergent
is to focus on creating a formula that cleans more effectively. In actuality,
while decisions related to the consumable parts of the product are extremely
important, the TOTAL product consists of more than what is consumed. The
total product offering and the decisions facing the marketer can be broken
down into three key parts:
THE CORE PRODUCT - the overall benefit of buying the product THE
ACTUAL PRODUCT the brand and quality you are purchasing
THE AUGMENTED PRODUCT - anything over and above the purchase such
as delivery
11.6.5 Price
In order to make a profit, a business should ensure that its products are
priced above their total average cost. In the short-term, it may be acceptable
to price below total cost if this price exceeds the marginal cost of production
so that the sale still produces a positive contribution to fixed costs.
If the business is a monopolist, then it can set any price. At the other extreme,
if a firm operates under conditions of perfect competition, it has no choice and
must accept the market price. The reality is usually somewhere in between. In
such cases the chosen price needs to be very carefully considered relative to
those of close competitors.
146
Consideration of customer expectations about price must be addressed.
Ideally, a business should attempt to quantify its demand curve to estimate
what volume of sales will be achieved at given prices. Sometimes a company
is not free to price its product at any level it chooses. For example, there may
be price controls that prohibit pricing a product too high. Pricing it too low may
be considered predatory pricing or dumping in the case of international
trade. Offering different price for different consumers may violate laws against
price discrimination. Finally, collusion with competitors to fix prices at an
agreed level is illegal in many countries.
11.6.5.1 The main key considerations when deciding the price of a

product:
4 C's
COST CUSTOMERS COMPETITION - CORPORATE

OBJECTIVES
11.6.5.2 Some pricing strategies would include:
Cost-plus pricing involves the determination of all fixed and variable costs
associated with products or services. After the total costs attributable to the
product or service have been determined, managers add a desired profit % to
each unit such as a 5 or 10 percent markup. The goal of the cost-oriented
approach is to cover all costs incurred in producing or delivering products or
services and to achieve a targeted level of profit.
Going rate pricing is when a company sets its price of a product according
to the price being charged by competitors offering similar products. This is
generally practised when there is a market leader and the other companies try
and meet his prices. This method can be rather dangerous for small
companies who are trying to compete with bigger companies that enjoy
benefits resulting from economies of scale.
The practice of price skimming involves charging a relatively high price for
a short time where a new, innovative, or much-improved product is launched
onto a market. The objective with skimming is to skim off customers who are
willing to pay more to have the product sooner; prices are lowered later when
demand from the early adopters falls.
Penetration pricing involves the setting of lower, rather than higher prices in
order to achieve a large, if not dominant market share. This strategy is most
often used by businesses wishing to enter a new market or build on a
relatively small market share. This will only be possible where demand for the
product is believed to be highly elastic, i.e. demand is price-sensitive and
either new buyer will be attracted, or existing buyers will buy more of the
product as a result of a low price.
147
Discrimination pricing takes place when a different price is charged either
to different people or else during peak and off-peak. For example, some
public transport services entitle a pensioner to pay a different price than a
person under 61 of age. The dial-up internet charges are higher during peak
hours.
11.6.6 Place
Place is also known as channel or distribution. It is the mechanism through

which goods and/or services are moved from the manufacturer/service
provider to the user or consumer. These are companies or persons that help
in some way or other for goods and services to be distributed from
manufacturers in order to reach consumers. These intermediaries are
generally referred to as:
Agents
Wholesalers
Retailers
Financial companies
Transport companies
Intermediaries perform tasks such as:
moving the goods efficiently

breaking bulk
consolidating goods (retail stores carry a wide assortment of goods
from different manufacturerse.g., supermarkets span from toilet
paper to cat food)
Added services (e.g., demonstrations and repairs)
11.6.7 Promotion
Personal
Advertising Selling
Marketing
Sales Communications Public
Promotion Mix Relations
Direct
Marketing
148
Personal Selling is an oral presentation in a conversation with one or more
prospective buyers for the purpose of making a sale.
Advertising is any paid form of non personal presentation and promotion of

ideas, goods or services by an identified sponsor.
Sponsorship is where an organization pays to be associated with a

particular event, cause or image. Companies will sponsor sports events such
as the Olympics or Formula One. The attributes of the event are then
associated with the sponsoring organisation.
Direct marketing is any unsolicited (spontaneous) contact a business makes

with existing or potential customers in order to generate sales or raise
awareness. Direct marketing allows a business to generate a specific
response from targeted groups of customers.
Public Relations is the art and science of managing communication between

an organisation and its key public constituents to build, manage and sustain
its positive image.
11.6.7.1 The AIDA Model
AIDA is a communication model which can be used by firms to aid them in

promoting their product or services. AIDA is an Acronym for:
Attention
Interest
Desire
Action
Beyond the 4P's other elements of the marketing mix have come to light
through the work of Kotler amongst others. These include:
People Process - Physical Evidence
11.6.8 People
An essential ingredient to any service provision is the use of appropriate staff

and people. Recruiting the right staff and training them appropriately in the
delivery of their service is essential if the organisation wants to obtain a form
of competitive advantage. Consumers make judgments and deliver
perceptions of the service based on the employees they interact with. Staff
should have the appropriate interpersonal skills, attitude and service
knowledge to provide the service that consumers are paying for.
11.6.9 Process
Process refers to the system used to assist the organisation in delivering the
service.
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11.6.10 Physical Evidence
Physical Evidence is the element of the service mix which allows the
consumer again to make judgments on the organisation. Physical evidence is
an essential ingredient of the service mix. Consumers will make perceptions
based on their sight of the service provision which will have an impact on the
organisations perceptual plan of the service.
11.6.11 The relationship of the Marketing Plan to the Strategic Plan
The focus of a strategic plan is on the entire organisation. It has to do with the
vision of an organisation spelling out where the organisation would like to go
in the future and how to get there. On the other hand, a marketing plan spells
out the activities related to marketing (product, price, place and promotion)
activities. It is only after formulating a very good strategic plan can a
marketing plan be prepared.
The main 3 steps in a strategic plan are:

Analysis
Choice
Implementation
Analysis implies the examination of the present situation. This is generally

conducted by a SWOT analysis (strengths, weaknesses, opportunities,
threats). At the time of performing analysis, long term goals are established. It
is then the time to choose the best methods or strategies to achieve the
goals. One has to decide where to compete and how to compete and if
staying in the local market or expanding in the international markets.
If a company manages to choose the right strategies, it would help in the

execution or implementation of such strategies. It is only at this stage that the
long-term strategy can be translated into other plans such as:
Marketing Management
Operations/Production Accounting/Finance
Computer Information Systems Research and Development
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_____________________________________________________________
KEY POINTS
151
Henry Mintzberg structured an organisation into 5 levels:
0 Strategic Apex (top managers who take the decisions)
1 Middle Line (act between top managers and operating core)
2 Operating Core (perform daily activities)
3 Techno Structure (direct operating core in being more efficient)
4 Support Staff (communicate with the outside world and support
all activities)
An organisation can be structured into different ways including:

0 Product/Division/Department (for example, dried food, chilled
food and frozen food)
1 Geographical/territory (for example ,North, South, West areas)
2 Functional (for example, R&D, Marketing, Finance etc)
3 Matrix (used for a specific project and combines the advantages
of functional and divisional structures)
4 Entrepreneurial (owner/manager for a small company)
The Shamrock Approach includes:

0 Core Workers (for example, full time workers not very
dominant in today's society)
1 Interface workers (for example, part time workers becoming
more dominant)
2 Suppliers (temporary and self-employed workers)
The main departments in an organisation are:

0 Research & Development
1 Purchasing
2 Production
3 Direct service provision
4 Marketing
5 Administration
6 Finance
Not every organisation has the above mentioned departments. An

organisation is free to structure and name the different departments
the way it feels to make the best way for an efficient communication
and production system.
It is also important to mention that a small organisation can have more

than one department integrated in the same department. For example,
R&D falling into the Marketing department.
Strategic planning is handled by top managers and has a long term vision.
Tactical planning is handled by middle managers and has a medium term

vision.
152
Operational planning is very detailed and has a short term vision.
Marketing is a management function which anticipates and satisfies

customers' needs and wants.
The Marketing Mix or 4P's are product, price, place and promotion.
In the case of service marketing, the marketing mix is extended to

7P's, product, price, place, promotion, people, process and physical
evidence.
The product is not only what the consumer is consuming. It has to do with
the benefits that the consumer is receiving with purchasing such
product (The Core Product) for example the core product of a car is
the benefit of being independent to go from point A to point B. The
quality and design of the product (The Actual Product) and the
services acquired once a customer purchases the product, such as a
warranty (The Augmented Product).
Consideration of the 4 C's Cost, Customer, Competition and Corporate

Objectives when attaching a price to a good or service.
The marketing distribution can be either a direct one or else having

intermediaries in between them.
The main tools of a promotional (communication) mix are advertising,
personal selling, public relations (PR), sales promotions and direct
marketing.
The main steps in formulating a strategic plan are Strategic Analysis,

Strategic Choice and Strategic Implementation. It is only in the
implementation stage that marketing will have a plan on its own.
153
_____________________________________________________________
QUESTION BANK
__________________
154
Question 1
According to Henry Mintzberg, strategic apex refers to:
A. the people directly related to the production of services or products B.

serves the needs of those people who control the organisation
C. the managers who connect the strategic apex with operation core
D. the analysts who design, plan, change or train the operating core
Question 2
What principle of the classical approach to management is breached by a

matrix structure?
Unity of command
Delegation of authority
Span of control
Division of work
Question 3
According to Handy's shamrock organisation model, which one of the

following is becoming progressively less important in contemporary
organisations?
the permanent, full time work force

the part-time, temporary work force
the role of independent sub-contractors
the role of technical support functions
Question 4
A matrix organisation aims to combine the advantages of which of the

following structures?
Functional and divisional

Entrepreneurial and functional
Product/division/department and geographical
Functional and geographical
Question 5
Which of the following is an advantage of a functional structure?
Speedy decision making

Rapid Growth and diversification are facilitated
Empire building is unlikely
There is a career for employees
155
Question 6
Which of the following is the most appropriate environment for companies

organised on a functional basis and which have few products and locations?
Fast moving
Dynamic
Stable
Unpredictable
Question 7
Which of the following is an advantage of the product/division/departmental

structure?
Specialists tend to flourish

Allocation of central costs is straightforward
Goal congruence
Growth and diversification are encouraged
Question 8
Which of the following is an advantage of an entrepreneurial structure?
Economies of scale
Enhanced career opportunities
Enables growth
Goal congruence
Question 9
Conflicting demands over allocation of resources is most likely to be a

disadvantage from which type of organisational structure?
entrepreneurial
matrix
divisional
geographical
Question 10
Which of the following 4 points is off less importance to the purchasing

department?
A. reliability of supplier
B. state of the art warehouse
C. delivery date
D. reasonable price and good quality
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Question 11
To which of the business functions is this statement referring - A business

management function which determines and satisfies customer needs', better
than its competitors and in a profitable way.
Finance
IT
Marketing
Sales
Question 12
Which of the following orientations places the customer at the centre of

organisational activity?
Sales orientation
Production orientation
Product orientation
Marketing orientation
Question 13
One of the main roles of the R&D department is to:
Take care of stock levels and delivery schedules

Bookkeeping
Develop new products
Convert raw materials into finished goods
Question 14
Robert Anthony's hierarchy refers to 3 business levels. Which of the following

is correct?
A. Strategic, Tactical and Operational

B. Strategic, Behavioural and Operational
C. Change, Tactical and Operational
D. Strategic, Tactical and Development
Question 15
A hospital is considering whether to have specialist wards or multi -national

disciplinary wards.
At which stage of the planning level is this decision taken.
157
Strategic level
Tactical level
Operational level
Question 16
A hospital manager is considering the use of temporary nursing staff to fill

shortages due to sickness. Which level of planning is involved here?
Strategic level
Tactical level
Operational level
Question 17
Which of the following is not part of the elements of the marketing mix or
4P's?
Product
Place
Communication
Span of Control
Distribution
Question 18
Which of the following is the main function of marketing?
To maximise sales volumes

To identify and anticipate customer needs
To persuade consumers to convert latent demand into expenditure
To identify suitable outlets for goods and services supplied
Question 19
At what stage of the planning process should a company carry out a

situational analysis?
A. When converting strategic objectives into tactical

plans B. When formulating a mission statement
When validating the effectiveness of plans against outcomes
When formulating strategic objective
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Question 20
Information technology has encouraged which three of the following?
Flattering of organization hierarchies

Widening span of control
Smaller volumes of routine processing
More flexible working arrangements
Question 21
Which of the following statements is true?
A. The grapevine springs up where there is inadequate formal

communication in an organisation
Cliques and other informal groups can be either helpful or dysfunctional in an
organization
Not all organisations promotes have an informal organisation
The informal organisation promotes employees health and safety.
Question 22
Henry Mintzbergs model analysed organization structure into five basic

components. Which of the following components includes analysts and
designors of control systems?
Strategic apex
Techno-structive
Middle line
Support staff
Question 23
What are the elements of the purchasing mix?
Place, product, price and promotion

Quantity, quality, price and delivery
Product, quality, price and delivery
Place, product, price and delivery
159
Question 24
Which of the following is NOT one of the main objectives of human resources
management?
A. To obtain the right number and type of skilled employees for the
organisations current and future requirements
To develop and deploy the organisations employees in such a way as to
maximize flexibility and productivity
To ensure compliance with the organisations social and legal responsibilities
in relation to employees
To minimize labour turnover and maximize employee retention witin the
organization.
160
_____________________________________________________________
ANSWER BANK
161
B A refers to operating care C
refers to middle line
D refers to techno-structive
A under a classical approach the boss remains the boss and what he
says goes
D distribution is another word for place
A,B,D
162
D minimizing labour turnover and retaining employees is not always a
main objective especially if the organization is after downsizing
163
CHAPTER 12
ORGANISATIONAL CULTURE IN
BUSINESS

DEFINE ORGANISATIONAL CULTURE
Culture is defined by Charles Handy as being - the way we do things around

here. By this Handy means the sum total of the beliefs, knowledge, attitudes,
norms and customers that prevail in an organisation.
12.1.1 The main components of Culture
If one had to analyse Culture in more detail, one might say that organisational
culture forms in response of two major challenges that confront every
organisation:
External adaptation which has to do with how the organisation copes with
its constantly changing external environment;
Internal integration which has to do with the establishment of effective
working relationships among the members of an organisation.
The national culture, customs and societal norms of a country also shape the
cultures of organisations operating in it. The dominant values of a national
culture may be reflected in the constraints imposed on organisations by
others. For example, a country's form of government may have a dramatic
impact on how an organisation does business. It is important to mention at
this stage, that culture is not something standard, thus an organisational
culture found in an accountancy firm no. 1 does not mean is the same as the
organisational culture found in an accountancy firm no. 2.

DESCRIBE THE FACTORS THAT SHAPE THE CULTURE OF THE
ORGANISATION
12.2.1 The six major influences on the culture of an organisation
Size how large is the organisation in terms of turnover, physical size and
employee numbers
Technology how technologically advanced is the organisation either in

terms of its products, or its productive processes
164
Diversity how diverse is the company either in terms of product range,
geographical spread or cultural make-up of its stakeholders
Age how old is the business or the managers of the business how
experienced are the strategic level decision makers
History what worked in the past? Do decision makers have past

successes to draw upon; are they willing to learn from their mistakes?
Ownership is the organisation owned by a sole trader? Are there a

small number of institutional shareholders or are there large numbers
of small shareholders?
While all the above cultural levers are important, the characteristics and
configuration of the board and the management team are key elements. To a
very large extent, they control each other, establishing the standards and the
tone. A change in management can have a profound impact on organisational
culture, effectiveness and performance. Good management is often "like the
Abominable Snowman whose footprints are everywhere but who is nowhere
to be seen." (Warren Bennis and Burt Nanus)
Often subtly, through their actions and words, management shape, foster and
evolve an organisations culture by pushing or pulling the levers that can
influence it. It is also their responsibility to ultimately dismantle the culture
when it becomes disfunctional. It is the role of leaders to ensure strategic
balance is maintained and to tailor culture so people "think and perceive in
ways that increase the probability that they will see unconventional
opportunities." (Leading the Revolution (In Conversation with Gary Hamel),
Ivey Business Journal, July/August, 2001)
In reality however this is frequently not the case. Many organisations are so
locked within their historical cultures that they cannot see reality for what it
really is. It is difficult to achieve above average performance when confined
by such mental model restraints. In a stable environment this may not be a
major problem. However in todays rapidly changing world, this reliance on
dated assumptions can easily lead to a terminal illness capable of devastating
an organisation and destroying many individual careers.

EXPLAIN THE CONTRIBUTION MADE BY WRITERS ON CULTURE
12.3.1 Edgar Schein Determinants of organisational culture
Schein argues that there exists a strong influence on organisational culture by

who leads the organisation. He further commented that if leaders are to lead
then it is essential that they understand the levels of organisational culture.
165
Schein divided organisation culture into 3 levels:
Artefacts are the aspects of culture that can easily be seen like for example
the way that people dress.
Expoused values are the strategies and goals of an organisation, including

company slogans.
Basic assumptions and values are difficult to identify as they are unseen
and exist mainly at the unconscious level.
12.3.1.1 Schein's Cultural theory is sometimes represented as the

Iceberg Concept
As with an iceberg, 9/10ths of a culture is hidden from view and our

consciousness.
12.3.2 Handy Four Cultural Types
In 1972, Harrison classified an organisation into four different types only for
Charles Handy to popularise them by using Greek Gods!
ZEUS Power Culture

APOLLO Role Culture
ATHENA Task Culture
DIONYSUS Person Culture or Existential Culture
Zeus (Power Culture) the all-powerful head of the gods, an organisation

dominated by the personality and power of one person, often the founder or
owner.
166
Then there was the Apollo (Role Culture) organisation, dominated by rules
and procedures, after Apollo the God of harmony and order. In this version of
culture, people describe their job by its duties, not by its purpose. It is a
bureaucratic organisation, where the structure determines the authority and
responsibility of individuals and there is a strong emphasis on hierarchy and
status.
Athena (Task Culture), the warrior goddess, was the symbol of the project
organization, the culture that dominates consultancies, advertising agencies
and, increasingly, all innovative businesses. In this type of culture, people
describe their position in terms of the results that they are achieving. It is after
accomplishing a task.
Lastly there was the Dionysian (Person) culture, one in which the individual
has the freedom to develop his or her own ideas in the way they want - an
artists' studio, perhaps, or a university. They are hard to manage, these
Dionysian places, but increasingly necessary if you want to employ really
creative people.
Does that mean that any organisation has only four options to choose from
for its style of management?
No. The world is not that simple. In fact every organisation, just like every
individual, is different from every other one, but what they are includes a
different mix of the same four basic cultures. The trouble is that some get
stuck in one of them instead of mixing all four.
Handy matched its cultural models to Robert Anthonys classification of

Managerial activity.
Strategic management is concerned with direction-setting, policy making

and crisis handling. Therefore it suits power culture.
Tactical management is concerned with establishing means to corporate
ends therefore suits a task culture.
Operational management is concerned with routine activities therefore it
suits role culture.
12.3.3 Hofstede International perspectives of Culture
Hofstede looked for national differences between more than 100,000 of IBM's
employees in different parts of the world, in an attempt to find aspects of
culture that might influence business behaviour.
167
1. Power distance
Power distance measures how subordinates respond to power and authority.

In high-power distance countries (Latin America, France, Spain, most Asian
and African countries), subordinates tend to be afraid of their bosses, and
bosses tend to be paternalistic and autocratic. In low-power distance
countries (the US, Britain, most of the rest of Europe), subordinates are more
likely to challenge bosses and bosses tend to use a consultative management
style. It suggests that a society's level of inequality is endorsed by the
followers as much as by the leaders. Power and inequality, of course, are
extremely fundamental facts of any society and anybody with some
international experience will be aware that 'all societies are unequal, but some
are more unequal than others'.
2. Collectivism versus Individualism
In individualistic countries (France, Germany, South Africa, Canada, etc.),

people are expected to look out for themselves. Solidarity is organic (all
contribute to a common goal, but with little mutual pressure) rather than
mechanical. Typical values are personal time, freedom, and challenge. In
collectivist cultures (Japan, Mexico, Korea, Greece) individuals are bounded
through strong personal and protective ties based on loyalty to the group
during one's lifetime and often beyond (mirrored on family ties).
3. Masculinity versus Femininity
Masculinity versus its opposite, femininity, refers to the distribution of roles

between the genders which is another fundamental issue for any society to
which a range of solutions are found. The IBM studies revealed that (a)
women's values differ less among societies than men's values; (b) men's
values from one country to another contain a dimension from very assertive
and competitive and maximally different from women's values on the one
side, to modest and caring and similar to women's values on the other. The
168
assertive pole has been called 'masculine' and the modest, caring pole
'feminine'. The women in feminine countries have the same modest, caring
values as the men; in the masculine countries they are somewhat assertive
and competitive, but not as much as the men, so that these countries show a
gap between men's values and women's values.
4. Uncertainty avoidance
Uncertainty avoidance deals with a society's tolerance for uncertainty and

ambiguity; it ultimately refers to man's search for Truth. It indicates to what
extent a culture programs its members to feel either uncomfortable or
comfortable in unstructured situations. Unstructured situations are novel,
unknown, surprising and different from usual. Uncertainty avoiding cultures try
to minimize the possibility of such situations by strict laws and rules, safety
and security measures, and on the philosophical and religious level by a belief
in absolute Truth; 'there can only be one Truth and we have it'. People in
uncertainty avoiding countries are also more emotional, and motivated by
inner nervous energy. The opposite type, uncertainty accepting cultures, are
more tolerant of opinions different from what they are used to; they try to have
as few rules as possible, and on the philosophical and religious level they are
relativist and allow many currents to flow side by side. People within these
cultures are more phlegmatic and contemplative, and not expected by their
environment to express emotions.
5. Confucianism versus Dynamism (Long term versus Short term)
Long-term orientation versus short-term orientation deals with Virtue

regardless of Truth. Values associated with Long Term Orientation are thrift
and perseverance; values associated with Short Term Orientation are respect
for tradition, fulfilling social obligations, and protecting one's 'face'. Both the
positively and the negatively rated values of this dimension are found in the
teachings of Confucius, the most influential Chinese philosopher who lived
around 500 B.C.; however, the dimension also applies to countries without a
Confucian heritage.
169
_____________________________________________________________
KEY NOTES
__________________
170
Charles Handy expressed culture as the way we do things around here.
Organisational culture can be influenced by both its internal and external

environments.
The external environment consists of all the factors and forces such as
politics, economy and technology.
The main influences on organisational culture are:

SIZE
TECHNOLOGY
DIVERSITY
AGE
HISTORY
OWNERSHIP
The determinants of Schein's observation regarding organisational culture

include:
Cultural artefacts (what can be seen)
Expoused beliefs (goals and strategies)
Basic assumptions (unseen values)
Handy's four cultural types:

ZEUS Power Culture
APOLLO Role Culture
ATHENA Task Culture
DIONYSUS Person Culture
Hofstede's international cultural perspective:

Power distance
Collectivism versus Individualism
Masculinity versus Femininity
Uncertainty avoidance
Confucianism versus Dynamism (Long term versus Short term)
171
_____________________________________________________________
QUESTION BANK
__________________
172
Question 1
Culture is expressed by Handy as being the way we do things around

here. Is this statement true of false?
True
False
Question 2
Cultures develop over time or can change instantly as a result of a single

major event, for example the death of a company founder. Is this statement
true or false?
True
False
Question 3
Which of the following factors could influence the culture of an organisation?

Past successes and failures experienced by the organisation
Senior management
The person who founded the organisation
The technology used by the organisation
The industry the organisation is in
1, 3 and 4
1, 2, 3 and 4
2, 3 and 5
1, 2, 3, 4 and 5
Question 4
Which of the following can be considered as influences on organisational

culture?
Individual initiative, the motor vans in use, clarity of direction

Individual initiative, degree of risk tolerance, clarity of direction
Individual initiative, no. of board of directors, clarity of direction
Question 5
Which of the following is not an element of organisational culture?
norms of behaviour
symbols
shared values
size of the organisation
173
Question 6
Schein said that leadership and culture were totally divorced from one
another. Is this statement true or false?
True
False
Question 7
To whom of the 4 Greek Gods was Handy referring when the culture of an
organisation is likely to be focused on individual, that is, the person takes the
central point of the organisation
Zeus
Apollo
Athena
Dionysus
Question 8
Hofstede looked for national differences in an attempt to find aspects of

culture that might influence business behaviour. Which of the following is one
of Hofstede's key dimensions of national differences?
Position-Power
Work-relaxation
Task-people
Question 9
A culture where there is one central source of power and few procedures or
rules would be classified by Handy as what sort of culture?
Power
Role
Task
Person
Question 10
Lucas Training is a small entrepreneurial organisation led by Frank Lucas

who started the business 2 years ago. Frank is central to all the key decisions
made in the firm. His knowledge and business awareness is critical to the
firm's success. Which of Handy's cultural types is present in Lucas Training?
174
Power
Role
Task
Person
Question 11
In a higher education teaching organisation an academic faculty is organised

into courses and departments, where teaching staff report both to course
programme managers and to subject specialists, depending on which course
they teach and upon their particular subject specialism. According to Charles
Handy's four cultural stereotypes, which of the following describes the above
of organisational structure?
Role
Task
Power
Person
Question 12
Schein argues that those who lead a company in its early days have a
substantial influence on its culture. Is this statement true or false?
True
False
Question 13
Hofstede developed an influential model of the dimensions on which national

cultures differ. In the Hofstede's model, a national culture which supports
single status pay arrangements, informal styles of dress in the workplace and
self-managed team working would be classified as:
Individualistic
Collective
Low power distance
High uncertainty avoidance
Question 14
A large management consultancy has implemented a matrix structure. Many

of the consultants work in temporary project teams. Which of Handy's cultural
types would you expect to see in this organisation?
175
Role Culture
Power Culture
Task Culture
Person Culture
Question 15
According to Schein, there is a strong link between culture and

_____________. Which word best fills the blank?
management style
leadership
influence
size of the organisation
Question 16
Research has indicated that workers in country X display characteristics such

as toughness and the desire for material wealth and possessions, while
workers in country Y value personal relationship, belonging and the quality of
life.
According to Hofstedes theory, these distinctions relate to which of the

following
Masculinity feminity
Power distance
Individualism collectivism
Question 17
Bureaucracy is another name for a:
Power culture
Role culture
Task culture
Existential culture
Question 18
A project team is more likely to be a role culture
True
False
176
Question 19
According to Hofstede, the extent to which security, order and control are
preferred to ambiguity and change is called:
Masculinity
Individualism
Power distance
Question 20
Which of the following is most likely to be an example of an existential

culture in Hofstedes model of cultural types?
An entrepreneurial start-up business

A partnership of graphic designers
A construction project
A large telecommunications company
177
_____________________________________________________________
ANSWER BANK
__________________
178
A
False most likely to be a task culture
B an entrepreneurial start-up is likely to be a power culture, a

construction project a task culture and a large telecom firm a role
culture.
179
CHAPTER 13
COMMITTEES IN THE BUSINESS

ORGANISATION

EXPLAIN THE PURPOSES OF COMMITTEES
A committee is a group of people assigned a task that they are expected to

carry out as a group. The key objective of the rules of procedure for
committees is to facilitate the smooth running of a committee. Its actions can
only be group actions individual members have no valid power to act or to
decide anything apart from the group. If, in fact, they do act apart from their
fellows and their acts are accepted as valid, then the committee is a mere
facade without any real substance!
In theory, when acting as a committee, all members enter it as equals. They

will normally elect a chairman and a secretary if the proceedings are to be
formal and records are meant to be kept. In fact, one can mention three main
types of committees:
The ad hoc committees which are created for a specific reason and on
temporary basis
The formal committees are part of the organisational structure with
specifically delegated duties and authority
Audit committees review the company's accounting policies and
internal controls, annual financial statements and the audit report with
the company's external auditors
The most common complaint brought against committee work is the amount
of time which it consumes in relation to the results achieved. This is the same
thing as saying that committees are an expensive instrument of
administration. This is because the modern world has far too many of them
and their proceedings are not always successful. Committees proliferate not
only within businesses but also outside in connection with trade associations
and government departments and they make increasing demands upon the
time of managers.
Each different point of view expressed by the members of the committee must
be ventilated and attempts made to construct a bridge between them. Even if
a simple majority vote is all that is needed, considerable time may be taken
up to avoid any appearance of stifling the expression of minority opinion.
180
Jobs assigned to committees are expected to achieve better results than that
of a single person because of the nature of group decision taking. From this
point of view, therefore, the committee will probably be employed in those
cases where group deliberation and judgement are likely to be of better
quality than that of an individual - two heads are better than one.
The following points summarise the purpose of the committee within an

organisation:
gather information
disseminate information or instructions delegating authority to
employees or managers
generate ideas
make or implement decisions committees may give a voice in the
making of the decisions before being implemented
coordinate the efforts of a number of people from divergent
disciplines bringing parties together for discussion in the hope of
finding reconciliation
act as a delaying mechanism and thus achieving time
oversee a function or procedure

DESCRIBE THE TYPES OF COMMITTEES USED BY BUSINESS
ORGANISATIONS
Committees have been classified in various ways according to the major

purposes which they are intended to serve and the power they exercise.
Some examples of committees include:
Board of Directors group of people that govern the organisation

Steering Committee oversee a major project, generally IT based. It is
often involved in deciding how to allocate scarce IT resources and
planning for future system development.
Works safety Committee
Ethics committee
The Accounting Standards Board (ASB) aims to promote consistency in
corporate reporting by creating financial reporting standards to which
major businesses are expected to adhere
Remuneration Committee in charge of setting the salaries of Directors
181
LIST THE ADVANTAGES AND DISADVANTAGES OF COMMITTEES
Consolidation of authority Sometimes too large to work

Delegate effectively Time consuming and can be
expensive
Blurring responsibilities Can delay matters due to other
work loads
Delay or gain time Frequent or infrequent
attendance
Incorrect or ineffective decisions
Can invite compromise

EXPLAIN THE ROLES OF THE CHAIR AND SECRETARY OF A
COMMITTEE
13.4.1 The Chairperson
Responsibility for the efficient running of the committee meeting rests with the
chair. While everyone has some responsibility for a well-run meeting, the
chair will, in the end, make the greatest contribution to the success of the
meeting. The chair must ensure that all discussion is orderly, that every
individual has an opportunity to participate and that a decision is made on
each topic before proceeding.
The chair must ensure impartiality during discussions, maintain an open

mind, and not influence the final decision. If, for any reason, the chair feels
compelled to join the discussion, other than to provide factual information to
the assembly, or to express an opinion, he/she must vacate the chair during
discussion on the topic and ask another director to chair the meeting. When
that topic is dealt with, the official chair may resume the position and continue
with the meeting.
13.4.2 The Committee Secretary
One of the busiest people at the meeting is the secretary. This person is
responsible for taking notes, documenting progress and procedures and
eventually producing a set of minutes that accurately reflects the decisions
made by the committee. The secretary is responsible for having copies of the
laws, policies and previous minutes (in the case of a continuation meeting)
available should members of the committee require them during the course of
the meeting.
182
One must also mention that the work of the secretary is not only during the
meeting. The secretary has different tasks both before and after the meeting.
Before the meeting the secretary must fix the date, book the venue, think for
any refreshments needed and make sure there is also access for people with
disability in case one of the attendants has such a condition. S/he needs to
prepare and issue the agenda and other relevant documents.
After the meeting, the secretary has the role of preparing the minutes and
sending them to all members of the committee after having them signed by
the chair. Responsibility for correspondence rests with the secretary.
183
____________________________________________________________
KEY POINTS
__________________
184
A committee is a group of people assigned a task that they are expected
to carry as a group.
The main types of committees are:

ad hoc
formal
audit
The main purposes of the committees within an organisation are to:

gather information
disseminate information or
instructions generate ideas
make or implement decisions
coordinate the efforts of a number of people from divergent
disciplines
act as a delaying mechanism
oversee a function or procedure
Different types of committees may include:

board of directors
steering committee
works safety committee
ethics committee
Accounting Standard Board (ASB)
remuneration committee
5.
185
6.
186
_____________________________________________________________
QUESTION BANK
__________________
187
Question 1
A committee can act as a delaying mechanism.
True
False
Question 2
Which one of the following can be used as a reason of using a delaying

mechanism?
to get a machine in a state of slow motion

to achieve more time
to oversee a function or procedure
Question 3
Ad hoc committees are created ________
for a specific reason

to resolve day to day issues within an organisation
to replace the directors in general meetings
Question 4
In an organisation which operates a system of good corporate governance, to

whom should the internal audit department of an organisation report?
The Board of Directors

The Finance Director
The Audit Committee
The Management Accountant
Question 5
Which of the following is a disadvantage of having a remuneration

committee?
A. Takes the directors attention away from making strategic decisions about
the company's future
Increases the agency problem
Increased costs
Removes the danger of directors being paid excessive salaries
188
Question 6
The responsibility of the secretary is to make sure that all members of the
committee have a say during a meeting.
True
False
Question 7
The notes taken by the secretary during a meeting are known as:
A. Executive summary
Minutes
Seconds
Question 8
It is very important that the chair expresses and influences other members of
the committee whilst they are in a meeting.
True
False
Question 9
You are convening a meeting. Which one of the following would you be
doing?
deciding on the individuals who will be attending the meeting

issuing a notice of the meeting
writing up the record of the meeting
Question 10
Since joining the project team, your friend has learned quite a lot about formal
meetings, but she has never come across the term motion. One of the
following is your explanation of what a motion is when referring to a
meeting.
it is an objection to the chair about an irregularity in the convening,

constitution or conduct of a meeting
it is a stand-in for an absent member, who has the right to be present but not
to speak
it is an interruption of the proceedings of a meeting before they have been
completed
it is a proposal put to a meeting
189
Question 11
What is the name of a committee with the power to govern or administer?
Joint committee
Ad-hoc committee
Executive committee
Standing committee
190
_____________________________________________________________
ANSWER BANK
__________________
191
A this is one of the advantages of a committee
A ad-hoc committees are dissolved once the project is done
B this is the role of the chairman
B the main role of a chairperson is to make sure there is a flow of

information and everyone is participating.
192
CHAPTER 14
GOVERNANCE AND SOCIAL

RESPONSIBILITY IN BUSINESS

EXPLAIN THE CONCEPT OF SEPARATION BETWEEN
OWNERSHIP AND CONTROL
The separation of ownership and control is a situation where decision makers

do not own a major share of the wealth effects of their decisions. However,
the shareholders will want to build in safeguards to ensure that the managers
run the business in the interests of all the stakeholders fairly, and not just in
the managers' own interest.
There are three different views associated with the ownership and
management of organisations:
The Stewardship Theory

Agency Theory
Stakeholder Theory
14.1.1 The Stewardship Theory
This views the management of the organisation as the stewards of its

assets, charged with their employment and deployment in ways consistent
with the overall strategy of the organisation. Other groups take little or no part
in the operations of the company. They receive information via reports,
accounts etc. Technically, the shareholders have the right to dismiss stewards
via a vote at the AGM (Annual General Meeting).
14.1.2 The Agency Theory
A very different approach to governance is held within that of the agency

theory. It believes that rather than acting as a steward of the company the
management seeks to service their own interests. They will only look after the
performance of the company if it coincides with their personal goals.
14.1.3 The Stakeholder Theory
This theory looks at the bigger picture. It believes that the management has a
duty of care, not just to the owners of the company but also to the wider
community of interest, or stakeholders.
193
DEFINE CORPORATE GOVERNANCE AND SOCIAL
RESPONSIBILITY AND EXPLAIN THEIR IMPORTANCE IN
CONTEMPORARY ORGANISATIONS
Corporate Governance is the set of processes and policies by which a

company is directed, administered and controlled. It includes the appropriate
role of board of directors and of the auditors of a company.
Corporate Social Responsibility refers to the idea that a company should

be sensitive to the needs and wants of all the stakeholders in its business
operations, not just the shareholders.
A closely linked idea is that of Sustainable Development. Companies should

make decisions based not only on financial factors, but also on the social and
environmental consequences of their actions.
Due to extensive abuse and scandals in recent years, both corporate

governance and an understanding of the social impact have been highlighted
within the business community. Imposing strict corporate governance
procedures can vastly improve the way in which an organisation is run. Poor
corporate governance can lead to poor organisational performance. In May
1991, the Cadbury Committee was set up due to lack of confidence in the
financial reporting and the ability of external auditors to provide the
assurances required by the users of financial statements. This led to the 2003
Combined Code of Corporate Governance.
Features of poor corporate governance
Domination by a single individual

Lack of involvement of board
Lack of adequate control function
Lack of supervision
Lack of independent scrutiny
Emphasis on short-term profitability
Misleading accounts and information
194
Cadbury Greenbury Committee Hampel Committee 1996
Committee 1992 1995 (Best Practice)
(Best Practice) (Directors Remuneration)
1998 Combined Code

(The principles of good governance and
the code of best practice)
Higgs Report 2003

(non-Executive
Turnbull Committee
directors)
1999
(Internal controls and
risk management) Smith Report 2003
(audit committees)
2003 Combined Code of Corporate Governance

EXPLAIN THE RESPONSIBILITY OF ORGANISATIONS TO
MAINTAIN APPROPRIATE STANDARDS OF CORPORATE
GOVERNANCE AND CORPORATE SOCIAL RESPONSIBILITY
The traditional view has been that corporate social responsibility offers no
business benefits, and destroys shareholder value by diverting resources
away from commercial activity. Such traditionalists argue that companies
should operate solely to make money for shareholders and that it is not a
company's role to worry about social responsibilities. Companies pay taxes to
government, and it is governments and charities that should be responsible
for social matters.
This traditional view is losing support amongst all sizes of businesses. The
modern view is that a coherent CSR strategy can offer business benefits by
enabling a company to:
monitor changing social expectations

manage operational risks
identify new market opportunities
retain key employees
By aligning the company's core values with the values of society, the
company can improve its reputation and ensure it has a long-term future.
195
14.3.1 Balanced Scorecard Approach
The Balanced Scorecard approach emphasises the need to provide the user
of a set of accounts with information which addresses all relevant areas of
performance objectively. This information should include both financial and
non-financial elements, and the usual balanced scorecard approach is to
report performance from four separate perspectives:
financial perspective
customer perspective
internal perspective (internal efficiency)
innovative perspective

BRIEFLY EXPLAIN THE MAIN RECOMMENDATIONS OF BEST
PRACTICE IN EFFECTIVE CORPORATE GOVERNANCE
14.4.1 NON-EXECUTIVE DIRECTORS
Whilst company law refers only to directors in general, two types of directors
have emerged. Those who are involved in the day-to-day execution of
management are known as executive directors and those who primarily only
attend board meetings are known as non-executive directors.
Non-executive directors should provide a balancing influence and play a key

role in reducing conflicts of interest between management and shareholders.
The UKs Higgs report provide a useful summary of the role of non-executive
summary.
Strategy setting direction

Performance should scrutinize the performance of management in
meetings goals and objectives
Risk should ensure that risk management is robust
14.4.2 REMUNERATION COMMITTEES
Directors remuneration should be set via a remuneration committee

consisting of independent non-executives. Due to directors being paid large
salaries etc for a number of years (and being seen as major corporate abuse)
The Greenbury committee in the UK set out principles to demonstrate what a
good remuneration policy should look like:
196
Directors remuneration should be set by independent members of the
board
Bonuses etc relate to measurable performance or enhance share value
Full transparency of directors remuneration
The committee also has to take into account the wider picture. So, for
example the package will need to attract, retain and motivate directors of
sufficient quality. There is also a balance between this and the shareholders
interests.
The committee also has to consider:
The different levels of management/directorship

The ability for managers to leave
Individual performance
Overall organisational performance
14.4.3 AUDIT COMMITTEES
An audit committee of independent non-executive directors should liaise with

external audit, supervise internal audit, and review the annual accounts and
internal control. Audit committees are very significant due to their
responsibilities for supervising and offering an overall review. They should
have close interest in the work of the internal audit.
The benefits of an effective audit committee, as highlighted by the Cadbury

committee:
Improve the quality of financial reporting, by reviewing the financial

statements
Reduce opportunity for fraud by creating a climate of discipline and
control
Enable the non-executive to play a positive role by giving an
independent judgment
Help the finance director, by providing the forum to raise concern in
situations that otherwise may be difficult
Strengthen the position of the external auditor but providing a
channel of communication and forum for issue of concern
Provide a framework within which the external auditor can assert
their independence in the event of a dispute
Strengthen the position of the internal auditor
Increase public confidence and credibility in the financial
statements
197
14.4.4 PUBLIC OVERSIGHT
The public is a legitimate stakeholder, thus it has the right to know how a
particular company is being governed. One can also mention that the public
has the right to be involved in the governance process of companies. The
most obvious means of public oversight of corporate governance is via the
publication of Annual Reports and Accounts. Companies should also discuss
their plans with their representatives of various stakeholder groups including
journalists and local politicians.
14.4.5 NOMINATION COMMITTEE
A nomination committee should be in place for selecting board members and

making recommendations to the board. It should consist of a majority of non-
executive directors and should be responsible for finding suitable applicants
to fill board vacancies and recommending them to the board for approval.
14.5 ACCA SYLLABUS GUIDE OUTCOMES 5 AND 6

EXPLAIN HOW ORGANISATIONS TAKE ACCOUNT OF THEIR
SOCIAL RESPONSIBILITY OBJECTIVES THROUGH ANALYSIS OF
THE NEEDS OF INTERNAL, CONNECTED AND EXTERNAL
STAKEHOLDERS
IDENTIFY THE SOCIAL AND ENVIRONMENTAL
RESPONSIBILITIES OF BUSINESS ORGANISATIONS TO
INTERNAL, CONNECTED AND EXTERNAL SHAREHOLDERS
Corporate Social Responsibility (CSR) philosophy is based on the idea of

being sensitive to the needs and wants of all the stakeholders in the
business, not just the shareholders.
A stakeholder needs analysis can be carried out to bring some structure to

the implementation of CSR programme. The analysis involves doing research
to determine:
Who are the key stakeholders of the business?

What are their needs?
Economic activities often impact those who are not involved in the activity. For
example, a corporation manufacturing automobiles generates pollution and
the cost of this pollution is borne by nearby residents. External costs (or
benefits) arising from economic activities are referred to as externalities.
While firms of any size can create externalities, multinational corporations can
use their political influence to avoid bearing responsibility for significant
external costs.
Given the close relation between minimizing costs and maximizing profits, it is
natural to assume that an organization that seeks profits and has significant
political power will feel some motivation to use that power to externalize costs,
198
where possible. This motivation may be held in check by ethical considerations, by
regulation, or by a fear of backlash from groups that might harm the organization;
for example, consumer groups, or others who could mobilize effective public
opinion. (Goodwin, 2003)
The benefits firms obtain from being able to impose externalities and shift
costs to others are difficult to measure in economic terms. The only available
estimate of the total public cost incurred to support the operations of private
corporations was $2.6 trillion for 1994 in the United States.
Refer to technical article Corporate governance: the board of directors and

standing committees at the back of the notes
199
_____________________________________________________________
KEY POINTS
__________________
200
Separation of ownership and control refers to the situation were owners
and managers are not the same people.
The Stewardship theory states that managers are employed by the

owners of the organisation to act as the stewards of their assets.
The Agency theory states that management (non-owners) tend to pursue

acts only if it seeks to service their own interests.
The Stakeholder theory states that management is employed not only to

take care of the need of the organisation but also to safeguard the
needs of all the stakeholders.
Corporate Governance is the set of processes and policies by which a

company is directed, administered and controlled. It includes the
appropriate role of board of directors and of the auditors of a company.
Corporate Social Responsibility refers to the idea that a company

should be sensitive to the needs and wants of all the stakeholders in
its business operations, not just the shareholders.
Sustainable Development refers to a situation in which companies

make decisions based not only on financial factors, but also on the
social and environmental consequences of their actions.
8.
A balanced scorecard approach emphasises the need for those who

use the accounts to translate the performance of an organisation by
studying the performance not only from a financial side but also from a
201
non- financial element including innovative, customer and internal
perspectives.
10.
Non- executive directors have gained a lot of importance in the

Code of Corporate Governance. These directors are not in charge
of the day-to-day running of an organization.
Audit committee should liaise with external audit, supervise internal

audit, and review the annual accounts and internal control.
Remuneration committee set the executive directors' remuneration in a

fair way and that is very close related to the performance of the
organisation.
Public oversight is the general public that must know what the
organisation is doing. This is generally held possible by reviewing
the publication of Annual Reports and Accounts.
202
_____________________________________________________________
QUESTION BANK
__________________
203
Question 1
What is defined as the scope and amount of discretion given to a person to

make decisions by virtue of the position he or she holds in the organisation?
Authority
Power
Accountability
Question 2
The agency problem is the name given to the situation where the managers
have to be motivated to act in the best interests of the company as a whole.
True
False
Question 3
The separation between ownership and control is only relevant in the context
of limited companies.
true
false
Question 4
Which of the following would reduce the agency problem in a large quoted
company?
pay the directors a fixed amount of cash each year

pay the directors a bonus in shares based on the reported profit
employ the directors on a rolling five-year contract
offer the directors large contractual parachute payments (compensation
payments if they are removed from office)
Question 5
The Cadbury Committee described corporate governance as the system by

which companies are directed and controlled
True
False
204
Question 6
Corporate Governance has nothing to do with the direction of an organisation

it focuses on controlling the organisation.
True
False
Question 7
Corporate social responsibility is solely concerned with a company's

obligations to its external stakeholders.
true
false
Question 8
Which of the following is a feature of poor corporate governance?
the establishment of an audit committee

focus on maximising shareholder wealth
lack of dominance of the board by several individuals
supervision of staff in key roles
Question 9
The balanced scorecard approach emphasises the importance of reviewing

the performance of company by purely studying the financial perspective.
True
False
Question 10
Traditional profit and loss financial reporting struggles to recognise the

benefits of CSR.
true
false
Question 11
A visible CSR programme can assist Human Resources departmen in

recruiting and retaining employees.
true
false
205
Question 12
Which of the following has become an established best practice in corporate

governance in recent years?
an increasingly prominent role for non-executive directors

an increase in the powers of external auditors
greater accountability for directors who are in breach of their fiduciary
duties
a requirement for all companies to establish an internal audit function
Question 13
What is the responsibility of a Public Oversight Board?
the establishment of detailed rules on internal audit procedures

the commissioning of financial reporting standards
the creation of legislation relating to accounting standards
the monitoring and enforcement of legal and compliance standards
Question 14
Non-executive directors can perform an important role in corporate

governance in all but one of the following ways:
they act an independent advisors ensuring that executive directors make

decisions in the best interest of shareholders
they play a role on the remuneration committee to ensure fair pay to directors
they are members of the audit committee to whom internal and external
auditors report
they are responsible for all key business decisions so they should ensure that
shareholders interests are taken into account
Question 15
In an organisation which operates a system of good corporate, to whom

should the internal audit department of an organisation report?
the board of directors

the finance director
the audit committee
the management accountant
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Question 16
Which of the following is not a responsibility of the remuneration committee?
setting the remuneration of an executive chairman

setting the remuneration of the senior NED
monitoring the level of remuneration of senior management below board level
appointing consultants to advise on executive directors' remuneration
Question 17
Which of the following is not a responsibility of the audit committee?
appoint the external auditors each year

review the external auditors' independence
monitor the integrity of the financial statements
review the company's internal financial controls
Question 18
The audit committee of a UK-listed company should comprise at least three

NEDs (or two in the case of small companies)
A. true
B. false
Question 19
Features of good corporate governance include the following:

True False
Splitting the roles of chairman and executive directors
Appointing a majority of executive directors on the board
Question 20
Audit committees are generally staffed by executive directors.
A. True
B. False
207
Question 21
Which of the following is a nomination committee responsible for?
Review of financial statements

Review of internal control
Recommending potential board members
Question 22
Which two of the following are symptoms of poor corporate governance?
Bonuses for directors

Inadequate supervision
The finance directors also performing the role of company secretary
Lack of board involvement
208
_____________________________________________________________
ANSWER BANK
__________________
209
A
A CRS corporate social responsability
True
False
False they should be staffed by non-executive directors excluding the

chairman.
B and D
210
CHAPTER 15
THE RELATIONSHIP OF ACCOUNTING

WITH OTHER BUSINESS FUNCTIONS
EXPLAIN THE RELATIONSHIP BETWEEN ACCOUNTING AND
PURCHASING/PROCUREMENT
EXPLAIN FINANCIAL CONSIDERATIONS IN PRODUCTION AND
PRODUCTION PLANNING
The purchasing/buying function is responsible for placing and following up

orders. It coordinates with the accounting department as follows:
Establishing credit terms The accounting department

will work with the buying
department to liaise with
suppliers to obtain a credit
account and to negotiate
credit terms which are
acceptable.
Prices The accounting department
can advise the buying
department on the maximum
price that should be paid to
maintain margins.
Payment Payments may be approved
by the buying department but
are made by the accounting
department.
Data capture, e.g. orders Order details will be input by
the buying department and
details passed to accounting
department.
Inventory The purchasing department
will consult with the inventory
section of the accounting
department to determine the
quantity of items already in
stock and therefore the
quantity required.
Budgeting The accounting department
will consult with the buying
department on likely costs in
preparing budgets.
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The production department plans and oversees the production of goods. It
liaises with the accounting department as follows:
Cost measurement, allocation, The production department

absorption measures quantities of materials
and time used; the management
accountant gives a monetary
value to them. Costs are then
allocated and absorbed to
calculate production costs based
on advice given by the
production department.
Budgeting The production department will
decide how many items of what
type are to be produced. The
cost of producing these will be
determined by the accounting
and production departments
together, and incorporated into
the overall budget.
Cost vs quality The production and accounting
departments will discuss the
features that can be included in
products and the raw materials
that should be used. They
should agree which better
quality materials and features
justify the extra cost, and
discuss how to maximise quality
and profit.
Inventory The production department will
liaise with the inventory section
to ensure that there are
sufficient raw materials in stock
for the production that is
planned.

IDENTIFY THE FINANCIAL ISSUES ASSOCIATED WITH
MARKETING
IDENTIFY THE FINANCIAL COSTS AND BENEFITS OF EFFECTIVE
SERVICE PROVISION
The marketing department coordinates with the accounting department as

follows:
212
15.2.1 Budgeting
The accounting department will discuss the likely sales volume of each
product with the marketing department, in order to produce the sales budget.
15.2.2 Advertising
The accounting department will help the marketing department in setting a

budget, and in monitoring whether it is cost effective. For example, they could
help in measuring new business generated as a result of different advertising
campaigns.
15.2.3 Pricing
The accounting department will have input into the price that is charged.
Often products are priced at cost plus a percentage. Even if the marketing
department determines the price based on market forces they need to consult
with the accounting department to ensure that costs are covered.
15.2.4 Market share
The accounting department can provide the marketing department with

information on sales volumes for each product, to help the marketing
department in determining market share. In many companies there can be a
great deal of antagonism between marketing and accounting, especially over
pricing and cost control.
15.2.5 Service provision
Companies very often provide services to customers, at the same time as a

sale or afterwards, e.g. a computer retailer may charge an extra fee to help
customers set up their system, or a car dealer may provide car servicing.
There are several issues about which the service departments may need the
input of the accounting department.
15.2.6 Chargeout rates
This is the hourly rate which the company charges clients. It should be higher
than salary, as it should include a share of overheads, e.g. training and any
profit the company wishes to make. However if the Chargeout rate is too high
customers will not use the service. Many accounting firms base Chargeout
rates for their staff on roughly three times that persons salary.
15.2.7 Estimating costs
Problems arise in determining the amount of overhead to be included in the

chargeout rate. Also, if the service takes longer to provide than expected, the
company may not be able to pass on the extra cost.
213
15.2.8 Problems measuring benefits
Market conditions may mean that the chargeout rate contains a very low profit
element. The company may question whether it is worth carrying out these
services. The problem is that the benefits are intangible and not easy to
measure, but nevertheless real. A company with effective service provision
has happier customers, and happy customers are more likely to buy from the
company in the future, therefore leading to lower selling costs. But it is very
difficult to measure these benefits.
214
_____________________________________________________________
KEY POINTS
__________________
215
The purchasing department liaises with the accounting department on the
following:
establishing credit terms
maximum prices to spend
approval of payments
data capture like for example orders
inventory
budgeting
The production department coordinates with the accounting department

on the following:
cost measurement, allocation, absorption
budgeting
cost vs quality
inventory
The marketing department coordinates with the accounting department as

follows:
Budgeting
Advertising
Pricing
Market Share
There are several issues about which the service departments may need
the input of the accounting department:
Chargeout rates
Estimating costs
Problems measuring benefits
216
_____________________________________________________________
QUESTION BANK
__________________
217
Question 1
In which of the following activities would the accounting department co-

ordinate with the purchasing or buying function?
liaison with suppliers to obtain a credit account and negotiate credit terms
which are acceptable
ensuring there are sufficient raw materials in stock for planned production
discussion of advertising and promotion budgets
systems design and development to make purchasing easier
Question 2
Which of the following is one of the activities where the purchasing/buying

function co-ordinates with the accounting department?
determining the specification of key components

securing the provisions for the accounting department's Christmas lunch
setting credit limits
obtaining quotations
Question 3
Which of the following is an example of co-ordination between the production

and accounting department?
establishing credit terms

determining sales price
allocating costs
deciding on pay rises
Question 4
Which of the following is not an example of co-ordination between the

production and accounting departments?
allocation costs
budgeting
balancing cost and quality
approving orders
Question 5
When giving a credit account, the most important consideration is the

likelihood of a significant volume of business from the prospective customer.
218
true
false
Question 6
Which of the following is not an example of co-ordination between the

marketing and accounting departments?
reviewing advertising cost/benefit

pricing
assessing market share
assessing creditworthiness
Question 7
Which of the following should be taken into account in determining charge-out

rates to be used by a service department?
wages cost
number of hours taken
foreign exchange rates
interest rates
Question 8
Which of the following is an advantage of providing good service?
greater customer satisfaction

higher payroll costs
higher inventory turnover
economies of scale
Question 9
Which of the following is not an advantage of providing good service?
reduced marketing costs, so more likely to sell to existing customers

customers less likely to buy elsewhere
provides a one-stop shop
economies of scale
219
Question 10
Which of the following personnel in an organization would be involved in the

purchase of materials?
Credit control
Stores manager
Accountant
Purchasing manager
220
_____________________________________________________________
ANSWER BANK
__________________
221
A
A his duty is to chase unpaid debts
222
CHAPTER 16
ACCOUNTING AND FINANCE FUNCTIONS

WITHIN BUSINESS

EXPLAIN THE CONTRIBUTION OF THE ACCOUNTING FUNCTION
TO THE FORMULATION, IMPLEMENTATION AND CONTROL OF
THE ORGANISATION'S POLICIES, PROCEDURES AND
PERFORMANCE
No one really knows who invented accounting, references in the Bible and the
Koran indicate that some form of accounting has existed for centuries. Since
the inception of trade and business, civilization understood the need for
accurate records. What was still lacking were means for standards of
accurate record keeping. Luca Pacioli, a Franciscan monk was the father of
double entry accounting, and set the business world on fire in 1494.
There have been many advances in the field of accounting, and many times
the accountants performing the work have been called upon to provide a
bridge between public trust and government regulation. Some of the more
important milestones in the field of accounting have been the implementation
of income tax laws and the more recent scandals involving corporate fraud.
Groups that may have an interest in the financial information:
Manager of the company: They supervise the activities of the organisation

and need this information to plan effectively, take control, forecast future
earnings.
Shareholders of the company: They need to assess how effectively the

company is being run.
Trade contacts: Suppliers need to understand the credit worthiness,

customers need to be confident that the company is not going to close down.
Providers of finance to the company: Banks need this information to

approve credit, loans, overdrafts.
Revenue & Customs: Need to know this information to assess business

profits and tax payable by the company.
Employees of the company: Need to know this information as their future

salaries, wages etc depend on the financial stability of the organization.
223
Financial analysts and advisers: May need this information for their clients.
Government and their agencies: Government may need this information to

assess their allocation of resources and for national statistics.
The public: Organisations may well have a substantial impact on the local
economy or indeed on environmental issues such as pollution.
At the head of each accounting department is usually a finance director. The

finance directors may sit on the board of directors and is responsible for
routine accounting and the broader financial policies.
The responsibilities within a large finance/accounting department may be

passed down to less senior staff such as:
16.2.1 Financial Controller:
Routine accounting
Providing reports for other departments
Cashiers duties and cash control
16.2.2 Management Accounting:
This is a much more important role therefore a company may employ a

Management Accountant. This position has equal status to the Financial
Controller but with separate responsibilities:
Cost accounting
Budgets and budgetary control
Financial management of projects
16.2.3 Treasurer
Raising funds by borrowing

Investing surplus funds
Cash flow control
16.2.4 The Sections within an accounts department
1. Financial Accounts
Divided into sections with a supervisor for each section (payroll,

credit control, sales, purchasing)
2. Management Accounting
Divided into a number of cost accountants (labour, materials,

overheads etc)
224
3. Capital Projects
Usually within large companies. (Sensitive analysis, capital budget

etc)
Finance Director
Management
Treasurer Financial Controller Accountant
Cashier Financial Accountants Cost Accountants
Fixed Asset Register

Cost Accounting
Sales Ledger
Management
Debt Collection
Accounting
Credit Control
Purchase Ledger
Wages & Salaries
Financial Accounts
Statutory Accounts
Sales Tax (VAT)
Taxation
16.3.1 Strategic management refers to the art of planning the business at

the highest possible level. It is the duty of the companys leader (or leaders)
including also the accounting function. Strategic management focuses on
building a solid underlying structure to a business that will subsequently be
fleshed out through the combined efforts of every individual employed with
the organisation.
formulate policy
implement policy by establishing procedures to be followed
control performance
16.3.2 Policy formulation is designed to achieve the organisations

objectives, so the starting point must be to identify the objectives. The
purpose of setting objectives is to convert mission into performance targets,
225
create yardsticks to track performance and push the firm to be inventive,
intentional and focused.
One can distinguish between two types of objectives:

Financial objectives outcomes that relate to improving firm's financial
performance, e.g. to maximise the reported profits after tax, subject to
treating each stakeholder group properly.
Strategic objectives outcomes that will result in greater
competitiveness and stronger long-term market position, e.g. become
leader in a new product introduction in the next 5 years ending 2020.
16.3.3 Planning is the establishment of objectives, and the formulation,

evaluation and selection of the policies, strategies, tactics and action required
to achieve them. The planning process is conventionally split into 3
timescales:
strategic planning
tactical planning
operational planning
Once a plan has been adopted, it is then possible to control the activities of
the business to seek to achieve the plans outcomes. Planning and control
are thus interrelated terms.
16.3.4 Control over organisational performance can be achieved by:
budgetary control, and

the establishment of standards.
A budget is a plan expressed in quantitative (normally financial) terms for

either the whole of a business or for the various parts of a business for a
specified period of time in the future.
Budgetary control is the establishment of budgets relating the

responsibilities of managers to the requirements of a policy, and the
continuous comparison of actual with budgeted results.
For example, a companys sales budget may be drawn up for each quarter of
the next calendar year, either in units sold or in money amounts. As the year
goes by the actual sales will be compared with the budgeted sales, and the
sales director will be asked to explain any large differences between the two
(budget variances). It is the management accounting section in the
accounting function that has particular responsibility for budgeting and
standard costing matters.
226
IDENTIFY AND DESCRIBE THE MAIN ACCOUNTING AND
REPORTING FUNCTIONS IN BUSINESS
Transactions Day Books Ledger Financial

Accounts Statements
Whenever a business transaction takes place (a sale or a purchase, or

payment of wages, etc.), there is a need to record the transaction in the
accounting records. The transaction is first entered in the books of prime
entry (or books of original entry).
16.4.1 The main books of prime entry are:

the purchases day book
the sales day book
the cash book
the petty cash book
the journal
On a regular basis (e.g. monthly), the day books are totaled and the totals for
the period are entered into the ledger accounts. For example, if the sales day
book is totaled at the end of each month, the total sales for the month are
posted into the ledger accounts of the business. At the accounting year end of
the business, the balance is calculated on each ledger account, and these
balances are taken, with any necessary adjustments as recorded in the
journal, to become the financial statements of the organisation for the period.
16.4.2 The main financial statements produced each year are:
a balance sheet statement of financial position at the year end,

showing the assets owned and the liabilities owed, and how these net
assets are financed.
an income statement of comprehensive income for the year, showing

the revenues earned and the costs incurred, leading to the net profit or
loss arising for the year.
a cash flow statement, statement of cash flow summarising the cash

receipts for the year and the cash payments paid out, to help readers
of the accounts to understand the liquidity of the business.
Companies must send a copy of their financial statements to their

shareholders each year. Large companies must appoint external auditors
each year to give their independent opinion on whether the published
financial statements have been drawn up properly and whether they give a
227
true and fair view.
GAAP (Generally Accepted Accounting Practice) is a set of rules governing

accounting. The rules may derive from:
company law
accounting standards
international accounting standards and statutory
requirements stock exchange requirements

IDENTIFY AND DESCRIBE THE MAIN MANAGEMENT
ACCOUNTING AND PERFORMANCE MANAGEMENT FUNCTIONS
IN BUSINESS
Management Financial
Accounting Accounting
Why information is For internal use, e.g. For external use,
mainly produced managers and employees e.g.
shareholders,
creditors, banks,
government.
Purpose of To aid planning, controlling To record the
information and decision making financial
performance in a
period and the
financial position at
the end of the
period.
Legal requirements None Limited companies

must produce
financial accounts.
Formats Management decide on Format and content
the information that they of financial
require and the most accounts must
useful way of presenting it. follow accounting
standards and
company law.
Nature of information Financial and non-financial Mostly financial.
Time period Historical and forward Mainly a historical
looking record.
Examples of decision making that management accountants can help

management with are:
228
Breakeven analysis what products or customer segments are currently
profit making or loss making?
Key factor analysis should products be made in house with

available resources or should their manufacture be outsourced to
somewhere cheaper?
Pricing decisions should the prices of strongly selling items be
increased to try and increase overall profit?
Investment appraisal should a new machine be bought for the factory
to replace an old machine near the end of its useful life?
One should appreciate that simply preparing an income statement for the
year, as a financial accountant does, is a valuable exercise in itself, but is of
no immediate help in answering all the above sorts of questions.
Management accountants are needed to address these issues.
The budgetary control process involves planning and control. Planning

involves the setting of the various budgets (sales budget, manpower budget,
etc.) for the appropriate future period. All the budgets of the various parts of
the business need to be coordinated, to ensure that they are complementary
and in line with the overall company objectives and policies.
229
Once the budgets have been set and agreed for the future period, the control
element of budgetary control is ready to start. This control involves
comparison of the plan in the form of the budget with the actual results
achieved for the budget period. Any significant divergences between the
budgeted and the actual figures should be reported to the appropriate
manager so that any necessary action can be taken.

IDENTIFY AND DESCRIBE THE MAIN FUNCTION AND TREASURY
FUNCTIONS
16.6.1 The functions of the treasury
Treasury management is the corporate handling of all financial matters, the

generation of external and internal funds for business, the management of
currencies and cash flows, and the complex strategies, policies and
procedures of corporate finance.
The Association of Corporate Treasurers
Cash management The treasury section will

monitor the companys cash
balance and decide if it is
advantageous to give/take
settlement discounts to/from
customers/suppliers even if that
means the bank account will be
overdrawn.
Financing The treasury section will
monitor the companys
investments/ borrowings to
ensure they gain as much
interest income as possible and
incur as little interest expense
as possible.
230
Foreign currency Thetreasury section will
monitor foreign exchange rates
and try to manage the
companys affairs so that it
reduces losses due to changes
in foreign exchange rates.
Tax The treasury section will try to
manage the companys
affairs to legally avoid as much
tax as possible.
16.6.2 The role of the finance function in determining business tax

liabilities
One of the roles of the finance function is to calculate the business tax liability
and to mitigate that liability as far as possible within the law.
Tax avoidance is the legal use of the rules of the tax regime to ones
own advantage, in order to reduce the amount of tax payable by
means that are within the law.
Tax evasion is the use of illegal means to reduce ones tax liability, for
example by deliberately misrepresenting the true state of your affairs to
the tax authorities.
The directors of a company have a duty to their shareholders to maximise the

post tax profits that are available for distribution as dividends to the
shareholders, thus they have a duty to arrange the companys affairs to avoid
taxes as far as possible. However, dishonest reporting to the tax authorities
(e.g. declaring less income than actually earned) would be tax evasion and a
criminal offense.
While the traditional distinction between tax avoidance and tax evasion is
fairly clear, recent authorities have introduced the idea of tax mitigation to
mean conduct that reduces tax liabilities without frustrating the intentions of
Parliament, while tax avoidance is used to describe schemes which, while
they are legal, are designed to defeat (nullify) the intentions of Parliament.
Thus, once a tax avoidance scheme becomes public knowledge, Parliament
will nearly always step in to change the law in order to stop the scheme from
working.
16.6.3 Responsibilities of the finance function
The finance function of any company is responsible by law for:

maintaining proper accounting records that contain an accurate account of
the income and expenses incurred, and the assets and liabilities
pertaining to the company.
231
calculating the tax liability arising from the profits earned each year, and
paying amounts due to the tax authorities on a timely basis. In
practice, most companies (particularly small companies) will seek the
advice of external tax specialists to help them calculate their annual
tax liability.
16.6.4 Investment appraisal and financing viable investments
Investment appraisal is concerned with long term investment decisions, such

as whether to build a new factory, buy a new machine for the factory, buy a
rival company, etc. Typically money is paid out now, with an expectation of
receiving cash inflows over a number of years in the future.
There are two questions to be addressed:

Is the possible investment opportunity worthwhile?
If so, then how is it to be financed?
For example, if a company is offered an investment opportunity that requires

paying out 1m now, and will lead to cash inflows of 2m in one years time
and 2m in two years time, during a period when interest rates are 5%, you
can see that this investment is worthwhile in real terms. If the 1m was
invested to earn interest, it would be worth 1.05m in one years time.
However the investment will give you 2m in one years time and another
2m in two years time. So the investment is worthwhile.
The second question is how this 1m required now should be financed.

Perhaps there is a surplus 1m sitting unused in a bank account. It is more
likely that fresh funds will be required, possibly by issuing new shares, or
possibly by raising a loan (e.g. from the bank). There are advantages and
disadvantages of each possibility.
Advantages of issuing new ordinary shares:
Dividends can be suspended if profits are low, whereas interest payments
have to be paid each year.
The bank will typically require security on the companys assets before it
will advance a loan. Perhaps there are no suitable assets available.
Advantages of raising loan finance:

Interest payments are allowable against tax, whereas dividend payments
are not an allowable deduction against tax
No change is required in the ownership of the company, which is
governed by who owns the shares of the company.
Generally the finance function and the treasury function will work together in
appraising possible investment opportunities and deciding on how they
should be financed.
232
16.6.5 Management of working capital
A company must also decide on the appropriate level of investment in short

term net assets, i.e. the levels of:
inventory
trade receivables (amounts due from debtors for sales on credit)
cash balances
trade payables (amounts due to creditors for purchases on credit).
There are advantages in holding large balances of each component of

working capital, and advantages in holding small balances, as below.
Advantage of large Advantage of

balance small balance
Inventory Customers are happy Low holding
since they can be costs. Less risk
immediately provided with of obsolescence
good. costs.
Trade receivables Customers are happy Less risk of bad

since they like credit. debts.
Good for cash
flow.
Cash Creditors are happy since More can be
bills can be paid promptly. invested
elsewhere to
earn profits.
Trade payables Preserves your own cash. Suppliers are
happy and may
offer discounts

IDENTIFY AND DESCRIBE THE MAIN AUDIT AND ASSURANCE
ROLES IN BUSINESS
16.7.1 Internal auditing is an independent activity, established by

management to examine and evaluate the organisations risk management
processes and systems of control, and to make recommendations for the
achievement of company objectives.
Internal auditors have an unavoidable independence problem. They are

employed by the management of the company and yet are expected to give
an objective opinion on matters for which management are responsible.
233
16.7.2 External auditing is the independent examination of the evidence
from which the financial statements are derived, in order to give the reader of
those statements confidence as to the truth and fairness of the state of affairs
which they disclose.
The fact that employees of the company know that their work may be
inspected by external auditors may encourage them to document their work
properly and dissuade them from fraud.

EXPLAIN THE MAIN FUNCTIONS OF THE INTERNAL AUDITOR
AND THE EXTERNAL AUDITOR
Internal auditing External auditing
Role To advise management on To provide an
whether the organisation has opinion to
sound systems of internal the shareholders
controls to protect the on whether the
organisation against loss. financial
statements give a
true and fair view.
Legal basis Generally not a legal Legal requirement

requirement. However the for large
Combined Code on companies, public
Corporate Governance companies and
recommends that if a listed many public
company does not have an bodies.
internal audit department; it
should annually assess the
need for one.
234
Scope of work Determined by management. Determined by the
Covers all areas of the auditor in order to
organisation, operational as carry out his
well as financial. statutory duty to
report. Financial
focus.
Approach Increasingly risk based. Increasingly risk

Assess risks. Evaluate based.
systems of controls. Test underlying
Test operations of systems. transactions that
Make recommendations for form the basis of
improvements. the financial
statements.
Responsibility To advise and make To form an opinion

recommendations on internal on
control and corporate whether the
governance. financial
statements give a
true
fair view
235
_____________________________________________________________
KEY POINTS
__________________
236
Luca Pacioli, a Franciscan monk was the father of the double-entry system
(1494).
Some of the most important step forward milestones in the field of

accounting have been the implementation of income tax laws and the
more recent scandals involving corporate fraud.
Groups that may have an interest in the financial information of a large

organisation:
managers
shareholders
trade contacts
financial providers
revenue & customs
employees
financial analysts and advisers
government
public
The head of an accounting department is usually a finance director.
Financial Controller's role:

Routine accounting
Providing reports for other departments
Cashiers duties and cash control
Management Accountant's role:

Cost accounting
Budgets and budgetary control
Financial management of projects
Treasurer:
Raising funds by borrowing
Investing surplus funds
Cash flow control
Policy formulation is designed to achieve the organisations objectives.
Financial objectives are outcomes that relate to improving firm's financial

performance.
Strategic objectives are outcomes that will result in greater

competitiveness and stronger long-term market position.
The planning process is conventionally split into 3 timescales:

0 strategic planning
1 tactical planning
2 operational planning
237
A budget is a plan expressed in quantitative (normally financial) terms for
either the whole of a business or for the various parts of a business for
a specified period of time in the future.
Budget variance is the discrepancy between the actual and budgeted

figures.
Whenever a business transaction takes place there is a need to record

the transaction in the accounting records namely in the books of prime
entry (or books of original entry).
The main books of prime entry are:

the purchases day book
the sales day book
the cash book
the petty cash book
the journal
At the accounting year end of the business, the balance is calculated on each
ledger account, and these balances are taken, with any necessary
adjustments as recorded in the journal, to become the financial statements of
the organisation for the period.
10.A balance sheet statement of financial position at the year end shows
the assets owned and the liabilities owed, and how these net assets
st
are financed at a particular point in time, for e.g. as at 31 December
20xx.
An income statement of comprehensive income for the year shows the

revenues earned and the costs incurred, leading to the net profit or
loss arising for the year.
A cash flow statement summarises the cash receipts for the year and the
cash payments paid out, to help readers of the accounts to understand
the liquidity of the business.
Companies must send a copy of their financial statements to each of their

shareholders each year.
Large companies and publicly quoted companies must appoint

external auditors each year to give their independent opinion on
whether the published financial statements have been drawn up
properly and whether they give a true and fair view.
Management Accounting produces information for internal use whilst

financial accounting is produced for an external use.
Management accounting aids management in planning, controlling and
238
decision-making whilst financial accounting is created to record
financial performance and position at a point in time.
There is no legal requirement to produce management accounting.
Format and content of financial accounts must follow accounting

standards and law whilst there is no one way how to do management
accounting. It is a decision entirely based on management.
24. Management accounting includes both financial and non-financial

information.
Treasury management is the:

corporate handling of all financial matters
the generation of external and internal funds for business
the management of currencies and cash flows
the complex strategies, policies and procedures of corporate finance
Tax avoidance is the legal use of the rules of the tax regime to ones own
advantage, in order to reduce the amount of tax payable by means that
are within the law.
22.Tax evasion is the use of illegal means to reduce ones tax liability, for
example by deliberately misrepresenting the true state of your affairs to
the tax authorities.
23.Tax mitigation to mean conduct that reduces tax liabilities without

frustrating the intentions of Parliament.
24.Finance can be raised by either issuing shares or else taking a loan.
25.Working capital is calculated by current assets less current liabilities.
Internal auditing is an independent activity established by management
The practice of internal auditing is not enforced by law but a listed

company needs to have at least an annual internal check as required
by the Combined Code of Corporate Governance
An internal auditor should:

review internal controls and financial reports
review risk management systems
carry out special assignments for example, fraud investigations
conduct operational reviews for example, into efficiency of parts of the
business
239
External auditing is the independent examination of the evidence from
which financial statements are derived, to study if the latter disclose a
true and fair view
240
_____________________________________________________________
QUESTION BANK
__________________
241
Question 1
What is a plan expressed in quantitative terms for a specified future period of

time?
a standard
a policy
a control limit
a budget
Question 2
The planning process can be split into three levels. Which one of the
following is incorrect?
tactical
operational
procedure
strategic
Question 3
Strategic objectives are outcomes that relate to improving firm's financial

performance.
true
false
Question 4
In a manual accounting system, the first record of transactions such as sales

or purchases, from which details are transferred into the accounting
ledgers,is made in the books of prime entry.
true
false
Question 5
Which of the following is not required in the financial statements of a small

company prepared in accordance with International Accounting Standards?
balance sheet
income statement
cash flow statement
auditors' report
242
Question 6
Companies must send a copy to their financial statements to:
all the public

the shareholders
the directors
the suppliers
Question 7
What sort of information will management be interested in for the purpose of

controlling their business?
financial information only

non-financial information only
both financial and non-financial information
Question 8
Both financial and management accounting are required by law.
true
false
Question 9
Any significant divergences between the budgeted and the actual figures
should be reported to the ___________ so that any necessary action can be
taken.
board of directors
treasury manager
appropriate manager
shareholders
Question 10
Financial accountants are vital to keeping business accounts and records.

Management accountants focus on making forecasts. They play a more
strategic role in management and can lead to top roles in businesses.
Whilst the above statement is certainly true, there is a missing point when it
comes to the exact focus of management accounting. Which point is missing?
243
Question 11
Tax avoidance is a legal activity whilst tax evasion is an illegal activity.
true
false
Question 12
The central bank has announced a 2% increase in interest rates. This

decision has the most impact on which department in a large company?
auditing
treasury
financial accounting
production
Question 13
The treasury department of a company can be run as a profit centre that is

expected to generate profits for the company.
true
false
Question 14
If a government was to announce that any profit made on a business

investment was to be tax free which department of an organisation will this
have the greatest impact?
financial accounting
management accounting
treasury
marketing
Question 15
Which of the following responsibilities would not be given to a typical treasury

department?
preparing the annual report and accounts for publication

advising whether new funds should be raised by a share issue or by a
loan
managing the banking relationship
preparing regular cash flow forecasts
244
Question 16
Which of the following is legal?
tax avoidance
tax evasion
overstating deductions in a tax computation to reduce the tax liability
understating income in a tax computation to reduce the tax liability
Question 17
The legal duty for a company to pay the correct amount of tax rests with the
tax advisers of the company.
true
false
Question 18
Which of the following sources of finance is most appropriate to finance the

building of a new factory?
bank overdraft
five-year loan
thirty-year loan
hire purchase
Question 19
McCain Foods is the worlds largest frozen chip manufacturer. Around 45% of
frozen potatoes sold in the UK are made by McCain, making it the clear
market leader. Producing on such a large scale means using a lot of energy
so McCain has set up two projects to reduce the amount of gas and electricity
it has to buy from energy suppliers. The two projects are a wind turbine
system and a wastewater treatment plant. These projects are designed to
produce renewable energy, so are more environmentally sound. One reason
for these innovations is to reduce costs. McCain has ________ that must be
paid whatever the level of production. ____________ like labour and raw
materials are directly linked to the amount of goods produced. The other
reason is to help demonstrate McCains corporate _________________.
Fill in the blanks:
variable costs, fixed costs, social responsibility

fixed costs, variable costs, ethics
fixed costs, variable costs, social responsibility
245
Question 20
To whom is the internal auditor primarily accountable?
the directors of the company

the company as a separate entity
the shareholders of the company
the employees of the company
Question 21
What is the primary responsibility of the external auditor?
to verify all the financial transactions and supporting documentation of the

client
to ensure that the client's financial statements are reasonable accurate and
free from bias
to report all financial irregularities to the shareholders of the client
to ensure that all the client's financial statements are prepared and submitted
to the relevant authorities on time
Question 22
Which one of the following is an example of work the internal auditors might
do in a company?
carrying out special assignments (e.g. fraud investigations)

preparing accounts
dealing with customer complaints
reconciling supplier statements to the accounting systems
Question 23
Which of the following is an important objective of internal control?
to ensure the orderly and efficient conduct of business

to ensure that internal controls are comprehensive in their scope
to ensure the retention of key staff
to ensure that any instances of fraud and error receive appropriate publicity
within the organisation
Question 24
Which of the following is one of the limitations of internal audit?
Unwillingness of staff to co-operate fully with internal audit staff

Lack of motivation to discover malpractice in their own business
Unwillingness to disclose fraud for fear of the repercussions
246
An unavoidable image problem
Question 25
Who gains benefit from the external audit of a company's financial

statements?
the directors only

the shareholders only
only the lenders of funds to a company
all readers of the financial statements
Question 26
To whom is an external audit report addressed?
the directors
the audit committee
the shareholders
all readers of the financial statements
Question 27
The primary purpose of an internal audit is to report on whether the financial

statements give a true and fair view.
true
false
Question 28
Internal auditors look at the management of all risks faced by a company
(operational risks, strategic risks, etc) whereas external auditors concentrate
on financial risks only.
true
false
Question 29
The implementation of a budgetary control system in a large organisation

would be the responsibility of the internal auditor.
True
False
247
Question 30
Who is responsible for the production of financial statements that give a true
and fair view?
the audit committee

the finance department
Question 31
The original role of the accounting function was which one of the following?
Providing management information

Recording financial information
Maintaining financial control
Managing funds efficiently
Question 32
What is the main aim of accounting?
to produce a trial balance

to record every transaction individually
to provide financial information to users of such information
to maintain ledger accounts for every asset and liability
Question 33
The key purpose of an accounting function is to provide information that will

enable senior management to justify its decisions to stakeholders.
True
False
Question 34
The purpose of accounting is to produce financial information that is useful to

a wide range of users. Which of the following information will be of most
interest to shareholders?
proportion of fixed and variable costs

profits
interest rates
248
Question 35
The purpose of accounting is to produce financial information that is useful to

a wide range of users. Which of the following information will be of most
interest to banks?
proportion of fixed and variable costs

profits
interest rates
Question 36
Farrah, Gordon, Helene and Ian work in the finance department of X Co.,
which has separate financial accounting and management accounting
functions. Farrah deals with payroll, the purchase ledger and sales invoicing.
Gordon's duties involve inventory valuation, budgetary control and variance
analysis. Helene deals with fraud prevention and detection, and internal
control. Ian carries out risk assessments, investment appraisals and assists in
projects planning. Which member of the department works in the financial
accounts function?
Farrah
Gordon
Helene
Ian
Question 37
The head of the accounting department is usually:
the accountant
the treasury
the management accountant
Question 38
The accounting department has produced some information on the quantity of

goods sold at different prices. For which other department would this
information be most useful?
production
marketing
purchasing
human resources
249
Question 39
The accounting department has produced some information on the number of

staff in each department and the distribution of their salaries. For which other
department would this information be most useful?
production
marketing
purchasing
human resources
Question 40
Desmond works in the accounting department of JKL Limited. He tells you

that he has spent the day researching interest rates at different banks. In
which section does Desmond work?
cashier
treasury
purchase ledger
Question 41
Celeste works in the accounting department of GHI Limited. She tells you that
he has spent the day preparing a cash flow forecast. In which section does
Celeste work?
cashier
treasury
purchase ledger
Question 42
Anna works in the accounting department of ABC Limited. She tells you that
he has spent the day reconciling suppliers' statements. In which section does
Anna work?
cashier
payroll
purchase ledger
Question 43
Boris works in the accounting department of DEF Limited. He tells you that he
has spent the day vetting potential credit customers. In which section
250
does Boris work?
cashier
sales ledger
purchase ledger
Question 44
What does GAAP stand for?
Group Audit and Accounting Policy

Generally Accepted Accounting Practice
Generally Accepted Audit Practice
Guidelines for Accepted accounting Principles
Question 45
Most management reports are made meaningful by the use of comparison.

Which of the following comparisons is/are likely to be made by an
organization in reviewing financial data?
With other organizations

With budget
With forecast
With prior periods
Question 46
Management reports are often used to make comparisons within the

organization. Where comparisons are made between products, what measure
would be used?
Gross profit
Net profit
Contribution
Return on capital
251
_____________________________________________________________
ANSWER BANK
__________________
252
D
B LT objectives does not include financial objectives only.
Management accounting rely on historical data apart from forcasted data
B the responsibility rests on the directors
253
D
31.B
33.B
All the answers are correct
C contribution refers to how much each product contributes to fixed

costs and profits
254
CHAPTER 17
PRINCIPLES OF LAW AND REGULATION

GOVERNING ACCOUNTING AND AUDIT

EXPLAIN BASIC LEGAL REQUIREMENTS IN RELATION TO
KEEPING AND SUBMITTING PROPER RECORDS AND
PREPARING FINANCIAL ACCOUNTS
Accountability refers to the state of being accountable, liable or answerable

for actions and conduct. In most countries there will be a government
department set up to oversee the regulation and accounts of companies.
Thus, companies in a particular country are accountable to this government
department. In the UK, this government department (regulatory body) is
Companies House.
Most countries have a law which governs the preparation of financial

statements. The name of this law varies from country to country, as does the
content. The companies legislation in many commonwealth countries is
based on the UK Companies Act.
The Companies Acts in the UK require that financial statements are prepared
which give a true and fair view, that is, they follow accounting standards,
follow generally-accepted best practice and have information of sufficient
quantity (adequately detailed) and quality (reasonably accurate) to satisfy the
reasonable expectations of the users. Under companies legislation,
directors are responsible for producing financial statements which give a
true and fair view.

EXPLAIN THE BROAD CONSEQUENCES OF FAILING TO COMPLY
WITH THE LEGAL REQUIREMENTS FOR MAINTAINING
ACCOUNTING RECORDS
Failing to keep the proper accounting records and preparing financial

statements that do not give a true and fair view are criminal offences and may
lead to prosecution. The responsibility is that of the directors and they can be
fined for failure to comply.
There could be problems with the tax authorities if records are found to be
incorrect; the tax authorities could investigate, and if the tax paid is too low,
then, the company is guilty of tax evasion, which is a crime. If the poor
255
accounting records means that the financial statements do not give a true and
fair view, and if this is detected by the auditor, the external auditor could give
a qualified audit report. This will damage the company's reputation and could
make it harder to borrow money and to get shareholders to invest.
Poor accounting records could also mean that the company has inadequate
records of receivables and payables. It could therefore fail to collect money
owed from customers which will damage cash flow, and pay suppliers on time
which could lead to suppliers cancelling credit facilities. These issues could
eventually lead to financial difficulties and the company going out of business.
The accounting function which is very keen to be self-regulated has to follow

the requirements of the Companies Act and tax authorities in order to avoid
the company facing legal action. By the 1970's, this meant that there was a
multitude of different accounting standard worldwide making it very difficult for
investors to compare the financial statements of companies in different
countries. In 1973, the International Accounting Standards Committee
(IASC) was formed to try to harmonise (make similar) accounting standards
in different countries. In 2001 the IASC was replaced by the
International Accounting Standards Board (IASB).

EXPLAIN HOW THE INTERNATIONAL ACCOUNTANCY
PROFESSION REGULATES ITSELF THROUGH THE
ESTABLISHMENT OF REPORTING STANDARDS AND THEIR
MONITORING
The International Accounting Standards Board (IASB) is an independent,

private-sector body that develops and approves International Financial
Reporting Standards (IFRS). The IASB operates under the oversight of the
International Accounting Standards Committee Foundation (IASCF).
The international accountancy profession regulates itself through the

International Accounting Standards Board (IASB). A new standard starts
life as Discussion Paper (DP). The IASB assigns a working group to develop
a new standard, following input from the Standards Advisory Council (SAC)
and produces a first draft with some points for discussion. This is then made
available for public comment.
The views expressed on the Discussion Paper (DP) are taken into account in
producing the next draft, known as Exposure Draft (ED). Again public
comment is invited. Finally an IFRS is issued. The IFRS may later be
amended if necessary.
The objectives of the IASB are:

Under the IASCF Constitution, the objectives of the IASB are:
256
to develop, in the public interest, a single set of high quality, understandable
and enforceable global accounting standards that require high quality,
transparent and comparable information in financial statements and other
financial reporting to help participants in the world's capital markets and other
users make economic decisions
to promote the use and rigorous application of those standards; and
in fulfilling the objectives associated with (a) and (b), to take account of, as
appropriate, the special needs of small and medium-sized entities and
emerging economies; and
to bring about convergence of national accounting standards and

International Accounting Standards and International Financial Reporting
Standards to high quality solutions
257
_____________________________________________________________
KEY POINTS
__________________
258
Accountability refers to the state of being accountable, liable or
answerable for actions and conduct.
In the UK, the government department (regulatory body) is Companies

House.
The companies legislation in many commonwealth countries is based on

the UK Companies Act.
Financial statements need to be prepared giving a true and fair view:

follow accounting standards
follow generally-accepted best practice
have information of sufficient quantity (adequately detailed) and quality
(reasonably accurate)
Under companies legislation, directors are responsible for producing

financial statements which give a true and fair view.
Failing to keep the proper accounting records and preparing financial

statements that do not give a true and fair view are criminal offences
and may lead to prosecution.
If the financial statements do not give a true and fair view, and if this is
detected by the auditor, the external auditor could give a qualified audit
report.
The International Accounting Standards Committee (IASC) was formed

to try to harmonise (make similar) accounting standards in different
countries.
In 2001 the IASC was replaced by the International Accounting Standards

Board (IASB).
The International Accounting Standards Board (IASB) is an

independent, private-sector body that develops and approves
International Financial Reporting Standards (IFRS).
The IASB operates under the oversight of the International Accounting

Standards Committee Foundation (IASCF).
The international accountancy profession regulates itself through the

International Accounting Standards Board (IASB).
A new standard starts life as Discussion Paper (DP).
The IASB assigns a working group to develop a new standard, following

input from the Standards Advisory Council (SAC).
The views expressed on the Discussion Paper (DP) are taken into
259
account in producing the next draft, known as Exposure Draft (ED).
The IFRIC gives guidance/interpretation on issues that are not covered in an

accounting standard or where the guidance is conflicting.
260
_____________________________________________________________
QUESTION BANK
__________________
261
Question 1
Which of the following bodies oversees company registration in the UK?
Companies Act
Companies House
Companies Home
Companies Officer
Question 2
Which of the following are disadvantages of having legislation which governs

the preparation of financial statements?
guaranteed minimum levels of disclosure of financial matters

make accounts more comparable
increased regulatory requirements lead to increased costs
investors have more faith in financial statements
Question 3
Which of the following is necessary for a company to have proper accounting

records?
there should be a computerised system

the finance director should be a qualified accountant
there should be control accounts
they should show and explain the transactions
Question 4
Which of the following is not necessary in order for a company to have proper
accounting records?
they should show and explain the transactions

there should be a computerised general ledger
there should be a record of income and expenses
there should be a record of assets and liabilities
Question 5
Which section of the accounting department has most involvement in

preparing the financial statements?
financial reporting
taxation
treasury
262
Question 6
Which section of the accounting department is unlikely to be involved in the

preparation of the financial statements?
inventory
sales ledger
treasury
non-current assets
Question 7
What are the potential consequences of financial statements failing to give a

true and fair view?
the company will be struck off the register of companies

the company will be forced to place a statement to that effect on its website
the directors will be forced to resign
the auditors will give a qualified audit report
Question 8
Which of the following is not a potential consequence of failing to keep proper

accounting records?
the directors will be asked to resign

the directors will be prosecuted and fined
true and fair accounts will not be produced
customers may not be chased for payment
Question 9
Who is responsible if the financial statements do not give a true and fair
view?
the directors
the chief executive officer
the auditor
Question 10
Which of the following is an advantage of harmonising accounting standards

worldwide?
263
all financial statements will be identical
users will be able to compare financial statements more easily
financial statements will be in accordance with the law
laws around the world will be harmonised
Question 11
Which of the following are consequences of failure to comply with the legal
requirements of maintaining financial records?
fines
prosecution
difficulties raising finance
unqualified audit report
damaged reputation
qualified audit report
a, b, e and f only
a, b, c and d only
a, b, c, d and e only
a, b, c, e and f only
Question 12
Which of the following produces accounting standards?
IASB
SAC
IASCF
IFRIC
Question 13
Which of the following produces interpretations?
IASB
SAC
IASCF
IFRIC
Question 14
Which of the following consults with the users of accounts?
IASB
SAC
IASCF
IFRIC
264
Question 15
Which of the following raises money?
IASB
SAC
IASCF
IFRIC
Question 16
Which of the following is produced as part of the process of preparing

international accounting standards (IASs)?
interpretation
exposure draft
directive
regulation
Question 17
Which of the following is NOT produced as part of the process of preparing

IASs?
interpretation
exposure draft
discussion paper
Question 18
Which of the following is produced as part of the process of preparing IASs?
discussion paper
legislation
recommendation
pronouncement
Question 19
Which of the following is not produced as part of the process of preparing

IASs?
exposure draft
recommendation
discussion paper
265
Question 20
Why does the accounting profession want to develop accounting standards?
it wants to have influence over their content

members of Parliament are too busy
it wants to make sure they are very easy
the Companies Act is out of date
Question 21
The major purpose of the IASB is to ensure consistency in ___________?
financial reporting
corporate reporting
external auditing
266
_____________________________________________________________
ANSWER BANK
__________________
267
B
268
CHAPTER 18
THE SOURCES AND PURPOSE OF

INTERNAL AND EXTERNAL
INFORMATION, PROVIDED BY BUSINESS

DESCRIBE THE VARIOUS PURPOSES FOR WHICH THE FOLLOWING
FINANCIAL INFORMATION IS REQUIRED
18.1.1 The Income Statement
The income statement lists revenues and expenses and calculates the
company's net income or net loss for a period of time. Net income means
total revenues are greater than total expenses. Net loss means total
expenses are greater than total revenues.
It serves as the basic measuring stick of profitability. The income statement

provides important financial information to business managers, investors,
lenders, and analysts.
18.1.2 The Statement of Cash flows
The statement of cash flows reports the cash receipts, cash payments, and
the net change in cash resulting from the operating, investing, and financing
activities of a company during the period.
The cash flow statement is intended to:
provide information on a firm's liquidity and its ability to change cash flows
in future circumstances
provide additional information for evaluating changes in assets, liabilities
and equity
improve the comparability of different firms' operating performance by
eliminating the effects of different accounting methods
indicate the amount, timing and probability of future cash flows
18.1.3 The Statement of Financial Position
The statement of financial position shows what resources are owned by a

business ("assets") and what it owes to other parties ("liabilities") at a
particular point in time. It also shows how much has been invested in the
business and what the sources of that investment finance were.
269
18.1.4 Sustainable Integrated Reporting
Sustainable integrated reporting aims to develop a framework for reporting

financial, environmental, social and governance information in an integrated
format. This information leads to the creation of value over the short, medium
and long term because it helps businesses to take more sustainable
decisions and enable investors and other stakeholders to understand how the
organisation is in fact performing.

DESCRIBE THE MAIN PURPOSES OF THE FOLLOWING TYPES OF
MANAGEMENT ACCOUNTING REPORTS
18.2.1 Cost Schedules

Cost schedules are used to calculate the cost of producing products for a
period of time. The cost of goods amount is transferred to the finished goods
inventory account during the period and is used in calculating cost of goods
sold on the income statement.
Wages and salaries

Departmental costs
Cost of sales
Selling expenses
Administration costs
18.2.2 Budgets
Budgets are part of a company's planning system. It is a set of interlinked

plans that quantitatively describe an entity's projected future operations. A
budget is used as a yardstick against which to measure actual operating
results, for the allocation of funding, and as a plan for future operations.
18.2.3 Variance Reports
Once a budget is established, one of the main financial tasks is to explain

variances between actual performance and the budget. It may be things have
changed from the budget. Volume may have changed increased, or there
may have been unexpected price increases.
270
_____________________________________________________________
KEY POINTS
__________________
271
The income statement lists revenues and expenses and calculates the
company's net income or net loss for a period of time.
The statement of cash flows reports the cash receipts, cash

payments, and the net change in cash resulting from the operating,
investing, and financing activities of a company during the period.
The statement of financial position shows what resources are owned by

a business ("assets") and what it owes to other parties
("liabilities") at a particular point in time. It also shows how much has
been invested in the business and what the sources of that investment
finance were.
Cost schedules are used to calculate the cost of producing products for a
period of time.
Budgets are part of a company's planning system. It is a set of interlinked

plans that quantitatively describe an entity's projected future
operations.
272
CHAPTER 19
FINANCIAL SYSTEMS, PROCEDURES

AND RELATED IT APPLICATIONS
IDENTIFY AN ORGANISATIONS SYSTEM REQUIREMENTS IN
RELATION TO THE OBJECTIVES AND POLICIES OF THE
ORGANISATION
Accounting systems lay down procedures and guidelines that reflect

the Companys policies.
In an organisation there are many transactions and roles therefore, an

organisation may opt to implement more formal rules and procedures policy
to ensure the management are able to keep control of the activities.
For example, having in place an authorisation policy for the purchase of

accepting new customers, new suppliers etc.
In a smaller organisation, such procedures and rules can be communicated

orally by the management, however in a larger organisation this might not be
impossible therefore a more formal procedure may be needed. This could be
in the shape of a policy manual.
Effective systems and procedures should ensure that:
Relationships with customers are effectively managed

Relationships with suppliers are effectively managed
Office functions interrelate properly and are not duplicate
273
DESCRIBE THE MAIN FINANCIAL SYSTEMS USED WITHIN AN
ORGANISATION
19.2.1 Purchases and sales invoicing and Credit control
Purchasing is an important area to control particularly if items are of a high

value. The organisation is likely to insist on a specific authorisation procedure
especially for the purchase of non-current assets.
Inputs to a purchase ledger system include:

Details of purchases recorded on invoices
Details of returns to suppliers for which credit notes are received
Details of payments to suppliers
Features Aims
Ordering All orders for, and expenditure on, goods and services are properly
authorised, and are for goods and services that are actually received
and are for the company
Orders are only made to authorised suppliers
Orders are made at competitive prices
Receipt & Goods/services used only for the organisations purposes
Invoices Goods/services only accepted if ordered & authorised
Goods/services are accurately recorded
Liabilities recognised for all goods/service
Credits for which the business is due are claimed
A receipt is needed to ensure a business establish a liability
Accounting Expenditure is authorised goods actually received
Expenditure is recorded in the nominal and purchase ledger
Credit notes recorded
Entries made to the correct ledger
Cut-off is applied correctly to the ledger
For sales, businesses want only to give credit to those customers who can
settle their debts. The sales ledger will help track what is owed by each
customer.
Inputs to a sales ledger system include:

Amendments customer details, new customers etc
Transaction data Sales, customer payments, credit notes
274
Features Aims
Ordering & granting of credit Goods/service to only to customers with good credit
ratings
Customers pay promptly
Orders recorded correctly
Orders are fulfilled
Despatch & invoicing Despatches of goods are recorded
Goods/services sold are correctly invoiced
All invoices raise relate to goods/services supplied
Credit notes only given for valid reasons
Recording, accounting & Sales invoiced and recorded
credit control Credit notes issues and recorded
Entries in sales ledger made to the correct ledger
Cut-off applied
Doubtful debtors identified
19.2.2 Payroll
The key functions of payroll are:

Documents and authorisation of staff changes
Calculation of wages and salaries
Payment of wages and salaries
Authorisation of deductions
Features Aims
Setting of wages and salaries Employees are only paid for work they have
done
Gross pay calculated correctly and
authorised
Recording of wages and salaries Gross/Net pay and deductions are
accurately recorded
Wages and salaries paid are recorded
correctly in the bank and cash records
Wages and salaries are correctly recorded
in the general ledger
Payment of wages and salaries The correct employees are paid
Deductions Statuary and non-statuary deductions have
been calculated correctly and authorised
The correct amounts are paid to the taxation
authorities
275
19.2.3 Cash & Working Capital
Cash and petty cash and therefore working capital must be regularly
reconciled. The forms of payment to a business could be through:
Company cheque
Bank transfer
Internet transfer
Standing order/direct debit
A control of receipt is fundamental if the company is to keep a healthy

cash/working capital position. Therefore:
Receipts must be banked promptly
The record of receipts must be complete
The loss of receipts through theft or accident must be prevented
Cash controls must be strict. They should apply to the smallest and the
largest of transactions. The three main steps to applying control over
cash/working capital payments are:
Documentary evidence to prove that the purchase is required

An authorisation of the payment
Restricting the authority to actually make the payment to a certain number
of individuals

EXPLAIN WHY IS IT IMPORTANT TO ADHERE TO POLICIES AND
PROCEDURES FOR HANDLING CLIENTS MONEY
Financial transactions are properly carried out

The assets of the business are safeguarded
Accurate and timely management information is produced

IDENTIFY WEAKNESSES, POTENTIAL FOR ERROR AND
INEFFICIENCIES IN ACCOUNTING SYSTEMS
Cash or cheques going missing

Excessive bad or doubtful debts
Customers not paying within credit
terms Suppliers not being paid on time
Unauthorized purchases being made
Failure to produce accounts or other reports at the specified time
276
RECOMMEND IMPROVEMENTS TO ACCOUNTING SYSTEMS TO
PREVENT ERROR AND FRAUD AND TO IMPROVE OVERALL
EFFICIENCY
Cheques over a certain amount of money need two signatories

Authorization limits for purchase orders
Authorization for petty cash and expenses claims
Effective credit control procedures
Computer security procedures and access levels

EXPLAIN WHY APPROPRIATE CONTROLS ARE NECESSARY IN
RELATION TO BUSINESS AND I T SYSTEMS AND PROCEDURES
Management must have control over the following areas:
Sales on credit made to new customers if a sale is made on credit

the goods are sent out with a promise from the customer to pay in the
future therefore the management of the business must be as certain as
they can be that this new customer can, and will, pay for the goods
which means that the credit controller must be happy that the new
customer has a good credit rating and is fairly certain to pay for the
goods
Purchases of goods or non-current assets and payments for expenses
this is money going out of the business therefore it is essential that
these are necessary and valid expenditures so a responsible official
must authorize them
Payroll one of the largest payments made by most organizations is
that of the wages bill for their employees. It is essential that only bona
fide employees are paid for the actual hours that they have worked
therefore authorization of the payroll is a very important part of any
business
19.7 ACCA SYLLABUS GUIDE OUTCOME 7 and 8

IDENTIFY BUSINESS USES OF COMPUTERS AND IT SOFTWARE
APPLICATIONS
DESCRIBE AND COMPARE THE RELATIVE BENEFITS AND
LIMITATIONS OF MANUAL AND AUTOMATED FINANCIAL
SYTSTEMS THAT MAY BE USED IN AN ORGANISATION
19.7.1 Spreadsheet application
A spreadsheet is essentially an electronic piece of paper divided into rows

and columns with a built in pencil, eraser and calculator. It provides an easy
way of performing numerical calculations
277
Spreadsheets have many uses within the business arena. From creating
balance sheets, income statements, financial accounts etc but also help
develop an informed and structured decision.
19.6.2 Database system
A database has many uses and consists of pooled data available to not only
the accounts department but usually the whole organisations.
There are three main virtues of a database:
Common data for all users

That extra effort is required in different departments to avoid duplication
Conflicts between departments who have conflicting data are avoided
A database should have 4 main objectives:
Shared information. Different users within different departments should be

able to access the same information
The integrity of the database must be preserved.
The database should meet the requirements of all users
The database should be capable of evolving
278
279
_____________________________________________________________
KEY POINTS
__________________
280
A system is a group of independent but interrelated elements comprising
of a unified whole, that is, a system is a process for obtaining an
objective.
A policy is a guiding principle.
A procedure is a series of acts.
A guideline is a recommended approach for conducting a task.
In a large organisation a more formal procedure is generally needed and

this is held possible by using a policy manual.
281
_____________________________________________________________
QUESTION BANK
__________________
282
Question 1
You are given the following extract from a systems manual:

....... the purchase officer gives a copy of the purchase order to the goods
inwards department and another to the accounts department. When the
invoice is received the accounts clerk matches it with the order to ensure that
the price charged is correct. The invoice is passed to the requisitioning
department for approval, and then entered into the accounts.....
What does this extract describe?
a system
a policy
a procedure
a guideline
Question 2
You are given the following extract:

... the clerk multiplies the hours worked by the hourly rate to determine the
gross pay...
What does this extract describe?
a system
a policy
a procedure
a guideline
Question 3
Which of these is an advantage of having a formal procedure for carrying out

a task?
all transactions should be recorded in an identical way

staff are allowed to be creative
staff are allowed to use their judgement more
it can be rather inflexible
Question 4
Which of the these is not an advantage of having a formal procedure for

carrying out a task?
transactions can normally be recorded more quickly as the learning effect is

reduced
transactions should be recorded uniformly
best practice can be adopted by all staff
283
it reduces flexibility
Question 5
Which of the following is not a stage in the purchasing cycle?

receipt of goods
receipt of cash
placing of order
matching of invoices with orders and goods received notes
Question 6
Which of the following documents would not appear in the purchasing cycle?
order
invoice
time sheet
goods received note
Question 7
Which of the following is not a stage in the wages system?
entering details from timesheets

authorising of clockcards
transfer from the company's bank account
payment of invoice
Question 8
Which of the following is not the name of a document used to record hours
worked?
clockcard
punchcard
watchcard
timesheet
Question 9
Which of the following is a term used in the petty cash system?
timesheet
goods received note
requisition
voucher
284
Question 10
Which of the following is not a category of inventory?
accrual
raw materials
work-in-progress
finished goods
Question 11
Which of the following is not a purpose of organisational control?
safeguarding assets
preventing fraud
avoiding foreign exchange risk
efficiency
Question 12
Which of these controls relates to the purchasing system?
agreeing invoices to goods received notes

checking creditworthiness
authorising timesheets
keeping the finished goods warehouse locked
Question 13
Which of these controls relates to the sales system?
agreeing invoices to goods received notes

checking creditworthiness
authorising timesheets
keeping the finished goods warehouse locked
Question 14
Which of the following is not a feature of an automated system?
uniform processing of transactions

lack of segregation of functions
simple to correct errors
potential for increased management supervision
Question 15
Which of the following is a feature of an automated system?
285
low capital costs
no computer training required
system will not crash
Question 16
Which of the following is not a disadvantage of a manual system?
slower at performing calculations

more likely to make calculation errors
analysis of information is more time consuming
cheaper to set up
Question 17
Which of the following is not a disadvantage of an automated system?
capital cost
training cost, especially for older staff
information easy to analyse
systems can crash
Question 18
Which of the following is not an advantage of an automated system?
lower capital cost

can perform more complex calculations
more security (passwords)
easier to sort and analyse data
Question 19
Which of the following is not a feature of an automated system?

lack of segregation of functions
simple to correct errors
potential for increased management supervision
Question 20
Which of the following is a feature of an automated system?

low capital costs
no computer training required
286
system will not crash
Question 21
Which of the following is not a disadvantage of a manual system?
slower at performing calculations

more likely to make calculation errors
analysis of information is more time consuming
cheaper to set up
Question 22
Which of the following is not a disadvantage of an automated system?
capital cost
training cost, especially for older staff
information easy to analyse
systems can crash
Question 23
Which of the following is not an advantage of an automated system?
lower capital cost

can perform more complex calculations
more security (passwords)
easier to sort and analyse data
Question 24
A series of cells arranged in columns and rows which can contain

calculations, numbers or text is called a:
Word document
Spreadsheet
Calculation sheet
Cell document
287
_____________________________________________________________
ANSWER BANK
__________________
288
A
289
290
CHAPTER 20
INTERNAL CONTROLS, AUTHORISATION,

SECURITY AND COMPLIANCE WITHIN
BUSINESS
EXPLAIN INTERNAL CONTROL AND INTERNAL CHECK
Internal control is the process designed and affected by management to

provide reasonable assurance on:
(Definition based on the Auditing Practices Board Glossary of Terms)
reliability of financial reporting

effectiveness and efficiency of operations, and
compliance with applicable laws and regulations.
Internal check is an element of internal control, concerned with ensuring that

no single task is executed from start to finish by only one person. Each
individuals work is subject to an independent check by another person in the
course of that other persons duties. The purpose of internal checking is to
reduce the likelihood of errors and fraud. Errors should be reduced since an
employee will take more care over their work if they know it is going to be
looked at by someone else.
291
Components of Internal Control
the control environment

the entitys risk assessment process
control activities
the information system relevant to financial reporting
monitoring of controls.
292
The term internal control can refer to any of these five components.
The control environment is the overall attitude of management regarding

internal controls and their importance. It encompasses managements
philosophy, e.g. a commitment to integrity and ethical values, a formal
organisation structure and proper training of staff.

EXPLAIN THE IMPORTANCE OF INTERNAL FINANCIAL
CONTROLS IN AN ORGANISATION
DESCRIBE THE FEATURES OF EFFECTIVE INTERNAL FINANCIAL
CONTROL PROCEDURES IN AN ORGANISATION
The purpose of internal control is implied to help management achieve the

entitys objectives, especially in terms of ensuring:
the orderly and efficient conduct of the business

the safeguarding of assets
the prevention and detection of fraud and error
the accuracy and completeness of the accounting records, and
the timely preparation of reliable financial information.
20.2.1 The importance of internal controls
Internal controls are there to prevent risks occurring or to minimise the impact
of risks (i.e. to help prevent things going wrong). Even when controls are in
place documents may still get lost or portable assets may go missing. The
level and extent of internal controls required depend on what the risks are if
such controls fail. It is particularly important that stringent controls exist where
there are associated legal requirements.
293
Most internal controls are of great interest to the external auditor. If internal
controls are believed to be very reliable from the external auditor point of
view, that will mean that the amount of substantive testing (tests to identify
errors and omissions in financial records) of transactions and resultant
balances in the ledger accounts will be reduced.
Internal controls are fundamental to internal auditors. They have to make

decisions on the extent of reliance on controls to manage risks to provide
assurance that the corporate governance requirements as being met.

DESCRIBE THE RESPONSIBILITIES OF MANAGEMENT FOR
INTERNAL FINANCIAL CONTROL
It is managements responsibility to establish proper internal control

arrangements within their company. This responsibility may derive from
statutory requirements or from general corporate governance arrangements.
This requirement is set out more clearly in the Combined Code on Corporate
Governance. Principle C2 of the Code states that: The board should maintain
a sound system of internal control to safeguard shareholders investment and
the companys assets.
Provision C2.1 of the Code goes on to explain that the board should, at least
annually, conduct a review of the effectiveness of the system of internal
controls and should report to shareholders that they have done so. This
review must cover all material controls, including financial, operational and
compliance controls and risk management systems.
In its annual assessment of internal control, the board should consider:
The changes in the nature and extent of significant risks since the last
annual assessment.
The scope of managements ongoing monitoring of risks, including the
reports management has made to the board and any relevant work by
internal audit.
The incidence of any significant control failings or weaknesses that have
been identified during the year.
Internal financial control is part of overall internal control. Although the

auditors, for example, will be particularly interested in testing and reporting on
the financial controls, the board is responsible for all the controls in the
company: financial, operational and compliance controls.
294
IDENTIFY AND DESCRIBE FEATURES FOR PROTECTING THE
SECURITY OF IT SYSTEMS AND SOFTWARE WITHIN BUSINESS
DESCRIBE GENERAL AND APPLICATION SYSTEMS CONTROLS
IN BUSINESS
Different books identify different categories of control activities. One

possibility is:
Authorisation
Comparison
Computer controls
Arithmetical controls (include pre-list, post-lists and control totals)
Maintaining a trial balance and control accounts
Accounting reconciliations
Physical controls.
(Use the mnemonic ACCA MAP to remember these categories.)
Monitoring of controls is a process to assess the quality of internal control

performance over time. It involves assessing the design and operation of
controls on a timely basis and taking necessary corrective actions.
Compliance failures may arise because of lack of staff motivation or through
poor training and supervision.
Alternative analysis of internal controls

Preventive controls
These are controls that prevent risks occurring. For example, authorisation
controls should prevent fraudulent or erroneous transactions taking place.
Other preventive controls include segregation of duties, recruiting and training
the right staff and having an effective control culture.
Detective controls
These are controls that detect if any problems have occurred. They are
designed to pick up errors that have not been prevented. These could be
exception reports that reveal that controls have been circumvented (for
example, large amounts paid without being authorised). Other examples
could include reconciliations, supervision and internal checks.
Corrective controls
These are controls that address any problems that have occurred. Basically,
corrective controls are aimed at restoring the system to its expected state.
Having backup configuration files or hard drive images that can be reloaded
to restore the state are both good examples. So where problems are
identified, the controls ensure that they are properly rectified.
Clearly the most powerful type of control is preventative. It is more effective to

have a control that stops problems occurring rather than to detect or correct
them once they have occurred. There is always a possibility that it is too late
to sort out the problem.
295
Other Classifications
Classifications Details
Discretionary Controls which are subject to human discretion.
Non-discretionary Controls automatically provided by the system and

cannot be overridden eg. use of password.
Voluntary Controls chosen by the organization to support

management.
Mandated Required by law and imposed by external

authorities.
Manual These controls demonstrate a one-to-one

relationship between the processing functions and
controls and the human functions.
Automated These controls are programmed procedures

designed to prevent, detect and correct errors all
the way through processing.
Types of Audit
Internal audit is a management control, as it is a tool used to ensure that

other internal controls are working satisfactory.
Different types of audit can be distinguished:
Operational audit concerned with overall managements performance

including outputs of the system and efficiency of the organization.
Systems audit based on testing and evaluation of the internal controls

including compliance tests to see that controls are applied as they should
and substantive tests used to discover errors and omissions.
Transaction audit
Social audit
Management investigations.
296
_____________________________________________________________
KEY POINTS
__________________
297
1. Internal control is the process designed and effected by management
to provide reasonable assurance on:
reliability of financial reporting
effectiveness and efficiency of operations, and
compliance with applicable laws and regulations
Internal check is an element of internal control with the purpose of

reducing the likelihood of errors and fraud
Components of Internal Control

the entitys risk assessment process
control activities
the information system relevant to financial reporting
monitoring of controls.
If internal controls are believed to be very reliable from the external auditor
point of view, that will mean that the amount of substantive
testing of transactions and resultant balances in the ledger accounts
will be reduced.
Substantive tests are held to identify errors and omissions in financial

records
Internal auditors have to make decisions on the extent of reliance on

controls to manage risks to provide assurance that the corporate
governance requirements as being met
It is managements responsibility to establish proper internal control

arrangements within their company
The responsibility of keeping proper internal control may derive from

statutory requirements or from general corporate governance
arrangements
The board should, at least annually should conduct a review of the

effectiveness of the system of internal controls and should report to
shareholders that they have done so
Different categories of control activities:

Authorisation
Comparison
Computer controls
Arithmetical controls
Maintaining a trial balance and control accounts
Accounting reconciliations
Physical controls
298
Preventive controls - preventing risks from occurring
Detective controls controls that detect if any problems have occurred
Corrective controls controls that address any problems that have

occurred
299
_____________________________________________________________
QUESTION BANK
__________________
300
Question 1
If a company's internal controls are very well designed, they eliminate the risk
of failing to achieve the company's objectives?
true
false
Question 2
Which of the following is not one of the components of internal control?
the entity's risk assessment

the documentation of control procedures
the monitoring of controls
Question 3
A formal organisation structure is part of which of the five components of

internal control?
the entity's risk assessment

the documentation of control procedures
the monitoring of controls
Question 4
Would an external auditor prefer to carry out an audit of a large company

using exclusively substantive testing, or would he prefer to be able to rely on
the internal controls of the business having carried out tests on those
controls?
A. use exclusively substantive testing

rely on internal controls
Question 5
Which of the following are substantive tests used for in the context of external
audit of financial accounts?
to establish whether a figure is correct

to investigate why a figure is incorrect
to investigate whether a figure should be included
to establish why a figure is excluded
301
Question 6
Which of the following is an aim of internal control?
to eliminate the possibility of poor judgement

to ensure the total accuracy of internal and external reporting
to eliminate the risk of human error
to help ensure compliance with applicable laws and regulations
Question 7
In the context of audit, what are substantive tests designed to accomplish?
to establish the causes of errors and omissions in financial records

to identify errors and omissions in financial records
to establish whether internal controls are being applied as prescribed
to test dangerous substances for their safety when being used
Question 8
Internal controls are of great interest to the external auditor because:
effective internal controls will reduce the scope of the external audit and help
to moderate audit fees
the absence of internal controls will increase the external audit workload
reliance on internal controls will reduce the amount of substantive testing of
transactions and resultant balances
the absence of internal controls substantially increases the risk of error and
fraud
Question 9
All of an organisation's internal controls would be of interest to the external

auditor.
true
false
Question 10
An internal audit function is normally required by law in a large quoted

company.
true
false
302
Question 11
The audit committee of a listed company is responsibly for the company's

system of internal controls.
true
false
Question 12
How often, as a minimum, does the Combined Code on Corporate

Governance state that the boards of listed companies should conduct a
review of the effectiveness of the system of internal control?
every six months

every 12 months
every two months
Question 13
Who is responsible for there being satisfactory internal controls within a

company?

the audit committee
the internal auditors
the external auditors
Question 14
The external auditors of Company X, a publicly-quoted company with an audit

committee, have discovered a serious weakness in internal financial control
during their audit, but management in undecided whether improvements in
control should be introduced. To whom should the auditors communicate the
details of this weakness in control?
the audit committee

the non-executive directors
the shareholders
the police authorities
Question 15
Calum works in the internal audit department of Z Co. His duties involve the
identification, evaluation and testing of internal controls. He produces reports
to senior management on these activities. For which type of audit is Calum
responsible?
303
operational audit
transactions audit
social responsibility audit
systems audit
Question 16
In order to establish an effective internal control system that will minimise the
prospect of fraud, which one of the following should be considered first?
recruitment policy and checks on new personnel

identification of areas of potential risk
devising of appropriate sanctions for inappropriate behaviour
segregation of duties in critical areas
Question 17
Which of the following internal controls might be least effective in preventing

fraud if staff are colluding with customers?
physical security
authorisation policy
sequential numbering of transaction documents
requiring signatures to confirm receipt of goods or services
Question 18
Segregation of duties ensures that the same person is responsible for

authorising a transaction, recording a transaction, and maintaining custody of
the asset.
true
false
Question 19
Comparing the actual performance of a business with the budgeted
performance for the period is an example of a control activity.
true
false
Question 20
One categorisation of control activities is between preventative controls,

detective controls and corrective controls. Into which category would the
proper segregation of duties be allocated?
304
preventative
detective
corrective
Question 21
Which type of audit is concerned with the evaluation of the internal control of
an organisation?
A. substantive audit
systems audit
operational audit
value for money audit
Question 22
In the context of data security of the following is an example of a physical

access control to protect computer equipment?
data back ups

card entry systems
logical access systems
anti-virus software
Question 23
Which of the following is an advantage of procedures manuals?
keeping the procedures up to date is straightforward

staff initiative is not stiffed since flexibility can be built in to the procedures
a manual can be provided to all staff to ensure easy access to procedures
the manual will normally enable the system to be quickly understood via the
inclusion of a flowchart.
Question 24
A record showing who has accessed a computer system is called:
A fraud trial
An audit trial
A computer trial
A password trial
305
_____________________________________________________________
ANSWER BANK
__________________
306
B
307
308
CHAPTER 21
FRAUD AND FRAUDULENT BEHAVIOUR

AND THEIR PREVENTION IN BUSINESS
EXPLAIN THE CIRCUMSTANCES UNDER WHICH FRAUD AND
THEIR PREVENTION IN BUSINESS
Fraud is an intentional act by one or more individuals among management,

those charged with governance, employees or third parties, involving the use
of deception to obtain an unjust or illegal advantage. (Auditing Practices
Board Glossary of Terms)
For example, managers may deliberately select inappropriate accounting

policies. Employees may seize the proceeds of cash sales and omit to enter
the sale into the accounting records. Third parties may send bogus (fake)
invoices to the company, hoping that they will be paid in error.
21.1.2 The prerequisites of fraud

There are three prerequisites for fraud to occur: dishonesty, opportunity
and motive. All three are usually required for example an honest employee
is unlikely to commit fraud even if given the opportunity and motive. Fraud is
more likely to occur in a business environment with poor or no controls. If the
control environment is soft and management has implemented few specific
control activities, then the potential for fraud is high.
21.1.3 Factors that might increase the risk of fraud and error:
management domination by one person, or a small group of people
unnecessarily complex corporate structure
high turnover rate of key accounting personnel
personnel who do not take leave/holidays
understaffed accounting department
volatile business environment
inadequate working capital
deteriorating quality of earnings
inadequate segregation of duties
lack of monitoring of control systems
unusual transactions in cash, or direct to numbered bank accounts
payments for services disproportionate to effort
significant transactions with related parties
Inadequate IT systems.
309
IDENTIFY DIFFERENT TYPES OF FRAUD IN THE ORGANISATION
EXPLAIN THE IMPLICATIONS OF FRAUD FOR THE
ORGANISATION
Example fraud by management

Financial statement fraud, e.g. window dressing and cooking the books
Misappropriation of assets stealing physical assets or selling property
False insurance claims
Using the companys assets for personal use.
Window Dressing/Cooking the books are the deceptive practices of using

accounting tricks to make a company's balance sheet and
income statement appear better than they really are. A normally used
trick is to enter transactions before year end and then they are
reversed out after the year end.
Example frauds by employees

Sales ledger fraud teeming and lading
Purchase ledger fraud
Skimming schemes
Payroll fraud.
Teeming and lading is a type of fraud normally on the sales ledger

whereby the receipts of later debtors are allocated to pay off earlier
debtors
Skimming schemes is when the fraudster diverts small amounts from a
large number of transactions, believing that no one will bother to
investigate the small differences individually, although in the aggregate
they can total to a worthwhile sum.
Example frauds by third parties

False billing fraud third parties sending bogus invoices to the
company Bank account fraud
Advance fee fraud (419 fraud)
Ponzi/Pyramid schemes
Advance fee fraud is a trick where a company is invited to pay a modest

fee up front in the promise of being paid a large amount in the future.
Ponzi/Pyramid schemes are fraudulent investments offers that involve
paying abnormally high returns to early investors out of the new money
paid in by subsequent investors, rather than from any genuine
underlying business.
310
21.2.1 The possible implications of fraud to the company
There is a spectrum of implications of fraud, including:

Misuse of assets
Loss of assets
Financial difficulties
Collapse of the company

EXPLAIN THE ROLE AND DUTIES OF INDIVIDUAL MANAGERS IN
THE FRAUD DETECTION AND PREVENTION PROCESS
The duties to prevent and detect fraud can be split between:
the duties of the board of directors

the duties of the audit committee
the duties of employees generally (including senior employees below
board level).
21.3.1 The duties of the board of directors

The board of directors is required by the Combined Code to maintain a sound
system of internal control. At least annually, the board should conduct a
review of the effectiveness of the internal control system and should report to
shareholders.
21.3.2 The duties of the audit committee

The audit committee is required by the Combined Code to monitor and review
the company's internal control and risk management systems. This should
ensure the continuing effectiveness of the controls in preventing and
detecting fraud.
21.3.3 The duties of employees

The specific duties of employees are set out in their contract of employment
and in what they are told to do by their supervisors, but there will always be
an implied duty to act honestly and to report suspected or actual frauds
encountered to supervisors. Fraud prevention and detection is the
responsibility of every employee in a company, not just the board of
directors.
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DEFINE THE TERM MONEY LAUNDERING
Money laundering is the practice of covering the origins of illegally-obtained

money. Ultimately, it is the process by which the proceeds of crime are made
to appear legitimate. Laundering allows criminals to transform illegally
obtained gain into seemingly legitimate funds. It seems to be a worldwide
problem. Criminals want their illegal funds laundered because they can then
move their money through society freely, without fear that the funds will be
traced to their criminal deeds. In addition, laundering prevents the funds from
being confiscated by the police.

GIVE EXAMPLES OF RECOGNISED OFFENCES UNDER TYPICAL
MONEY LAUNDERING REGULATION
IDENTIFY METHODS OF DETECTING AND PREVENTING MONEY
LAUNDERING
The biggest source of illicit profits comes from the drugs' trade and it was
drug trafficking that provided the initial catalyst for concerted international
efforts against money laundering. The drugs' industry is a highly cash
intensive business and "in the case of cocaine and heroin the physical
volume of notes received is much larger than the volume of drugs
themselves". In order to rid themselves of this large burden it is necessary to
use the financial services industry and in particular, deposit-taking institutions.
Money laundering usually consists of three steps: placement, layering, and

integration.
Placement is the depositing of funds in financial institutions or the conversion

of cash into negotiable instruments. Placement is the most difficult step. To
disguise criminal activity, launderers route cash through a "front" operation;
that is, a business such as a cheque-cashing service or a jewellery store.
Another option is to convert the cash into negotiable instruments, such as
money orders (similar to a certified cheque) or traveller's cheques (fixed-
amount cheque designed to allow the person signing it to make an
unconditional payment to someone else as a result of having paid the issuer
for that privilege).
The entry of cash into the financial system, (placement stage) is where the
launderer is most vulnerable to detection. Because of the large amounts of
cash involved it is extremely hard to place it into a bank account legitimately
Layering involves the wire transfer of funds through a series of accounts in

an attempt to hide the funds' true origins. This often means transferring funds
to countries outside the country that have strict bank-secrecy laws. Once
deposited in a foreign bank, the funds can be moved through accounts of
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"shell" corporations, which exist solely for laundering purposes. The high daily
volume of wire transfers makes it difficult for law enforcement agencies to
trace these transactions.
Transfers to and from the financial system are also under the umbrella of
reporting of suspicious transactions and this can provide useful information
on the layering stage of the money laundering process. The keeping of
comprehensive transaction records (part of the procedures) by financial
organisations provides a useful audit trail and gives useful information on
people and organisations involved in laundering schemes once discovered.
Integration involves the movement of layered funds, which are no longer

traceable to their criminal origin, into the financial world, where they are
mixed with funds of legitimate origin

EXPLAIN HOW SUSPICIONS OF MONEY LAUNDERING SHOULD BE
REPORTED TO THE APPROPRIATE AUTHORITIES
Today, most financial institutions globally, and many non-financial institutions,

are required to identify and report transactions of a suspicious nature to the
financial intelligence unit in the respective country. For example, a bank must
perform due diligence by verifying a customer's identity and monitor
transactions for suspicious activity. To do this, many financial institutions
utilize the services of special software to gather information about high risk
individuals and organizations.
If a suspicious transaction is identified then this should be reported

immediately either to a nominated Money Laundering Reporting Officer
(MLRO) within their organisation or SOCA (Serious Organised Crime Agency)
For Accountants, the most worrying aspect of the law on money laundering
relates to the offence of failing to disclose. It is relatively straightforward to
identify actual knowledge of money laundering and therefore of the need to
disclose it, but the term suspicion of money laundering is not defined. The
nearest there is to a definition is that suspicion is more than mere speculation
but falls short of proof or knowledge. It is a question of judgement.
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_____________________________________________________________
KEY POINTS
__________________
314
Fraud is an intentional act by one or more individuals
Company fraud may be undertaken by management, employees or third

parties
There are three prerequisites for fraud to occur: dishonesty, opportunity

and motive
Fraud is more likely to occur in a business environment with poor or no

controls.
Examples of fraud by management include:

financial statement fraud
misappropriation of assets
false insurance claims
using company's assets for personal use
Examples of fraud by employees include:

sales ledger fraud
purchase ledger
fraudskimming fraud
payroll fraud
Examples of fraud by third parties include:

false billing
fraudbank
account fraud
advance fee
fraudponzi
schemes
Money laundering is the practice of covering the origins of illegally-

obtained money.
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_____________________________________________________________
QUESTION BANK
__________________
316
Question 1
Which of the following is an example of fraud?
deliberate failure to notify the bank of an error in the company's favour

deliberate failure to pay overdue invoices
deliberate use of all available discounts to minimise the cost of high value
purchases
deliberate suppression of relevant information
Question 2
Which of the following is a false billing fraud?
submission of invoices that contain inflated amounts due

sending bogus invoices for services which have not been provided
invitation to pay a small fee up front to secure a large amount in the future
diversion of small amounts of salary payments to employees
Question 3
Which of the following is not a necessary ingredient of a fraud?
a deliberate act
collusion between two or more persons
deception
an objective of unfair advantage
Question 4
An ineffective control environment can create an opportunity to commit fraud?
true
false
Question 5
Segregation of duties in the accounts department is an effective control to

discourage fraud.
true
false
Question 6
In the context of fraud, teeming and lading is most likely to occur in which
area of operation?
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sales
quality control
advertising and promotion
despatch
Question 7
Which of the following is an example of fraud which could be carried out by

third parties?
window dressing
teeming and lading
skimming schemes
pyramid schemes
Question 8
Which of the following is an advance fee fraud?
diversion of small amounts of salary payments to employees

invitation to pay a small fee up front to secure a large amount in the future
submission of invoices which contain inflated amounts due
a fraudulent investment offer that involves paying abnormally high returns to
early investors out of the new money paid in subsequent investors, rather
than from any underlying business
Question 9
A fraud is always committed by a person inside the organisation, such as an

employee or manager and cannot be committed by a third party external to
the organisation.
true
false
Question 10
Which of the following factors suggests an increased risk of fraud and error in
a company's recording of its transactions?
simple corporate structure

well-resourced internal audit department
stable business environment
employees paid bonuses depending on sales achieved
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Question 11
Which of the following types of fraud is not carried out by a third party to the
business?
419 fraud
Ponzi scheme
false billing fraud
teeming and lading fraud
Question 12
Why would auditors be interested in examining large credit notes issued at

the start of the financial year?
credit notes suggest non-current assets may be stolen

credit notes suggest window-dressing of sales
credit notes suggest cash may be stolen
credit notes suggest purchases may be mis-stated
Question 13
During which type of economic situation do financial statement frauds

normally come to light?
economic boom
economic recession
Question 14
Which of the following controls should discourage a teeming and lading fraud
from being carried out in the payments received department?
two people should be present at the opening of the mail

a list should be prepared at the mail-opening of all monies received
regular rotation of duties in the department
control account reconciliations should be carried out each month
Question 15
The human resources department has no role in preventing fraud in an

organisation.
true
false
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Question 16
Who is primarily responsible for the prevention and detection of fraud in a

company?
the executive directors

the non-executive directors
the board of directors as a whole
the internal auditors
Question 17
The directors of a company are required by law to publish financial

statements that give a true and fair view of the company's financial
performance and position. Thus it follows that any accounts given a qualified
audit report by the external auditors must have been prepared fraudulently by
the directors.
True
False
Question 18
Applying incorrect rates to understate depreciation will result in a higher

profit, giving a more favourable impression of the financial health.
True
False
Question 19
Computers have increased the risk of fraud
True
False
Question 20
A stores manager instructs staff not to record returns of goods to suppliers if

goods are already entered in the system, as this will be sorted out by
accounts department. Is this action fraud?
No
Yes as it results in removal of assets
Yes as it results in intentional misrepresentation of the financial position of a
business
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Question 21
Which of the following would be regarded as fraud prevention measures?
Requiring all quantities to be written in words rather than numbers

Requiring all staff to take full holiday entitlements
Defining standard procedures for normal business operations
All the above
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_____________________________________________________________
ANSWER BANK
__________________
322
D
A depreciation is a calculation therefore it is easier to tamper with
A computers have created a bigger exposure
323
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CHAPTER 22
LEADING AND MANAGING INDIVIDUALS

AND TEAMS
DEFINE LEADERSHIP, MANAGEMENT AND SUPERVISION AND
EXPLAIN THE DISTINCTION BETWEEN THESE TERMS
22.1.1 Leadership
A basic definition of a leader is someone who exercises influence over

other people. This can be expanded into a more complex definition:
Leadership is an interpersonal influence directed toward the
achievement of a goal or goals.
Interpersonal between people.

Influence the power to affect others.
Goal something that we need/want to achieve.
Leadership is a conscious activity and is concerned with setting goals and

inspiring people to provide commitment to achieve the organisations goals.
The leader accepts responsibility for the accomplishment of group objectives.
S/he must discharge this responsibility to the satisfaction of the group;
otherwise, there will be a loss of effectiveness. The organisation of effective
teamwork requires an acknowledgment by the leader that he cannot get
results unaided; that s/he does not himself know all the answers.
22.1.2 Managers
All managers have in common the overall aim of getting things done,
delegating to other people rather than doing everything themselves. It can be
defined as the effective use and coordination of resources such as
capital, plant, materials and labour to achieve defined objectives with
maximum efficiency.
Management can be considered as:

Function the responsibility for directing and running an organisation
Process it incorporates activities by which internal and external
resources are combined to achieve the objectives of the organisations.
These resources include people, money, machines and materials.
Discipline this is both an art and a science in the study of management
Profession this position is achieved only after several years of study and
advanced training and education.
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22.1.3 Supervision
The supervisor is part of the management team.
The supervisor is a person given authority for planning and controlling the
work of their group, but all they can delegate to the group is the work
itself.
A supervisor, therefore, is a type of manager whose main role is to ensure

that specified tasks are performed correctly and efficiently by a defined
group of people.
In general, supervisors will also be doing operations work and giving

advice to others to help in solving problems. If the more senior
manager is absent, the supervisor will take over the role.
A leader can be a manager, but a manager is not necessarily a leader. If

a manager is able to influence people to achieve the goals of the
organisation, without using formal authority to do so, then the manager
is demonstrating leadership.

EXPLAIN THE NATURE OF MANAGEMENT
Some people assert that one needs no knowledge of theory to solve

problems in the practical world of business. In this view, management is a
matter of common sense, and theory either is not needed at all or is
unimportant. Management is entirely an art and not a science. Such views
proceed from MISTAKEN IDEAS about the nature and role of theory and its
relation to action and decision in the real world.
22.2.1 Scientific/Classical theories of management Fayol and

Taylor
A man of considerable influence in the scientific management movement is

Fredrick W. Taylor. Taylor believed that managers should accept special
responsibilities for planning, directing and organising work. He deemed it
essential, to separate the planning of work from its execution, so that each
individual could work at his best efficiency and could be compensated
accordingly. He thought that management should develop a science of doing
work (central authority) and that each kind of work had its own science.
Henri Fayol was a key figure in the turn-of-the-century Classical School of

management theory. He saw a manager's job as:
planning
organising
326
commanding
coordinating activities
controlling performance
These activities are very task-oriented, rather than people-oriented (modern-

view).
Henri Fayol realised that organisations were becoming more complex and
required their managers to work more professionally. His motivation was to
create a theoretical foundation for an educational program for managers who
lacked formal training in those days. Basing his work on his experience as a
successful managing director of a mining company, he developed generic
'Principles of Management' to help organisations achieve optimum
performance working toward their goals and company objectives.
22.2.2 Fayol described fourteen Principles of Management
Division of labour
Achieving the maximum efficiency from labour through specialisation across
all aspects of organisation (commercial, financial, security, accounting,
managerial) rather than just focusing purely on areas of technical activities.
Establishment of authority
Having the legitimate standing to give orders linked with responsibility.
Enforcement of discipline
Upholding discipline is a core activity when running an organisation, although
its form varies across organisations. Management can sanction employees
with warnings, penalties, demotions or even dismissals.
Unity of command
An employee should receive orders from one supervisor only. Dual
command generates tension, confusion and conflict, and results diluted
responsibility and blurred communication.
Unity of direction
A common objective for a group of activities is an essential condition to
obtaining unity of action, coordination of strength and the focusing of effort.
Subordination of individual interest to the interests of the organisation

Reconciling general interest with that of the group or the individual is one of
the greatest problems managers face and applies to the relationship between
staff and supervisor as well. Too often, managers pursue personal interest
rather than the common good.
Fair remuneration for all

Should be fair to both the recipient and the firm
327
Centralisation
Fayol choose the 'living organism' as metaphor for an organisation when
considering centralisation versus decentralisation. The level of centralisation
is a matter of proportion as is the division of labour.
Adoption of a 'scalar chain'

The chain of supervision that connects the managing director to the lowest
ranks. Fayol combined hierarchy that makes employees aware of their place
and duties, with an organisation's lines of communication.
A sense of order and purpose

Workers and materials should be in their prescribed place.
Equity
Equity is the combination of justice and kindness. Managers must constantly
apply the correct balance between equity and discipline.
Stability of jobs and positions/Tenure of personnel

Both staff and management require suitable induction periods to familiarise
themselves with new work habits and situations.
13. Development of individual initiative

Initiative should be encouraged within the boundaries of authority and
discipline.
14. Esprit de Corps

Building and maintaining staff and management morale and unity. Harmony
and teamwork should be encouraged in the organisation.
22.2.3 The human relations school Mayo
Worried by the failure of the industrial engineering approach to achieve high

productivity, the Western Electric Company of Chicago decided to call in
industrial psychologists that came along under the guidance of Elton Mayo,
of Harvard University. For five years, from 1927 to 1932, the team conducted
a series of investigations covering such factors as payment schemes, rest
pauses, and informal group controls over output.
The researchers concluded that group relationships and management worker

communication were far more important in determining employee behaviour
than were physical conditions and the working practices imposed by
management. Also, wage levels were not the dominant motivating factor for
most workers.
Further research established the following propositions of the human relations

school.
328
Employee behaviour depends primarily on the social and
organisational circumstances of work.
Leadership style, group cohesion and job satisfaction are major
determinants of the outputs of the working group.
Employees work better if they are given a wide range of tasks to
complete.
Standards set internally by a working group influence employee attitudes
and perspectives more than standards set by management.
So, why is the human relations approach useful?
The school explicitly recognised the role of interpersonal relations in

determining workplace behaviour, and it demonstrated that factors other than
pay can motivate workers. However, the approach possibly overestimates the
commitment, motivation and desire to participate in decision making of many
employees.
22.2.4 The functions of a manager Drucker - Mintzberg
Peter Drucker is one of the most influential management philosophers of the

modern era. As a consultant, author and speaker for over sixty years, Drucker
influenced the thinking of many executives in businesses and not-for-profits.
According to Drucker, the manager has 5 basic operations in his work:
Develop Set Objectives
The Manager
According to
Drucker
Establish Organise
Yardsticks
Motivate &
Communicate
Henry Mintzberg, on the other hand, identified ten skills which managers
need if they are to develop greater effectiveness, and grouped them together
under three categories, interpersonal, informational and decisional.
329
Interpersonal Example
Figurehead Symbolic role, manager E.g. receiving
obliged to carry out social, visitors
inspirational, legal and and making
ceremonial duties. presentations.
Leader Managers relationship E.g. seeking to

with subordinates, build teamwork
especially in allocating and foster
tasks, hiring, training and employee
motivating staff. commitment.
Liaison The development of a E.g. lunches with

network of contacts suppliers or
outside the chain of customers.
command through which
information and favours
can be traded for mutual
benefits.
Informational Example
Monitor The manager collects and E.g. reading
sorts out information which reports
is used to build up a and interrogating
general understanding of subordinates.
the organisation and its
environment as a basis for
decision making.
Disseminator To be a disseminator E.g. passing
means to spread the privileged
information widely. information to
subordinates.
Spokesperson Managers transmit E.g. a sales

information to various presentation to
external groups by acting Prospective
in a PR capacity, lobbying customers.
for the organisation,
informing the public about
the organisations
performance, plans and
policies.
330
Decisional Example
Entrepreneur Managers should be E.g. launching a
looking continually for new idea or
problems and introducing
opportunities when procedures such
situations requiring as a cost
improvement are reduction
discovered. programme.
Disturbance handler A manager has to respond E.g. strikes.

to pressures over which
the department has no
control.
Resource Choosing from among E.g. approving
allocator competing demands for expenditure on a
money, equipment, project.
personnel and
management time.
Negotiator Managers take charge E.g. drawing up
when their organisation contracts with
must engage in suppliers.
negotiating with others. In
these negotiations, the
manager
participates as figurehead,
spokesperson and
resource allocator.

EXPLAIN THE AREAS OF MANAGERIAL AUTHORITY AND
RESPONSIBILITY
Authority is the right to make decisions in the course of discharging a

responsibility and to require others to accept these decisions and, if
necessary, to enforce them (sense of power).
Authority stems from two main sources. In the first place it owes much to the
position which the manager occupies in the hierarchy. It is of course true that
real authority does not come automatically with the entitlement of using a job
title, but it is undeniable that a person can be materially assisted by the
authority and influence associated with his position. Having said this,
however, it must be recognised that the personal qualities of the individual
his general competence and the confidence which he inspires are even
more important.
331
Responsibility expresses the obligation a person has to fulfill a task, which he
or she has been given. A person is said to be responsible for a piece of work
when he or she is required to ensure that the work is done. Responsibility is
the obligation to use delegated powers. A very important point that everyone
manager has to consider is that managers and supervisors themselves are
ultimately responsible for the actions of their subordinates; The term
accountable is often used.
It is accountability for the performance of specified duties or the satisfactory

achievement of defined company objectives. Because responsibility is an
obligation owed, it cannot be delegated. No superior can escape responsibility
for the activities of subordinates, for it is the supervisor who delegates
authority and assigns the duties.
John French and Bertram Raven identified 5 sources or bases of power
Reward Power is based on one person having the ability to reward

another person for carrying out orders or meeting other requirements
Coercive Power is based on one person's ability to punish another for
not meeting requirements, is the negative side of reward power
Expert Power is based on the perception or belief that a person has
some relevant expertise or special knowledge that others do not
Referent Power is based on one person's desire to identify with or
imitate another
Legitimate Power the power derived from being in a position of authority
within the organisation structure.
332
EXPLAIN THE SITUATIONAL, FUNCTIONAL AND CONTINGENCY
APPROACHES TO LEADERSHIP WITH REFERENCE TO
THEORIES OF ADAIR, FIEDLER, BENNIS, KOTTER AND HEIFETZ
22.4.1 The action centred approach (Adair)
Adair suggests that any leader has to strive to achieve three major goals
while at the same time maintaining a position as an effective leader.
Adairs action centred leadership model looks at leadership in relation to

the needs of the task, individual and group.
Coaching
Counselling
Developing
Motivating
Individual
Needs
Task
Needs
Group
Setting Objectives Needs
Planning Tasks
Allocating Responsibilities Communication
Setting Performance Team Building
Standards Motivation
Discipline
333
22.4.2 The contingency approach - (Fiedler)
Contingency theory sees effective leadership as being dependent on a

number of variable or contingent factors. There is no one right way to lead
that will fit all situations; Rather, it is necessary to lead in a manner that is
appropriate to a particular situation.
Fiedler studied the relationship between style of leadership and effectiveness

of the work group. Two styles of leader were identified.
Psychologically distant managers (PDMs).
Maintain distance from their subordinates by formalising roles and

relationships within the team.
Are withdrawn and reserved in their interpersonal relationships.
Prefer formal communication and consultation methods rather than seek
informal opinion.
Judge subordinates on the basis of performance and are primarily task
orientated.
Fiedler found that leaders of the most effective work groups actually tend
to be PDMs.
Psychologically close managers (PCMs)
Do not seek to formalise roles and relationships.

Prefer informal contacts to regular formal staff meetings.
They are more concerned to maintain good human relationships at work
to ensure that tasks are carried out efficiently.
Fiedler concluded that a structured (or psychologically distant) style works
best when the situation is either very favourable or very unfavourable
to the leader.
On the other hand, a supportive (or psychologically close) style works
best when the situation is moderately favourable to the leader.
He further suggested that group performance would be contingent
upon the appropriate matching of leadership styles and the degree of
favourableness of the group situation for the leader
22.4.3 Transformational leadership (Bennis)
Some of the values used to distinguish between managers and leaders have
also been identified as:
Transactional leaders see the relationship with their followers in

terms of a trade: they give followers the rewards they want in
exchange for service, loyalty and compliance. (doing things right)
Transformational leaders see their role as inspiring and motivating
334
others to work at levels beyond more compliance. Only
transformational leadership is said to be able to change
team/organisational cultures and create a new direction. (doing the
right thing)
22.4.4 Managing change (Kotter)
People resist what they do not understand. People resist what they do not
like. People resist because, We tried that before and it didnt work. People
resist just for the sake of resisting. People resist for many reasons. It is
important to understand the dynamics of resistance and to proactively plan
and deal with such resistance.
Kotter set out the following change approaches to deal with resistance.
22.4.5 Leadership to mobilise (Heifetz)

Heifetz argues that the role of the leader is to help people face reality and to
mobilise them to make change. Heifetz suggests that the old approach to
Heifetz argues that the role of the leader is to help people face reality and to
mobilise them to make change. Heifetz suggests that the old approach to
leadership was that leaders had the answers, the vision and then needed to
persuade people to sign up for the change. Heifetz believes that leaders
provide direction but do not have to offer definite answers and should
mobilise people to tackle the tough challenges for themselves.
335
Leaders have two choices when resolving a situation:
Technical change the application of current knowledge, skills and or

tools to resolve a situation.
Adaptive change is required when the problem cannot be solved with

existing skills and knowledge and requires people to make a shift in
their values, expectations, attitudes or habits of behaviour. This is often
required to ensure organisational survival .

DESCRIBE LEADERSHIP STYLES AND CONTEXTS: USING THE
MODELS OF ASHRIDGE, BLAKE AND MOUTON
22.5.1 Blake and Mouton
Robert Blake and Jane Mouton carried out research into managerial
behaviour and observed two basic dimensions of leadership: concern for
production (or task performance) and concern for people. Based on the
results of staff questionnaires, managers can then be plotted on Blake and
Moutons grid.
Management impoverished: this manager only makes minimum

effort in either area and will make the smallest possible effort
required to get the job done.
Country Club management: this manager is thoughtful and

attentive to the needs of the people, which leads to a comfortable
friendly organisation atmosphere but very little work is actually
achieved.
Task management: this manager is only concerned with production

and arranges work in such a way that people interference is
minimised.
'Middle of the road management': this manager is able to balance

the task in hand and motivate the people to achieve these tasks.
336
Team management: this manager integrates the two areas to foster
working together and high production to produce true team
leadership.
Benefits Drawbacks
The grid shows areas where The grid assumes that
management faults can be leadership style can be
identified and can then categorised into the two
provide the basis for training dimensions and that
and for management results can be plotted on
development. the grid.
As an appraisal and The position of team
management development management is accepted
tool to inform managers that as the best form of
attention to both task and leadership. This may not
people is possible and be practical or indeed
desirable. advisable. In many
Managers can determine how industries, concern for the
they are viewed by their task may be more
subordinates. important than concern for
people, and visa versa
and will always depend on
the individual situation.
22.5.2 Ashridge
Research at Ashridge Management College focuses on four different

management styles.
Tells (autocratic) the manager makes all the decisions and issues
337
instructions which must be obeyed without question.
Strengths
Quick decisions can be made when required.
The most efficient type of leadership for highly programmed work.
Weaknesses
Communications are one way, neglecting feedback and potential for
upward communication or team member input.
Does not encourage initiative or commitment from subordinates,
merely compliance
Sells (persuasive) the manager still makes all the decisions, but believes
that team members must be motivated to accept them in order to carry them
out properly.
Strengths
Team members understand the reason for decisions.
Team members may be more committed.
Team members may be able to function slightly better in the absence of
instruction.
Communications are still largely one way.

Team members are not necessarily motivated to accept the decision.
It still doesnt encourage initiative or commitment.
Consults (participative) the manager confers with the team and takes
their views into account, although still retains the final say.
Strengths
Involves team members in decisions, encouraging motivation through
greater interest and involvement.
Consensus may be reached, enhancing the acceptability of the decision
to team members.
The quality of the decision may benefit from the input of those who do the
work.
Encourages upward communication.
Weaknesses
May take longer to reach decisions (especially if consensus is sought).
Team member input may not enhance the quality of the decision.
Consultation can be a faade for a basic sells style.
Joins (democratic) the leader and the team members make the decision
together on the basis of consensus.
Strengths
Can provide high motivation and commitment from team members.
338
Empowers a team member to take the initiative (e g. in responding flexibly
to customer demands and problems).
Shares other advantages of the consults style (especially where team
members can add value).
Weaknesses
May undermine the authority of the manager.
May further lengthen the decision making process.
May reduce the quality of the decision because of the politics of decision
because of the politics of decision making.
339
_____________________________________________________________
KEY POINTS
__________________
340
341
342
Scientific/Classical theories of Management include the views of Taylor and
Fayol
Taylor believed in the following:

one central authority
specialisation of tasks
fair pay and good working conditions decided by management
clear lines of command
Fayol applied 14 rules of managerial conduct:
division of work centralisation

authority scalar chain
discipline order
unity of command equity
unity of direction tenure of personnel
subordination to the general interest initiative
remuneration espirit de corps
Elton Mayo contributed to the Human Relations School of Management

social and organisational circumstances of work are very important
Leadership style, group cohesion and job satisfaction are major
determinants of the outputs of the working group.
Employees work better if they are given a wide range of tasks to
complete.
Standards set internally by a working group influence employee attitudes
and perspectives more than standards set by management.
Mintzberg's ten skills of management
343
Authority is the right to give orders and may sometimes exert power on others
10.Responsibility is when a person is accountable to do a particular type of

job
11.French & Raven identified 5 types of power:

Reward
Legitimate
Expert
Coercive
Referent
Adairs action centred leadership model looks at leadership in relation to the

needs of the
task
individual
group
Bennis identified two types of leaders

Transformational
Transactional
Heifetz argued that there are two types of choices that the leaders have
infront when they are about to resolve a problem
Technical change
Adaptive change
344
_____________________________________________________________
QUESTION BANK
__________________
345
Question 1
Which of the following statements best describes the classical approach to

management?
No one best approach

Communication should be encouraged
One best approach
Question 2
Which of the following are elements of management as identified by Fayol?
Control
Motivation
Communication
Compromise
Question 3
Which one of the following statements is closest to the beliefs of the classical
school?
Emphasis on social groups

Emphasis on the task to be done rather than the person doing it
Emphasis on the person rather than the task
Emphasis on encouraging people to reach their full potential.
Question 4
Which one of the following statements is closest to the beliefs of the human
relations school?
Emphasis on social groups

Emphasis on the task to be done rather than the person doing it
Emphasis on one best approach
Emphasis on hierarchy of management
Question 5
The manager in the informational role as described by Mintzberg, combines

a spokesperson and disseminator with being a monitor of information.
True
False
346
Question 6
Adrian is the manager of a call centre. Consultants have advised him that by
reorganising his teams to complete highly specific tasks the call centre will be
able to increase the throughput of work significantly, as well as increasing the
number of sales calls made to the public. The reorganisation proposals are
unpopular with many workers, who feel that their jobs will become tedious
and repetitive. The proposal to reorganise the work of the call centre utilises
principles put forward by which school of management thought?
the human relations school

the empirical school
the scientific school
the administrative school
Question 7
Which of the following is one of Fayol's five functions of management?
Communicating
Motivating
Coordinating
Developing
Question 8
Peter Drucker grouped management activities into five categories. Which of

the following is one of those categories?
planning
controlling
commanding
motivating
Question 9
Mintzberg identified 10 managerial roles. Which of these managerial roles

transmits factual and value based information to subordinates?
Liason
Monitor
Disseminator
Spokesperson
Question 10
Which of the following statements could be a definition of responsibility?
347
liability to be called to account
accountability for actions
an obligation owed
Question 11
If a manager justifies an instruction to a subordinate by saying because I am

a qualified accountant, the manager is relying on which of the following
bases of power?
referent
reward
legitimate
expert
Question 12
Which of the following is not one of the five sources or bases of power
identified by French & Raven?
reward power
referent power
hierarchical power
legitimate power
Question 13
A supervisor is a person given ______ for planning and controlling the work
of their group.
authority
autonomy
autocracy
Question 14
Which of the following can be delegated?
responsibility
authority
obligation
liability
Question 15
The accounts manager holds a departmental meeting every Monday at

10.00am. How would Fiedler define this manager?
348
Psychologically Distant Manager
Psychologically Close Manager
Question 16
Training in the use of a new information system is a means of overcoming

resistance to change by:
Facilitation and support

Education and involvement
Participation and involvement
Negotiation and agreement
Question 17
Adair's action-centred leadership suggests that leadership depends on three

inter-related needs; task needs, group needs and people needs. Which of the
following roles is a task role?
motivation
decision-making
peace-keeping
recognition
Question 18
According to Fiedler, which of the following are true of psychologically close

managers?
they tend to be reserved in their relationship with subordinates

they prefer to seek staff opinions rather than formal consultation methods
they are primarily people-oriented
a and b
b and c
c only
a only
Question 19
The leadership style that least acknowledges the contribution that

subordinates have to make is _____________.
Which word correctly completes this sentence?
Authoritarian
Autocratic
Assertive
349
Question 20
Renata has attended a leadership development course in which she

experienced a self-analysis exercise using the Blake and Mouton grid. The
course leader informed her that the results suggested that Renata
demonstrated a 9.1 leadership style, which suggested that she is highly
focused on achieving the objectives of the team.
What other conclusions may be drawn in relation to Renata's leadership

style?
She maximises the involvement of her team

She demonstrates little concern for people in the team
She balances the needs of the team with the need to complete the task.
She favours psychologically close manager subordinate relationships.
Question 21
Blake and Mouton developed a grid for assessing management responsibility.

The grid provides a method of scoring managers according to their:
concern for people and concern for production

concern for participation and concern for authority
concern for objectives and concern for performance
concern for hygiene factors and concern for motivation factors
350
____________________________________________________________
ANSWER BANK
__________________
351
C
352
353
CHAPTER 23
RECRUITMENT AND SELECTION OF

EMPLOYEES
EXPLAIN THE IMPORTANCE OF EFFECTIVE RECRUITMENT AND
SELECTION TO THE ORGANISATION
Recruitment is the process of identifying that the organisation needs to

employ someone up to the point at which application forms for the post have
arrived at the organisation. Thus, recruitment is the process of generating a
supply of possible candidates for positions within an enterprise. It is very
important that a recruitment activity is done in a systematic and consistent
way throughout the organisation since such activity is an interface between
the organisation and the outer world. If applicants feel that they were treated
unfairly, they might leave a bad impact on the organisation's reputation
through word of mouth. Selection then consists of the processes involved in
choosing from the supply of applicants, a suitable candidate to fill a post. A
good selection process should involve first of all a review of all the application
forms, interviewing and finally obtaining references.
Recruiting people who are not suitable for the organisation means they are
likely to be discontented, unlikely to give their best, and end up leaving
voluntarily or involuntarily when their unsuitability becomes evident.
354
Consequences of effective Consequences of poor
recruitment and selection recruitment and selection
The person appointed will:
have the technical high staff turnover

competence and ability to the cost of advertising
perform certain tasks the management time
have the potential for training, involved in selection and
development and future training
promotion the expense of dismissal
be flexible and adaptable to the effects of high turnover
possible new methods, on the morale, motivation
procedures or working and job satisfaction of staff
conditions reduced business
be sociable, work opportunities
harmoniously and fit within the reduced quality of product
cultural and social structure of or service.
the organisation
comply fully with all the legal
requirements relating to
employment and equal
opportunities.

DESCRIBE THE RECRUITMENT AND SELECTION PROCESSES
AND EXPLAIN THE STAGES IN THESE PROCESSES
EXPLAIN THE ADVANTAGES AND DISADVANTAGES OF
DIFFERENT RECRUITMENT AND SELECTION METHODS
23.2.1 Agree on the vacancy to be filled
A vacancy presents an opportunity to either reassess the requirements of the

job or to consider restructuring. A number of questions should always be
asked prior to recruiting to the vacancy:
Why replace at all? Alternatives to recruitment include retraining,
promotion and job rotation
What is the purpose of the post?
Has the function changed?
Can workloads be adjusted?
Can the job be carried out on a part time rather than a full time basis?
Alternatives to full-time employment include home working (or
teleworking), job sharing, flexitime or fixed term contracts.
23.2.2 Job Analysis
The process of job analysis starts with realising that there is a need or
requirement of a job. A job specification is a detailed study and description
355
of the tasks that make up the job and the kind of person required to do the
job. A job description will set out how a particular employee will fit into the
organisation. It will therefore need to set out:
the title of the job

to whom the employee is responsible
for whom the employee is responsible
a simple description of the role and duties of the employee within the
organisation.
23.2.3 Person Specification
A person specification defines the attributes of the ideal candidate it is a

blueprint of the qualities required of the jobholder. There are two main
theories relating to the content of a person specification those put forward
by Alec Rodgers and John Munro Fraser.
Alec Roger 7 point plan Fraser 5 point plan

S Special aptitudes F Flexibility and adjustment
C Circumstances I Impact on other people
I Interests R Required qualifications
P Physical makeup M Motivation
D Disposition I Innate abilities
A Attainments
G General intelligence
23.2.4 Recruit or promote?
There are many alternatives to external recruitment:

promotion of existing staff (upwards or laterally)
secondment (temporary transfers to another department, office, plant or
country) of existing staff, which may or may not become permanent
closing the job down, by sharing out duties and responsibilities among
existing staff
rotating jobs among staff, so that the vacant job is covered by different
staff, on a systematic basis over several months.
The decisions on whether to recruit someone from outside the organisation or

to promote or transfer someone from within the existing workforce will depend
mainly on the availability of the skills and attributes required to fill the vacancy.
Where there are skill shortages in the country, it may be necessary to develop
them within the organisation. Other reasons include:
356
Internal External
Motivating present employees Obtain specialist skills
Part of career development Inject new blood into Company
plan
Know the staff already But
Candidate understands work
Save time and money May create dissatisfaction in existing
No induction necessary employees
May cost more (higher wage)
23.2.5 Attract a field of candidates
It is important to know where suitable applicants are likely to be found, how to

make contact with them and to secure their application. Potential sources:
employment service job centers and agencies
private employment agencies
career advisory offices
universities, colleges and schools
professional and executive appointments registers
executive search or headhunting
advertising.
Recruitment consultants
Any organisation which is considering the use of external recruitment

consultants would make its decision upon the following:
the availability, level and appropriateness of expertise available within the
organisation and its likely effectiveness
the cost of using consultants against the cost involved in using the
organisations own staff, recognising the level of the vacancy or
vacancies against the consultants fee
the particular expertise of the consultants and the appropriate
experience with any particular specialised aspect of the recruitment
process
the level of expertise required of potential employees and therefore the
appropriate knowledge required of the consultants.
23.2.6 Prepare recruitment advertisements
The content of the advertisement should be:

concise, but comprehensive enough to be an accurate description of the
job, its rewards and requirements
attractive to the maximum number of the right people
positive and honest about the organisation. Disappointed expectations
will be a prime source of dissatisfaction when an applicant actually
comes into contact with the organisation
357
Choosing advertising media
The selection of the right medium depends on several factors:

Type of organisation.
Type of job.
Geographic coverage of the medium.
Readership and circulation.
Cost of medium
Frequency and duration.
This could be any of the following:

National Press
Local Press
Internet
Radio & TV
Specialist Journals
23.2.7 Sort candidates
Methods of selection generally start with the short listing of applicants. The
potential candidates then face a variety of other methods used in the
selection process. These include:
Selection Methods:
Application Forms
Assessment Centres
References
Tests
Interviews
Selection interviews
Interviews are by far the most widely used selection technique. The main
interview options are:
Face to face
Group Interviews
Succession Interviewing
Problem Solving
Panel Interview
Stress
358
Advantages of the interview Disadvantages of the interview
technique Technique
places candidate at ease too brief to get to know
highly interactive, allowing candidates
flexible question and answers interview is an artificial
opportunities to use situation
nonverbal communication halo effect from initial
opportunities to assess impression
appearance, interpersonal qualitative factors such as
and communication skills motivation, honesty or
Opportunities to evaluate integrity are difficult to
rapport between the assess prejudice
candidate and the potential stereotyping groups of
colleagues/bosses. people
lack of interviewer
preparation, skill, training
and practice
Subjectivity and bias.
Selection testing
There are two basic types of test:
Proficiency and attainment tests are used to measure an individual's
demonstrated competence in particular job related tasks.
Psychometric testing measures such psychological factors as aptitude,
intelligence and personality.
The elements of the selection process are:

Intelligence test measuring general intellectual ability
Proficiency test measuring the ability to do the work involved in the job
Psychometric test assess the thinking processes of the person
Aptitude test testing specific abilities
Medical examination tests regarding health issues
Psychological and personality test basic attitude profiles can be
accessed through questionnaires
Assessment centre
An assessment centre can consist of many processes:
Group discussions
Presentations
Questionnaires
Simulations an imitation
Games
Speeches
Peer ratings
Self-appraisal
Role-play
359
Written tests
References
The purpose of references is to confirm facts about the employee and

increase the degree of confidence felt about information given during
interviews and from application forms and CVs. References should contain
two types of information:
Straightforward factual information. This confirms the nature of the

applicants previous job(s), period of employment, pay, and
circumstances of leaving.
Opinions about the applicants personality and other attributes.

DESCRIBE THE ROLES OF THOSE INVOLVED IN THE
RECRUITMENT AND SELECTION PROCESSES
DESCRIBE THE METHODS THROUGH WHICH ORGANISATIONS
SEEK TO MEET THEIR RECRUITMENT NEEDS
SENIOR MANAGERS/DIRECTORS LINE MANAGERS

Clarifying corporate objectives Requesting more human
designing an effective structure resources advising on
providing a system for HR planning requirements having a final say
on the selection
ROLES AND
RESPONSIBILITIES
HR DEPARTMENT RECRUITMENT CONSULTANTS

Assessing needs for staff analysing the demands of the job
maintaining records of employees advising on or helping with job analysis
advertising for new employees designing job advertisements
designing application forms screening applications
ensuring compliance with legislation helping with short-listing for interview
liasing with recruitment consultants offering a list of suitable candidates
interviewing and selection testing advising on interview procedures
360
23.4 ACCA SYLLABUS GUIDE OUTCOMES 6 to 8
EXPLAIN THE PURPOSES OF A DIVERSITY POLICY WITH THE

HUMAN RESOURCES PLAN
EXPLAIN THE PURPOSE AND BENEFITS OF AN EQUAL
OPPORTUNITIES POLICY WITHIN THE HUMAN RESOURCE
PLANNING
EXPLAIN THE PRACTICAL STEPS THAT AN ORGANISATION MAY
TAKE TO ENSURE THE EFFECTIVENESS OF ITS DIVERSITY AND
EQUAL OPPORTUNITIES POLICY
Organisations and businesses are made up of many individuals working

together to achieve organisational success. These individuals bring different
attitudes, perceptions and learning experiences to the workplace, as well as
ethnic, gender and personality differences. These can be a source for
developing creativity within an organisation. However they can also be the
cause of problems. Over the past 30 years or so, employment has changed
beyond all recognition. This change has led to a fundamental re-thinking of
the way employees are managed. Managers have had to recognise the need
(or in many countries the legal requirement) to develop and enforce company
policies aimed at reducing and eliminating discrimination. In addition, the
increasing globalisation of business has meant that managers must be aware
of cultural and race issues (diversity).
Equal opportunities is a universally used and understood term which

describes the idea that everyone in an organisation should have an equal
chance to apply and be selected for posts, to be trained or promoted and to
have employment terminated fairly. Employers can discriminate only on the
basis of ability, experience or potential. All employment decisions are based
solely on an individuals ability to do a particular job. No consideration should
be taken of a persons sex, age, racial origin, disability or marital status.
In addition, many organisations have adopted a sex discrimination policy

that requires gender equality in all areas of employment including the
selection process, opportunities for training, promotion, benefit provision,
facilities and dismissal. Such a policy deems it wrong to make any form of
discrimination within employment matters because of marital status or sex
and covers three main categories of sex discrimination: direct discrimination,
indirect discrimination and victimisation.
Direct discrimination involves treating a person less favourably than others

on sexual, racial or marital grounds. This might include for example, a
dismissal from employment upon marriage. One act of discrimination is
sufficient and must be directed against an individual.
Indirect discrimination describes a term or condition applicable to both

sexes, but where one sex has a considerably lesser ability to comply with it
361
than the other. An example would be a condition that a candidate must be of
a particular height.
Finally, victimisation is discrimination against an individual who has brought

proceedings or given evidence in another case involving discrimination or
disciplinary matters.
The promotion of equal opportunities makes good business sense. Equal

opportunities are promoted as a key component of good management as well
as being a legal requirement. It is also socially desirable and morally right.
Managing diversity on the other hand expands the horizons beyond equality
issues and builds on recognised approaches to equal opportunities. It adds on
to the development of equal opportunities and creates an environment in
which enhanced contributions from all employees work to the advantage of
the business, employees themselves and society generally. It offers an
opportunity for organisations to develop a workforce to meet business goals
and to improve approaches to customer care. Managing diversity is about
having the right person for the job regardless of sex, race or religion.
(Dr John Ball is former examiner for Paper 1.3)
362
_____________________________________________________________
KEY POINTS
__________________
363
Recruitment is the process of generating a supply of possible candidates
for positions within an enterprise.
Selection consists of the processes involved in choosing, from the supply

of applicants, a suitable candidate to fill a post.
A recruitment activity should be done in a systematic and consistent

way throughout all the organisation - such activity is an interface
between the organisation and the outer world.
Recruiting people who are not suitable for the organisation means they
are likely to be discontented, unlikely to give their best, and end up
leaving voluntarily or involuntarily when their unsuitability becomes
evident.
Agree on the vacancy to be filled a reassessment of the existing vacant

post
Job Analysis the process starts with a detailed study and description of
the tasks that make up the job and the kind of person required to do
the job
Person Specification attributes of the ideal candidate
Recruit or Promote? - getting someone from the internal or from the

external
Attract a field of candidates the following sources can be used:

employment service job centres
private employment agencies
colleges
advertising
10.Prepare recruitment advertisements the job description can help a lot

in this stage
11.Sort candidates methods include:

application forms
assessment centres
references
tests
interviews
12. Selection of candidate which eventually leads to induction and training
13. The concept of diversity embodies the belief that people should be
valued for their difference and variety.
364
Equal opportunities describes the idea that everyone in an organisation
should have an equal chance to apply and be selected for posts, to be
trained or promoted and to have employment terminated fairly.
Sex discrimination policy requires gender equality in all areas of

employment.
Direct discrimination involves treating a person less favourably than others

on sexual, racial or marital grounds.
Indirect discrimination describes a term or condition applicable to both

sexes, but where one sex has a considerably lesser ability to comply
with it than the other.
Victimisation is discrimination against an individual who has brought

proceedings or given evidence in another case involving discrimination
or disciplinary matters.
365
_____________________________________________________________
QUESTION BANK
__________________
366
Question 1
Indicate from the list below which three steps in the selection process will
come before inviting candidates for interviews.
sort applications into possible, unsuitable and marginal

send standard letters to unsuccessful applicants
assess each application against key criteria in the advertisement and
specification
deal with responses to job advertisements
take up all references
Question 2
Which of the following is not an adverse consequence of poor recruitment

and selection?
high staff turnover

management time in recruitment and selection
morale of other staff
employing sociable and flexible people
Question 3
Why is it important to make recruitment activity systematic and consistent

throughout the organisation?
this activity is an interface with the outer world

it is required by law
it is the policy of every large organisation
Question 4
Recruitment is choosing from a number of candidates the one most suitable

for a specified position.
True
False
Question 5
Which of the following is one of the characteristics of a satisfied worker?
367
willingness to challenge company rules and requirements
rarely absent from work on grounds of illness
takes pride in belonging to the company
content with his remuneration
Question 6
The process of recruitment as distinct from selection involves the attraction of

a field of suitable candidates for the job, whilst the selection processes are
aimed at selecting the best person for the job from that field of candidates.
True
False
Question 7
Which of the following is one of the main consequences of poor recruitment

and selection?
reduced scope to develop the business

existing staff wonder whether they would have been employed if better
procedures had been used
existing staff tend to resent the presence of the new recruits
increased pay for existing staff covering for weak new recruits
Question 8
In relation to employee selection, which type of testing is most appropriate for

assessing the depth of knowledge of a candidate and the candidate's ability
to apply that knowledge?
A. intelligence testing
personality testing
competence testing
psychometric testing
Question 9
Job descriptions are beneficial for organisations in all of the following

circumstances with the exception of one. Which is the exception?
writing a recruitment advertisement
368
screening candidates
employee flexibility
identifying training needs
Question 10
An accountancy firm has a job vacancy for a receptionist at one of its offices.
Which of the following would be the most suitable medium for the job
advertisement?
A. accountancy journal
national newspaper
local newspaper
the company website
Question 11
Lloyds Co. Ltd introduced flexible working hours to deliver high service levels
to its existing employees in the hope of retaining its staff. They also thought
that implementing flexible working is a cheaper option than recruiting.
Do you agree with the above?
Yes
No
Question 12
Workforce planning is a suitable tool for a business that wants to make sure
that it always has the right employees and skills available.
True
False
Question 13
Tesco advertises jobs in different ways. First it looks within the business at its
internal talent plan. This shows which workers are looking to move forward
and develop their skills. Externally it advertises online and in stores, whilst for
more specialist jobs, like pharmacists and bakers, it advertises in specialist
magazines, online or via TV and radio.
Where else would you consider advertising?
Question 14
369
Which of the following is not part of Rodger's 7 point plan for person
specification?
special aptitudes
impact on other people
disposition
general intelligence
Question 15
Job analysis is the process of identifying the purpose of the job and its
components parts, and specifying what must be learnt in order for there to be
effective performance.
true
false
Question 16
A company has advertised for staff who must be at least 1.88 metres tall and
have been in continuous full-time employment for at least 5 years.
Which of the following is the legal term for this unlawful practice?
Direct discrimination
Indirect discrimination
Victimisation
Implied discrimination
Question 17
Ms. Abee was an Indian migrant, and is now an Australian citizen. She
alleged that Ms Simpson, a co-worker at ABC Co. Ltd, called her a lazy,
black, Indian stupid, which caused her to be distressed and humiliated,
because all the warehouse employees knew about it. She complained to the
management who ordered an apology and also issued a warning that
dismissal would follow any repetition of the remark.
Ms Abee was dissatisfied, because she believed that the apology was not
genuine, and she therefore refused to accept it. She was of the view that Ms
Simpsons employment should have been terminated. She also claimed that,
following her complaint, she was not welcomed by other employees,
particularly by her new supervisor who was appointed after her complaint was
made and who was Ms Simpsons boyfriend.
Which are the two main type of problems?
indirect discrimination, victimisation
370
direct discrimination, implied discrimination
direct discrimination, victimisation
Question 18
James and Liam, both 13 years old, go to a games shop after school. As they
walk in they are told by the store manager to leave their school bags at the
entrance of the shop, pointing to a sign next to the door displaying the shop's
'No school bags allowed inside' policy. Soon afterwards, they notice that a few
older guys wearing business suits have been allowed to bring their bags into
the store.
What kind of discrimination has James and Liam experienced?
Age
Sex
Maritial Status
Question 19
Considering the case scenario in question 18. What else could the store
manager have done if he was concerned about theft?
installed a security device system at the entrance

asked all people entering the store to leave their bags outside
checked bags on the way out
all the above
Question 20
What selection method is the most reliable predictor of job performance?
Interviews
References
Work sampling
Personality tests
Question 21
Jonathan offered to provide evidence at the Employment Tribunal on behalf of

a colleague who is claiming that she was not granted a promotion as she was
married. Over the following weeks, her department head repeatedly denies
her requests for work breaks because she is already having time off in court.
Jonathan claims for what kind of discrimination?
Direct discrimination
Indirect discrimination
Victimization
371
D. Harassment
_____________________________________________________________
ANSWER BANK
__________________
372
A, C and D
Newspapers, Job centres
373
CHAPTER 24
INDIVIDUAL AND GROUP BEHAVIOUR IN

BUSINESS ORGANISATIONS

DESCRIBE THE MAIN CHARACTERISTICS OF INDIVIDUAL AND
GROUP BEHAVIOUR
Behaviour always involves a complex interaction of the person and the

situation. Events in the surrounding environment (including the presence and
behaviour of others) strongly influence the way people behave to any
particular time; yet people always bring something of themselves in the
situation. This something may include:
motivation level
perception
attitudes
personality
When you are dealing with other people there are different types of behaviour
that can be adopted.
Assertive behaviour is direct, honest and professional

communication. It is insisting on your rights without violating the rights
of others. E.g. I would like you to rework this report there are several
mistakes in it.
Aggressive behaviour violates another persons rights and can lead to

conflict. E.g. I do not know how you have the nerve to submit this
report, it has so many mistakes in it.
Passive behaviour is giving in to another person in the belief that their

rights are more important than ones own. E.g. The mistakes in the
report are probably my fault for not explaining it properly.

OUTLINE THE CONTRIBUTIONS OF INDIVIDUALS AND TEAMS
OF ORGANISATIONAL SUCCESS
Being inherently social, people generally do not choose to live or work alone.
Most of their time is spent interacting with others. People are born into a
374
family group, work in groups and play in teams.
One person cannot do everything, but a team can combine all the main areas
of skill and knowledge that are needed for a particular job.
Synergy describes the phenomenon in which combined activity of

separate entities has a greater effect than the sum of activities of each
entity working alone often described as a way of making 2 + 2 = 5.
Within organisations there has been an implicit belief that people working as
members of a group or team perform more effectively than if they are
organised as individuals. There are, of course, many work situations where
the group is the best means to get work done, such as:
When working cooperatively, rather than working individually, gives a

better end result in terms of speed, efficiency or quality.
Where the task requires a mixture of different skills or specialisms.
Where competition between individuals leads to less effectiveness rather
than more.
Where the task requires the coordination of activities.

IDENTIFY INDIVIDUAL AND TEAM APPROACHES TO WORK
One of the key points that manager need to grasp is that an effective group is
one which not only achieves its task objectives but satisfies the needs of its
members as well.
For each individual there are many factors that affect behaviour and
performance at work
24.3.1 Motivation
Physical and working conditions.

Safety.
Monetary rewards.
Recognition.
Many of the factors that motivate individuals to perform are social in nature;
groups can bring out the best in people and can be essential for the delivery
of social needs.
24.3.2 Perception
Developing a group means identifying distinct roles for each of its members.
Any individual can have several roles, varying between different groups and
activities. The role adopted will affect the individuals attitude towards other
375
people.
A role is the expected pattern of behaviours associated with members

occupying a particular position within the structure of the organisation.
It also describes how individuals perceive their own situation.
An individuals perceptions of other people and interactions with other
people will be influenced by the different roles. The role they adopt will
affect their own behaviour, as well as their attitude towards other
people.
There is also a role theory which suggests that people behave in any
situation according to other peoples expectations of how they should
behave in that situation
Role ambiguity arises when individuals are unsure what role they are to play,
or others are unclear of that persons role and so hold back cooperation. If a
manager tries to be friend with staff, this may create ambiguity and people
will not know where they stand
Role conflict arises, when individuals find a clash between differing roles that
they have adopted. For example, if you have to discipline a member of staff
(in your role of supervisor) with whom you have become informally friendly (in
your role as a sociable person)
Role incompatibility occurs when individuals experience expectations from

outside groups about their role that are different from their own role
expectations.
Role signs are visible indications of the role. Style of dress and uniform are
clear examples of role signs.
Role set describes the people who support a lead person in a major role, e.g.
the accounts clerk will relate to the accounts manager.
Role models are the individuals you aspire to be like: people you look up to
and model your own behavior on.
376
_____________________________________________________________
KEY POINTS
__________________
377
The 3 main types of behaviours are:
assertive
aggressive
passive
Synergy has to do with better results when there are combined activities
rather than entities working alone
2+2=5
Some factors that affect behaviour are:

motivation
perception
The role theory includes 6 types of roles:

role
ambiguityrol
e conflict
role
incompatibilityrol
e signs
role set
role model
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_____________________________________________________________
QUESTION BANK
__________________
379
Question 1
Which of the following is one of the three main types of behaviour that can be
adopted when dealing with other people?
persuasive behaviour
demonstrative behaviour
appreciative behaviour
passive behaviour
Question 2
Synergy is often described as a way of making:
2+2=5
2+2=4
nothing
Question 3
Which one of the following has nothing to do or has a minimal effect on

motivation?
physical and working conditions

recognition
working hrs of the canteen at the workplace
monetary rewards.
Question 4
An individuals perceptions of other people and interactions with other people

will be influenced by different roles. Which role occurs when individuals
experience expectations from outside groups about their role that are
different from their own role expectations?
role ambiguity
role set
role signs
role incompatibility
380
_____________________________________________________________
ANSWER BANK
__________________
381
D
382
383
CHAPTER 25
TEAM FORMATION, DEVELOPMENT AND

MANAGEMENT

EXPLAIN THE DIFFERENCES BETWEEN A GROUP AND A TEAM
DEFINE THE PURPOSES OF A TEAM
A group is any collection of people who perceive themselves to be a group.
Groups have the following attributes.

A sense of identity - there are acknowledged boundaries of the group, who
is in and who is out.
Loyalty to the group acceptance that bind the group together.
Purpose and leadership express purpose, choose individuals to lead them
towards their goals.
In groups:
people accommodate each other
people negotiate
objectives may be modified
the process issues are often covert (hidden)
politics are rife (frequent)
commitment can be high.
An informal group is one that develops out of the day-to-day activities,

interactions and sentiments that the members have for each other. Informal
groups typically meet their members' security and social needs. In the work
setting, the purpose of informal groups is not related to organisational goals.
Informal groups in organisations cannot always be classified simply as
positive or negative because they may exhibit both circumstances from time
to time, depending on the circumstances or issues facing the organisation at
a point in time.
A formal group is used in organisations to carry out tasks, communicate and

solve problems. Membership is normally formal, often determined or
constrained by the organisation into departments or divisions.
A team is a number of employees with complementary competencies such as

abilities, skills and knowledge who are committed to common performance
goals and working relationships for which they hold themselves mutually
384
accountable. The heart of any team is a shared commitment by its members
for combined performance. Goals cannot be achieved without the cooperation
and communication of team members. When a team is formed, its members
must have the right mix of competencies to achieve the team's goals. Also, its
members need to be able to influence how they will work together to
accomplish those goals even if it includes the need of constructive criticism.

EXPLAIN THE ROLE OF A MANAGER IN BUIDING A TEAM AND
DEVELOPING INDIVIDUALS WITHIN A TEAM
25.2.1 Belbin's team role theory
The role team role theory was developed by Meredith Belbin in 1981,
following nine years of study. The Belbin's team role theory has become one
of the most accessible and widely used tools to support team building. The
team roles were designed to define and predict potential success of
management teams, recognising that the strongest teams have a diversity of
characters and personality types. It has been criticised due to its potential
oversimplification. However, when used wisely to gain insight about the
working of the team and identify the team strengths and weaknesses it can
be extremely useful.
Belbin suggested that a group needs a balance of the above roles to be

effective.
Leader Coordinator
Shaper Task leader, extrovert
Plant Thoughtful and thought provoking, ideas
Person
Monitor Criticises others ideas, brings the team
evaluator down to earth
Resource Extrovert, networker, looks for alternative
investigator Solutions
The Company Administrator, organizer
worker
The Team Concerned with relationships within the
worker Groups
The Finisher The progress chaser
The Expert As required by the project
Rackham and Manga have developed a helpful categorization of the types of

contribution people can make to team discussion and decision making,
385
including:
Proposing
Supporting
Seeking information
Giving information
Blocking / difficulty stating
Shutting-out behavior
Bringing-in behavior
Testing understanding
Summarizing
Each type of behavior may be appropriate in the right situation at the right
time. A team may be low on some types of contribution and it may be up to
the team leader to adopt behaviors as to provide a balance.
25.2.2 Tuckman's theory of team development
Dorming (recently added)

Adjournment
Performing
Productivity
Norming
Cooperation
Storming
Conflict
Forming
Awareness
Groups initially concern themselves with orientation accomplished primarily

through testing. Such testing serves to identify the boundaries of both
interpersonal and task behaviours. Coincident with testing in the interpersonal
realm is the establishment of dependency relationships with leaders, other
group members, or pre-existing standards. It may be said that orientation,
testing and dependence constitute the group process of forming.
The second point in the sequence is characterised by conflict and polarisation

around interpersonal issues, with concomitant (being parallel with) emotional
responding in the task sphere. These behaviours serve as resistance to group
influence and task requirements and may be labelled as storming.
Resistance is overcome in the third stage in which in-group feeling and
cohesiveness develop, new standards evolve, and new roles are adopted. In
386
the task realm, intimate, personal opinions are expressed. Thus, this is the
stage of norming.
Finally, the group attains the fourth stage in which interpersonal structure
becomes the tool of task activities. Roles become flexible and functional, and
group energy is channeled into the task. Structural issues have been
resolved, and structure can now become supportive of task performance. This
th
stage can be labelled as performing. (Tuckman 1965). More recently a 5
stage has been added to Tuckman's original four. Dorming If a team
remains for a long time in the performing phase, there is a danger that it will
be operating on automatic pilot. Groupthink occurs to the extent that the
group may be unaware of changing circumstances. Instead, maintaing in the
team becomes one of its prime objectives.

LIST THE CHARACTERISTICS OF EFFECTIVE AND INEFFECTIVE
TEAMS
DESCRIBE TOOLS AND TECHNIQUES THAT CAN BE USED TO
BUILD THE TEAM AND IMPROVE TEAM EFFECTIVENESS
25.3.1 Ineffective Teams
inappropriate leadership
unqualified membership
unconstructive climate
unclear objectives
poor achievement
ineffective work methods
insufficient openness and confrontation
undeveloped individuals
low creative capacity
unconstructive relationships between team members
25.3.2 Effective Teams
Peters and Waterman define the five key aspects of successful taskforce
teams as:
The numbers should be small; Inevitably each member will then represent
the interest of their section/ department.
The team should be of limited duration, and exist only to resolve this
particular task.
Membership should be voluntary.
Communication should be informal and unstructured, with little
documentation and no status barriers.
It should be action oriented - The team should finish with a plan for action
387
25.3.3 Evaluating team effectiveness
The organisation could measure the following:

effectiveness the degree to which objectives are achieved
efficiency the use of resources in achieving the objectives
team member satisfaction the motivational climate
observe and rate the teams behaviour
interview the team about performance
send out a questionnaire to team members.
388
_____________________________________________________________
KEY POINTS
__________________
389
1.
2.
Teams
share a common goal
enjoy working together
commitment to achieve goals
diverse individuals
loyalty to the project
attain a team spirit.
Groups:
people negotiate
objectives may be modified
the process issues are often covert
politics are rife
commitment can be high.
Belbin suggested that a group needs a balance of the following roles to be

effective
resource investigator networker that looks for alternative solutions
shaper task leader
plant idea person
finisher progress chaser
team leader co-coordinator
team worker concerned with relationships
the monitor evaluator criticises others' ideas
the company worker organiser
the expert specialist
Tuckman's stages of group development include:

forming
storming conflict
norming
390
performing
dorming
Team dynamics and effectiveness are influenced by the interplay of context,

goals, size, member roles, norms, cohesiveness and leadership.
Team members need to clearly understand and accept team goals as

outcomes desired by each member of the team as a whole.
Team size can substantially affect the dynamics among the members and the
ability to create a sense of mutual accountability.
391
_____________________________________________________________
QUESTION BANK
__________________
392
Question 1
Which of the following is a characteristic of a team as opposed to a group?
members agree with other members

members all have equal status
members arrive at decisions by consensus
members' work in cooperation
Question 2
Which of the following best describes a team?
a team is a formal group that has a leader, a distinctive culture and is geared
towards a final result
a team shares common goals and enjoys working together
a team is a group that needs each others' skills, talent and experience in
order to achieve their goals
a team is any group of people that significantly relate with each other
Question 3
Which of the following is more likely to occur in the behaviour within a group
rather than a team?

feelings are expressed freely
commitment can be very high
decisions are made by consensus
Question 4
Jackie leads an established team of six workers. Last month, two have left to
pursue alternative jobs and one has commenced maternity leave. Three new
staff members have joined Jackie's team.
Which one of Tuckman's group stages will now occur?
Norming
Forming
Performing
Storming
393
Question 5
Richard is a highly enthusiastic member of his team. An extrovert by nature,

he is curious and communicative. He responds to new challenges positively
and has a capacity for contacting people exploring anything new. However,
his attention span is short and he tends to become less involved in a task
once his initial interest has passed.
According to Belbin's team roles theory, Richard displays the characteristics

of which of the following?
monitor-evaluator
plant
resource-investigator
company worker
Question 6
Tuckman identified four stages in group development which occur in a

particular order. What is the correct order in which the stages occur?
storming, norming, forming, performing

forming, storming, norming, performing
forming, norming, storming, performing
norming, forming, storming, performing
Question 7
A company has established a project team to design a new database. The

team has had a few meetings to discuss how they are going to tackle the
work and who should be doing what but some early ideas have been
unsuccessful. Group members are still putting forward innovative ideas but
they often strongly disagree with each other. The group members appear to
be dividing into a number of separate camps each of which has an unofficial
leader. These leaders agree about very little and appear to strongly dislike
each other.
According to Tuckman what stage of development has the project team

reached?
forming
storming
norming
performing
Question 8
Belbin defined 9 roles with a team. Bringing in new contracts, ideas and
394
developments to the group is a description of which role?
shaper
plant
resource investigator
team worker
Question 9
According to Belbin the source of original ideas and proposals is known as:
shaper
plant
resource investigator
team worker
Question 10
A team has been formed to plan the Christmas social event for the company.
One of the members of the team, John, is heard to comment negatively on
other people's ideas. Which of Belbin's roles does he fulfil?
the finisher
monitor evaluator
shaper
team worker
Question 11
ABC Limited is a small marketing agency. A group has been formed, chaired
by Nicholas, to work on an advertisement for a new client. Progress on the
advertisement is slow many ideas are being put forward, but there is a lot of
criticism within the group of other people's ideas. Which of Tuckman's group
stages applies in this case?
forming
storming
norming
performing
Question 12
Which of the following is a blockage to building a successful team?
A. diverse mix of personalities
395
clear objectives
members who do not challenge or criticise
regular views of performance
Question 13
The number of members in a team should be small and each member should
represent his own interest and not that of their section/ department.
True
False
Question 14
The team should be of limited duration, and exist to resolve a particular task
whilst membership should be voluntary.
True
False
Question 15
Which of the following is not a criterion for a successful team as per Peters
and Waterman?
A. voluntary membership
B. structured communication
action orientated
small number
396
_____________________________________________________________
ANSWER BANK
__________________
397
C
398
399
CHAPTER 26
MOTIVATING INDIVIDUALS AND GROUPS

DEFINE MOTIVATION AND EXPLAIN ITS IMPORTANCE TO THE
ORGANISATION, TEAMS AND INDIVIDUALS
Motivation represents the forces acting on or within a person that cause the
person to behave in a specific, goal-directed manner. Since motives of
employees affect their productivity, one of management's jobs is to channel
employee motivation effectively toward achieving organisational goals.
However, motivation is not the same as performance. Even the most highly
motivated employees may not be successful in their jobs, especially if they do
not have the competencies needed to perform the jobs or work under
unfavourable job conditions. Although job performance involves more than
motivation, the latter is an important factor in achieving high performance.
A distinction should be made here between:

motivation (how hard you are willing to work) and
satisfaction (being content with your job and not looking for another).
In the short run you can have one without the other but in the long run there is
usually congruence. Consider someone working for a very aggressive
manager who constantly shouts at them. They may work very hard to avoid
further abuse from their boss but would probably be looking for another job.
In the longer term the poor working conditions would also dampen their
motivation. From the organisations perspective it is highly desirable to
have motivated workers, as they
work harder
make fewer mistakes
generate less waste
provide more feedback
make more suggestions
are more likely to be satisfied with their jobs and
dont waste time
Teams
Motivation is also important to the efficient running of teams. Apart from the
benefits outlined above, motivated employees are also
more likely to cooperate and put team interests first.
400
Individuals
From an individuals perspective being motivated should result in:
greater job satisfaction
improved health (less stress)
improved career prospects and
finding the job more interesting.

EXPLAIN CONTENT AND PROCESS THEORIES OF MOTIVATION
EXPLAIN AND IDENTIFY TYPES OF INTRINSIC AND EXTRINSIC
REWARD
26.2.1 Content & Process Theories
Content Theories Process Theories

Ask the question What are the Ask the question how are
things that motivate people? They people motivated. They attempt
are also referred to as need to explain how
theories and assume that human individuals start, sustain and
beings have a set of needs or direct behaviour and assume that
desired outcomes which can be individuals are able to select their
satisfied through work. own goals and means of
Content theories assume that achieving those goals through a
everyone responds to motivating process of calculation.
factors in the same way and that Process theories change the
there is one best way to motivate emphasis from needs to the goals
everybody. and processes by which workers
are motivated.
26.2.2 Maslow Hierarchy of Needs (Content Theory)
Maslow proposed that people have five types of needs (as cited in the
diagram above) and when a need is satisfied it no longer motivates a person.
401
26.2.3 Hertzberg's two factor theory of motivation (Content
Theory)
Hygiene factors must be addressed to avoid dissatisfaction and include:

Policies and procedures for staff treatment
Suitable level and quality of supervision
Pleasant physical and working conditions
Appropriate level of salary and status for the job
Team working
Hygiene factors are concerned with extrinsic factors these are separate from
or external to the job itself and are dependent on the decisions of others.
However, in themselves hygiene factors are not sufficient to result in positive
motivation.
Motivators include
Sense of achievement
Recognition of good work
Increasing levels of responsibility
Career advancement
Attraction of the job itself
The main motivation factors are thus not in the environment but in the intrinsic
value and satisfaction gained from the job itself. Most are non financial in
nature. Fredrick Herzberg defines three ways that management can attempt
to improve staff satisfaction and motivation
Job enrichment (sometimes called vertical job enlargement) a

deliberate, planned process to improve the responsibility, challenge
and creativity of a job. Typical examples include delegation or problem
solving. For instance, where an accountants responsibilities for
producing quarterly management reports end at the stage of producing
the figures, they could be extended so that they included the
preparation of them and the accountant could submit them to senior
management. This alteration in responsibilities could not only enrich
402
the job but also increase the workload, leading to delegation of certain
responsibilities to clerks within the department, the cascading effect
enriching other jobs as well.
Job enlargement widening the range of jobs, and so developing a job

away from narrow specialisation. There is no element of enrichment.
Argyris calls this horizontal job enlargement. Herzberg contends that
there is little motivation value in this approach.
Job rotation the planned rotating of staff between jobs to alleviate

monotony and provide a fresh job challenge. The documented
example quotes a warehouse gang of four workers, where the worst
job was tying the necks of the sacks at the base of the hopper after
filling; the best job was seen as being the forklift truck driver. Job
rotation would ensure that equal time was spent by each individual on
all jobs. Herzberg suggests that this will help to relieve monotony and
improve job satisfaction but is unlikely to create positive motivation.
26.2.4 McGregor's Theory X and Theory Y (Content Theory)
McGregor presented two opposite sets of assumptions made by managers

about their staff. These assumptions, which he called Theory X and Theory Y,
are implicit in most approaches to supervision. These theories are opposite
ends of a continuum.
Theory X assumptions: (Negative approach)

People dislike work and responsibility
People must be coerced to get them to make an effort
Subordinates prefer to be directed, wish to avoid responsibility, have
relatively little ambition, and want security above all.
Theory Y assumptions: (Positive approach)

physical and mental effort in work is as natural as play or rest
the average human being does not inherently dislike work, because it can
be a source of satisfaction
people can exercise self direction and self-control to achieve objectives to
which they are committed.
people can learn to enjoy and seek responsibility
403
26.2.5 Vroom's Expectancy Model (Process Theory)
The expectancy model holds that individuals know what they desire from
work. They choose activities only after they decide that the activities will
satisfy their needs. An individual believes that effort expended will lead
(expectancy) to some desired level of performance and that this level of
performance will lead (instrumentality) to desired rewards.
Vrooms theory may be stated as:
Force = valence x expectancy
Force = the strength of a persons motivation

Valence = the strength of an individuals preference for an
outcome Expectancy = the probability of success

EXPLAIN HOW REWARD SYSTEMS CAN BE DESIGNED AND
IMPLEMENTED TO MOTIVATE TEAMS AND INDIVIDUALS
Management action is required to keep staff highly motivated in order to

deliver high performance. Achievement of high performance may be delivered
through positive rewards. It is important that in setting the reward system goal
congruence is achieved (e.g. higher productivity may be at the expense of
quality when using a piece rate system).
These rewards should help to:
1. Attract and retain staff.
404
Demonstrate care for employees.
Improve company image being seen as a company who is socially
responsible.
To encourage desirable behaviour (motivation).
Provide a fair and consistent basis for motivating and rewarding
employees.
To further company objectives through an externally based fair system.
To reward progression or promotion through developed pathways.
To recognise the various factors apart from performance such as job size,
contribution, skills and competences.
To control salary costs.
26.3.1 Incentive schemes
An incentive scheme ties pay directly to performance and the reward should
encourage improvements in performance. It can be tied to the performance of
an individual or a team of employees. The scheme should link performance to
organisational goals.
There are three main types of incentive schemes:
Performance related pay (PRP)

0 Piecework reward related to the pace of work or effort. The faster
the employee works, the higher the output and the greater the
reward.
1 Management by objectives (MBO) key results are identified for
which rewards will be paid on top of salary.
2 Points system this is an extension to MBO reward systems where a
range of rewards is available based on a point system derived from
the scale of improvement made such as the amount of cost
reduction achieved.
3 Commission paid on the performance of an individual typically paid
to salaried staff in sales functions, where the commission earned is
a proportion of total sales.
Bonus schemes usually a one off as opposed to PRP schemes which are
usually a continual management policy
Profit sharing
Usually available to a wide group of employees (often company wide)
where payments are made in the light of the overall profitability of
the company.
Share issues may be part of the scheme.
Incentives need to encourage effort or action towards the delivery of

organisational objectives. There can be potential conflict when contrasting
long and short term objectives. (e.g. sales staff offering discounts to
405
customers to win extra orders this year to get a bonus, at the expense of next
years sales)
Long term incentive schemes will be those that are designed to continually
motivate and deliver organisational objectives.
Short term incentive schemes will be those that motivate in the short term
but do not deliver ongoing motivation and are often achieved at the detriment
of longer term objectives.
406
Refer to technical article Understanding Hertzbergs motivation
theory at the back of the notes.
_____________________________________________________________
KEY POINTS
__________________
407
Maslow's hierarchy of needs proposes that once a person has
accomplished a need, then s/he moves forward to the next reachable
need.
The five needs described by Maslow are:

Psychological
Safety
Belongingness
Esteem
Self-actualisation
Hertzberg claimed that two types of factors affect a person's motivation

hygiene factors and motivator factors.
Hygiene factors (extrinsic factors), such as working conditions prevent job

dissatisfaction but cannot lead to job satisfaction.
Motivator factors (intrinsic factors), such as job challenge leads to job

satisfaction.
Managers need to structure jobs that focus on motivators because they

lead to high job satisfaction and performance.
Job enrichment is a deliberate, planned process to improve the

responsibility, challenge and creativity of a job.
Job enlargement means widening the range of jobs, and so developing a

job away from narrow specialisation.
Job rotation is the planned rotating of staff between jobs to alleviate

monotony and provide a fresh job challenge.
McGregor conceptualises motivation of employees into two:

Theory X negative approach
Theory Y positive approach
Vrooms theory may be stated as - Force = valence x expectancy
11.There are 3 main types of incentive schemes

Performance related pay (PRP)
Bonus scheme
Profit sharing
12.Long-term incentive schemes are designed to motivate continually
408
employees to deliver organisational goals.
13.Short-term incentive schemes are used to motivate employees in the

ST.
_____________________________________________________________
QUESTION BANK
__________________
409
Question 1
Which of the needs listed below do NOT feature explicitly on Maslow's

hierarchy?
Sense of achievement
Recognition
Bonus
Interpersonal relationships
Question 2
Which of the following factors can be both a hygiene factor and a motivator
for employees?
Pay
The quality of management
Working conditions
The level of responsibility the individual is given
Question 3
Which one of the following is an intrinsic reward?
Company car
Extra holiday entitlement
On the job training for new recruits
Bonus payment
Question 4
Force or motivation = ________ x expectancy
Which of the following words completes Vroom's equation.
needs
valence
opportunity
Question 5
According to Douglas McGregor
A. theory X people dislike work, need direction and avoid responsibility
410
B. theory Y people dislike work, need direction and avoid responsibility
C. self actualising people dislike work, need direction and avoid responsibility
D. hygiene factors determine whether people like work, need direction or take
responsibility
Question 6
According to Hertzberg work related factors causing satisfaction or

dissatisfaction for individuals can be classified as either hygiene factors or
motivator factor.
Which of the following did he call a motivator?
supervision
working conditions
job security
being given responsibility
Question 7
Lo-cost Ltd offers its employees the following conditions as part of their
employment:
competitive salaries and bonuses

training programmes
safe and pleasant working conditions
considerate supervision
According to Hertzberg's two-factor theory of motivation, which of the above

factors will motivate employees in the long run to become more productive?
a, b and c
a only
a, b and d
b only
Question 8
Vroom's expectancy theory is an example of which type of motivational

theory?
content theory
process theory
Question 9
Which of the following states Vroom's expectancy model accurately?
Vroom believes that people will be motivated to achieve a goal if they
411
have a strong interest in achieving that goal.
Vroom believes that people will be motivated to achieve a goal if they feel that
they have a high chance of achieving that goal
Vroom believes that people will be motivated to achieve a goal if that goal is
easily achieved
Vroom believes that people will be motivated to achieve a goal if they
value that goal and if they can see that what they do will help them to
achieve it.
Question 10
Which of the following statements is correct in relation to monetary rewards in

accordance with Hertzberg's two factor theory?
pay increases are a powerful long-term motivator

Inadequate monetary rewards are a powerful dissatisfier
monetary rewards are more important than non-monetary rewards
pay can never be used as a motivator
Question 11
________________ incentive schemes will be those that are designed to

continually motivate and deliver organisational objectives.
long term
short term
412
_____________________________________________________________
ANSWER BANK
__________________
413
C
414
415
CHAPTER 27
LEARNING AND TRAINING AT WORK

EXPLAIN THE IMPORTANCE OF LEARNING AND DEVELOPMENT
IN THE WORKPLACE
Learning can be defined as the process of acquiring knowledge through

experience, which leads to a change in behaviour. It includes the acquisition
of a new skill, new knowledge, a modified attitude or a combination of all
three.
Many employers, mostly of small businesses, perceive investment in work

related learning to be a drain on their business. However, studies have shown
that organisations that deliberately foster a culture of learning are those that
are on the leading edge of development and change.
Learning in the workplace is important for the following reasons:
It can lead to increased competence, understanding, self-esteem and

morale.
People who enjoy learning are more likely to be flexible in times of
constant change and therefore are more adaptable to organisational
turbulence.
There is growing evidence that a learning culture can increase the
productivity and competitiveness of organisations.
If workers are not given learning opportunities, there is a risk that they will
feel undervalued and become disenchanted.
As is so often said by management writers if you want to develop an

organisation, then develop its people and they will develop the organisation.
Lifelong learning should be the concern of all employees in the organisation
and, despite its title, it is arguable that the concept of continuing professional
development (CPD) should not be seen as applying only to professionals or
managers.
CPD continuing professional development - can be defined as the

continuous maintenance, development and enhancement of the professional
416
and personal knowledge, skills and ability, often termed competence, which
members of certain professions require throughout their working lives.
Put simply, it is a lifelong learning approach to planning, managing and

getting the most from an individuals own development. Learning and
development are planned, rather than accidental.
DESCRIBE THE LEARNING PROCESS: HONEY AND MUMFORD,
KOLB
27.2.1 Kolbs experiential learning theory
Experiential learning can apply to any kind of learning through experience.

David Kolb suggests that learning is a series of steps based on learning from
experience. He suggested that classroom learning is false and that actual
learning comes from real life experiences.
Experiential learning comes from DOING and this ensures that learners
actually solve problems.
To learn effectively from experience (which includes work placements and
practical activities within taught courses) usually involves completing a
cycle of activities.
All four stages of the learning cycle (shown below) have to be addressed.
27.2.2 The Four Learning Styles
Accommodative feeling and doing strong preference for concrete

experiences and active experimentation (hands on).
Divergent feeling and watching preference for concrete experiences,
but to reflect on these from different perspectives.
Assimilative thinking and watching prefers to swing between
reflection and conceptualisation and will use inductive reasoning to
develop new theory.
Convergent thinking and doing prefers to apply ideas, will take an idea
and test it out in practice.
417
27.2.3 Learning styles Honey and Mumford
There are different ways of learning and people learn more effectively if they
are aware of their own learning style preferences. Most people exhibit clear
strong preferences for a given learning style. We should not assume that the
ability to use or switch between different styles comes easily or naturally to
many people. People who have a clear learning style preference, for
whatever reason, will tend to learn more effectively if learning is geared to
their preference. For instance according to Kolb:
people who prefer the assimilating learning style will not be comfortable
being thrown in at the deep end without notes and instructions
people who prefer to use an accommodating learning style are likely to
become frustrated if they are forced to read lots of instructions and
rules, and are unable to get hands on experience as soon as possible.
Honey and Mumford designed a self description questionnaire so that people

can discover their preferred learning style. The scoring reveals the persons
strength of preference for each of the four learning styles.
Those who like active learning tick statements such as I often act without
considering the possible consequences and I am often one of the
people who puts life into a party.
Reflectors agree with statements such as I like the sort of work where
I have time for thorough preparation and I am always interested to
find out what people think.
Theorists tick statements such as I tend to solve problems using a step
by step approach.
Pragmatists agree with What matters most is whether something works in
practice.
A feature of Honey and Mumfords model is that it provides suggestions about

the best ways for individuals to learn. The most effective learning methods
are different for each learning style.
Activists have a practical approach to training, are flexible and
optimistic. They prefer practical problems, enjoy participation and
challenge, are easily bored and have a dislike of theory. They must
have hands-on training.
Theorists require their learning to be programmed and structured;
designed to allow time for analysis; and provided by people who share
the same preference for ideas and analysis.
Reflectors need an observational approach to training. They need to
work at their own pace slow, cautious and non participative where
conclusions are carefully thought out. They do not find learning easy
especially if rushed.
Pragmatists need to see a direct value and link between training
and real problems and aim to do things better. They enjoy learning new
techniques and tasks and are good at finding improved ways of
418
doing things.

DESCRIBE THE ROLE OF THE HUMAN RESOURCES
DEPARTMENT AND INDIVIDUAL MANAGERS IN THE LEARNING
PROCESS
Within organisations, HR Department programmes are divided into three

main categories:
training for the present

educating for the future
developing to lead.
The main characteristics of each include:

Training usually implies a planned process to modify attitude, knowledge,
skill or behaviour to achieve effective performance in an activity or
range of activities. It is job orientated rather than personal.
Education is usually intended to mean basic instruction in knowledge and
skills designed to enable people to make the most of life in general. It
is personal and broadly based.
Development suggests a broader view of knowledge and skills
acquisition than training, concerned more with changes in attitudes,
behaviour and potential than with immediate skill. It relates more to
career development than job development learning for growth of the
individual, but not related to a specific present or future job.
27.3.1 Role of Management in a learning organisation
The role of the management in a learning organisation is to encourage

continuous learning and acquisition of new knowledge and skills and to
transform these into actual behaviour, products and processes within the
organisation
The training manager is responsible for determining, organising, managing

and directing training activities as well as acting in an advisory capacity.
Responsibility for training is usually shared between personnel training
specialists and departmental supervisors. Training and development methods
for individuals include:
Training courses, both external and in-house

Mentoring
Coaching
Computerised interactive learning
419
Planned experiences
Self managed learning.

DESCRIBE THE TRAINING AND DEVELOPMENT PROCESS
Identifying training needs

The training needs will be indicated by a job training analysis. However, it is
vital that the line manager begins with an understanding of the organisational
strategy and departmental goals and objectives before he or she carries out
the training needs analysis.
Performance appraisal each employees work is

measured against the
performance standards or
objectives established for their
job
training and development needs
are considered in terms of future
job performance as well as in
terms of improving current
performance.
Analysis of job requirements the skills and knowledge
specified in the
appropriate job description are
compared with data concerning
jobs and activities, e.g. job
descriptions, personnel
specifications, and leadership
and communication activities to
identify candidates for training.
Organisational analysis uses data about the
organisation as a whole, e.g. its
structure, markets, products or
services, human resources
requirements, etc.
the key success factors are
identified and analysed into HR
activities.
Defining the learning required

Specify the knowledge, skills or competencies that have to be acquired.
Setting training objectives
420
As with all objectives these should have clear, specific, measurable targets in
relation to the behaviour and standard of behaviour in order to achieve a
given level of performance
Planning the training

This covers who provides the training, where the training takes place and
divisions of responsibilities between trainers, line managers or team leaders
and the individual personally
Delivering/implementing the training

A combination of formal and on-the-job training programmes will be used
Evaluating training
A cost-benefit analysis with feedback to improve selection of method and
delivery

EXPLAIN THE TERMS TRAINING, DEVELOPMENT AND
EDUCATION AND THE CHARACTERISTICS OF EACH
LIST THE BENEFITS OF EFFECTIVE TRAINING AND
DEVELOPMENT IN THE WORKPLACE
27.5.1 Education is defined as the activities which aim at developing the

knowledge skills, moral values and understanding required in all aspects of
life rather than a knowledge skill related to only a limited field of activity.
Education is usually intended to mean basic instruction in knowledge and
skills designed to enable people to make the most of life in general. It is
personal and broadly based.
27.5.2 Training is the planned and systematic modification of behaviour

through learning events, programmes and instruction which enable
individuals to achieve the level of knowledge, skills and competence to carry
out their work effectively. Training usually implies a planned process to
modify attitude, knowledge, skill or behaviour to achieve effective
performance in an activity or range of activities. It is job orientated rather than
personal.
27.5.3 Development is the growth or realisation of a persons ability and

potential through conscious or unconscious learning and educational
experiences. Development suggests a broader view of knowledge and skills
acquisition than training, concerned more with changes in attitudes,
behaviour and potential than with immediate skill. It relates more to career
development than job development learning for growth of the individual, but
not related to a specific present or future job.
Many employers, mostly of small businesses, perceive investment in work

related learning to be a drain on their business. However, studies have shown
421
that organisations that deliberately foster a culture of learning are those that
Learning in the workplace is important for the following reasons:
It can lead to increased competence, understanding, self esteem and

morale.
People who enjoy learning are more likely to be flexible in times of
constant change and therefore are more adaptable to organisational
turbulence.
There is growing evidence that a learning culture can increase the
productivity and competitiveness of organisations.
If workers are not given learning opportunities, there is a risk that they will
feel undervalued and become disenchanted.
422
_____________________________________________________________
KEY POINTS
__________________
423
Learning can be defined as the process of acquiring knowledge through
experience, which leads to a change in behaviour.
Organisations that deliberately foster a culture of learning are those that

A learning culture is very important in organisation.
CPD continuing professional development - can be defined as the

continuous maintenance, development and enhancement of the
professional and personal knowledge, skills and ability, often termed
competence, which members of certain professions require throughout
their working lives.
David Kolb suggests that learning is a series of steps based on learning

from real life experiences.
The four stages described by David Kolb as regards to the learning

cycle include:
experience
observation and reflection
abstract conceptualisation
active experimentation
According to Honey and Mumford, there are different ways of learning

and people learn more effectively if they are aware of their own
learning style preferences.
David Kolb and Honey & Mumford work around the same set of stages in
the learing cycle
Honey & Mumford came out with 4 learning styles

activists
reflectors
theorists
pragmatists
424
10. The Training Process
425
_____________________________________________________________
QUESTION BANK
__________________
426
Question 1
Does learning take place at a steady rate?
Yes
No
Question 2
The board of directors set up a meeting to discuss how to develop their

organisation since they are by far lacking from the development of their direct
competition. Mr. Charles argued that the experience of the organisation is
well-grounded and thus the organisation should keep on moving on the
developments taken place in the past. Mr. Arthur proposed that the
organisation should invest in their people because ultimately they will be the
ones that can develop the organisation. Mr. Michael argued that investment in
people is a great expense for the company and should not be seen as an
investment. Who do you think had the best point of view in the case scenario
above?
A. Mr. Charles
Mr. Arthur
Mr. Michael
Question 3
Experiential learning (Kolb) theory suggests that learning is a continuous

cycle with four stages, all of which have to be completed for new knowledge
to be fully acquired. What are the four stages?
A. experience, reflection, abstract observation and active conceptualisation

B.experience, active experimentation, abstract conceptualisation, observation
and reflection
C. education, active experimentation, abstract conceptualisation, observation
and reflection
D. education, experimentation, observation and reflection
Question 4
David Kolb suggested that classroom learning is false and that actual learning
comes from which of the following?
A. parental example and mentoring

B. watching others
427
C. real life experiences
D. dreams and other sub-conscious experiences
.
Question 5
Honey and Mumford identified individual learning preferences. Which learning

preference is to maximise certainty and feel uncomfortable with subjective
judgements?
activistists
reflectors
theorists
pragmatists
Question 6
Which of the following is NOT one of the learning styles postulated by Honey
and Mumford?
theorist
reflector
assimilator
pragmatist
Question 7
Role playing exercise using video recording and playback would be most
effective for which type of training?
Development of selling skills

Regulation and compliance
Dissemination of technical knowledge
Introduction of new processes or procedures
Question 8
Training can bring about more flexibility to the workforce.
True
False
Question 9
Training is more future orientated and more individually orientated than

development.
A. True
428
B. False
Question 10
Which one of the following is NOT a step in the training process?
A. Evaluating training
Assessing the physical health
Planning the training
Identifying training needs
Question 11
Job ___________, personnel specifications, and leadership and

communication activities are the basis to identify candidates for training.
analysis
performance
descriptions
rotation
429
_____________________________________________________________
ANSWER BANK
__________________
430
B
431
CHAPTER 28
REVIEW AND APPRAISAL OF INDIVIDUAL

PERFORMANCE

EXPLAIN THE IMPORTANCE OF PERFORMANCE ASSESSMENT
Judgements and choices about people have to be made within all

organisations, and for the sake of everyone involved, it is desirable that they
should be made on the basis of systematic evaluation, rather than casually,
and known to be made in a way which is as fair and acceptable as possible.
Performance appraisal may be defined as the regular and systematic

review of performance and the assessment of potential with the aim of
producing action programmes to develop both work and individuals.
Performance appraisal aims to improve the efficiency of the organisation by

ensuring that the individual employees are performing to the best of their
ability and developing their potential for improvement. Appraisal schemes can
contribute usefully to all or many of the organisational objectives and thus
they should be considered of utmost significance.

EXPLAIN HOW ORGANISATIONS ASSESS THE PERFORMANCE
OF HUMAN RESOURCES
An effective appraisal system can be used to assess attitudes, behaviour and

performance but must have a balance of both measures of results and
measures of activities.
They may be a combination of:
quantitative measures using some form of rating scale

qualitative measures involving an unstructured narrative report on
specific factors and overall levels of behaviour and work performance.
A key issue in performance appraisal is determining what constitute valid

criteria or measures of effective performance. The problem is made more
432
difficult because almost all jobs have many dimensions so that performance
appraisal must employ multiple criteria or measures of effectiveness in order
to accurately reflect the actual performance of the employee.
Beer et al. (1984) suggest four criteria for assessing performance:
high commitment the workforce is motivated and understanding, and

are willing to interact with management about changes within the
organisation. Improved commitment may lead to more loyalty and
better performance for the business. It can also benefit the individual
through enhanced self worth, dignity, psychological involvement, and
identity
high competence the capacity of employees to learn new tasks and
roles if the circumstances require it and the organisations ability to
attract, keep, or develop employees who have valuable skills and
knowledge
cost effectiveness can be evaluated in terms of wages, benefits,
turnover, absenteeism, strikes, etc.
higher congruence the internal organisation, the reward system, and
the input, throughput, and output of personnel, which need to be
structured in the interests of all stakeholders.
Appraisal criteria may include the following:
Volume of work produced

Within time period
Evidence of work planning
Personal time management
Effectiveness of work under pressure
Knowledge of work
Gained through experience
Gained through training courses
Gained prior to employment
Quality of work
Level of analytical ability
Level of technical knowledge accuracy
Judgement exercised
Cost effectiveness
Management skills
Communication skills
Motivation skills
Training and development skills
Delegation skills
Personal qualities:
decision making capabilities
flexibility
adaptability
assertiveness
433
team involvement
motivation
commitment to organisational goals
Appraisal systems are often misunderstood and mismanaged. Appraisals are

central both to human resource management and performance management.
Understanding their role, objectives, benefits and purpose is important to all
employers. Careful preparation and understanding is required if the appraisal
process is to be successful, worthwhile and relevant. Appraisal systems exist
to improve organisational efficiency by ensuring that individuals perform to the
best of their ability, develop their potential, and earn appropriate reward. This
in turn leads to improved organisational performance.
Appraisals have three main purposes. These are often misunderstood. The
first is to measure the extent to which an individual may be awarded a salary
increase compared with his or her peers. This is the reward review
component.
The second purpose of an appraisal is to identify any training needs and, if

appropriate, to provide training and development to enable an individual to
help the organisation to achieve its objectives. This is the performance
review component. Finally, appraisals are also important to aid an
individual's career development by attempting to predict work that the
individual may be capable of in the future. This is the potential review
component.
Employees often question the value and usefulness of the time and effort
taken up by an appraisal. However, it establishes key results that an
individual needs to achieve within a time period while also comparing the
individual's performance against a set and established standard. The
employee is not the only beneficiary - the organisation benefits through
identifying employees for promotion, noting areas for individual improvement,
and by using the system as a basis for human resource planning.

DEFINE PERFORMANCE APPRAISAL AND DESCRIBE ITS
PURPOSES
An appraisal is a process by which the progress, performance, results and

sometimes personality of an employee are reviewed and assessed by his or
her immediate superior. It is customary for appraisals to be made by an
employees immediate superior, and this has an obvious rationale. The
superior has a wider view of the organisation's objectives and his subordinate
is responsible for the work to accomplish such objectives. Thus, the
immediate superior is the person best placed to judge how well his junior has
done, and help/guide him to do better.
434
For an effective performance appraisal, employees must know not only what
is expected of them, but also the reason for doing the job the way they do it,
and how good/bad they are at their work.
Each person will be appraised individually on:
the progress they have been making in their job

their strengths and weaknesses
their future needs as regards training and development
their potential for promotion.
The other side of this is that management are fully aware of what the staff are
supposed to be doing and how they are actually doing it. This can be
achieved if performance criteria are established jointly, appropriate on the job
behaviour is mutually understood and the review is a continual process
focused on growth and development. The organisations appraisal scheme is
inextricably linked to its control structure:
it clarifies specific jobs relating them to the objectives of the organisation

it develops realistic and appropriate performance standards
it assesses competencies
it uses feedback and reward to improve performance
it links performance to organisational goals.
It aims to make the behaviour of employees predictable and, hence,

controllable. Obviously any rating could only occur in situations where the
climate is open, that is, the subordinate is made comfortable and the
immediate superior is feeling so as well. Ideally appropriate performance
standards should work under defined procedures.

DESCRIBE THE PERFORMANCE PROCESS
The process of performance appraisal usually entails:
identifying the criteria for assessment perhaps based on job

analysis, job requirements, performance standards and person
specification
assessing competence
manager preparing an appraisal report sometimes both appraiser and
appraisee prepare a report and they are then compared. Assessments
must be related to meaningful performance criteria and a common
standard so that comparisons can be made between individuals
manager interviewing the jobholder for an exchange of views about the
appraisal report
435
identifying and agreeing future goals and targets for improvement,
solutions to problems
managers own superior reviewing the assessment to establish the
fairness of the procedure
agreeing, preparing and implementing action points, plans to achieve
improvements, e.g. training needs
following up giving the results of the appraisal, monitoring the

progress of the action plan, carrying out agreed actions on training,
promotion and so on and giving regular feedback.
While many people view the performance appraisal process as beginning

after 6 months or 12 months of employment and view it as a review of how
the employee has performed for the previous period, a successful
performance management process begins during the hiring process. It
continues as an ongoing cycle from recruitment, through selection,
induction/orientation, and goal setting and on to performance appraisal and
evaluation. This process occurs in 3 stages with the following components:
Review and comparison consists of the individual being assessed and

analysed in terms of objectives, tasks, workflows and results achieved.
Management by objectives managers agree certain objectives with
their subordinates and then review the results achieved. It is based on
the idea that if subordinates know their objectives they are more likely
to reach them.
The task-centred method relates to what the subordinate is doing
and how they do it. It avoids the more formal approach to staff
appraisal and adopts a continual assessment approach.

EXPLAIN THE BENEFITS OF EFFECTIVE APPRAISAL
Effective appraisal is grounded in the belief that feedback on past

performance influences future performance, and that the process of isolating
and rewarding good performance is likely to repeat it. Agreement on
challenging but achievable targets for performance motivates employees by
clarifying goals and setting the value of incentives offered. Staff appraisal can
have benefits for both the employer (the organisation) and the employee:
Benefits for the employer Benefits for the employee

It provides a formal system for The employee gets feedback
assessing the performance and about performance at work, and
potential of employees, with a view to an assessment of competence.
identifying candidates for promotion.
It provides a system for identifying A formal appraisal system offers
ways of improving the competence of the employee an opportunity to
436
employees, in order to raise the discuss future prospects and
general level of efficiency and ambitions.
effectiveness of the work force.
It is a valuable system for human An appraisal interview may be
resource planning, and ensuring that used as a basis for considering
employees are ready for promotion, to pay and rewards.
fill
management job vacancies that arise.
If it is well managed, Appraisal can be used to
communications can be improved identify and agree measures for
between managers and staff and so further training and
improve working relationships. development, to improve the
employees competence.
28.6 ACCA OUTCOME 6

IDENTIFY THE BARRIERS OF EFFECTIVE APPRAISAL AND HOW
THESE MAY BE OVERCOME
There have been studies on the effects of appraisal, which show some
negative effects:
criticism had a negative effect on goal achievement
subordinates generally react defensively to criticism during appraisal
interviews
inferior performance resulted from defensive reactions to criticism
repeated criticism had the worst effect on subsequent performance of
individuals who had little self confidence.
J Lockett suggests that appraisal barriers can be identified as follows:
Appraisal as Differing views regarding performance.

confrontation Feedback is subjective the manager is biased,
allowing personality differences to get in the way
of actual performance.
Feedback is badly delivered.
Assessment is based on yesterdays performance
not on the whole year.
Disagreement over prospects and solutions.
Appraisal as Appraisal is seen as a one sided process the
judgement manager is judge, jury and counsel for the
prosecution.
Appraisal is imposed.
Appraisal as Lack of will from either party.
chat An unproductive conversation.
No outcomes set.
Appraisal as A traditional ceremony.
bureaucracy No purpose or worth.
437
Appraisal as A traditional ceremony.
an No purpose or worth.
annual event
Appraisal as Frustration at limited appraisal time.
unfinished No belief that issues will be followed up.
business
28.6.1 Overcoming the barriers to effective appraisal
One of the barriers to effective appraisal was the view of employees that the
annual appraisal was not treated as something important, and that nothing
was done after an appraisal interview had finished.
There must be a system of follow up and feedback.
There may be agreement between the interviewer and the employee in the
appraisal interview about further training that the employee needs, or
ways in which the employee can be developed. These agreements
should be recorded as part of the official record of the appraisal
interview.
The action plan that has been agreed with the employee should be
reported to senior management and the HR department.
The interviewer is normally the manager of the employee. He or she
should follow up the appraisal report and should arrange the training or
development that has been agreed.
At the next appraisal interview, the interviewer and the employee should
discuss whether the agreed training or development was provided, and
what has been its effect.
The appraisal system itself should be assessed and the claims made by
Lockett will need to be addressed to ensure:
Relevance does the system have a useful purpose and is it relevant to
the needs of both the organisation and the individual?
Fairness is there reasonable objectivity and standardisation of criteria
throughout the organisation?
Serious intent is the management committed to the system or has it
been thrust on them by the HR department? Do the appraisers have
training in interviewing and assessment techniques? Is there a
demonstrable link between performance and reward?
Cooperation is the appraisal a participative, problem solving activity with
the appraisee given time and encouragement to prepare for it to be
able to make a constructive contribution? What type of conclusion
emerges from the process?
Efficiency is it costly and difficult to administer and does it seem too time
consuming compared with the value of its outcome?
Another way of ensuring effective appraisals is to apply the 4Fs:
438
Firm managers should be willing to discuss negative as well as
favourable aspects of performance.
Factual subjective aspects should be avoided.
Fair all employees should be treated the same.
Frequent appraisals should be held on a regular basis rather than when
a problem arises.
28.6.2 Approaches to Performance Appraisal
Tell and Sell - This emphasises the managers role as judge, telling the
employee the outcome of the appraisal and where they need to
improve. This approach may be effective with inexperienced
employees, but is unlikely to be well received by someone who feels
they have the capacity to judge their own performance. It is highly
controlling and it is mostly a one-way communication system.
Tell and Listen - The appraiser still takes on the role of judge, passing on
the results of an appraisal which has already been completed, but
then elicits the appraisees reactions. This may enable the appraisee to
influence the results, by offering evidence or explanations which were
previously unknown to the appraiser. Certainly this approach is more
likely to involve the appraisee in decisions about how development
needs might be addressed, such as whether they would prefer to
attend a training course or receive such on the job coaching.
Nevertheless, identification of the development need in the first place
remains with the appraiser. Most of the control therefore remains with
the appraiser, but the appraisee is allowed their say within the limits
that the appraiser allows.
Problem solving approach - described as a very different kind of

interview. The emphasis is not on the judgments of the appraiser but
the growth and development of the appraisee. The appraisers role is
to elicit their self-reflection, so that the appraisee is able to identify their
own strengths and development needs, and how these needs
might be met. The term problem solving may be off-putting to the
employee the appraisal may reveal a high level of performance with
few problems at all! Non-directive interviewing is a possible
alternative, and is more likely to provide a focus on future
development.
360 degree approach - founded on the idea that any employees

performance is seen by many otherstheir manager, peers, direct
reports, customers, etc. Nevertheless, none of these people see
anyone elses performance all the time. 360- degree appraisals
improve on any evaluation done by one person by combining ratings
from many people who see different parts of an employees
performance.
439
EXPLAIN HOW THE EFFECTIVENESS OF PERFORMANCE
APPRAISAL MAY BE EVALUATED
Evaluating the appraisal scheme can involve the following:
calculating the costs and benefits of the appraisal process

investigating if there have been any improvements in performance by the
individual and the organisation
asking appraisers and appraisees their opinions on the process
monitoring performance results
watching take up most of training and development opportunities
checking succession and promotion processes/results
reviewing other factors such as staff turnover a figure that is too high
or too low is an indication that something is wrong in an organisation.
Also, the appraisal scheme ought to identify individuals who are ready
for promotion and if many talented people leave on the grounds that
there are no job opportunities then the overall development system
may be at fault.
The process of assessment and staff appraisal should highlight some of the
causes of dissatisfaction, find solutions and remedy them before the
employee becomes disillusioned, looks for another job and resigns.
The causes of staff leaving fall into three categories:
Discharge as a result of an employees unsuitability, disciplinary action

or redundancy.
Unavoidable because of marriage, moving house, illness or death.
Avoidable due to pay, working conditions, relationships with work
colleagues.
From records, the staff turnover can be calculated by dividing either the total
separations (those leaving the organisation) or the total replacements by the
average number in the workforce, and expressing the result as a percentage.
Examination of this figure may highlight vital information, e.g. poor selection
techniques or poor working conditions.
440
Refer to technical article Understanding the importance of
appraisals at the back of the notes
_____________________________________________________________
KEY POINTS
__________________
441
An effective appraisal system should include both quantitative and
qualitative measures.
Beer et al (1984) suggest 4 criteria for assessing performance:

high commitment
high competence
cost effectiveness
high congruence
Appraisal criteria may include:

volume of work produced
knowledge of work
quality of work
management
skillspersonal
qualities
There are 3 main components for performance appraisals

reward review
performance
reviewpotential
review
An appraisal is a process by which the progress, performance, results

and sometimes personality of an employee are reviewed and
assessed by his or her immediate superior.
The immediate superior is the person best placed to judge how well his
junior has done.
Each person will be appraised individually on:

the progress in their job
their strengths and weaknesses
their future needs
potential for promotion
The organisations appraisal scheme is inextricably linked to its control

structure.
442
9.
Lockett suggests that appraisal barriers can be identified as follows:

appraisal as confrontation
appraisal as judgement
appraisal as chat
appraisal as bureaucracy
appraisal as an annual event
appraisal as unfinished business
11.The appraisal system should be assessed and claims made by Lockett

will need to be addressed to ensure:
relevance
fairness
serious intent
cooperation
efficiency
The main approaches to Performance appraisals are:

tell and sell
tell and
listenproblem-
solving
360 degree approach
443
_____________________________________________________________
QUESTION BANK
__________________
444
Question 1
Beer et al. (1984) suggest four criteria for assessing performance. Which one
takes into consideration the interests of all stakeholders?
high commitment
high competence
cost effectiveness
high congruence
Question 2
Astrid had her performance appraisal with her manager today. She was very
dissatisfied since her manager emphasised on her lack of team involvement
even though she proved to be well tuned whenever she is given a task by
herself.
Should Astrid's dissatisfaction be justified?
Yes
No
Question 3
Appraisal based on results has the advantage of encouraging and rewarding

the outcomes desired by the organisation.
True
False
Question 4
Appraisal based on results has the disadvantage that it might encourage

people to break rules or go against company policy in order to achieve what
is desired by the organisation in terms of results.
True
False
Question 5
The best person to conduct the performance appraisal of a sales person is

the company director.
445
True
False
Question 6
Performance appraisals should be conducted by:
Company Director
Human Resources Manager
Colleagues
Immediate superior
Question 7
Appraisal should be done only once a year. Employees should not be given
day-to-day feedback on their performance?
True
False
Question 8
An unavoidable reason for staff leaving is due to
pay
working conditions
relationships with work mates
marriage
Question 9
The performance appraisal should be conducted and viewed only by the

immediate superior.
True
False
Question 10
Sam was conducting his performance appraisal with his manager. The
manager decided to use his office so that he will not loose sight of the line
production whilst conducting this appraisal. The manager received a call and
446
he had to leave the office. When he came back, after around 5 minutes, he
told Sam that it was nothing urgent. One of the labourers had a headache
and wanted to go home and rest. Eventually they restarted their appraisal
interview after about 3 minutes since they had to repeat much of what had
already been said.
List the main problems in the case scenario above.
Question 11
The best form of questions to get to know more about a person are:
closed questions
open-ended questions
Question 12
Gils is conducting an appraisal interview with his assistant Jill. He initially

invites Jill to talk about the job, her aspirations, expectations and problems.
He adopts a non-judgmental approach and offers suggestions and guidance.
This is an example of which approach to performance appraisal?
Tell and sell approach

Tell and listen approach
Problem solving approach
360 degree approach
Question 13
Gerry has just had his performance appraisal. He was told that his work was
unacceptable and if he does not improve in the next two months he will be
dismissed.
What approach was used in Gerry's case?
Tell and sell approach

Tell and listen approach
Problem solving approach
360 degree approach
Question 14
Which of the following is an objective of the appraisal system from the

organisation's point of view?
A. it is a confidential means of identifying staff dissatisfaction

B. it monitors human resources selection processes against results
447
C. it enables the HR Department to gauge an acceptable general pay rise for
staff
D. it monitors the physical and mental health of employees
Question 15
st
Every year-ending 31 December all staff at ABC Co. Ltd are required to do a
physical stock-taking. They all know that this stock-taking exercise is followed
by an appraisal performance. After the festive holidays they are all called for a
performance interview for which they really do not look forward. The fact is
that they see it as a waste of time considering no follow up action is taken
during the year.
Which are the main appraisal barriers in the case scenario above:
appraisal as confrontation
appraisal as unfinished business
appraisal as chat
appraisal as an annual event
Question 16
Which one of the following is NOT a purpose of appraisal?
To identify performance levels

To assess development needs
To encourage communication between manager and employee
To highlight employees weeknesses
448
_____________________________________________________________
ANSWER BANK
__________________
449
D
Main problems:
use of office the performance interview should ideally be conducted in a
private place such as a board room
interruptions tend to show unprofessionalism
lack of delegation the manager should have delegated the day-to-day
responsibilities to a subordinate in order to conduct appraisals and
show to the employees how valuable are such appraisals.
11.B
12.B
13.A
14.B
15.B and D
16 the appraisal must not be seen as a chance for the manager to act as
judge, jury and counser for the prosecution!
450
451
CHAPTER 29
PERSONAL EFFECTIVENESS AND

COMMUNICATION IN BUSINESS

EXPLAIN THE IMPORTANCE OF EFFECTIVE TIME MANAGEMENT
Whatever the qualities or attributes of a successful manager, or the qualities

of the people working for him or her, one essential underlying criterion is the
effective use of time. Time is a unique resource you cannot hire, rent or buy
more time. The supply is totally irreplaceable and everything requires time.
The purpose of time management (TM) is to:

plan the best use of time
cut down on time wasted
devote more time to the really important issues, or jobs on hand
complete more in the time available.
This will allow you to:

eliminate wastage
refuse excessive workloads
monitor project progress
allocate resource (time) appropriate to a tasks importance
plan each day/week efficiently.
The first point we have to recognise is that we are the persons responsible for
the effective management of our own time. A good place to start is to set our
goals, missions and overall objectives. We can then plan ahead and
maximise our time by devoting maximum effort to activities which directly
contribute to the achievement of these goals.

DESCRIBE THE BARRIERS OF EFFECTIVE TIME MANAGEMENT
AND HOW THEY MAY BE OVERCOME
Three keys to effective time management are: remembering, setting priorities,

and motivation. It is easy to fall into the trap of thinking "I won't forget that."
But the important thing is not just to remember it, but to remember it at the
right time -- a time when you can take the first step in doing it.
Some people say they do not need to spend time planning. That may be true.
452
If you have a list of things to do that are all about equally important, and if you
are sure that the most important things are on the list, then you do not need
to spend any time comparing them. Just start doing one of them, it does not
matter which one. But for most people most of the time, some of the things
are more important than others, so it is worthwhile taking a few minutes to
read over the list and choose the most important to do first.
John Adair in his book How to manage your time, suggests that there are 5
problems common to almost all managers.
Procrastinating
Delegating ineffectively
Mismanaging paperwork
Holding unnecessary meetings
Failing to set priorities
Apart from working to plans, checklists and schedules, organizations might be

improved by the ABCD method in-tray management.
Act (immediately)
Bin (it)
Create (a plan)
Delegate
29.2.1 The main influences of effective time management are:
Culture
Colleagues Influence
Staff Demands
Individuals Personality
Individuals Personal Skills
Nature of Work
Management Style
Internal Barriers
Discipline
Procrastination (Putting off)
Lack of Motivation
External Barriers
Workload Issues
Available Resources
453
Overcome the internal barriers Overcome the external barriers
Be assertive identify your Do the right thing right
time wasters and resolve to doing the right thing is
deal with them, learn to say effectiveness; doing things
NO, delegate. right is efficiency. Focus
Identify and make use of your first on effectiveness
personal biorhythms, or up (identifying what is the
time and down time. right thing to do),
Conquer procrastination find then concentrate on
out what causes you to put off efficiency (doing it right).
doing something and Eliminate the urgent
remedy it, e.g. a feeling of urgent tasks with short
inadequacy could be due to term consequences often
lack of information, lack of a get done
particular skill or lack of to the detriment of the
training. important tasks those
Promise yourself a reward. with long term, goal related
implications.
Break big jobs into little
steps.
Use negotiation to improve
the use of time.

DESCRIBE THE ROLE OF INFORMATION TECHNOLOGY IN
IMPROVING PERSONAL EFFECTIVENESS
IT Planning Aids:
Electronic personal organisers

Project management software
Hand-held computerised diaries
Integrated software packages
Integrated software packages like MS Outlook has the following features for
personal productivity management:
A calendar allows users to timetable their activities for the day and plan
meetings with others. It will also be able to generate reminders, for
example when a deadline is approaching, or the date of a meeting.
An address book.
To do lists.
A journal. This can automatically record interactions with people involved
in a project, such as email messages and record and time
actions such as creating and working on files. The journal will keep
track of all of this and is useful both as a record of work done and as a
quick way of finding relevant files and messages without having to
remember where each one is saved.
454
A jotter for jotting down notes as quick reminders of questions, ideas, and
so on.
Handheld
Computers like the Palm do not attempt to do the work of a complete

computer. It tracks appointments and contacts, synchronises them with a
desktop computer, and takes the occasional note. The features include date
book, address book, To Do list, calculator, Expense Tracking, and memo pad.
455
_____________________________________________________________
KEY POINTS
__________________
456
The purpose of time management is to:
plan the best use of time
eliminate wastage
devote time to the really important issues
complete more in the time available
We are the persons responsible for the effective management of our own
time.
Three keys to effective time management are: remembering, setting

priorities, and motivation
The main influences of effective time management are:

Culture
Colleagues Influence
Staff Demands
Individuals Personality
Individuals Personal Skills
Nature of Work
Management Style
Internal Barriers
Discipline
Procrastination
Lack of Motivation
External Barriers
Workload Issues
Available Resources
457
_________________________________________________________
QUESTION BANK
__________________
458
Question 1
Which of the following is one of the recognised time management

techniques?
refuse to do inessential tasks

charge out your time
advance your watch by five minutes every hour to create blue sky thinking
time
cost your time
Question 2
Which one of the following is not a technique to overcome external barriers?
use negotiation
concentrate on effectiveness
concentrate on efficiency
promise yourself a reward
Question 3
Which of the following is not an internal barrier?
Discipline
Work issues
Lack of Motivation
Procrastination
Question 4
Danny is a team leader who keeps a detailed checklist of his daily tasks, and
ranks them in order of importance and urgency. He only takes phone calls
during particular times of day to avoid interruptions. Even so, at the end of the
day, he has to work late to complete a large number of urgent but low-hard
tasks for the following day. Which of the following is Dannys weakness?
Planning
Delegation
Focus
Amortization
459
Question 5
It has been suggested that work organization might be improved by an ABCD

method of in-tray management.
Act, Bin, Create and Delegate

Apply, Bin, Collate and Delegate
Act, Blame, Create and Deliver
Apply, Bin, Collate and Deliver
460
_____________________________________________________________
ANSWER BANK
__________________
461
D
B a good leader should know how to delegate
462
463
CHAPTER 30
CONSEQUENCES OF INEFFECTIVENESS
AT WORK

IDENTIFY THE MAIN WAYS IN WHICH PEOPLE AND TEAMS CAN
BE INEFFECTIVE AT WORK
It is a tough job balancing the needs of the organisation and the needs of a
team. The main problems resulting in ineffective work include:
uncommitted workforce
unequal participation between
workforce unmotivated workforce
people having different goals and priorities
distorted communication
inadequate training
no job description
lack of team support from management
conflict between team members

EXPLAIN HOW INDIVIDUAL OR TEAM INEFFECTIVENESS CAN
AFFECT ORGANISATIONAL PERFORMANCE
Employees are the lifeblood of an organisation. How they feel about the work
they are doing and the results received from that work directly impact an
organisation's performance and, ultimately, its stability. For instance, if an
organisation's employees are highly motivated and proactive (and therefore
being effective), they will do whatever is necessary to achieve the goals of the
organisation as well as keep track of industry performance to address any
potential challenges. This two-prong approach builds an organisation's
stability. An organisation whose employees have low motivation and are
ineffective in their work are completely vulnerable to both internal and external
challenges. Such employees will not dare to take that extra mile to maintain
the organisation's stability. An unstable organization ultimately underperforms .
464
_____________________________________________________________
KEY POINTS
__________________
465
1. The main problems resulting in ineffective work are:
uncommitted workforce
unequal participation between
workforce unmotivated workforce
people having different goals and priorities
distorted communication
inadequate training
no job description
lack of team support from management
conflict between team members
466
467
CHAPTER 31
COMPETENCE FRAMEWORKS AND

PERSONAL DEVELOPMENT

DESCRIBE THE FEATURES OF A COMPETENCE FRAMEWORK
EXPLAIN HOW A COMPETENCE FRAMEWORK UNDERPINS
PROFESSIONAL DEVELOPMENT NEEDS
31.1.1 What is competence framework?
Competence may be defined as the behaviours (and, where appropriate,

technical attributes) that individuals must have, or must acquire, to perform
effectively at work that is, the term focuses on the personal attributes or
inputs of the individual.
A competency framework is a structure that sets out and defines each

individual competency (such as problem-solving or people management)
required by individuals working in an organisation or part of an organisation
Competencies are a signal from the organisation to the individual of the

expected areas and levels of performance. They provide the individual with a
map or indication of the behaviours and actions that will be valued,
recognised and in some organisations rewarded. Competencies can be
understood to represent the language of performance in an organisation.
Creating a competency framework is an effective method to assess, maintain,

and monitor the knowledge, skills, and attributes of people in organisations.
The framework allows to measure current competency levels to make sure
staff members have the expertise needed to add value to the business. It also
helps managers make informed decisions about talent recruitment, retention,
and succession strategies. Additionally, by identifying the specific behaviours
and skills needed for each role, it enables the company to budget and plan for
the training and development your company really needs.
468
EXPLAIN HOW PERSONAL AND CONTINUOUS PROFESSIONAL
DEVELOPMENT CAN INCREASE PERSONAL EFFECTIVENESS AT
WORK
Personal effectiveness encompasses both the central importance of

acknowledging that we all need to continuously strive to achieve our potential
as well as live fulfilled lives, for our own sense of self-worth and satisfaction.
As a consequence, we improve our ability to reach out and touch the lives of
others whilst being open and responsive to their needs and wants. Underlying
this is the assumption that our actions are conducted with positive intent, so
that in meeting our own needs and wants we behave with integrity and
generosity of spirit.
But why should this emphasis on personal growth and development

matter in a business context?
It matters because if we are not fully effective as individuals, we are unlikely

to be effective as leaders and managers, our relationships may be wanting,
our ability to influence reduced and our performance and contribution to our
organisations diminished. There is an inevitable link between personal and
organisational success. When individual effectiveness and integrity is lacking
it can result in serious problems.
Personal and professional development opens the door into raised self-
awareness that encourages to take action to change what one does not like
and work on what s/he does really well, so that a person becomes distinctive
and strong in his own self-belief. These are core qualities for leadership at all
levels and for success in any role.

EXPLAIN THE PURPOSES AND PROCESSES OF COACHING,
MENTORING AND COUNSELLING AND THEIR BENEFITS
31.3.1 Mentoring is a process where one person offers help, guidance,

advice and support to facilitate the learning or development of another. It
follows an open and evolving agenda and deals with a range of issues.
The mentoring process consists of three core activities, which set it apart
from other developmental activities:
exchange of knowledge that is unique to a business, industry, profession

or organisation
a sustained partnering relationship
measurable, beneficial outcomes for the individual parties involved and for
the larger organisation.
469
A mentor is a guide, counsellor, tutor or trainer who:
can give practical study support and advice

can give technical, ethical and general business guidance
can help with development of interpersonal and work skills
is an impartial sounding board no direct reporting responsibility
is a role model who can help improve career goals.
31.3.2 Coaching focuses on achieving specific objectives, usually within a

preferred time period. It is more about improving the performance of someone
who is already competent rather than establishing competency in the first
place, or focusing on the task and ensuring that the learner gains
competence.
It is usually on a one to one basis, is set in the everyday working situation

and is a continuing activity.
It involves gently nudging people to improve their performance, to develop
their skills and to increase their self confidence so that they
can take more responsibility for their own work and develop their
career prospects.
Most coaching is carried out by a more senior person, or manager. What
is essential is that the coach should have the qualities of expertise,
judgement and experience that make it possible for the person
coached to follow the guidance.
31.3.3 Counselling can be defined as a purposeful relationship in which one

person helps another to help himself/herself. It is a way of relating and
responding to another person so that the person is helped to explore his/her
thoughts, feelings and behaviour with the aim of reaching a clearer
understanding. The clearer understanding may be of himself/herself or of a
problem, or of the one in relation to the other.
The counsellor needs to be:
Observant. There is a need to note behaviour, which may be symptomatic

of a problem.
Sensitive. There is a need to acknowledge and understand that another
persons beliefs and values may be different from their own
(for example religious beliefs).
Empathetic. There is a need to appreciate that the problem may seem
overwhelming to the individual.
Impartial. There is a need to remain impartial and refrain from giving
advice.
Discreet. There will be situations when an employee cannot be
completely open unless they are sure that the comments they make
will be treated with confidentiality.
Through active listening, the use of open questions and clarifications, the
470
counsellor encourages reflection and help the client identify issues and
solutions. Counselling does not involve giving advice or making suggestions.
What advantages does counselling provide for the wider organisation?

It provides a means of understanding and addressing individual problems,
which are very often not directly related to the workplace. It also provides a
confidential service for the employee to discuss problems without directly
involving management. Over the longer term, an organisation might develop
counselling as part of its human resources policy, demonstrating a
commitment to its employees beyond that normally expected.

DESCRIBE HOW A PERSONAL DEVELOPMENT PLAN SHOULD
BE FORMULATED, IMPLEMENTED, MONITORED AND REVIEWED
BY THE INDIVIDUAL
31.4.1 A personal development plan is a clear developmental action plan

for an individual that incorporates a wide set of developmental opportunities
including formal training. During their career, employees are increasingly
encouraged to manage their own development. In consultation with
management, they might be asked to set up personal development plans
whereby they set targets and propose actions/activities to achieve them.
Development is more general than training, is more forward looking and

orientated towards the individual, and is concerned with enabling the
individual to fulfil his or her potential. The purpose of personal development is
to ensure growth during the persons career.
The growth should be triggered by a job that provides challenging, stretching

goals. The clearer and more challenging the goals, the more effort will be
exerted, and the more likely it is that good performance will result. If the
person does a good job and receives positive feedback, he or she will feel
successful (psychological success). These feelings will increase the feelings
of confidence and self esteem and lead to involvement in the work, which in
turn leads to the setting of future stretching goals.
Stage 1 Analysis of current position requires the individual, with their

manager, to carry out a personal SWOT (strengths, weaknesses,
opportunities, threats) analysis. This can be as simple as assessing what an
individual does by referring to the job description, evaluating which aspects of
a job an individual likes and dislikes on the one hand, and those aspects that
an individual does well and not so well in on the other.
Stage 2 Set Goals - following the above analysis, personal goals should be
set for the individual. The tasks the person does not do well are examined
and reasons are established. This can take the form of an alternative and
more traditional type of SWOT analysis by examining the persons strengths
471
and weaknesses. Particular weaknesses should be identified as being the
cause of failure to carry out certain tasks well. This should then inform a
personal set of objectives in order to overcome these weaknesses.
Goals should have the characteristic of SMART objectives:

Specific
Measurable
Attainable
Realistic
Time bounded.
Stage 3 Draw up an action plan an action plan and training programme

should be based on addressing the identified weaknesses and trying to move
more of the tasks of the current role into the do well side. It is easier to
improve the performance of individuals in tasks that they like performing than
in those that they do not.
472
_____________________________________________________________
KEY POINTS
__________________
473
A personal development plan is a clear developmental action plan for an
individual that incorporates a wide set of developmental opportunities
including formal training.
Development is more general than training, is more forward looking and

orientated towards the individual, and is concerned with enabling the
individual to fulfil his or her potential.
Positive feedback from behalf management, will increase the feelings of

confidence and self esteem of employees and lead to involvement in
the work, which in turn leads to the setting of future stretching goals.
4.
Mentoring is a process where one person offers help, guidance, advice

and support to facilitate the learning or development of another.
A mentor is a guide, counsellor, tutor or trainer.
7.Coaching focuses on achieving specific objectives, usually within a

preferred time period. It is more about improving the performance of
someone who is already competent rather than establishing
competency in the first place.
8.Counselling can be defined as a purposeful relationship in which one

person helps another to help himself/herself. It is a way of relating and
responding to another person so that the person is helped to explore
his/her thoughts, feelings and behaviour with the aim of reaching a
clearer understanding.
A competency framework is a structure that sets out and defines each

individual competency (such as problem-solving or people
management) required by individuals working in an organisation or part
of an organisation.
474
_____________________________________________________________
QUESTION BANK
__________________
475
Question 1
Which of the following is NOT one of the purposes of a personal development

plan?
increasing self-confidence
self-actualisation (the top level of the Maslow pyramid)
increasing self-awareness
developing specialist expertise
Question 2
Self-fulfillment needs can be best described by which of the following?
the need to achieve something worthwhile in life

the need to be seen as successful
the need to be a popular member of a group
the need to feel envied by others
Question 3
Development is the planned and systematic modification of behaviour through

learning events, programmes and instruction which enable individuals to
achieve the level of knowledge, skills and competence to carry out their work
effectively.
True
False
Question 4
Which of the following is not a characteristic of objectives?
specific
motivational
attainable
time bounded
Question 5
Analysis of current situation is generally done by a:
PEST analysis
SWOT analysis
PESTEL analysis
Environmental scan
476
Question 6
It is easier to improve the performance of individuals in tasks that they like

performing than in those that they do not like.
True
False
Question 7
Gloria has the responsibility to work with selected management trainees in

her organisation. Her objective is to help the trainees over the medium to
long-term with their personal career development. Supporting and
encouraging them to fulfill their potential is an integral part of her role. Gloria
has no involvement in the technical content of the trainee managers' work.
Which of the following roles does Gloria fulfill?
Buddy
Counsellor
Mentor
Instructor
Question 8
Which of the following best defines coaching?
A. Developing the individual by helping to build on skills and overcome

weaknesses.
B. Provision of one-way instruction on formal tasks required to carry out the

immediate job.
C. Offering career guidance in order to maximise the individuals potential.
D. Provision of objective advice to overcome the individuals personal
problems.
Question 9
Which of the following is not a skill that counsellor needs to demonstrate?
observant
sensitive
empathetic (sharing feelings)
advisory
477
Question 10
Compromise is an example of a:
Win-win result
Win-lose result
Lose-win result
Lose-lose result
478
_____________________________________________________________
ANSWER BANK
__________________
479
D
B the definition is referring to training
B smart objectives, specific, measurable, attainable, realistic and time-

based
D neither party gets what they want
480
481
CHAPTER 32
SOURCES OF CONFLICT AND

TECHNIQUES FOR CONFLICT
RESOLUTION AND REFERRAL

IDENTIFY SITUATIONS WHERE CONFLICT AT WORK CAN ARISE
Conflict refers to a process in which one party (person or group) perceives

that its interests are being opposed or negatively affected by another party.
Four primary levels of conflict may be present in organizations:
Intrapersonal conflict occurs within an individual and commonly result in

inner tensions and frustration
Interpersonal conflict occurs when two or more individuals perceive that
their attitudes, behaviours or preferred goals are in opposition
Intragroup conflict refers to disputes among some or all of a groups
members, which often affect a groups dynamics and effectiveness.
Family-run businesses can be especially prone to intragroup and
other types of conflict
Intergroup conflict refers to opposition, disagreements and disputes
between groups or teams.

DESCRIBE HOW CONFLICT CAN AFFECT PERSONAL AN
ORGANISATIONAL PERFORMANCE
Many people automatically assume that conflict is related to lower group and
organisational performance. This assumption is frequently incorrect. Conflict
can be either constructive or destructive to the function of a group. Levels of
conflict can be either too high or too low. Either extreme hinders performance.
An optimal level is one at which there is enough conflict to stimulate creativity,
allow tensions to be released and initiate the seeds for change.
Inadequate or excessive levels of conflict can hinder the effectiveness of a

group or an organization, resulting in reduced satisfaction of group members,
increased absence and turnover rates and eventually lower productivity.
482
EXPLAIN HOW CONFLICT CAN BE AVOIDED
The avoiding style refers to unassertive and uncooperative behaviours. A

person uses this style to stay away from conflict, ignore disagreements or
remain neutral. The avoidance approach reflects an aversion (dislike) to
tension and frustration and may involve a decision to let a conflict work itself
out. This style may be desirable under some situations such as:
The issue is minor or only of passing importance and thus not worth
the individuals time or energy to confront the conflict
The individual does not have enough information to deal effectively
with the conflict at that time
The individuals power is so low relative to the other persons that there
is little chance of causing change
Others may resolve the conflict more effectively

IDENTIFY WAYS IN WHICH CONFLICT CAN BE RESOLVED OR
REFERRED
Direct Approach: This approach concentrates on the leader confronting the

issue head-on and is probably the best approach of all. Admittedly, conflict
is uncomfortable to deal with, but it is best to look at issues
objectively and to face them as they are. If criticism is used, it must be
constructive to the recipients.
Bargaining: This technique is best used when both parties have some
sort of idea or solution but simply cannot find common ground. Often a
third party, such as a team leader, is needed to help find the compromise.
Compromise involves give and take on both sides.
Enforcement of Team Rules: This technique is only used when it is obvious

that a member does not want to be a team player and refuses to
work with the rest. If enforcement has to be used on an individual, it may
be best for that person to find another team.
Retreat: By simply avoiding it or working around it, a leader can often delay
long enough for the individual to cool off. If this technique is used in the
right environment and by an experienced leader, it can help to prevent
minor incidents that are the result of someone having a bad day from
becoming real problems that should never have occurred.
De-emphasis: This is a form of bargaining where the emphasis is on the

areas of agreement. When parties realise that there are areas where they
are in agreement, they can often begin to move in a new direction.
483
_____________________________________________________________
KEY POINTS
__________________
484
Conflict refers to a process in which one party (person or group) perceives
that its interests are being opposed or negatively affected by another
party. Four primary levels of conflict may be present in organizations:
Intrapersonal conflict ii.
Interpersonal conflict
iii. Intragroup conflict
iv. Intergroup conflict
An optimal level is one at which there is enough conflict to stimulate

creativity, allow tensions to be released and initiate the seeds for
change.
Inadequate or excessive levels of conflict can hinder the effectiveness of a

group or an organization, resulting in reduced satisfaction of group
members, increased absence and turnover rates and eventually lower
productivity.
Ways in which conflict can be resolved or referred include Direct

Approach, Bargaining, Retreat, De-emphasis.
485
CHAPTER 33
COMMUNICATING IN BUSINESS
33.1 ACCA SYLLABUS OUTCOME 1

DEFINE COMMUNICATIONS
In our everyday lives, we all communicate. Communication is the process of

transmitting information from one person to another. Communication always
involves two or more people. True leaders must handle communication
effectively considering that a lot of time within an organisation is spent in
order to solve problems, discuss future plans and delegate work.
In theory, Communication is the interchange of information, ideas, facts and

emotions by two or more persons. It establishes relationships and makes
organising possible
Without communication, members of an organisation would be working in a

vacuum considering no links can be undertaken with the people around us.
The tasks of management in guiding, instructing, warning and encourage
workers would become impossible.
Imagine a person working in the production line of a factory producing denim

jeans, and, let us assume that this labourer is in charge of sewing the pockets
of the jeans and he is constantly conducting his work wrongly! If there is no
communication and s/he continues to be unproductive, the final product will
not qualify the final inspection and quality checking. As a result, therefore, the
company will end up with unqualified goods that cannot be sold to the end
customer (a process which at the end is getting no return to the organisation
thanks to the lack of communication)
486
IDENTIFY METHODS OF COMMUNICATION USED IN THE
ORGANISATION AND HOW THEY ARE USED
DESCRIBE THE MAIN METHODS AND PATTERNS OF
COMMUNICATION
When we look beyond two person communication to the linkages among

work groups, departmental or organizational members, we are concerned
with communication networks, which are systems of communication lines
linking various senders and receivers.
The flow of information is regulated by several factors:

the proximity of workers to one another
the rules governing who communicates with whom
the status hierarchy
other elements such as job assignments and duties.
Five major types have been studied in depth: wheel or the star, circle, all
channels, chain or the line and Y
There has been extensive research on communication networks. The results

of these studies indicate that each of the different networks has different
strengths and weaknesses:
In the centralised networks (chain, wheel and Y), group members have to
go through a person located in the central position in the network in
order to communicate with others. This leads to unequal access to
information in the group.
In decentralised networks (circle and all channels) information can flow
freely between members without having to go through a central
person.
The main conclusions of the experiment were:
The wheel is always the quickest way to reach a conclusion, and the circle
the slowest.
For complex problems, the all channel is the most likely process to reach
the best decision.
487
The level of satisfaction for individuals is lowest in the circle, fairly high in
the all channel, mixed in the wheel, with the central figures usually
expressing greater satisfaction, and the rest feeling isolated.
Under time pressure the all channels system either restructures, to
become a wheel, or disintegrates.

EXPLAIN HOW THE TYPE OF INFORMATION DIFFERS AND THE
PURPOSE FOR WHICH IT IS APPLIED AT DIFFERENT LEVELS OF
THE ORGANISATION: STRATEGIC, TACTICAL AND
OPERATIONAL
The levels of decision-making and the information required to support it have

been classified into three levels.
Strategic Information
Helps senior managers with long term planning and the development
of a strategic plan.
Tactical Information
To help middle management monitor and control the organisation.
Operational Information
To help knowledge and data workers design services/products,
disseminate information and perform routine administrative tasks.
Example of a retail store:
As a consumer you have to deal regularly with the information systems that
support business operations at the many retail stores where you shop. Most
retail shops now use computer-based information systems to help them
record customer purchases, keep track of inventory and evaluate sales
trends. Store operations would grind to a halt without support of such
information systems.
Information systems also help store managers make better decisions and
attempt to gain a strategic competitive advantage. For example, decisions on
what lines of merchandise need to be added or discontinued, or on what kind
of investment they require, are typically made after an analysis provided by
computer-based information systems.
488
LIST THE ATTRIBUTES OF GOOD QUALITY INFORMATION
Businesses are often criticised for producing too much information simply
because their information systems can do it. A good way of ensuring
relevance is to closely define the objectives of any information report and
produce information that are ACCURATE.
Accurate C
Complete C
Cost
U Understandable
R Relevant
A Adaptable
T Timely
E Easy to use
Accurate - information should be sufficiently accurate for its intended

purpose and the decision-maker should be able to rely on the information.
Complete the more complete information is, the more reliable it will be.
Cost the information should not cost more to obtain than the benefit derived
from it.
Understandable user friendly information is much more readily acted upon.
Relevant the information provided should concentrate on the essentials

and ignore trivia (useless information)
Adaptable information should be tailored to the needs and level of

understanding of its intended recipients
Timely information that is out-of-date is a waste of time, effort and money
489
33.5 ACCA SYLLABUS GUIDE OUCOME 6
EXPLAIN A SIMPLE COMMUNICATION MODEL SENDER,
MESSAGE, RECEIVER, FEEDBACK AND NOISE
Effective communication involves a message being sent and received

successfully. A TRANSMITTER/SENDER/ENCODER of the message is the
person who starts the communication process in order to pass on information
to others. The MESSAGE is the information that the sender wants to transmit.
The MEDIUM/MEANS OF COMMUNICATION/CHANNEL is the method used

for sending the message. For example a letter on the notice board or an
email. A means of communication can also be thought of a smell, taste and
feel. A RECEIVER/DECODER of the information is the person to whom the
message is sent.
In businesses, ineffective communication, or communication failure, between

people in the firm can have serious consequences. NOISE can be one of the
reasons why we end up with ineffective communication. Noise can be
anything that interferes with the communication or makes it difficult to
understand. Noise can arise from many sources, e.g., factors as diverse as
load machinery, technical noise such as poor telephone connection to
smudges on a printed page, status differentials between sender and receiver
and distractions of pressure at work or emotional upsets.
FEEDBACK is when the receiver confirms that the message has been
received and responds to it. This ensures that the information has been
correctly received by the right person and if necessary, acted upon.
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EXPLAIN FORMAL AND INFORMAL COMMUNICATION AND
EXPLAIN THEIR IMPORTANCE IN THE WORKPLACE
33.6.1 Formal communication
Formal communication in organisations follows official reporting relationships

and/or prescribed channels. Notices, noticeboards, reports, emails, memos
and formal meetings are all example of formal communication. These are
channels of communication which are set up and recognised by an
organisation. Even though formal communication is important and is mostly
used both between the management and the employees (vertical
communication) and between workers in the same hierarchical level
(horizontal communication), it is not the only means of communication that is
used in a company.
Communication through the formal channels in an organisation may be (as

cited in the figure above):
Downward communication provides a basis for specific job

instructions, policy decisions, guidance and resolution of queries.
Upward communication feedback from employees or the levels below

in a particular hierarchy explaining any results achieved and problems
encountered.
Horizontal/Lateral communication refers to communication between

people or groups at the same level in the organisation.
Diagonal communication interdepartmental communication by people

coming from different ranks
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33.6.2 Informal communication
One is also likely to receive information through informal channels, such as

meetings with friends or contacts with others in the canteen or at break times.
These informal or unrecognized meetings are sometimes called as the
grapevine.
The grapevine is an informal communication network that can permeate

(spread through) an entire organisation. These informal channels can be used
by managers to try out the reactions of new ideas such as a new shift system
in the factory before communicating details of the new system formally. If the
reaction to management from the grapevine is negative, they might
reconsider or even change some details.

IDENTIFY THE CONSEQUENCES OF INEFFECTIVE
COMMUNICATION
Lack of downward communication is likely to result in:

poor awareness of corporate objectives at lower management levels
poor understanding of working instructions and responsibilities
poor morale of junior managers because they are not consulted about
changes which affect them or their working conditions.
Lack of upward communication, including feedback, has the following

undesirable consequences for management:
early warning of troubled areas is not received
benefit of creative ability in subordinates is lost
participation of subordinates is limited
need for change is not appreciated because management is isolated from
the operation areas
control becomes difficult
introduction of change is difficult.
Lack of lateral communication often leads to:

divisions in management teams
lack of coordination
rivalry between sections and departments
lack of advice and involvement by staff specialists.

DECRIBE THE ATTRIBUTES OF EFFECTIVE COMMUNICATION
The ultimate test of the effectiveness of communication for whatever

purpose, however it is delivered or whatever its nature is that those who
need the information receive it in a comprehensible form, in the right format,
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on time and in a state where it can be acted on.
Effective communication will ensure that the right person receives the right
information at the right time.
This means it must be:

Timely
Accurate
Complete
To the point
Directed to the right people
Understandable

DESCRIBE THE BARRIERS TO EFFECTIVE COMMUNICATION
AND IDENTIFY PRACTICAL STEPS THAT MAY BE TAKEN TO
OVERCOME THEM
Poor communication can be the result of any number of causes, some of

which are discussed below:
Unclear Messages
Message Overload
Bad Timing
Jargon
Speed
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_____________________________________________________________
KEY POINTS
__________________
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Communication is the interchange of information, ideas, facts and
emotions by two or more persons. It establishes relationships and
makes organising possible.
There are various ways and means used by organisations for the
achievement of their company objectives effective communication is
definetly one of them.
A transmitter/sender/encoder is the person who starts the process to send

a message.
The medium/means of communication/channel is the method used to

transmit such message.
A receiver/decoder is the person who receives the message.
Noise can be anything that interfers with the communication.
Feedback is the confirmation of how such message has been received by

the receiver.
Formal communication follows a structured type of communication.
downward communication
upward communication
horizontal/lateral communication
diagonal communication
9. Informal communication is a non-structured type of communication.

One might include the following under this category:
Rumours
Gossip
Effective communication should be:

Timely
Accurate
Complete
To the point
Directed
to the right
peopleUnderstandable
Some barriers of communication may include:

Unclear message
Message overload
Bad
timingJar
gon
Speed
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12. The main types of communication :
13. The wheel (star) is the quickest to reach conclusions.
14. The all channels is best used for complex situations.
15.People using the circle are the lowest satisfied.
People using the all channels have a fairly high satisfaction.
People using the wheel (star) have an average (mixed) satisfaction.
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_____________________________________________________________
QUESTION BANK
__________________
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Question 1
Sales were not going as it was planned at a perfume importing company.

Sarah Agius, the sales manager of the retail outlets decided to write a letter to
all employees within the different shops around Malta in order to
communicate with them what was happening and that their jobs were at risk if
they were not going to act upon this situation. In the letter she asked for ideas
on how to increase the sales. The staff was asked to confirm that they had
received the letter and tell her if they had any good ideas about the matter.
In this case study identify:
the transmitter of the message

the medium being used
the receiver of the message.
Question 2
Did the communication involve feedback?
Question 3
Do you think the method used by the manager to communicate to her staff
was the best one used? If not, which method would have been more
effective? Explain your answer
Question 4
Which of the following is not part of the communication process?
sender
message
receiver
distortion
Question 5
What are the two ways in which information is exchanged?
formally and informally

clearly and confusingly
succinctly and verbosely
internally and externally
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Question 6
Formal communication is not a structured way of communicating
True
False
Question 7
Interdepartmental communication by people coming from different ranks is

known as:
A. Horizontal communication
Diagonal communication
Downward communication
Upward communication
Question 8
Which of the following is not one of the four of the most important reasons for
lateral communication?
task co-ordination
problem-solving
conflict resolution
specifying job instructions
Question 9
Horizontal communication may occur in an organisation that is managed in an

authoritarian style?
True
False
Question 10
Poor quality lateral communication will result in which of the following?
lack of direction
lack of delegation
lack of control
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Question 11
Lack of downward communication is likely to result in:
benefits from the creative ability of subordinates
poor understanding of working instructions and responsibilities
Question 12
Which pattern of communication is the quickest way to send a message?
The circle
The chain
The Y
The wheel
Question 13
Charlie is the leader of a team which tends to communicate via e-mail. Team
members send all messages to Charlie who checks the content of the
messages and then forwards them on to the other team members if he feels
they need to be made aware of any of the information. Which communication
pattern is Charlie using in the team?
The Y
The wheel
All channels
The circle
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_____________________________________________________________
ANSWER BANK
__________________
501
1a. Sarah Agius
1b. Letter
1c. Employees
Yes the confirmation of receiving the letter
Face to face interaction would have been better in this case but it really
depends on the no. of employees concerned (which is not specified in
the case question)
D distortion is a barrier to communication
A information can be achieved from internally or externally and can be

exchanged formally and informally.
D downward communication is used to specify job instructions
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CHAPTER 34
PROFESSIONAL ETHICS IN ACCOUNTING

AND BUSINESS

DEFINE BUSINESS ETHICS AND EXPLAIN THE IMPORTANCE OF
ETHICS TO THE ORGANISATION AND TO THE INDIVIDUAL
Ethics has to do with the righteousness or wrongness of the decisions and

behaviours of individuals and the organisation of which they are members.
Business ethics is the application of ethical values to business behaviour.
Ethical issues in organisations are more common and complex than generally
recognised. Some ethical issues influence the decisions that employees
make daily. Some ethical issues involve factors that blur the distinction
between right or wrong. As a result employees may experience ethical
dilemma.
There is no simple rule for making ethical decisions but the following points
may act as guidelines or considerations:
The consequences that is, the end justifies the means

The motivation of the parties concerned
Guiding principles for example, treat others as you would like to be
treated
Duties for example, based on religious codes
Key values for example, the importance of human rights
Ethical considerations are important for both the organisation and the
individual. The following points highlight some reasons why ethics is very
important for organisations.
Ethics is a driver for profitability rather than a burden

Ethics is a part of good corporate governance
Ethics reassures investors about the company's approach towards risk
management
Ethics create a warm environment in which employees are more
motivated to work
The following points highlight the importance of ethics to the individual:
Consumers may choose to buy ethical items, for example fairtrade

products even if they are not always the cheapest
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Employees will not blindly accept orders to act in a manner that they
personally perceive to be unethical

DESCRIBE AND DEMONSTRATE THE PRINCIPLES FROM THE
IFAC CODE OF ETHICS
Most companies have approached the business ethics issue by formulating a

set of internal policies and instructing employees to follow them. Often ethics
officers also called compliance officers are appointed to monitor the
application of the policies and to be able to discuss ethical dilemmas with
employees who approach them.
34.2.1 Code of Ethics for Accountants
The International Federation of Accountants (IFAC) is an international body

representing all the major accountancy bodies across the world. Its mission is
to develop the high standards of professional accountants and enhance the
quality of services they provide
34.2.2 IFAC & ACCA (Association of Chartered Certified

Accountants)
To ensure the development of high standards within the profession, the IFAC
established a code of ethics. These indicate a minimum level of conduct. As a
member the ACCA released there own code of ethics, designed to align to
those of the IFAC (this means that the standards of ACCA are the same as
those of IFAC)
34.2.3 ACCA Fundamental Principles
1. Integrity
Members should be straightforward and honest in all professional and

business relationships. The ACCA Rulebook (and the IFAC Code of Ethics)
goes on to state that integrity implies not merely honesty, but fair dealing and
truthfulness.
2. Objectivity
Members should not allow bias, conflicts of interest or undue influence of

others to override professional or business judgements.
3. Professional competence and due care
Members have a continuing duty to maintain professional knowledge and

skill at a level required to ensure that a client or employer receives competent
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professional service based on current developments in practice, legislation
and techniques. Members should act diligently and in accordance with
applicable technical and professional standards when providing professional
services.
4. Confidentiality
Members should respect the confidentiality of information acquired as a

result of professional and business relationships and should not disclose any
such information to third parties without proper and specific authority or
unless there is a legal or professional right or duty to disclose. Confidential
information acquired as a result of professional and business relationships
should not be used for the personal advantage of members or third parties.
5. Professional behaviour
Members should comply with relevant laws and regulations and should avoid
any action that discredits the profession. The ACCA Rulebook goes further,
and states that members should behave with courtesy and consideration
towards all with whom they come into contact in a professional capacity.
The ACCA's Code of Ethics and Conduct is contained in the annual Rulebook
issued by the Association. All registered students, affiliates and members of
the ACCA are required to comply.
All ACCA members must comply with the Fundamentals Principles, whether
or not they are in practice. Members must identify threats to compliance with
the Principles and apply safeguards to eliminate the threat or to reduce it to
an acceptable level such that compliance with the Fundamental Principles is
not compromised
An ACCA member may be called to appear before the Disciplinary Committee

for breach of any of the ethical principles and may be admonished (warned),
fined, suspended or excluded from membership.

DESCRIBE ORGANISATIONAL VALUES WHICH PROMOTE
ETHICAL BEHAVIOUR
Values are psychological constructs, internal to a person. Organizations as

such don't have values but, because they are composed of people, their
cultures are shaped by values that are shared in varying degrees.
Organisational values act as guiding principles to their employees.
34.3.1 Openness
A culture high on openness encourages receiving and giving ideas and

feelings from internal and external environment. Openness may also mean
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spatial openness, in terms of accessibility like installing facebook, no
separate cabin for executives. This openness combined with willingness to
share results in greater clarity of objectives and free interactions among
people.
34.3.2 Trust
No matter how many such formal structures there may be in organisations, if

we do not trust each other simply to do what we say we will, we cannot
conduct business in the modern world. Trust is confidence in the integrity,
ability, character, and truth of a person thing (Berube, 1985). It is the most
critical prerequisite for knowledge exchange and without trust, knowledge
initiatives will fail, regardless of how thoroughly they are supported by
technology and rhetoric (public speaking) (Davenport and Prusak, 1998).
34.3.3 Honesty
In the context of human communication, people are generally said to be

honest when they tell the truth to the best of their knowledge and do not hide
what they know or think. Apart from being truthful, honesty is also generally
thought to involve abstaining from unfair behavior.
34.3.4 Respect
Respect is an important value that takes into consideration others strengths

and weaknesses and who they are as persons. Respect includes also the
courtesy towards others and also the willingness to keep confidentiality.
34.3.5 Empowerment
Empowerment should be seen as the process of an individual enabling

himself to take action and control work and decision making in autonomous
ways. The organisation has the responsibility to create a work environment
which helps foster the ability and desire of employees to act in empowered
ways. The work organisation has the responsibility to remove barriers that
limit the ability of staff to act in empowered ways.
34.3.6 Accountability
It is frequently described as an account-giving relationship between

individuals, e.g. "A is accountable to B when A is obliged to inform B about As
(past or future) actions and decisions, to justify them, and to suffer
punishment in the case of eventual misconduct". Accountability cannot exist
without proper accounting practices; in other words, an absence of accounting
means an absence of accountability.
506
EXPLAIN THE CONCEPT OF ACTING IN THE PUBLIC INTEREST
Acting in the public interest means acting for the common good of the
community. The meaning of the public interest is often taken as self-evident.
Proponents and opponents of a proposal can equally and strongly argue that
a particular proposal is, or is not in the public interest, often leading to
confusion about the application of the term.
There are any numbers of variables in trying to understand why someone

thinks something is in the public interest.
Applying different views on: who the public are: what their objectives
should be, what the public actually want, what underlying values
should be applied?
Applying different weighting to various interests that need balancing?
Applying different decision-making processes on, for example, when
individual preferences should be over-ridden; the merits of different
types of incentive; how people will react, etc?
The emerging governance and accountability regime for business and the
professions has become far more concerned with stakeholder interests and
ethical matters than has been the case in the past. Directors, executives and
professional accountants who serve the often conflicting interests of
shareholders directly and public indirectly, must be aware of the publics new
expectations for businesses and must manage their risks accordingly. This
awareness must be combined with traditional values and incorporated into a
framework for ethical decision making and action.
The changes in public expectations and interests have triggered, in turn, an

evolution in the mandate for business. For some businesses, this may be
stating the degree of change too strongly; but even they would concede that
the relationship of business to society is one of interdependence where the
long-run health of one determines that of the other.
The UK governments Committee of Standards in Public Life set out seven

principles that individuals employed in the public sector must follow:
Selflessness individuals should act solely in the public interest and not for
personal gain or that of friends and family
Integrity individuals should avoid actions which would place them under
financial or other obligations whereby the person holding their obligation
could influence their public duties
Objectivity all choices, especially those regarding awarding contracts,

rewarding or providing benefits to others and make public appointments must
be made purely on merit
507
Accountability individuals are responsible for their own actions and are
accountable to others. They must subject themselves to whatever scrutiny
comes with their office
Openness individuals must be open about their decisions and actions.

Information regarding the reasons for their decisions must be freely available.
Restrictions on information are only permitted when it is in the wider public
interest
Honesty where individuals have private interests which relate to their public
ones, they should declare them and seek to resolve any conflict to protect the
public interest
Leadership individuals must promote and respect the other six principles
through leadership and example
508
_____________________________________________________________
KEY POINTS
__________________
509
Ethics has to do with the rightness or wrongness of decisions.
Ethics has to do with what an organisation or individual should or ought to

do.
Ethics has nothing to do with facts.
Unethical behaviour does not conform to generally accepted social norms.
Before taking important decisions, one must consider the following:

the consequences
the motivation of the parties
concerned guiding principles
duties
key values
6.
The ACCA's Code of Ethics and Conduct is contained in the annual

Rulebook issued by the Association.
All ACCA members must comply with the Fundamentals Principles,

whether or not they are in practice.
The UK governments Committee of Standards in Public Life set out

seven principles that individuals employed in the public sector must
follow:
Selflessness
Integrity
Objectivity
Accountability
Openness
Honesty
Leadership
510
_____________________________________________________________
QUESTION BANK
__________________
511
Question 1
Which of the following is one of the main reasons why ethics is important to
an organisation?
The adoption of an ethical framework reassures investors who may be

concerned about risk management
Management's commitment to ethical standards should reduce the level of
theft by employees
Employees will feel that they are likely to be fairly treated
Espousing good ethics has a cost but that is more than offset by the clear
public relations benefits
Question 2
The study of business ethics is purely concerned with legal requirements?

True
False
Question 3
Business ethics concerns which group of people in a company?
directors only
sales and marketing employees only
qualified accountant employees only
all employees
Question 4
Which of the following conditions would be unacceptable in a job

advertisement?
must be a qualified accountant

must be a non-smoker
must be at least 5 inch 6 tall
must be punctual and self-motivated
Question 5
Which of the following would be unacceptable in a company's code of

conduct for its employees?
512
maximum number of days off for sickness each year
no smoking of cigarettes inside the building
employees who meet the public must be smartly dressed
no personal use of company photocopying machines without prior permission
from a manager
Question 6
In term of employment ACCA's ethical guidelines require members to:
A. act responsibly in the way that all other professional due

B. act responsibly but in a way that satisfies organisational demands and
pressures
C. act responsibly but in a way that satisfies the individual's own ethical code
D. act responsibly, honour any legal contract of employment and conform to
employment legislation
Question 7
ACCA students do not have to comply with either IFAC's or ACCA's code of
ethics?
Is the above statement true or false?
True
B False
Question 8
The IFAC Code of Ethics and the ACCA Code of Ethics and Conduct identify
the same Fundamental Principles to be observed by professional
accountants.
True
False
513
Question 9
A professional accountant is working in a South American country that has its

own code of conduct for accountants that is not strict as the IFAC Code in
certain areas.
A. the accountant must comply with both the local code and the IFAC Code in
all areas, whichever is stricter
B. the accountant need only comply with the local code
C. the accountant can choose, for each area, which code to follow
D. the accountant must comply with all statutory requirements in the country,
but otherwise is free to take whatever action he chooses, since codes of
conduct are non-statutory
Question 10
Which of the following is not a fundamental ethical principle identified by the

ACCA?
integrity
objectivity
confidentiality
independence
Question 11
Which of the Fundamental Principles in the IFAC Code of Ethics requires that
a professional accountant should be straightforward and honest in all
professional and business relationships?
integrity
objectivity
professional competence
professional behaviour
Question 12
What is the meaning of the ethical principle of independence in

appearance?
Accountants must complete their work free from bias or prejudice

Accountants must complete their work without excessive supervision
Accountants must complete their work in such a way as to give a reasonable
person no cause to question their objectivity
Accountants must complete their work in such a way as to give a reasonable
person confidence that they can work without supervision
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_____________________________________________________________
ANSWER BANK
__________________
515
A without investors there is clearly no business
C discrimination!
A there shouldnt be a maximum number of sick leave although there

should be a maximum amount of paid sick leave.
C independence in appearance is to be seen as independent or

objective
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CHAPTER 35
THE ROLE OF REGULATORY AND

PROFESSIONAL BODIES IN PROMOTING
ETHICAL AND PROFESSIONAL
STANDARDS IN THE ACCOUNTING
PROFESSION

RECOGNISE THE PURPOSE OF INTERNATIONAL AND
ORGANISATIONAL CODES OF ETHICS AND CODES OF
CONDUCT IFAC, ACCA
Reform of the accounting profession has shifted to harmonisation with global

standards worked out under the support of the IASB and IFAC. These global
standards have returned professional accountants to focus on serving the
public interest.
IFAC Code of Ethics Preface:
The mission of the International Federation of Accountants (IFAC), as set out

in its constitution, is the worldwide development and enhancement of an
accountancy profession with harmonised standards, able to provide services
of consistently high quality in the public interest.
In pursuing this mission, the IFAC Board has established the IFAC Ethics
Committee to develop and issue, under its own authority, high quality ethical
standards and other pronouncements for professional accountants for use
around the world. This Code of Ethics establishes ethical requirements for
professional accountants.
A member body of IFAC or firm may not apply less stringent standards than
those stated in this Code. However, if a member body or firm is prohibited
from complying with certain parts of this Code by law or regulation, they
should comply with all other parts of this Code. Some jurisdictions may have
requirements and guidance that differs from this Code. Professional
accountants should be aware of those differences and comply with the more
stringent requirements and guidance unless prohibited by law or regulation.
517
DESCRIBE HOW PROFESSIONAL BODIES AND REGULATIONS
PROMOTE ETHICAL AWARENESS AND PREVENT OR PUNISH
ILLEGAL OR UNETHICAL BEHAVIOUR
RECOGNISE WHEN AND TO WHOM ILLEGAL OR UNETHICAL
CONDUCT BY ANYONE WITHIN OR CONNECTED TO THE
ORGANISATION SHOULD BE REPORTED
An accountancy student should start at an early stage of his career (from time
of studying) to apply ethical considerations in his decisions. The diagram
above shows how a student should develop his skills in ethics starting from
enhancing the ethics knowledge and moving on to developing ethical
sensitivity. Once these criterions are reached, the student / junior accountant
needs to improve ethical judgment and continue to maintain an ongoing
commitment to ethical behaviour.
518
The member bodies of IFAC are professional bodies such as the ACCA, so
IFAC has no direct ability to punish an accountant who acts contrary to the
code. However, IFAC expect the transgressors professional body to
investigate the matter and punish the accountant if necessary.
Usually the discipline process begins with a complaint being lodged with the
professional body about the ethical conduct of a member or firm. Alternatively,
the conviction on a legal charge of consequence (example, fraud) may also
trigger the discipline process. The complaint or legal charge is investigated by
staff, and a decision is made to lay a charge or not. Laying a charge
necessitates a hearing to determine guilt or innocence, and the hearing
process can be quite cumbersome (burdensome). When a professional
accountant is found guilty, the details of the case are made public.
Lynne Paine suggests that ethical decisions are becoming more important
and that there are two approaches to the management of ethics in
organizations:
Compliance-based approach designed to ensure that the company acts

within the letter of the law, and that violations are prevented, detected and
punished.
Integrity-based approach strive to define companies guiding values,

aspirations and patterns of thought and conduct.

IDENTIFY THE FACTORS THAT DISTINGUISH A PROFESSION
FROM OTHER TYPES OF OCCUPATION
Essential professional qualities of an accountant:
Independence must be able to complete work without bias
Skepticism you question information
Accountability responsible for your own judgments and decisions
Social responsibility act in the interest of society at large
Essential personal qualities of an accountant:
Reliability when taking on work, you must ensure that it gets done
and meets professional standards
Responsibility in the workplace you should take ownership of your

work
519
Timeliness clients and work colleagues rely on you to be on time and
produce work within a specified time frame
Courtesy you should conduct yourself with courtesy and

consideration towards clients and colleagues
Respect as an accountant, you should respect others by developing

constructive relationships and recognizing the values and rights of
others

EXPLAIN THE ROLE OF THE ACCOUNTANT IN PROMOTING
ETHICAL BEHAVIOUR
While regulation is important, it is not on its own enough to achieve the

objective of assuring quality and consistency of quality in the provision of
professional services. IFAC recognizes that values also are critical in driving
behavior. No regulation can be truly effective unless it is accompanied by
ethical behavior. It is the ethical behavior of the professional accountant that
is the ultimate guarantee of good service and quality.
Education in values, especially through example and the appropriate use of

experience and professional judgment, based on a solid educational
foundation, and reinforced through continuing professional education, will be
essential to the future of the accountancy profession. Regulatory systems
should be designed to promote and to achieve these behaviours. High quality
service from the profession is ultimately a function of professional standards,
including ethics, personal competencies and values, and regulatory systems,
all of which must be consistent with and supportive of one another.
520
_____________________________________________________________
KEY POINTS
__________________
521
Reform of the accounting profession has shifted to harmonisation with
global standards worked out under the support of the IASB and IFAC.
These global standards have returned professional accountants to
focus on serving the public interest.
A member body of IFAC or firm may not apply less stringent standards
than those stated in this Code. However, if a member body or firm is
prohibited from complying with certain parts of this Code by law or
regulation, they should comply with all other parts of this Code. Some
jurisdictions may have requirements and guidance that differs from this
Code. Professional accountants should be aware of those differences
and comply with the more stringent requirements and guidance unless
prohibited by law or regulation.
Compliance-based approach designed to ensure that the company

acts within the letter of the law, and that violations are prevented,
detected and punished.
Integrity-based approach strive to define companies guiding values,

aspirations and patterns of thought and conduct.
Essential professional qualities of an accountant:
Independence - Skepticism - Accountability - Social responsibility
Essential personal qualities of an accountant:
Reliability Responsibility Timeliness Courtesy Respect
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CHAPTER 36
ETHICAL CONFLICTS AND DILEMMAS

DESCRIBE SITUATIONS WHERE ETHICAL CONFLICTS CAN
ARISE
There are no universally accepted principles and rules for resolving all the
ethical issues in complex decision-making situations. In addition, individuals
and groups differ over what influences both ethical and unethical behaviours
and decisions.
Organisations, though, can draft sets of criteria to be used in making difficult

decisions:
Is it legal?
Is it contrary to our company's adopted code of ethics?
Is it contrary to any other published official code of ethics like for example,
the ACCA code of ethics and conduct?
Would you mind other people knowing what you have decided, for
example, if it was published in tomorrow's newspaper?
Who is affected by this decision? Would they regard the decision as fair?
The highest form of ethical decision making involves a careful determination

of who will receive benefits or incur costs at the consequence of a decision.
For major decisions, this assessment may include a variety of stakeholders
for example, shareholders, customers, banks, suppliers etc. The more
specific an individual or group can be about who may benefit and who may
incur costs from a particular decision, the more likely it is that ethical
implication will be fully considered.
There is a section in the ACCAs Code of Ethics and Conduct dedicated to the
subject of conflicts of interest. ACCA members need to be aware that a
conflict between members and clients interests might arise if members
compete directly with a client, or have a joint venture with a company that is
in competition with the client.
The rules state that members and firms should not accept or continue
engagements in which there are or are likely to be significant conflicts of
interest between members, firms or clients.
Members should evaluate the threats arising from a conflict of interest and
unless they are insignificant, they should apply safeguards. The test of
whether a treat is significant is whether a reasonable and informed third party
523
having knowledge of all relevant information, would consider the conflict of
interest as likely to affect the judgment of members and firms.
524
_____________________________________________________________
KEY POINTS
__________________
525
ACCA members need to be aware that a conflict between members and
clients interests might arise if members compete directly with a client,
or have a joint venture with a company that is in competition with the
client.
Members and firms should not accept or continue engagements in which

there are or are likely to be significant conflicts of interest between
members, firms or clients.
526
CHAPTER 37
CORPORATE CODES OF ETHICS

DEFINE CORPORATE CODE OF ETHICS
Corporate code of ethics are designed to provide guidance about the conduct
expected by members in order that the services offered will be of acceptable
quality and the reputation of the company will not be violated. To be effective,
codes of conduct need to blend fundamental principles with a limited number
of specific rules. If a code were drafted to cover all possible problems, it
would be extremely voluminous. Corporate codes of conduct are completely
voluntary. They can take a number of formats and address any issue -
workplace issues and workers' rights being just one possible category. Also,
their implementation depends totally on the company concerned.

DESCRIBE THE TYPICAL CONTENTS OF A CORPORATE CODE
OF ETHICS
37.2.1 Typical framework for a Code of Conduct for Professional

Accountants
Introduction and purpose

Fundamental principles and standards
General rules
Specific rules
Discipline
Interpretations of rules
37.2.2 Fundamental Principles in Codes of Conduct for Professional

Accountants
Members should:
Act in the public interest,
At all times maintain the good reputation of the profession and its
ability to serve the public interest,
Perform with integrity, objectivity and independence, professional
competence, due care and professional skepticism, and confidentiality,
Not be associated with any misleading information or
misrepresentation
527
Example
CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS CONTENTS

Page
PREFACE............................................................................................................................................2
PART A: GENERAL APPLICATION OF THE CODE
Introduction and Fundamental Principles..................................................................................4
Integrity.................................................................................................................................................9
Objectivity.........................................................................................................................................10
Professional Competence and Due Care..................................................................................11
Confidentiality..................................................................................................................................12
Professional Behavior.....................................................................................................................14
PART B: PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE

Introduction.......................................................................................................................................16
Professional Appointment.............................................................................................................21
Conflicts of Interest.......................................................................................................................24
Second Opinions...............................................................................................................................26
Fees and Other Types of Remuneration....................................................................................27
Marketing Professional Services................................................................................................29
Gifts and Hospitality......................................................................................................................30
Custody of Clients Assets..............................................................................................................31
ObjectivityAll Services...............................................................................................................32
IndependenceAssurance Engagements..................................................................................33
PART C: PROFESSIONAL ACCOUNTANTS IN BUSINESS

Introduction.......................................................................................................................................79
Potential Conflicts...........................................................................................................................83
Preparation and Reporting of Information...............................................................................85
Acting with Sufficient Expertise...............................................................................................86
Financial Interests..........................................................................................................................87
Inducements.......................................................................................................................................89
DEFINITIONS.................................................................................................................................91
EFFECTIVE DATE....................................................................

EXPLAIN THE BENEFITS OF A CORPORATE CODE OF ETHICS TO
THE ORGANISATION AND ITS EMPLOYEES
Directors, owners and senior management are in the process of realising that
they and their employees need to understand that appropriate ethical values
are to be considered when decisions are being made. Organisational,
professional and personal values provide the framework to decision making,
therefore, it is vital that organisations create an environment or culture where
appropriate shared values are created, understood, fostered and committed
to by all concerned. This cannot be reliably achieved by simply leaving ethics
solely to the judgment of individuals in a workforce of divergent experiences
528
and backgrounds to work out by trial and error. Nor can it be achieved by
simply sending a letter urging employees to be on their best behaviour, or by
just publishing a code of conduct.
In order to ensure commitment to the ethical principles or values considered

appropriate for the organization, it must be evident to the members of the
organization that top management is fully supportive and that such support is
evident throughout the organizations governance system.
A code of ethics promotes an environment of respect based on integrity.

When people know the code of ethics and follow it, this creates an
atmosphere of trust, respect and confidence in the actions of each person
involved in the organization or group. In the presence of a written code of
ethics, employees at a company, for instance, are expected to behave a
certain way toward each other and toward customers. The practical result of
this is a more peaceful atmosphere in which to work, and one that is free of
such widespread problems as work-based sexual harassment, violence and
other forms of misconduct. A code of ethics is only effective in this way when
group members are confident that the rules will be enforced.
529
_____________________________________________________________
KEY POINTS
__________________
530
Corporate code of ethics are designed to provide guidance about the
conduct expected by members in order that the services offered will be
of acceptable quality and the reputation of the company will not be
violated.
Typical framework for a Code of Conduct for Professional Accountants

would include: -
Introduction and purpose

Fundamental principles and
standards General rules
Specific rules
Discipline
Interpretations of rules
3. Members should:
Act in the public interest,
At all times maintain the good reputation of the profession and its
ability to serve the public interest,
Perform with integrity, objectivity and independence, professional
competence, due care and professional skepticism, and confidentiality,
Not be associated with any misleading information or
misrepresentation
A code of ethics promotes an environment of respect based on integrity.
531
532
CHAPTER 38
ETHICAL CONFLICTS AND DILEMMAS

IDENTIFY THE MAIN THREATS TO ETHICAL BEHAVIOUR
Paragraph 100.12 of the IFAC Code provides:
Threats may be created by a broad range of relationships and

circumstances. When a relationship or circumstance creates a threat, such a
threat could compromise, or could be perceived to compromise, a
professional accountants compliance with the fundamental principles. A
circumstance or relationship may create more than one threat, and a threat
may affect compliance with more than one fundamental principle.
Threats fall into one or more of the following categories:
Self-interest threat the threat that a financial or other interest will

inappropriately influence the professional accountants judgment or
behaviour;
Self-review threat the threat that a professional accountant will not

appropriately evaluate the results of a previous judgment made or service
performed by the professional accountant, or by another individual within the
professional accountants firm or employing organisation, on which the
accountant will rely when forming a judgment as part of providing a current
service;
Advocacy threat the threat that a professional accountant will promote a

clients or employers position to the point that the professional accountants
objectivity is compromised;
Familiarity threat the threat that due to a long or close relationship with a
client or employer, a professional accountant will be too sympathetic to their
interests or too accepting of their work; and
Intimidation threat the threat that a professional accountant will be deterred

from acting objectively because of actual or perceived pressures, including
attempts to exercise undue influence over the professional accountant
533
OUTLINE SITUATIONS AT WORK WHERE ETHICAL DILEMMA MAY
BE FACED
Most people, most of the time, know the difference between right and wrong.
Ethical dilemmas rarely involve choosing between these two opposing
alternatives. Instead, ethical dilemmas normally arise because there is no
entirely right option. Instead, there are compelling reasons for each of the
alternatives so it is up to the individual to decide which alternative to choose.
Example 1
You are under time pressure to complete this months management accounts.
Important sales information is provided by the sales department usually in
good time for you to incorporate it into the final figures. The sales report is
delayed this month due to staff sickness and you will not receive the
information until a few hours before the accounts are due for presentation to
the finance director.
Answer there is integrity issue her. Whilst you may have time to include the
information in the management accounts, it is unlikely that you will be able to
check its accuracy as well. Therefore you risk misinforming the finance
director of the months sales.
Example 2
During your lunch break, your companys human resources manager has
asked you for some help. She has recently inherited a considerable sum of
money and would like you to calculate her inheritance tax and capital gains
tax liability. She has also asked you for advice on how she should invest the
money.
Answer the issues here are professional competence and due care. Unless
you are a tax expert, it is unlikely that you would have sufficient competence
to calculate the tax liabilities. Giving financial advice can be a minefield, and
you may need to be qualified under the financial services regulation before
you could do so.
38.2.1 Examples of circumstances that may create self-interest threats

for warrant holders in public practice include, but are not limited
to:
A financial interest in a client where the performance of professional

services may affect the value of that interest.
A loan to or from an assurance client or any of its directors or officers
where the performance of professional services may affect the value of
that loan.
Concern about the possibility of losing a recurring
client. Potential employment with a client.
534
38.2.2 Examples of circumstances that may create self-review threats
include, but are not limited to:
The discovery of a significant error during a re-evaluation.

Reporting on the operation of financial systems after being involved in their
design or implementation.
A member of the engagement team for an assurance client being, or
having recently been, a director or officer of that client.
A member of the engagement team being, or having recently been,
employed by the client in a position to exert direct and significant influence
over the subject matter of the engagement.
Having prepared the original data used to generate records that are the
subject matter of the engagement.
38.2.3 Examples of circumstances that may create advocacy threats

Promoting shares in a public interest entity when that entity is an audit

client.
Acting as an advocate on behalf of an assurance client in resolving
disputes with third parties.
38.2.4 Examples of circumstances that may create familiarity threats

A member of the engagement team having a close or immediate family

relationship with a director or officer of the client.
A member of the engagement team having a close or immediate family
relationship with an employee of the client who is in a position to exert
direct and significant influence over the subject matter of the engagement.
A former principal of the firm being a director or officer of the client or an
employee in a position to exert direct and significant influence over the
subject matter of the engagement.
Accepting gifts or preferential treatment, unless the value is clearly
insignificant.
38.2.5 Examples of circumstances that may create intimidation threats

Being threatened with dismissal or replacement in relation to a client

engagement.
Being threatened with litigation.
Being pressured to reduce inappropriately the extent of work performed in
order to reduce fees.
535
LIST THE MAIN SAFEGUARDS AGAINST ETHICAL THREATS AND
DILEMMAS
Safeguards that may eliminate or reduce ethical threats to an acceptable

level fall into two broad categories:
Safeguards created by the profession, legislation or regulation; and
Safeguards in the work environment.
These may include:
Educational, training and experience requirements for entry into the

profession.
Continuing professional development
requirements. Corporate governance regulations.
Professional standards.
Professional or regulatory monitoring and disciplinary procedures.
External review by a legally empowered third party of the reports, returns,
communications or information produced by a warrant holder.
38.3.1 Approaches To Ethics
EGOISM - the action is morally correct as long as the outcome is favourable

to the indvidual.
UTILITARIANISM - the action is considered morally correct as long as the

outcome is favourable for the greatest amount of people
PLURALIST - trying to cater to the needs of all stakeholders without seriously

compromising the interests of any one group
Refer to technical article A question of ethic at the back of the notes
536
_____________________________________________________________
KEY POINTS
__________________
537
Threats fall into one or more of the following categories: -
Self-interest threat
Self-review threat
Advocacy threat
Familiarity threat
Intimidation threat
538
_____________________________________________________________
TECHNICAL ARTICLES
__________________
539

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THE BUSINESS ORGANISATION, ITS

1.1 ACCA SYLLABUS GUIDE OUTCOME 1

Organisations are defined as:

The organisation is formed to have a good social arrangement made up of people

Share skills and

1.1.1 How does management formulate objectives?

The common features of a business organisation:

1.3 ACCA SYLLABUS GUIDE OUTCOME 3

Size of the organisation (number of employees)

1.4 ACCA SYLLABUS GUIDE OUTCOME 4

In summary, the main industries in which organisations operate are: agriculture,

1.5 ACCA SYLLABUS GUIDE OUTCOME 5

1.5.1 Commercial organisations

A very important difference within the structure of organisations is the difference

1.5.2 Not-for-profit organisations

A non-profit organisation (NFP) works with a prime intention (primary goal) of

Examples of a public sector organisation are:

1.5.4 Non-governmental organisations (NGO's)

A non-governmental organisation is an independent voluntary association of people

A co-operative is defined as an autonomous association of persons united voluntarily

1.5.6 Mutual Associations

A mutual association or organisation is owned by the member/clients that such

Refer to technical articles Non Profit organisation part 1 and part 2

5889 Profit oriented organisations are after maximising shareholders' wealth

5890 The Public Sector is owned and run by government.

The Private Sector is composed of Limited Companies (LTD), partnerships

Which of the following is an example of a mutual organisation?

What is the most appropriate goal of the firm?

0 Shareholder wealth maximisation

Which of the following statements is true?

0 Partnerships offer the same benefits as limited companies

Which of the following are owners of a limited company?

A private sector organisation is one owned or run by:

24 A Profit maximization is important but ultimately it is the take home

25 C There is no limit in the number of partners. Sole-traders have a personal

26 C Shareholders could be anyone who has an interest in the organisation

29 C Any organisation irrelevant of the size, technology and ownership have an

30 D A public sector organisation is owned or run by central or local

2.1 ACCA SYLLABUS GUIDE OUTCOME 1

A stakeholder is a group or individual who has an interest in what the organisation

The diagram hereunder lists some of the most important stakeholders of an

2.2.1 Internal Stakeholders

Internal stakeholders are intimately associated to the organisation and their

2.2.2 Connected Stakeholders

Connected stakeholders can be viewed as having a contractual relationship with the

23 Shareholders interested in shareholders wealth measured by profitability

2.2.3 External Stakeholders

The needs/expectations of the different stakeholders may conflict. Some of the

2.4 ACCA SYLLABUS GUIDE OUTCOME 5

2.4.1 Mendelow's power-interest matrix

Key players a key customer.

25Control of the environment

26Exercising discretion (power in being involved in decision making)

1. A stakeholder is a group or individual who has an interest in what the

23 There are three types of stakeholders: -

Internal stakeholders are intimately associated to the organisation and their

Connected stakeholders can be viewed as having a contractual relationship

27 Mendelows power-interest matrix

Stakeholders can move from quadrant to quadrant within Mendelow's matrix.

Which of the following would be described as an external stakeholder?

1. D Managers are internal stakeholders

C A, B and D are connected stakeholders.

3.1 ACCA SYLLABUS GUIDE OUTCOME 1