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Business Skills for Engineers and Technologists

Elsevier Science

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CHAPTER 1

Organizations and organizing

Summary

Organizations exist in an intricate, continually changing world, with many pressures on it that influence its behaviour. The organization structures itself to survive and prosper by planning and forming links with other organizations. At the same time, it must present an acceptable persona by working within society's constraints.

Objectives

By the end of this chapter, the reader should:

• appreciate the complexity of the business world and the forces acting on it and be aware of the different forms of ownership and the processes involved in starting a company (Section 1.1);

• understand why organization structures arise and the links made internally and externally in the supply chain (Section 1.2);

• understand the application of organizational analysis using methodology such as the EFQM model and the Balanced Scorecard (Section 1.3);

• understand the need for ethics in organizations expressed through codes of conduct especially where applied to environmental management (Section 1.4).

1.1 The business world

This section examines the business world by starting with a look at the influencing on a business through the PEST analysis. It then describes the different types of organizations, including the different legal forms that can be taken. It goes through the business plan essentials for a startup situation and then concludes by looking at the external money transactions that are made.

The business world is a complex situation. Each organization exists in a world of opportunities and constraints. The best way to describe this environment is to carry out a PEST analysis, to consider the ways that outside forces impinge on an organization. PEST stands for Political, Economic, Social and Technological factors. There are a few similar acronyms such as STEP, STEEP, LE PEST C, which cover similar factors.

PEST analysis

This analysis looks at a variety of present factors which presently affect the business world and gauges the probability of changes arising. The areas examined include:

Political factors

• Legislative structures of the EC, national and local government and how they are changing.

• Monopoly restrictions such as the Office of Fair Trading and the Monopolies Commission in the UK and similar structures in the EC commission and other countries and how they are interpreting events in a worldwide context as well as domestically.

• Political and government stability – not only extreme cases such as armed insurrection, but even in the UK a change of government may herald changes in legislation such as deregulation and privatization of state controlled industries, which affect businesses – as happened in Western Europe in the later decades of the twentieth century.

• Political orientations of governments' attitude towards business, trade unions and the environment often drive tax and other economic policies.

• Pressure groups such as Friends of the Earth and the various consumer groups can influence not only buyers' and investors' attitudes, but also government policy. This affects matters such as the environment legislation and delays in the construction and other industries by public enquiries. Other examples include the fuel price escalator in the UK during the 1990s.

• Taxation and grant policies can change over a period. For example, the various UK and EC grant schemes and changes in policy on capital allowances for factory construction in areas of high unemployment.

• Employment legislation in areas such as equal opportunities, working time directive, etc.

• Foreign trade regulations both at home and in a country targeted for exports, for example many countries, have restrictions on the importation of certain goods to protect indigenous industries. This happens not just in the developing countries, but also in the developed countries, as can be seen from the regular meetings of GATT (General Agreement on Tariff and Trade) where discussions have been ongoing since 1947 without completely eradicating national tariffs and quotas.

Economic factors

• Business cycles: These are a natural rise and fall in demand for products which have been observed throughout history. They are caused by a complex mixture of factors and can be quite severe on occasions, i.e. the depression of the 1930s. Unfortunately these cycles vary considerably and are not easy to forecast. Governments have attempted to do so in the hope of controlling them, with limited success.

• Money supply: Reflects government action on government tax and spend policy and actions such as credit availability controls. The saving behaviour of individuals can affect the circulation of available money as can be seen in Japan where there is a high tendency towards saving when future trends look pessimistic.

• Inflation rates, i.e. the rate at which prices of products, services and wages change. This can affect people's attitude to credit and savings and the ability of people on fixed incomes to have surplus money for spending. It can affect the flow of imports and exports as the exchange rates vary in relation to other countries.

• Investment levels: Ties in with business confidence about the future, perhaps based on an assumption regarding the stage of the business cycle. This cycle especially affects the construction and machine tool industries.

• GNP (Gross National Product), i.e. the value of the productive efforts of the nation as a whole.

• Pattern of ownership – especially trends in same. Examples include home computers, mobile phones and the growth in car ownership.

• Energy costs: Can affect the cost of making products. Also affects the consumer's attitude towards various products and their functions. A good example is the drive for lower fuel consumption in cars following the oil price rises of the 1970s.

• Unemployment. Is a double-edged factor. Low unemployment means a healthy demand from consumers, but it also leads to a shortage in certain key skill areas which tends to drive up wage costs for these jobs.

Socio-cultural factors

• Demographics, i.e. the make-up of the population – the age groups, where they live, etc.

• Lifestyles: As well as fashion trends, this also looks at habits such as eating out, holiday preferences, central heating, etc.

• Education levels: This will determine the ability of staff to take on new ideas, equipment and processes. It will also affect job seekers' expectations towards company policy and pay.

• Consumerism: This reflects the growing power of special interest groups towards policies. Consumer panels often advise the regulator on privatized industries regarding service delivered and allowed charges.

Technological factors

• Levels and focus of R&D expenditure within the industry and especially by your competitors.

• Speed of technology change in processes and products.

• Product life cycles.

In addition to the PEST analysis, there are always the competitors' actions which will directly affect a business in its relationships with its customers. Chapter 6 deals further with the market and an organization's competitive position therein.

Organizations

Organizations come in many shapes and forms, from the one-man business to the large multinationals employing thousands of people in many countries. Although most are profit making there are also some which do not have making a profit as one of their aims, such as the National Health Service, one of the largest employers in the UK.

For a group of people to become an organization requires more than just casual contact – it requires a formal relationship of the participants in working towards a set goal. So what are the goals for organizations?

There are probably as many goals as there are organizations. The first one must be continual survival, and money is the important component in this. Even all the not-for-profit organizations such as charities, trade unions, the civil service, the National Health Service and state education, which are very large organizations, must have money to complete their function and ensure their continued existence.

In this textbook, we are mainly considering the organizations which supply services or products for a profit. If the profit does not materialize, then they will have to cease trading – either voluntarily or by being put in the hands of the official receivers, i.e. by being made bankrupt.

It is therefore important to recognize the legal status of those companies you deal with – especially if you are supplying them with goods on payment terms. It is illegal for a business to continue to trade when they know they cannot meet existing debts, but that fact does not guarantee your payments will be made. You need to determine your own risk.

Types of ownership

Sole trader/proprietor

The basic one-person business – although it may employ others. This is the majority of businesses where one person raises the investment capital and takes all the profit. The owner also takes all the risk and remains personally liable for the business debts.

Most small businesses do not grow and many fail because:

• Many ideas are not commercially viable.

• Many owners have little commercial understanding and training.

• Capital raised is insufficient to cover the initial time until customers build up.

This size of business does, however, have its advantages:

• Personal involvement of the owner.

• Quick decision making and action.

• Normally communications are easy.

• Details of earnings required by tax authorities are limited, in effect they are treated as self-employed and do not require to submit audited accounts.

The latter does not mean that sole traders should not keep detailed accounts for their own purposes.

Partnership

Basically similar to the sole proprietor, but involving more than one person – up to twenty people can be partners, although more are allowed in certain professions. All partners have the same ultimate liability as the sole trader, even a sleeping partner, i.e. someone who contributes to funding but takes no part in the day-to-day management of the partnership. Working, and sleeping, partners do not necessarily take the same share of the profits, but cannot take a secret share.

This is a common arrangement amongst professions such as accountants and consultant engineers. It has the advantage of more skills and money available initially.

Again the details of earnings submitted for tax purposes are limited although it is highly likely that detailed audited accounts will be required to demonstrate a proper share out of the profits.

The registered company

This is an artificial legal individual under the law, i.e. it is legally separate from its owners. There are three types:

• Unlimited company: Whilst still a separate entity, the owners retain full liability for the business debts. This has advantages in certain circumstances that full accounts need not be disclosed.

• Limited company: The owners have a liability for debts only to the extent of their agreed shareholding. If they have not paid for all their shares when the company ceases trading, they will have to pay up – but only for the amount they have outstanding. A limited company can be private, or public:

– Private limited company: The shares for this type of company cannot be offered on the stock market, but it is still a limited company. It has the advantage that owners can take decisions without considering how their share price fluctuates on the stock market, but has the disadvantage that selling of shares is more controlled, i.e. they cannot be offered on the stock market only by personal contact with the buyer.

– Public limited company: The shares for this type of company are bought and sold on the stock market and as such the share price has an influence on the operation of the company. Legally these companies are controlled by their owners, i.e. the shareholders, but in practice the day-to-day operation is very much in the hands of the company directors.

The accounts of registered companies do need to be audited independently annually and submitted for company tax purposes (see Chapter 5).

The limitation of liability does make dealing with a limited company more risky, but most companies do have a long life, therefore as long as you keep track of the company's performance these risks can be kept small.

Without this limitation in liability, it would be extremely difficult to persuade investors to risk participation in companies. However, it is also said that the limitation deprives creditors of a full comeback if the company is mismanaged – after all the shareholders are legally supposed to be the ultimate controllers.

Setting up a business

Sole traders and partnerships are relatively easy to set up as they require no legal stages to come into existence. They do, however, require registration for tax, VAT (Value Added Tax) and National Insurance contributions. The main problem with their formation tends to be the raising of capital.

Although it is not a requirement, most partnerships do complete a legal Deed of Partnership, i.e. a personal contract between the partners. This should spell out their relationship on matters such as capital input, share of the profits, management of the partnership, signatories for contracts and cheques, and how partners are changed, e.g. addition of a new partner or a present partner leaving the partnership.
(Continues...)

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Excerpted from Business Skills for Engineers and Technologists by Harry Cather. Copyright © 2001 by Harry Cather, Richard Morris and Joe Wilkinson. Excerpted by permission of Elsevier Science.
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