ACCA F1 Accountant in Business - 2010 - Study text - Emile Woolf Publishing
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Chapter 1: The structure of business organisations
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Overall, matrix structures should:
encourage communication between functional departments
place emphasis on ‘getting the job done’ rather then on each functional manager
defending his or her own position.
Example
Another example of matrix organisation is commonly found in universities.
A university has a traditional functional management structure. Within the teaching
department there are functional specialisations for teaching, such as the engineering
function, art and design function, business studies function, law school, and so on.
Each teaching department has a head.
However, many courses at universities are multi-functional, and teachers for each
course come from a number of different functional departments. For example, an
accounting degree programme might use teachers from the business studies
department, law school and economics department.
In addition to the functional management structure based on heads of faculty and
heads of department, there is a course-based management structure in which
individual lecturers are responsible for all aspects of a particular course or degree
programme. For example, the course leader is responsible for obtaining and
managing the teachers from different faculties or departments, finding the lecture
rooms, marking the examinations, reporting absentee students to the administration
department, and so on.
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Functional departments in business organisations
The main business functions
Research and development
Purchasing
Operations function
Marketing function
Administration function
Finance function
2 Functional departments in business organisations
2.1 The main business functions
Most business organisations have a functional structure. Even divisional structures
and matrix organisations use functional management structures. The number of
different functions and the type of functions will vary with the nature of the
business operations and activities.
Most large companies have some or all of the following functions:
Research and development
Purchasing
Operations
Marketing
Administration
Finance.
Outsourcing functional activities
These functions are usually carried out by specialist departments within the
company. However, some functions might be ‘outsourced’ to a separate company.
For example a company might outsource all its book-keeping and accounting to a
firm of accountants that provides book-keeping services for clients. Some
administration activities, such as cleaning services and security, might be
outsourced to specialist companies.
2.2 Research and development
A company is likely to have a research and development function when it needs to
innovate, and continually produce new or improved products (or processes or
services). For example, pharmaceutical companies have research and development
departments for developing new medicines. Food manufacturers use research and
development to develop new food products or ‘healthier’ contents.
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A distinction can be made between:
pure research
applied research
development.
Pure research (also called basic research) is experimental work or theoretical work
whose aim is to acquire new scientific or technical knowledge for its own sake. Pure
research is not directed towards any specific application or use.
Applied research is original investigations to gain new scientific or technical
knowledge that is directed towards a specific use or purpose.
Development is the use of scientific or technical knowledge to produce new (or
substantially improved) products, services or processes. If the development work is
successful, it will lead on to the commercial launch of a new or improved product or
service, or the introduction of a new process into operational use.
Pure research is often carried out in the scientific or engineering departments of
universities or in government-owned laboratories. Research in universities might be
sponsored partly or wholly by a commercial company. However, companies might
have their own research and development department for both applied research
and development.
Example
A research laboratory might conduct original research into the link between salt in
foods and heart disease in humans. This would be pure research, because there is no
specific aim other than to acquire new scientific/medical knowledge.
A research department might conduct research into how to reduce the amount of
salt in a food product without affecting the taste of the product in a way that people
do not like. This would be applied research, because the aim would be directed
towards the production of food products with a lower salt content.
A research department might use knowledge that has been gained about reducing
the salt content in food products to develop a new low-salt tinned soup. This would
be product development. If successful, the development work will lead to the
introduction of a new soup product to the market.
2.3 Purchasing
The purchasing department in a large organisation (also called the buying
department) is responsible for purchasing goods and services from external
suppliers.
Provided that the annual value of purchases is sufficient to justify the cost, there are
several advantages in having a specialist purchasing department.
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The purchasing department is staffed by buyers who should have special skills
in buying, such as knowledge of how to negotiate the terms of a purchase
contract with a supplier, and how to arrange the shipment of goods from
another country.
The purchasing department should maintain a record of potential suppliers for
all items. Buyers should therefore know which suppliers to approach to ask for a
price quotation or negotiate a purchase order.
When all purchase orders from a company go through the same department, it
might be possible to negotiate ‘bulk purchase’ discounts on the purchase price
for ordering in large quantities.
Buyers have the responsibility for ensuring that purchase orders are met, and
that suppliers deliver the goods or services on time and to the required
specification. When there is no purchasing department, there may be no
individual in the organisation with special responsibility for ‘chasing up’ late
supplies or making complaints to suppliers.
When there is a purchasing department, it deals with all purchase orders. This
has the advantage of applying control over buying from external suppliers. It
prevents managers in all the functional departments from making their own
decisions to buy supplies whenever they want to, from suppliers of their own
choice. This should improve purchasing efficiency and help to prevent wasteful
spending.
The system for purchasing might vary between different organisations. Usually,
however, the procedure for making a purchase of goods or services is as follows.
The department wishing to make the purchase prepares a purchase requisition.
For regular items of inventory, the purchase requisition comes from the stores
department for a re-supply of the item that is now running out of stock. The
purchase requisition might be generated automatically by the inventory control
computer system.
Other purchase requisitions for unusual and non-recurring items might come
from the department that wants the goods or services. These are requests for the
purchase of specified items. Each of these purchase requisitions must be signed
by a manager in the functional department who has the authority to approve the
purchase.
The purchasing department uses the purchase requisition as its authority to
make the purchase.
2.4 Operations function
Every business has an operations function. The nature of this function varies
according to the nature of the business.
Manufacturing businesses
In a manufacturing business, the operations function is manufacturing
(production) and related activities.
A manufacturing function includes not only the activities directly concerned
with producing the finished manufactured item from raw materials and
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components, but also support activities such as engineering and maintenance
work, production planning and control activities, and quality checking,
inspection of finished goods and quality control.
In some businesses, pollution control and waste disposal might also be
important aspects of operations.
Manufacturing operations convert raw materials and components (many
provided by external suppliers) into a finished product. At any time, there will
be some inventories of raw materials and components that have not yet been
used in production. These are held in a stores department that might also be a
sub-function within operations.
There are often several stages in the manufacturing process, and the manufacturing
function may be sub-divided into sub-functions for each of the stages or processes.
Some manufacturing businesses produce standard products. These standard
products might be produced to meet specific customer orders. However, some of
the finished items are transferred to a finished goods inventory, so that future
customer orders can be met from existing stock.
Other manufacturing businesses produce non-standard items, to meet specific
requests from customers. The non-standard items are made to specifications
provided by the customer. Each customer order is treated as a separate ‘job’ or
‘contract’.
Service operations
In a service business, the operations function involves the provision of the service
to the customer.
Some services involve the provision of a service to the customer by employees of
the business. Other services such as the provision of a telephone service, or
providing electricity, gas or water supply, do not involve employees of the
business, except for installation and repair work.
Services provided by employees of the business might be carried out at the
customer’s premises or at the premises of the business. For example, car repairs
are carried out at the workshop of the business whereas a large amount of
auditing work is performed at the premises of the client.
Direct service operations might be divided into sub-functions. For example, a firm
of accountants might have sub-functions for auditing, tax consultancy and
management consultancy.
2.5 Marketing function
The marketing function within a business organisation is sometimes called the sales
and distribution department. The activities in the marketing function vary
according to the nature of the business and the way that it sells its products or
services. For example, a chemical manufacturer sells its products to other
manufacturing companies. Its marketing activities differ from those of a theatre
company, that sells its entertainment services direct to the ‘general public’.
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The activities that might be included within the marketing function include the
following.
Direct selling. Sales representatives might be employed to make sales direct to
customers. Direct selling by sales representatives can be expensive, because the
salaries, sales commissions and expenses of sales representatives might be high.
Direct face-to-face selling is therefore used only for large-value items where a
large profit can be made with each sale. Manufacturers of consumer goods, for
example, use sales representatives to sell their products to retail companies such
as supermarket companies and department stores. Some businesses use direct
selling by telephone, rather than direct selling by visiting the customer.
Advertising and sales promotion. Many businesses use advertising and sales
promotions to market their products or services.
Distribution (sometimes called outward logistics). Marketing usually includes
the activities involved in delivering products to the customer. This might
involve the physical delivery of goods to the customer by truck. For retail
companies, distribution usually involves persuading customers to visit retail
stores to buy goods; however, many companies now use the internet to sell
goods or services, and arrange for delivery by courier or by post.
Marketing is described in more detail in a later chapter.
2.6 Administration function
The administration function in a business organisation carries out all the tasks that
are not performed by the other functional departments. The term ‘administration’ is
also used to describe several different functional departments in large business
organisations.
Examples of the work performed by the administration function are as follows.
Administration relating to employees. In many businesses, this work is
performed by a human relations management department (HRM department)
Some years ago, it was called the ‘personnel department’. A business
organisation must maintain employment records for each employee and arrange
for the training of existing employees. The HRM department is also usually
involved in matters such as recruitment and selection of new employees, and
dealing with redundancies, disciplinary matters and claims of unfair dismissal
by employees who have been dismissed.
Ensuring compliance with regulations. Many countries have regulations
relating to health and safety at work. An administration activity is to ensure
compliance with any such regulations.
Facilities management. This is a term used to cover a range of administrative
issues, including arranging for the security of buildings and other valuable
assets, office cleaning services and the purchase and maintenance of the motor
vehicles of the business.
Arranging insurance. Business organisations are required to arrange certain
types of insurance. In the UK for example, there is a legal requirement to arrange
employer’s liability insurance, which provides insurance cover against the risk
of claims by members of the public for injury caused to them by its employees.
There is also a legal requirement for any business to insure its motor vehicles
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and drivers. Some types of insurance are voluntary, such as insurance of
business premises against fire and theft.
2.7 Finance function
The main part of a finance function in a business organisation is the accounts
department. The accounting function is described in much more detail in a later
chapter.
Large companies might also have a treasury department within the finance
function. The role of a treasury function is to manage the company’s finances.
Activities of the treasury function include:
making sure that the business has the money it needs to pay employees, lenders
and suppliers on time and to finance new investments
managing the cash of the business: this is often the responsibility of a chief
cashier and cashier’s sub-department
obtaining new funds from the financial markets, including the negotiation of
new bank loans
investing surplus cash
arranging transactions for the purchase of foreign currency (for example to pay
for purchases from other countries) or sale of foreign currency (for example to
convert sales income in a foreign currency into domestic currency).
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Functions and characteristics of management
Functions of management: Henri Fayol
Functions of management: Henry Mintzberg
Principles of effective organisation and management
Strategic, tactical and operational management
3 Functions and characteristics of management
The organisation structure for a business can also be described as its management
structure. Every business organisation has managers, who make and implement
decisions on behalf of the business. In order to understand business organisation
properly, it is also necessary to understand something about the functions and
characteristics of management.
3.1 Functions of management: Henri Fayol
Ideas about the functions of management – what managers do – that were expressed
about a hundred years ago remain relevant today. An early writer about the
principles of management was Henri Fayol (1841 – 1925), a French engineer whose
views were formed by his experience in the mining industry. However, he believed
that there are some general principles of management that apply to all types of
business organisation in all industries.
He suggested that management performed five functions:
To forecast and plan. Managers consider the future and try to forecast what
might happen. They look forward and plan ahead. They select objectives. They
formulate the strategies, policies, plans and procedures for achieving those
objectives.
- There is a need for unity in the planning process. The plans for different
parts of the organisation must be co-ordinated so as to achieve the aims of
the organisation as a whole.
- Managers must forecast and plan for the long term and the shorter term.
There should be consistency between long-term and short-term planning.
- Forecasts need to be accurate, so that realistic action plans can be prepared.
- Managers must also have the flexibility to deal with unforeseen
circumstances that arise, and adapt plans to meet those circumstances.
To organise. Managers build up the structure of a business organisation. They
acquire suitable assets and resources for the business, including employees, and
decide how these should be used.
- They create groups of jobs within departments or work sections.
- They appoint individuals to carry out those jobs.
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- They delegate authority within the management structure, and make
particular managers responsible for particular tasks.
- They gather the resources – men, materials, equipment and money – to enable
the tasks to be carried out.
- They also establish a system of communication and information within the
organisation.
To command. Fayol suggested that managers were responsible for maintaining
activity amongst employees by telling them what to do. Giving commands is a
very authoritarian form of management, however, and today a more appropriate
description of this function is ‘to provide leadership’.
To co-ordinate. Managers co-ordinate the activities of all the individuals within
the organisation, to ensure that the activities are directed towards a common
purpose.
- Managers should co-ordinate the activities of their subordinates.
- They must also co-ordinate the activities of their own work group with the
activities of other work groups within the organisation.
To control. Managers make sure that actual performance conforms with policy
and established procedures. They also take control measures when actual
performance differs significantly from the plan or target, to bring actual
performance back into line with the plan (if this is possible).
3.2 Functions of management: Henry Mintzberg
Henry Mintzberg is another modern management theorist who has written on a
wide range of topics. He is particularly well-known for research that he carried out
into what managers actually do. According to classical theorists such as Fayol, the
role of managers is to plan, organise, command, co-ordinate and control.
Mintzberg suggested that reality is different. His research into the activities of
managers made the following discoveries:
A lot of management work is disjointed. Planning, for example, is done on a
day-to-day basis, when time permits between more urgent or immediate tasks.
Managers spend some of their time on routine duties of a ceremonial nature,
such as meeting with important visitors.
Managers prefer informal verbal communication to formal written
communications, such as reports and briefing notes. Communicating informally
by word of mouth is much faster and more effective than communication
through the formal information system.
Management activities and decisions are based largely on judgement and
intuition. General principles of management are not relevant to management
practice. In practice, managers do many of their tasks quickly and superficially.
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Mintzberg suggested that managers perform three main roles.
Interpersonal role. Managers spend much of their time performing
interpersonal roles:
- As a figurehead. Managers often perform a ceremonial role, representing the
organisation at events and as a ‘public face’ of the organisation. Managers
also represent their organisation in its dealings with other organisations.
- As a leader. Managers also deal with relations between individuals inside the
organisation, providing leadership (hiring, firing, training, motivating and so
on).
- Liaison. Managers of groups within an organisation act as a link or bridge
with other groups. For example, different departments often communicate
with each other through their managers.
Information role. Managers receive and disseminate information, acting as a
channel of information both inside the organisation and in communicating with
external bodies. Managers gather information from formal and informal sources,
and develop an extensive knowledge of the organisation as a result.
Decision-making role. Managers make decisions.
- They have an entrepreneurial role, and take initiatives.
- They have a role in resolving conflicts and disputes, and other similar
problems.
- They decide how resources should be used, for example what the available
money should be spent on and how employees should use their time (what
work they should do).
- They negotiate with others, and reach decisions through joint agreement.
Example
You have recently been appointed to a management position in your organisation,
a chain of hotels. You have been appointed as the manager of one of the hotels.
Required
(a) What are the management tasks involved in organising the work of the hotel
staff?
(b) What will be your role in achieving those tasks?
Answer
You might have your own ideas about what the role of a hotel manager should be,
but here are some suggestions.
(a) A manager must understand what is expected from him or her. An important
starting point is therefore to understand what the responsibilities of the hotel
manager are, and what targets he or she is expected to achieve, in both the short
term and the longer term. In other words, a manager must know the answer to
the question: ‘What am I expected to do?’