This document discusses different types of organizations and how they are classified. It begins by defining organizations as social arrangements for collective goals. Organizations are then classified based on their profit orientation, such as profit-seeking companies and not-for-profit organizations. They are also classified based on ownership and control, like public sector organizations controlled by government and private sector organizations not controlled by government. The document also discusses goals of different stakeholders and conflicts that can arise between them, as well as issues like principal-agent problem and how corporate governance aims to address it. Transaction costs associated with insourcing and outsourcing activities are also summarized.

1. The Goals and Decisions of
Organizations
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2. 1. Share skills and knowledge
2. To be specialize
3. Pool resource
Why Do we need organizations?
What is an organization?
 Organizations are social arrangements for the controlled
performance of collective goals.
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3. Classifying organizations by profit orientation
Profit seeking organizations
 Companies and partnerships.
 Main objective is maximizing the wealth of their owners.
 Primary objectives as;
- to continue in existence.
- to maintain growth and development.
- to make a profit.
Not-for-profit organizations (NFP/ NPO)
 Government departments, schools, hospitals, charities, club.
 Main objective is satisfy particular needs of their members or sectors of society that they
had set up to benefit.
 Primary objectives are not financial but they still need money to enable them to reach
them.
 Mutual organizations are not-for-profit associations formed for the purpose of raising
funds by subscriptions of members. Examples include such as some building societies,
trade unions and some social clubs.Ayesha.J.

4. Classifying organizations by ownership/ control
Public sector organizations
• The public sector, is that part of the economy that is concerned
with providing basic government services and is controlled by
government organizations.
• Examples such as police, military, public roads, public transit,
primary education and healthcare for the poor.
Private sector organizations
• The private sector, is that part of a nation’s economy that is not
controlled by the government.
• Examples such as businesses, charities and clubs.
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5. Maximizing shareholder wealth
 Higher share prices.
 Higher dividend payments.
• The role of the managers within the business is to make decisions that will
affect the values of the company and therefor the values of shareholder
wealth.
• To measure and increase shareholder value have focused on three
attempts;
1. Cash flows have a higher correlation with shareholder wealth than profits.
2. Exceeding the cost of capital (return), to cover not just the cost of
debt(interest payments) but also the cost of equity(the return required by
shareholders).
3. Managing both long and short term perspectives.
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6. Short term measures of financial performance
Return On Capital Employed (ROCE)
• ROCE = profit before interest and tax x 100%
average capital employed
- ROCE gives an indication as to how well a business uses its capital(or assets purchased with the capital) to generat
profits.
Return On Net Assets (RONA)
• RONA = profit before interest and tax x 100%
(total assets – current liabilities)
The higher the figures for ROCE/ RONA is, the more profitable the company is.
Earning Per Share (EPS)
• EPS = profit after interest, tax and preference share dividends x 100%
number of ordinary shares issued
- EPS gives an earnings per share that each owner of ordinary shares might expect to receive.
Main weakness of both ROCE and EPS is that they do not correlate directly to the goal of maximizing shareholder
wealth.
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7. Long term measures of financial performance
See later chapter on
‘Discounting and Investment Appraisal’
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8. Share values
 Net Present Value of a project = (Sum of the discounted future cash flows) – (Capital cost of the project)
(NPV)
- If the market believes that the project is delivering a positive NPV, then the share price should rise.
How press releases and market rumors can affect the share price?
 Any information that reaches the market that suggest that future cash flows will be
higher than previously forecast should result in a share price rise.
 If bad news reaches the market like as revising forecast cash flows downwards, investors
considering the investment as having risk, future receipts will less valuable than
previously estimated. The end result is a fall in the share price.
• External factors to the business may affect a wide range of shares.
• Internal factors to the business might affect the future flow of profits such as failure of
a new product.
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9. Stakeholders
Stakeholder Need/ expectation
Internal
stakeholders
Employees Pay, working conditions and job security
Managers/ directors Status, pay, bonus, job security
Connected
stakeholders
Shareholders Steady flow of income, possible capital growth
and the continuation of the business
Customers Value for money product and services
Suppliers Paid promptly
Finance providers Ability to repay the finance including interest,
security of investment
External
stakeholders
Community at large Depends on organizations’ decisions
Environmental pressure groups Does not harm the external environment
Government Success of the economy (providing jobs and
paying taxes), Legislation (health and safety)
Trade unions Taking an active part in the decision making
process
 Stakeholders, the persons and organizations that have an interest in the strategy of an
organization.
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10. Stakeholder conflict
Stakeholders Conflict on needs/ expectations
Employees vs Managers Jobs/ wages vs Bonus
Customers vs Shareholders Product quality/ Service levels vs Profits/ dividends
General public vs Shareholders Effect on the environment vs Profit/ dividends
Managers vs Shareholders Revenue growth vs Profit growth
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11. Principal – agent problem
- Specially companies that are listed in stock market are often extremely complex and require a lot of investment
in equity to fund them.
- They therefore often have large number of shareholders.
- So, these shareholders delegate control to professional managers (the board of directors) to run the company
on their behalf.
- This separation of ownership and control leads to a potential conflict of interests between directors and
shareholders.
- Above conflict is an example of the principal - agent problem.
- The principal (the shareholders) have to find ways of ensuring that their agents (the managers) act in their
interests.
- Agents objectives;
1. Balance the interest of different stakeholders in the company.
2. Manage the objectives of its own.
3. Sales maximization.
4. Growth maximization.
5. Satisfying.
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12. Possible areas of conflict
1. ‘Fat Cat’ salaries and benefits
the media regularly highlight cases such as directors are paid huge bonuses despite the
company they manage making a loss.
2. Mergers and acquisitions
directors are looking to expand their own spheres of influence rather than focus on
shareholder value.
3. Poor control of the business
the Enron and WorldCom scandals in the US in 2002 resulted in improve the control of
stakeholders over the board of directors.
4. Short-termism
managers make decisions to maximize short term profitability to ensure they get bonus and
hit the targets, rather than looking at the long term.
 Attempt to resolve this conflict through corporate governance, which is ‘review of the remuneration
and bonuses schemes’ given to directors;
• High bonuses linked to profit
• Bonuses paid using shares
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13. The objectives of corporate governance
 Corporate governance, the systems by which companies and other
organizations are directed and controlled.
 Main objectives;
1. To control the managers/ directors by increasing the amount of reporting and
disclosure.
2. To increase level of confidence and transparency in company activities for all
investors (existing and potential) and thus promote growth in the company.
3. To increase disclosure to all stakeholders.
4. To ensure that the company is run in a legal and ethical manner.
5. To build in a control at the top that will ‘cascade’ down the organization.
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14. Transaction costs
- Managers are faced with a choice as to whether performing an activity in-house or
choosing to outsource.
- If an activity is outsourced (external party), it can be difficult to determine the
transaction costs.
1. Search and information costs
2. Bargaining and decision costs
3. Policing and enforcement costs
- It is in the interest of management to internalize (reduce) transactions as much as
possible.
1. How often a transaction is made (frequency)
2. Long term relationships, close relationships, lack of trust (uncertainty)
3. How unique the component is (asset specificity)
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15. Thank you
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