3: The purpose of an organisation Flashcards
How may the purpose of an organisation be communicated?
The purpose of an organisation may be communicated in a mission statement.
The role and value of such statements has been a matter of debate.
Define a mission.
The values and expectations of those who most strongly influence strategy about the scope and posture of the organisation (Johnson, Scholes and Whittington).
What are the Elements of mission according to the Ashridge College model of mission?
- Purpose: Why does the organisation exist? Who does it exist for?
- Strategy: the competitive position and distinctive competence of the organisation.
- Policies and standards of behaviour: the policies and behavioural patterns underpinning its
work. - Values: what the company believes in, which is replicated in employees’ personal values.
How is the role of mission determined in various approaches to strategy?
- Rational approach: Mission is the starting-point of strategy formulation. It is the basis on which strategic objectives are set. Any strategy developed must be shown to be consistent with the mission before it is adopted. The culture and values of the organisation must be moulded to serve the strategy.
- Emergent approach: Mission is embedded in the culture of the organisation and used to generate strategic initiatives.
What are mission statements?
Mission statements are formal documents that state the organisation’s mission. There is no standard format, but the four element Ashridge model of mission is a good basis for writing a mission statement. Mission statements are published within organisations to promote desired behaviour: support for strategy and purpose, adherence to values and adoption of policies and standards of behaviour.
What are some benefits of mission statements?
- Provide a basis for the control of organisations, ie, managerial and operational goals can be set on the basis of them
- Communicate the nature of the organisation to stakeholders
- Help to instil core values in the organisation
What are some criticisms of mission statements?
- They are often public relations exercises rather than an accurate portrayal of the firm’s actual values
- They can often be full of generalisations from which it is impossible to tie down specific strategic implications or develop meaningful strategic objectives.
- They may be ignored by the people responsible for formulating or implementing strategy
What is the purpose of profit seeking organisations?
The primary goal of these is assumed to be to deliver economic value to their owners ie, to increase shareholder wealth. Goals such as satisfying customers, building market share, cutting costs, and demonstrating corporate social responsibility are secondary goals which enable economic value to be delivered.
What is the purpose of Not-for-profit organisations (NFP)?
The primary goals of these vary enormously and include meeting members’ needs, contributing to social well-being and pressing for political and social change. Secondary goals will include the economic goal of not going bankrupt and, in some cases, generating a financial surplus to invest in research or give to the needy. Often the goals of NFP organisations will reflect the need to maximise the benefit derived from limited resources, such as funds. Their objectives may be more heavily influenced by external stakeholders such as the government.
How is the concept of shareholder wealth maximisation relied on?
- As a decision-making criterion: techniques such as NPV and IRR assume this as the goal of the business.
- As a criterion to evaluate divisional managers: using performance measures such as Return on Capital Employed (ROCE) or sometimes Return on Investment (ROI) which should exceed cost of capital and rise from year to year.
- As the basis for financial incentives for managers. Bonuses may be based on improvements in the ROCE, earnings per share (EPS) or share price from year to year.
- As a benchmark against which to evaluate the board. Investment analysts and ‘active value’ investors use shareholder value measures to evaluate corporate performance and some newspapers publish league tables to name and shame underperforming boards.
What are the limitations of the shareholder value assumption?
- Corporate governance is too weak to give shareholders sufficient information or influence to ensure management maximise shareholder wealth rather than, say, their own emoluments.
- It ignores the non-financial goals of shareholders.
- It is impossible to verify: Seen in retrospect a board’s decisions may be seen to have failed to maximise shareholder wealth.
- Ignores the nature of the financial return required: shareholders receive their wealth from dividends and from capital growth. They are assumed to be indifferent between the two, but may not be in practice due to income needs and the different tax treatments of income and capital growth.
- Overlooks the power of stakeholders other than shareholders, eg, increasing shareholder wealth at the expense of staff benefits may lead to loss of staff and industrial action.
- Ignores corporate responsibility (CR): many cultures take the view that profits should be balanced against the good of society and the natural environment.
What is the Mission and objectives hierarchy?
Mission –> Objectives –> Strategies –> Action plans/Budget
There should be goal congruence, ie, the mission and objectives set at each level should be consistent with each other and not in conflict.
What does SMART stand for?
For objectives to be of use in practice, they must be SMART – Specific, Measurable, Achievable, Relevant and Timebound – eg, ‘increase online revenues by 25% within one year’.
Define stakeholders.
Are those groups or persons with an interest in what an organisation does.
What are the types of shareholders?
- Internal stakeholders (employees, management)
- Connected stakeholders (shareholders, customers, suppliers, financiers)
- External stakeholders (the community, government, pressure groups)
