Integrated Management

Strategic Management: Strategic Objectives

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Integrated Management Chapter Four Strategic Management Strategic Objectives

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Integrated Management

Strategic Management: Strategic Objectives

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GOALS AND OBJECTIVES

Goals or objectives are the intentions behind actions. Some goals are quantified. Quantified objectives (or operational goals) normally describe what an organization hopes to achieve over a specific period and can be measured. They include indicators such as profitability and market share. Goals and objectives are derived from mission and should support It. They provide the detail of what must be done if mission is to be achieved. There should be a hierarchy of objectives, cascading downwards from the general to the specific, each level supporting the one above. FORMULATING OBJECTIVES 1. Identifying the different key result areas to be covered by objectives 2. Determining the time frame covered by the objectives 3. Determining the magnitudes of the objectives 4. Putting the objectives in written form THE NATURE OF GOALS AND OBJECTIVES Operational goals can be expressed as objectives. Mintzberg says that an objective is a goal expressed in a form by which its attainment can be measured, that is to say, an objective is (preferably) a quantified goal, or (at least) a precisely stated one. Here is an example. (a) Mission: deliver a quality service (b) Goal: enhance manufacturing quality (c) Objectives: over the next twelve months, reduce the number of defects to 1 part per million Non-operational goals or aims on the other hand cannot be expressed as objectives. Mintzberg quotes the example of a university, whose goal might be to seek truth. This cannot really be expressed as a quantified objective. To increase truth by 5% this year does not make a great deal of sense. FUNCTIONS OF OBJECTIVES (a) Provide a focus for the planning process (b) Define managers areas of responsibility (c) Provide a basis for co-ordination of effort (d) Motivation of managers and staff stretch objectives (e) Provide a bisis for performance measurement and control

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Integrated Management

Strategic Management: Strategic Objectives

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OBJECTIVES SHOULD MEET THE SMART CRITERIA. (a) Specific (b) Measurable (c) Attainable (d) Results-orientated (c) Time-bounded However, not all goals, as we have seen, can be measured, or can ever be attained completely. Customer satisfaction is a goal, but satisfying customers and ensuring that they remain satisfied is a continuous process that does not stop when one target has been reached

CHARACTERISTICS OF A GOOD OBJECTIVE

1. Result of participation by those responsible for carrying them out. 2. All objectives within an enterprise should support the overall objectives 3. Should have some reach (reasonable) 4. Should be realistic 5. Should be contemporary as well as innovative 6. The number of objectives established for each management member should be limited 7. Should be ranked according to their relative importance. 8. Should be balanced within a given enterprise. POOR AND BETTER STATEMENTS OF OBJECTIVES Poor: To minimize our costs

Better: To reduce our departmental costs by 1 0 percent within the next 6 months Poor: To increase the quality of our work

Better: To reduce the number of rejects to an average of 5 per month by the end of the current fiscal year Poor: To follow up more quickly on all sales inquiries

Better: To follow up on all sales inquiries within 48 hours after the initial contact Poor: To become a socially responsible company 3 Prepared by Mohammad Muzammil

Integrated Management

Strategic Management: Strategic Objectives

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Better: To hire at least 4 minority employees within the next year and to donate $1 000 to the United Way campaign Poor: To increase sales

Better: To increase sales by 20 percent by the end of September of this year Poor: To upgrade employee morale

Better: To decrease employee absenteeism to an average of 2 days per year per employee" and to reduce tardiness to an average of 2 days per year per employee by the end of the current fiscal year FEATURES OF GOALS AND OBJECTIVES IN ORGANIZATIONS (a) Goal congruence. Goals should be consistent with each other. (b) Across all departments. There should be horizontal consistency (I.e. the goals set for different parts of the organization should be consistent with each other). At all levels Objectives should be consistent vertically (i.e. at all levels in the organization). Over time. Objectives should be consistent over the same time span. An objective should identify the beneficiaries as well as the nature and size of the benefit.

HIERARCHY OF OBJECTIVES
A simple model of the relationship between the various goals, objectives and targets is a pyramid analogous to the traditional organizational hierarchy. At the top is the overall mission; this is supported by a small number of wide ranging goals, which may correspond to overall departmental or functional responsibilities. Each of these goals is supported in turn by more detailed, subordinate goals that correspond, perhaps, to the responsibilities of the senior managers in the function concerned. This pattern is continued downwards until we reach the work targets of individual members of the organization. As we work our way down this cascade of goals we will find that they will typically become more detailed and will relate to shorter timeframes. So, the mission might be very general and specify no time scale at all, but an individual worker is likely to have very specific things to achieve every day, or even every few minutes. Note that this description is very basic and that the structure of objectives in a modern organization may be much more complex than this, with the pursuit of some goals involving input from several functions. Also, some goals may be defined in very general terms, so as not to stifle innovation, cooperation and informal ways of doing things.

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Integrated Management

Strategic Management: Strategic Objectives

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An important feature of any structure of goals is that there should be goal congruence; that is to say. goals that are related to one another should be mutually supportive. Goals can be related in several ways: (a) (b) (c) Hierarchically, as in the pyramid structure outlined above Functionally, as when colleagues collaborate on a project Logistically, as when resources must be shared or used in sequence

(d) In wider organizational senses, as when senior executives make decisions about their operational priorities A good example of the last category is the tension between long- and short-term priorities in such manors as the need to contain costs while at the same time increasing productivity by investing in impuived plain CORPORATE AND UNIT GOALS AND OBJECTIVES Corporate objectives are concerned with the firm as a whole or the strategic business units in the firm. A strategic business unit is a part of the company that for all intents and purposes has its own distinct products, markets arid assets. Objectives should be explicit, quantifiable and capable of being achieved. The corporate objectives outline the expectations of the firm and the strategic planning process is concerned with the means of achieving the objectives. Objectives should relate to the critical success factors for business success, which are typically the following. Profitability (return on investment) Customer satisfaction Market share The quality of the firms products Growth Industrial relations Cash flow Added value

Unit objectives arc specific to individual units of an organization. Here are some examples. (A) FOR BUSINESSES Increasing the number of customers by x% (an objective of a sales department). Reducing the number of rejects by 50% (an objective of a production department). Producing monthly reports more quickly, within 5 working days of the end of each month (an objective of the management accounting department). (B) FOR THE PUBLIC SECTOR

To introduce x% more places at nursery schools (an objective of a borough education department). 5 Prepared by Mohammad Muzammil

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Responding more quickly to calls (an objective of a local police station, fire department or hospital ambulance service).

GUIDE LINE FOR PUTTING OBJECTIVES IN WRITTEN FORM 1. Clear, Concise and unambiguous 2. Stated in a form that facilitates their use in measuring results at a future time 3. Accurate in terms of the true end state sought 4. Consistent with the policies of the organization PRIMARY AND SECONDARY OBJECTIVES Some objectives are more important than others. In the hierarchy of objectives, there is a primary corporate objective (restricted by certain constraints on corporate activity) and other secondary objectives which are strategic objectives which should combine to ensure the achievement of the overall corporate objectives. For example, if a company sets itself a primary objective of growth in profit, it will then have to develop strategies by which this primary objective can be achieved. Secondary objectives might then be concerned with matters such as sale growth, continual technological innovation, customer service, product quality, efficient resource management and reducing the companys reliance on debt capital. Secondary objectives have to be ranked in order of priority. ANNUAL OBJECTIVES Establishing annual objectives is a decentralized activity that directly involves all managers in an organization. Active participation in establishing annual objectives can lead to acceptance and commitment. Annual objectives are essential for strategy implementation because they: Represent the basis for allocating resources They are a primary mechanism for evaluating managers They are the major instrument for monitoring progress toward achieving long-term objectives They establish organizational, divisional, and departmental priorities.

Considerable time and effort should be devoted to ensuring that annual objectives are well conceived, consistent with long-term objectives, and supportive of strategies to be implemented. Approving, revising, or rejecting annual objectives is much more than a rubber-stamp activity. The purpose of annual objectives can be summarized as follows:

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Strategic Management: Strategic Objectives

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Annual objectives serve as guidelines for action, directing and channeling efforts and activities of organization members. They provide a source of legitimacy in an enterprise by justifying activities to stakeholders. They serve as standards of performance. They serve as an important source of employee motivation and identification. They give incentives for managers and employees to perform. They provide a basis for organizational design.

Clearly stated and communicated objectives are critical to success in all types and sizes of firms. Annual objectives, stated in terms of profitability, growth, and market share by business segment, geographic area, customer groups, and product are common in organizations. Following figure illustrates how the Stamus Company could establish annual objectives based on long-term objectives. It also reflects how a hierarchy of annual objectives can be established based on an organizations structure. Objectives should be consistent across hierarchical levels and form a network of supportive aims. Horizontal consistency of objectives is as important as vertical consistency. For instance, it would not be effective for manufacturing to achieve more than its annual objective of units produced if marketing could not sell the additional units.

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Strategic Management: Strategic Objectives

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Annual objectives should be measurable, consistent, reasonable, challenging, clear, communicated throughout the organization, characterized by an appropriate time dimension, and accompanied by commensurate rewards and sanctions. Too often, objectives are stated in generalities, with little operational usefulness. Annual objectives such as to improve communication or to improve performance are not clear, specific, or measurable. Objectives should state quantity, quality, cost, and time and also be verifiable. Terms such as maximize, minimize, as soon as possible, and adequate should be avoided.

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Strategic Management: Strategic Objectives

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Annual objectives should be compatible with employees and managers values and should be supported by clearly stated policies. More of something is not always better! Improved quality or reduced cost may, for example, be more important than quantity. It is important to tie rewards and sanctions to annual objectives so that employees and managers understand that achieving objectives is critical to successful strategy implementation. Clear annual objectives do not guarantee successful strategy implementation but they do increase the likelihood that personal and organizational aims can be accomplished. Overemphasis on achieving objectives can result in undesirable conduct, such as faking the numbers, distorting the records, and letting objectives become ends in them-selves. Managers must be alert to these potential problems.

EXAMPLES OF OBJECTIVES
1. FINANCIAL OBJECTIVES

For business in the UK, the primary objective is concerned with the return to shareholders. (a) A satisfactory return for a company must be sufficient to reward shareholders adequately in the long run for the risks they take. The reward will take the form of profits, which can lead to dividends or to increases in the market value of the shares. The size of return which is adequate for ordinary shareholders will vary according to the risk involved.

(b)

Here are different ways of expressing a financial objective in quantitative terms. Financial objectives would include the following: (a) (b) (c) (d) 1.1 Profitability Return on investment (ROI) or return on capital employed (ROCE) Share price, earning per share, dividend Growth PROFIT AS AN OBJECTIVE

We are used to thinking of profit as a major objective, and possible as the overriding one. However, profit has limitations ass measure of success. (a) It is an accounting convention and is subject to technical adjustment and managerial manipulation. It is a retrospective, annual measure: It does not necessarily reflect current strategy and is anyway short-term in its focus. It is of little use as a measure of success in the early years of a business venture (as are cash flow measures) because of the heavy investment normally required at stage.

(b)

(c)

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Integrated Management 1.2 PROFITABILITY

Strategic Management: Strategic Objectives

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Profitability on its own is not satisfactory as an overall long-term corporate objective. It fails to allow for the size of the capital investment required to make the profit. Shareholders should be interested in maximizing profits over time. In order to maximize profits over time, costs will have to be incurred today in order to generate returns in the future. Return on investment (ROI) or return on capital employed (ROCE) 1.3 RETURN ON INVESTMENT (ROI) OR RETURN ON CAPITAL EMPLOYED (ROCE)

Many companies use an accounting ROI (profits as a percentage of capital invested) as a primary objective. Although it relates the return to the capital, it has these drawbacks. (a) Unreliable data. Capital employed is notoriously suspect as a financial measure, since a book value in the balance sheet will probably bear little or no comparison with the 'true' value - net replacement cost, gross replacement cost, net realizable value or economic value of the asset. Short vs. long term. There will be difficulty in balancing short-term results against longterm requirements. Risk, High risk projects might promise a high return but it may be safer to opt for a project with a lower return but a greater guarantee of success. SHARE PRICE, EARNINGS, DIVIDENDS AND MARKET VALUE

(b)

(c)

1.4

Earnings per share or dividend payments are measures which recognize that a company is owned by its shareholder-investors. Failure to provide a satisfactory EPS or dividend could lead the shareholders to sell their shares. Market capitalization is the total value of the businesses shares on the stock market. When earnings and dividends are low, the market value of shares will also be depressed unless there is a strong prospect of dividend growth. Shareholders are concerned with the size of the return they get, but also with the size of the investment they must make to achieve the return. To overcome this problem, earnings and dividend growth could be expressed as dividends received plus the capital growth in market value. The price/earnings ratio measures the relationship between earnings per share and the price at which shares are traded. It is the market value divided by earnings per share. 1.5 GROWTH

There are some difficulties in accepting growth as an overall objective: (a) Growth of what? In the long run, some elements must be expected to grow faster than others because of the dynamics of the business environment. 10 Prepared by Mohammad Muzammil

Integrated Management (b)

Strategic Management: Strategic Objectives

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In the lung run, growth might lead to diseconomies of scale so that inefficiencies will occur.

Smaller companies will usually have a greater potential for significant rates of growth, especially in new industries, and growth will be a prime objective. Larger companies grow to achieve a size which will enable them to compete with other multinationals in world markets. 1.6 MULTIPLE OBJECTIVES

A firm might identify several financial objectives. (a) (b) (c) 1.7 Scope for growth and enhanced corporate wealth Maintaining a policy of paying attractive but not over-generous dividends Maintaining an acceptable gearing ratio SUBSIDIARY OR SECONDARY OBJECTIVES

Whatever primary objective or objectives are set, subsidiary objectives will then be developed beneath them.

Establish Objectives

Corporate Level

Out line corporate strategy / Plan Manufacturing Objectives Marketing Objectives

Department Level

Operational Level

Develop departmental strategies / plans Scheduling program / action plan

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Integrated Management 1.8

Strategic Management: Strategic Objectives

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UNIT OBJECTIVES

Unit objectives relate either to strategic business units or functions of the business. (a) From the private sector: (i) Increasing the number of customers by 10% (ii) Reducing the number of rejects by 50% (iii) Producing monthly reports more quickly, within five working days of the end of each month From the public sector: (i) (ii) 1.9 Responding more quickly to emergency calls Reducing the length of time a patient has to wait for an operation

(b)

GOALS FOR MARKETS AND MARKETING

Goals for markets will involve the following type of decisions. (a) Market leadership. Whether the organization wants to be the market leader, or number two in the market, what rate of growth it desires and so on. Coverage. Whether the product range needs to be expanded? Positioning. Whether there should be an objective to shift position in the market - e.g. from producing low-cost for the mass market to higher-cost specialist products/ Expansion. Whether there should be an objective of broadening the product range or extending the organizations markets. GOALS FOR PRODUCTS AND SERVICES

(b) (c)

(d)

1.10

Labor productivity objectives are often quantified as targets to reduce unit costs and increase output per employee by a certain percentage each year. Capital productivity is measured less often, but it can denote how efficiently a firm is using its equipment. Quality objectives might be measured in low rejects (eg 'six sigma'). In some environments, targets may be set for service delivery, such as speed in answering the telephone, customer satisfaction and service quality. BALANCED SCORECARD Kaplan and Norton suggested a balanced scorecard approach that looks at the bus in four perspectives; performance in all must be satisfactory if the business is to prosper (a) (b) (c) The financial perspective, or how do we look to shareholders? The customer perspective, or how do customers see us? The internal business perspective, or what must we excel at? 12 Prepared by Mohammad Muzammil

Integrated Management (d)

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The innovation and learning perspective, or can we continue to improve and create value?

It is necessary for each business to set goals and establish performance measure for each perspective. Some will be fairly simple and traditional. For instance, shareholders will want to see their company survive and grow; suitable measures here might be cash generation and profits respectively. The internal perspective will vary widely between companies but will concentrate on efficiency goals and measures. Measuring customer satisfactions can be done in a variety of ways such as counting complaints or start programme of interviews. The innovation and learning perspective will, perhaps, be the most difficult to handle. Kaplan and Norton give the example of an electronic company with several goals in this perspective; one is technology leadership and the chosen measure is how long it takes to develop a new generation of product. CONFLICTS BETWEEN GOALS OR TRADE OFF BETWEEN OBJECTIVES Dealing with conflicts between different types of goals: (a) (b) Rational evaluation according to financial criteria. Bargaining. Managers with different goals will compete and will form alliances with other managers to achieve their goals. Satisficing. Organizations do not aim to maximize performance in one area if this leads to poor performance elsewhere. Rather they will accept satisfactory, as opposed to excellent, performance id a number of areas. Sequential attention. Goals are dealt with one by one in a sequence. Priority setting. Certain goals get priority over others. This is determined by senior managers, but there are quite complicated systems to link goals and strategies according to certain criteria. Exercise of power.

(c)

(d) (e)

(f)

When there are several key objectives, some might be achieved only at the expense of others. For example, attempts to achieve a good cash flow or good product quality, or to improve market share, might call for some sacrifice of profits. There will be a trade-off between objectives when strategies are formulated, choice will have to be made. For example, there might be a choice between the following two options. OPTION A 15% sale growth, 10% profit growth, a two million negative cash flow and reduced product quality and customer satisfaction OPTION B 8% sale growth, 5% profit growth, a 500,000 surplus cash flow and maintenance of high product quality and customer satisfaction 13 Prepared by Mohammad Muzammil

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Strategic Management: Strategic Objectives

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LONG-TERM AND SHORT-TERM OBJECTIVES Objectives may be long-term or short-term. (a) Company that is suffering from a recession in its core industries and making losses in the short term might continue to have a primary objective in the long term of achieving a steady growth in earnings or profits, but in the short term, its primary objective might switch to survival. (b) Secondary objectives will range from the short term to the long term. Planners will formulate secondary objectives within the guidelines set by the primary objective, after selecting strategies for achieving the primary objective. For example, a companys primary objective might be to increase its earnings per share from 3Op to 50p in the next five years. Strategies for achieving the objective might include those below. Increasing profitability in the next twelve months by cutting expenditure Increasing export sales over the next three years Developing a successful new product for the domestic market within five years

Secondary objectives might then be re-assessed. Improving manpower productivity by 10% within twelve months Improving customer service in export markets with the objective of doubling the number of overseas sales outlets in selected countries within the next three years Investing more in product-market research and development, with the objective of bringing at least three new products to the market within five years

POTENTIAL CORPORATE KEY RESULT AREAS WITH SAMPLE OBJECTIVE STATEMENT 1. PROFITABILITY can be expressed in terms of profits return on investment, earnings per share, or profit-to- soles ratios, among others objectives in area may be expressed in such concrete and specific terms as to increase return on investment to 15 percent after taxes within five years or increase profits to six million dollars next year. MARKETS may also ho describe in a number of different ways, including share of the market, dollar or unit volume of sales and niche in the industry. To illustrate, marketing objectives might be "to increase share of market to 28 percent within three years, "to sell 200,000 units next year," or "to increase commercial sales to 85 percent and reduce military sales to 15 percent in the next two years. PRODUCTIVITY objectives may he expressed in terms of ratio of input to output (e.g., to increase number of units to x amount per worker per eight hour day). The objectives may also be expressed in terms of cost per unit of production.

2.

3.

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PRODUCT objectives aside from sales and profitability by product or product line may be stated as, for example. " to introduce a product in the middle range of cur product line within two years or to phase out theire rubber products by the end of next year." FINANCIAL RESOURCE objectives may be expressed in many different ways depending upon the company, such as capitol structure, new issues of common stock, cash flow, working capital, dividend payments, and collection periods. Some illustrations include to decrease the collection period 26 days by the end of the your or "to increase working capital to five million dollars within five years." PHYSICAL FACILITIES may he described in terms of square feet, fixed cost, units of production, and many other measurements. Objectives might be increase production capacity to eight million units per month within two years or "to increase storage capacity to 15 million barrels next year RESEARCH AND INNOVATION objectives may be expressed in dollars as well as in other terms: to develop an engine in the (specify) price range, with an emission rate of loss than 10 percent, within two years at a cost not to exceed $150,000 ORGANIZATIONAL objectives, which include changes in structure or activities may be expressed in any number of ways, such as to design and implement a matrix organizational structure within two years or "to establish a regional office in the South by the end of next year." HUMAN RESOURCE objectives may he quantitatively expressed in terms of absenteeism, tardiness, number of grievances and training, such as "to reduce absenteeism to less then 4 percent by the end of next year" or to a conduct a 20 hour in-house management training program for 120 front line supervisors by the end of 1985 at a cost not to exceed $200 per participant." SOCIAL RESPONSIBILITY objectives may be expressed in terms of types of activities, number of days of service, or financial contributions. An example might be to hire 120 hard core un-employable within the next two years.

5.

6.

7.

8..

9.

10

NOT MANAGING BY OBJECTIVES An unknown educator once said, If you think education is expensive, try ignorance." The idea behind this saying also applies to establishing objectives. Strategists should avoid the following alternative ways to nor managing by objectives." 1. MANAGING BY EXTRAPOLATION

Adheres to the principle If it isnt broke, dont fix it. The idea is to keep on doing about the same things in the same ways because things are going well. 2. MANAGING BY CRISIS

Based on the belief that the true measure of a really good strategist is the ability to solve problems. Because there are plenty of crises and problems to go around for every person and every organization, strategists ought to bring their time and creative energy to bear on solving the 15 Prepared by Mohammad Muzammil

Integrated Management

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most pressing problems of the day. Managing by crisis is actually a form of reacting rather than acting and of letting events dictate whats and whens of management decisions. 3. MANAGING BY SUBJECTIVES

Built on the idea that there is no general plan for which way to go and what to do; just do the best you can to accomplish what you think should be done. In short, Do your own thing, the best way you know how (some times referred to as the mystery approach to decision making because subordinates are left to figure out what is happening and why). 4. MANAGING BY HOPE

Based on the fact that the future is laden with great uncertainty, and that f we try and do not succeed, then we hope our second (or third) attempt will succeed. Decisions are predicted on the hope that they will work and the good times are just around the corner, especially if luck and good fortune are on our side

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STAKEHOLDERS
Managers are not completely free to set objectives; they have different groups of stakeholders to consider. We discussed the stakeholder view of business earlier in this Study Text. Whether stakeholder influences is viewed as an ethical imperative or, more cynically, as just one more force to be managed, it still has to be taken into account. The influence of stakeholders varies from organization to organization. For a business, return or profit is the main yardstick, but even so managers have to consider stakeholder goals when setting objectives. There are three broad types of stakeholders in an organization 1. Internal stakeholders such as employees and management 2. Connected stakeholders such as shareholders, customers, suppliers and financial institutions. 3. External stakeholders such as the community, government and pressure groups INTERNAL STAKEHOLDERS Because employees and management are so intimately connected with the company, their objectives are likely to have a strong and immediate influence on how it is run. They are interested in the organizations continuation and growth. The organization is a place where management and employees spend a great deal of their time and energy. It pays them. Management and employees have a special interest in the organizations continued existence. This interest may not be held by shareholders. For example, if the organization has surplus funds, the management might try and invest them in new projects whereas shareholders might prefer these funds to be returned to them, so that they can make up their own minds. Internal Interest to defend Stakeholders Managers and employees Security of income Increases in income A safe and comfortable working environment A sense of community Interesting work Skills and career development A sense of doing something worthwhile Response Risk Pursuit of Systems goals rather than shareholders interest Industrial action Negative power to impede implementation Refusal to relocate Resignation

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CONNECTED STAKEHOLDERS Malcom Smith stated that increasing shareholders value should assume a core role in the strategic management of the business. If management performance is measured and rewarded by reference to changes in shareholder value then shareholders will be happy, because managers are likely to encourage long term share price growth. Connected Interest to defend Stakeholders Shareholders (Corporate Strategy) Bankers (Cash flows) Suppliers (Purchase strategy) Customers (Product market strategy. Increase in shareholder wealth, measured by profitability, P / E ratios, market capitalization, dividend yield Risk Security of loan Adherence to loan agreement Profitable sale Payment for goods Long term relationship Goods are promised Response Risk Sell shared or boot out management Denial of credit Higher interest charges Receivership Refusal of credit Court action Wind down relationship Buy elseware

EXTERNAL STAKEHOLDERS External stakeholder groups the government, local authorities, pressure groups, the community at large, professional bodies are likely to have quite diverse objectives and have a varying ability to ensure that the company meets them. External Interest to defend Stakeholders Central government / Local authorities Professional bodies Interest / Pressure groups Jobs Training Tax revenue Compliance with legislation Local employment to ensure that members who work for companies comply with professional ethics and standards. Pollution Rights Response Risk Tax increase Regulations Legal action De Registration Market reputation Restrictions Publicity Direct action Sabotage Pressure on Government

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Integrated Management THE NATURE OF STAKES

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Stakes may be analyzed in several ways. (a) (b) (c) (d) Local, national or international Single or multiple issues Economic or social (ie financial- or concern-based: the latter would include interests such as equal opportunities) Concrete or, symbolic: symbolic stakes are hard to define but important to the persons concerned and include general concern, anxiety and the need for respect

Stakeholders may also be analyzed by reference to whether they have a contractual relationship with organization. Stakeholders who have such a relationship are called primary stakeholders, while who do not are known as secondary stakeholders. The primary stakeholder category thus inch internal and connected stakeholders, while the secondary stakeholders category equates to ext stakeholder status. DEPENDENCY ON STAKEHOLDERS A firm might depend on a stakeholder group at any particular time, (a) (b) A firm with persistent cash flow problems might depend on its bankers to provide it with money to stay in business at all. In the long term, any firm depends on its customers.

The degree of dependence or reliance can be analysed according to these criteria. (a) (b) (c) Disruption. Can the stakeholder disrupt the organisation's plans (eg a bank withdrawing overdraft facilities)? Replacement. Can the firm replace the relationship? Uncertainty. Does the stakeholder cause uncertainty in the firm's plans? A firm with healthy positive cash flows and large cash balances need not worry about its bank's attitude to a proposed investment.

STAKEHOLDER POWER How stakeholders relate to the management of the company depends very much on what type of stakeholder they are internal, connected or external and on the level in the management hierarchy at which they are able to apply pressure. Clearly a companys management will respond differently to the demands of, say, its shareholders and the community at large. Specific factors that influence stakeholders power (a) (b) (c) (d) Seniority (managers) Reputation Social status Shareholding (directors) 19 Prepared by Mohammad Muzammil

Integrated Management (e) (f) (g) (h)

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Volume of sales (customers) Volume of purchases (suppliers) Formal representation (eg trades union staff) Legal status

The way in which the relationship between company and stakeholders is conducted is a function of the character of the relationship, the parties relative bargaining strength and the philosophy underlying each partys objectives. This can be shown as a spectrum.

MANAGING STAKEHOLDERS STAKEHOLDER MAPPING Mendelow classifies stakeholders on a matrix whose axes are power held and likelihood of showing an interest in the organizations activities. These factors will help define the type of relationship the organization should seek with its stakeholders.

Key players are found in segment D: strategy must be acceptable to them, at least. An example would be a major customer. These stakeholders may participate in decisionmaking. Stakeholders in segment C must be treated with care. While often passive, they are capable of moving to segment D. They should, therefore be kept satisfied. Large institutional shareholders might fall into segment C. 20 Prepared by Mohammad Muzammil

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Stakeholders in segment B do not have great ability to influence strategy, but their views can be important in influencing more powerful stakeholders, perhaps by lobbying. They should therefore he kept informed. Community representatives and charities might fall into segment B. Minimal effort is expended on segment A.

It is not possible to produce a single, definite map: stakeholders are likely to move about the map as different issues are considered. Stakeholder mapping is used to assess the significance of stakeholders. This in turn has implications for the organization. (a) The framework of corporate governance should recognise stakeholders levels of interest and power. It may be appropriate to seek to reposition certain stakeholders and discourage others from repositioning themselves, depending on their attitudes. Key blockers and facilitators of change must be identified.

(b)

(c)

A single stakeholder map is unlikely to be appropriate for all circumstances. In particular, stakeholders may move from quadrant to quadrant when different potential future strategies are considered. Stakeholder mapping is used to assess the significance of stakeholder groups. This in turn has implications for the organization. (a) (b) (c) The framework of corporate governance should recognise stakeholders' levels of interest and power. It may be appropriate to seek to reposition certain stakeholders and discourage others from repositioning themselves, depending on their attitudes. Key blockers and facilitators of change must be identified.

Stakeholder mapping can also be used to establish political priorities. A map of the current position can be compared with a map of a desired future state. This will indicate critical shifts that must be pursued. In Power In and Around Organizations, Mintzberg identifies groups that not only have an interest in an organization but power over it. The external coalition The internal coalition Owners (who hold legal title) The chief executive and board at the strategic apex Associates (suppliers, customers, trading partners) Line managers Employee associations (unions, Operators professional bodies) The techno-structure Public (government, media) Support staff

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Each of these groups has three basic choices. (a) (b) (c) Loyalty. They can do as they are told. Exit. For example by selling their shares, or getting a new job. Voice. They can stay and try to change the system. Those who choose voice are those who can, to varying degrees, influence the organization. Influence implies a degree of power and willingness to exercise it.

Existing structures and systems can channel stakeholder influence. (a) (b) (c) (d) (e) (f) They are the location of power, giving groups of people varying degrees of influence over strategic choices. They are conduits of information, which shape strategic decisions. They limit choices or give some options priority over others. These may be physical or ethical constraints over what is possible. They embody culture. They determine the successful implementation of strategy. The firm has different degrees of dependency on various stakeholder groups. A company with a cash flow crisis will be more beholden to its bankers than one with regular cash surpluses.

STAKEHOLDER CONFLICT Since their interests may be widely different, conflict between stakeholders can be quite common. Managers must take the potential for such conflict into account when setting policy and be prepared to deal with it if it arises in a form that affects the organization. A relationship in which conflict between stakeholders is vividly characterized is that between managers and shareholders. The relationship can run into trouble when the managers decisions focus on maintaining the corporation as a vehicle for their managerial skills while the shareholders wish to see radical changes so as to enhance their dividend stream and increase the value of their shares. The shareholders may feel that the business is a managerial corporation run for the benefit of managers and employees without regard for the objectives of the owners. The conflict in this case can be seriously detrimental to the companys stability. (a) Shareholders may force resignations and divestments of businesses, while managers may seek to preserve their empire and provide growth at the same time by undertaking risky policies. In most cases, however, managers cannot but acknowledge that the shareholders have the major stake as owners of the company and its assets. Most companies therefore focus on making profits and increasing the market value of the companys shares, sometimes at the expense of the long term benefit of the company. Hence long term strategic plans may be hijacked by the need to make a sizeable profit in one particular year; plantain horizons are reduced and investment in long term business prospects may be shelved.

(b)

Clearly, each stakeholder group considers itself in some way a client of the organization, thus broadening the debate about organization effectiveness.

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THE STRATEGIC VALUE OF STAKEHOLDERS The firm can make strategic gains from managing stakeholder relationships. This was highlighted by a recent report by the Royal Society of Arts on Tomorrow's Company. Studies have revealed the following correlations. (a) (b) A correlation between employee and customer loyalty (eg reduced staff turnover in service firms generally results in more repeat business). Continuity 'and stability in relationships with employees, customers and suppliers is important in enabling organizations to respond to certain types of change, necessary for business as a sustained activity.

Responsibilities towards customers are mainly those of providing a product or service of a quality that customers expect, and of dealing honestly and fairly with customers. Responsibilities towards suppliers are expressed mainly in terms of trading relationships. (a) The organizations size could give it considerable power as a buyer. One ethical guideline might be that the organization should not use its power unscrupulously. Suppliers might rely on getting prompt payment in accordance with the terms of trade negotiated with its customers. All information obtained from suppliers and potential suppliers should be kept confidential.

(b) (c)

MEASURING STAKEHOLDER SATISFACTION If it is accepted that stakeholders other than shareholders have a legitimate interest in what the firm does, it is appropriate to consider measuring the degree of success it achieves in satisfying those interests. We deal with performance measurement generally in Part D of this Study Text, but we will consider stakeholder measures here for convenience. We have already considered ways in which stakeholders may be classified and given some instances of their probable interests. Measuring the satisfaction of stakeholder interests is likely to be difficult, since many of their expectations relate to qualitative rather than quantitative matters. It is, for example, difficult to measure good corporate citizenship. On the other hand, some of the more important stakeholder groups do have fairly specific interests, the satisfaction of which should be fairly amenable to measurement. Here are some examples of possible measures. Stakeholder group Employees Measure Staff turnover; pay and benefits relative to market rate; job vacancies

Government Pollution measures; promptness of filing annual returns; accident rate; efficiency Distributors Share of joint promotions paid for; rate of stock-outs

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STAKEHOLDERS OBJECTIVES We remarked earlier that financial returns to shareholders are a commercial organizations prime objective. The problem of how best to measure financial success for shareholders then arises. Shareholders financial objectives are not uniform. Some require steady cash income in the form of a stream of dividends; others require capital appreciation in the form of a rising share price; others may require a mixture of the two. Also, attitudes to financial return cannot be divorced from attitudes to the degree of risk involved in achieving it. Shareholders may be expected to invest in firms whose risk profile reflects their own degree of risk aversion, but they will expect to see continuing evidence that the riskiness of the firms they invest in is under control. Profit and measures based on profit, such as ROCE and EPS, are poor measures of success in achieving this range of shareholder objectives, since they ignore risk, are single-period measures and do not reflect cash flows to the shareholder. Objectives are set for varying time horizons. There is a trade-off between long and short term objectives when they are in conflict or resources are scarce. For example, capital expenditure projects may be postponed or abandoned in order to protect short term cash flow and profits. 1. LONG-TERM AND SHORT-TERM OBJECTIVES

Objectives may be long-term or short-term: (a) For example, a company's primary objective might be to increase its earnings per share from 30p to 50p in the next five years. Strategies for achieving the objective might be selected to include the following: (i) Increasing profitability in the next twelve months by cutting expenditure. (ii) Increasing export sales over the next three years. (iii) Developing a successful new product for the domestic market within five years. (b) Secondary objectives might then be re-assessed to include the following: (i) (ii) (iii) The objective of improving manpower productivity by 10% within twelve months. Improving customer service in export markets with the objective of doubling the number of overseas sales outlets in selected countries within the next three years. Investing more in product-market research and development, with the objective of bringing at least three new products to the market within five years.

Targets cannot be set without an awareness of what is realistic. Quantified targets iur achieving the primary objective, and targets for secondary objectives, must therefore emerge from a realistic 'position audit1. 2. TRADE-OFFS BETWEEN SHORT-TERM AND LONG-TERM OBJECTIVES

Just as there may have to be a trade-off between different objectives, so too might there be a need to make trade-offs between short-term objectives and long-term objectives. This is referred to as S/L trade-off. 24 Prepared by Mohammad Muzammil

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Decisions which involve the sacrifice of longer-term objectives include the following. (a) Postponing or abandoning capital expenditure projects, which would eventually contribute to growth and profits? in order to protect short term cash flow and profits. Cutting R&D expenditure to save operating costs, and so reducing the prospects for future product development. Reducing quality control, to save operating costs (but also adversely affecting reputation and goodwill). Reducing the level of customer service, to save operating costs (but sacrificing goodwill).

(b)

(c)

(d)

(e) Cutting training costs or recruitment (so the company might be faced with skills shortages). STAKEHOLDERS GOALS AND ORGANISATIONAL EFFECTIVENESS Some writers have used the idea of stakeholders and their goals in connection with measuring organizational effectiveness. A view has developed that effectiveness should not be measured purely in terms of increasing shareholder value; the extent to which the interests of other stakeholder groups are promoted should also be measured. Opinion continues to be split on the validity of the stakeholder concept in commercialization. However, many companies do at least pay lip service to the idea. Where the case, and stakeholder goals is are adopted into the companys objectives, it sense to do this in a rational way. Groups of stakeholders should be identified and assessed for their importance to the organization. The Mendelow model may be useful here. Stakeholder goals should be established and assessed for potential or actual conflict.

SOCIAL RESPONSIBILITY AND SUSTAINABILITY

Some argue that a business has a social responsibility for the cost of its activities, while others argue that businesses already contribute enough to society via the taxes on their profits. The sustainability of business activity is becoming a major concern as business moves into the 21st century. This considers both environmental and social pressures. The 'triple bottom line' refers to a whole new way of measuring business performance using not only economic prosperity, but environmental quality and social equality. 1. SOCIAL RESPONSIBILITY

If it is accepted that businesses do not bear the total social cost of their activities, it could be suggested that social responsibility might be a way of recognizing this. Social cost. Tangible and intangible costs and losses sustained by third parties or the general public as a result of economic activity, for example pollution by industrial effluent. 25 Prepared by Mohammad Muzammil

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Social responsibility accounting. Identification, measurement and reporting of the social costs and benefits resulting from economic activities. However, is there any justification for 'social responsibility' outside a business's normal operations? (a) 'The public1 is a stakeholder in the business. A business only succeeds because it is part of a wider society. Giving to charity is one way of enhancing the reputation of the business. Charitable donations and artistic sponsorship are a useful medium of public relations and can reflect well on the business. Involving managers and staff in community activities is good work experience. It helps create a value culture in the organization and a sense of mission, which is good for motivation. In the long-term, upholding the community's values, responding constructively to criticism, contributing towards community well-being might be good for business, as it promotes the wider environment in which businesses flourish. THE SOCIAL AUDIT

(b) (c) (d) (e)

2.

Firms sometimes carry out social audits. This generally involves: (a) (b) (c) (d) (e) Recognizing a firm's rationale for engaging in socially responsible activity Identifying of programmes which are congruent with the mission of the company Setting of objectives and priorities related to this programme Specifying of the nature and range of resources required Evaluating of company involvement in such programmes (past, present and future)

Whether or not a social audit is used depends on the degree to which social responsibility is part of the corporate philosophy. A cultural awareness must be achieved within an organisation in order to implement environmental policy, which requires Board and staff support. In the USA, social audits on environmental issues have increased since the Exxon Valdez catastrophe in which millions of gallons of crude oil were released into Alaskan waters. The Valdez principles were drafted by the Coalition for Environmentally Responsible Economics to focus attention on environmental concerns and corporate responsibility. (a) (b) (c) (d) (e) (f) Eliminate pollutants and hazardous waste Conserve non-renewable resources Market environmentally safe products and services Prepare for accidents and restore damaged environments Provide protection for employees who report environmental hazards Companies should appoint an environmentalist to the board of directors, name an executive for environmental affairs and develop an environmental audit of global operations

There are many contrasting views about the responsibilities of the corporation. (a) If the company creates a social problem, it must fix it (eg Exxon). 26 Prepared by Mohammad Muzammil

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(c)

Companies already discharge their social responsibility, simply by increasing their profits and thereby contributing more in taxes. If a company was expected to divert more resources to solve society's problems, this would represent a double tax. The multinational corporation has the resources to fight poverty, illiteracy, malnutrition, illness and so on. This approach disregards who actually creates the problems. STRATEGIES FOR SOCIAL RESPONSIBILITY A strategy which a business follows where it is prepared to take full responsibility for its actions. A company which discovers a fault in a product and recalls the product without being forced to, before any injury or damage is caused, acts in a proactive way. This involves allowing a situation to continue unresolved until the public, government or consumer groups find out about it. This involves minimizing or attempting to avoid additional, obligations arising from a particular problem. This approach involves taking responsibility for actions, probably when one of the following happens. Encouragement from special interest groups Perception that a failure to act will result in government intervention

3.

Proactive strategy

Reactive strategy Defense strategy Accommodation strategy

4.

ENVIRONMENTAL AND GREEN CONCERNS

Business activities in general were formerly regarded as problems for the environmental movement, but the two are now increasingly complementary. There has been an increase in the use of the green approach to market products. 'Dolphin friendly' tuna and paper products from managed forests are examples. Environmental impacts on business may be direct. (a) (b) (c) Changes affecting costs or resource availability Impact on demand Effect on power balances between competitors in a market

They may also be indirect. Pressure for better environmental performance is coming from many quarters. (a) (b) Green pressure groups have increased .their membership and influence dramatically, Employees are increasing pressure on the businesses in which they work for a number of reasons - partly for their own safety, partly in order to improve the public image of the company. Legislation is increasing almost by the day. Growing pressure from the green or greeninfluenced vote has led to mainstream political parties taking these issues into their programmes, and most countries now have laws to cover land use planning, smoke emission, water pollution and the destruction of animals and natural habitats, Environmental risk screening has become increasingly important. Companies in the future will become responsible for the environmental impact of their activities.

(c)

(d)

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STRATEGIC PLANNING

Physical environmental conditions are important for strategic planning. (a) (b) Resource inputs. Managing physical resources successfully (eg oil companies, mining companies) is a good source of profits. Logistics. The physical environment presents logistical problems or opportunities to organizations. Proximity to road and rail links can be a reason for sitting a warehouse in a particular area. Government. The physical environment is under the control of other organizations. (i) (ii) Local authority town planning departments can influence where a building and necessary infrastructure can be sited. Governments can set regulations about some of the organizations environmental interactions.

(c)

(d)

Disasters. In some countries, the physical environment can pose a major 'threat' to organizations.

Issues relating to the effect of an organizations activities on the physical environment have come to the fore in recent years. How green issues will impinge on business Possible issues to consider are these. (a) (b) (c) (d) (e) (f) (g) Consumer demand for products which appear to be environmentally friendly Demand for less pollution from industry Greater regulation by government and the EU (e.g. recycling targets) Demand that businesses be charged with the external cost of their activities Possible requirements to conduct environmental audits Opportunities to develop products and technologies which are environmentally friendly Taxes (e.g. landfill tax)

The consumer demand for products which claim environmental soundness has waxed and waned, with initial enthusiasm replaced by cynicism as to 'green' claims. (a) (b) Marketing. Companies such as Body Shop have exploited environmental friendliness as a marketing tool. Publicity. Perhaps companies have more to fear from the impact of bad publicity (relating to their environmental practices) than they have to benefit from positive ecological messages as such. Public relations are a vital competitive weapon. Lifestyles. There may be a limit to which consumers are prepared to alter their lifestyles for the sake of ecological correctness. Consumers may be imperfectly educated about green issues. (For example, much recycled paper has simply replaced paper produced from trees from properly managed (ie sustain ably developed) forests.) In short, some companies may have to 'educate' consumers as to the relative ecological impact of their products.

(c) (d)

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ECOLOGY AND THE MANAGEMENT ACCOUNTANT

One of the ways in which governments have tried to make pollution control palatable is by claiming that business will benefit by good environmental practices. There are sadly some doubts about this, largely explained by the law of diminishing returns. (a) (b) (c) Measures to control pollution have had the effect of reducing waste in other ways. TQM principles, such as zero defects production, save money by reducing waste. The earliest and easiest savings are the cheapest to make. Savings at the margin become more and more expensive. The annual costs of pollution control are rising each year.

Firms need a suitable policy to identify which investments in environmentally friendly activities yield the best ecological payoff for the money spent. 7. ENVIRONMENTAL ACCOUNTING

In their capacity as information providers, management accountants may be required to report on a firm's environmental impact and possible consequences. Environmental management accounting (according to Frank Kirken in Management Accounting, February 1996) is more advanced in Germany or Scandinavia than in the UK. Environmental management accounting (EMA) information is: Future-orientated, reflecting environmental as well as economic realities A natural development from management accounting It may be necessary, for example, for a management accountant to play a role in distributing information focusing on the implications of the misuse of scarce resources. According to B.S 7750, EMA systems should be integrated with other control systems within the company, so that the two desirable goals of economic and environmental efficiency coincide at company operation levels. Examples of EMA are as follows. (a) (b) (c) Eco-balance. The firm identifies the raw materials it uses and outputs such as waste and noise, which it gives a notional value. The firm can identify these outputs as a social cost. Cleaner technology, in the manufacturing process to avoid waste. Simple wasteminimization measures can increase profit on purely economic grounds. Corporate liabilities. Firms are being sued for environmental damage, and this might need to be recorded as a liability, with a suitable risk assessment. This might have to be factored into the project appraisal and risk. Performance appraisal can include reducing pollution. Life cycle assessments. The total environmental impact of a product is measured, from the resources it consumes, the energy it requires in use, and how it is disposed of, if not recycled. It may be that a product's poor ecological impact (and consequent liability or poor publicity) can be traced back to one component or material, which can be replaced. Budgetary planning and control systems can be used to develop variances analysing environmental issues.

(d) (e)

(f)

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RENEWABLE AND NON-RENEWABLE RESOURCES

Sustainability involves developing strategies so that the company only uses resources at a rate that allows them to be replenished. At the same time, emissions of waste are confined to' levels that do not exceed the capacity of the environment to absorb them. Sustainability means that resources consumed are replaced in some way: for every tree cut down another is planted. Some resources, however, are inherently non-renewable. For example, oil will eventually run out, even though governments and oil firms have consistently underestimated reserves. (a) (b) Metals can be recycled. Some car manufacturers are building cars with recyclable components. An argument is that as the price of resources rise, market forces will operate to make more efficient use of them or to develop alternatives. When oil becomes too expensive, solar power will become economic.

John Elkington, chairman of the think-tank Sustain Ability Ltd, has said that Sustainability now embraces not only environmental and economic questions, but also social and ethical dimensions. He writes about the triple bottom line, which means 'business people must increasingly recognize that the challenge now is to help deliver simultaneously: (a) (b) (c) Economic prosperity Environmental quality Social equity

A full consideration of Sustainability in company reports is hampered by several difficulties: (a) (b) (c) (d) Lack of a standard methodology. Accountants/auditors lack environmental expertise. Difficulties in determining environmental costs. Identification and valuation of potential liabilities is problematic.

Elkington considers there to be three main forms of capital that businesses need to value: (a) (b) (c) Economic capital (physical, financial and human skills and knowledge) Natural capital (replaceable and irreplaceable) Social capital (the ability of people to work together)

Environmental and social accounting is still embryonic, but Elkington believes that it will eventually develop our ability to see whether or not a particular company or industry is 'moving in the right direction'.

NOT-FOR-PROFIT ORGANISATIONS
Not-for-profit organizations have their own objectives, generally concerned with efficient use of resources hi the light of specified targets.

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VOLUNTARY AND NOT-FOR-PROFIT SECTORS

Although most people would know one if they saw it, there i surprising .problem in clearly defining what counts as a not-for-profit (NFP) organization. Local authority services, for example, would not be setting objectives in order to arrive at a profit for shareholders, but nowadays they are being increasingly required to apply the same disciplines and processes as companies which are oriented towards straightforward profit goals. Bois proposes that a not-for-profit organization be defined as:' ... an organization whose attainment of its prime goal is not assessed by economic measures. However, in pursuit of that goal it may undertake profit-making activities.' This may Involve a number of different kinds of organization with, for example, differing legal status - charities, statutory bodies offering public transport or the provision of services such as leisure, health or public utilities such as water or road maintenance. Business strategy issues are just as relevant to a not-for-profit organization as they are to a business operating with a profit motive. The tasks of setting objectives, developing strategies and controls for their implementation can all help in improving the performance of charities and NFP organizations. Whilst the basic principles are appropriate for this sector, differences in how they can be applied should not be forgotten. 2. OBJECTIVES OF NON PROFIT ORGANIZATION

Objectives will not be based on profit achievement but rather on achieving a particular response from various target markets. This has implications for reporting of results. The organization will need to be open and honest in showing how it has managed its budget and allocated funds raised. Efficiency and effectiveness are particularly important in the use of donated funds, but there is a danger that resource efficiency becomes more important than the service effectiveness. Here are some possible objectives for a NFP organization. (a) (b) (c) (d) (e) (f) (g) (h) Surplus maximization (equivalent to profit maximization) Revenue maximization (as for a commercial business) Usage maximization (as in leisure centre swimming pool usage) Usage targeting (matching the capacity available, as in the NHS) Full/partial cost recovery (minimizing subsidy) Budget maximization (maximizing what is offered) Producer satisfaction maximization (satisfying the wants of staff and volunteers) Client satisfaction maximization (the police generating the support of the public)

There are no buyers in the NFP sector, but rather a number of different audiences. (a) (b) (c) (d) A target public is a group of individuals who have an interest or concern about the charity. Those benefiting from the organizations activities are known as the client public. Relationships are also vital with donors and volunteers from the general public. There may also be a need to lobby local and national government and businesses for support.

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The objective setting process must balance the interests and concerns of these audiences, which may result in a range of objectives, rather than a single over-riding one. In order to allow for this balance to be achieved, NFPs may allow wide participation in the objective setting process, or, indeed, may have it enforced upon them by, for example, legal requirements for consultation with interested parties, or constitutional provision for a range of constituencies to be heard. NFP objective-setting has other complications. (a) (b) (c) (d) Providers of funds have potentially greater influence than members or beneficiaries and may have different objectives. There is no overall profit motive. Priorities may change rapidly as circumstances change, as for instance when a natural disaster occurs or a government changes, All the factors above make it easier for powerful insiders to pursue their personal objectives for power or recognition.

Charities and NFP organizations often deal more with services and ideas than products. (a) (b) (c) (d) Appearance needs to be business-like rather than appearing extravagant, Process is increasingly important, for example, the use of direct debit to pay for council tax, reduces administration costs leaving more budget for community services. People need to offer good service and be caring in their dealings with their clients. Distribution channels are often shorter with fewer intermediaries than in the profit making sector. Wholesalers and distributors available to business organisations do not exist in most non-business contexts. Promotion is usually dominated by personal selling. Advertising is often limited to public service announcements due to limited budgets. Direct marketing is growing due to the ease of developing databases. Sponsorship, competitions and special events are also widely used. Pricing'is probably the most different element in this sector. Financial price is often not a relevant concept. Rather, opportunity cost, where an individual is persuaded of the value of donating time or funds, is more relevant.

(e)

(f)

Controlling activities is complicated by the difficulty of judging whether non-quantitative objectives have been met. For example assessing whether the charity has improved the situation of client publics is difficult to research. Statistics related to product mix, financial resources, size of budgets, number of employees, number of volunteers, number of customers serviced and number and location of facilities, are all useful for this task.

THE PUBLIC SECTOR

In the public sector, resources (not sales) are the limiting factor. The rationing of health care typifies the problems faced. In a business, the level of sales often indicates the level of activity (number of goods produced). Effectively, sales are a limiting factor, and once the level of activity has been determined, resources are obtained to satisfy this demand. While sales of services can be used in some public sector organizations as the starting point of she budgeting process, this cannot be the case when the services are not sold but are provided to 32 Prepared by Mohammad Muzammil

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meet social needs. Instead resources are the limiting factor, since demand is potentially limitless. Many of the concerns about rationing health care suggest precisely this problem. 'Care in the Community' The Audit Commission published some guidelines for budgeting, in situations where levels of service provision must be matched to available resources. An example is a guideline for budgeting for local authority support for community care. Rather than look after the elderly, disabled or mentally ill in institutions, care is delivered at the patient's home. How do authorities deal with the delivery of services to dependent elderly people? A basic problem with this sort of budget in the public sector is to find the starting point. (a) (b) Planners can budget for a set level of service provision. The budget is based upon the number of home helps currently available and the number of day care centres to be run. Planners can identify the needs of. service recipients. These can be classified and ranked to establish various levels of possible demand for the service.

Relevant factors need to be identified. (a) (b) (c) (d) The needs of the local dependent elderly population The various alternative policies by which these needs can be met The resources actually available The amount of those resources which are already committed

Identifying the needs means that the level of service can be tailored more accurately to the requirements of the clients. The Commission recommends three stages. Stage 1: identify the care needs of the local dependent elderly population Developing budgets for different levels of care needed by the dependent elderly might involve the following process. (a) What is the demand? (i) Identify categories of needs. An example is given below.

High level of needs Unable to do one or more of the following without help: get in and out of bed eat and drink get to and use WC/commode get dressed wash hands and face - are incontinent Moderate Unable to: bath/strip wash themselves do shopping do light household cleaning cook meals and/or are mildly confused 33 Prepared by Mohammad Muzammil

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Low Some disability but do not need help more than once a week. (ii) Identify the number of people in each category of need. There is a variety of data sources, including data collected in the Census and other exercises.

(b)

Estimate the type of package of care required to satisfy people in each need category (high, moderate, low). (i) Seek the professional judgment of relevant personnel in the "Social services department. These packages are then coasted. It may mean an assessment of the likely fees to be paid to private sector contractors.

(ii)

(c)

So, the final budgeted cost of meeting identified needs is: Cost of a typical care package x Estimated numbers needing care package

Stage 2: suggest options for satisfying needs and budget for them It is possible that Stage 1 above will reveal: (a) (b) A demand pattern for services that is not matched by existing provision A shortage of available resources, leading to a requirement for rationing

The budgeting process should therefore take mismatches and shortages into account. (a) (b) It may be difficult to alter existing patterns of services in the short term, so there will be excessive or deficient levels of capacity in some areas. The authority will have to make a judgment of how much it will be able to spend on Community Care. (i) (ii) For example, it may only be possible to provide a full service to those with high needs. Alternatively they might provide a wider, but less intensive, level of service. The number of people receiving the service can be reduced by changing criteria of eligibility.

Stage 3: implementation In practice resources are almost certain to be limited, and the services will be rationed according to the eligibility criteria for individuals, or in changes to the package of services offered. Integration with the total budget It is possible that a similar budgeting process can be implemented for other services (eg services to the mentally disabled, those with learning disabilities).

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If total social services are delivered on an area basis, it might be necessary to use these service budgets as the building blocks of an area budget. Responsibility accounting in health care An example of the problems hi introducing management accounting techniques to achieve the objectives of public sector stakeholders is offered by the extension since the 1970s of responsibility accounting to the National Health Service (outlined by Irvine Lapsey in an article in Management Accounting Research). Responsibility accounting aims to devolve budget and expenditure control to decision-makers, such as doctors. The NHS internal market is now hi place with purchasers arranging contracts with hospitals. Trust hospitals now work autonomously. In the NHS, the introduction of management accounting techniques based on private sector practice is problematic for the following reasons. (a) Although NHS self-governing hospital trusts are financially autonomous, they are not profit-making businesses. The purpose of the internal market is to allocate resources efficiently, not to make a profit. Many doctors resent managerial and financial involvement in medical decisions. NHS managers may seek the cheapest option rather than what the doctor considers most effective. , The level of paperwork involved in implementing the system causes a lot of resentment. The budgetary system is often conducted on an annual basis. Strategic planning, as we have seen, should be a long-term process. There is political interference - after all, the NHS survives on tax-payers' money and NHS funding decisions are a matter of public policy.

(b)

(c) (d) (e)

What is undeniably true is that there is an increased emphasis on performance. Schools and hospitals publicize league tables on certain key criteria. (a) Critics argue these ignore the real differences in the schools' environments (eg a school's exam success might depend on the quality of its pupils and the relative social deprivation of its catchments area). Supporters argue that league tables give clients of services a better choice and concentrate managers' minds on improving performance.

(b)

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