BT Study Notes

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Table of Contents
Foreword 1
Syllabus area A: The business organisation, its stakeholders and external environment 9
Business Organisation and Stakeholders 10
External analysis - 21
Political and legal factors affecting businesses 21
Syllabus area B: Business organisation structure, functions & governance 76
Organisational Structures & Design in Business 77
Organisation culture and committees in business organisation 101
Role of Governance and CSR in Business 112
Syllabus area C: Accounting and reporting systems, technology, compliance & controls 121
Importance Accounting & Finance in Business 122
Application of technology & IT at workplace 129
Legal Aspects, Compliance and Fraud in Business 137
Syllabus area D: Leading and managing individuals and teams 181
`Leadership, Management & Behaviour at Workplace 182
Team Work, Behaviour & Motivation at Workplace 212
Training & Appraisal at Workplace 232
Syllabus area E: Personal effectiveness and communication in business 250
Personal Effectiveness & Communication 251
Syllabus area F: Professional ethics in accounting and business 271
Professional ethics in accounting and business 272
Foreword 1
Foreword
‘By the ACCA, for the ACCA’
These notes are designed with a simple mission, to fill the gap for Indian students who don’t find
comfort in studying from notes that are framed in a complex manner. Our priority at Zell is to improve
the results our students achieve by providing all that they need, be it quality education, state of the
art infrastructure and techniques or the next step, the content that perfectly fits in making the trifecta
or the winning formula.
Here at Zell, we don’t worry about the background, prior knowledge or preferences someone has. The
aim is simple, by the time a student is done with a paper, they are on the same page as anyone else
and that for us, should be enough knowledge to be able to call them a professional truly.
Keeping all this in mind, we bring to you these notes, created by us, for you, to truly help make the
difference and turn your journey of ACCA into an even better one. This is just the beginning; there is
more in store.
Thank you
Credits
Authored By:
Rushit Udani
Bhavik Rughani
Janelle Crasto
Designed By:
Rushil Shah
Sana Patni
Foreword 2
Best way to study
Planning how to study
Before starting the preparation for any paper, you should always make a macro level plan on how to
go about preparing for the exam. Understand what is expected of you to be able to clear the exam
with high scores. It is important to set targets and stick to them, to ensure that you stay on track and
progress in your ACCA journey.
Have a plan from the beginning about where you want to be at the end of the month or two months,
then work backwards and understand what you must do to stay on track. Then, at the start of every
week, make a brief plan about how much needs to be covered every day, resulting in the timely
completion of the exam.
Break your macro plan intro studying along with the professor/recordings, examination month and
final revision. Plan how many hours can you give every day and make a schedule accordingly. Ensure
that you can give quality hours without distractions. The quantity of hours doesn’t matter.
How to approach the exam
Knowing how much importance ACCA places on application-based learning is important. You must
understand that rote learning in any exam for any concept will mostly amount to zero marks being
scored.
Further, students tend to take many days after the classes conclude for their self-preparation phase,
which tends to work negatively. The maximum time you should take after completing the classes is
21 days, after which, while you might practice more, the retention of the vast range of topics
covered in class will become faint.
The ideal approach is to watch/attend lectures and keep up with the pace, practicing 40% of the
question bank alongside, to cement conceptual understanding. Once classes conclude, ensure the
remaining 60% of the question bank is solved, followed by at least three mock examinations before
attempting the main exam.
Exam month
• In the exam month, ensure that you finish the portion as soon as possible and shift all focus
to completing the question bank. Remember, completing the textbook alone is not enough,
whereas completing the question bank gives you a higher chance of clearing the exam.
• If you are done with your question bank, repeat the question bank or key questions you
marked before the exam. Only 40% of your total time should be allocated to building a
conceptual understanding, the remaining 60% to solve questions.
• Ensure you do not get into the habit of reading a question and then reading the answer. This
approach will make you seek answers in the exam and not seek solutions on your own. Read
a question, solve it on your own, check the answer. If it is incorrect, solve the question again
to get another answer, rather than reading the explanation to understand what you did
wrong. That should always be the last resort.
• Familiarize yourself with the scientific calculator, the CBE exam platform and other tools to
ensure you are comfortable with the same in the actual exam.
• Ensure you complete 100% of the portion. Do not skip anything as the exam will test you on
a range of interconnected topics and leaving parts of the portion will guarantee you are
losing certain marks.
Foreword 3
Exam strategy
There are certain things to be kept in mind before attempting the main exam.
1. Remain calm before the exam. Do not study at the last moment, as going into the exam with
a fresh mind will allow you to tackle the questions more easily.
2. There is no negative marketing in the exams. Ensure that you attempt 100% of the paper to
ensure that some of your educated guesses score some marks even in the worst case.
3. The examination is 2 hours long, which means you have 120 minutes for 100 marks, or
simply 1.2 minutes per mark. Ensure you don’t get overboard with the time you take to solve
a question at hand.
4. Ensure you read the question very carefully. Please don’t assume that you faced a similar
question in the past and jump to solving it as the requirements can vary even in small
concepts causing you to lose easy marks.
5. The options are set up so that even answers derived using the wrong steps are available as
options. Please do not jump to the conclusion that your answer has to be correct because it
is available as an option.
6. If there is a tricky question that you can’t solve, make an educated guess by eliminating the
one’s you know are wrong, flag the question and move ahead. If you finish the paper and
have remaining time, revisit the flag questions to score full marks.
7. Do not sit and recalculate the answer you got more than twice, as you are likely to calculate
it in the same way you did previously, by repeating the same mistake if any. This is a massive
waste of your crucial time. Rather move faster and revisit key questions at the end,
recalculating your answers at that point will possibly reveal mistakes and allow you to rectify
them, thus scoring more marks.
Foreword 4
Elements
Syllabus wise study material
The study material is curated in a manner where the syllabus provided by ACCA has been covered in
vast depth, and the order is set in a way that the flow of concepts within the material suits a
student.
Apply Your Knowledge
Various AYK style questions test the student on their ability to remember and understand concepts
thoroughly before moving to analytical questions.
Quiz
Further, there are primarily application-based quiz questions, introducing the student to analytical
and evaluative questions to bring the student one step closer to actual exam-style questions.
Recap
After the end of every main chapter, there is a recap page summarising all the important topics,
formulae etc., to enable ease of revision for the student.
Mind Maps
Mind maps are flowcharts that summarise the information visually, making it more likely for a
student to retain the knowledge and build upon it. These are present at the end of the book to
enable last-minute revision by simply spending time on those pages.
Foreword 5
Nimbus™ Preparation tools
Interactive notes with gamification
The articulated version of the notes is available on the platform, allowing students to get fully
immersed in their learning and complete more in less or equivalent time they spend reading the
book.
Case studies
Case studies are specifically tailored to address the audience commonly using these notes. Having
interesting case studies based on current affairs, covering key organisations etc., contribute to
further professional development.
Technical articles
ACCA’s technical articles are placed strategically in the material, allowing students to understand
when to go through these all-important technical articles.
Exam experience
The system mimics the exam experience to ensure that the student has conceptually and technically
mastered the paper before appearing for the exam. This includes various objective questions, live
spreadsheets and word processors to practice typing, presentation and most importantly, time
management.
Question Bank & Test Series
The students have access to unit tests, half portion tests, progressive tests, mock tests and unlimited
practice tests with all performance data allowing them to know where they stand, the
improvements required before the exam day arrives.
Flashcards and Interactive mind maps for revision
Flashcards help students quiz themselves, which is more effective as a revision technique than
simply reading through pages. Interactive mind maps allow the student the power to take a detailed
glance through a whole chapter or large concept in minutes while revising at the same time.
Check the last page of this book for more information on Nimbus™ LMS by Zell
Foreword 6
ACCA support
Examining team guidance/Exam technique & reports
The examiners’ reports are an essential study resource. Read them to learn about mistakes that
students commonly make in exams and how to avoid them.
Practice tests
Practice Tests are an interactive study support resource that will replicate the format of all the
exams available as on-demand computer-based exams (CBEs). They will help you to identify your
strengths and weaknesses before you take an exam.
As well as giving you an insight into a live exam experience, Practice Tests will also provide feedback
on your performance. Once you complete the test, you will receive a personalised feedback diagram
showing how you have performed across the different areas of the syllabus.
Specimen exams
The specimen exam indicates how the exam will be assessed, structured and the likely style and
range of questions that could be asked. Any student preparing to take this exam should familiarize
themselves with the exam style.
Technical articles
There is a range of technical articles available on ACCAs website under ‘Study support resources’.
These include a range of simplified articles on complex topics, study support videos, articles on exam
technique etc. making it an important tool to be practised when nearing the exam.
FAQs
Various commonly asked questions about the style of the examination, the coverage, computer-based
exam setup etc., are covered here to allow a student to stay up to date and ensure their understanding
is aligned with that of the ACCA body.
Foreword 7
Syllabus
The Business and Technology (BT/FBT) syllabus introduces students who may not have a business
background to the business, which as an entity is made up of people and systems which interact
with the environment and with each other. The syllabus begins with examining the purpose and
types of business, the key stakeholders and the rights and responsibilities that businesses have in
connection with them, exploring the external influences that affect the business in its environment,
including economic, legal, social and technological factors.
The syllabus then examines the structure and functions of business, focusing on corporate
governance and the specific accounting related roles in this process, particularly in financial
reporting, assurance, control and compliance.
The syllabus then introduces key leadership, management and people issues such as effective
individual and team behaviour, motivation and personal effectiveness.
The final section of the syllabus examines how accepted professional ethics and professional values
should underpin behaviour at all levels within a business.
On successful completion of this exam, candidates should be able to:
a. Understand the purpose and types of businesses and how they interact with key stakeholders
and the external environment.
b. Understand business organization structure, functions and the role of corporate governance.
c. Recognize the functions, systems and new technologies in accountancy and audit in
communicating, reporting and assuring financial information, including the effective
compliance, internal control and security of financial and other data.
d. Recognize the principles of authority and leadership and how teams and individuals are
recruited, managed, motivated and developed.
e. Understand the importance of personal effectiveness as the basis for effective team and
organizational behaviour.
f. Recognize that all aspects of business and finance should be conducted in a manner that
complies with and is in the spirit of accepted professional ethics and professional values
ACCA Performance Objectives
Objective Chapter in text

PO1 Ethics and professionalism Professional ethics in accounting and business
PO2 Stakeholder relationship management Business organization and Stakeholders
PO4 Governance, risk and control Role of Governance and CSR in Business
PO5 Leadership and management Leadership, management & behaviour at workplace
PO22 Data analysis and decision support Legal Aspects, Compliance and Fraud in Business
Foreword 8
Exam duration
The exams are computer-based. They are 2-hour long 100-mark exams. Before that, students will get
10 minutes to read the exam instructions.
Exam format
Style Description Marks
MCQs 30 x 2marks 60
MCQs 16 x 1marks 16
MTQs 6 x 4marks 24
100
Foreword 9
Syllabus area A:
The business organisation, its stakeholders and external environment
Business Organisation and Stakeholders
The purpose and types of business organisation
Syllabus area A1
- Define business organisations and explain why they are formed.
- Describe common features of business organisations.
- Outline how business organisations differ.
- List the industrial and commercial sectors in which business organisations operate.
- Identify the different types of business organisation and their main characteristics
(i) Commercial
(ii) Not-for-profit
(iii) Public sector
(iv) Non-governmental organisations
(v) Co-operatives
Business Organizations and the reasons they are formed
As per Buchanan and Huczynski, “Organisations are social arrangements for the controlled
performance of collective goals.”
The three key aspects of this definition help classify and separate a business organisation from a
mere group:
1. Collective Goals
The goal of an organisation defines the purpose of their existence, for instance, a public school’s goal
is to ensure that the maximum number of students gain access to education for free.
A sole trader would not be considered as an organisation based on Buchanan and Huczynski
definition as it lacks the element of collective goals.
2. Social Arrangements
Organisations are not a one man show or a single person working alone; they have group of people
working together with a shared purpose. Whether it is a formal or an informal organisation structure
depends on the size and management.
3. Controlled Performance
A set of systems and control procedures must be set in place for an organization to achieve its goals.
For example, money managers may have an aim to generate more returns than the benchmark
returns. Dominos has a target of delivering a pizza within 30 minutes so it needs to time its deliveries
accordingly.
Why do we need Organizations?
Organizations enable people to do the following:-
1. Sharing of skills and knowledge
Organisations enable people to perform a task which they would not have been able to do on their
own. Organisations help in sharing knowledge with other people.
2. Specialisation
Organizations enable workers and employees to be specialised on a specific scale and expand their
knowledge in a focused area rather than having a generalised approach to all.
3. Pooling of Resources
Whether it be monetary or non-monetary resources.
All of the above results in the formation of Synergy [2+2=5], aiding the organisation to achieve more
collectively than each one individually.
Apply your knowledge 1:
Which of the following advantages do business organisations have over individuals?
A. Sharing of skills, knowledge and resources

B. Specialised Knowledge and Skills
C. Pooled Resources
D. All of the above
Different Types of Organisations
Commercial Organisations
These are organisations with the main objective of profit making and wealth maximisation.
The common types of commercial companies are:
1. Sole Traders: These organizations are run by one person, and the legal entity of the
organization is not separate from the owner hence there is unlimited liability for the sole
trader. This means that if the business cannot pay off its debts, the personal assets of the
owner can be attached to recover the amount.
2. Partnerships: These organizations are owned and run by two or more individuals. Like sole
traders, these partners also have unlimited liability and are not a separate legal entity from
their owners. However, in recent years there are new structures of Limited Liability
Partnerships [LLP] created where in the owner’s liability is limited to the extent of their
investment in business.
3. Limited Liability Partnerships [LLP]: The owners/partners have a separate legal entity and
liability is limited to the amount of the investment
There are two types of Limited Companies: -
i. Private Limited [with ‘Ltd’ after their name]

These tend to be smaller businesses owned by a few shareholders and shares are not
offered to the general public.
ii. Public Limited [with ‘Plc’ after their name]

These tend to be larger businesses and shares are offered to the general public. Hence,
more money is raised.
Not for Profit Organisations [NFPs or NPOs]
These organisations do not see profitability as the main objective. Rather NPOs aim to satisfy the
needs of members or sectors of society that have been set up to benefit.
For example: NFPs include schools, hospitals, charities and government departments and agencies.
Public Sector Organizations
These organizations are concerned with providing basic services to the citizens of the country and
are controlled by the government.
For example: Public Hospitals provide healthcare for the poor.
Public Schools provide primary and secondary education for the poor without any cost.
Private Sector Organizations
These organizations are run by private individuals and groups with an objective of profit
maximization or welfare of people (Private NGOs).
For example: Reliance Industries Limited and Bill and Melinda Gates Foundation.
Which of the following are Public Sector Organisations?
A. Sole Trader
B. Partnership
C. Public Limited Company
D. None of the above
Non-Governmental Organisations [NGO]
NGOs are not affiliated or owned by the government but have the same goal as public welfare.
They promote political beliefs, social agendas and environmental concerns in the country of their
operation.
For example: Doctors without Borders and Red Cross.
Co-operatives
These are organisations owned, managed and controlled by the members using a democratic
mechanism by electing a committee and having regular meetings. They also share any profits made.
There is a ‘one person, one vote’ mechanism used rather than ‘one share, one vote’.
For example: Amul is a co-operative organisation of multiple farmers in Gujarat. They are among the
top 3 largest and efficient co-operatives around the globe.
Sectors in which Organisations operate
A few of the common sectors in which organisations operate are given below:
1. Agriculture: production, processing and packaging of foodstuff

2. Mining: extraction and processing of minerals
3. Finance: banks and other financial intermediaries that profit through
investments and money lending
4. Retailers: middle men who sell goods to consumers in small quantities and buy
from manufacturers in large quantities hence breaking bulk
5. Service: provider of services
6. Transportation: movement of goods between locations
Key differences between various types of organisations
Ownership Government: Public organization [E.g. IRCTC Railway]
Who owns the organisation determines the Co-operatives: Owned by members [E.g. Co-operative
type of organisation Building Societies]
Private: Owned by shareholders and/or private owners
Objectives Private Organizations: Profit maximization
Every organisation has a different goal Public Organizations: Welfare of people
Activities Hyundai: Manufactures and sells automobiles with an intent

to make profit.
An organisation’s activities will vary as per their
purpose and the type of Organisation MHADA: Government organisation with the objective of
infrastructure development.
Sources of Funding Charities: Voluntary donations
The source of the capital funding varies from Private Sector: owners
organisation to organisation
Public Sector: government
Size Sole traders or large multinational companies
The reach and size of an organisation varies

depending on which it is
Liability Company owners have limited liability.
The extent of the liability depends on the type Sole traders/partnerships have unlimited liability
of organisation
Despite these differentiating factors, many organisations have similar problems and obstacles in
terms of motivating employees, macro-economic concerns in the same industry, strategic
management, operational problems etc.
For example: During the COVID-19 lockdown, many organisations - small and large faced issues in
adopting work online and faced cashflow issues.
ABC Co., a sole proprietorship owned by Mr. X files for bankruptcy. Will Mr. X’s personal assets be
liquidated as well to cover the total dues.
A. Yes
B. No
Stakeholders in business organisations
Syllabus area A2
- Define stakeholders and explain the agency relationship in business and how it may vary in
different types of business organisation.
- Define internal, connected and external stakeholders and explain their impact on the
organisation.
- Identify the main stakeholder groups and the objectives of each group.
- Explain how the different stakeholder groups interact and how their objectives may conflict
with one another.
- Compare the power and influence of various stakeholder groups and how their needs should be
accounted for, such as under the Mendelow framework.
Stakeholders and their groups
A stakeholder is an individual or group who has a direct or an indirect interest in the activities of an
organization and their actions.
An organisation is no more accountable to just the shareholders but also to the stakeholders, which
is why organisations now follow a stakeholder centric approach.
Understanding the different and changing needs and requirements of stakeholders will help
organisations formulate a more effective strategy.
Three types of Stakeholders: Internal, Connected and External
1. Internal Stakeholders
These are the stakeholders that exist within the organization and their objectives are more likely to
have a direct impact on how the organization runs.
For example: employees, managers and directors.
2. Connected Stakeholders
These are the stakeholders who have invested or have business with the organization. Each of these
connected stakeholders has varying objectives.
For example: shareholders, customers, suppliers and finance providers.
3. External Stakeholders
These stakeholders are not directly linked to the organisation but are impacted by the organization’s
actions and activities.
For example: community at large, environmental pressure groups, government and trade unions.
Another classification of stakeholders is based on the contractual relationship with the organisation:
i. Primary Stakeholders: These are the stakeholders that have a contractual relationship with
the organization.
For example: employees, directors and shareholders.
ii. Secondary Stakeholders: These are the shareholders that do not have a contractual
relationship with the organization however do have an interest in the organisation’s actions.
For example: community as a whole and the general public.
Government is which type of Stakeholder from the below options

A. Connected
B. External
C. Internal
Types of stakeholders and their impact on the organisation
Stakeholder Needs Explanation

Employees Salary, working conditions, job With a higher workload and
security more responsibility, employees
will expect an increment in
their salaries.
Managers / Directors Job status, fringe benefits, job If the organization excels and
security, compensation the stock price increases,
structure [CTC] managers well require higher
bonuses.
Shareholders Capital appreciation, going Shareholders are investors of

concern, healthy dividends the company hence expect a
healthy dividend pay-out and
appreciation of share prices

over time.
Customers Value for money products, Expect that the company

maintain quality of products maintains the existing quality
standards and continually
increases these standards.
Parallelly the prices should not
increase with it.
Suppliers Timely payment for goods and Expect timely payment as well
services as higher quantities ordered
over time.
Finance Providers Higher collateral, timely Concerned with the cash

payment of EMI and total position and cash flows over
interest payments time.
Community at Large The general public expects that Organizations co-exist

the organization’s actions are alongside communities hence
ethical and environmentally communities expect them to
friendly behave accordingly.
Environmental Pressure The organization’s actions If any of the organization’s

Groups should be environmentally actions are not
friendly environmentally friendly, then
the groups may protest against
it.
Government An organization must also aid Governments exists to ensure
to the advancement of the there is law and order and the
economy by creation of jobs, same legislations apply to
adhering to laws and payment organizations.
of taxes
Trade Unions Get a say in the decision- Unions exist to protect the
making process interest of employees in the
event of adverse
organizational actions.
Which of the following are the needs and expectations of an Employee?
A. Salary, Working Conditions, Job Security

B. Job Status, Fringe Benefits, Job Security, Compensation Structure [CTC]
C. Capital appreciation, going concerned, healthy dividends
D. Value for money products, maintain quality of products
Interaction between different stakeholder groups and conflicting objectives
An organisation will have many different stakeholders, each with separate and conflicting views and
needs.
An example of this is as follows:
Stakeholders Conflict
Employees versus managers Higher wages and lower workload versus
budget restrictions and important deadlines
Customers versus shareholders Lower prices and more quantity versus profit
margins and growth
Community versus shareholders Environmental impact versus shrinking profits
Managers versus shareholders Organisation growth versus profits/ dividends
Bankers versus shareholders Lower leverage and more asset-backed loans vs

higher leverage and easing on asset backed
loans
The ecological and environmental impact is a conflict for which of the below group of Stakeholders?
A. Community vs Shareholders
B. Customers vs Shareholders
C. Employees vs Managers
D. Managers vs Shareholders
Mendelow’s Power-Interest Matrix

This matrix aids in the comparison of power and influence of various stakeholder groups.
An organization will need to plot each of its stakeholders according to this matrix and then decide on
the relevant course of action in the event of a conflict. An organization cannot keep all stakeholders
satisfied at all times but must consider fulfilling the needs of as many stakeholders as they can.
Managers must also be aware that stakeholders may switch from one quadrant to another as a result
of a chain of events.
- Segment A Example: Flat earthers complaining to a miniature globe manufacturer.

- Segment B Example: Leaders of an environmentalist organisation.
- Segment C Example: Big investors.
- Segment D Example: Big Customers who contribute high percentages of company revenue
PO2 – STAKEHOLDER RELATIONSHIP MANAGEMENT
Description
You manage stakeholder expectations and needs, developing and maintaining productive business
relationships. You listen to and engage stakeholders effectively and communicate the right
information to them when they need it.
Elements
a. Display sensitivity, empathy and cultural awareness in all your communications. This allows
you to establish trust and credibility with a range of stakeholders and gain their confidence.
b. Use a range of mediums and make appropriate use of digital technology to communicate
clearly, concisely and persuasively in formal and informal situations.
c. Gain commitment from stakeholders by consulting and influencing them to solve problems,
meet objectives and maximise mutually beneficial opportunities.
d. Develop and build effective and ethical professional relationships and networks using face to
face and digital technology.
e. Deal calmly and efficiently with conflicting priorities, deadlines or opinions – both internally
and externally – by listening and negotiating.
Example of these activities include:

• Communicating in a way that suits the audience, using the right tone, style and medium,
including data visualisation techniques. This could include communicating with clients from
different cultures.
• Developing relationships in meetings that lead to positive outcomes.
• Discussing work problems with colleagues or clients to improve and maintain relationships.
• Planning for and engaging positively with the appraisal process.
• Using media and technology to contribute to business related discussions – for example,
contributing to intranet community conversations, hosting virtual meetings or making online
presentations.
• Participating effectively in interviews.
• Drafting reports effectively.
• Dealing well with conflicting deadlines or requirements.
• Acting responsibly and with maturity when there are disagreements.
• Addressing service level complaints.
• Engaging productively with internal and external stakeholders including business partners.
• Discussing expectations of your work with your supervisor.

• Working within your supervisor’s requirements and giving them regular progress updates.
• Networking at conferences, internally or by joining business-related groups.
21
External analysis - Political and legal factors affecting businesses
Syllabus area A3
- Explain how the political system and government policy affects the organisation.
- Describe the sources of legal authority, including supranational bodies, national and
regional governments.
- Explain how the law protects the employee and the implications of employment legislation
for the manager and the organisation.
- Identify the principles of data protection and security.
- Explain how the law promotes and protects health and safety in the workplace.
- Recognise the responsibility of the individual and organisation for compliance with laws on
data protection, security and health and safety.
- Outline principles of consumer protection such as the sale of goods and simple contracts.
The business environment consists of the following factors. These can affect the business’s
functioning, decision-making process and performance.
P - Political
E - Economic
S - Social/Demographic
T - Technological
L - Legal
E - Environmental
Political systems and government policy
A political system is:
- a set of institutions, political organizations and interest groups (such as lobby groups); and
- the relationship between them; and
- the rules and norms that govern their functions (such as constitutions and election law).
What does the P stand for in PESTEL?
A. Power
B. Presence
C. Political
Impact of the political system and government policy on the organisation.
Governments can impact organisations via government policy and direct legislation
Government Policy Direct Legislation

1. Housing - It is mandatory for organizations to
New housing development initiatives will comply with the specific regulations laid
create avenue for such firms in real estate and down by the government which is
its ancillaries. This will result in an increased relevant to their industry.
demand for leisure facilities at residential - Failure in doing so will result in fines,
areas. closures and negative publicity resulting
in other adverse consequences such as
2. Crime losing customers to competitors.
Changes in crime related laws may impact - Few aspects of these direct regulations
firms operating in security. revolve around employee protection,
data protection, health and safety and
3. Education consumer protection.
Education policy may affect the availability of
suitable potential employees for businesses.
4. Defence
Government policy on defence has a direct
impact on suppliers in the defence sector,
including ammunition and arms
manufacturers.
5. Healthcare
Healthcare policy has implications for drugs,
medical equipment manufacturers and
hospitals.
6. Energy
Government stands on energy and its sources
directly benefits selected firms and put at risk
the operation of others.
For example: In 2020, the UK Government has
pledged to opt for green renewable energy by
2030 for areas such as farming, town planning,
domestic and foreign affairs. This increased the
demand for electric cards thus helping Tesla to
penetrate the European markets.
Employee Protection – dismissal and redundancy
In any country, the government passes laws and legislation to protect employees from any unfair
treatment by their employers. These laws are designed to protect the said employee from any unfair
treatment.
Dismissal
Organizations may dismiss employees via termination of their contract.
Constructive Dismissal: Employee resigning as the employer has breached the terms of their
employment contract.
In any case, there must be a minimum mandatory notice period given to the employee by the
employer as employees have a right to get a written statement outlining the reasons for their
dismissal.
Examples of constructive dismissal are:

- Reduction in salary/wages without prior notice
- Harassment at the workplace
Fair Reasons under which an employee may be dismissed:
- Employee misconduct such as dishonesty or theft

- The role of an employee was made redundant within the organization
- The employee lacks the required qualifications and skills for the job
- Dismissed for legal reasons [for example certain jobs require employees to have no criminal
record]
Unfair Dismissal
This is when the employee is dismissed without any fair reason or due to an unfair reason.
Unfair reasons may include:
- Pregnancy or parental leave

- Trade Union ties as an active member
- Discrimination based on cast, creed and sex
The difference between unfair dismissal and wrongful dismissal is that wrongful dismissal occurs
when the employer is in breach of the employee's contract during the dismissal.
Unfair dismissal always justifies a legal action however, a wrongful dismissal may or may not warrant
legal action and differs in every situation.
Redundancy
This is a form of dismissal where in the employee is asked to leave due to the employer
downsizing/reducing the overall workforce.
Reasons for this include the financial condition of the organization, restructuring or the state of the
economy. Legislation in redundancy gives rights to the employee being made redundant such as:
- A consultation
- Fair notice
- Redundancy Pay [depending on the circumstances and employer norms]
- Employee selection for redundancy based on merit and personal preferences
If the employee is not entitled to the above rights in the event of a redundancy, the said employee
may initiate legal action against the employer
Organisation B is overtaken by an MNC who is shifting jobs abroad and which leads to employees
being made to leave as a part of Corporate Restructuring?
This is known as:
A. Redundancy
B. Dismissal
C. Lay off
Answer: B. Dismissal
Data Protection
As businesses become more complex, organisations are storing a lot of data about individuals. Some
of this data includes the size of our homes, ice cream preference, Aadhar and PAN Card Details.
Thereby in recent times, the concept of data protection has been gaining a lot of attention from all
types of business and different sectors in the industry.
“Data Protection is the protection of information to prevent individuals with malicious intent
from misusing it.”
Data Protection Acts aim to make sure that the information is:
- Used in a fair and transparent manner

- Used for specified, legal purposes
- Accurate and updated
- Handled in a way that ensures appropriate security including protection of data against
unauthorised access, destruction, disclosure, accidental and amendment loss.
- Kept no longer than it is necessary
- Adequate, relevant and limited to the necessary content
- The data holder and user is responsible for the security and protection of data against
unauthorised access, destruction, disclosure, accidental and amendment loss.
Data Security
This is concerned with keeping data safe from anything that could cause data loss or corruption:
“Data is the often referred to as the new oil in the 21st century. “
The hazards which may cause data loss or corruption are as follows:
1. Physical risks – Damage to the physical place where data is stored. For example fire, flood or
theft.
2. Human risks – External access gained by users with malicious intent to damage, amend or
manipulate the data
The following table highlights the main threats and measures to counter them:
Potential Threats Counter Measures

Physical damage due to fire, flood, theft. - Offsite back-ups of data files
Other environmental factors include dust - Equipped off-site facility to prepare for the
and cold possibility of destruction of the main equipment
- Back-up power sources
- Fire extinguishers and smoke detectors should be
present
- Documented fire procedures
- Training should be provided for staff members
Human damage is caused due to Human - Security guards and CCTV Monitoring
error and interference. For example: theft - Restricted area and not open to everyone
- Hardware kept in a secure location and sensors set
to sound an alarm if the hardware is moved from
the building.
Operational problems such as bugs and - Training to staff members

errors which are inbuilt into the system - Strict procedures
- Testing of new systems and fixing of bugs and errors
on a timely basis
Corrupted data. This is caused by external - Set up anti-virus and firewalls to prevent unknown
users with malicious intent. and external hackers from gaining entry into the
system
- Off-site backups of data files
- Passwords and user number limits
Data theft with an intent to resell the data - Heavy data encryption practices and complex
decryption keys
- Different passwords and login credentials, each
with limited access to data based on clearance
levels rather than giving everyone access to all the
data
- Physical Security Barriers. An example of this is a
physical key to gain access into the systems and
rooms
Offsite Data backups will be a counter measure against which of the following:
A. Physical Damage due to Fire, Flood, Theft etc

B. Corrupted Data
C. Data Theft
D. Human Damage caused due to Human error and interference
Health and safety in the workplace
It is the responsibility of the employer to minimize potential hazards by implementing proper

protocols in any workplace.
Example of such hazards is dim lighting, wet floors, rugged carpets and heavy cabinets which could
fall on the employee.
Countries have laws in place to put the responsibility for health and safety on both the employer and
employee.
Employer’s responsibilities Employee’s responsibilities

An employer has a duty to: - An employee has a duty to: -
- Ensure that the working environment is safe - Take reasonable care to ensure no harm and
and minimize any hazards injury happens to others and themselves
- Set up safe working protocols and emergency - Report any injuries that occurred to oneself
plans. while performing the task
- Ensure the required training is provided and - Inform the employer of any potential hazards
that employees follow it. that have gone unnoticed
- Ensure the right equipment is used and there - Co-operate with the employer during induction
is proper maintenance of the same. training and safety drills
- Keep the staff informed of any unsafe
potential hazards
- Ensure there is a first aid kit nearby and fully
equipped
Breaches of health and safety
If the employer is unable to provide a working environment that is safe for the employee, the
employer will be breaching the common law, thereby opening themselves to civil litigation suits
from the employee. They could also be guilty of a criminal lawsuit.
Consumer Protection Laws
These laws are made by every country to protect their consumers from unethical sellers. These laws
prevent the consumers from falling prey to conniving tactics of fraudsters by empowering them with
rights and protecting them with laws.
Consumer Rights
In every country, there is a need to protect consumers who buy goods and services from other
businesses as these businesses could be unscrupulous. In India, this is dealt with by the Sale of
Goods Act, 1930.
Simple Contracts
A contract is a legally enforceable agreement between two or more parties.
A contract can be either written or verbal as well as legally binding however it is difficult to enforce
non-written contracts most of the time.
Features of a basic, simple contract is as follows:
I. Agreement: Both the parties must have agreed to the terms of the contract; this means an offer
made by one party has been accepted by the other party.
II. Consideration: For a contract to be valid, both the parties must be receiving something out of the
contract. This is known as consideration.
III. Intention to create legal relations: Both parties must have an intent to make the contract legally valid.
Informal arrangements will not be a legally enforceable contract.
For example: An informal agreement to pay a friend Rs. 2000 as an apology is not a legally valid
contract.
IV. Capacity and Legality: For a contract to be valid, both parties must be in a state to knowingly enter
the contract and fully understand the consequences. Legally enforceable contracts cannot be formed
for the purposes of illegal acts. In many countries, individuals under the age of 16 cannot enter into
legally binding contracts.
Macro-economic factors
Syllabus area A4
- Define macro-economic policy and explain its objectives.
- Explain the main determinants of the level of business activity in the economy and how
variations in the level of business activity affect individuals, households and businesses.
- Explain the impact of economic issues on the individual, the household and the business:
(i) inflation
(ii) unemployment
(iii) stagnation
(iv) international payments disequilibrium.
- Describe the main types of economic policy that may be implemented by government and
supra-national bodies to maximise economic welfare.
- Recognise the impact of fiscal and monetary policy measures on the individual, the household
and businesses.
Macroeconomics deals with factors at a large or macro-level i.e., nationwide.
It studies about the aggregate demand supply rather than individual demand and supply, national
output of goods (GDP) rather than individual firm output. At a national level, government policy is
crucial in managing the macroeconomics factors of a country.
Objectives of Macroeconomic policy
4 main objectives of the macroeconomic policy of the government includes –
1) Steady and rising economic growth

2) Low and stable inflation
3) Lower rates of unemployment
4) Sustainable balance of payments
We will look at each in detail later
Level of business activity in the economy
Key Factors that ascertain the level of business activity and its trend in an economy include –
1) Aggregate Demand
It is the total demand of an economy’s output. It can be derived by:
AD = C + I + G + (X-M)
where,
AD = Aggregate Demand
C = Consumer Expenditure
I = Investment by firms
G = Government spending
X = Exports
M = Imports
(X – M) = Net Import / Export
All of these are known as the determinants of aggregate demand of a country.
2) Consumer Confidence
It is the degree of optimism that consumers feel about their own personal financial state and the
state of the economy. If confidence is high, people will spend more and businesses will produce
more leading to higher aggregate demand and growth.
3) Availability of Capital
If finances are readily available at low interest rates in the country, businesses will flourish and in
turn, aggregate demand will rise.
4) Government Policy & Taxes
Fiscal policy includes taxes and government spending whereas monetary policies include interest
rates and the level of money supply. Favourable or expansionary policies will boost demand in the
country, increase consumer confidence and aggregate demand.
The DD & SS comes under the purview of Macro Economics
A. True
B. False
Trade Cycles
Every economy at some point in time goes through the above ‘boom and busts’ period. In booms,
the economy is flourishing and output, employment and income are rising too. In busts, the opposite
happens.
During the start of a recession, demand and output decline and reach a bottom at the trough stage
(often called the depression phase). After that, the government intervenes with appropriate
measures to revive the economy.
Then a recovery or expansion phase starts as investments rise and economic activity speeds up and a
boom stage will start. The company will once again reach a peak after full capacity is reached and
the whole cycle will repeat once again.
The following can be associated with the boom-and-bust periods in the economy:
Boom phase Bust phase

Individuals and • Low unemployment • Job losses
Households • Rising house prices • People losing their
• High levels of confidence homes when unable to
• Increasing consumer spending. pay mortgages
• Fall in labour mobility
due to negative equity
• Bankruptcy
• Low confidence.
Firms • Growth in profitability • Corporate failures

• Extra competition as new firms are • Fall in profits
established. • Excess capacity.
Test your understanding
a) Describe the main types of economic policy that may be implemented by government and supra-
national bodies to maximise economic welfare.
b) Recognise the impact of fiscal and monetary policy measures on the individual, the household and
businesses.
Recap
Recollect the 4 macroeconomic policy objectives discussed earlier. These are the main goals of any
government trying to manage the economy via its fiscal and monetary policies.
1) Steady and rising economic growth

2) Low and stable inflation
3) Lower rates of unemployment
4) Sustainable balance of payments
The government can achieve these by using either fiscal policy (use of taxes and government
spending) or monetary policy (interest rates and money supply).
Fiscal Policy
Fiscal policy refers to the use of government spending and tax policies to influence economic
conditions.
The government uses a budget to determine its use of fiscal policy. Its elements constitute:
● Income – the money raised by the government from direct and indirect taxes on individuals
and businesses is considered as income
● Expenditure –the total amount needed to be spent by the government to provide services
such as costs of the police and army, road and rail building as well as the wages of civil servants
for the population.
There are three types of budget:
1. Balanced Budget: A balanced budget occurs when the income and expenditure of the
government is equal. This is the ideal target for governments to achieve in the medium to long
term.
2. Budget Deficit: A deficit occurs when expenditure is more than the income of the government.
This is used when a deflationary gap exists in the economy, that is, aggregate demand is low.
By running a budget deficit, the government injects more money into the economy than it is taking
out. This will boost aggregate demand and reduce unemployment in the economy. This strategy is
known as an ‘expansionary fiscal policy.’
To fund the deficit, the government will need to borrow money. This borrowing is referred to as the
Public Sector Net Cash Requirement (PSNCR).
3. Budget surplus- A surplus occurs when income is more than the expenditure of the government.
This is used when an ‘inflationary gap’ exists in the economy, that is when aggregate demand in
the economy is higher than the country can supply
By running a surplus, the government is taking money out of the economy, reducing aggregate
demand. This is referred to as a ‘contractionary fiscal policy.’
Tick the correct box against the correct option
Budget Surplus Budget

Deficit
Contractionary Fiscal Policy will lead to
Expansionary Fiscal Policy will lead to
Monetary Policy
Monetary policy refers to the management of the money supply (the total amount of money,
including currency in circulation and deposited in banks and building societies) in the economy.
It involves changing interest rates or varying the amount of money that banks need to keep in the
reserves.
Same as fiscal policy, if money supply is increased to inject money in the economy, it is known as
‘expansionary monetary policy’, and if money supply is decreased it is known as ‘contractionary
monetary policy.’
Tools of Monetary Supply
1. Interest Rates: Increasing interest rates encourages savings and discourages borrowings
therefore reducing the money supply in circulation in the country, which leads to it being a
contractionary measure.
2. Reserve Requirements: Commercial banks typically needs to keep a percentage of their

deposits as a reserve with the Central bank in case of emergencies. If the percentage required
is increased, banks will have less money to lend to the borrowers thereby decreasing the
money supply.
3. Open Market Operations: The central bank buys and sells its bonds in the open market. If it
buys its bonds back, it is basically injecting money in the economy and taking an expansionary
monetary policy stand.
Economists Theories
Several renowned economists in the past have expressed their views on how the government and
central bank of the economy should use the fiscal and monetary policy tools to their best use.
Different types of government follow different theories.
3 Main theories to know are as follows:
1. Classical Theory
This theory suggests that the government should do absolutely nothing.
The economy should run its natural course of booms and busts cycles to reach equilibrium, and the
government shouldn’t interfere at all under any circumstances.
2. The Keynesian view (demand side)
Keynes argued that governments need to manipulate the level of aggregate demand within the
economy (i.e. demand side economics).
As per his philosophy, government intervention was a must without which the economy cannot
reach an equilibrium point.
This means that if the economy is in a recession and the government is in a budget deficit, the
government still should borrow more to inject money in the economy to boost it despite increasing
its deficit.
3. The monetarist view (supply side)
Monetarists believe that there is only one equilibrium point in an economy, the point where demand
equals supply in all markets of the economy.
Market imperfections are the reason why the economy does not find this equilibrium point, and the
work of the government’s role is to remove these imperfections, which can be:-
- Inflation
- Government Spending and taxation
- Monopolies
- Price fixing
Monetarist measures are involved with the supply side of the economy and include factors like ease
of doing business, better access to skilled factors of production, etc.
Test your understanding: Explain the impact of economic issues on the individual, the household
and the business.
The 4 key macroeconomic issues are:
a. Inflation
b. Unemployment
c. Stagnation and economic growth
d. International payments disequilibrium (Balance of Payments)
Inflation
Inflation is the rise in the prices of goods and services within an economy over time. It reduces the
purchasing power of money, meaning that each unit of currency buys fewer goods and services in
the future.
A low and stable level of inflation is what is desirable by the government to promote economic
growth. High inflation invites the following problem with it:
- Rising prices discourage consumer spending and thus slows down growth
- Employee costs for organisations rise
- Consumer confidence can become negative if inflation is excessive
- Fixed wage and salary earners are worse off if prices start rising steeply and if their income
does not rise in proportion
- People who save to spend later (a ‘transactions motive’) will save less in order to avoid the
purchasing power of their saving being eroded.
- People who save in case of future emergencies (a ‘precautionary motive’) will save more as
they will be uncertain about how much money they may need in the future due to rapid
price rises
When inflation rises, and economic growth slows down (a very rare phenomena), a special situation
of stagflation occurs.
Types and causes of inflation
1. Demand Pull inflation: This is caused by excessive and rising demand which pull the general prices
upward. The government would look to increase taxes and cut spending in order to curb a demand-
pull inflation.
2. Cost-push inflation: The costs of the factors of production rise making the price of the final
product rise. For example, an increase in the prices of oil would cause such an inflation.
3. Imported inflation: If a country imports too many goods and raw materials and their prices rise,
imported inflation will occur. Strengthening the domestic currency and discouraging imports are
appropriate steps the government can take.
4. Monetary inflation: Inflation caused by an increase in the money supply in the economy leaving
people with too much money to spend and increased demand. Increasing interest rates to
encourage savings is a way to control monetary inflation.
Inflation caused by excessive costs is known as monetary inflation.
A. True
B. False
Unemployment
Unemployment occurs when people are willing and able to work but cannot find a job. High levels of
unemployment cause problems such as:
● Decrease in tax revenue for the government

● Increased spending by the government for welfare benefits for the unemployed
● Increased tax burden on the people already working in the labour force
● Low morale amongst unemployed workers
Types of Unemployment
1. Cyclical unemployment
It is also known as demand deficient, persistent or Keynesian unemployment. It occurs in the ‘bust’
period of the trade cycle and it is caused by aggregate demand being too low.
The best way to fight cyclical unemployment is to deploy measures to increase aggregate demand
such as having a budget deficit, reducing taxes, increasing government spending, etc.
2. Frictional unemployment
This form of unemployment is short-term. It is for people who are temporarily unemployed or
looking for jobs. It is generally not a massive problem unless it forms a large proportion of total
unemployment.
3. Structural or technological unemployment
This type of unemployment occurs due to structural changes in the economy and it is usually long-
term. Skills that are demanded drastically change in the long-run causing unemployment of workers
who do not keep up. An example would be with the advent of technology. Many blue collars,
repetitive jobs were lost in the industrial revolution.
4. Seasonal unemployment
It occurs in industries which tend to be highly seasonal in nature, such as farming or tourism.
Geographical areas which rely much on these industries can face huge problems during off-season
times.
5. Real Wage Unemployment
This occurs in industries which are highly unionised. Union negotiations keep wages artificially high
using the threat of industrial action, such as strikes. The solution proposed by monetarists is to
abolish minimum wage rates in such classes or industries.
Stagnation and economic growth
Economic growth is vital for any economy to flourish. Economic growth means a rise in the output
(GDP) of the economy, which leads to higher incomes and employment levels, more demand and
increasing consumer confidence in the country which all in all leads to a better standard of living.
However, economic growth can be problematic at times too and a balancing act needs to be figured
out by the government.
● The wealth gap between the rich and poor widens

● Economic growth can occur in demerit goods which are illegal and this is not good for the
welfare of the people
● Growth can be at the expense of the exploitation of the poor
● Economic growth can have adverse impacts on the environment
Measures to Promote Economic growth
1. Government budget deficit: The government borrows and injects money into the economy to
increase aggregate demand (Keynesian Theory)
2. Increase availability of factors of production: Skilled and efficient factors of production can
increase economic growth (Monetarist view)
3. Reduction in interest rates: Reduction in interest rates will encourage businesses to borrow more
which will stir more production and economic growth
4. Government grants and incentive: Government grants are given to companies to reduce their
costs, and they can focus on driving innovation more, which promotes economic growth in the long
term.
Balance of Payments (BOP)
A country’s BOP records all financial transactions made between individuals, businesses and its
government with foreign consumers and organisations.
The balance of payments is split into three parts:
1. Current account (imports and exports)

2. Capital account (net change in ownership of foreign assets and loans)
3. Financial account (financial Cash Flows).
If Imports > Exports = Trade deficit on the current account (net cash outflow from the economy)
Imports < Exports = trade surplus on the current account (net cash inflow to the economy)
The aim of the government is to have neither a trade deficit nor a trade surplus as they both have
their own problems; however, this is not feasible in practical life. Hence, the goal is to keep either a
deficit or a surplus to a bare minimum or insignificant amount.
Trade deficits drain resources from domestic countries to foreign countries, whereas trade surpluses
can cause rising inflation levels in the domestic country, which has its own set of problems.
Ways to reduce a trade deficit
● Adopt measures to reduce imports (tariffs, quotas) or increase exports (export subsidies,
incentives).
● Run a contractionary monetary policy.
● Reduce inflation in domestic countries to make domestic goods cheaper in foreign markets
which encourages exports.
● Devalue the domestic currency. This will make imports more expensive for domestic people
whereas it will make exports cheaper for foreign citizens.
Micro economic factors
Syllabus area A5
- Define the concept of demand and supply for goods and services.
- Explain elasticity of demand and the impact of substitute and complementary goods.
- Explain the economic behaviour of costs in the short and long term.
- Define perfect competition, oligopoly, monopolistic competition and monopoly.
External Analysis – Economic Factors
Economic factors form a crucial part of the ‘PEST’ Analysis.
Economics can be defined as - ‘the study of how society allocates scarce resources, which have
alternative uses, between competing ends.’ OR ‘the study of wealth creation.’
Microeconomics is a branch of economics which deals with the study of economic behaviour at a
small or individual level, whereas macroeconomics deals with the large or aggregate level.
Demand and elasticity of demand
Microeconomics focuses on how the individual parts of an economy make decisions about how to
allocate scarce resources to individuals, firms and consumers. The concept of demand and supply is
what forms the core of taking these decisions.
Individual demand shows how much of a good or service someone intends to buy at different prices.
The willingness, ability and desire of the individual to buy the product are what constitutes demand.
Total or aggregate of all individual demands is what is known as market demand, often referred to
as just demand.
The downward sloping demand curve shows the relationship between the price of a product and the
quantity demanded. This is illustrated below:
If the price falls from P1 to P2, more of the product will be demanded by the consumers, and as a
result, demand would rise from D1 to D2. This is known as an expansion in demand.
Conversely, if price were to rise from P2 to P1, demand would fall from D2 to D1, causing a
contraction in demand.
The thing to remember is that price and quantity demanded have an inverse relationship. This is
known as the price effect.
The price effect is a by-product of:
1. Substitution effect: If a price of a substitute were to rise, then the demand for goods would
rise. For example, if the price of coffee rises, then people will demand less of coffee and
start consuming tea which in turn would increase the demand for tea (a substitute good for
coffee).
2. Income effect: This states that as income rises, the demand for the good will also rise. This
increases the purchasing power for all normal goods. For example, if on average everyone’s
income were to rise in the country, people would be able to afford luxurious cars thereby
increasing their demand.
Causes of changes in demand (Other than price)
There are other factors other than price which can affect the level of demand. These other factors
(assuming the price of the product is constant) cause a shift in the demand curve as shown in the
diagram –
An increase in demand would cause the demand curve to shift to the right and a decrease in demand
would cause it to shift to the left.
Factors that can cause these changes include –
1. Income and taxes
The general rule is if income rises, even demand would rise. If taxes decrease, then demand would
rise as the disposable income of people would rise.
A special case to consider here is inferior goods. In this case, the opposite happens; an increase in
income causes the demand to fall due to the good being considered ‘inferior’ to consume. Consider
the Indian example of vada pav. A labourer would consume it on a daily basis for lunch, but if the
daily wage limits were to rise significantly, then the demand for vada pav would fall. People would
start to consume more expensive and probably healthier alternatives of food.
2. Consumer taste and fashion
Consumers' tastes and fashion trends can change in the medium to long run causing a shift in the
demand. Advertising can be used as a tool to influence demand.
For example, when fidget spinners were considered fancy to have and were trending on social
media, their demand was high. But once the trend worn of, their demand fell.
3. Prices of related goods (substitutes and complements)
Substitute goods are goods which can be replaced with another. The substitute effect between
coffee and tea explained above is what is applicable here.
Complements, on the other hand, are goods which are meant to be used in conjunction with one
another. For example, tea and sugar, if the price of tea were to fall, the demand of tea would rise
and as a result the demand of sugar would rise too. Therefore, the demand curve for sugar would
shift to the right.
4. Population and demographics
If the population of the country rises, there would be more buyers in the economy and demand for
most goods would rise.
The composition of the population is also a factor to consider here. If the population demographic
sees an increase in older people than younger people, the demand for products such as wheelchairs
and medicines would increase in the country.
Changes in the price of the product will cause a change in
A. The movement along the demand curve

B. Demand curve to shift to the right or left
A change in price causes a movement along the demand curve.

A change in the factor of demand causes the demand curve to shift to the right or left
Price Elasticity of Demand (PED)
Above, we learnt that price and other factors cause a change in demand. But we did not quantify by
how much this change is caused. This is where PED comes in.
PED measures the responsiveness of a change in quantity demanded to a change in the price of the
product i.e., it measures by how much the quantity demanded changes due to a specific change in
price.
PED is calculated by using the formula -
Percentage change in quantity demanded

PED = Percentage change in price
If this percentage change is negative the minus sign is usually ignored.
PED Value Description Explanation Example

<1 Relatively A change in price will cause Necessity goods (Salt, sugar,
inelastic a less % change in demand etc)
=1 Unit elastic Price and demand will -
change by the same %
>1 Relatively elastic A change in price will cause Luxury goods (Cars, Expensive
more than a proportionate phone, etc.
change in demand
Factor affecting PED
1. Proportion of income spent
If the proportion of total income spent on the good is small, then a change in price would not have
much of an impact on the quantity demanded of the good i.e., demand would be inelastic.
2. Availability of substitutes
If close substitutes of the product are available, then an increase in the price of the product will
cause a fall in the quantity demanded. Demand would be elastic.
For example, if the price of sweets were to rise during Diwali time, the demand for sweets would fall
significantly as people would start gifting chocolates instead.
3. Necessity or luxury
Necessary goods like sugar and salt tend to have inelastic demands as a change in their price will not
have much effect on the demand as they will still be bought.
On the other hand, luxury goods like expensive watches will have an elastic demand.
4. Habits
If the goods consumed are on a habitual or addictive basis like tobacco, then a change in price would
not affect the demand as much, leaving the PED to be inelastic
5. Time
In the short run, PED is usually inelastic. However, in the long run, PED tends to be elastic as the
consumer can think of an alternative or even delay their purchases of luxuries such as cars.
Zara products have which type of Demand?
A. Price elastic
B. Price inelastic
C. Unitary elastic
Cross-elasticity of demand
Cross-elasticity of demand (XED) measures how sensitive demand for one product is to changes in
the price of another product. XED's formula can be found below.
XED = (Change in quantity demanded of Good A expressed as a percentage) /(percentage change

in price of Good B)
Think about a scenario where the butter with respect to margarine is XED +1.5 and the price of
margarine drops by 6%. On average, we can predict a 9% drop in demand for butter.
Indicator of demand cross-elasticity
It is important to know whether the PED figure was greater or smaller than one. Whereas a key issue
with XED is the sign - whether the elasticity is positive or negative.
When butter was compared to margarine in the previous activity, the XED result was positive due to
the fact that they are substitutes. Consumers switched to buying more margarine instead of butter
when the price of margarine dropped. Margarine and butter prices move in lockstep, so XED is
positive.
XED between complements is negative. As an example, consider the use of gas and gas central
heating. A decrease in the price of gas central heating would result in a rise in the demand for gas
central heating. Due to the complementary nature of gas central heating and gas, the demand for
gas is also expected to rise. XED of these complements is negative as the price of gas central heating
and demand for gas move in opposite directions.
When it comes to substitutes, the XED is positive, while it is negative for complements.
Supply and Equilibrium
A supply curve shows how many units producers would be willing to offer for sale, at different
prices, over a given period of time.
The main objective of suppliers is to make a profit and that is the underlying principle. Hence, at
higher prices suppliers would be willing to supply more as they can earn higher profits at those
levels.
This causes the supply curve to be upward sloping as opposed to the demand curve which was
downward sloping. There a direct relationship between price and quantity supplied.
Likewise of a demand curve, shifts in the supply curve are also possible.
Factors causing a shift in the supply curve (other than price)
1. Production costs
If costs of production were to decrease, then supply would increase as suppliers can now make more
profit while charging the same price as before to consumers.
2. Indirect taxes
If taxes were to decrease, profitability improves thereby increasing supply and causing the supply
curve to move to the right from S1 to S2.
3. Technological advances
Advances in technology would reduce production cost and improve efficiency thereby increasing
profitability and supply.
Equilibrium price and quantity
The market forces of both demand and supply determine the ideal price and quantity for a good in
the market. This is known as price mechanism. Consider the following diagram which is very
important:
P is the equilibrium price where buyers and sellers are both willing to buy and sell respectively. Q is
the equilibrium quantity of goods demanded and supplied at price P. Where the demand curve and
supply curve intersect it is called the equilibrium point which is the ideal price and quantity to buy
and sell in a market.
Any point other than the equilibrium point will cause disequilibrium in the market i.e., the balance
between the demand and supply will be broken causing either excess demand or excess supply.
When price increases to P1, consumers demand less of the product but suppliers are willing to
supply more at P1 causing excess supply in the market. Demand will contract to Q1 whereas supply
will extend to Q2.
Alternatively, when price decreases to P2, buyers will be willing to buy more but suppliers would not
be able to supply the goods at a lower price causing excess demand. Demand will extend to Q2 but
supply will contract to Q3.
Therefore, any price above the equilibrium price will cause an excess in supply whereas and any
price below the equilibrium will cause an excess in demand.
Eventually, these price signals will be understood by both the buyers and suppliers and in the long
run and they will decide to either return to the original equilibrium or make a new equilibrium in the
market.
Minimum (floor) prices and maximum (ceiling) prices
In certain markets, the price set by the forces of demand and supply might be unfair to consumers or
suppliers. In such cases, the government intervenes to set prices above or below the market
equilibrium price.
Minimum (floor) Price
The use of a floor price is very common in industries like agriculture. There is often exploitation of
farmers and to avoid that the government sets a minimum floor price above which goods have to be
sold.
In the above diagram, it is seen that a minimum floor price is set above the prevailing market
equilibrium price. In such cases, there will be temporary excess supply in the market (Q2 – Q1) till
the market eventually moves towards the minimum price set by the government.
The same is to be applied to a wage curve where a minimum guaranteed wage is set up by the
government.
Maximum (Ceiling) Price
Ceiling prices are put in place to protect the exploitation of consumers or to control the inflation
level in the economy.
In the above diagram, the maximum price is set below the current equilibrium price causing a
temporary shortage in supply. (Q2 – Q1)
Apply your knowledge 15 :
Tick the correct box
Below the Equilibrium Above the Equilibrium

Maximum Price
Minimum Price
Answer: the maximum price is set below the current equilibrium price causing a temporary shortage
in supply. It can be seen that a minimum floor price is set above the prevailing market equilibrium
price causing a temporary excess supply in the market.
Economic behaviour of cost
The relationship between selling price and quantity demanded or supplied is not the only
relationship microeconomics explores. It also looks at how costs tend to fluctuate over time.
Short-term cost behaviour
According to micro-economists, costs are subject to the law of diminishing returns. As equal
quantities of variable factors of input (such as labour or materials) are added to a fixed factor,
output initially rises by a greater proportion, increasing returns and causing the average cost per unit
to fall. But beyond a certain threshold, the added output will start to decline, and the average cost
per unit will start to rise again.
Social and demographic factors
Syllabus area A6
- Explain the medium and long-term effects of social and demographic trends on business
outcomes and the economy.
- Describe the impact of changes in social structure, values, attitudes and tastes on the
organisation.
- Identify and explain the measures that governments may take in response to the medium
and long-term impact of demographic change.
Demographic trend
The word ‘demographics’ refers to the composition of the population in the area i.e., could be a
continent, country, state, or a district.
There are many demographic issues that impact businesses such as:
1. Population Size
2. Population Composition
3. Population Location
4. Wealth Distribution
5. Education
6. Health
Population Size
A growing population provides businesses with a growing market to sell their goods and services.
The growth/decline in population is a combination of birth rates, death rates, immigration and
emigration.
For example: you might have observed that every company aims to penetrate the Indian and
Chinese market, a major reason for this is the humongous population size of these countries.
Population Composition
This relates to be the average age of the population affected by factors like birth and death rates.
The larger the workforce, the more MNCs will be attracted to set up their operations in that country.
Moreover, companies will target their products as per the population composition.
For example: pharma companies will opt for countries with a more aged population as there is a
larger target market to be served in those countries.
Population Location
This is the percentage of the population living in different areas generally classified into –
urban, rural and semi-urban. Businesses will target areas wherein they have more of that product’s
existing customer base.
For example: with more migration from rural to urban areas, there is an excess of the workforce in
urban areas with very small living spaces. As a result, there has been a phenomenal rise in the
invention and sales of portable furniture.
Wealth Distribution
Countries with a higher disposable income for its population will be a lucrative market for businesses
to sell their goods and services.
For example: India is one of the fastest growing economies. What western markets lack in size
compared to eastern markets, they overcompensate for it in terms of purchasing power.
Education
A country with an uneducated workforce is a hub for companies to set up their operations requiring
skilled labour. Countries with higher education levels will attract service companies.
For example: several IT companies set up offices in the south of India to benefit from the skills of
educated engineers.
Health
The health deterioration in terms of obesity and the spread of diseases is where the pharma
companies concentrate their efforts in producing medical equipment and medicines.
For example: In South Africa, diseases like measles, malaria and HIV is still a major and common cause
of death.
The study of Country’s Demographics is useful for the Government only.
A. True
B. False
Impact of changes in Social Structure, Values, Attitudes and Tastes on the organisation
Social Structure
This refers to the concept of social class, which is a group of people who have the same social,
economic and /or educational status.
Changes in social structures will result in changes in buying patterns and disrupt the predictive analysis
used by organisations to predict future demand.
For example: Tesla will focus on developed countries first and emerging economies next;
Tata CLiQ Luxury will focus its efforts on metropolitan Cities to sell its high-priced luxury items
Values
Social values are the commonly used and accepted norms and behaviours that keep a group together.
For example:-
- Women married, unmarried or with a child, are joining the workforce; there is an increase in
the disposable income of households. There is more demand for luxury baby products.
- Increased concerns about ethical practices and the environment have brought in a new wave
of demand for renewable energy and recycled products such as bamboo straws and
environmentally conscious clothing.
Attitudes
Attitudes show a person’s liking or disliking towards a particular person, place, thing or event.
Initially for organizations, CSR was just an additional burden however now it is a crucial part of their
strategy.
Waste management was not popular years ago but now there is a whole consumer market who only
uses recyclable goods. Reliance on cloud storage and the Internet has promoted work from home
which was frowned upon years ago.
Tastes
Taste refers to an individual’s reference on a personal level while on the social level it may be linked
to the social group, they belong to.
In wealthy countries, there is a higher demand for luxury stores while in developing countries there is
high demand for fast fashion products. Hence, many organizations take account of the ever-changing
fashion and taste in society.
H & M decides to launch an eco-friendly clothing line. This uses which type of social aspects?
A. Attitudes
B. Values
C. Tastes
D. Social Structure
Measures taken by governments in response to the medium and long-term impact of demographic
change
Governments take the following response to deal with any new and emerging trends of demographic
change:
Population structure
Depending on the birth date, death rate and the state of the population, governments adopt different
policies to curb the population structure.
For example: China with a rapidly growing population, had passed a law to increase taxes and other
restrictions on families giving birth to more than one child. Whereas USA with a declining population,
provides tax subsidies to parents giving birth to more than two children.
Housing
With increasing populations in emerging countries like India, there has been a rise in housing
development projects both by private institutions and the government thereby increase demand for
real estate and its ancillaries.
Employment
In India, state governments of Tamil Nadu and Maharashtra have been encouraging single parents,
married women and single women to join the workforce. Thereby, creating an additional demand for
babysitting services and house help.
Health
Many governments have taken severe action to cure diseases which are specific to their countries like
obesity in America, AIDS in South Africa, smoking and tobacco worldwide.
Technological factors
Syllabus area A7
- Explain the effects of technological change on the organisation structure and strategy
(i) Downsizing
(ii) Delayering
(iii) Outsourcing.
- Describe the impact of information technology and information systems development on
business processes and the changing role of the accountant in business, as a result of
technological advances.
Impact of technological change on the organisation structure and strategy
An organizational structure is impacted in the following ways:
- IT systems like smart calendars and cloud storage have overtaken many administration roles.
- Improved flow of communication between employees using mail services and video
conferencing.
- Robots and automated product lines have been replacing manual jobs – Industrial Revolution
4.0.
All of the above has led to downsizing, delivering and outsourcing.
Downsizing
This is a term used for reduction in the labour force and the total number of employees in an
organization with the intent of reducing the work or the output. The idea is to make the organization
leaner and improve the overall output as a result.
Delayering
- This is the process of removing an entire layer of management.

- This is done in order to shift to a flatter organisational structure with a focus on teamwork
and reduction in supervision.
Outsourcing
This comprises of contracting out non-core activities of an organization to specialist providers of

those services.
The rationale behind outsourcing is that the organization can now focus on core activities hence
saving time, resources and money previously spent on the non-core activities.
This is particularly common for services such as IT, cleaning and maintenance.
The 4 key types of outsourcing are:
1. Total: This is where the organisation’s non-core activity is outsourced to an external, third party
provider/supplier.
2. Ad hoc: This occurs when an organization outsources the non-core activity ( for example IT support)
for a limited, short period and hires external support on a temporary basis.
3. Partial: This is where partial functions are outsourced, however, other activities are kept in-house by
the organization such as management of servers and cloud storage.
4. Project Management: This is where the creation and/or implementation of an entire non-core
activity such as IT systems or maintenance and cleaning is outsourced to an external third party.
Advantages of Outsourcing Disadvantages of Outsourcing

• The supplier will possess specialist skills and • May lead to the organization being locked
knowledge that the organization lacks into an unfavourable contract with a poor-
quality service provider.
• Outsourcing may operate on a fixed-fee
contract. Thus removing any uncertainty in • Causes loss of staff with specialist skills
the cash outflow incurred for the outsourced required, thereby making it difficult to bring
task. the outsourced services back in-house at a
later date.
• Higher business flexibility in outsourced
services by allowing businesses to increase the • Will provide the third-party service provider
level of IT service required depending on the with access to the organization’s confidential
organisation’s requirement. information. This may lead to a potential data
breach.
• Suppliers may be more efficient at running the
outsourced task. • There is no scope for customization as the
organisation will have to rely on the third-
party. This may enable the competitor to get
an edge over the organization.
Indian Government hires Infosys to devise the new banking systems. This is an example of which
type of outsourcing:
A. Total
B. Ad hoc
C. Partial
D. Project Management
Impact of information technology and information systems development on business processes
Impact of technological change on Products
- Transformation of the business model for industries like banking, supermarkets etc.
- The emergence of substitutes: the CD/DVD has been widely replaced by OTT Apps, and even
Cinemas may be taken over by OTTs.
- Advancements in technologies have resulted in many products becoming more sophisticated,
i.e., efficient even with smaller sizes. For example, computers weighing 100’s of kilos are now
available in our palm as our phones.
Impact of technological change on production processes
- Industrial revolution 4.0 has introduced the concept of humans walking alongside the robots
operating in the automated production lines.
- Enterprise Resource Planning systems [ERPs] have been used to manage the entire business
from inventory management to maintenance of machines as well as inventory levels all on the
cloud, which can be accessed by anyone with the required credentials and access to the
Internet.
Impact of technological change on marketing
- Pricing: IT helps track competitor’s and industry averages of product prices which are used to
ensure that business prices are competitive.
- Promotion: Social media marketing has proven to be more effective with a much wider reach
and customer base for most organizations’ products and services.
For example: Nykaa spends more than 50% of their marketing budget on social media
platforms.
- Distribution: The Internet has enabled a local firm to get worldwide reach via e-commerce.
Impact of technological change on society
Today everything has become digital, from stock trading to grocery shopping to banking to
education, and the list is endless.
Environmental factors
Syllabus area A8
- List ways in which the business can affect or be affected by its physical environment.
- Describe ways in which businesses can operate more efficiently and effectively to limit
damage to the environment.
- Identify the benefits of economic sustainability to a range of stakeholders.
This evaluates the impact of the physical environment on the organization’s activities. It is one of the
crucial factors that companies often overlook, thereby stimulating a negative and deteriorating
response from stakeholders such as governments, consumers, and the community.
Impact of businesses operations on its physical environment.
Business effects upon the environment Environmental effects upon the environment
• Pollution in the form of CO2 emissions • Global warming has caused unpredictable
and unprecedented climate changes, which
• Loss of flora and fauna directly affects agricultural produce and its
ancillary industries
• Destruction of water bodies and greenery
• Legislation: Governments may penalise
• Wastage of resources like food, water and polluting companies. These fines and
other raw materials additional compliance costs will reduce
profits.
• Companies with a poor green image will face

lower sales. Customers will switch to their
competitors.
• Business profits will reduce if there are a lack

of resources, as the costs of raw materials
will increase.
Ways in which businesses can operate more efficiently and effectively to limit damage to the
environment
The following are ways in which an organisation can become more sustainable and reduce its
carbon footprint [basically going green]: -
1. Revamping of products to have fewer raw materials
Recently Apple announced that it will not include a charging port and earphones in the new iPhone
boxes to reduce the carbon footprint and the electronic waste that comes out of it.
2. Less product packaging
Many environmental groups have accused Amazon because of the cardboard packaging wastage the
company causes. As a result, Amazon has been innovating packaging practices by using renewable
and recyclable packaging boxes and containers.
3. Recycling
Recently many supermarkets and grocery stores have started selling cloth bags as a product. These
cloth bags are also used since they are recyclable and reusable.
4. Becoming more energy efficient
Businesses have started consulting organizations that help them reduce energy consumption with
the intent of not only reducing cost but also using less energy. Many businesses also have installed
solar panels at the facilities to diversify and limit reliance on fossil fuels.
5. Efficient Production Planning
Try to limit wastage from additional inventory.
Benefits of economic sustainability to a range of stakeholders
Sustainable development means using resources in a manner that does not compromise the needs
of future generations.
For example: If a city is built by cutting down a forest, then everyone in the city should pledge to
plant one tree so that in the future, there are enough of trees.
Stakeholder Benefit
General Public Lower CO2 emissions and less carbon footprint thereby more
greenery
Shareholders Improved efficiency and reduction in waste can improve profitability.

This in turn will create higher returns for investors
Customers Environmentally conscious customers will prefer ethical organization’s

products
Workers / Community as A better work environment with reduced waste and pollution
a whole
Becoming green and environmentally friendly will always be expensive for the business organisation:
A. True
B. False
Competitive Factors
Syllabus area A9
- Identify a business's strengths, weaknesses, opportunities and threats (SWOT) in a market
and the main sources of competitive advantage.
- Identify the main elements within Porter’s value chain and explain the meaning of a value
network.
- Explain the factors or forces that influence the level of competitiveness in an industry or
sector using Porter's five forces model.
- Describe the activities of an organisation that affect its competitiveness:
(i) Purchasing
(ii) Production
(iii) Marketing
(iv) Service
Competitive Advantage
A business must evaluate the internal factors and perform an external analysis to assess the level of
competition within the industry and whether the organization stands at a disadvantage.
To find out whether an organisation has a competitive advantage or not can be done in the following
three steps:
1. Identification of the main competitive forces present in the relevant industry

2. The different measures a firm can take to achieve a competitive advantage
3. What the competitive advantage comprises of, i.e. the different activities and actions taken by the
firm
Strengths, eaknesses, opportunities and threats (SWOT)
- SWOT (strengths, weaknesses, opportunities, and threats) analysis is a framework used to

evaluate a company's competitive position and to develop strategic planning.
- SWOT analysis assesses internal and external factors, as well as current and future potential.
- A SWOT analysis is designed to facilitate a realistic, fact-based, data-driven look at the strengths
and weaknesses of an organization, its initiatives, or an industry.
- The organization needs to keep the analysis accurate by avoiding pre-conceived beliefs or grey
areas and instead focusing on real-life contexts. Companies should use it as a guide and not
necessarily as a prescription.
Uses of SWOT Drawbacks of SWOT
o Understand your business better o Does not prioritise issues

o Address weaknesses o Does not provide solutions or offer
o Deter threats alternative decisions
o Capitalise on opportunities o Can generate too many ideas but not help
o Take advantage of your strengths you choose which one is best
o Develop business goals and strategies for o Can produce a lot of information, but not all
achieving them. of it is useful.
Checklist of the strengths quadrant
1. What have we excelled at in the past?

2. What have others said that we have excelled at?
3. What awards have we won?
4. What resources, equipment, or facilities do we have that others do not?
Checklist of the weakness quadrant
Think of your top 3 project failures.

1. What was the principal cause?
2. What criticism have you received from others?
3. What business relationships, clients, or customers have you lost? Why did you lose them?
4. What internal conflicts has your organization experienced?
5. What sales have you lost?
Checklist of the opportunities quadrant
1. What are the three biggest changes in your industry recently?

2. What technology has opened new doors?
3. How can you reduce costs in your existing business?
4. What trends are occurring in your market (lifestyle, demographic, etc.)?
5. What new products have your competitors pursued?
Checklist for the threats quadrant
1. Where have you recently lost business?

2. What changes have occurred in your industry that could result in lost business?
3. Which competitors are your biggest threat?
4. Which part of your business is the most valuable?
5. Which part of your business is the most under threat (likely to decrease)?
Porter’s Five Forces
● It is a method used to analyse the competitive factors of a firm by studying five key areas or
‘forces’. Cumulatively these forces determine the profitability potential of a business.
Using the Tool
Step 1. Gather the information on each of the five forces

Step 2. Analyse the results and display them on a diagram
Step 3. Formulate strategies based on the conclusions
Evaluate the following five on very weak/weak/strong/very strong
1. Rivalry among existing competitors

2. Threat of new entrants
3. Threat of substitutes
4. Bargaining power of buyers
5. Bargaining power of suppliers
Factors affecting buyer’s power
● Number of buyers
● Size of buyers
● Size of each order
● Buyer’s cost of switching supplies
● Many substitutes
● Price sensitivity
● Threat of integrating backward
Factors affecting supplier’s power
● Number of suppliers
● Size of suppliers
● Ability to find substitute materials
● Material scarcity
● Cost of switching to alternative materials
● Threat of integrating forward
Factors impacting the threat of substitutes
● Number of substitutes
● Threat of substitutes
● Performance of charging
Factors impacting the threat of new entry
● Amount of capital required

● Retaliation by existing companies
● Legal barriers such as patents and copyright
● Brand reputation
● Product differentiation
● Access to suppliers and distributors
● Economies of scale
● Sunk cost
● Government regulation
Factors affecting the threat of rivalry among existing competitors
● Number of competitors
● Industry growth rate and size
● Product differentiation
● Competitor size
● Customer loyalty
● Threat of horizontal integration
● Level of advertising expense
The threat of new entrants is high when:
● A low amount of capital is required to enter a market

● Existing companies can do little to retaliate
● Existing firms do not possess patents, trademarks or do not have established brand
reputation
● There is no government regulation
● Customer switching costs are low (it does not cost a lot of money for a firm to switch to
other industries);
● There is low customer loyalty
● Products are nearly identical
● Economies of scale can be easily achieved.
● For example: low barriers to entry in FMCG retail and high barriers to entry in banking
Suppliers have strong bargaining power when:
● There are few suppliers but many buyers

● Suppliers are large and threaten to forward integrate
● Few substitute raw materials exist
● Suppliers hold scarce resources
● The cost of switching raw materials is high
● For example: whenever oil prices rise, oil refiners have to increase their spending
Buyers exert strong bargaining power when:
● Buying in large quantities or control many access points to the final customer
● Only a few buyers exist
● Switching costs to other suppliers are low
● They threaten to backward integrate
● There are many substitutes
● Buyers are price sensitive.
● For example: Walmart
Threat of Substitutes
● This force is especially threatening when buyers can easily find substitute products with
attractive prices or better quality and can switch from one product or service to another
with little cost.
● For example: Ola and Uber are substitutes.
Rivalry among competitors is intense when:
● There are many competitors

● Exit barriers are high
● Industry of growth is slow or negative
● Products are not differentiated and can be easily substituted
● Competitors are of equal size
● Low customer loyalty
Example – 5 Forces of Automobile Industry
Threat of new entry (very weak)
● A large amount of capital required

● High retaliation is possible from existing companies if new entrants would bring innovative
products and ideas to the industry
● Few legal barriers protect existing companies from new entrants
● All automotive companies have established brand image and reputation
● Products are mainly differentiated by design and engineering quality
● New entrants could easily access suppliers and distributors
● A firm has to produce at least 5 million (estimate) vehicles to be cost-competitive. Therefore,
it is very hard to achieve economies of scale
● Governments often protect their home markets by introducing high import taxes
Supplier power (weak)
● There are a large number of suppliers

● Companies use another type of material (use one metal instead of another) but only to some
extent (plastic instead of metal)
● Materials are widely accessible
● Suppliers do not pose any threat of forward integration
Buyer power (strong)
● There are many buyers

● Most of the buyers are individuals that buy one car, but corporates or governments usually
buy large fleets and can bargain for lower prices
● It does not cost much for buyers to switch to another brand of vehicle or to start using another
type of transportation
● Buyers can easily choose an alternative car brand
● Buyers are price sensitive, and their decision is often based on how much a vehicle costs
● Buyers do not threaten backward integration
Threat of substitutes (weak)

● There are many alternative types of transportation, such as bicycles, motorcycles, trains,
buses or planes
● Substitutes can rarely offer the same convenience
● Alternative types of transportation almost cost less and sometimes are more environment
friendly
Competitive rivalry (very strong)
● A moderate number of competitors

● If a firm decided to leave an industry, it would incur huge losses, so most of the time, it either
bankrupts or stays in the automotive industry for a long time
● The industry is very large but matured
● The size of competing firms vary, but they usually compete for different consumer segments
● Customers are loyal to their brands
● There is a moderate threat of being acquired by a competitor
Specialty Chemicals Sector in India is quite technical and capital intensive. Which of Porter’s Five
Forces does this statement refer to:
A. Rivalry among existing competitors

B. Threat of New Entrants
C. Threat of Substitutes
D. Bargaining Power of Buyers
Porter’s Value Chain
- Value chain analysis divides various business activities into primary and supports activities and
analyses them, keeping in mind their contribution towards value creation to the final product.
- To do so, inputs consumed by the activity and outputs generated are studied to decrease costs
and increase differentiation.
- Value chain analysis is used to identify activities within and around the firm and relate these
activities to an assessment of competitive strength.
- While primary activities include the activities that are performed to satisfy external demand,
secondary activities are performed to satisfy internal requirements.
Primary Activities Support Activities

Inbound Logistics Firm Infrastructure
Operations Human Resource Management
Outbound Logistics Technology Development
Marketing and Sales Procurement
Service
The Primary Activities in depth are as follows:
● Inbound Logistics: These are activities that involve maintaining relationships with suppliers to
carry out activities such as data collection, receiving, storing, handling and dissemination of
inputs. Inputs include plastic, steel, nuts etc.
● Operations: these are the ‘transformation activities’, which change the inputs into outputs to
sell them to consumers. It includes activities such as designing, cutting, plastic assembly,
moulding and pressing, inspection.
● Outbound Logistics: The activities delivering our product to the customers. They are
collection, storage, and distribution systems. They may be internal or external to our
organization.
● Marketing and Sales: to inform the buyers about our product and persuading them to buy the
product. We tell them about the benefits we offer, including advertising, promotions,
selection of channel, sales force management.
● Services: activities carried out to maintain the value of our product to our customers after the
purchase. These include any services as a part of product offering like support or an additional
after sales service.
The Support Activities in depth are as follows:
The role of support activities is to complement the primary activities as per Porter’s Value Chain. The
effective implementation of the primary activities hinges on how well established and advanced the
firms support functions are.
• Procurement (purchasing): This is what an organization does to get the resources it needs to
operate. This includes finding vendors and negotiating the best prices. This support function
is of key importance to businesses. It acts as an intermediary between the place where
demand is generated and the place where supply is created. The business’s role is to bridge
the gap by ensuring that the prices at which we acquire the raw materials, semi-finished and
finished goods facilitate product bundling, add a feasible and sustainable profit margin and
then sell it at an attractive price to the consumers.
● Human resource management: This is how well a company recruits, hires, trains, motivates,
rewards, and retains its workers. People are a significant source of value to create a clear
advantage with good HR practices. The human element forms a significant source of
sustainable competitive advantage for a business. Any new employee would be thoroughly
inducted with regards to the protocols of the firm, the working environment, the grievance
redressal mechanism and steps to take in case of any unforeseen event such as a fire at the
premises. Employers look for strong ethical values, a commitment to contribute towards the
growth of the firm and fostering strong coordination with other members of the team when
selecting employees. They must also be informed about the repercussions if the employee
enters into any sort of misconduct such as pilferage or sexual harassment. The employees
would be viewed as value generators, and all efforts would be taken to ensure that members
are motivated and committed to staying with the company for many years.
● Technological development: These activities relate to managing and processing information

and protecting a company's knowledge base. Minimizing information technology costs,
staying current with technological advances, and maintaining technical excellence are sources
of value creation. Being a business in the 21st century, having well established IT systems and
infrastructure becomes a crucial asset that a business can leverage. The systems would be
backed by proper mechanisms to ensure the utmost safety of the databases and to prohibit
unauthorised access to the system through a password. Matching orders from customers with
the inbound supply would be an automated process that would reduce the lead times and the
overall inventory in the warehouses.
● Infrastructure: These are a company's support systems and the functions that allow it to
maintain daily operations. Accounting, legal, administrative, and general management are
examples of necessary infrastructure that businesses can use to their advantage. Proper lines
of communication would be established to ensure that there is co-ordination. Consultants
and lawyers would be used in case of any legal lawsuits and timely action taken to defuse any
issue that arises.
Porter’s Generic Competitive Strategies
● These strategies propose different ways through which businesses

can differentiate themselves from competition.
● Porter called the generic strategies "cost Leadership" (no frills),

"differentiation" (creating uniquely desirable products and
services) and "focus" (offering a specialized service in a niche
market). He then subdivided the focus strategy into two parts:
"cost focus" and "differentiation focus."
Cost Leadership Strategy
● It involves the business making a product of similar quality to its rivals but at a lower cost.
● There are two main ways of achieving this within a cost leadership strategy:
1. Increasing profits by reducing costs, while charging industry-average prices.

2. Increasing market share by charging lower prices, while still making a reasonable profit on each
sale because costs are reduced.
This can include:
● Building state of the art efficient facilities (may make it costly for competition to imitate)
● Maintain tight control over production and overhead costs
● Minimize the cost of sales, R&D, and service
● For example: Mc Donald’s Speedy System;
● For example: Reliance Jio is a perfect example of a price leader, it slashed the price of mobile
tariffs in India and became one of world’s fastest growing telecom company.
Porter’s 5 Forces Model and Cost Leadership Strategy
A cost leadership strategy may help to remain profitable even with: rivalry, new entrants, suppliers'
power, substitute products, and buyers' power.
● Rivalry: Competitors are likely to avoid a price war, since the low-cost firm will continue to
earn profits after competitors compete away their profits (for example airlines and JIO)
● Customers: Powerful customers that force firms to produce goods/service at lower profits
may exit the market rather than earn below average profits leaving the low-cost
organization in a monopoly position. Buyers then lose much of their buying power.
● Suppliers: Cost leaders are able to absorb greater price increases before they raise the price
to customers.
● Entrants: Low-cost leaders create barriers to market entry through its continuous focus on
efficiency and reducing costs.
● Substitutes: Low-cost leaders are more likely to lower costs to entice customers to stay with
their product, invest to develop substitutes, purchase patents.
Obtain a Cost Advantage Risks

• Determine and control cost • Technology
• Reconfigure the value chain as needed • Imitation
• Tunnel vision
Companies that are successful in achieving cost leadership usually have:
● Access to the capital needed to invest in technology that will bring costs down.
● Very efficient logistics.
Jet and Kingfisher committed cardinal branding errors by renaming their low-cost carriers in their
own image.
A not-for-profit can use a cost leadership strategy to minimize the cost of getting donations and
achieving more for its income, while one pursuing a differentiation strategy will be committed to the
very best outcomes, even if the volume of work is smaller.
Local charities are great examples of organizations using focus strategies to get donations and
contribute to their communities.
Differentiation Strategy
● Differentiation involves making your products or services different from and more attractive
than those of your competitors. How you do this depends on the exact nature of your
industry and of the products and services themselves, but will typically involve features,
functionality, durability, support, and also a brand image that your customers value.
● For example: Starbucks, Apple
Like the cost leadership strategy, the differentiation strategy also carries risks such as the following:
1. Customers may decide that the cost of uniqueness is too high. In other words, the price differential
between the standardized and differentiated product is too high. Perhaps the firm provides a
greater level of uniqueness than customers are willing to pay for. (What makes Apple brilliant is that
throughout several years it has been able to avoid this)
2. The firm’s means of differentiation no longer provides value to customers. For instance, what is the
value of prestige or exclusivity?
3. How long will they last as customers become more sophisticated? Customer learning may reduce
the customer’s perception of the value of the firm’s differentiation. Through experience, customers
may learn that the extra price for a differentiated good is no longer a value.
Counterfeiting - Increasingly, counterfeit goods (products that attempt to convey differentiated

features to customers at significantly reduced prices) are a concern for many firms using the
differentiated strategy.
Focus Strategy
● Concentrate on particular niche markets, by understanding the dynamics of that market and
the unique needs of customers within it. Develop uniquely low-cost or well-specified
products for the market.
● Because they serve customers in their market uniquely well, they tend to build strong brand
loyalty amongst their customers. This makes their particular market segment less attractive
to competitors.
● As with broad market strategies, it is still essential to decide whether you will pursue cost
leadership or differentiation once you have selected a focus strategy as your main approach.
For example: Cred.
Focus is not normally enough on its own
● The key to making a success of a generic focus strategy is to ensure that you are adding
something extra as a result of serving only that market niche.
● It is simply not enough to focus on only one market segment because your organization is
too small to serve a broader market (if you do, you risk competing against better-resourced
companies' offerings).
● Your choice of which generic strategy to pursue underpins every other strategic decision you
make, so it is worth spending time to get it right.
● But you do need to make a decision: Porter specifically warns against trying to "hedge your
bets" by following more than one strategy. One of the most important reasons why this is
wise, is that the things you need to do to make each type of strategy work, appeal to
different types of people. Cost Leadership requires a very detailed internal focus on
processes. Differentiation, on the other hand, demands an outward-facing, highly creative
approach.
● So, when you come to choose which of the three generic strategies is for you, it is vital that
you take your organization's competencies and strengths into account.
Zara – Focused Differentiation Strategy [Fast Fashion Retailing]

Zara excels by targeting technology investment at the points in its value chain where it will have the
most significant impact, making sure that every dollar spend on tech has a payoff.
IKEA– Focused Cost Leadership Strategy [Fast Fashion Retailing]
IKEA sells a lifestyle that customers around the world embrace as a signal that they have good taste
and recognize value.
Mi has used which of the following strategies:
A. Focused Differentiation
B. Cost Focus
C. Cost Leadership
D. Differentiation
Different activities of an organisation that affect its competitiveness:
1. Purchasing
Cost Advantages: Larger quantities result in bulk discounts, lower transportation costs thereby
lowering the costs of production.
Quality Advantages: Improved quality in the end product with a higher quality of raw materials
used.
2. Production
Cost Advantages: With large quantities produced and sold by larger organizations, they can
experience economies of scale, lower storage costs by keeping stock levels low and standardised
output produced.
Quality Advantages: Large organizations have access to advanced manufacturing systems and
technology and a dedicated human resource department which ensures employing highly trained
staff with continuous training.
3. Marketing
Cost Advantages: Use B2C model to reduce middlemen margin; this is word-of-mouth promotion.
Quality Advantages: Using market research, find out more about customer needs in depth, use
branding, large promotional budgets to advertise the goods more.
4. Service
Cost Advantages: Outsourcing non-core activities.
Quality Advantages: outsourcing to highly skilled staff whose core business is the activity that the
organisation is outsourcing.
APPLY YOUR KNOWLEDGE(AYK)

Answers:
AYK 1
Answer: D
AYk 2
Answer: D
AYK 3
Answer: A. Yes, as Sole Proprietors have unlimited liability
AYK 4
Answer: External Stakeholder
AYK 5
Answer: A
AYK 6
Answer: A. Community vs Shareholders
AYK 7
Answer: C. Political
AYK 8
Answer: B. Dismissal
AYK 9
Answer: A
AYK 10
Answer: False only Aggregate DD & SS comes under Macroeconomics
AYK 12
Answer: B. False
Inflation caused by Excessive costs is known as Cost Push Inflation
AYK 13
Answer: A
AYK 14
Answer: A
AYK 15
Answer: the maximum price is set below the current equilibrium price causing a temporary shortage
in supply
it can be seen that a minimum floor price is set above the prevailing market equilibrium price. In
such cases, there will be a temporary excess supply in the market
AYK 16
Answer: B
AYK 17
Answer: A
AYK 18
Answer: A
AYK 19:
Answer: False
AYK 20:
Answer: B
AYK 21:
Answer: B
Syllabus area B:
Business organisation structure, functions & governance
Organisational Structures and Design in Business 77
Organisational Structures and Design in Business
The Formal and Informal Business
Syllabus area B1
- Explain the informal organisation and its relationship with the formal organisation.
- Describe the impact of the formal organisation on the business.
Informal organisation
The informal organization represents the existing network of relationships within the organization.
This network is established due to common interest and friendship that has developed overtime
between members of the staff from different departments or within the department itself. It keeps
on changing based on time and trends.
The informal organization acts as a representation of the organizational culture
Advantages Disadvantages
• An informal network will help promote • There might be a conflict between formal
cross communication between teams and informal structure which may
leading to better innovation. promote inefficiency and
miscommunication in business meetings.
• Higher level of motivation and
productivity. • Informal communication lines could be
given more importance than the formal
• Help maintain decorum and social lines.
control in the organisation, as managers
communicate more freely and without • In the event of resistance, the manager
coming across as judgemental. will face it from not only formal but also
the informal organizations due to the
grapevine effect.
• For example: Restructuring in the sales

division will cause unrest in the IT division
via informal communication lines.
Informal organisation’s relationship with the formal organisation
Managers must tactfully deal with the informal organization. They must take the following steps in
order to ensure that informal organization does not negatively impact organizational efficiency:
● Amend the former structure to complement the informal structure

● Include informal structure as a factor in decision making
● Have a free and open structure for the organization to thrive
Thereby, managers must ensure there is integration between the groups, formal and informal, if not
then have training courses and reduce the impact of an informal organization.
Informal organisations exist in every organizational structure.
A. True
B. False
Business organisation, structure and design
Syllabus area B2
- Describe Mintzberg’s components of the organisation and explain the different ways in which
formal and informal organisations may be structured:
(i) Entrepreneurial
(ii) Functional
(iii) Matrix
(iv) Divisional (geographical, by product, or by customer type)
(v) Boundaryless (virtual, hollow or modular)
- Explain basic organisational structure concepts:
(i) Separation of ownership and management
(ii) Separation of direction and management
(iii) Span of control and scalar chain
(iv) Tall and flat organisations
(v) Outsourcing and offshoring
(vi) Shared services approach.
- Explain the characteristics of the strategic, tactical and operational levels in the organisation
in the context of the Anthony hierarchy.
- Explain centralisation and decentralisation and list their advantages and disadvantages.
- Describe the roles and functions of the main departments in a business organisation:
(i) Research and development
(ii) Purchasing
(iii) Production
(iv) Direct service provision
(v) Marketing
(vi) Administration
(vii) Finance.
- Explain the role of marketing in an organisation
(i) Definition of marketing
(ii) Marketing mix
(iii) Relationship of the marketing plan to the strategic plan.
Organisational Structure
An organizational structure is the manner in which assignments and work is allocated among the
employees within an organization.
It outlines the rules and responsibilities of individuals and groups within the organization.
There are different types of organizational structure based on the size, approach and the industry in
which organization operates, each having its own distinct advantages and disadvantages.
Different Organisational Structures
● Entrepreneurial
● Functional
● Matrix
● Divisional (geographical, by product, or by customer type)
● Boundaryless (virtual, hollow or modular)
1. Entrepreneurial
This structure is when the owner and manager is one. It is often used in small businesses which are in
the early stages of the development. This is also when the owner has specialist knowledge of the
product or service the organization provides.
● Faster decision making, since there is only ● Suitable only for small organizations. As a
one person which who needs to be big business is difficult to make with only
consulted in the decision making process. one person’s talent, energy and
supervision.
● Dynamic response to market changes as,
with one person any new market trends or ● Overdependence on the manager/owner as
changes can be quickly implemented in the all strategic decisions are made by the
business model. manager /owner thereby there is no
external views and opinions.
● Close to the employees as the owner
directly communicates with all the ● There is lack of career growth for
employees instead of other employee / employees.
managers.
● Direct control over employees. The owner

has direct control over the employees in
terms of responsibilities and assignments
allocated to them.
● Alignment of goals as both the owner and

businesses goals are the same hence no
conflict.
2. Functional
The organization is divided into different departments with each department having a specific and
common task to perform. Herein different major business functions are assigned to different
departments. This is prevalent in small organizations with less geographical reach and product line.
• Instead of duplicating similar activities in • Managers may try to concentrate power
different branches, these activities are and also work for personal benefit
grouped together. This reduces costs, rather than the company’s benefit.
time and brings people with similar
talents together. • Expensive in terms of the administration
cost and time utilised in meetings.
• There is a possibility of career growth for
the employees. • Duplication of resources and may lead
to loss of control.
• Due to added layers of hierarchy, the

decisions made will be slower.
3. Divisional
Under such a structure, the organisation is segregated into various DIVISIONS – These could be:
1. Product based (4-wheeler division, 2-wheeler division, 3-wheeler division, etc.)

2. Geography based (Indian division, African division, etc)
3. Customer based (Corporate clients, retail clients, urban client’s division, etc)
Divisions usually run as profit centres i.e., they are responsible for their own costs and profit
margins. They are separately identifiable part of the business also known as Strategic Business Units.
Explain divisional structure individually. With advantages and disadvantages.
Geographical Structure
This is a type of divisional structure where each division deals with a specific geographic area
E.g. – Many large MNC like McDonalds, with operations all around the globe split the different
directions based on continents thereby Asia Division, Europe Division, North America Division etc.
• A geographical widespread and reach of • Expensive in terms of the administration
the business organization. cost and time utilised in meetings.
• Allow scope for localization and encourages • Dilutes the functional authority
decision making rather than acting as
request handlers. • Duplication of resources and may lead to
loss of control
• Helps nurture managers for more strategic
and managerial roles. • Many more are similar to that of Divisional
structure
• Allows top management to focus on
strategic issues.
4. Matrix
A combination of functional and divisional structure wherein there are multiple managers depending
on the product type and function related to it. Aimed to take advantage of both divisional and
functional structures
For example: The product manager and production department will have authority over the teams
working on it thereby dual reporting and dual supervision. Therefore, a staff member working for sales
of Product B, will report to both the sales manager and the production manager for product B.
• Best of both worlds - Functional and Divisional • Expensive in terms of the administration cost
structure and time utilised in meetings
• Customer oriented and flexible in nature • Dilutes the functional authority
• Encourages teamwork and free movement of • Multiple managers to report to and may cause
opinions conflicts
5. Boundaryless (virtual, hollow or modular)
This contemporary model of unstructured organizational design is more flexible in nature as it is a

design which is not limited by chain of control or formal departmentalization rather has its focus on
flexibility. The different types of boundaryless organizations:
1. Hollow Organizations
2. Virtual Organizations
3. Modular Organizations (These are based on the degree of business functions that are
outsourced)
1. Hollow Organizations
These organizations split their functions into 2 categories – core and non-core functions.
Core functions/activities are crucial to a business’ existence- which is why they are performed in-
house. Non-core functions/activities do not directly impact a business’s existence which is why they
are mostly outsourced to specialist organisations.
For example: Cafeteria or cleaning services may outsource to an external specialist organisation.
2. Virtual Organizations
This is when an organization has most of its core and non-core functions outsourced, and it simply
exists as a virtual organization acting as a network of contracts.
For example: Amazon/E-bay. These companies get the products from the wholesaler, their products
are delivered by external courier service- they just act as a facilitator platform.
3. Modular Organizations
This is an organization which rather than manufacturing all components of their products by
themselves breakdown the manufacturing process and have the separate components and parts
manufactured by external manufacturers and assemble themselves by their own.
For example: Most of Apple parts are manufactured by Foxconn and Wistron who have manufacturing
facilities in emerging and underdeveloped economies. After accumulation of these parts from them
they are assembled at Apple’s own factories.
Which of the following is a disadvantage of Matrix Structure?
A. Expensive in terms of the administration cost and time utilised in meetings

B. Managers may try to concentrate power and also work for personal benefit rather than the
company’s benefit.
C. Suitable only for small organizations. As a big business is difficult to make with only one
person’s talent, energy and supervision.
Answer: A
Company Beta has decided to that Cafeteria & Cleaning Services will be outsourced to an external
specialist organisation to focus on more core activities Which boundaryless structure is Company
Beta planning?
A. Virtual
B. Hollow
C. Modular
Answer: B
“Mintzberg’s Organizational Configurations”
Henry Mintzberg in his book “The Structuring of Organisations and Structures in 5s: Designing Effective
Organisations” has a theory that all organizations are comprised of 5 key building blocks which are as
follows:
1. Strategic Apex
2. Techno Structure
3. Support Staff
4. Middle Line
5. Operating Code
Each of the building represents people that exist within the organisation:-
1. Strategic Apex - Represents the senior level of management

E.g. – The Board of Directors and CEO
2. Middle Line – Represents the middle Level of management

E.g. – The departmental heads within the organization
3. Operating Core – represents the employees directly involved in providing the service or
manufacturing the product
E.g. – For a manufacturer of bottles, the operating core would be the assembly line workers and
for a retailer this represents the sales people
4. Technostructure – represent the employees who provide input on technical aspects which do
not relate to the core operations of the business
E.g. – Management accountants and IT workers
5. Support Staff - administrative and support staff who provide indirect services
E.g. – cleaning workers and secretaries
Mintzberg believed that one of the building blocks would dominate the other depending on the type
of organization
Organisation Explanation
Structure
[Building Block which
dominates]
Simple Structure In this simple/entrepreneurial structure, the top manager has a

[Strategic Apex] concentration of power. While it may be flexible in decision making, it
places reliance on a few managers thus struggling to handle growth
Machine Bureaucracy This is more common in larger and wide spread organizations with formal
[Technostructure] work and operating procedures. There is a standardized approach to work
and is prevalent in manufacturing companies and government
organizations
Professional Heavy reliance on skilled staff with decentralized organisations who have
Bureaucracy heavy bureaucracy with stringent rules and procedures. Prevalent in law
[Operating Core] offices and hospitals
Divisionalised Similar to the divisional structure, divisional heads represent the middle
[Middle Line] line managers and is responsible for the operational level decision making
and planning. The BOD and CEO are responsible for this strategic level
decision making and planning
Adhocracy Core focus is on innovation and decentralised decision making who use
[Supporting Staff / their own expertise and knowledge to suit the dynamic environment as
Operating Core]
the job does not require standardized output. Prevalent in tech and
pharmaceutical industries
Missionary Business mission and beliefs are strictly adhered to above else
[Ideology]
Basic organisational structure concepts
(i) separation of ownership and management

(ii) separation of direction and management
(iii) span of control and scalar chain
(iv) tall and flat organisations
(v) outsourcing and offshoring
(vi) shared services approach.
Some terms you must know:
Separation of Ownership and Management
Separation of ownership and control is the situation when people who own the company i.e. the
shareholders, are not the same people responsible for the management and operations of the
company i.e. the board of directors.
This situation often occurs in publicly listed companies which are owned by a number of different
external shareholders whose interests are represented by the board of directors. The BOD are
specialist managers hired for their experience, set of skills and intent of running the day-to-day
operations of the business without involving the shareholders.
This is not a problem in small companies as there is no separation of ownership and control as the
owner is the one who is also responsible for the management.
Separation of Direction and Management
Unlike the separation of ownership and management, this refers to the board of directors being the
management and the direction being delegated to managers.
A wide board of directors may occupy themselves with the strategic level of planning and strategy.
The execution of this may be done by the managers at the operational level
To conclude we can say directors will focus on the strategic level while managers will focus on the day-
to-day operational level
Example: directors may decide to launch a new product line, the managers will be responsible for the
type of marketing strategy and other such operational decisions while introducing this new product
line.
Shareholders want heavy dividend payments whilst management and directors wish to retain these
profits and make capital intensive investments. What can this be described as?
A. Separation of Direction and Management

B. Separation of Ownership and Management
Scalar Chain
Scaler chain refers to the line of authority which exists within the organisational hierarchy and is
between the senior level and the junior level of staff/management. It can be found up and down the
chain of command. It is the total number of management levels that exist within an organisation.
Chain of Command
The continuous line of authority that extends from the upper levels of an organization to the lowest
levels of the organization and clarifies who reports to whom.
Authority
The rights inherent in a managerial position to tell people what to do and to expect them to do it.
Responsibility
The obligation or expectation to perform.
Unity of Command
The concept that a person should have one boss and should report only to that person.
Employee Empowerment
Increasing the decision-making authority (power) of employees.

Span of Control
The number of employees who can be effectively and efficiently controlled by a manager.
Width of span is affected by:
• Skills and abilities of the manager

• Employee characteristics
• Characteristics of the work being done
• Similarity of tasks
• Complexity of tasks
• Physical proximity of subordinates
• Standardization of tasks
• Sophistication of the organization’s information system
• Strength of the organization’s culture
• Preferred style of the manager
Tall and Flat Organizations
Flat structure organisations have smaller levels and a wider span of control at each level thereby
managers should be able to delegate the tasks assigned well between his subordinates.
Tall structure organisations have many different levels of hierarchy with smaller spans of control.
There is concentration of power at top levels and more levels of employee control.
Offshoring
This is the process of outsourcing some of the non-core business functions to a foreign country. This
creates more opportunities for the skilled labour of the home country and takes advantage of lower
costs in terms of infrastructure.
The drawback may be difficulty in coordination with foreign culture and barriers in the form of
language and differences in culture.
E.g. – Most large MNC’s have outsourced their IT functions to emerging economies like India which is
why top IT companies in India despite having employees and offices in India derive more than 90% of
their sales revenue from abroad [This includes TCS, Wipro and Infosys]
Shared Services Approach
As the term suggest there is a certain service or an aspect within the organisation which is required
by all departments and instead of having a person within all these departments who specialises in that
particular skill or service, it makes more sense to centralise that service into a department of itself
which they can directly coordinate with the other departments.
One of the most common services which are used is IT.
Shared services are not just about centralising the function into one place rather it involves running
the service as a separate business unit and charging the other business departments for the use of
that service.
This comes with the advantages of:
● No duplication of rules
● Savings in cost time and effort
● Improved quality and consistency while providing the service
Centralisation and Decentralization
Centralization Decentralization
A higher degree of decision making is Organizations in which decision making is
concentrated at upper levels in the pushed down to the managers who are closest
organization. I.e., the top-level managers make to the action.
most of the decisions and dictate it to the lower
staff.
E.g.: The CEO decides the monthly stocking E.g.: Individual Factory Managers decide the
carried by each Factory. quantity of inventory they must keep.
Factors affecting the level of decentralization:
1) Management Style
2) Capabilities of the employees and management
3) Geographic vastness of the company
4) The scale of the company.
Centralization
● Environment is stable.
● Lower-level managers are not as capable or experienced at making decisions as upper-level managers.
● Lower-level managers do not want to have a say in decisions.
● Decisions are relatively minor.
● Organization is facing a crisis or the risk of company failure.
● Company is large.
● Effective implementation of company strategies depends on managers retaining say over what
happens.
Decentralization
● Environment is complex, uncertain.

● Lower-level managers are capable and experienced at making decisions.
● Lower-level managers want a voice in decisions.
● Decisions are significant.
● Corporate culture is open to allowing managers to have a say in what happens.
● Company is geographically dispersed.
● Effective implementation of company strategies depends on managers having involvement and
flexibility to make decisions.
Levels of Strategy
In every organization, every management level has a different responsibility attached with their role
and designation which is why when devising a strategy or plan of action, every management level will
device one such strategy based on their level within the organization.
The different levels of strategy are as follows based on the Anthony Hierarchy:
1. Strategic Planning
This is done by the senior most level of management and requires making long term strategic decisions
for the business organization.
E.g. – The Board of Directors deciding on which products to sell and any mergers and acquisitions to
be made.
2. Tactical Planning / Business Strategy
This is undertaken by the middle level managers who make plans for the individual departments and
decide on how to deploy their resources in order to achieve the long-term strategic goal set by the
corporate Strategy.
E.g. – Deciding on advertising and marketing strategies.
3. Operational Planning / Functional Strategy
This is undertaken by junior managers and supervisors. This involves how to get the task done which
is why these plans are extremely detailed and practical rather than theoretical like the strategic plans.
E.g. – Determining factory layout and employing new store workers.
The roles and functions of the main departments in a business organisation:
(i) Research and development

(ii) Purchasing
(iii) Production
(iv) Direct service provision
(v) Marketing
(vi) Administration
(vii) Finance
Despite organizations working in different sectors of an industry, many organizations have similar
basic departments which the same rules and responsibilities irrespective of the type of organization
or the sector of industry in which the organization operates.
Department Role Key Concern

Research and Development of new products and Identifying upcoming customer
Development services. needs.
Improvement in existing products Generating new ideas.
and services Development and testing of new
products.
Purchasing Procurement of the necessary raw Deciding on the payment terms and
materials, semi-finished goods and pricing.
finished goods for the business Maintaining quality of raw materials.
Handling inventory levels and
ensuring timely delivery of goods.
Production Conversion of raw material i.e., High quality goods produced with
inputs to finished goods i.e., output minimal wastage and high efficiency
fulfilling the production deadlines
and maintaining the quality.
Direct Service Provider of business services to Quality.

Provision clients [example- consulting,
advisory services] Timely scheduling.
Marketing Identification of existing customer Product concept

needs
Promotion strategy
Market research
Distribution strategy
4 Ps of Marketing
Pricing strategy
Administration Administration and relevant Efficient information processing

paperwork.
No gaps in paperwork
Day to day Transaction processing
Finance Finance related aspects include the Ensuring timely, accurate and
following: complete records.
● Accounting
● Financial reporting and Management and financial reporting
analysis on a monthly and annual basis
● Budgeting
● Capital requirements
The role of marketing in an organisation
(i) Definition of marketing

(ii) Marketing mix
(iii) Relationship of the marketing plan to the strategic plan
Marketing
“The management process that identifies, anticipates and supplies customer needs efficiently and
profitably” by Chartered Institute of Marketing.
The key emphasis is on customer needs and expectations. Breaking down the above definition into 4
parts:
● Identification and anticipation of customer needs - fulfilled via thorough market research
● Satisfying the customer needs - this relates to the product aspect of the 4 P’s thereby is about product
design and product development
● The term efficiently here means the distribution aspect off marketing
● Profitability - It is about decisions regarding price and promotion aspect
Present-day marketing involves much more than just advertising and the digital aspect of marketing
may take over the entire industry. Commonly known or referred to “Digital Marketing”.
Marketing Orientation
The focus in marketing is on satisfying customer needs which gives rise to a system wherein customers
are placed at the centre of the organizations decisions and as their main focus.
Thereby truly following and believing in “Customer is King” and a customer centric approach will help
gain a competitive advantage over competitors and even in incorporating customers in corporate
culture and strategic decision making.
Product Orientation
In this approach the management views that the success achieved via reducing goods and services of
optimum quality. Company operations should focus their efforts on quality control and research and
development.
Although it is reasonable to assume that consumers will welcome better quality products, there are
some drawbacks to this assumption:
● Unnecessary, unappreciated and excessive product features

● The final cost of the product may be above the company expectations and the company may
overspend on the perfect product for which customers are not willing to pay
There could be no better EXAMPLE for this than Apple. This company has boasted that it offers the
customers not what they need but what they deserve. Apple due to innovation, sheer brilliance in
marketing and a strong home market has managed to avoid drawbacks we discussed earlier.
Marketing Mix
It is a group of the controllable mix of variables, which the company can tweak and remix in order to
better cater to its target market.
According to Kotler et al. [1999] “The marketing mix is a set of controllable, tactical marketing tools...
that the firm blends to produce the response it wants in the target market.”
4 P’s – Product, Price, Place, Promotion
Product This includes the product features, durability,

design, branding related aspects, packaging,
warranty and guarantee, after sales services
Price Pricing policy, discounts and allowances offered,

credit policy, payment terms
Place Distribution, transportation, management of

outlets, warehouses and other storage related
aspects
Promotion Advertisement, word of mouth promotion,

[Distribution] publicity, personal selling
Marketing Mix as the term suggest is to be managed by the marketing department and is mainly about
influencing the customer demand.
Additions by Kotler to the 4 P’s:
● People – This takes into regard both employee and customer needs.
● Processes – this refers to the systems through which the service is carried out.
● Physical Evidence – this refers to any demonstrations, testimonials and propositions relating
to service.
Relationship of the Marketing Plan to the Strategic Plan
Product Issues
The two main product issues to consider:
1. Product Definition –
Core Product: Fundamental service or benefit that the customer is really buying
Basic Product: Containing only those attributes or characteristics absolutely necessary for its
functioning but with no distinguishing features
Expected Product: A set of attributes and conditions buyers normally expect when they purchase the
product
Augmented Product: Exceeds customer expectations
Potential Product: Encompasses all possible augmentations and transformations the product might
undergo in future
The core benefit is the fundamental level. This is the service or benefit the customer is really buying
for.
Example: A hotel guest is buying rest and sleep. Marketers must see themselves as benefit providers.
Basic Product: At the second level, the marketer must turn the core benefit into a basic product. Thus,
a hotel room includes a bed, bathroom, towels, desk, dresser, and closet.
Expected product: At the third level, the marketer prepares an expected product, a set
of attributes and conditions buyers normally expect when they purchase this product.
Hotel guests minimally expect a clean bed, fresh towels, working lamps, and a relative degree of
quietness.
Augmented product: At the fourth level, the marketer prepares an augmented product that exceeds
customer expectations. It may include WIFI Connection, free breakfast, free pick up and drop facility
to airports.
2. Product Positioning –
How well does our product position itself?
Price Issues
The 4 C’s when deciding the price of the product:
1. Cost – the price should cover all the incurred costs

2. Customers – the customer’s willingness needs to be factored in
3. Competition – Are business’s prices competitive or lower than the competition
4. Corporate Objectives – For e.g. If the business organization is following a cost leadership
strategy, then it will try to have the lowest price in the market
Pricing Tactics
1. Cost plus pricing: the total cost plus the mark up is added to arrive at the price
2. Penetration pricing: a low price is charged in order to penetrate the markets
3. Price discrimination: different prices charged to different people based on the market
conditions. For example; airfare for the same flight is different on weekdays and weekends.
4. Perceived quality pricing: a high price is set to reflect/ create an image in the minds of the
consumers that the product is of very high quality.
5. Loss leaders: certain products may be sold at a loss so that people buy the other more
profitable products. Example- Many hypermarkets and supermarkets sell certain products at
low profit margins so that people enter the store and buy the other high profit margin
products as well.
6. Price skimming: for the product launch, a high level of prices is charged. This is later decreased
to increase the level of demand
7. Captive product pricing: customers must buy a pack of two/three bundles of products. For
example: Louis Phillipe, Arrow and Peter England often used a captive product pricing policy
wherein if you buy one you get the second one at 50% off
Place Issues
Depending on what type of product it is, consumer or industrial and what channels are they using for
their distribution; they can either:
Sell Directly – Suitable for B2B products
Sell Indirectly - Suitable for B2C products which go through various channels to take advantage of
breaking bulk
Promotion [Distribution] Issues
Promotion is used by marketers to move the customer along the AIDA flow: Awareness; interest;
desire; action.
Promotion tactics include advertisements, sales promotion, personal selling and anything that is used
to communicate the business and its products to the customers.
Strategic Marketing Process
The marketing process has a significant impact on the strategic planning of an organization in the
following manner:
1. Strategic analysis of the form and its business environment
Marketing analysis includes the following aspects:
● Analysis of the competitor strategy

● Analysis of the brand name, quality of the product and brand reputation
● Market research about the product and brands reach
● Analysis of customer expectations and power
2. Strategic Choice
Marketing decisions to be taken will revolve around:
● The product line to be sold

● Segmentation of the markets
● Developing strategies for marketing mix – 4Ps
3. Strategic implementation
Implementation of marketing strategies will include the following actions:
● Budget setting for media and advertising

● Budget setting for sales and marketing related aspects
● Monitoring, control and variance analysis
Strategic market research will be carried out as follows:
1. Desk research
This involves using the secondary sources of data – research surveys, government statistics and the
use of internal business records to predict and analyse information related to sales and other
customer related aspects.
2. Field research
This is a primary source of data where people are asked their views on different products. Sometimes
there is a live sampling of products, where people are asked to try those products and their reactions
and opinions are recorded for further research purposes.
3. Test marketing
Before the launch of a new product, a test marketing campaign is launched on a sample population
where all the necessary traits and aspects of the larger marketing campaign gauge the reaction of the
same.
After making minor improvements or any necessary suggestions, the marketing campaign is then
launched on the national, international or the intended scale. This has a track record of being effective
and successful on a smaller population.
Strategic Choice
Markets can be segmented in many different ways
1. Geographic
2. Demographic
3. Psychological
4. Socio economic
Attractive market segments can be selected using a variety of criteria:
1. Size
2. Scope of growth
3. Level of competition
(Targeting strategies include: differentiated, undifferentiated, concentrated)

101
Organisation culture and committees in business organisation
Organisational culture in business
Syllabus area B3
- Define organisational culture.
- Describe the factors that shape the culture of the organisation.
- Explain the contribution made by writers on culture:
(i) Schein – determinants of organisational culture
(ii) Handy – four cultural stereotypes
(iii) Hofstede – international perspectives on culture
Organisational Culture
Organisational culture is basically how the business functions. The policies and methods it enacts in
its operation. Some definitions of Organisational Culture are:
‘The way we do things around here’ by Handy
‘The specific collection of values and wrong that are shared by people and groups in an organization
and that control the way they interact with each other and with stakeholders outside the
organization’ by Hill and Jones
Components of Culture
There are 3 key elements to any organization’s culture:
1. A set of norms – These norms suggest what is or what is not appropriate and the thing that is
apt to do in the organization [E.g. – Dress codes at an organisation]
2. Symbols and symbolic actions – certain rituals like bring your child to work day
3. A set of shared values and beliefs – these underline what aspects of the culture are important.
E.g. – A belief in privacy and work life balance
Factors that shape the culture of the organisation
There are six major factors that shape the culture of an organization:
1. Size - the strength of the organization in terms of number of employees, employee turnover and the
total physical size
2. Technology - the level of technological adaptability and in what processes is technology involved?
3. Diversity - is the organization diverse in terms of product range, varied geographical locations and
cultural makeup of the stakeholders?
4. Age - how old is the business - do these strategic level decision makers have experience?
5. History - any success or failure the company has had in the past from which they can draw on the
lessons and experience of what has worked and what has failed
6. Ownership - who owns the organization and what is the type of organization? A sole trader,
partnership, private limited company or a public limited company?
There are many other indirect influences on the culture of the organization:
● Conflict tolerance
● Level of risk tolerance
● Reward system
● Communication pattern
● Education qualification of the people employed
● Degree of individual initiative
Some takes on organisational culture by renowned writers:
Schein – Determinants of Organisational Culture
Schein in his studies concluded that the initial leaders of the organization i.e.t the originators of the
company create the culture of the organization. Any future leaders will be selected only if they support
the original culture thereby the link between the original culture and leadership style is very strong,
relevant and not easily changeable. In order to lead any organization the leader must also understand
the culture of the organization.
As per Schein culture is divided into 3 levels:
1. Artefacts – these are the aspects of the culture which are easily visible and can be changed.
E.g. Dressing Style – Formal [Investment Banks], Casual [Tech Companies] or Semi Formal
[Mid-sized Organisation]
2. Espoused Values – these are the strategies and goals of an organization including company
slogans
3. Basic Assumptions and Values – these are aspects of a culture which exist at an unconscious
level and are difficult to be seen and identified directly. Identifying the basic assumptions and
values is one of the most difficult to understand aspect and a major contributor of failure
when implementing change.
Top investment banks require their employees to be well dressed in formals preferably in suits. This
refers to which type of determinant of organizational culture as per Schein?
A. Artefacts
B. Espoused Values
C. Basic Assumptions and Values
Handy – Four Cultural Stereotypes
Handy has popularised four cultural types. (The Rick Riordan fans reading this will get the references):
1. Power Culture [Denoted by Greek God Zeus]
Here one person wields major power and influence. It is most often found in entrepreneurial
structured organizations.
E.g. – a small business owner has a complete control over all of its employees.
2. Role Culture [Denoted by Greek God Apollo]
In this version of culture, the job is described by the duties and not the purpose. This is commonly
prevalent in bureaucratic organizations wherein the organizational structure determines the authority
and responsibility of individuals with a strong focus on the hierarchy and status. One of the ways to
describe role culture is “the way we do things around here”. This has the most effect in the stable
environments where employees perform monotonous jobs.
E.g. - a restaurant where the manager is responsible for customers, and the waiters are responsible
for the cleaning tables and serving food.
3. Task Culture [Denoted by Greek God Athena]
In this version of culture, the emphasis is on completion of the particular task given to the employee
who must be flexible in order to meet the deadline. This works best in project teams that exist for a
particular task. The jobs and description of these jobs given by the employees are in terms of the
results they have achieved who do not allow anything to get into their way of accomplishing the task.
E.g. - a cross functional team formed from different departments in order to investigate the low sales
and losing market share in North East region.
4. Person Culture [Denoted by Greek God Dionysius]
In this, the culture is characterised by the notion that the purpose of it is to satisfy the requirements
of the particular individuals within the organization. This is often found in small scale start-ups,
requiring inputs and participation from all its employees who undertake their duties.
E.g. – A start up is not defined by the rigid rules. A person in finance will contribute and work on the
marketing campaigns; thereby work is distributed based on the person.

Digital marketing agencies require each individual to report to their manager for every campaign
details
This refers to which type of determinant of Organizational Culture as per Handy?
A. Person
B. Task
C. Role
D. Power
Hofstede – International Perspectives on Culture
Hofstede's cultural dimensions theory is a framework for cross-cultural communication, developed

by Geert Hofstede. It describes the effects of a society's culture on the values of its members, and how
these values relate to behaviour, using a structure derived from factor analysis. This theory was based
on the study of 100,000 Global IBM employees.
The 6 dimensions of Hofstede Culture are:
1. Individualism vs Collectivism
2. Uncertainty Avoidance [UA] Index
3. Power Distance [PD] Index
4. Masculinity vs Femininity
5. Long term orientation vs short term orientation
6. Indulgence vs Restraint
1. Individualism vs Collectivism
Individualism Collectivism
• Root of happiness is personal fulfillment • Groups are the most important unit
• They are more independent • They are interdependent
• Individuals are given more importance in • Relationships are key to a collectivistic

the relationships between individual and society
larger social groups
• The relationship between employer and
• Staff prefers being judged on individual employee is based on expectations
performance rather than collective (Protection from employer and loyalty from
performance. employee)
• E.g., North American cultures are more

independent than east Asian cultures.
2.Uncertainty Avoidance [UA] Index
High Uncertainty Avoidance Low Uncertainty Avoidance

• Culture resistant to change • Culture adapts to changes (High tolerance)
• Culture is threatened by ambiguity • Need not be perfect (Risk taking)
(uncertainty) • Favourable destination for outsiders to
• Structured learning (more interactive) establish business
• More formal rules • Few rules
• Low labour turnover • High labour turnover
• Patient country
3. Power Distance [PD] Index
High Power Distance Low Power Distance

• Higher tolerance of power distribution • Lower tolerance of power distribution
creating inequality creating inequality
• More willing to accept instructions from • Relationship between bosses and

seniors without question subordinates is one of interdependence.
• Relationship between bosses and • Non-Hierarchical

subordinates is one of dependence U.S.A 40
U.K 35
• Hierarchical in nature New Zealand 22
PDI: Malaysia 104 Austria 11
Philippines 94
India 77
4. Masculinity vs Femininity
Masculinity Femininity
• Society driven by achievement, competition • Individuals care for each other’s success
and success • Good quality of life
• Success defined by winners • Good relations
• More ambitious • Not much importance given to money
• Work is the center of one’s life • Satisfied with what they have
• Visible symptoms at work place • E.g., Sweden and Norway
• Success equals money between competitors
• E.g., Japan and Austria
5. Long term orientation vs short term orientation
Long term orientation Short term orientation

• Focuses on future success • Focus on the present or what has happened
• Willing to delay short term material success in past
for future gains • Do not consider the future as important
• Motivation: Incentives • Current social hierarchy
6. Indulgence vs Restraint
Indulgence Restraint
• People are given more importance as • Sense of helplessness about personal
individuals have freedom of speech destiny and actions restrained by social
• More likely to leave an organization if not norms
happy • Less likely to voice their opinion if not happy
• Customer service people visibly • Friendliness is considered inappropriate and
demonstrate their happiness with a smile unnatural
• Relationships are more friendly • Relationships are more formal
Company A shows Individuals care for each other’s success and good quality of life & relations with
not much importance given to money while Company B is driven by Achievement, competition and
Success defined by winners with citizens more ambitious and Work at the centre of one’s life
As per Hofstede’s Theory, these distinctions relate to which of the following cultural dimensions:
A. Masculinity – Femininity
B. Power - Distance
C. Uncertainty Avoidance
D. Indulgence – Restraint
Committees in business organisations
Syllabus area B4
- Explain the purposes of committees.
- Describe the types of committees used by business organisations.
- List the advantages and disadvantages of committees.
- Explain the role of the Chair and Secretary of a committee.
Committees
A Committee is a group of people who are appointed to design and prepare a report revolving around
a subject.
Typically, committees:
● Are given authority to find solutions by the involvement of the key parties involved
● Permanent or at least long term in nature
● Follow established procedures
Purposes of Committees
The major purposes of a meeting include the following:
● Develop new ideas for the organization

● People with a unique set of skills and varied knowledge come together to work in a
collaborative manner
● Acts as a mechanism to delay
● Head in implementation of decisions within the organization
● Help oversee a function or procedure. For example: public oversight boards are formed with
the purpose of overseeing the risk of an organization who breached any legal requirements
● Find and gather information about various issues
Types of committees used by business organisations
The different types of communities are as follows:
Executive Committee – this is a committee that is responsible for the affairs of the organization and
are equipped with administrative powers and meet frequently for the same.
E.g., Board of Directors appointed by the shareholders to run the company.
Standing Committee – this is the committee which is formed with a particular purpose for a long term,
permanent basis.
E.g. - remuneration committee which examines the CTC of the directors of the company
Ad Hoc Committee – this is a committee which is formed with the intent of completion of a particular
task in the given deadline.
E.g. - a committee was formed to investigate a failure in the production process at X location and
suggest new guidelines which prevent such failures in the future.
Sub Committee – This committee is a subordinate to another committee. It consists of members

appointed by the parent committee. Their aim is to help the parent committee.
E.g. - a committee formed with 3 members of the board of directors to investigate malpractices and
mismanagement in a particular office
A cross functional committee formed to investigate the cause and solution for low Q4 sales in FY 17.
Which type of committee is this?
A. Executive Committee
B. Standing Committee
C. Ad Hoc Committee
D. Sub Committee
Advantages and Disadvantages of Committees
Advantages
1. Committees together will be able to complete their objective via combined skills of all the
members rather than individually
2. In a committee there will be a number of people making decisions thereby increasing
motivation.
3. A committee often comprises of people from different departments who bring in their
expertise as well as problems/complaints faced by people from those departments. Any
decisions made by the committee will more likely be accepted as it will incorporate those
problems/complaints in the final decision
4. There will be a collective responsibility suggesting no individual is accountable for any adverse
consequences from the committee recommendations but instead the entire committee is
responsible
Disadvantages
1. The decision-making process in a committee is often extremely slow which incurs additional
opportunity costs due to missing out on valuable opportunities. Additionally, there is the cost
of the decision-making process [time the committee members lost in their core job]
2. Due to collective responsibility no individual is likely to be held accountable. There will be
lower motivation of committee members to contribute to their fullest extent
3. Individual committee members will try to further their own personal objective or the
departmental objective rather than the objective of the organization
4. Communities often arrive at the final decision based on compromises thereby they lack the
decisive element needed
5. There will be a few experienced committee members or committee leaders granted additional
power who will dominate and influence the entire decision-making process thereby there is
no complete participation from all the members
Role of the Chair and Secretary of a Committee
There are essentially 2 key roles for the proper functioning of any committee – Chairperson and
Secretary
The Chairperson
The responsibilities of a chairperson include the following;
1. Ensuring that the discussion occurs as on schedule and does not deviate from any relevant
issues
2. Maintaining the decorum of the meeting. Ensuring that only one person speaks at a time
3. Impartiality - the chair must be impartial at all times and allow everyone in the meeting to
voice their opinions
4. Conclusion and Final Decision – the chair must arrive at the final decision of the meeting by
conducting a vote and announcing the result
5. Finalizing the minutes of the meeting - depends on the nature of the meeting itself
The Secretary
Responsible for all the administrative aspects of the committee and supporting the chair in order to
ensure all runs smoothly
Before the Meeting During the Meeting After the Meeting

● Deciding the venue, ● Taking notes of the ● Preparing minutes
date and time of the meeting ● Dealing with
meetings ● Assisting and advising correspondence and
● Preparing and the chairperson with taking the initiative with
showing any relevant the procedures any communication
documents required with an external party
for the meeting or within the committee
Maintaining the decorum of the meeting, ensuring that only one person speaks at a time and
finalizing the minutes of the meeting. Who is responsible for this?
A. Chairperson
B. Secretary
C. Committee Head
D. Committee Member
112
Role of Governance and CSR in Business
Governance and Social Responsibility in Business
Syllabus area B5
- Explain the agency concept in relation to corporate governance.
- Define corporate governance and social responsibility and explain their importance in
contemporary
- organisations.
- Explain the responsibility of organisations to maintain appropriate standards of corporate
governance and corporate social responsibility.
- Briefly explain the main recommendations of best practice in effective corporate governance:
(i) Executive and non-executive directors
(ii) Remuneration committees
(iii) Audit committees
(iv) Public oversight
- Explain how organisations take account of their social responsibility objectives through analysis of
the needs of internal, connected and external stakeholders.
- Identify the social and environmental responsibilities of business organisations to internal,
connected and external stakeholders.
Agency Concept in relation to Corporate Governance – Separation of Ownership & Control
Separation of ownership and control is the situation when people who own the company i.e., the
shareholders are not the same people responsible for the management and operations of the
company i.e., the board of directors. This situation often occurs in publicly listed companies which are
owned by a number of different external shareholders whose interests are represented by the board
of directors. The BOD are specialist managers hired for their experience, set of skills and intent of
running the day-to-day operations of the business without involving the shareholders.
This is not a problem in small companies as there is no separation of ownership and control as the
owner is the one who is also responsible for the management.
Divorce between Ownership and Control
This refers to the situation of conflict where in the managers of the company, the board of directors
decide to have huge salaries and bonuses linked to the profitability of the business as well as huge
golden parachute packages which is in the best interest of the director but not of the shareholders.
To avoid this, one of the solutions is to align the interest of directors and shareholders; wherein they
will be having a small basic salary and performance linked bonuses, and the rest of the compensation
will be paid partly in shares, thereby ensuring they have vested interest in the share price.
This will make sure that the board of directors acts as agents for the shareholders rather than agents
for their own self-interest.
Corporate Governance and CSR and its importance
“Corporate governance is the system by which the companies are directed and controlled” by the
Cadbury Report, 1992.
“Corporate Governance involves a set of relationships between a company’s management, it's

board, it’s shareholders and other stakeholders. Corporate governance also provides the structure
through which the objectives of the company are set, and the means of attaining those objectives
and monitoring performance are determined.” by the OECD ‘Principles of Corporate Governance’,
2004.
Best practices for a thorough and effective corporate governance are as follows:
1. Both executive and non-executive directors in appropriate proportions on the board of

directors
2. Disclosure of the amount and method of directors’ remuneration calculation
3. Both internal and external audit carried out within the company in accordance with proper
accounting and ethical procedures
4. The public who has a direct vested interest as a stakeholder in the large company must be
able to access and know how the company is being governed
(i) Executive and non-executive directors
In general, there are 2 types of directors - executive and non-executive directors.
Executive directors are responsible for the operational decision making and day-to-day running of the
organization.
Non-Executive directors are the directors who have no responsibility for the day-to-day management
but have a say in the strategic decision making of the company. They are not employees of the
company.
For a NED to be truly independent:
● Must not be an employee of the company in the last 5 years

● Must not serve on the board of directors for more than 9 years
● Must not have close ties with any of the senior company executives or executive directors
● Refrain from participating in companies share options and pension schemes
● Not have a business interest in the company for in the last 3 years
Note:
Composition in Numbers For Smaller companies – At least 2 NED
For Larger Companies – NED’s must account for at least 50% of

Board
[Excluding the Chairman who must also be NED]
Appointment of Senior The role of the senior executive director is to be the channel
Executive Director between the board of directors and shareholders who wish to
raise concerns in private rather than via the public executive

channel of communication
Separate Role of Chairman & For good corporate governance it is essential that the roles of
CEO chairman and CEO are not performed by the same person. The
CEO will be responsible for the day-to-day operations and the
chairman will be responsible for the board of directors. They
must not be the same person as it will lead to a huge conflict of
interest and over concentration of power in the hands of one
person.
Re-election Every 3 years, all executive directors and non-executive directors

must stand for election by shareholders.
NEDs on Board for more than 9 years must stand for election by
shareholders every year.
Which of the following traits of a prospective candidate for NED makes him less than truly
independent from a Corporate Governance standpoint?
A. Ex-employee of the company 2 years back

B. No experience in this sector
C. No contact and acquaintance with any of the Executive Directors
D. Served on the Board of Directors as NED 5 years back
(ii) Remuneration committees
• It is a committee made up of NEDs who are responsible for deciding the salary and other benefits
offered to the executive directors.
• One of the important aspects of corporate governance is that no director should set their own
level of pay as it is a direct conflict of interest.
• The remuneration committee is responsible for setting all the remuneration related aspects of the
executive directors including the pension rights, bonus payments and any golden parachute
payments.
• The remuneration committee should comprise of at least 3 independent NEDs [or at least 2 in case
of smaller companies]
Advantages of Remuneration Committees Disadvantages of Remuneration Committees

- Leave the entire board of directors free - Cost involved in the preparation and
to concentrate on other core strategic holding these remuneration committee
decisions about the company’s future meeting
- Avoid the problem of directors deciding - Internally beneficial arrangements

their own level of remuneration made between directors for a high
salary and bonus payments. There's no
guarantee of complete objectivity even
with such special committees
(iii) Audit committees
An audit committee comprises of NEDs who monitor and review the company’s internal controls and
the accuracy of the reported financial statements on an annual basis.
The audit committee acts as an interface between the full board of directors and the internal and
external auditors. The responsibilities are as follows:
● Liaison with the external auditors on their findings about the flaws in the reporting processes
and audit systems as well as ensuring that the external auditor remain independent and
objective
● Decide on nomination and remuneration of external auditors which is reported to the board
of directors who propose it to the shareholders at the AGM
● Deciding on the scope of work for internal auditors and audit department
● Review systems of internal controls and risk management within the organisation
● Ensure that the relevant accounting policies were adhered to while preparing financial
statements and the final account show a true and Fair view of the business
The reason for the existence of an audit committee and the primary advantage is that it allows any of
the auditors to submit their reports and findings directly to the board of directors rather than having
to go through the hierarchy and bureaucratic channels.
Adding on, this helps overcome the following problems:
● Internal auditors who evaluate the reporting systems feel uncomfortable in sharing the
weaknesses and flaws of these reporting systems to the executive directors who have devised
these systems
● External auditors are not required to report the fraud and errors to the participating executive
directors who may be involved in these
An Audit Committee should be consisting of accounting professionals, Executive Directors and Non-
Executive Directors. Is this statement True or False?
A. True
B. False
(iv) Public Oversight
The general public has a direct interest in the operations and activities of the business thereby is also
entitled to know how the business is being governed.
Due to the above reason, companies have also started publishing a separate report / section on
public oversight of corporate governance in their annual report alongside the financial statements.
Public oversight of corporate governance comprises of the information about the board of directors
along with details about the remuneration committee, audit committee and other key details like
composition and salary of board of directors.
In India, publicly listed companies are required to submit their annual financial statements to the
regulatory body SEBI. For transparency purposes, these companies also upload it on their website
for anybody to view and download it.
Benefits of Corporate Governance:
1. Mandatory listing requirement - many stock exchanges like London Stock Exchange [LSE] and
NASDAQ requires companies to have proper corporate governance guidelines disclosed in
their annual statements for them to be listed in the respective stock exchange
2. Boosts investor confidence - corporate governance reflects and reinforces the investors trust
in company management. Hence, companies with proper corporate governance will be more
easily able to raise finance thereby creating a positive impact on the share price
3. Business success - there will be a spike in revenues and profits with improved controls and
lower chances of fraud or any other manipulative practices occurring within the company due
to adherence of corporate governance guidelines
4. Wastage minimization - With a robust corporate governance system there would be lower
wastage within the organization in terms of resources, mismanagement etc
Stakeholder Needs Analysis
It includes an organization researching about who its key stakeholders are and what are their
expectations [needs and wants].
Every company must identify all of its key stakeholders, whether it be internal external or connected.
After identification of the key stakeholders, your organization must make an effort to understand their
expectations, using one of the following research methods - questionnaire, focus groups, interviews
with stakeholder representatives.
Corporate Social Responsibility [CSR]
It refers to a notion wherein a company is sensitive to the needs and wants of all its relevant
stakeholders and not just the shareholders.
It refers to an organization’s obligation to maximize the positive and minimise the negative impact
upon the stakeholders.
CSR is a concept which is closely linked to sustainable development which suggest that resources
should be used in such a manner that it does not compromise the needs of posterity/future
generation.
“CSR is the continuing development by business to behave ethically and contribute to economic
development while improving the quality of life of the workforce and their families as well as of the
local community and society at large.” By World Business Council for Sustainable Development
[WBSCD], 1998
World Business Council for Sustainable Development (WBSCD) has divided corporate responsibility
[sustainable development] into 3 aspects:
1. Corporate Financial Responsibility

2. Corporate Environmental Responsibility
3. Corporate Social Responsibility
However, all of these areas being similar and lapping over each other is an issue.
The key issues in CSR debate include: Employee Rights; Environmental Protection; Supplier Relation;
Community Involvement.
Importance of CSR
Present day CSR has a number of benefits for the organization in comparison to their drawbacks:
● Recently customer surveys have found that an organization’s reputation is also a key factor used
by customers in evaluating which brand/company to buy from
● Ethical businesses will be able to attract and retain quality human resource capital
● Going green currently gives the organization benefits of tax savings and saves fines payable to the
government. E.g., Smartphone manufacturers imitated apple and stopped including chargers in
their boxes citing environmental reasons. They hope to earn some goodwill via doing so.
● Becoming energy efficient will also lower the organizations total cost
Few drawbacks of CSR include:
● Increasing cost of sourcing materials from ethical suppliers

● Rejecting business from customers and suppliers who are considered to be unethical
● Opportunity cost of management time that could be utilised for more productive reasons than
CSR planning and implementation
CSR will always result in increased costs but will improve reputation.
Is this statement True or False?
A. True
B. False
PO4 – GOVERNANCE, RISK AND CONTROL
Description
You contribute to effective governance in your area. You evaluate, monitor and implement risk
management procedures, complying with the spirit and the letter of policies, laws and regulations.
Elements
a. Provide and present information at the appropriate time to comply with organisational
requirements and external regulation.
b. Operate according to the governance standards, policies and controls of your organisation.
You also review your work and your colleagues’ work to make sure it complies.
c. Evaluate and identify areas of risk including data and cyber security risks – assessing the
probability of fraud, error, security breaches and other hazards in your area of responsibility,
and the impact they would have.
d. Assess the risk of failures in the internal controls and procedures in your area of responsibility.
e. Consult with stakeholders and specialists, communicating with them to solve problems and
reach conclusions.
Example activities
• Collating data on risks, including cyber security risks and assessing their likelihood and
potential impact using appropriate technology.
• When you identify risks, bringing them to the attention of your line manager.
• Complying with authorisation limits and other internal controls.
• Complying with money laundering legislation or regulation – and reporting any suspicious
activities.
• Briefing a team on a new policy, procedure or methodology.
• Creating and/or updating policies and/ or process documentation/procedures.
• Training staff on recent compliance issues.
• Reviewing policies, processes or procedures following audit reviews and revise them
accordingly.
• Contributing to or organising a survey or focus group to obtain opinions and feedback from
colleagues, clients or customers.
Apply Your Knowledge (AYK)

Answers
AYK 1:
Answer: A
AYK 2:
Answer: A
AYK3:
Answer: B
AYK 4:
Answer: B
AYK 5:
Answer: A
AYK 6:
Answer: A
AYK 7:
Answer: A
AYK 8:
Answer: C
AYK 9:
Answer:
Answer: A
AYK 11:
Answer: False [only NED’s no executive directors]
AYK 12:
Answer: False [Not always increased costs may even decrease costs in long run]
121
Syllabus area C:
Accounting and reporting systems, technology, compliance &
controls
Importance of Accounting and Finance in Business 122
Importance of Accounting and Finance in Business
The relationship between accounting and other business functions
Syllabus area C1
- Explain the relationship between accounting and other key functions within the business
such as procurement, production and marketing.
- Explain financial considerations in production and production planning.
- Identify the financial issues associated with marketing.
- Identify the financial costs and benefits of effective service provision
Relationship between accounting and other key functions within the business
The accounting function is also related to several other key functions within the business -
production, marketing, purchasing and services.
Purchasing / Procurement
The purchasing or buying function in the business organization is responsible for placing and
following up on orders.
The purchasing department directly coordinates with the accounting department for the following
aspects:
Establishment The accounting department will work with the procurement department to
of credit terms establish credit terms with suppliers and determine the appropriate credit
limits in which the business can make payments
Pricing Accounting department will provide advice to the purchasing and

procurement department on the maximum prices which could be paid for
procuring the raw materials based on break-even analysis and calculations.
the price is determined such that it does not hinder profit margins.
Payments Any payments to suppliers must be first approved by the purchasing

department and then conducted by the accounting department
Data Capture The purchasing department will pass on the data captures like order no.123
for purchases of raw materials to the accounting department who will then
place the order
Inventory Purchasing department will work with the accounting department to

Management determine the safety inventory level and other key levels like reorder level
which will help both the departments to plan in advance
Budgeting The accounting department will work with the purchasing department for
the preparation of budgets and the relevant costs
Production
The role of the production department is to oversee all production related aspects of the business;
this department generally exists in manufacturing businesses. It liaises with the accounting
department as follows:-
Measuring, Allocation Management accountants help the production department in

and Absorption of Cost measuring the amount of raw materials and the time used by
allocating a value to each of them. this is then absorbed based on
the type of product thereby helping in overall costing.
Budgeting Production department and accounting department will decide upon

the number of goods and their types which are to be produced and
the relevant forecasts for the same
Cost vs Quality Production department and accounting department must work in

liaison with each other to evaluate the types and quality of raw
materials which should be used in production as they need to
balance out both cost and quality with the object of maximization of
quality, profit and minimization of cost.
Inventory Management Production department will coordinate directly with the accounting
department for inventory management in terms of the inventory
levels and any required orders which needs to be placed
Marketing
The accounting and marketing department coordinate for the following aspects:
Budgeting Accounting department will coordinate with the marketing department

regarding the anticipated and predicted volume of sales for each of the
products for sales budget estimation
Advertising Accounting department will aid the marketing department in setting the
budget and evaluating whether the advertisement has been cost
effective or not. The accounting department will use various marketing
KPIs to measure this and evaluate the different marketing campaigns
Pricing Accounting department can be consulted before advertising products

with their prices. The accounting department will have a cost accountant
who will compute the prices based on the business’ pricing strategy
Market Share Accounting department, based on these sales volume for each product,
will compute the market share for each product and this data will be
used by the marketing department for their marketing strategy
Service Provision and the Nature of Services
Companies do not only provide physical goods but also provide services to their customers [products
= physical goods or intangible services].
E.g.: Apple TV+ with i-Phones.
Apple with the purchase of every iPhone offers its customers a complementary subscription to its
streaming service Apple TV+ for a few months. [physical good = iPhone; service = OTT platform]
4 Main Features of Services are:
1. Variability - Every service is unique and cannot be repeated in exactly the same manner
thereby offering the same service to each and every customer proves to be very difficult.
E.g. – A Lawyer will give different advice based on the individual client need
2. Intangibility - Services do not have a tangible existence thereby are tangible in nature.
E.g. – Jio providing internet services and calling services
3. Inseparability - Services are inseparable in nature and they are created at the same time when
the demand for those services is required. A service is inseparable from the service provider.
E.g. – An individual requiring medical consultation from a doctor.
4. Perishability – Services are perishable in nature and cannot be stored for future use.
Eg – A cleaner’s cleaning service cannot be stored for later
The law advice on a divorce case cannot be applied on a corporate case. This refers to which of the
features of services?
A. Variability
B. Intangibility
C. Inseparability
D. Perishability
Relationship between Service Provision and Accounting
The service department requires inputs from the accounting department in the following aspects:
Charging Rates Deciding upon the rate charge per hour for the services provided by the
business to its clients is quite extensive in nature as the rate must not be too
high as customers might switch to competitors and not too low (lower than the
staff’s hourly rates) as it will be loss making for the business.
Many accounting firms base charge out rates for their staff on roughly three
times that person’s salary.
Estimation of Estimation of cost for additional time spent and resources consumed for each
Costs client will not be same as the previous clients as every case is different. The
accounting department must intervene and compute these additional cost for
each client so that they can be passed on to the customers
Problems faced Accounting Department may help evaluate if certain services with a low profit
while measuring margin are still worth carrying out. However, they will not be able to measure
benefits the qualitative, intangible benefits derived from those services. A company
with effective service provision will bring in happy customers who will buy
again thus leading to lower selling costs.
Accounting and finance functions within business
Syllabus area C2
- Explain the contribution of the accounting function to the formulation, implementation and
control of the organisation's policies, procedures and performance.
- Identify and describe the main financial accounting functions in business:
(i) recording financial information
(ii) codifying and processing financial information
(iii) preparing financial statements
- Identify and describe the main management accounting and performance management
functions in business:
(i) Recording and analysing costs and revenues
(ii) Providing management accounting information and decision-making
(iii) Planning and preparing budgets and exercising budgetary control
- Identify and describe the main finance and treasury functions:
(i) Calculating and mitigating business tax liabilities
(ii) Evaluating and obtaining finance
(iii) Managing working capital
(iv) Treasury and risk management
- Identify and describe the main audit and assurance roles in business:
(i) Internal audit
(ii) External audit
- Explain the main functions of the internal auditor and the external auditor and how they differ.
Functions of a Treasury
The treasury department is responsible for refunds of the business, management and cashflows;
even corporate finance policy and procedure comes under their purview.
Roles and Functions of a Treasury Department are as follows:
1. Working Capital Management

2. Cash Management
3. Financing [Via Debt or Equity]
4. Maintaining multiple Foreign Currencies
5. Tax Minimization
Internal and External Audit
An external audit is performed by an outside auditor who does not have a relation to the
organisation or the entity’s financial statements. The auditor examines the financial statement
prepared by the entity’s management to ensure it is presented in a fair manner, the relevance and
accuracy of data presented. Most importantly, an auditor tests whether the company is complying
to professional standards and IAS/IFRS.
An internal audit is performed by companies to ensure that the company is meeting internal and
external goals. Internal goals include compliance, appropriate controls, consistency, quality, while
external goals would usually include customer satisfaction and market share. Auditors check to
ensure appropriate authorization was provided for undertaken transactions, purchases of assets,
etc. Overall, the internal auditor rates the company’s overall effectiveness.
Comparison between Internal and External Audit
Internal Audit External Audit

Appointment By management. No qualification Guidelines provided by statue and
needed. appointed by members. Auditor must
be qualified to act.
Objective Evaluating the effectiveness and Expressing an opinion on whether the

efficiency of a company’s internal financial statements are free from all
controls. material misstatements and represent
a true and fair view of the entity’s
position.
Accountable to Reports produced are usually Reports are provided to the

addressed to the board of directors shareholders of the company. These
or TCWG. These reports are NOT reports are attached to the financial
publicly available and are for the use statements and thus are public
of the company only. information.
Scope Work of the internal auditor would Work of an external auditor would
comprise of evaluating the internal relate only to the financial statements
controls of a company and providing of an entity. However, internal controls
special audit assignment reports. are tested to analyse whether they
provide accurate and complete
information relating to the financial
statement.
Relationship For most companies, an internal Are appointed by members, an

with the auditor is an employee of the independent auditor is employed to
company company, however companies can ensure a degree of independence is
outsource this service. maintained.
Eg: Go Air has its own employees’
part of internal audit. Emirates has
outsourced this work to EY.
Types of Internal sources of evidence. Internal and external sources of

evidence evidence
collected
Limitations of internal audit:
These include independence issues; if employees are part of the internal audit team, it gives rise to
familiarity threats and management can influence the reports produced by them before these are
provided to the audit committee.
Internal audit reports are prepared for?
A. Employees
B. Managers
C. Shareholders
D. Board of Directors
Relation between external auditor and internal control
With an internal control system in place, the external auditor will reduce the amount of substantive
testing. The auditors will have to decide on the extent to which they can place reliance on these
internal controls.
Relationship between internal control and internal auditor
One of the roles of the internal auditor is to review the internal control system and ensure that the
corporate governance objectives are met and then report this to the board of directors.
Internal controls are of key importance and directly relate to the work and operations of an internal
auditor.
Internal audit must ensure that there are controls in place to safeguard the company against the
relevant risks and that these controls are working correctly.
The external auditor has an interest in the internal controls due to the which of the following
reasons:
a. Less testing to be done

b. The subject matter of the Audit
c. Internal controls are made by them
Which of the following statements best defines the external audit?

a. The external audit is an exercise carried out by auditors in order to give an opinion on
whether the financial statements of a company are fairly presented.
b. The external audit is an exercise carried out in order to give an opinion on the effectiveness
of a company's internal control system.
c. The purpose of the external audit is to identify areas of deficiency within a company and to
make recommendations to mitigate those deficiencies.
d. The external audit provides negative assurance on the truth and fairness of a company's
financial statements.
Application of technology & IT at workplace
The sources and purpose of internal and external financial information, provided by business
Syllabus area C4
- Explain the various business purposes for which the following financial information is
required:
(i) The statement of profit or loss
(ii) The statement of financial position
(iii) The statement of cash flows
(iv) Sustainability and integrated reports
- Describe the main purposes of the following types of management accounting reports:
(i) Cost schedules
(ii) Budgets
(iii) Variance reports.
The above diagram shows the organizational hierarchy of the accounting department within an
organization and their functions and responsibilities.
The 3 key functions of the accounting department are:

1. Financial Accounting Function
2. Management Accounting Function
3. Treasury Function
In a large organisation, who is responsible for financing strategies and related aspects:
A. Chief Accountant
B. Treasurer
C. Tax Manager
D. Management Accountant
The Financial Accounting Function
Books of Prime Entry
Books of prime entry are books in which the first, initial entry is made in the books of accounts.
These books are required so that entries in the ledgers reduce.
The 7 books of prime entry are –
Book of prime entry Transaction Type

1) Sales day book Credit sales
2) Purchases day book Credit purchases
3) Sales returns day book Sales Returns for goods sold on credit
4) Purchases returns day book Purchases returns for goods sold on credit
5) Cash book All cash and bank transactions
6) Petty cash book All small cash transactions
7) The journal All transactions not recorded in either of the other
books of prime entries
Credit transactions are the ones which do not need immediate payment. E.g., If Mr. A sells goods to
Mr. B on credit, that means Mr. B will receive the goods today but he will pay Mr. A for those goods
later (per say after 1 month hypothetically).
The 3 main financial statements produced by most businesses are as follows:
1. The Statement of Profit and Loss and Other Comprehensive Income (SOPLOCI)
The SOPL section records the revenues and expenses of a business for a particular accounting
period. Revenue less expenses will give us the profit (or loss) for the period.
Revenue is the income for a period. It is the gross inflow of economic benefits (cash, receivables,
other assets) arising from the ordinary operating activities of an enterprise (such as sales of goods,
sales of services, interest, royalties, and dividends).
Expenses are decreases in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrences of liabilities. Examples include wages and salaries, electricity, etc.
The Other Comprehensive Section of the SOPLOCI consists of gains not yet realised by the business.
For example, the revaluation of an asset which is not yet sold by the business, hence the gain on
revaluation is still unrealised
2. The Statement of Financial Position (SOFP)
The SOFP shows the assets, liabilities and capital/equity balance of the business at the business’s
year end. It shows the accumulated balances of these items from the incorporation of the business.
3. The Statement of Cash Flows
This statement shows the cash inflows and outflows of a business i.e., the amount it has paid and
received throughout the reporting period.
XYZ, a forensic accountant wishes to evaluate the relationship between Sales and Fixed Assets
Investments. Which of the following Financial Statements does he require?
1. Statement of Cash Flows

2. Notes to Accounts
3. Statement of Profit & Loss
4. Statement of Financial Position
A. 1&2
B. 2&3
C. 1&4
D. 2&4
Why businesses prepare and how different stakeholders use financial statements
User Type of Needs of the user

User
Owners / Shareholders / Internal Owners want to evaluate how profitable the
Potential Investors company is and will be in the future. They would
want to know how efficiently their money is being
used in the business and if they are earning
sufficient returns or not.
Management / Board of They need detailed financial information to check if

Directors the business is on track to achieve its short-term
and long-term targets, and if the company is not,
then to take corrective measure periodically.
Employees and Trade As the future of an employee’s career depends on

Unions the existence and growth of the company, an
employee would have a keen interest in knowing
about the survivability of the company.
For example, before Jet Airways fell, if the
employees and management knew about its
working capital problems they would have taken
corrective measures or started finding jobs

elsewhere earlier on.
Suppliers External The suppliers need to know if the company will be

able to pay its credit dues on a timely basis or not
Customers Customers need to know if the company will be

able to continue to provide products and services
for the foreseeable future or not.
Lenders (Banks) Lenders are most concerned with the solvency and
creditworthiness of a business. They are also
interested in the assets a company has as it may be
secured against long term loans.
Government The government needs to know if the company is

following the reporting standards and law. As well
as if the correct amount of tax is being paid.
The Public A business operates within the society and the

public has the right to know about the impact it is
creating on the environment and society as a
whole.
For example, if the company is running adequate
corporate social responsibility (CSR) activities or
not.
Integrated Reporting
Integrated reporting is an idea wherein instead of having a separate section or report to reflect the
sustainability. the entire report should comprise of the strategic and operational management actions
with a holistic approach to business and ensure that all stakeholders needs are met.
The integrated reporting framework is based on financial and sustainable performance. The following
six types of capital are:
1. Financial capital-this is the traditional equities and capital section of the balance sheet which
includes all the reserves, ordinary share capital.
2. Manufactured capital – this is the tangible material goods and fixed assets which the business
owns and is used to produce other goods and services. Example-land and Building, machinery
and tools
3. Intellectual capital-this capital refers to the employee knowledge and proprietary information
that gives the business their competitive edge
4. Human capital-this refers to the knowledge skills and motivation which contribute to the
productivity of the organisation
5. Social and relationship capital-this refers to the organisations which work in partnership with
the business i.e., the community as a whole, trade unions, schools and other voluntary
organisations such as charities and NGOs
6. Nature capital-This refers to the natural resources that are used in the production process
such as land and water; also, the natural factors which directly impact production such as
climate change and CO2 emissions
The term human capital refers to employee knowledge and proprietary information that gives the
business their competitive edge. Is this True or False?
A. True
B. False
International integrated reporting Council IIRC
The IIRC was formed with the objective to create a framework that is globally accepted and results in
business reports that reflect the value creation over time.
The seven guiding principles laid down by IIRC are as follows:
1. Strategic focus and future orientation

2. Connectivity of information
3. Stakeholder relationships
4. Materiality
5. Conciseness
6. Reliability and completeness
7. Consistency and compatibility
The eight content elements are as follows:
1. Organisational Overview and the External Environment

2. Governance
3. Business Model
4. Risk and Opportunities
5. Strategy and Resource Allocation
6. Outlook
7. Basis of Preparation and Presentation
Management Accounting
Management accounting is carried out with the objective to aid the management in fulfilling their
duties of planning, directing and controlling the business operations.
It measures, analyses, interprets and communicates the information to management in a pre-set and
agreed format
Budgets
These are the total planned revenues and costs for the upcoming periods and mere estimates.
In order to address the discrepancy between these estimates and the actual values, one must prepare
a variance report.
Budgets are used for the following: [C R U M P E T S]
1. Coordination
2. Responsibility
3. Utilization
4. Motivation
5. Planning
6. Evaluation
7. Telling
Variance Reports
A summary of total predicted and total actual costs with the difference calculated as variance.
Both the positive and negative values carry their own importance and are used to improve efficiency
by investigating any huge differences and the reason behind it.
Variance = Predicted - Actual
Favourable Variances – Predicted Costs < Actual Costs; Predicted Revenue > Actual Revenue
Unfavourable Variances - Predicted Costs > Actual Costs; Predicted Revenue < Actual Revenue
Cost Cards
A summary of total costs as per the below format created for management purposes.
Aids in the pricing of goods/services , identify keys levels like break-even point and ROI Levels; make
or buy decisions.
Difference between Financial and Management Accounting

Noteworthy Terminology
Working Capital - lifeblood of the business; this is the amount of money available for day-to-day
operations of the business and is the excess of current assets over current liabilities.
Working = Total of current assets - a total of current liabilities
Tax Avoidance – this refers to the use of exploiting the loopholes in the tax system in order to
reduce the tax liability for the year and this is done within the boundaries of law and is legal
Tax Mitigation – similar to tax avoidance
Tax Evasion – As the term sounds it is evading tax which is illegal via the use of deception and
misleading the tax authorities of the state of affairs; this is a criminal offense
Companies are not mandated by Law to prepare Management Accounting Records:
A. True
B. False
Legal Aspects, Compliance and Fraud in Business
Principles of law and regulation governing accounting and audit
Syllabus area C3
- Explain basic legal requirements in relation to retaining and submitting proper records and
preparing and auditing financial statements.
- Explain the broad consequences of failing to comply with the legal requirements for
maintaining and filing accounting records.
- Explain how the international accountancy profession regulates itself through the
establishment of reporting standards and their monitoring.
Basic Legal Requirements
Many countries have laws and legislations in place which ensure that all the listed companies and
other business organizations properly record the financial position via the financial statements.
These legislations primarily apply to listed companies.
There are several government bodies which keep the companies and other business organizations
fair and honest:
1. Regulatory Bodies
- Company Legislation
- Requirements
- Responsibility
2. Consequences of Non-Compliance
3. International Regulation
Regulatory Bodies and Tax Authorities
In many countries there is a government department which oversees regulation and accounts of the
listed companies. In India it is SEBI [Securities Exchange board of India] for publicly listed companies
and for other business organisation it is the Central Board of Direct Taxes, GOI. It’s the Companies
House in UK.
Companies are required to submit the financial statements to the above bodies in order for the
regulatory bodies to inspect and find out any discrepancies overall and particularly in the tax
computation.
Additionally, these submitted financial statements once approved by the regulatory bodies will be
made public for other relevant stakeholders to view them.
Additionally, since the general public have invested their money in these listed companies via the
stock exchange, there are more key documents such as the register of shareholders and directors
which is to be submitted by these listed companies as a part of the regulatory compliance.
Other Authorities
Publicly listed companies and other business organizations are not only accountable to the
regulatory bodies and tax authority but they are also accountable to other authorities such as in UK:
1) FCA and PRA for services which deal with client money.
2) Charities Commission to overview the charities.
Note - Due to these regulatory compliances, most business organizations retain their financial
statements for a period of minimum 7 years
Typical requirements for financial statements
The financial statements must provide the reader with a true and fair view of the financial position
and performance for the business organization as on that particular date.
However, there is no legal definition which defines the true and fair view but it generally means the
following:
● Comply with all the required and appropriate accounting standards

● Follow the generally accepted practice
● Must not have any material misstatement pertaining to company operations
● Information within the financial statements should be sufficiently detailed to meet the
expectations of the users
E.g. – A break up of non-current assets and the depreciation must be provided rather than just a
figure of overall totals of non-current assets and the depreciation
Companies are also required to maintain a record of transactions that have been recorded in these
accounting records along with explanation of the same. The detailed contents of these transactions
are not required however a complete record of all the transactions must be present.
When financial statements are finalised by the board of directors, business organizations have to
submit it to which of the following government entity?
A. Tax Authorities
B. Financial Markets Regulators
C. Central Bank
D. Stock Exchanges
Responsibility of maintaining Financial Records
Responsibility of maintaining financial records internally within the organization lies with the board
of directors which the board delegates to the Finance Director [FD] or the Chief Financial Officer
[CFO].
The financial reporting function which exists in the accounting department helps the finance director
in maintaining the financial records.
An external accounting firm may provide assistance in the preparation of the same, if the finance
director does not have the relevant skills.
Consequences of Compliance Failure
The following are the consequences of a company not keeping up with the accounting compliances:
● It’s a criminal offence to not keep proper accounting records or to not prepare regular
accounting records.
● The company may be suspended from the stock exchange thereby no active trading of its
shares
● Directors may be penalised via hefty fines as it is their responsibility to maintain true and fair
accounts.
● Any further discrepancies maybe passed to the tax authorities who would investigate the
company for tax evasion- which is a criminal offense
● The external auditors who audited the company would issue a qualified report, which in turn
would decrease the company’s ability to raise funds.
● The business organization may be branded as unethical and illegal thereby making it more
expensive and difficult for them to raise finance
● If the business has not been able to keep required accounting records there might be
problems with the day-to-day operations like neglected payments to suppliers and forgotten
reminders sent to customers
If there is a discrepancy in the financial accounts, who is likely to be held responsible for the same:
A. Finance Director
B. Chief Accountant
C. Treasurer
D. Management Accountant
International Regulation of the Accountancy Profession
With globalisation, more companies are going international and having their operations in multiple
countries thereby accounting for each of these operations under both the parent country’s and host
country’s financial standards is quite burdensome. This led to the birth of International Financial
Reporting Standards [IFRS] Foundation whose aim to make the accounting standards similar
worldwide for better global reporting.
Also, it is worth noting that the accounting profession is “Self-Regulating” meaning it would device
its own regulations and standards, solve their problems themselves rather than rely upon the laws
and regulations.
Role of IFRS Foundation [Supervisory Body for the IASB]
The IFRS foundation’s responsibility is to govern the issues of its member bodies and ensure funding
of each of the member bodies.
The primary objectives of the IFRS foundation are as follows:
● Bring convergence between the national and international implimentation standards

● Promoting the use and strict application of these international standards of accounting
● Consider the needs of small and medium sized countries as well as companies from different
emerging economies
● Develop a set of high quality, understandable, enforceable and globally accepted financial
reporting standards
International Accounting Standards Board [IASB]
IASB is responsible for and publications regarding the new IFRS and old IFRS as well as their
interpretations
IFRS Interpretations Committee [IFRS IC]
IFRS IC issues guidelines on widespread accounting issues on a timely basis
IFRS Advisory Council [IFRS AC]
Acts as the formal advisory body to the IASB and the IFRS foundation. It is made up of members who
have a direct impact on the IASB’s work. Their objectives include the following:
● Advising the IASB on work decisions and other related matters

● Giving advice to the trustees
● Informing the IASB on views of the council pertaining to the setting of standards and other
related matters
● Advising IASB about decisions regarding the agenda and prioritisation of their work
Role of IASB
The IASB is an independent standard setting body based out of London which has 14 members from
9 countries.
The primary aim of IASB is to develop a set of high quality, cognizable and implementable global
accounting standards.
The standards produced by the IASC [predecessor to IASB] are referred to as International
Accounting Standards [IASs].
Standards produced by the IASB are referred to as International Financial Reporting Standards
[IFRSs], and both IAS and IFRS together form the International Standards.
About 100 countries have adopted the international accounting standards or amended the national
standards to bring some sort of convergence
In India, we have shifted to Indian Accounting Standards [Ind AS], which were adopted based on IFRS
Principles
E.g. – IFRS 16 Leases and Ind AS 116 Leasing
For a new standard to be introduced by the IASB the following procedure is followed:
Step 1: Starts as a Discussion Paper [DP] prepared by a working group who takes inputs from SAC
Step 2: Then produces a draft which is available for the public to view and comment.
Step 3: The expressed views on the discussion paper are incorporated in the next draft known as the
exposure draft which is also made public
Step 4: Finally, a new IFRS is issued and amendments may be made to the new IFRS, if there need be
Which of the following is the role of IASB?
A. To develop a set of high quality, cognizable and implementable global accounting standards .
B. Giving advice to the trustees
C. Issues guidelines on widespread accounting issues on a timely basis
D. Responsible for and publications regarding the new IFRS and old IFRS as well as their
interpretations
Financial systems, procedures and related IT applications
Syllabus area C5
- Identify an organisation's system requirements in relation to the objectives and policies of the
organisation.
- Describe the main financial systems used within an organisation:
(i) Purchases and sales invoicing
(ii) Payroll
(iii) Credit control
(iv) Cash and working capital management.
- Explain why it is important to adhere to policies and procedures for handling clients' money.
- Identify weaknesses, potential for error and inefficiencies in accounting systems including
computerised accounting systems.
- Recommend improvements to accounting systems to prevent error and fraud and to improve
overall efficiency.
- Explain why appropriate controls are necessary in relation to business and IT systems and
procedures.
- Identify business uses of computers and IT software applications:
(i) Spreadsheet applications
(ii) Database systems
(iii) Accounting packages
- Describe and compare the relative benefits and limitations of manual and automated financial
systems that may be used in an organisation.
Overview of Important Terminology
Term Meaning
System A series of independent but irrelated tasks which must be followed in order
to achieve the desired objective
Policy Guiding principle
Procedure A set sequence of steps to be followed
Guideline A recommended approach or path to follow which is made by the experts in
the field
Organisation's system requirements in relation to the objectives and policies of the organisation
Existence of a Formal System in place has the following advantages:
● Training of new staff

● Written procedures reduce the scope for uncertainty
● Most efficient way is followed by employees rather than using their own personal judgements
● Convenient for auditors to check for transactions that are recorded in the same manner
● Easy to identify errors and frauds by checking the transactions wherein the procedure was not
followed to the letter
Designing Systems
A system is a series of procedures. The creator or designer of the system is required to consider the
objectives of the system, the required outputs and expected inputs; he/she is also required to
amend the system to safeguard it from the ‘what could go wrong factors’.
For designing any system, make the following box:
Objectives
Outputs
Inputs
What Could Go Wrong
Main financial systems used within an organisation:
(i) Purchases and sales invoicing

(ii) Payroll
(iii) Credit control
(iv) Cash and working capital management
Purchasing System
The following stages occur in the purchases cycle and each stage has its own importance, challenges
and control measures:
Stage Administration What can go wrong? Control Measures

Requisition Production department decide upon Business may wait until Perform weekly
the quantity of goods required to the end moment and not checks on inventory
carry out the production and then negotiate competitive levels.
requests for the required prices or result in idle Have the requisition
goods/services which then need to be production time, order approved by
approved by the supervisor and wrong inventory or the purchasing
agreed upon by the ordering inventory that is not manager
department required may be ordered
Order The ordering or purchasing Have multiple copies sent Match the purchase
placed department will place the order with to all the necessary order to the
the required supplier after finding a departments and requisition order.
suitable supplier and negotiating a recipients Have all the
price and getting it approved by the managers namely
purchase department. purchasing,
procurement and
production manager
sign off on the
purchase order copy
Goods It must be ensured that the goods The employee not Issue of goods
received received are accounted for. The sending a copy of a goods received note after
required goods should be in proper received note (document checking the
condition and quality confirming that the condition of goods
customer has received and investigate any

the goods mentioned in discrepancies
the note) to the suppliers. immediately.
Good received are not of Perform regular

the desired quality all purchase Ledger
quantity reconciliations
Goods received note is

not allocated to the
supplier that has sent the
goods
Invoicing and Asking the supply company for an Wrong entry being made Have an auditor
reporting in invoice and ensure that the type of in the books of accounts cross verify all
the financial goods and prices of goods were as for the purchase. entries made based
statements discussed before and record these on business
invoices in company accounting documents
system
Making Payment to the supplier should first Certain suppliers may not Ensure on a weekly
Payment be approved by the senior managers be paid their dues even basis if any suppliers
when the credit period ends after the credit period are pending (any due
ends payments)
How can Talvar Inc ensure that they record all purchases made against the right supplier?
A. Ensure on a weekly basis if any of the suppliers are pending (any due payments)
B. Have an Auditor cross verify all entries made based on business documents
C. Have all the managers namely purchasing procurement and production manager sign off on
the purchase order copy
D. Perform weekly checks on inventory levels
Sales System
The following stages occur in the sales cycle and each stage has its own importance, challenges and
control measures:

Order received ● Depending on how ● Order details ● Ask the
the order is received can be recorded customer to
via post, fax, email or incorrectly confirm the
call order details
● Record should be via email so
made of all the that there is a
incoming orders with proper record.
multiple copies of
these records
Order processed Perform an inventory Business may Check with the

check to ensure that the overextend themselves production manager or
required goods are present and over commit to store manager if they
and in proper condition. supplying goods that can meet these
they cannot supply. requirements
Customer due diligence to
ensure the credibility of Confirm orders with Ask for advance or
the customer customers who are not supply goods against
eligible due to their payment or stick to the
invalid credit history set credit period for
customers
Goods dispatched Ensure that the goods are The goods dispatched Goods dispatch note is
dispatched to the note could be issued crosschecked against
customers proper address without confirming it goods and send to the
and in a timely manner and with the actual goods customer
the customer has signed supplied.
the goods dispatch note
This could lead to less or
more goods being
supplied.
Invoicing and Ensure that the sales Wrong entry being Have an auditor cross
reporting in the invoice is sent to the made in the books of verify all entries made
financial customer and all accounts; either wrong based on business
statements paperwork including the party or amount documents
record of the invoice,
goods dispatch note and
any other Internal paper
work is recorded in the
books of account
Receiving Customers who have paid Customers have already Ensure there are
payment via cheque or bank paid but their entries employees who follow
transfer, their entries may not be recorded in up with customers for
should be recorded in the the financial statements payment on a timely
books. basis
Credit controller should There will be customers

contact the customers who who have not made the
have not made the payment and are way
payment yet beyond their credit
period
Payroll System
• Responsible for maintaining variable data [timesheets, leaves taken by employees, hours worked
by employees] and fixed data [pay rates, pay rise, details of employees, holidays]
• Compute the net pay [gross pay-tax]
• Prepare payroll reports [used by management], employee payslips and makes payments to the
employee directly or via accounting department

Record the hours Use of timecards or Incorrect data inputted. All the data input should
worked automated systems to be having management
record the hours Overwriting and other authorisation and
worked. form of manipulation in verification
the time cards.
Approved by a
supervisor generally.
Record the Working overtime is Manipulation and ghost Segregation of tasks

overtime paid additionally and employees and duties in the payroll
thereby needs to be department
recorded and approved
by a supervisor
Determine or On a monthly or annual Incorrect rate of pay Regular review and

refer to the basis. entered. update of staff data.
payrates
Change in pay rates Information of Authorisation of
must have the superior’s employees not management for the
approval maintained correctly. employee database and
verification of
Certain employees may employees should be
not be added or done
removed from the
company database
Computation of No. of hours x rate per Mistake in calculations Random surprise audits
Pay hour; the fixed amount resulting in a difference on payroll calculations
of monthly pay
Computation of Differs for every Mistakes in calculations Have a qualified

Deductions country. It could be tax resulting in a difference. accountant review the
and social security. It deductions calculated
will be deducted from Missed certain

gross pay. deductions in
calculations
Net pay paid to Paid at the end of the Over or under payment Random surprise audits
employee month via bank transfer. made to employees on payroll calculations.
If paid in cash then this Automate these payroll

has to be acknowledged systems.
by the supervisor
Timely reconciliations
for any discrepancies
and adjustments made.
Cash System
The cash system is mainly divided into 3 parts:
1) Receipt System
2) Payment System
3) Petty Cash System
Receipts System
● Cheques received from customers as a payment for goods supplied by the business must be
recorded in the cash book as well as in the customer’s account as a part of the double entry
bookkeeping system
● These cheques must be deposited into the bank in a timely manner.
● There must be controls in place, so that all cheques received by the business are banked and
none of them are lost. For this, a supervisor and accounting department employee could work
together
● Customer paying directly paying directly via NEFT, IMPS or RTGS; this requires the cashier to
browse through the bank statement carefully and put details into the cash book. Make sure
that the relevant sales ledger entries are passed which reflect a deduction in the customers
outstanding balance
Payments System
● Suppliers have to be paid their dues before the end of our credit period via cheques
● Generally, a cheque requisition form needs to be prepared before payment wherein the
condensed ledger, cheque made and cheque requisition form will need to be approved from
the senior manager
● Cheques for a large amount of money generally require multiple signatures and approval
● Company paying suppliers via NEFT, IMPS or RTGS require approval from senior management.
If such systems are not followed than the company might face a situation like that of Citi bank
Petty Cash System
Petty cash refers to small sized transactions involving small expenses which are clubbed into a
common heading of petty cash rather than maintaining individual ledgers which over crowd the
ledger books.
The mechanism works in the following manner:
● A standard balance known as float is maintained at the start of every month

● Cheques are used to encash the float and is maintained by the petty cashier
● Staff will ask the petty cashier for money which he will give in exchange for generating
vouchers
● At the end of the month another cheque is issued to restore the petty cash ledger balance to
the float.
The Cash System is divided into parts
A. Receipts System, Payments System & Cash System

B. Petty Cash System & Cash System
C. Cash Ledger and Bank Ledger
Inventory System
The inventory system is not a standalone system, rather an aggregation of different types of systems
dependent on each other
Link to Purchasing System Raw Material Purchase

Should be Valued at Year End Raw Material Inventory
Should be Valued at Year End Work In Progress Inventory
Should be Valued at Year End Finished Goods Inventory
Link to Sales System Inventory Sold
• The production manager will decide on levels of raw material purchases based on pending orders
and inventory in hand; many organizations have automated this process via ordering when
inventory reaches the reorder level (a pre-determined level of inventory at which the company
should replenish the stock)
• Raw material purchase is stored in a common location alongside other raw material
• The production manager, when in need of raw materials will fill out requisition form and transfer
raw materials from the raw materials pool to the production site.
• Partially completed goods which are more commonly known as work in progress and finished
goods will be stored separately
• Finished goods when sold will have to be deducted from the finished goods inventory. At the year
end, an inventory count will be done to represent closing inventory of raw materials, work in
progress and finished goods. These will be inputted in cost of goods sold in SOPL and current assets
in SOFP.
Importance of adhering to policies and procedures for handling clients' money
Organisational control has the following advantages:
1. Prevent companies’ assets from being stolen or damaged and thereby saving on the
replacement cost
2. Prevent fraud from occurring and safeguarding the resources of company
3. Higher efficiency thereby more productive use of company’s resources
4. Prevent errors and lower chances of errors thereby savings in terms of time and money
Now these core advantages are for every one of the systems studied above including – purchases,
sales, wages, cash and inventory.
System Purpose Key Areas

Purchasing Safeguard company assets Ensure that the good received are not damaged
and payment is made only for the quantity of
goods received
Higher efficiency Ensure that quantity trade discounts or low prices

are paid via searching for different suppliers.
Prevent fraud from Prevent staff from accepting bribes from suppliers
occurring
Prevention of errors Ensure that the right amount is paid to the
suppliers and all transactions are reported
Sales Safeguard Company Ensure that only the customers who have ability to
Assets pay are supplied by the business
Higher Efficiency Ensure correct processing of orders so wrong goods

are not delivered in the wrong location
Prevent Fraud from Prevent cash received from customers from being
occurring stolen
Prevention of Errors Ensure that the right quantity, type and quality of
goods is dispatched and recorded
Wages Safeguard Company Prevent theft of cash wages

Assets
Higher Efficiency Ensure that employees are only paid for the total
amount of time worked and these hours are not
inflated
Prevent Fraud from Ensure that there are no ghost employees and
occurring employees do not claim pay for inflated hours
Prevention of Errors Ensure all transactions are recorded correctly
Cash Safeguard Company Prevent cash from being stolen

Assets
Higher Efficiency Ensure there is not a lot of cash lying around as the
business will have an opportunity cost in the form
of lost interest earned if that cash were deposited
Prevent Fraud from Fake bills and expenses by employees must not be
occurring entertained
Prevention of Errors All cash book transactions must be correctly

recorded
Inventory Safeguard Company Safeguard inventory from being damaged or stolen

Assets
Higher Efficiency Optimum production and inventory levels to
prevent excess inventory costs
Prevent Fraud from Safeguard inventory from being stolen by

occurring employees
Prevention of Errors Ensure proper computation of finished goods cost
Safeguarding inventory from being stolen by employees will result in which of the following
advantages:
A. Safeguard Company Assets

B. Higher Efficiency
C. Prevent Fraud from occurring
D. Prevention of Errors
Weaknesses, the potential for error and inefficiencies in accounting systems including
computerised accounting systems.
Automated Systems
Automated or computer systems and nowadays used by all organization from small to big
businesses. Wherein small organisations use standardised softwares like Tally and ERP while large
organisations use Bespoke systems like Sales Force or SAP or even a customized software.
Automated systems mainly became popular as they allowed easier data analysis.
Automated Systems have the following features:
1. Enhanced Management Supervision –
Allows management to easily supervise and evaluate the activities of subordinates and detect
discrepancies on the click of a button which can then be investigated further
2. Data vulnerable to corruption and hacking
When everything is computerised, there is a high chance that hackers with malicious intent could
gain access to the data thereby corrupting or leaking the sensitive data
3. Over concentration of power in IT department
The IT department will have access to all data within the organization and can cause the organization
to standstill with the press of a button.
4. Standard procedures and norms for transaction processing
All transactions are performed in a standardised manner.
Manual Systems
● High initial setup cost ● Slow at performing calculations and
absence of automatic calculation
● Portable ledgers which can be reviewed functions of spreadsheet
easily
● Time consuming analysis and
● Whitening fluid and overriding can be preparation
used to rectify errors
● Difficult to audit
● No computer knowledge required
Automated Systems
● Quicker to process more transactions. ● High set up cost
Less time taken without mistakes being
made ● Requires training of employees
● Better security with password setups. ● Vulnerable systems may be hacked or

Allow only authorised personnel to access even crash
the data
● Main advantage of an automated system

is that it enables easier analysis of data
which is key in the 21st century
Improvements to accounting systems to prevent error and fraud and to improve overall efficiency
Data consists of raw facts and figures gathered and stored. It has no clear meaning until it is
processed, analyzed and sorted into information.
Types of data
1. Quantitative data is data which can be measured numerically.

E.g., Quantity of material used
2. Qualitative data represents a characteristic of the data.

E.g., the type of metal used in the process
3. Primary data is data collected specially for a specific purpose and is first-hand collected
data.
E.g., Survey form made and responses collected
4. Secondary data is data that has already been collected by someone else for a purpose and is
now being used by us.
E.g. Using data published in newspapers, internet, etc.
5. Discrete data is data that will have a specific integer value.

E.g., you can have either 1 or 2 people, you cannot have 1/2 a person!
6. Continuous data is data that can have any value

E.g., we can be 50.2348 kg!
Information is data processed in such a way so that it is meaningful to the person who
uses it to make decisions like shareholders, management, suppliers, etc.
In order to be helpful in decision making, information should have certain characteristics

which can be summarized by using the acronym ‘ACCURATE’-
Full form Explanation

A Accurate Information should be accurate but not
excessive.
C Complete The information provided should contain

everything needed to make the decision, without
unnecessary information.
C Cost effective The information should not cost more than the
benefit it will provide.
U Understandabl Information should be understandable to the

e people who are using it.
R Relevant Information provided should be relevant to the

decision being made.
A Accessible Information provided should be accessible by the

person who needs it.
T Timely Information should be provided before the

decision needs to be made, there is no point in
the information being provided after.
E Easy to use Information should be easy to use.
Types of Information systems
Recap about the strategic, tactical and operational levels of management from the following
diagram -
As each level of management requires different types and lengths of information, different kinds of
information systems are needed to capture and present the said data.
Information systems (IS) refer to the management and provision of information to support the
running of the organisation.
There are majorly 5 types of IS –
1. Transaction Processing System (TPS)
These systems are used to record daily transactions of a business and are mainly used by the
operational level of management.
E.g., Using Tally to record daily journal entries on a daily basis to record financial data
2. Management Information System (MIS)
An MIS uses the data from the TPS and converts it to make it meaningful for the tactical level of
management. An MIS is used to control, appraise as well as use historic data to forecast future
predictions.
E.g., Sales data from TPS is being used to divide the sales done by each geographical location
3. Decision Support Systems (DSS)
As the name suggests, these systems help management take decisions using internal and external
information, especially in scenarios when a high level of uncertainty is involved.
A key point to note here is that a DSS is customised to suit the needs of the organisation.
E.g., An investing firm would build a DSS which would by default calculate some important financial
ratios of the investment and show them in ways like graphs and charts.
4. Executive Information systems (EIS)
An EIS is to be used by the board of directors and senior management of the company to gather an
overview of the performance of the business. The output of EIS is usually in the form of summarised
reports.
5. Expert Systems
Expert systems are used by specialist and professionals to aid them in their work. Technical aspects
are to be embedded in the system only. Lawyers, accountants, medical professionals all use expert
systems.
E.g., An accountant using an expert system to file tax returns for clients.
Syllabus area no
- Identify business uses of computers and IT software applications:
(i) Spreadsheet applications
(ii) Database systems
(iii) Accounting packages
- Describe and compare the relative benefits and limitations of manual and automated financial
systems that may be used in an organisation
Software Applications
Software applications are computer programmes that are designed to help users with certain tasks.
Three types of software applications that exist include –
(i) Spreadsheet applications – Used to analyse data, for number crunching and graphical
representation of data.
(ii) Database systems – Used to store large amounts of data sets.
(iii) Accounting packages – Assist in preparation of financial statements at the year end and
management reports as well.
The advantages and disadvantages of each system are as follows-
Spreadsheets
1) Easy to use Difficult to identify data errors
2) Little to no training required for use Multiple users cannot use it at the same time
3) Widely used in the corporate world Finite amounts of data can be stored
compared to databases
Database Systems
1) Two or more users can use the data at the Training of employees to use the database is
same time required
2) Changes made to the data do More expensive than spreadsheets

not corrupt the programming
(e.g. at the cell level of a spreadsheet
where calculations are running).
3) Better security features Difficult to migrate from one database system

to another in terms of time and cost
Accounting Packages
1) Faster and efficient recording of Requires training of personnel
accounting data
2) Probability of making a mistake is low Can be expensive
3) Quicker generations of reports and Not cost efficient for small businesses with
financial statements low transaction volumes
An EIS system is used for the following purposes:
A. Used to record daily transactions of a business and are mainly used by the operational level
of management.
B. Uses the data from the TPS and converts it to make it meaningful for the tactical level of
management
C. Help management take decisions using internal and external information, especially in
scenarios when a high level of uncertainty is involved.
D. Be used by the board of directors and senior management of the company to gather an
overview of the performance of the business
Advantages of Computerisation
The advent of the age of computers has certainly been a big boon with several advantages in terms
of –
1. Speed – Repetitive process have been automated. There are increased outputs due to faster
processing speeds compared to manual work
2. Accuracy – The chances of a computer making a calculation error or any other error are near to
zero.
3. Volume – Large volumes of data can be managed and processed 24/7
4. Complexity – Supercomputers are used to perform calculations in a week which would take
years for human minds to solve.
5. Cost effective – Computerisation has led to tremendous amounts of cost savings in the
accountancy, banking and insurance companies.
6. Presentation – Softwares like Microsoft word and PowerPoint help present data and information
in a much more eye-pleasing fashion.
PO22 – DATA ANALYSIS AND DECISION SUPPORT
Description
You use commercial acumen to articulate business questions to resolve problems, exploit
opportunities, identify and manipulate relevant data requirements. This helps in analysing data by
applying appropriate techniques. You draw clear conclusions and present your findings to enable
relevant stakeholders to make sound business decisions.
Elements
a. Identify any relevant financial and non-financial data and use it to provide insights to answer
important business questions and provide solutions for your organisation.
b. Use appropriate analytical tools to process, manipulate and analyse data. These tools could
include spreadsheet applications or more technical statistical analysis software.
c. Apply modelling techniques to deliver specific types of analysis, which may include: scenario
analysis, forecasting, optimisation problems or cost-benefit analysis.
d. Use data and resulting information ethically and responsibly, analysing and interpreting data
sceptically to draw appropriate conclusions and make recommendations to support effective
decision-making.
e. Communicate the recommendations to relevant stakeholders in a way they can easily visualise
and understand, to exploit business opportunities, manage risk and evaluate performance.
Internal controls, authorisation, security and compliance within business
Syllabus area C6
- Explain internal control and internal check.
- Explain the importance of internal financial controls in an organisation.
- Describe the responsibilities of management for internal financial control.
- Describe the features of effective internal financial control procedures in an organisation,
including authorisation.
- Identify and describe the types of information technology and information systems used by the
business organisation for internal control.
- Describe general and application systems control in the business.
Internal Controls and Internal Checks
“Internal control represents the system or policies and procedures implemented by an organization”
Those charged with governance provide reasonable assurance about the reliability of financial
reporting, the effectiveness of operations and compliance with relevant regulations by maintaining,
controlling and implementing internal controls.
It is crucial for an auditor to understand its entity and the internal controls operating within the
entity in order to determine the accuracy of financial statements, whether they have been prepared
in compliance with all rules and regulations and also the efficiency of management preparing them
can be assessed.
Importance of Internal Financial Controls within an organisation
The need for internal control:
● Fraud, wastage and errors can be avoided.

● Accuracy of all data, statements and recorded can be maximized.
● An auditor can determine the degree of reliance that can be placed on the internal control
systems and thus, can determine the accuracy of the financial statements.
● Any weakness identified during the audit can be reported to management in order for corrective
measures to take place.
● Designing effective substantive procedures.
● Planning of an audit can take place once the auditor determines the various systems in place.
● Various components of internal control can be taken into account while planning the audit,
these include:
▪ Identifying the types of misstatements, the entity is susceptible to.
▪ Consideration of all factors affecting the risk of misstatement.
The organisation rule prevents employees from working on the transaction processing system on
Saturday for auditing and maintenance work. This is a part of internal control. Is the above
statement True or False?
A. True
B. False
Components of Internal Control
Control Environment The tone of the organization is set by establishing the

control environment of an entity. This includes the
awareness, attitude and actions of TCWG in relation to
internal controls and its importance within an entity.
Understanding the entity’s risk The auditor must understand the management’s
assessment process process to identify the potential risks in financial
reporting and how management deals with such risk.
After which, the auditor would evaluate the
effectiveness of the entity’s process of risk assessment.
Information system and Understanding the recording of transactions and how

communication they are reported in the financial statements is
important for the auditor.
He shall also understand how the entity communicates
financial reporting roles.
Control Activities “These are policies and procedures which help ensure
the management directives are carried out”.
The auditor must understand these in order to be able
to assess the risk of material misstatements and to
design further procedures.
Examples of control activities include:
a) Segregation of duties
b) Information processing
c) Authorization
d) Physical controls
e) Arithmetic controls
f) Performance reviews
g) Account reconciliation
Monitoring of Controls The auditor would check if the internal controls in

place are effective and efficient.
Ensuring effectiveness of internal financial controls
Ensuring that the internal financial procedures are able to meet with the organisation's expected
objectives involves the following actions:
● A regular risk assessment protocol

● Systems in place to prevent and detect any frauds and errors
● Safeguard the company assets
● Preparation of company’s financial information in a timely manner
● Recording of accounting records
Achieving these objectives will require the business organisation to have a thorough internal
financial control system which has all the five components of the internal control system.
Features of Effective Internal Control Systems
Corporate Governance Internal Controls

Board of Directors Combination of executive and non- Quality control environment
executive directors who are responsible and risk assessment
for the internal control system procedures
Company Employees Should be made aware of ethics in Good information system and
general and business ethics with continuous flow of information
relevant training given between the organization
Internal Audit Investigation of internal control Appropriate control activities

standards
External Audit Reporting of weaknesses in the internal Monitoring of control

controls over the course of the audit
procedure
Alternative Internal Controls
The three types of alternative internal controls are as follows:
1. Preventative controls: these controls prevent frauds and errors from occurring. This includes having
honest staff, authorisation controls and segregation of duties. Rather than over concentration of
power and responsibility in one person’s hands.
Detective controls: these controls detect any problems that have occurred and are designed with the
intent to identify errors that could have been prevented. Search detective controls include frequently
occurring internal checks, supervision and reconciliations.
2. Corrective controls: such type of controls serves the purpose of dealing with any problems that have
already occurred. Corrective controls include necessary management action and follow-ups.
Among all of these controls, it is said that preventive controls is more effective. It stops problems
from occurring rather taking action to detect or correct the errors once they have occurred.
However in real life, there is always a possibility that it is too late to solve the problem.
The system has a control built in which disallows payments of more than $10,000 without the
manager’s credentials or approval. This is which type of control?
A. Preventative controls
B. Detective controls
C. Corrective controls
D. External Controls
Responsibilities of management for Internal Financial Control
The responsibility of ensuring that proper internal control systems are operational and present
within the company lies with the senior management officials and directors of the company.
The board of directors of the company are legally responsible and held accountable to safeguard
company assets, prevent fraudulent practises within the company and maintain accounting records
thereby all of this requires proper internal control.
Even though internal financial control may only form a segment and part of the overall internal
control, the entire board of directors are responsible and held accountable for all types of controls
that exist within the business irrespective of whether they are operational, compliant or financial.
General and Application System Controls in business
Control activities are affected by information technology, the security and integrity of the
information held. Thus, an effective information technology system would have specific control in
place. These controls are of two kinds, these include:
(a) Application controls

(b) General controls
Application controls are “those controls relate to transaction and standing data relating to a
computer-based accounting system.”
These controls are application specific to ensure that there is completeness and accuracy of
information and entries made. For a computer-based system to be effective, there must be effective
controls at the point of input, processing and output stages of the processing cycle and the standing
data contained.
Application controls must be recorded and evaluated by the auditor as a part of determining the risk
of material misstatement in the client’s financial statement.
1. Input controls: These are put in place to ensure accuracy, completeness and timeliness of
data when it is transferred from its original form into the application system.
Examples of input controls include:
- Format check
- Range check: to verify arithmetical accuracy.
- Compatibility check
- Exception check
- Sequence check: to ensure the number sequence is complete and no items are missing.
- Control totals
- Existence checks: to check employees exist.
- Check digit verification
- Document counts
- One for one checking
2. Processing controls: These exist to ensure that all data input is processed correctly and the
data is appropriately updated on a timely basis.
3. Output controls: These exist to ensure that all data is processed and distributed only to
authorized users. These would vary from company to company; however, the most common
ones include:
- Careful scheduling of the processing of data to help facilitate the distribution of information
to end users on a timely basis.
- Ongoing monitoring by a responsible official, distribution of output and to ensure only
authorized users are given access to this data.
Application Controls
1. Segregation of Duties
Assignment of roles or responsibilities to ensure the tasks of authorising, recording transactions

and maintaining custody of assets are carried out by different people, thereby reducing the risk of
fraud and error. For example, the payables ledger clerk recording invoices in the payable’s ledger,
and the finance director authorising the payment of those purchase invoices.
2. Information processing
Controls including application and general IT controls, which ensure the completeness, accuracy and
authorisation of information being processed. For example, use of batch control totals when
entering transactions into the system.
3. Authorisation
Approval of transactions by a suitably responsible official to ensure transactions are genuine. For
example, authorisation by a responsible official of all purchase orders.
4. Physical Controls
Restricting access to physical assets as well as computer programs and data files, thereby reducing
the risk of theft. For example, cash being stored in a safe which only a limited number of employees
are able to access.
5. Performance reviews
Comparison or review of the performance of the business by looking at areas such as budget versus
actual results. For example, the review by department heads of monthly results of actual trading
to budget and prior year, with analysis of variances.
Types of Information Technology and Information Systems used by the business organisation for
Internal Control
The organisation’s IT systems and software play a key role for the thorough operation of internal
controls
IT in general controls include the following:
1. Physical controls- with the intent to prevent unauthorised access to computer and IT
equipment. For example: passwords, door locks and card entry systems with surge protectors
in place to guard against any power surge.
2. Output controls- ensuring that system output does not fall in the hands of unauthorised
personnel. Example: a list of people with clearance to access the information.
3. Technical support-the IT department is available at all times to ensure that any sort of
technical support is valuable
4. Hardware and software configuration- ensure that the system is tested and correctly installed
to minimise any chances of error and damage
Application controls
IT make sure that these types of controls ensure the following:
● Completeness of the data input

● Authorise personal to input data
● The authorised personnel can be identified uniquely
● Data validity
● Forensic checks such as form and control totals
Physical controls are which type of controls
A. Application Controls
B. General Controls
Fraud and fraudulent behaviour and their prevention in business
Syllabus area C7
- Explain the circumstances under which fraud is likely to arise.
- Identify different types of fraud in the organisation.
- Explain the implications of fraud for the organisation.
- Explain the role and duties of individual managers in the fraud detection and prevention
process.
- Define the term money laundering.
- Give examples of recognised offences under typical money laundering regulations.
- Identify methods for detecting and preventing money laundering.
- Explain how suspicions of money laundering should be reported to the appropriate authorities.
Definition of Fraud
Fraud: is defined as an intentional act where in a party is deceived to obtain an unfair and illegal
advantage. Fraud is a criminal offense punishable by fine or imprisonment or both
Errors: They are unintentional mistakes and are a part of human nature which can be prevented or
detected using internal control systems
Irregularity: refer to a contradiction to a particular rule or standard
Mistreatment: It is when something which is stated incorrectly as a result of fraud, irregularity or

error
Examples:
Fraud – There are 80 employees on a production site yet 82 employees are being paid by the cashier.
The additional employees are ghost employees [employees only on payroll and do not exist] thereby
the cashier is pocketing the additional wages of 2 employees thereby a textbook fraud is being
committed.
Irregularity – In the petty cash a/c, there was a transaction of $8,000 recorded on the expense side.
[This is a human error $80 recorded as $8,000].
Misstatement – Sales recorded as $150,000 instead of $180,000 this could be intentional [then a
fraud] or unintentional [human error].
A person entering 60 instead of 66 as the no. of employees as an honest mistake. This would be
classified as:
A. Errors
B. Irregularity
C. Mistreatment
D. Fraud
3 Pre-requisites of Fraud
Prerequisites refer to any aspects or qualities which are required before the action occurs.
Thereby for fraud to occur, the 3 prerequisites are as follows:
1. Dishonesty
2. Opportunity
3. Motivation
All the above 3 are usually required to influence an employee to become fraudulent.
The following factors or indicators may represent an increased chance of fraud and error occurring:
● Transactions of unusual size and unusual nature

● Employees spending
● Low staff motivation
● Complex organizational structure
● Personnel not taking any holidays
● Absence of thorough monitoring of internal control systems
● [Excessive] payments not directly proportionate to effort
Organisation allowed an employee who is an ex-convict to carry $10,000 cash to be deposited into
the bank. If a fraud occurs, then by giving an employee the cash, they satisfied which pre-requisite of
fraud:
A. Dishonesty
B. Opportunity
C. Motivation
Example of Fraud
Fraud by Management ● Use of company resources for personal gain

● Cooking the books
● False claims
Fraud by Employees ● Deceiving the company

● Use of company’s resources for personal gain
● Accounting Fraud
Fraud by External ● Fake Bills

Parties ● Overcharging and/or underdelivering
● Ponzi schemes
Types of Frauds in depth
1. Misappropriation of assets
• Physical Assets like inventory or non-current assets may be written off and stolen by employees
• Sale of intellectual property right to competitors
• Thereby misappropriation of assets refers to misplacement or theft of company assets
2. Using the company’s assets for personal use
This is often done by the senior management - where in company assets like the company plane is
used for personal gain or use
3. Sales Ledger Frauds
Stealing receipts received from debtors in the form of cash (or cheque pocketing them) and either
writing them off as a bad debt or never recording them in the accounting books
4. Purchase Ledger Frauds
The most common type is teeming and lading wherein the purchase department will collude with a
supplier to inflate the prices of goods and services and taking their cut from the supplier OR
dummy purchase invoices entered into the system and payments made in the fraudsters account in
exchange for these invoices.
5. Skimming Schemes
Here a large volume of small value thefts are committed as small value thefts are not investigated.
However, it totals to a huge amount.
6. Payroll Fraud
Fraudster setup up ghost employees in order to pocket the ghost employee’s salary
7. False Billing Fraud
Fake invoices and bills to pocket the cheques written to these fake companies
8. Bank Account Fraud
Setting up bogus direct debits and credits from the business’s bank account to the fraudsters
9. Advance Fee Fraud
These refer to the frauds committed on email where they ask for a small amount while offering
them a large amount of money. Examples are Nigerian Prince and Coco Cola Scams.
10. Ponzi [Pyramid] Schemes
These are fraudulent investment schemes wherein abnormal returns are offered to the investors.
This entices new investors and any time an investor wants to withdraw they are paid the money of
new investors.
The largest Ponzi scheme in the history of US is Bernie Madoff’s Ponzi Scheme [Note – Harshad
Mehta Scam was not a Ponzi Scheme rather they defrauded the SBI Bank]
Ghost employee to siphon payments from company to organization’s accountants are considered
which type of fraud:
A. Skimming Schemes
B. Payroll Fraud
C. False Billing Fraud
D. Bank Account Fraud
Answer: B
Fraudulent Financial Reporting [Creative Accounting in depth]
As the name suggests, this means including false statements in the accounts. This can be undertaken
to give altered information to the users of the financial statements. These statements do not give a
true and fair view of the company.
Examples of Fraudulent Financial Reporting:
● Concealment of material facts that directly impact the financial statement

● Alteration of financial records which are unusual in nature
● Manipulating the recording of financial transactions by preponing or delaying the recording
of these transactions
● Use of fictitious assets prior to year-end thereby cooking the books
● Inappropriate judgements and assumptions in recording key business transactions.
Few examples of creative accounting [cooking the books / earnings management] include the
following:
1. Window Dressing
2. Delaying or Accelerating Company’s Expenses
3. Manipulation of Revenue Recognition
4. Off Balance Sheet Accounting
Window Dressing
It is a misrepresentation of the financial position via inputting the transaction before the year end
and it is undone/reversed after the year end with the intent to inflate the company‘s financial well-
being at the year end as bonuses may be linked to it.
Example: Sale of $10,000 will be recorded in the month of December however, an equivalent credit
note will be issued thereby nullifying the impact. The sales figure will appear inflated by $10,000
which improves the appearance of the company’s operational performance. Thereby this is
fraudulent in nature.
Delaying or accelerating a company’s expenses
Showing an expense as an asset on the balance sheet rather than writing it off against profits is a
quick way top improve reported profits. This an unacceptable accounting practice.
Organisations may try to delay the company‘s expenses so that it appears next year thereby their
current year‘s profits will be high which is directly linked to their bonuses.
Manipulation of Revenue Recognition
Revenue is arguably the key figure which all business owners and investors care about which is why
it may be manipulated to present a false image of the company‘s financial and operational position.
Example-if the company has taken a long-term contract wherein it may be paid upfront however the
work will require four years. The company must pro rate the revenue and use IFRS 15 instead of
recording it as revenue in the first year itself and presenting a false image.
Off Balance Sheet Accounting
As the term suggest it means not including certain items of the balance sheet - assets and liabilities
in order to mislead and present a false image of the company‘s financial situation.
Example-new assets purchased for the financial year should be recorded in the company’s books,
creating a reduction in the cash and bank equivalents and an increase in the non-current assets,
however if neither of these adjustments have been made, this refers to off balance sheet accounting
Money Laundering
It is a process whereby money and assets are received from illegal activities. Through a series of
steps, these are converted into assets appearing to have a legal origin. This makes this money/asset
free of any suspicion.
The money and assets include cash, stocks and any other tangible assets like land, government
bonds or even gold.
Money laundering consists of 3 phases (these are always tested in the exam)
Step 1 – Placement
The amount received from criminal activities is disposed into an apparently legitimate business
activity or asset.
Step 2 – Layering
Here the amount is transferred from one business or place to another a few times. This creates so
many exchanges(layers) for the supervisory authorities to go through that it makes it nearly
impossible to trace the origin of the amount.
Step 3 – Integration
Here as a summing up of all the previous procedures, the money gets an official appearance and
now can be used by the person.
These might make the concept more interesting:

https://www.youtube.com/watch?v=257wV-AbKaE (check it out on the LMS)
E.g. - a drug dealer who has bundles of cash from selling drugs will open a chain of fitness centres,
nail salons, massage parlours and use the cash to show as fake cash sales and generate fake receipts
and bills. By this he has converted the cash from drug dealing with cash from legitimate business
which can be deposited into the bank and has a paper trail.
Recognised offences under typical Money Laundering Regulations
The PCA includes 3 offences:
1. Laundering:
We just learnt what laundering is. Let’s get a few specifics clear. As per PCA, criminal property is any
property the offender receives knowing that it’s derived via criminal conduct. Criminal Conduct
includes:
● An offence in any part of UK

● Would be an offence in any part of the UK if it occurred there.
2. Failure to Report:
When an individual carries on a ‘relevant business’ where they are sure, suspect or have reasonable
grounds to suspect that another person in the business is engaged in money laundering, that
individual is guilty of failure to report.
This only includes professionals like accountants who knowingly ‘act in the course of business in the
regulated sector.’
‘Such an individual is required to disclose any laundering activity to a nominated Money Laundering
Reporting Officer within their organization or straightaway to the National Crime Agency.’
3. Tipping Off:
Where an individual makes a disclosure to that offender, it may harm the Money Laundering
investigation. For e.g.: An accountant who was interrogated by the authorities informs his boss of
the investigation.
A drug dealer buying bulk goods from Amazon in cash [drug money] and returning these goods to
Amazon and having the refund transferred to the bank account. Which stage of money laundering
occurs in the ordering goods?
A. Placement
B. Layering
C. Integration
Money Laundering Regulation 2017:
It is meant for corporations and is towards the ill effects of money-laundering. This enables
corporations to implement safeguards and controls that prevent money laundering through or within
their organization. At a minimum, an anti-money laundering program should include:
- Risk assessment of money laundering and terrorist funding.

- The systems, safeguards and controls implemented by the organization should prevent money
laundering and ensure legislative compliance.
- Complying to ‘customer due diligence, enhanced due diligence and simplified due diligence
requisites.’
- ‘Enhancement of record keeping methods and data protection systems, policies and procedures.’
Certain Internal Controls against Money Laundering:
1) Firms must appoint a Money Laundering Compliance Principal (MLCP).

2) The MLCP should be a part of the BOD or is a member of Senior Management.
3) Sole practitioners are exempt from this rule.
4) Firms must also appoint a nominated member – Money Laundering Reporting Officer (MLRO),
to report suspicious activities to appropriate legal authorities.
5) The MLCP and MLRO can be the same person.
6) An organization must carry out Customer Due Diligence, which means to assess the risk of a
customer being a fraudster or a money launderer. These processes are often called “Customer
Due Diligence’ or “Know Your Customer” process.
7) For high-risk customers, Enhanced Due Diligence is conducted. This includes a background
check, verifying reasons behind transactions of a customer and increased monitoring. For low-
risk clients, Simplified due diligence is conducted.
Implications of Fraud to the Business Organization
If there is a fraud within the company and when it is exposed to all the stakeholders, the following
implications can occur:
● Shareholders lose their confidence leading to panic selling

● Reduction in businesses assets
● Financial viability of the firm is affected
● Closure of business
● Fines, penalties and legal action by authorities and shareholders
E.g. – Initially, it was called the ‘Big 5’ but when the Enron scandal became public, one of the Big 5
companies named Arthur Andersen was at the center of this scandal alongside Enron as it was a
direct beneficiary and party involved in the cover up. Thereby, when the scandal was exposed, it
took down 2 companies – Enron and Arthur Andersen. Not only was Arthur Andersen’s reputation
ruined but also they were sued by numerous government authorities and shareholders both in civil
and criminal cases. And by the time the dust settled Arthur Andersen lost all their clients, was
disgraced and forgotten by the public.
Measurement and Prevention of Fraud
In order to measure and prevent any fraud, the organization uses an internal control system.
The 5 steps of an internal control system which we studied in the previous chapter are used here:
Component Example in Practice

Control Environment The organizational structure should have authority flowing upwards and
responsibility flowing downwards
Risk Assessment IT department in their advisory capacity helps to implement new changes
Process and identify ways in which procedures can be circumvented to commit
fraud
Information System Monthly accounts must be submitted by middle management to senior

management to monitor company performance
Control Activities Allocation of responsibilities based on level of qualification
Control Monitoring Internal audit department is responsible for the review of the internal
controls and suggesting any necessary changes
These internal controls and internal financial controls will ensure the organisation is protected
against avoidable risks
Internal Control Systems must be targeted at the elimination of risk rather than management of
risk
The internal control system must be revised and updated on a regular basis to keep up with the
dynamic business environment. Fraudsters these days are coming up with new and more advanced
ways to commit fraud.
E.g. – One of the most common frauds is fraudsters posing as the employee’s HR department and
sending mails to eligible employees and asking them to make a deposit for giving an interview. This
caused a lot of problem not only for the authorities and people getting scammed but also the
company’s actual HR department in proving that they are eligible and scouting for worthy
candidates
Role of Management in Measurement and Prevention of Fraud
The employees and stakeholders of the business organization must do the following in order to
prevent fraud from occurring:
● Board of Directors – Ensure there is a robust internal control system in place. The Board of
Directors have to review the effectiveness of the internal control system and that all steps are
taken in order to detect any fraud that has occurred and prevent any future fraud from
occurring
● Audit Committee – Constantly review and improve the internal control and risk management
systems
● Employees – detection and prevention of fraud on a continuous basis by reporting any
suspicious activities that have occurred or abnormalities that exist to their superiors
The impact of Financial Technology (Fintech) on accounting systems
Syllabus area C8:

- Describe cloud computing as a capability in accountancy and how it creates benefits for the
organisation.
- Describe cloud computing as a capability in accountancy and how it creates benefits for the
organisation.
- Explain how automation and artificial intelligence (AI) in accounting systems can affect the role
and effectiveness of accountants.
- Describe how the application of big data and data analytics can improve the effectiveness of
accountancy and audit.
- Outline the key features and applications of Blockchain technology and distributed ledgers in
accountancy.
- Define cyber security and identify the key risks to data that cyber-attacks bring.
- Identify and describe features for protecting the security of IT systems and software within
business.
Financial Technology (Fintech) consists primarily of 5 broad categories –
1. Cloud Computing
2. Artificial Intelligence (AI)
3. Big Data
4. Blockchain Technology
5. Cyber Security
1. Cloud Computing
Cloud computing uses cloud service providers to store data on the internet, removing the need for
any software, hardware, applications, etc. In the accounting industry, it is very helpful as the same
data can be accessed from sitting anywhere in the world!
Some such services are Amazon’s AWS and Microsoft’s Azure.
Benefits of Cloud computing for the company include –
1. Easy sharing and access to data

2. Offers flexibility. For example, companies using cloud services would not have had a very
huge problem to shift to the work from home culture during the Covid pandemic.
3. Multiple employees can work on the same file at once
4. Extra cloud storage can be bought easily as and when the business scales
5. IT maintenance costs are reduced
6. Regular back-ups can be taken on cloud services and recovered with ease when needed
7. Cloud service provider offers better security of data at most times
2. Artificial Intelligence (AI)
Artificial Intelligence is an area of computer science that emphasises the creation of intelligent
machines that work and react like human beings.
Functions like voice recognition (E.g., Alexa by Amazon), machine learning and advanced problem
solving can be achieved with AI.
Machine learning algorithms detect patterns and learn how to make predictions and
recommendations by processing data and experiences, rather than by explicit programming
instruction.
AI and accountancy
In the accountancy profession, AI carries several benefits like increased accuracy, more constituent
outputs and better efficiency. Examples of AI and machine learning include forecasting profits using
complex predictive models with many inputs and running simulations in the books of accounts to
identify frauds.
However, it should be noted that AI and machine learning is no replacement for the human mind. It
is merely the best way for humans and machines to work together to become more efficient.
3. Big Data
Big Data refers to data sets which are of high volume and variety, relating to the consumers,
markets, competition, etc.
Such data can help identify and analyse patterns and trends of consumer behaviour, and further
help the user to exploit such data to influence choices of the end consumer.
By examining any activity of a user, several data points are plotted and such data points
help build a frame of how the consumer behaves, how the consumer buys etc. Data sets are
sets of consumers having similar data points.
Big data is used by various industries, including healthcare, weather forecasting, hospitality,
banking etc. It helps a company improve its efficiency in marketing their product, design and
develop new products, analyse and eliminate risks, make accurate forecasts which in turn
leads to profit to the society as a whole.
Example: Facebook was recently heavily criticized for harvesting data of millions of users without
consent and using and selling such big data which was misused as a tool to influence the decisions of
the masses in many significant political events around the world.
Big Data is characterized using the 3V’s
1. Volume
Volume refers to the quantity of data that is generated. Businesses, especially those having an online
presence hold huge volumes of data. Facebook claims to have 5000 data points on each of its user.
They use such data collected from our activity on the website, to show us ads they think would be
relevant to us.
2. Variety
Variety refers to the range of data that is generated. Only data of financial nature is not helpful,
operational data such as efficiency, time taken, customer choices form a larger part of big data.
Facebook has access to the user’s private information, access to photos and videos uploaded and, in
some instances, chats.
Data can be structured or unstructured.

Structured: Such data is easily available, as it is mostly in text form, such as date, amounts, items
purchased. Such data does not form a major part of big data.
Unstructured: Such data is difficult to store and analyse, as it includes drawing assumptions based
on other forms, such as audio, video, images. Such data is more useful.
3. Velocity
Velocity refers to the speed of data. Data needs to be converted into information, and the quicker
the better as information received late will not help in decision making.
Too much volume and variety lead to decreased velocity, as more data needs to be processed before
it can be turned into useful information. Companies such as Facebook, invest heavily in the
development of software that can sort data quickly!
A fourth ‘V’, Veracity is often added to this by companies -
4. Veracity (Truthfulness)
Organizations should ensure that the data they gather is accurate as if it is not, the whole data set is
useless. If data gathered by Facebook to show ads to its users is not accurate, the ads shown might
not be relevant and then the whole purpose is lost.
Big Data refers to data masses collected and analysed for individual purposes. Is this statement True
or False?
A. True
B. False
Benefits of Big data and analytics in the accountancy and audit profession include -
1. It enables innovation within the company

2. Improves productivity
3. Effective management control systems and budgeting processes are developed by the use of
big data
4. Improving the quality of accounting standards by providing meaningful information
5. Quality of audit engagements has increased. For example, entire populations of audit-
relevant data sets can be tested and verified as opposed to using sample-based testing
Risks associated with Big Data
1. Data if not held securely can lead to a security concern, as a breach of data can
lead to private information of various individuals being handed to unsafe users.
2. Incorrect data can lead to incorrect conclusions being made.
3. Poor handling of big data can lead to issues for both parties, as breaches will
lead to misuse which will affect the subject. This in turn will attract fines and
penalties, plus reputational damage for the business.
4. Data that may be of no use to the company is collected and stored together with other
important data, thus making it more difficult to identify useful data.
Example:
Big data is widely used to understand customer preferences by various websites

offering hotel bookings, effectively showing exactly what the customer is looking for,
thus saving their time. The customer will keep visiting such websites more than generic
ones where more manual work needs to be put, which benefits the website offering
such personalization.
4. Blockchain Technology
A blockchain has been described as a decentralised, distributed and public digital ledger that is used
to record transactions across many computers so that the record cannot be altered retroactively
without the alteration of all subsequent blocks and the consensus of the network.
In simple words, blockchain technology is a digital ledger where records can be stored online and not
changed. The most common application of the technology which is well known is in cryptocurrency,
for example Bitcoin, Ethereum, etc.
Bitcoins can be acquired by trading or by mining. Bitcoin mining involves solving complex math
problems on the network and as when the problems are solved the bitcoins are credited to the
person mining them.
Key Features of Blockchain Technology
1. By using the internet, any transaction done is recorded by all participants involved on the
same network. This does not include just the current buyers and seller, but all previous ones
as well, hence forming a chain of transactions; thus, the derivation of the term ‘blockchain’.
2. The details of the transactions such as the value, the time, the date and other details are
recorded when a transaction takes place. Hence, it takes the agreement of all participants in
the chain to update their ledgers for the transaction to be accepted.
3. The transactions are verified by the computers of all participants of the blockchain. The
computers work together to ensure that each transaction is valid before it is added to the
blockchain. This decentralised network of computers ensures that a single system cannot
add new blocks to the chain.
4. A special cryptographic hash is generated whenever a new block or ledger is added to the
chain which gives each block a unique identity. Due to this, it is near to impossible to alter
past records and transactions as the whole chain will need to be updated.
5. As a result, cyber security is increased as there is control over the transactions. The consent
of all parties is required to record the transaction, even if one fails to do so the transaction
would not be recorded.
Thus, the effective control system and benefits of cyber security are what are the main benefits of
blockchain.
Talking about how this relates to the accountancy profession, a permanent and transparent record
of all financial data can be available using blockchain technology. It can reduce costs of reconciling
ledgers, provide certainty as to the validity of transactions and ownership of assets as records are
unalterable and accountants can have more time to perform advance tasks rather than book-
keeping.
Blockchain Technology’s scope is limited to Bitcoin and other crypto currencies. Is this statement
True or False?
A. True
B. False
5. Cyber Security
Cyber security is the protection of internet-connected systems, including hardware, software and
data, from cyber-attacks i.e. individuals or companies trying to gain unauthorized access.
Risks to loss of data by cyber-attacks
1. Malicious Software (Malware) – Viruses and Trojan horses destroy data on the computer or
the whole network or may gain unauthorised control of the device / network as well
2. Phishing – Emails are sent with links which lead to misleading sites where personal data is
asked to be entered which is misused by the cyber attacker.
3. Denial of service attacks – Attackers overload the traffic to a website on purpose as it stops
responding or malfunctions.
4. Man in the middle of attacks - The cyber attacker becomes a middle man between the user
and the internet service provider to gather personal information of the user.
Use of Cyber Security to protect IT Systems and Software
Possible threats Possible solution to protect from it

Natural Disasters like fire, tsunami, and 1. Have compliant fire procedures in place like
malfunction of computer hardware keeping a fire extinguisher, insurance cover,
etc.
2. Don’t keep servers in basements or lower
floors of buildings which can be flooded
3. Have a cool environment with air
conditioners for servers so no overheating
occurs
4. Back-up data regularly and keep it in a
secondary location
Viruses and Trojan Horses 1. Regular audits to check for unauthorised

software.
2. Have anti-virus softwares installed on all
devices on the network.
Hackers 1. Use a firewall to prevent unauthorised

access.
2. Use passwords and unique usernames as per
the hierarchy of people in the organisation
granting limited access to data
Electronic eavesdropping i.e. leak of 1) Use of passwords and usernames

confidential information
2) Encrypt the data so no one can access it
while it is being transmitted to the receiver
Human errors Provide adequate training to employees
Having regular audits to check for unauthorised software will prevent against which type of threat?
A. Viruses and Trojan Horses
B. Human errors
C. Hackers
D. Natural Disasters like fire, tsunami, etc. and malfunction of computer hardware
Apply Your Knowledge (AYK) Answers
AYK 1:
Answer: A
AYK 2:
Answer: D
AYK 3:
Answer: b
AYK 4:
Answer: a
AYK 5:
Answer: B
AYK 6:
Answer: B
AYK 7:
Answer: B
The assumption of the Integrated reporting framework states that all types of capitals are a valuable
in nature and help in value creation in the Long run
AYK 8:
Answer: A
AYK 9:
Answer: A
AYK 10:
Answer: A
AYK 11:
Answer: A
AYK 12:
Answer: B
AYK 13:
Answer: A
AYk 14:
Answer: C
AYK 15:
Answer: D
AYK 16:
Answer: True
AYK 17:
Answer: A
AYK 18:
Answer: B
AYK 19:
Answer: B
AYK 20:
Answer: B
AYK 21:
Answer: B
AYK 22:
Answer: A
AYK 23:
Answer: A
AYK 24::
Answer: B
AYK 25:
Answer: A
Syllabus area D:
Leading and managing individuals and teams
Leadership, Management and Behaviour at the workplace 182
Leadership, Management and Behaviour at the workplace
Leadership, management and supervision
Syllabus area D1
- Define leadership, management and supervision and explain the distinction between these terms.
- Explain the nature of management:
(i) Scientific/classical theories of management – Fayol, Taylor
(ii) The human relations school – Mayo
(iii) The functions of a manager – Mintzberg, Drucker.
- Explain the areas of managerial authority and responsibility.
- Explain the situational, functional and contingency approaches to leadership with reference to the
theories of Adair, Fiedler, Bennis, Kotter and Heifetz.
- Describe leadership styles and contexts: using the models of Ashridge and Blake and Mouton.
Leadership, Management & Supervision and the distinction between these terms
Management: Definitions by Management Theorists
Supervision:
- Supervision is done by the supervisors. They are the lowest level of management. They have the
responsibility to plan and control the activities done by a group. They are responsible for ensuring
that the given tasks are performed properly and in a timely manner.
- They act as a bridge between the Management and the workers.
Managerial Authority, Responsibility and Power
Authority
As per Fayol, “Authority is the right to give order and the power to exact obedience.”
Responsibility
It is a person to be held accountable for their actions.
Note - Responsibilities cannot be delegated to other people.

If a person is given a particular task which he delegates to another person he is still responsible and
accountable if the task is not done well.
Power
Students usually confuse Authority with Power. Authority is the right to do something. Whereas
Power is the ability to do something.
French and Raven identified five types and sources of power which are as follows:-
1. Reward power-Here the manager derives power because of his ability to provide rewards to the
workforce in exchange for their obedience. This includes pay raises and bonuses
2. Coercive Power - The manager derives power because of his ability to punish the person if they
are not able to carry out the responsibilities and orders given. This includes a pay cut or maybe
even a demotion.
3. Expert power- Here the manager derives power because of his ability to exercise his specialised
knowledge and expertise, which are only possessed by him and not anyone else.
4. Referent power - Here the manager derives power because of his skills and the personal traits
which others may wish to copy or emulate.
5. Legitimate power- Here the manager derives power because of his authority power or the power
which is derived from the designation. This includes seniority which the senior managers have
over the juniors or their immediate subordinates.
Other sources of power have also been identified which are –

6. Resource power-this type of power relies on control and dominance over important resources.
Example: labour unions have the power to stop company operations by organising a strike-thereby
they control a key power.
7. Negative power-this power relies on the disruptions which causes a halt in operations. Example:
a union could implement a strike thereby causing company operations to halt.
ABC is a project leader at Company XYZ. ABC threatens an employee to kick him off the project if he
doesn’t perform and keeps making mistakes.
A. Coercive Power
B. Legitimate power
C. Referent power
D. Expert power
Relationship between Authority and Responsibility
A manager in order to perform their managerial duties requires both authority and responsibility in
proper proportions
Responsibility without Authority –
Example: A manager is given responsibilities of ensuring quality production however has no

authority to discipline (using a punishment or a wage cut) any employees not adhering to the
required quality.
This may result in the manager being unable to fulfill his responsibility and become demotivated.
Authority without responsibility –
A manager is given authority to train new recruits however he may not be held responsible for the
work and actions of these recruits. The manager will fulfill the responsibility, however it won't be
quality work and the organization will have to support negative replications due to the same.
Theories of Management
There are mainly 2 types of management theories:

1. Classical theories of management
2. Modern theories of management
Classical theories of management – Henri Fayol
Henri Fayol suggested that the following 5 areas represent the management process:
1. Planning
2. Organising
3. Commanding
4. Coordinating
5. Controlling
Planning
A management function that involves defining goals, establishing strategies for achieving these
goals, and developing plans to integrate and coordinate activities.
Planning involves selecting missions and objectives and the actions to achieve them; it requires
decision making.
Organizing
A management function that involves arranging and structuring work to accomplish organizational
goals.
● Organizing involves establishing an intentional structure of roles for people to fill in an
organization.
● The structure results from identifying and grouping work, defining and delegating
responsibility and authority and establishing relationships.
E.g. – Organisational Structure
Commanding
● Covers different activities aimed at filling various positions in the organization with people of
appropriate competency
● Involves human resource planning, delegate tasks and responsibilities and hiring of people for
the relevant tasks and jobs
Coordinating
Motivating, leading and any other actions involved in dealing with people so that they will contribute
to the organization and group goals.
● Involves 3 sub functions – Communication, Leadership and Motivation
Controlling
Controlling is measuring and correcting individual and organizational performance to ensure that
events conform to plans. It involves:
● Setting standards of performance

● Measuring current performance and comparing it to the established standards

● Taking corrective action if the performance does
Taylor – Scientific Management [Taylorism]
● Frederick Winslow Taylor (1856 – 1915)

● Father of Scientific Management
● His contributions include:
- Time and Motion Studies
- Differential Payment
- Reorganization of Supervision
- Scientific Recruitment and Training
- Cooperation between Management and Workers
● Taylor believed that by using scientific analysis, it was possible to
find a single efficient procedure to carry out a process.
● He believed that increased remuneration was the only motivation F.W.Taylor
for the workers.
Principles
• Scientific Methods outweigh the rule of thumb

• Creating group harmony
• Cooperation
• Maximum output
• Improved work procedures
Features
• Separation of planning and execution functions

• Scientific structuring of the task, scientific selection and training
• Scientific categorization across work, methods, motion and time
• Scientific wage allocation and standardization of work
• Economy and mindset transformation
Characteristics of Scientific Management
General approach
● Developed standard method for performing each job

● Selected workers with appropriate abilities for each job
● Trained workers in standard methods
● Supported workers by planning their work and eliminating interruptions
● Provided wage incentives to workers for increased output
Contributions
● Demonstrated the importance of compensation for performance

● Initiated the careful study of tasks and jobs
● Demonstrated the importance of personnel selection and training
Criticisms
● Did not appreciate the social context of work and higher needs of workers
● Did not acknowledge variance among individuals
● Tended to regard workers as uniformed and ignored their ideas and suggestions
Criticism of Classical Models – Fayol and Taylorism
● Did not consider the physical, mental and emotional well-being of the worker
● Taylorism laid more emphasis on production management rather on other verticals
● Too much interference by the supervisors into the working of the worker, which constrained their
thought process/ did not give a chance for innovative thinking
● Increased productivity of workers increased the company yield but wages did not increase
proportionately
● The time, fatigue and motion studies could not be scientifically measured.
● Implementation of Taylorism required a considerable amount of time, therefore disrupting the
smooth functioning of the organization.
The Human Relations School – Elton Mayo
Elton Mayo, in his Hawthorne Works based on Western Electric Company in Chicago.
Mayo concluded the following findings:
● Wages weren’t the highest level of motivators as one might think

● Worker attitudes, the relationship between the groups and leadership styles were key
motivating factors
● Employee behaviour and productivity depends more on group relations and communications
with management to working conditions and hours [long hours, lighting and noise]
Thereby interpersonal roles and factors are key factors
Henri Fayol’s studies are considered to be which theory of management?
A. Classical Theory of Management

B. Contingent Theory of Management
C. Scientific Theory of Management
D. Human Relation Theory of Management
Modern Writers
Drucker – 5 Basic Questions

As per Drucker, all managers perform the basic 5 functions, in which the economic performance relies
upon objective setting and controlling the performance.
The 5 basic operations are as follows:
1. Setting Objectives
2. Organizing Resources
3. Motivating employees and communicating plans
4. Establishing benchmarks [which the employees must meet]
5. Developing people [including both subordinates and manager themselves]
Mintzberg’s Managerial Roles [10 Skills of a Manager]

Mintzberg identified the 10 skills that managers require, in order to maximize their effectiveness
which are in 3 categories
Category Role ACTIVITY

Informational Monitor Seek and receive information, scan periodicals and reports, maintain personal
contacts.
Disseminator Spreading of information. Forward information to other organization members;

send memos and reports, make phone calls.
Spokesperson Transmit information to outsiders through speeches, reports, memos.
Interpersonal Figurehead Perform ceremonial and symbolic duties such as greeting visitors, signing legal
documents.
Leader Direct and motivate subordinates; train, counsel, and communicate with
subordinates.
Liaison Maintain information links both inside and outside the organization; use e-mail,
phone calls, meetings.
Decisional Entrepreneur Initiate improvement projects; identify new ideas, delegate idea responsibility to
others.
Disturbance Take corrective action during disputes or crises; resolve conflicts among
Handler subordinates; adapt to environmental crises.
Resource Decide who gets resources; schedule, budget, set priorities.

Allocator
Negotiator Represent department during negotiation of union contracts, sales, purchases,
budgets; represent departmental interests.
Informational
● Monitor: Seek and receive information; scan web; periodicals, reports; maintain personal
contacts
● Disseminator: Forward information to other organisation members; send memos and reports,
make phone calls
● Spokesperson: Transmit information to outsiders through speeches, reports
Interpersonal
● Figurehead: Perform ceremonial and symbolic duties such as greeting visitors, signing legal
documents
● Leader: Direct and motivate subordinates; train, council, and communicate with subordinates
● Liaison: Maintain information links inside and outside the organisation; use e-mail, phone,
meetings
Decisional
● Entrepreneur: Initiate improvements projects; identify new ideas, delegate idea responsibility
to others
● Disturbance handler: Take corrective action during conflicts or crises; resolve disputes among
subordinates
● Resource allocator: Decide who gets resources; schedule, budget, set priorities
● Negotiator: Represent team or department’s interests; represent the department during
negotiation of budgets, union contracts, purchases
Identify the managerial roles
1. A sales manager taking his/her customer for lunch

2. The sales manager motivating his sales staff
3. The President of the company networking with government officials
4. Supply chain manager suggesting product specifications to vendor

5. Manager passing information about company policies to their subordinates
6. Manager perpetually scanning the environment for information, interrogating liaison contacts
and subordinates
7. Manager seeks to improve the unit, to adapt it to changing conditions in the environment
8. Manager involuntarily responding to pressures. Here change is beyond the manager’s control.
The pressures of a situation are too severe to be ignored—a strike looms, a major customer
has gone bankrupt.
Answers to the Activity
1. Figurehead
2. Leader
3. Liaison
4. Spokesperson
5. Disseminator
6. Monitor
7. Entrepreneurial
8. Disturbance handler
Leadership
● Combination of personal behaviours that allow an individual to enlist dedicated followers and
create other leaders in the process
● Art or process of influencing people so that they will strive willingly and enthusiastically
towards the achievement of group goals (Koontz)
● Is the process of lifting a man’s visions to higher sights, raising of men’s performance to a
higher standard and building a man’s personality beyond its normal limitations (Drucker)
In simple words, bringing a diverse group of people together under one identity and inspire them to
work together to achieve one goal.
Trait Theories:
- These theories argue that leaders are born rather than made.
- They suggest that certain physical or personality traits help a manager perform well.
- These theories were largely disapproved.
Style Theories
Blake and Mouton’s Managerial Grid
This managerial grid considers two key aspects in leadership – concern for people (Y axis) and concern
for production (X axis)
This grid is used to evaluate the current leadership style and devise a plan on how to reach the most
of optimum leadership style. Here a manager is placed on the graph based on his/her degree of human
concern or production concern.
The research identified the following key points on the grid:
1. Management Impoverished [1, 1]
The manager makes the least effort and has the least concern for people and getting the task done
2. Country Club Management [1, 9]
The manager has concerns for the people which leads to a comfortable and friendly organisation.
But is not effective as less work gets done
3. Task Management [9, 1]
This manager is focused on increasing production efficiency and quantity at the cost of labour
wellbeing.
4. Middle of the Road Management [5, 5]
The manager’s concern for people and production scores an average on both
5. Team Management [9, 9]
The manager is able to optimally manage people and production thereby the best form of leadership
in theory
Pros of using the Grid Cons of using the Grid

• Acts as a training and development tool • Limited scope. as all leadership styles can’t
be summarised using the grid
• Informs the managers that both task and
people are equally important • In real life, no one leadership style is the
most appropriate especially not team
• Managers become aware of their management
subordinates view them
Ashridge Management College
There are 4 management styles as per Ashridge Management College’s research:
1. Tells / Autocratic Style
The manager is the sole decision maker and instructs employees on what to do. These instructions
have to be obeyed by the employees without any suggestions.
2. Sells / Persuasive Style
The manager is still the sole decision maker however will try to convince employees by explaining
them the rationale behind his decisions and instructions rather than simply instructing them to obey
him
3. Consult / Participative Style
Manager will ask the employees for their opinions and it is his decision whether to incorporate their
views or not and the manager will still make the final decision.
4. Joins / Democratic Style

Manager will include employees in the decision-making process and there will be a consensus.
Different kinds of situations or environments call for different kinds of management styles. For e.g.:
Situation Style
1) Crisis or fast decision making 1) Tells
2) Normal Conditions 2) Consults and Joins
3) Unskilled and demotivated workers 3) Tells and Sells
Most important thing is consistency as employees don't appreciate a manager switching styles
repeatedly.
Contingency Theories
● Also called the situational approach.

● It states that there is no one universally applicable set of management principles (rules) by which to
manage organizations.
● Organizations are individually different, face different situations (contingency variables), and require
different ways of managing.
● Every situation is unique
● Managers must determine what method will work
● Managers must identify key contingencies for the current situation
● Organizational structure should depend upon the industry and other variables
Adair – Action Centred Leadership

As per Adair, a leader has to balance 3 interrelated needs and goals – Task Needs, Group Needs and
Individual Needs, in order to be effective.
Task Needs Group Needs Individual Needs

• Planning • Team work • Coaching
• Organising and Allocation • Team building • Counselling
• Staffing • Team co-ordination • Motivating
• Directing • Peace Keeping • Training
• Controlling
• Decision Making
Fielder – Contingency Theory
As per Fiedler who evaluated the relationship between leadership style and effectiveness of work,
there are 2 styles of leadership:
1. Psychologically Distant Managers [PDMs]

2. Psychologically Close Managers [PCMs]
Psychologically Distant Managers [PDMs]
- Such managers prefer to be distant from their employees.

- They keep interpersonal communication with the employees formal.
- They are focused on the business work.
Psychologically Close Managers [PCMs]
- Prefer informal meetings rather than closed door meetings

- Have a person-oriented approach to leadership
- Such leaders offer informal opinions
- This approach works best when the situation is moderately favourable for the leader
The following aspects affect which leadership style is more effective:
● How well defined and structured is the task.

● The extent of trust, respect and other relationship variables between the group and the leader
● The level of power the leader has over the group.
Bennis – Transformational Leadership
As per Bennis there are two types of Leaders:
Transactional Leadership Transformational Leadership

• They have a transactional outlook • Stimulates and inspires followers to
towards their employees. achieve extraordinary outcomes
• The demand loyalty and efficiency from • Challenges the status quo
their employees and in return reward • Produces levels of employee effort and
them with salary hikes, bonuses, performance that go beyond what
remuneration, etc. would occur within a transactional
approach alone
• Focuses on the need for love, need for
growth, need for contribution, need for
meaning
• Proactive
Mahatma Gandhi as a Transformational Leader
• Challenged the status-quo of British rule

• Inspired followers, changed beliefs and created new ideals (Gandhian Philosophy)
• Made people achieve beyond what they thought about their abilities
• Led so many movements – Dandi-march, Quit India
• Developed many leaders
• Connected with people’s emotions and values
• He changed and transformed India
Kotter – Managing Change
Kotter suggested the following ways in order to deal with resistance and conflicts:
1. Participation and involvement
This approach allows employees to be a part of the decision-making process resulting in an active
and more practical involvement. Suggestions given by the employees might be implemented in
these decisions. The employees will have a sense of ownership and responsibility as they were
stakeholders in the decision-making process.
E.g. – Re-arranging the factory layout by asking employees for their inputs.
2. Education and communication
This approach involves informing employees via audio visual mediums like presentation and videos
about the changes and communicating the benefits of these changes. This results in issuing a dictate
about the changes without explaining the rationale behind these actions.
E.g. – Re-arranging the factory layout with reasoning provided
3. Facilitation and support
This approach involves giving training and counselling which will help employees overcome
hesitation.
E.g. – Dispelling fears of employees regarding the new machines involved in the factory
rearrangement.
4. Manipulation and co-optation
This approach involves the use of selective disposition (I.e., stating only the positives and benefits
while ignoring the cons) of new changes with the objective of sidestepping any resistance.
E.g. – Re-arranging the factory and informing the floor managers and factory supervisors and letting
them direct the floor workers
5. Negotiation and agreement
This approach involves allowing other parties(employees) to put forward their views and concluding
with a compromise and agreement.
E.g. – Reducing the distance between the lunchroom and production space after negotiations with the
employees.
Heifetz – Leadership to motivate
Heifetz is of the opinion that the central role of managers is to aid their subordinates in facing reality
and empowering them to make changes where they deem necessary. A true leader must not have
answers to all the questions but rather, should help and guide people in facing their issues and
challenges.
Conclusion and Practical Application of Contingency Theories
Although the contingency theories sound the most appropriate and practical in a dynamic business
environment like that of today’s, they are not preferred by managers as it is impractical and
inconvenient for managers to change the leadership style which is why most manager stick to one
fixed leadership style irrespective of the situation
Company A re-arranged the factory layout with reasoning provided to employees as a part of
induction. Which of the following ways did it use to deal with conflict as per Kotter – Managing
Change?
A. Participation and involvement

B. Education and communication
C. Negotiation and agreement
D. Manipulation and co-optation
PO5 – LEADERSHIP AND MANAGEMENT
Description
You manage yourself and your resources effectively and responsibly. You contribute to the
leadership and management of your organisation – delivering what’s needed by stakeholders and
the business.
Elements
a. Show initiative with your team – working towards organisational goals, collaborating with and
supporting others.
b. Manage time and tasks effectively to meet business needs and professional commitments.
You are capable of working under pressure.
c. Manage resources – including teams – to deliver your objectives to agreed deadlines. You
motivate other people and you are actively involved in helping them to develop.
d. Work with others to recognise, assess and improve business performance. You use different
techniques and appropriate technologies to support business improvement.
e. You negotiate effectively and can justify solutions logically and persuasively to colleagues and
clients.
Example activities
• Effectively managing or leading a group of people.
• Identifying and allocating resources.
• Coordinating activities involving more than one team or department.
• Creating a project plan with timelines.
• Participating in a project team using project management methodology.
• Learning from and influencing others positively, to reach acceptable and desirable results.
• Sharing best practice with colleagues.
• Supporting a positive, inclusive and respectful work environment.
• Training others on an area of work.
• Being a role model to others.
• Allocating work effectively to other team members or suppliers.
Recruitment and selection of employees [Chapter 19]
Syllabus area D2
- Explain the importance of effective recruitment and selection to the organisation.
- Describe the recruitment and selection process and explain the stages in this process.
- Describe the roles of those involved in the recruitment and selection processes.
- Describe the methods through which organisations seek to meet their recruitment needs.
- Explain the advantages and disadvantages of different recruitment and selection methods.
- Explain the purposes and benefits of diversity and equal opportunities policies within the human
resources plan.
- Explain the practical steps that an organisation may take to ensure the effectiveness of its diversity
and equal opportunities policy.
Recruitment
“It is the process of finding and attracting capable applicants for employment. The process begins
when new recruits are sought and ends when their applications are submitted. The result is a pool of
applicants from which new employees are selected”.
- K. Aswathappa
Selection
Process of picking individuals (out of a pool of job applicants) with requisite qualifications and
competence to fill jobs in the organization.
“It is a process of differentiating between applicants in order to identify (and hire) those with a
greater likelihood of success in a job”.
- K. Aswathappa
Selection Process are systems used to choose the most suitable applicants out of all the recruits.
Importance of Recruitment & Selection
1. Helps meet the present and future personnel requirement in the organization.
2. Pool of candidates at a low cost.
3. Helps in selecting the most capable applicants.
4. Increases individual and organizational effectiveness.
5. Reduces employee turnover.
6. Applications available for future reference.

Which of the following is a direct consequence of good recruitment and selection policies?
A. Lower time taken by employees to do the required work
B. Reduces employee turnover.
C. Improved relations between Management and Employees
Recruitment and Selection Process
1. Identify a Vacancy
• The start of recruitment process is with a vacancy

• The choice lies with the business organisation whether to replace the employee with another full
time or part time employee or distribute his tasks among other employees via providing additional
training or promoting employees
2. Job Analysis
Job analysis is the in-depth study and the list of tasks that an employee must perform at that
designation. This includes job description and person specification
Job Description
Job description is the broad statement of purpose, scope, duties and responsibilities that come with
the job. The purpose of a job description is:
● Benchmark for the employees after they are hired

● Used as the foundation for contract of employment
● Determine the right candidate for the job
● Used as a base while advertising the role to other candidates
Person Specifications
Person specification includes the attributes, qualities and personal traits that the ideal job holders
should have.
These attributes, qualities and personal traits will be factored in the decision making when choosing
between multiple eligible candidates
A seven-point plan suggested by Alec Rodgers helps devise the person specification (SCIPDAG):
1. Special attitudes- The skills and attitudes the candidate must possess
2. Circumstances- Does the job have any different or abnormal demands such as working on weekends
then that must be mentioned
3. Interest- Any interest that the person may have in their social life which links directly to the job
performance. Example: a cricket commentator must have a deep love and passion for the sport only
then they will be able to perform effectively
4. Physical make up-Does the job require a certain level of health and personal appearance. Example:
armed forces and police forces have a physical benchmark that needs to be fulfilled before joining
them
5. Disposition-The nature of the ideal candidate; whether they should be calm or social. Example: call
centre workers must be patient and sociable in order to do their job
6. Attainments- Does the candidate require specific qualifications and achievements for the role.
Example-top business schools require their professors to have PHD and medals in their respective
fields.
7. General intelligence-Does the candidate require a certain level of general intelligence.

Which of the following concepts refers to “in-depth study and the list of tasks that an employee must
perform at that designation”?
A. Job Analysis
B. Job Evaluation
C. Job Description
D. Personal Specifications
Attracting Candidates
Candidates can be attracted via internally or externally.
Internal recruitment involves allowing an internal employee to interview for the position.
Internal Recruitment
◼ Less costly. ◼ Does not allow for new ideas.
◼ Less time required. ◼ Causes a morale problem for those who
◼ Candidates are already oriented are not promoted.
towards the company. ◼ Candidates’ performance is affected for
◼ Organization knows about the a short time, while he adjusts in the
candidates. new job.
◼ Enhances employee morale and
motivation.
◼ Good performance is rewarded.
External Recruitment
◼ Benefits of new talents and new ◼ Costly
experience in an organization. ◼ Time consuming
◼ Scope for resentment, jealousies are ◼ De- motivates the internal employees.
avoided. ◼ New recruit may not get the support of
the older employees.
◼ Time taken by the new recruit to adjust
to the organization.
Potential Sources of Recruitment – Internal Sources and External Sources
Internal Sources External Sources

Present Employees Advertisements
Referrals Trade Publications
Past Employees Employment Exchanges
Past Applicants Consultants
Campus Recruitment
Contractors
Displaced Persons
Acquisition and Mergers
Competitors
E-Recruiting
Advertising
Recruitment advertising is a statement aimed at capturing the attention of prospective candidates

who can fill the vacancies. The advertisement should be:
- Concise and attractive

- True and honest
- Include general details like deadlines and procedures to apply for the job
These advertisements are ineffective if the medium chosen is wrong which is why for every
organisation the advertisement medium will deferred and will depend on the following factors –
● Organisation type and size [small business or MNC]

● Nature of job being advertised [senior levels or junior level]
● Advertisement cost [benefits should be more than the cost incurred]
● How frequent is it advertised and how long will it be advertised?
● The reach of the advertisement [nature of readers]
● For e.g., Linked In or other job listing websites like Monster.com are great examples.
Application Forms
These days, MNCs, in order to streamline the recruitment process, use Google forms or any other
options, which prospective candidates can apply. They are required to fill in the details asked in the
form. This enables the organisation to filter out relevant applicants, save time and create the initial
database for prospective candidates.
Selection Interviews
After various filtering rounds, the remaining applicants are interviewed with an objective to find the
most suitable person of the job whose intent matches with the job description.
Advantages of the interview technique Disadvantages of the interview technique

● Judging of non-verbal cues ● It is an artificial situation with a short
period of time to truly assess whether
● Interviewer can assess the interviewees he is the ideal candidate
appearance and interpersonal skills first
hand ● Halo effect - The interviewee will only
highlight their good qualities and hide
● Helps establish the initial rapport and their bad qualities
relationship between a candidate and
the potential boss ● Cannot assess the honesty and integrity
in a single meeting
● There is always an individual bias and

prejudice wherein the interviewer may
subject the interviewee to stereotyping
Selection Tests
To finalise a candidate, testing is undertaken before or after the interview:

The basic type of test are as follows-
Psychometric test-these involve general and psychological factors like intelligence and personality.
Proficiency and attainment test-these involve examination of applicant’s skills, abilities and technical
knowledge which are a must for the given job.
Assessment Centre [Group Assessments]
The assessment centre is where candidates are observed and evaluated based on the exercises and
tests by a professional assessor.
The assessor will be looking for qualities which are required for the job such as analytical skills,
leadership skills, technical skills like Excel proficiency and any other relevant software knowledge etc.
Assessment procedures involves a group of 6 to 10 candidates brought together and exposed to
various assessments.
This Group assessment practice is quite common in high-level managerial positions.
Assessment centres have the following advantages:
● Assessors themselves learn something new

● Able to get an insight of how the prospective candidate will work, multiple assess reduce the
chances of a bias
● The assist individuals will learn to work under pressure and be able to discuss their thoughts
and expectations more openly with the senior management being as the assessors
Tick the correct box as per the given definition
Proficiency and Psychometric

attainment test test
Involve general and psychological factors like intelligence and
personality
Involve examination of applicant’s skills, abilities and

technical knowledge which are a must for the given job
Limitations of Testing
Testing has the following disadvantages –
1. These tests are highly subjective

2. Interpretation of results is complex and often yields no direct relationship between the test
and the ability to perform the job itself
3. Difficulty in exclusion of bias from the test
References
The rationale behind asking for a reference is to verify the facts about the candidate and know more
about the prospective candidate.
References generally contain information about candidates’ previous jobs and employment terms, the
candidates’ personalities and other personal traits.
Often multinational corporations and MBA colleges ask for two references –
1) Professional reference from one of the past employers

2) A personal reference which helps the recruiter know more about the employee on a personal
level
Responsibility for Recruitment and Selection
The following management and departments are responsible for recruitment and selection
● Senior management -responsible for recruitment of senior positions like independent non-
executive directors and CEOs
● Human resource department -responsible for the recruitment and selection of the overall
organisation and all human resource needs of the organisation
● Line managers -responsible for recruitment and selection of immediate junior managers and
subordinates. In small businesses, they could have the sole responsibility of recruiting.
Equal Opportunities and the role of Equal Opportunities Policies at Workplace
Equal opportunities are the belief that each and every prospective employee should have an equal
chance of being judged and considered fairly.
Equal opportunities should not be used only while hiring but also for promotions and other
advancement opportunities.
Equal opportunities is based on the following principles:
● Employees should be judged and evaluated only on their skills, abilities, experiences and
potential
● Any employee should not be discriminated against based on caste, creed, sex or any other
aspect/trait
Adopting an equal opportunities policy is not only the moral thing to do however it also brings in the
following advantages:
● A wider pool of talent

● The heads comply with legislation and laws thereby preventing any fines
● Improve the business organisation’s image amongst employees, customers, shareholders and
the global community
Types of Discrimination
The different types of discrimination which an equal opportunities policy attempts to prevent is as
follows:
1. Direct discrimination-when there is discrimination based on caste, creed or sex. Though this could be
allowed by law in certain tightly defined circumstances.
Example-only male applicants were considered for management positions. This is illegal and
punishable by jail/fine or both.
2. Indirect discrimination-this is when certain work conditions and rules cause one group to be at a loss
or causes them discomfort or disadvantage. This is not always illegal as certain situations require such
discrimination.
Example-air hostess is a required a certain level of minimum height and hand length, this puts some
aspirants at a disadvantage.
3. Victimisation- This occurs when an employee has complained against discrimination and is treated
unfavourably henceforth.
4. Positive discrimination-this is the practice of giving preference to protected groups such as ethnic
minorities, woman, older workers, etc. This is not always permitted under all legislations.
E.g., Every avenue in India has a reservation for some or the other protected division.
Diversity at Workplace
There is often a common misconception that diversity and equal opportunities are similar however
they both very vastly. Equal opportunities involves having people from different caste, creed, sex and
not discriminating against them while diversity involves an appreciation of the varied opinions,
attitudes habits and experiences of different employs from different backgrounds.
Having a diverse workforce will result in the following advantages:
● Competitive edge
● A wider labour pool to recruit from
● Wider range of skills added to the organisation’s portfolio
● Increase in level of innovation, creativity and motivation
● Improve customer relations and service to the diverse customers who will feel more
comfortable knowing that the organisation has diverse employees
After the organisation is committed to incorporating diversity in its hiring policies and in the
workforce, a proactive approach will be required to monitor whether the organisation is actually
diverse or is it just for namesake.
Organisation’s hiring policies and human resource department will need to take the following
initiatives:
● Two-way communication with diverse workers

● Help solve the individual disputes between different employees
● Become comfortable with the diverse employees and embrace them within the organisation
212
Team Work, Behaviour and Motivation at Workplace
Individual and group behaviour in business organisations
Syllabus area D3
- Describe the main characteristics of individual and group behaviour.
- Outline the contributions of individuals and teams to organisational success.
- Identify individual and team approaches to work.
Main characteristics of individual behaviour
The main characteristics of individual behaviour are as follows:
1. Level of motivation – This refers to an individual’s desire to work and the level of effort they put
into that work/task. It is affected by both financial and non-financial factors.
2. Perception – this is how an individual perceives a certain message based on their own
interpretation of the stimuli they receive. Messages received from managers may be distorted
with the subordinate selecting certain parts of the message and interpreting it, based on his own
experience, wants and needs.
3. Attitude – These refer to the persistent feelings and behaviour directed towards specific groups,
people or ideas
4. Individual personality – this refers to the combination of emotions, attitudes and behavioural
aspects of an individual. A manager must be aware of all of these characteristics and their impact
on individual staff members
Role Theory
This model interprets the behaviour of individuals based on expectations of other people and how
these individuals behave in a given scenario .
“A role is defined as the pattern of behaviour expected by another person who take on a
particular position.”
There are several items relating to the role theory that one must be aware of:
● Role Behaviour – ‘certain behaviours can be associated with a particular role in an

organization.’ Example - a subordinate who is about to be promoted to manager may begin
acting as if he has already been promoted.
● Role Set – ‘It describes the group of people who report to an individual for a particular role’.
E.g. – Manager A’s set will include his/her personal secretary and junior subordinate
Team Work, Behaviour and Motivation at Workplace 213
● Role Signs - These are the visible indications of a role. Examples of role signs include dress
styles and uniforms. E.g. – In the military, different uniforms could be for different parts of
the military such as the navy, para military or soldiers on the border. adding on each one of
them could have a different salute and hierarchical structure.
Some problems caused by expected patterns of behaviour are:
● Role Ambiguity – this is when an individual is not sure of what role is to be performed by
them and so do not fully cooperate.
E.g. - a new associate joins an established team working on a project
● Role Conflict – this occurs when individuals have clashing roles.

E.g. - if a group member discovers fraud by their peers, they are in a conflict as their role as a
professional and a fellow friend clash with each other
● Role Incompatibility – this occurs when members of the team experience expectations from
external groups which are different to their own role expectations.
Main characteristics of group behaviour
Group – It is a collection of individuals who perceive themselves to be a group.
The following are the characteristics of a group:
1. Sense of identity – all group members will have a predetermined boundary and a sense of
identity about who is a part of a group and who is not
2. Loyalty to the group – all group members will accept each other as their peers and understand
that they will have to conduct themselves with certain behaviour which binds them together
as a group.
3. Purpose and leadership – any group must have a purpose. An individual working within the
group must collectively work together in order to achieve that purpose in the given deadline.
A joined Team X one month into an important project however is unsure what his exact role is in the
project whether it is on the marketing or sales side. The project leader is a busy person who is pre-
occupied with the project work the entire day. What aspect of Role theory does this refer to?
A. Role Ambiguity
B. Role Conflict
C. Role Incompatibility
D. Role Behaviour
Group Behaviour
Now we will discuss the different types of behaviours individuals can adopt while working in groups:
1. Assertive Behaviour – this is when a group member is direct, honest and professionally
communicates the message. It also involves staying firm on your own rights without the violation
of others
E.g. - An assertive member would say “I would like you to perform this task without making any
mistakes.”
2. Aggressive Behaviour – this is when a group member neglects another member, which this leads
to a direct conflict
E.g. - an aggressive member would say “You should complete your work before time as even I
have done that”
3. Passive Behaviour – this is when a group member puts the rights of other group members above
his.
E.g. - a passive member would say “I went through the report and found they were mistakes
however I think they were probably because I was unable to explain the assignment to you
properly “
2 main types of groups:
Informal Groups – these are the groups with employees who have voluntary joined, in order to meet
their social or security needs; these members depend on each other and may even influence the other
members behaviour.
E.g. – this may include people who live near a specific part of town thereby often commute together
and meet each other during breaks and lunchtime.
Formal Groups – these are the groups created with a specific purpose of completing a specific task,
spearheading of project etc. The membership is decided by the organization based on the skill set
required for this particular group.
E.g. – a new group may be formed within the marketing department in order to revamp the entire
website.
Contributions of individuals and teams to organisational success.

Key benefits of people working in groups rather than as individuals include the following –
● The competition between the employees may prove to be healthy as each worker and
employee will try to do their best, thereby an increase in overall efficiency and productivity
within the organisation
● Better communication between workers and control over the employees as the individual’s
performance will be reviewed by the other group members as well
● Increase in motivation with the group’s social needs being met and an increase in flexibility as
different people can perform different tasks
● Combination of different skills and abilities thereby the scope of synergy which means the
2+2 = 5 principle
However, with people working in groups the following drawbacks and shortcomings may occur
● Slower decision-making. Decisions are compromised rather for the maximum benefit of the
business
● Increase in the number of conflicts occurring and with too much social interaction there may
be little work done
● The competition between employees may prove detrimental to the business
● People may conform to group pressure and may not bring their opinions to the table
● As the entire group is responsible there is a lack of individual responsibility thereby the groups
may choose to make riskier bets than they usually do
“Complete the project on time or there will be dire consequences and your future at this company will
be at peril.” Which type of behaviour does this refer to?
A. Passive
B. Aggressive
C. Passive-aggressive
Team formation, development and management
Syllabus area D4
- Explain the differences between a group and a team.
- Define the purposes of a team.
- Explain the role of the manager in building the team and developing individuals within the team.
(i) Belbin’s team role theories
(ii) Tuckman’s theory of team development
- List the characteristics of effective and ineffective teams.
- Describe tools and techniques that can be used to build the team and improve team effectiveness.
Teams
- A team is defined as a group of people who relate with each other on a significant level, with the
objective of accomplishing the shared group objective.
- It is more than just a group of people.
- A team is there by a former group who has its own culture, leader and is geared towards achieving
a shared group objective
Teams usually have the following traits:
● Share a common goal

● Enjoy working together
● Loyal to the team and has a sense of team spirit
● Committed towards achieving the stated goal / objective
● Comprise of diverse individuals
1. Leader (Co- Job: Organises and unites the group in a manner fit for attaining the shared goal.
ordinator)
Traits: A balanced and a disciplined person who is thorough in directing others
2. Shaper Job: Promotes various kinds of activities among the group
Traits: A dominant, extrovert and task driven person with a force for action
3. Plant Job: Thinks of new ideas
Traits: Intellectually bright, imaginative, thoughtful and innovative.
4.Monitor– Job: Acts as a critic on other people’s ideas and often tries to bring the team down
Evaluator to earth.
Trait: not a creative person however analytical, examines the ideas and identify
the flaws
5. Resource – Job: a popular member of the group who has a network of people which the team
Investigator can utilise
Trait: good at networking internal and external members of the group, and is an
extrovert, not a good source of ideas but a very connected and influential person
6.Implementer Job; the person who does the administrative and organising related jobs as well
(Company as turning ideas into practical solutions
Worker)
Trait: a trustworthy person with a go to nature
7.Team Worker Job: a person who is concerned with the bonding and relationship within the
group
Trait: Usually perceptive and uses diplomacy as a tool to resolve any issues within
the team
8.Completer- Job: this is often the person who chases the progress of the goal
Finisher
Trait: a detail-oriented person who pushes the team in order to achieve the
target
9.Specialist Job: a provider of special skills and knowledge needed by the group
[Expert]
Traits: Joins and advises the team only on matters outside the competence level
of the existing team members and within the competence level of the individual
Belbin’s Team Roles Theory
Belbin suggested that the following 9 distinct roles are needed for a team to function effectively.
This does not mean that every team must have a minimum of 9 members rather the team must have
team members taking on these 9 roles and all these roles must be filled. A team member can certainly
take on more than one role.
“As per Belbin’s Team Role Theory, all 9 members of the group must each have one role individually.”
Is the above statement True or False?
A. True
B. False
Tuckman’s Stages of Group Development
Tuckman argues that all teams progress through the following 4 main stages of development:
Stage 1 - Forming
Stage 2 - Storming
Stage 3 - Norming
Stage 4 - Performing
Stage 5 - Dorming
Stage 6 – Mourning / Adjourning
Forming This is where the team comes together for the first time.
Storming Refers to the stage of conflict where individuals’ roles and team processes are
criticized and challenged
Norming Commencement of cooperation and assignment of individual roles
Performing Team starts to act productively
Dorming The team gets complacent
Adjourning / Completion of the team objectives and dismantling of the team

Mourning
Stage 1 – Forming
At the initial stage the group is no more than a number of random individuals. They will need time to
find the purpose of the group and think on how it will work as a group
Stage 2 – Storming
Most numbers of groups go through this stage and this stage is often referred to as the stage of conflict
wherein the norms, attitudes and behaviour of the group members are challenged and rejected.
Members compete with other members for certain roles within the group.
If a group is able to successfully navigate through this stage, then they will come out stronger with
clearer objectives and more knowledge about the other group members
Stage 3 – Norming
This step establishes the norms under which the group shall operate. Members and the group leader
observe the reactions of others as these norms are established.
The norming stage will establish the manner in which the group will make decisions regarding the
behavioural patterns, trust among the group members, roles of the group members and openness
Stage 4 – Performing
Once the final stage has been reached the group will start operating to its full potential with all
difficulties resolved.
Note - it is not necessary that all groups follow these 4 stages in this same exact sequence. It is also
not necessary that all these teams pass through all the stages at some point, as some teams may get
stuck in one of the stages and remain inefficient and ineffective. Nearby managers must identify such
groups and resolve their problems in order to deal with it.
Stage 5 – Dorming
This is when the team remains stuck in the performing phrase for a long period of time, there exists a
danger that it is operating on ‘auto pilot’. The concept of “Groupthink” may occur to the extent that
the group is unaware of the dynamic and changing circumstances.
Stage 6 – Mourning / Adjourning
The team has been able to fulfill their stated objectives and is now dismantled which may cause many
team members to become upset and insecure.
The 5th and 6th stage in Tuckman’s stages of development are:
A. Dorming and Mourning

B. Dorming and Performing
C. Mourning and Norming
D. Mourning and Performing
Team Effectiveness
Peters and Waterman have defined 5 key aspects of successful teams as:
1. Voluntary membership - All members of the team should have a choice as to whether to join and stay
in the team. An unwilling and involuntary member will not likely participate as much as other voluntary
members.
2. Action oriented - the team should always have a plan of action and be working towards achieving
their goals
3. Informal and Unstructured communication - with informal communication there will be a smaller
number of barriers and a more continuous flow of information between the members
4. Limited duration - the team should exist only to achieve their particular given task and should be
dismantled afterwards
5. Small in size - the size of the team should be small so that each member is able to represent the
interest of their departments. Large teams would be slower and difficult to manage.
Building the Team and Improving Team Effectiveness
Measuring the Team Effectiveness: Ways to measure team effectiveness include the following:
1. Job satisfaction among the team members –measured using the labour turnover and level of
absenteeism
2. Effectiveness – this is the stated objective against the resources/inputs used

3. Level to which the team has been able to achieve their objectives and the overall quality of the job
done
Team leaders can also use questions, conduct interviews or directly observe the team effectiveness.
Team rewards could also be designed with an objective of encouraging cooperation and
responsibility sharing as well as motivating the team members and the team as a whole.
Characteristics of an Effective Team - low Labour turnover, no absenteeism and high productivity.
Which of the following is one of the aspects of successful teams as per Peters and Waterman?
A. Lower absenteeism
B. high productivity
C. Voluntary Membership
D. High Job Satisfaction
Motivating individuals and groups [Chapter 21]
Syllabus area D5
- Define motivation and explain its importance to the organisation, teams and individuals.
- Explain content and process theories of motivation: Maslow, Herzberg, McGregor and Vroom.
- Explain and identify types of intrinsic and extrinsic rewards.
- Explain how reward systems can be designed and implemented to motivate teams and individuals.
Motivation and its importance to the organisation, teams and individuals
It is the process by which a person’s efforts are energized, directed, and sustained towards attaining
a goal.
• Energy: a measure of intensity or drive.
• Direction: toward organizational goals
• Persistence: exerting effort to achieve goals
Nature of Motivation
• Individuals differ in their motives

• Sometimes the individual himself is unaware of his motive
• Motives changes
• Motives are expressed differently
• Motives are complex
• Multiple motives make the choice of goals difficult for an individual
Motivation and satisfaction differ in the following manner
Satisfaction is concerned with whether the employee is satisfied with the existing job or the task at
hand.
Motivation is concerned with how hard someone is willing to work.
They are similar and yet different.
Looking at a short-term perspective, it is possible for a company to grow without one of them but
looking at the long term, both of them required in order to retain employees.
Content and process theories of motivation: Maslow, Herzberg, McGregor and Vroom
2 groups of motivational theories are content theories and process theories

Content Theories / Need Theories

Assumes that there is a best way to motivate everybody and that human needs and desires can be
satisfied through work.
It ponders on the question – “What” to motivate people.
It Includes:
1) Maslow's Hierarchy of Needs
2) Herzberg's 2 Factor Theory
3) Mc Gregor's X & Y Theory
Process Theories
• Assumes that motivational tools should be goals and process centric rather than needs centric.
• Uses the study of human behaviour and human goals to determine best practices of motivation
for its employees.
• It ponders on the question – “How” are people motivated.
• Includes Vroom's expectancy theory.
Maslow’s Hierarchy of Needs
Needs were categorized as five levels of lower- to higher-order needs.
• As per Maslow’s Individuals satisfy lower-order needs before they can satisfy higher order
needs.
• Satisfied needs will no longer act as motivation for the person.
• Motivating a person depends on knowing at what level that person is on the hierarchy.
Hierarchy of needs
• Lower-order (external): physiological, safety

• Higher-order (internal): social, esteem, self-actualization
Examples –
A 23-year-old [ACCA G=graduate with 3 years of experience] working at XYZ Company [MNC] as an
accountant
1. Physiological Needs – require enough salary and compensation to pay rent and purchase
clothes as well as buy groceries on a daily basis
2. Safety Needs – required protection from unemployment, sickness leave and retirement as
well as protection in the event of unforeseen events which could be done by the sick fund and
pension plans
3. Belongingness and Love Needs – this involves the employee having cordial relations with
his/her counterparts at work and a decent relationship with the superior/manager
4. Esteem Needs – employee being promoted with a higher job status such as senior manager
while earning respect from office peers and superiors
5. Self-Actualization – Fulfilled by earning and nominated as “Employee of the Month” award;
basically, being given recognition for a job well done

Fill in the table with the apt level of Maslow’s Hierarchy as per the given factor?
Factors Level in Maslow’s Hierarchy
new job title
Bonuses and higher salary
Sick Pay
Christmas party & Retirement Party
Challenging work
Sufficient cash to live by
Answer –
Factors Level in Maslow’s Hierarchy
new job title Ego
Bonuses and higher salary Ego
Sick Pay Safety
Christmas party & Retirement Party Social
Challenging work Self-fulfilment

Sufficient cash to live by Basic
Criticism of Maslow’s Theory
1) Individuals may not be able to satisfy all needs through work.

2) Individuals may satisfy several needs at the same time.
3) Individuals may not have the same needs as that of Maslow’s theory or even in the same
order.
McGregor’s X and Y Theory
The theory assumes that the managers make their assumptions about the staff. These thinking
attitudes guide their relations with and action towards the staff. There are two types of managers:
Theory X
● Assumes that workers have little ambition, dislike work, avoid responsibility, and require close
supervision.
● In such a scenario the manager follows a rigid and authoritative policy of management.
Theory Y
● Assumes that workers can exercise self-direction, desire responsibility, and like to work.
● In such a scenario the manager follows a more liberal attitude towards the workers. The
workers are more involved in the decision-making process. They are given higher autonomy.
● The manager views the employees as assets.
Application of Mc Gregor Theory:
• Managers often see their employees to be between these extremes of X and Y.

• The purpose of the model is to make managers aware about the staff assumptions and incorporate
this in their leadership and management approach
• A theory Y workforce should have a democratic management style while a theory X workforce
should have an autocratic management style.
The managers use an authoritative style of leadership thereby he believes that the workers are
which of the following as per Mc Gregor Theory:
a. Theory X
b. Theory Y
c. None of the above
Herzberg’s 2 Factor theory
• Job satisfaction and job dissatisfaction are created by different factors.

- Hygiene factors: extrinsic (environmental) factors that create job dissatisfaction.
- Motivators: intrinsic (psychological) factors that create job satisfaction.
• Attempted to explain why job satisfaction does not result in increased performance.
- The opposite of satisfaction is not dissatisfaction, but rather no satisfaction.
Motivators:
● Achievement
● Recognition
● Work itself
● Responsibility
● Advancement
● Growth
Hygiene factors:
● Supervision
● Company policy
● Relationship with supervisor
● Working conditions
● Salary
● Relationship with peers
● Personal life
● Relationship with subordinates

● Status
● Security
Contrast
Herzberg suggested that job satisfaction can be increased only in a limited amount by simply
increasing the remuneration of the employees.
He suggested 3 job designs which would help managers motivate employees:
Job Design
a) Job Enrichment [Vertical Job Enlargement]
This involves widening the scope of the job by adding on more tasks of a higher and difficult level
which will increase the autonomy and creativity as well as improve the employee skills. This creates
a sense of responsibility within the employee, as the employees would look at it; those decisions and
actions taken by them come to fruition and reap positive benefits.
Employee Increase in the level of motivation factors

Perspective
Employer Will expect an increase in the level of compensation and if this is not
Perspective given, it will lead to a decrease in job satisfaction.
b) Job Enlargement [Horizontal Job Enlargement]
This involves widening the job by adding on more tasks of the same level with the objective of an
increase in the workload. This only adds to the employee’s workload without any corresponding
increase in remuneration or reward. This would in turn demotivate the employee.
Employee Limited impact on employee motivation as only more tasks has been
Perspective allotted
Employer With more tasks allotted, eventually the employee will ask for an
Perspective increased level of pay and compensation
Job Rotation
Involves rotation of staff between jobs to eliminate boredom and ensure that everyone gets
acquainted with all types of job
Employee Improve satisfaction but has no impact on motivation

Perspective
Employer Training employees for different roles will be time consuming and
Perspective expensive
Examples –
A Floor Supervisor Responsible for work area A and ensuring production runs smoothly
• Job enrichment – co-ordinating with the purchase department to reorder and maintain inventory
levels
• Job enlargement – also responsible for inventory counting
• Job rotation – floor supervisor for work area B on the weekends
Apply your knowledge

A teacher who previously taught Grade 4 now will also teach Grade 5. Which Job design does this
refer to: -
A. Job Rotation
B. Job Enrichment
C. Job Enlargement
Answer: B
Process Theories
Vroom’s Expectancy Theory

As per Vroom, motivation is closely linked to the confidence of the doer that the task will help him
satisfy his goals.
Formula
E.g. – Motivation for completing a supply chain assignment.

• Expectancy - how likely is it for the student to complete the assignment on time and fulfil all the
required criterions while doing the assignment.
• Valence - the perceived interest of a person in the supply chain as a topic will influence the
motivation of the person.
Rewards are a token of appreciation given to an employee for successful/efficient/timely

completion of a job.
Types of Intrinsic and Extrinsic Rewards
Intrinsic rewards- arise from the job itself, to make the employee feel satisfied for the job being
done well.
Extrinsic rewards- these arise from aspects external to the job and independent of the job. E.g., pay,
bonuses that the employee cannot control.
Note – Extrinsic Rewards are closely linked to Herzberg’s Hygiene Factors while Intrinsic Rewards are
closely linked to Herzberg’s Motivator Factors
Intrinsic and Extrinsic Rewards
Extrinsic reward – initiated from outside the person
● Salary and wages

● Employee benefits
● Interpersonal rewards
● Promotions
Intrinsic reward – one that is self-administered by the person
● Completion
● Achievement
● Autonomy
● Personal growth
Design and Implementation of Reward Systems to motivate teams and individuals
In present times, rewards are used as a motivation tool by most organizations.

Designing these reward systems are of a burdensome job however, the systems must have the
following qualities –
● Encourage hard work and reward it

● Control salary cost
● Adhere to required laws and legislation
● Help attract and retain staff
● Improve employee performance
An incentive is a reward which is directly linked to the employee’s performance. The better the
performance the higher the incentives.
The 3 main types of incentive schemes are as follows:
1. Performance related pay

2. Bonus schemes
3. Profit sharing
Performance Related Pay
1. Piecework scheme – Rewards are in proportion to the output produced

2. Commission – Reward is in proportion to the sales made
3. Management by Objectives [MBO] – Important desired results are identified and for these
results, rewards will be paid additional to the salary
4. Points Systems – Similar to MBO, there are a variety of rewards available on the point system.
Difference performance indicators are given different weightage points, based on which the
overall points are determined.
Bonus Schemes
These are generally one-off payments in recognition of exemplary work done.

There are also group bonuses where in if the team has managed to meet or beat the targets, they
will be awarded a bonus this has its own pros and cons.
Profit Sharing
This is a companywide reward for employees wherein employees are paid for the overall rise in
profitability.
ESOPs are part of profit-sharing schemes.
Incentives that encourage employees and align them with the organisational objectives depending
on the nature will have a long and short-term impact:
Long-term Incentive Schemes are those schemes which not only motivate the employees but also
align employees with organisational objectives.
Short-term Incentives Schemes are those which only motivate employees in the short-term even at
the expense of long-term objectives.
Example - Production manager approving faulty produced goods in order to meet the quarterly
production target; this may result in the business losing customers and its quality.
232
Training and Appraisal at Workplace
Learning and training at work [Chapter 22]
Syllabus area D6
- Explain the importance of learning and development in the workplace.
- Describe the learning process: Honey and Mumford, Kolb.
- Describe the role of the human resources department and individual managers in the learning
process.
- Describe the training and development process: identifying needs, setting objectives, programme
design, delivery and validation.
- Explain the terms 'training', 'development' and 'education' and the characteristics of each.
- List the benefits of effective training and development in the workplace.
Learning
Learning is defined as “the process of acquiring knowledge through experience, which leads to
changes in behaviour”.
It includes acquiring new skills, knowledge or attitudes or a combination of all three.
There are 3 types of learning:
1. Formal –
This is when individuals take on structured and formal based learning wherein, they learn and study
particular concepts consciously.
E.g. – a finance student learning technical analysis from a Udemy course; an accounting student
studying ACCA.
2. Informal –
This is when an individual learns and studies but not in a structured manner, common examples
include self-taught learning, networking, coaching and mentoring. This is also deliberately done.
E.g. – a finance student learning digital marketing from Youtube.
3. Incidental –
This is when an individual learns something as a by-product while trying to learn something else.
E.g. – stock trading teaches an individual a lot about mindset and risk management
Training and Appraisal at Workplace 233
Rate of Learning
Based on various studies the following conclusions have been made regarding the rate of learning:
• Learning does not take place after studying, rather the initial progress will be slower with sudden
improvements followed by further progress for a brief period of time
• There will be a final levelling of wherein enormous effort will not be put and little further progress
will be achieved
Importance of learning and development in the workplace
Small businesses see learning and development as a futile and unfruitful business activity in their
case however it has the following advantages:
● Enhance the creativity and innovation side of workers there by leading a competitive
advantage over others
● Increase in the skillset, understanding and morale of the workers leading to improvement in
productivity
● Employees may get demotivated and dissatisfied if they're not learning anything new and are
doing this same old, repetitive task like a machine
● Constant and continuous learners are often flexible in dynamic times like recessions and
booms in the economic cycle [even in black swan events like COVID]
Mr A learns about stock trading by appearing for the NISM examinations from Udemy. Identify the
type of Learning
A. Formal
B. Informal
C. Incidental
D. None of these
The Learning Process: Honey and Mumford, Kolb
The learning process defines how people are able to learn new things. It explains the process of how
an organization creates training programs for its employees to follow.
These training programs, these days, are a must for every midsized and large MNC as present-day
hiring practices include hiring them as young and freshly graduated students then empowering them
with required technical knowledge and skills.
2 theories proposed for the learning process are “Honey and Mumford” and “Kolb”.
Kolb: Experimental Learning Cycle
According to Kolb, learning is derived from everyday experiences and the following 4 learning stages
occur and the classroom learning is faulty in nature:
This is an ongoing and continuous cycle; where you start does not matter and every time you stop
while learning new skills in order to solve that problem a new cycle will begin.
E.g., if you want to learn a data visualisation software like Google Data Studio or Power BI:
• Concrete experience- Start downloading and browsing the software application
• Reflective observation- If you are unable to use the Power BI or Google data studio you will try to
note down what needs to be learnt
• Abstract conceptualization- you opt for an online course or a YouTube walk through in order to
understand the basics and see how the dashboard can be made
• Active experimentation-after completing the online course, you once again open the software
application and see if you can now make the dashboard which you had originally planned
Kolb also identified the following full learning styles depending on which part of the learning cycle
begins.
Each of the following learning style is derived from combining 2 elements within the cycle:
● Divergent-feeling and watching - Such people try to observe and analyse the skill first instead
of jumping in directly
● Assimilative-watching and thinking- such people required a structured logical approach with
clear-cut explanations rather than practical examples
● Convergent-thinking and doing- Such people prefer seeing how their ideas work in real life
● Accommodative-doing and feeling- such people prefer the ‘hands-on’ approach while
learning new skills
Honey and Mumford: Learning Styles
They gave 4 different learning styles. They believed that if the person’s learning style is known
better, they can be taught more effectively.
Activists These are dynamic learners who love to face new challenges and learn new things.
The most effective way of learning for them is via games and competitive tasks.
Reflectors These are learners who are cautious and indecisive in nature with observational
qualities. They prefer to take long time before committing to a particular task.
Theorists These are analytical learners who prefer a structured approach in learning and go
for the most probable and achievable output.
They prefer activities with links between ideas and principles
Pragmatists Common sense learners who like practical techniques of learning and prefer
making practical decisions and are often short tempered when having long,
unfocused discussions
1) Dynamic Learners (Activists): They are ever-keen and restless, always hungry for new and
creative tasks. They focus a lot on innovation and always ask the question- What If? They
could be likened to an Arian or Sagittarian personality.
2) Analytical Learners (Theorists): They are mainly concentrated on the theories, concepts and
principles. They always ask the question “What”. They are like the front-benchers in your
classroom (the only difference being that they are actually interested and acting in order to
impress the teacher). They can liken to a Virgo personality.
3) Common Sense Learners (Pragmatists): These learners learn best by getting feedbacks from a
senior person. They always ask the question- How? They could be likened to an Aquarian
personality.
Implication of Learning Models
Kolb Model Implications

• Assimilating Learning Style – Don’t prefer learning without notes and instructions
• Accommodating Learning Style – Don’t prefer learning with notes and instructions as they require
a hands-on experience
Honey and Mumford Model Implications
Activists Hands on training as they like to have a practical approach in training. On-
going participation and they do not prefer theory
Reflectors Look for an observational approach while training and generally works at
their own pace – slowly, cautiously and in a non-participative manner.
Rushing them is not ideal
Theorists Learning must be pre-decided and structured with sufficient time for
analysis and well thought conclusions
Pragmatists These require a direct value and link between training and real-world
problems as they aspire to do better things and devise better ways of doing
things
Terms 'Training', 'Development' & 'Education'
Education – This involves the all-round enrichment of the learner and not only a specific area. It
helps people steer through their lives in general.
Training – A training is more focused and specific. It is aimed at making the learner more suited to
exercise his particular duties in his job. E.g., ACCA is a particular training in accounting which an
aspiring accountant might undertake.
Development – training helps the person upgrade his skills for a particular job but these skills are
not hard skills but rather soft skills. E.g., A management consultant will know how to read balance
sheets and analyse markets and if he does not, training will help him. But if the consultant does not
have presentation or communication skills then he can enhance them via development.
Tick the correct box
Training Development Education

Aimed at making the learner more suited to
exercise his particular duties in his job
Involves the all-round enrichment of the
learner and not only a specific area
Benefits of effective training and development in the workplace
For the individual For the organisation

• Improvement in skills and qualification • Improved motivation leading to more -
efficiency in the tasks performed
• Increase in confidence and job satisfaction
• Lower staff turnover thereby savings in
organisation’s resources
• Higher quality of work and less errors made

as employees will be skilled
• Work force which is more skilled, innovative

and more customer centric in nature
In the present day’s dynamic environment, the importance of training and development at the
workplace is pivotal rather concentrate on the approach and maximizing the effectiveness of it via a
systematic step by step approach.
E.g. – off the job training is provided in finance firms wherein they are taught intermediate concepts
such as valuations in a 1–2-month period
Training and Development Process: identifying needs, setting objectives, programme design,
delivery and validation
Stage 1: Identification of training needs

Stage 2: Setting objectives for training
Stage 3: Program design and delivery
Stage 4: Evaluation and validation of the training program
How can a company identify if their workers and workforce require training in order to upgrade their
skills?
The following ways could be used:
1. Performance appraisal-after conducting a performance review, managers can suggest and identify
any existing training needs for the employee
2. Observation-in view of the staff making a number of errors and lower efficiency of workforce,
management may decide that it is time for employees to be trained so that they can improve their
skills and efficiency by making a lower number of mistakes thereby lower wastage and correction cost
3. Organisational strategy-the organisation may decide to become a market leader via a high level of
customer service which is not possible without the training and development of the employees
4. Formal training needs analysis - This is a formal procedure wherein the current job holder is asked to
fill out the application consisting of a list of the existing skills knowledge and experience, and if the job
holder is not fulfilling certain areas, then this learning app needs to be filled which is done by training
the employee
This involves setting the objective or the outcome of training which the company desires
E.g. – In a finance firm, after training is provided the organization expects that the trainee should be
able to read and understand financial models, the basics of corporate finance etc.
In a call centre, the organization expects that the trainee should be able to solve the customer
queries on the phone.
Note - Objectives must be specific, measurable, attainable realistic and time bounded [SMART]
Stage 3: Program Design and Delivery
Training and Development may include the following mediums:
● Formal training courses [Off the Job Training]

● Mentoring
● Coaching
● Computer based learning via pre-recorded courses
● Self-learning from Internet sources like YouTube and Google
● Hybrid based learning models - pre-recorded lectures plus live doubt solving sessions
Present day learning methods have been updated using incorporation of the following:
Group Discussions, Case Study Solving, Role Playing and other methods
It is upon the organization whether they want to train the trainees externally or inhouse.
Many organizations these days go for a mix of both where in basic and intermediate concepts are
taught by external faculties while advanced concepts like client management and interaction is
taught by in-house senior executives.
Stage 4: Evaluation and Validation of the training program
Like any other management model or business process the last step includes evaluation of the
process.
The evaluation of the training program is targeted at the assessment of whether the objective of the
training program was completed and fulfilled as this will help detect any flaws in the training
programme and process.
There are different levels of evaluation which needs to be performed and these are via different
techniques, methods and tests.
Level of Evaluation Measurement Method

Reactions Asking for feedback at the end of the course via a questionnaire or face to
face interview may help evaluate the training programme immediately but
this evaluation may not be optimum to analyse the future benefits and
costs
Learning Knowledge tests and interviews to review and know if the skills and abilities
that the training intended to teach the trainee were actually learnt or not
Job Behaviour Observing the performance of the trainee post training to know if there is
any improvement.
Also, if the trainee post training has exceled further in his career, then it
may help evaluate the training program
Organisation The 3E’s could be used:

Efficiency – Output measured against inputs
Effectiveness - Output measured against objectives met
Economy - Output measured against cost
Ultimate Value Measured using the additional profits generated, employee growth and
whether the employee was laid off or not in the future due to performance
issues
Irrespective of the evaluation method, the evaluation should be done before, during and after the
training program for the following reasons:
1. Before the training – To gauge the existing skill, abilities and knowledge level of the trainee in
order for the trainer to modify the course accordingly
2. During the training – To know if the trainee is comfortable with the trainer and making
progress as well as measuring the rate of learning and providing any additional resources if
need be
3. After the training - feedback can be taken immediately after training ends as well as after a
certain period of time to see if the objective of the training has been met or not
Role of Management in the Learning Process
The training and development of employees is a common responsibility shared by a number of

people. It includes the following:
1. Human Resources Department
The human resource department is concerned with and responsible for any and all aspects related
to employees including learning and development.
Adding on, they have the highest level of authority and are the decision makers in terms of content
and platforms to be used for learning and development of employees:
● Aids in the creation of a framework for the appraisal process and analysis of training gaps
● Identification of any existing training needs of the workforce
● Designing of career paths for employees along with relevant leadership roles and
responsibilities along with the respective designation
● Making employees aware of the need and resources provided by the organisation for learning
and development opportunities
2. Line Managers
These work in co-ordination with the HR Department and encourage the employees to follow HR
plans for learning and developments and help implement those plans
● Advising on the pre-requisites for the job in terms of skills and offering on the job training via
coaching and mentoring
● Monitoring the level of abilities and knowledge of the team and its individuals
● Identification of skills and knowledge required for the job and communicating it to the Human
Resources Department
Rank them as per the correct order
1. Setting objectives for training

2. Program Design and Delivery
3. Evaluation and Validation of the training program
4. Identification of training needs
A. 1, 3, 4, 2
B. 3, 1, 4, 2
C. 4, 1, 3, 2
D. 4, 1, 2, 3
Review and appraisal of individual performance [Chapter 23]
Syllabus area D7
- Explain the importance of performance assessment.
- Explain how organisations assess the performance of human resources.
- Define performance appraisal and describe its purposes.
- Describe the performance appraisal process.
- Explain the benefits of effective appraisal.
- Identify the barriers to effective appraisal and how these may be overcome.
Performance Assessment
“Performance assessment is a regular and systematic review of performance and assessment of

potential with the aim of producing action programmes to develop both work and individuals.”
The aim of performance assessment is to make the organisation more efficient by encouraging each
of the individual employees to perform and bring out the best in them, discover their untapped
potential and help them improve holistically.
Now performance assessment is a very well concept however, it is of no use unless it can be put to
use via measurement, assessment and application.
For measurement, a mix of quantitative measures and positive measures are used, using just one
type of measure. A handful of measures will not do justice to the integrity of the process.
Quantitative measures - these include any measure which can be valued in numbers and digits.
E.g. – No of projects worked and completed; No of hours clocked in
Quantitative measures - these include any measures which cannot be valued in number and digits
and is measured on a scale or in ratings however is highly subjective as the entire power lies in the
hands of the assessors whose approach and perception will decide these measures and their
measurements.
Eg – Fit within the department, team and organisation; attitude of the staff member
Assessment criteria may include:
1. Amount of Work Done

- Time taken
- Quality of work done
- Evidence of work planning
- Pressure under which work was done and whether the Deadlines were met
2. Knowledge of Work
- Gained via first-hand experience, personal research and prior to employment
3. Quality of Work
- Levels of skills, abilities and technical knowledge
4. Management Skills
- Interpersonal skills
- Leadership skills
5. Personal Skills
- Motivation
- Teamwork compatibility.
Appraisal and its objectives
The appraisal is a formal process in which the performance, current progress and even the employed
personality is reviewed and evaluated by the immediate superior with the intent of improvement
and enhancement of the appraisal in work and nature.
The objectives of appraisal are as follows: –
● Determination of the revised compensation package and salary

● Assessment of present and future growth potential with any scope for growth and
development
● Improve communication between managers and their direct subordinates
● Identify suitable candidates for promotion and retirement
● Help formulate a training plan in order to fulfil the present learning gaps experienced by the
employees
How Organisations assess the performance of employees
Process of Performance Assessment

The following 4 steps must be used when accessing the performance of the employees:
1. Set targets
2. Monitor existing performance
3. Review performance
4. Devise an action plan
The few types of staff appraisal processes used are:
1. Review and comparison - this involves reviewing the existing performance after monitoring
it and comparing it with other benchmarks
2. Management by objectives - this involves managers focusing on whether the final objective
is being met and if it is not then taking corrective action to ensure that those objectives will
be met
3. Task- cantered approach - this involves the subordinates being given the freedom to perform
a particular task and they themselves devise their own method of working which is constantly
and continuously overseen by the manager
Select the right option that represents the order of Appraisal Process
2. Set Targets
A. 2, 4, 1, 3
B. 2, 1, 4, 3
C. 1, 4, 2, 3
D. 1, 4, 3, 2
Performance Appraisal Process
The four main stages of the performance appraisal process are as follows:
1. Identification of the Assessment Criteria
This involves devising a corporate plan of the business and deciding upon what targets and
objectives should be set for the employees. It is based on job analysis, requirements of the job, set
performance standards and job specifications.
2. Preparation of an Appraisal Report
The manager is required to prepare an appraisal report which comprises of the appraised
performance against the agreed criteria and the appraisee is required to write a report on his
performance as well; both of these reports will be compared.
In certain large organizations, it is expected to perform self-appraisal final output which may save
managers time, however it is not a true assessment of the employee performance.
3. Interviewing the Appraisee
The appraisee will be interviewed by the manager which will allow a free flow of thoughts and
opinions between both of them.
The impact and effectiveness of this step will depend on the skills of the manager while conducting
the interview.
Maier identified the following approaches to appraisal interviews:
1. Tell and sell - in this approach, the appraiser acts as a sales person with the intent to persuade
and convince the subordinate to look at things from his perspective and make his/her recommended
changes. Thereby, it is a one-way communication system.
2. Tell and listen - in this approach, the appraiser also listens to the problems and expectations of
the appraisee and tries to have a natural conversation between them wherein both of them share
and exchange their ideas and expectations. Thereby, it is a 2-way communication system making this
more effective.
3. Joint problem solving - Different from the above two, the appraiser uses his interpersonal skills to
nudge the appraisee in a self-assessment state of mind by making him/her identify and present
solutions to their own problems while the appraiser acts as a coach and counsellor.
4. Concluding Report and Actionable Plan of Action
This involves the manager making a concluding report, acting upon the plan of action and constantly
monitoring while giving feedback for the same.
Benefits of Effective Appraisal / Reason for their Existence
Benefits to the Employer Benefits to the Employee

• A formal system with the objective to • Getting feedback about their
evaluate the existing potential and performance at work
performance of employees with the
objective of improving it and maybe • The appraisal system is a means for the
identifying candidates for promotion employee to plan for their future and
take the necessary actions on it with the
• Improve communication flow between guidance of their managers
managers and their subordinates
• Used to know what skills, abilities and
• A valuable tool used by human resources knowledge must be polished
Barriers to an effective appraisal
Appraisals are very sensitive for certain employees and if it's not handled correctly, it can lead to a
fall in motivation and a negative impact on the overall employee’s perception and self-confidence.
Lockett suggested 6 Main barriers to effective appraisals:
Appraisal as • Opposing views between the employee and manager on the same
Confrontation performance.
• Subjective feedback from the perspective of a manager with whom the
employee being assessed may not agree.
• Assessment is backward looking and not forward looking.
• Delivery of feedback matters as much as the content.
• Not agreeing on the course of action and solution.
Appraisal as In some organizations, appraisals are imposed and seen by the employees as a
Judgment one-sided process with the entire power lying in the hands of the manager
Appraisal as Generally, it is more of dictation than a conversation.

Chat Unproductive in nature.
Appraisal as In some organizations it is merely a duty to be performed by the manager and

Bureaucracy doesn't add any value for the employee
Appraisal as an An annual task to be performed by the organisation’s managers and simply a way
Annual Event to tick the annual year-end task list
Appraisal as Disbelief by the manager that the employee will take criticisms and act on it.
Unfinished Disbelief by employees that managers will actually help them in the process of
business improvement.
Lockett described Appraisal as a Confrontation which means it is :-

A. Assessment is backward looking and not forward looking
B. Unproductive in nature
C. An annual task to be performed by the organisation’s managers
D. Generally, it is more of a dictation than a conversation
Overcoming Barriers to effective appraisal
One of the primary barriers to effective appraisal is a perception in the mind of the employees that
annual appraisals are not significant, just an interview or dictation on an annual, yearly basis.
Overcome the above via the following courses of action:
● A system of follow up and feedback post the appraisal interview is set up with timing and they are
adhered to
● Official record of all discussions during the interview as well any discussions pre and post
interviews should be present to refer to in the future
● The agreed upon action plan should be communicated to the senior management and HR
department
● Post the appraiser interview, any discussed training and development needs should be arranged
as early as possible; this should be noted in the agenda of the next appraisal meeting
Optimum Appraisal Practices include the following 4 F traits:
1. Firm – managers should discuss both the shortcomings as well encouraging aspects of the job
performance
2. Factual – all the subjective aspects such as how they should dress, how they should talk should be
avoided
3. Fair – all employees must be treated equally and not be discriminated against
4. Frequent – appraisal should not just be an annual activity or carried out when there is an issue rather
should be conducted more frequently
Evaluating the effectiveness of Performance Appraisal
Evaluation of whether the performance appraisal process met the objectives intended can be done
by the following methods:
● Computation of costs and benefits of the performance appraisal process thereby conducting a
cost benefits analysis
● Check for movements in the future performance of the appraisee
● Asking the appraisee for their opinions and take on the entire process
● See if the existing ratios and statistics which indicate the performance of the organization have
improved or degraded such as staff turnover
Lockett made an argument pertaining to the performance appraisal process that the following
aspects and traits should be monitored to ensure their relevance to present day:
● Relevance – does the performance appraisal process and the system used suit the organization’s
specific needs and is it useful in evaluating the individual capabilities?
● Fairness – does the system directly or indirectly discriminate or objectify any assumption or action
of the appraisers and the appraisees?
● Serious intent – is the management actively involved in the process or just delegated this off as a
task to the HR Department; are the operators using present day techniques for appraisal or just
having a conversation which would yield no benefit in the future?
● Co-operation – Do both the appraiser and appraisee find this process to be worthy of the time
and whether they are operating in a manner that leads to a final actionable course of action and
concluding summary for the entire process?
● Efficiency - does the entire performance appraisal process and system justify benefit with respect
to the total cost income and whether the final objective is being met?
Staff Turnover
The formula for calculating staff turnover is as follows: total separations or replacements divided by
the averaged number in the workforce. This can be expressed as a percentage (%).
The causes of staff turnovers are as follows:
1. Discharge – employee’s insubordination, unsuitability and disciplinary action taken.

2. Unavoidable – employee voluntarily resigns due to marriage, switching states, terminal illness and
death
3. Avoidable – employee leaves on their own accord due to employment conditions no longer suitable
for them such as CTC packages, working conditions and compatibility between the organisation and
employee.
The process of staff appraisal and assessment is the cause for satisfaction among the staff, solutions
for the same and any possible courses of action should be taken before an employee resigns or loses
the motivation.
Mr A resigned from the job to take another job which is more near to his residence Which of the
reason is it classified as for the staff leaving?
A. Discharge
B. Unavoidable
C. Avoidable
Apply Your Knowledge Answers:
AYK 1:
Answer: A
AYK 2:
Answer: A
AYK 4:
Answer: B
AYK 5:
Answer: B
AYK 6:
Answer: A
AYK 7:
Answer: Psychometric test-these involve general and psychological factors like intelligence and
personality
Proficiency and attainment test-these involve examination of the applicant’s skills, abilities and
technical knowledge which are a must for the given job
AYK 8:
Answer: A
AYK 9:
Answer: B
AYK 10:
Answer: B. False
AYK 11:
Answer: A
AYK 12:
Answer: C
AYK 14:
Answer: A. Theory X
AYK 15:
Answer: A
AYK 16:
Answer:
Aimed at making the learner more suited to exercise his particular duties in his job – Education
Involves the all-round enrichment of the learner and not only a specific area – Training
AYK 17:
Answer: C

Stage 3: Program Design and Delivery
Stage 4: Evaluation and Validation of the training program
AYK 18:
Answer: A
1. Set Targets
AYK 19:
Answer: A
AYK 20:
Answer: B
Syllabus area E:
Personal effectiveness and communication in business
Personal Effectiveness & Communication
Personal effectiveness techniques
Syllabus area E1
- Explain the importance of time management.
- Describe the barriers to effective time management and how they may be overcome.
- Describe the role of information technology in improving personal effectiveness.
Time Management and its importance
Time management is the process of planning and controlling the amount of time spent on specific
activities, usually with the aim of increasing overall efficiency and productivity.
In simple words, instead of taking one’s own time to perform a task, timing yourself with the
objective of improving the skill in order to reduce the time taken.
As each one has 24 hours in a day what and how we choose to use them is what makes each one
different and via time management we can surpass and be better than other.
Efficient Time Management helps with the following:
● Manage excessive workloads

● Avoid missing deadlines
● Produce quality work
● Higher productivity
● Allocate more time to important and less to non-essential tasks
● Management of key projects with ease
Barriers to Effective Time Management and overcoming them
The main aspects which influence one’s time are as follows:
❖ Travelling time-if the employs colleagues, clients live nearby then less time is wasted in travelling
❖ Organisational culture and management style -some organisations have stringent rules regarding
procedures and protocols thereby there is lower wastage of time in these organisations
❖ Individuals’ personal skills and the personality-an individual who is faster in decision making and
likes to get their job completed first will waste lower time
❖ Nature of the work-jobs requiring an intricate level of scrutiny and detail like law will take longer
while jobs which require an overview like accounts will get done faster
The main time barriers can be classified into two:
1. Internal - Discipline, procrastination, lack of motivation

2. External - Workload issues, available resources
Internal barriers are barriers which occurred from an individual’s own habits and influences.
External barriers are barriers which occur from an organization influence, issues and resources.
Overcoming External Barriers Overcoming External Barriers

❖ Being assertive – Denying work if one can’t ❖ Follow a Lean approach and get the thing
incorporate it in the schedule and simply done right the first time and focus on
saying NO efficiency and effectiveness
❖ Managing one’s own me time - using up time ❖ Sort the tasks as per urgent and not urgent
[productive] and down time [leisure] more as well as based on short and long-term
effectively urgency
❖ Conquering procrastination – avoid putting off ❖ Break the bulk jobs into smaller parts and
work merely out of laziness and fulfil that gap perform them
with information and proper training
❖ Negotiate to reduce the job load and
improve time
Time Management Techniques
The following actions must be taken to manage and ensure time is spent in an efficient manner
without any wastage of time:
1. Allocate time just for planning and organizing

2. Have an activity log
3. Make lists
4. Prioritise using the below box
High Delegate Deal with them now

Importance Low Delegate or cancel Delegate or remove from your task
roster
Low High
Urgency
Mr V has a lot of unimportant tasks like proof checking and making copies due tomorrow in his
position as a manager. What course of action should he take?
A. Allocate time just for planning and organizing

B. Have an Activity Log
C. Make lists
D. Delegate the task
Role of Information Technology (IT) in improving personal effectiveness.
The wide range of it tools that could be used for improving personal effectiveness:
1. Email – Via email, one doesn’t need to personally deliver any documents instead he/she can just email
the relevant documents
2. Video Conferencing – No need to travel hundreds of miles for a face-to-face meeting instead simply
video conference them and reduce costs as well as travelling time
3. EDI [Electronic Data Interchange] – Using EDI can share information between computers.
E.g.- Instead of making a request form and mailing it to the supplier one can simply use EDI to place
order from suppliers
4. Intranet - with the advent of internal networks in organizations wherein employees can freely access
and upload any information or documents, one can easily save time by directly accessing the Internet
instead of reaching out to another person for the same information in the organization as now that
information is readily available on the Intranet at the tap of a button
5. Office Automation - With the advent of Microsoft Office and Google workspace, organizations and
then employees have been able to process a high volume and variety of data at high speeds thereby
saving time and money
6. Home Working – Working from Home [WFH] which was once just an option for single parents and
individuals to opt for a limited no. of times, has now become a norm adapted by most IT companies
who plan to make WFH a regular norm for all their employees in the next few years.
Statement 1 – Using EDI one can share information between computers.
Statement 2 - With the advent of Microsoft Office and Google workspace organizations and then
employees have been able to process a high volume and variety of data at high speeds thereby saving
time and money
Which of the above statements are true?
A. 1 only
B. 2 only
C. Both
D. Neither
Consequences of ineffectiveness at work
Syllabus area E2
- Identify the main ways in which people and teams can be ineffective at work.
- Explain how individual or team ineffectiveness can affect organisational performance.
Main ways in which people and teams can be ineffective at work
Impact of individual or team ineffectiveness on organisational performance

The following scenarios can occur when individuals or team’s organisational performance is
ineffective:
Individual Ineffectiveness Team Ineffectiveness

❖ Unable to uphold the deadlines and ❖ Low productivity and motivation levels
compromising the quality of work expected among the employees
❖ Miscommunication between employees ❖ Difficulty in the identification of key issues

from operational level staff thereby
❖ Poor work ethic and professionalism at work slowing the decision-making process
❖ Unable to remain adept at core competence ❖ Negative impact on reputation and in

skills required for work customers minds
Competence frameworks and personal development
Syllabus area E3
- Describe the features of a competence framework.
- Explain how a competence framework underpins professional development needs.
- Explain how personal and continuous professional development can increase personal
effectiveness at work.
- Explain the purpose and benefits of coaching, mentoring and counselling in promoting employee
effectiveness.
- Describe how a personal development plan should be formulated, implemented, monitored and
reviewed by the individual.
Competency Framework
Competences constitute of the key critical skills, common knowledge and attitudes that a job holder
must possess in order to do the task assigned to him effectively.
A competent individual is preferred over an incompetent one.
Competency frameworks am at identifying the competencies which one must possess in order to
perform a particular role within the organization
In order to identify whether an individual will be able to perform that job or not, a common list of
competences is produced and used as a benchmark.
Most competency frameworks have the following skills in common:
1. Interpersonal, communication skills

2. Being a team player
3. Result oriented
4. Problem solving
5. Ability to lead and manage people
Each competence is often described by an even more in-depth description.

For example - Results oriented could be described as “Ability to focus on the end output produced
while optimising the process of reaching to the end report”
Competence Framework and Professional Development Needs
This is a two-way street wherein employers and employees both have an active role to play.
Employers must keep competence framework updated for the specific job and employees have to
keep brushing these competency framework skills as a part of their CPD.
Impact of Personal and Continuous Professional Development [CPD]
Ensuring that the skills and abilities of employees are up-to-date helps in the following ways:
1. Minimizing of errors and improvement in quality of work done

2. Improves the customer service and satisfaction
3. Increases employee motivation and job satisfaction
Role of Coaching, Mentoring and Counselling in promoting employee effectiveness.
Mentoring
This is the process where an individual offers his/her help, guidance, advice and support to help
another individual learn and develop.
A mentor could be a senior staff member or an individual who doesn’t work in the same firm, who
does the following:
● Offers practical advice and support

● Source of an unbiased opinion
● Guidance regarding ethical aspects and within depth technical aspects of the job
● Help develop communication skills and on the job skills
● A role model who helps improve the mentee’s career goals
Coaching
This focuses on the achievement of specified objectives within the appropriate time frame. Coaching
refers to more about improving and sharpening of an individual skill rather than teaching new skills to
the same person.
● This is usually on a one-to-one basis in an everyday working situation and is an ongoing

process
● This involves encouraging people to improve their performance, skills and develop more self
confidence in order to advance their career
● Coaching is mostly carried out by a senior person or manager and that person must have
sufficient expertise, experience and judgment to help the person being coached
Counselling
This involves an individual helping another individual in order to solve an existing problem or problems
via exploring other individuals’ thoughts and feelings as well as helping them in working their problems
and issues.
The counsellor must possess the following traits:
1. Observant - Necessary to make observations about their behaviour and other non-verbal cues
2. Sensitive - the counsellor must acknowledge the other person’s beliefs in values and must not
oppose them if they are in contrast to their own
3. Empathetic - provide empathy when hearing and helping them through their problems
4. Impartial - Need to remain unbiased and avoid giving advice on the discussed problems and issues
5. Discreet - the counsellor must remain discreet and maintain confidentiality in certain sensitive
matters
Tick the correct box as per the given definition
Mentoring Coaching Counselling

Focuses on achievement of specified objectives
within the appropriate time frame
This is the process where an individual offers

his/her help, guidance, advice and support to
help another individual learn and develop
Formulation, Implementation and Review of a Personal Development Plan of an Individual.
Personal Development Plan

This is a clear developmental action plan for an individual that incorporates a wide set of
developmental opportunities including formal training.
Employees are often encouraged by management to develop a personal development plan which is
not specialised in a specific area rather much more general and forward looking, it is more of
concerned with the shaping and development of the employees’ career
Formulating a Personal Development Plan
Stage 1 – Analyse the current position
Stage 2 – Set goals to cover:
- Performance in the existing job

- Future changes in current role
- Switching to another department in the organization
- Developing specialised skills to advance the career
Stage 3 – Draw up a detailed actionable plan to achieve the goals
Stage 1 – Analyse of the current position
Carry out a personal SWOT Analysis
Strengths Weaknesses
Opportunities Task a person does well and likes Task the person likes but does not
do well
Threats Task a person dislikes however Tasks the person dislikes and does
performs well not do well
Stage 2 – Set goals to cover:

- Performance in the existing job

- Future changes in current role
- Switching to another department in the organization
- Developing specialised skills to advance the career
An alternate SWOT Analysis could be done on the person’s individual Strengths, Weaknesses,
Opportunities and Threats.
Goals must be SMART

❖ Specific – The goal must be clear in terms of what aspects are to be achieved
❖ Measurable - One should be able to quantify the goal and measure how much of the goal has
been met
❖ Achievable – Goal set should be realistic and achievable with the given resources and time frame
❖ Relevant – The goal set should be linked to the organization’s overall strategy or outcome
❖ Timely - The goal set should have a deadline or a specified time frame. E.g. – Tesla plans to
manufacture 100,000 cars in the Germany plant by the end of the year 2020.
Stage 3 – Draw up a detailed actionable plan to achieve the goals
The action plan and training programme should focus on addressing the weaknesses and try to make
most of the task performed of the current role.
Logically, it is easier to improve performance of individuals in tasks that they like performing than in
those tasks that they don't.
A degree of control will help regulate this process overall.
Sources of conflict and techniques for conflict resolution and referral
Syllabus area E4
- Identify situations where conflict at work can arise.
- Describe how conflict can affect personal and organisational performance.
- Identify ways in which conflict can be managed.
Types of Conflicts at work
Conflict is defined as any personal divergence of interest between groups and individuals.
In simple words, it is a difference of opinion over a certain course of actions.
Often positive conflicts lead to improvement and fruitful discussions however with negative
conflicts, they may escalate into fights causing inefficiency and internal disputes.
Types of Conflicts
There are 2 main types of conflicts:
1. Vertical
These conflicts occur between individuals and groups who are at different levels in the organization
hierarchy.
E.g. - A conflict between a subordinate and his manager.
The reasons for such conflicts are as follows:
1. Difference of opinion over human resource related aspects

2. Miscommunication or even lack of communication leading to alienation of subordinate
3. Difference in personalities and way of workings
2. Horizontal
These conflicts occur between individuals and groups who are situated at the same level in the
organization’s hierarchy.
E.g. – Between Finance Director and Marketing Director.
The reasons for such conflicts are as follows:
1. Scarcity of resources
2. Overlap of authority i.e., a common area which comes under the purview of both the
person/groups involved
3. Difference in personalities and way of working
Managing Conflicts
The way to dealing with a conflict is either avoiding it by not having it occur in the first place or
tactfully resolving the conflict
Conflict Avoidance
1. Clear Communication - Have clear lines of communication and ensure messages don’t get distorted
2. Adhering to rules and procedures – with employees following the rules and detailed guidelines in
event of any conflict, employees will know about their role and protocols in dealing with it
3. Prompt allocation of resources – In order to avoid future conflicts, ensure that resources like money,
time and workforce is allocated as per the needs of the respective department
4. No blaming each other – Managers must ensure that in event of conflict, the focus should be on solving
it rather than pointing fingers at each other
Conflict Management
Approaches to resolving a conflict is as follows:
1. Denial – Used in the event of minor conflicts amongst subordinates, basically the manager will deny
the existence of the conflict and hope that the conflict resolves itself without any intervention/action
required by the manager
2. Suppression – This is basically using a stick to solve a problem by threatening the parties involved with
a punishment if they refuse to resolve the conflict. This is only suitable for petty short-term disputes
and not any long-term conflicts
3. Reduction/Negotiation – the manager will try to reach a compromise between the conflicting parties
as an unbiased third party. This is one of the most common approaches used.
4. Resolution - Manager will try to have a win-win solution where in both parties will agree to it by
understanding and resolving the conflict in depth. This may be time consuming however it will give a
long-term solution to the problem.
The methods used for conflict management will depend on the style adopted by the manager and
the type of conflict.
Manager deals with conflict which occurred on Monday by addressing it 3 days later on Thursday in
a closed-door meeting Which type of conflict management strategy has it used?
A. Denial & Resolution

B. Denial & Suppression
C. Resolution & Suppression
D. Resolution & Negotiation
Communicating in business
Syllabus area E5
- Define communications and identify methods of communication used in the organisation and
how they are used.
- Explain how the type of information differs and the purposes for which it is applied at different
levels of the organisation: strategic, tactical and operational.
- List the attributes of good quality information.
- Explain a simple communication model: sender, message, receiver, feedback, noise.
- Explain formal and informal communication and their importance in the workplace.
- Identify the consequences of ineffective communication.
- Describe the attributes of effective communication.
- Describe the barriers to effective communication and identify practical steps that may be
taken to overcome them.
- Identify the main patterns of communication.
Communication
Communication is the two-way interchange of information, ideas, facts and emotions by one or
more parties involved. It helps establish a relationship and allows for direction and coordination of
the given tasks/responsibilities.
Non-Verbal Communication
Not all communication must be verbal, communication can take place without uttering a single word
as well via non-verbal cues or non-verbal communication as it is more commonly known.
Non-verbal communication is all about body language; these include eye contact, facial expressions,
the distance between the parties and the posture of a person.
Methods of Communication
Communication occurs in many forms:
● Giving or receiving information / instructions

● Exchanging ideas
● Announcement of plans and strategies
● Implementation of rules and procedures
● Variance analysis comparison of actual results against a plan
● Manual, organisation’s charts and job descriptions
Communication Process
The communication process involves the following parties and steps:
1. Sender [Encoder] - be the initiator of the communication process; the sender’s job is to encode
the message into words
2. Message - information the sender wishes to pass on to the receiver

3. Channel [Medium] – channel/medium stands for the mode of communication used in the
communication process. Few examples of the channel are telecommunication, newspaper, letters,
email etcetera and any other relevant media or mode of communication.
4. Receiver [Decoder] - person or group for whom the sender initiates the communication process
and the receiver/decoder is the recipient of the message. The receiver’s job is to decode the
message and send feedback to the sender. Therefore, in the feedback loop the receiver becomes the
sender and the sender becomes the receiver
5. Noise - this refers to anything that interferes with the communication process or make it difficult
to understand. There are various sources of noise which are as follows:
● Environmental Noise –this refers to the noise that causes physical disruption such as loud
environments
● Organisational Noise – this refers to instructions for instructions, chosen words and grammar
which are incorrect and make it difficult for the receiver to interpret and understand the
message
● Psychological Noise – these refer to the mood and feelings of the receiver. If the receiver is
upset, it may be hard for them to interpret the message in the way it was intended
● Social Noise – these refer to the differences in culture or differences in designations which
result in misunderstandings and wrong interpretations of the message
6…. Feedback - ensures that the message communicated was received and understood in the way it
was intended to and is communication as a two-way process. It is also the job of the receiver to
provide the sender with feedback.
Types of Communication
Most communication within an organization can we broadly categorised into two - Formal and
Informal
1. Formal Communication
This aids in creating a structure which enables individuals within the organization to know what is
expected of them and how should their performance had been. This involves plans, procedures,
policies and reports as well as meetings and any other formal communication to communicate the
management decisions.
2. Informal Communication
This informal mode of communication include face to face conversation, telephone conversations,
email, text messages and even grapevine. This does not follow the lines of authority but rather is an
outcome of cooperation between individuals.
Examples:
Formal Communication
A formal press release by the company to inform the public and employees about a corporate action
such as the acquisition of company XYZ
Informal Communication
The employees within the organization working on the acquisition deal may have already spoken to
other organisation employees who may have spoken to outsiders thereby the news had been leaked
prior to the announcement itself
Formal Communication
As we read earlier, formal communication helps create a structure within the organization and
thereby there are channels or the flow in which messages are communicated.
The types of such flows are:
1. Vertical- could be downwards [from a manager to subordinates] or upwards [from subordinates

to a manager]
2. Horizontal or Lateral- communication between people at a similar level in the organizational
hierarchy
3. Diagonal - communication between people of different departments and different designations
thereby present on different levels of hierarchy
Informal Communication
Informal communication moves in any direction, skips the organisational hierarchy, achieve certain
tasks and at the same time satisfy one’s social needs. There are many informal communication
channels.
Grapevine
It refers to the web of social relationships that have been formed as people communicate with one
another on current information and is often used by employees to overcome does see creative
management.
The Grapevine often carries:

❖ Rumour - this is a message which is transmitted using grapevine and is not based on official
information thereby it may or may not be true or can have remains of both actual and fake news.
❖ Gossip - this refers to the generic banter which does not carry any heavy consequences. However,
may be used to hurt individuals, cause a rift in a professional relationship. On the other hand, it
can also be a morale booster allowing employees to communicate more freely and voice their
concerns.
The Grapevine will often thrive when:
● There is insecurity among employees regarding their jobs

● There is a new piece of information which people want to share with others quickly
● Presence of personal hatred or interest in certain situations such as when our friend is
reprimanded by his/her manager
● There is an information gap amongst the employees which they try to fulfil themselves
Management can make use of the Grapevine in order to communicate news and information which
they don’t want to transmit using formal channels.
E.g. – Staff layoffs due to budget cuts
Which of the following statement are true:
❖ Statement 1 – Communication is the two-way interchange of information, ideas, facts and

emotions by one or more parties involved
❖ Statement 2 – Formal Communication helps establish a relationship and allows for direction and
coordination of the given tasks/responsibilities.
❖ Statement 3 – Non-verbal communication is all about body language these include eye contact,
facial expressions, the distance between the parties are communicating and the posture of a
person
A. 1, 2
B. 2, 3
C. 1, 3
D. All of them
Both Formal and Informal Communication helps establish a relationship and allows for direction and
coordination of the given tasks/responsibilities.
Consequences of Ineffective Communication: The following is the result of ineffective

communication:
Lack of Downward Communication will result in:
● Lower motivation of junior employees as they are not included in the decision-making process
● Less understanding of instructions and responsibilities given by managers
● Less awareness of strategic objectives in lower levels of the hierarchy
Lack of Upward Communication will result in:
● Difficulty in the control stage of the management process

● Implementation of change in a process is difficult
● Limited participation by subordinates
● Early warning signs of trouble are not detected
● The creativity of subordinates is not utilised to its fullest extent
Lack of Lateral Communication will result in:
● Mismanagement and conflicts between management teams and departments

● Specialists would not be sharing their advice and knowledge on the subject matter hence
lower efficiency
● Lack of co-ordination
A manager communicating with his subordinates is which type of communication?
A. Lateral Communication
B. Upward Communication
C. Downward Communication
D. Formal Communication
Attributes of Effective Communication
Communication shows that the right message is sent to the right person within the right time frame.
It should be the following:
1. Timely – speed at which the message must be communicated is directly linked to the urgency
of the message i.e., if a message is mark with highly urgent then it must be communicated as
quickly as possible
2. Accurate and complete - the message must not have any inaccurate or incomplete
information as it will do nothing but confuse and misguide the receiver
3. Relevant – The message must not be too worded or too technical and should be to the point.
4. Sent to the right receiver - message must be sent to the right person as it might compromise
the confidentiality of the message, leak of sensitive information and confuse the receiver.
5. Understandable - message must be presented in a manner which the receiver should be able
to comprehend and understand
6. Cost effective - the message’s cost must be as reasonable and low as possible
Effective Communication results in the following:
● Reduction in misunderstandings, disagreements and conflicts within the organisation

● Self-awareness of individuals
● Better co-ordination and management across the organisation
● Thorough communication of Instructions, rules and procedures across the organisation
● Better planning and controlling of resources and operations
Communications and Methods of Communication used in the organisation
Communication is the interchange of information, ideas, facts and emotions between two parties or
groups of parties. It aids in establishing the relationship and helps in co-ordinating tasks.
Barriers to effective communication: a barrier to communication is anything that pauses

information from:
● Not being understood by the intended recipient

● Not reaching the intended recipient
● Resulting in no subsequent action taken based on the communication
Few of the common communication barriers are:
1. Status - These differences are caused by both receiver and sender being on different levels in the
organization hierarchy thereby resulting in a reluctance to pass information and a fear of
judgment/criticism
2. Language - These differences result in the use of technical and professional jargons thereby preventing
effective communication
3. Conflict - these differences result from personal feuds between the receiver and the sender
4. Overload - these differences result from overload of information being communicated in one single
message thereby resulting in the receiver not being able to process all of this information in the
manner it was intended
5. Distance - these differences result from the physical, geographical distance between the sender and
receiver
6. Personal differences - these differences result from factors like age, communication and different
priorities thereby different interpretation of the same message
Overcoming barriers to effective communication
● Avoiding technical jargons and keeping communication as simple as possible

● Confirming that the information has been sent, received and understood in the way it was
intended
● Avoid any inconsistency in verbal and non-verbal cues during communication to avoid future
confusion
● Ensure that the information is sent to all parties involved
● Confirm priorities and deadlines in advance rather than waiting for the end moment
Levitt’s Patterns of Communication
A pattern shows how individuals communicate with one another in the organization or group.
Levitt identified 5 major patterns of communication:
These five patterns are grouped into two main types:
1. Centralised Networks [Chain, Wheel and Y]

All the information is passed down to a single person at the center of the network and then re-laid
to the other members hence this creates a restrictive access of information
2. Decentralized Networks [Circle & All Channel]

All the information flows from one member to another freely thereby creating of 13 news flow and
free access of information
Levite made the following conclusions
1. Wheel – Faster than others;

2. Circle – Slower than others
3. Wheel – Ideal for Problem Solving
4. All-Channel – Ideal for complex decision making and reach a decision
5. Circle - Highest level of satisfaction for individuals
6. All-Channel – Fairly high level of satisfaction for individuals
Centralised network has highest level of job satisfaction for the central figure while the rest feel
unvalued and discouraged hence lower job satisfaction for members.
Which communication patterns could be used for the below scenario?
Company Alpha is a tech company where in each project team assists and guides a client in a
complex technical issue the client faces in their system. Each team member is valued and bring their
own unique set of skill which is useful in solving the client’s problem
A. Wheel
B. All Channel
C. Circle
D. Chain
Apply Your Knowledge Answers:
AYK 1:
Answer: D
AYK 2:
Answer: C
AYK 3:
Answer:
Statement 1 – Coaching
Statement 2 – Mentoring
AYK 4:
Answer: A
AYK 5:
Answer: C
AYK 6:
Answer: C
AYK 7:
Answer: B
Syllabus area F:
Professional ethics in accounting and business
Professional ethics in accounting and business
Fundamental principles of ethical behaviour
Syllabus area F1
- Define business ethics and explain the importance of ethics to the organisation and to the
individual.
- Describe and demonstrate the following principles from the IFAC (IESBA) code of ethics,
using examples:
(i) Integrity
(ii) Objectivity
(iii) Professional competence
(iv) Confidentiality
(v) Professional behaviour
- Describe organisational values which promote ethical behaviour using examples.
i. Openness
ii. Trust
iii. Honesty
iv. Respect
v. Empowerment
vi. Accountability
Business Ethics
Ethics in simple words is the sense of right or wrong as per one’s own perception.
Business ethics is the application of ethics i.e., the system of moral principles to business behaviour.
Deciding on whether the action is right or wrong depends on the circumstances and other factors:
● Consequences
● Motivation behind the action
● Guiding principles
● Key values
Business ethics are partly related with legal requirements but is not only limited to the letter of the
law but also some areas which are not covered by the law.
Business ethics is often confused with an ethical dilemma.

Ethical dilemma is when a person has to decide between right or wrong.
Examples of such ethical dilemmas are present across all business operation spectrums
• Accounting – Bribery and Greasing the wheels; Creative Accounting; Insider Trading
• Production Issues – Product testing on Animals; Environmental Impact
• Sales and Marketing Issues – Price Fixing; Anti-competitive behaviour
• Personnel (HRM) Issues – Employment Terms; Discrimination at Workplace
Approaches to Ethics
Ensuring that all decisions made are ethical is not as simple as it sounds. Moreover, individuals often
find themselves stuck in an ethical dilemma unsure of the right course of action.
The approaches one can use in this decision-making process:
1. Consequentialist vs Pluralist
2. Relativist vs Absolutist
Consequentialist Pluralist
This approach states that a decision taken is right This approach tries to cater to all stakeholders
or wrong, depends on the consequences or and not compromise and focus on the
outcomes of the decision. interest of just one or any specific groups.
As long as the outcome is right the action itself is
irrelevant. E.g. - A manufacturing company has been
polluting the nearby lake - so the community
Eg-Stealing of food is justified if it is done as a as a whole will want to shut down the factory
matter of last resort to feed the family. or have the company dispose of its waste
somewhere else however due to the high cost
Egoism – Action is deemed to be morally sound if it is not possible by the company.
the final outcome is favourable for the individual
making the decision Here in a pluralist approach, it will involve
having built a steady water supply for the
Utilitarianism – the greater good principle meaning villagers so that they have to rely less on the
the action is morally sound if the outcome is polluted lake as well as coming up with
favourable for the greatest number of people alternate solutions to dispose of the waste
E.g. – If an employee is asked to cover up a fraud,

according to the egoist approach, it benefits the
accountant but in the future, it will impact the
shareholders and employees as the company might
have to shut down (E.g. Enron scandal).
According to the utilitarian point of view, the
accountant keeping quiet will be unacceptable as
the fraud will cause harm a large number of people
in the future than the no. of people benefitting
from it in the short term
Relativist Absolutist
This is the view wherein there is no absolute This approach to ethics believes there is a
universal moral code and that ethics is universal moral core wherein certain actions
circumstantial and differs for every situation and are inherently right or wrong such as stealing
circumstance. and murder etc.
Even if the murder is done in self-defence, it is
E.g. – Theft of food by a beggar is not justified why not justified and deemed as wrong and
others feel as it is a matter of survival, thus unethical.
justified.
The advantage of absolutism is that there is a
The greatest advantage lies in the fact that standard framework of rules for companies
relativism accepts views opinions from different and individuals to follow
people and cultures thereby MNCs who adapt to
the local taste and fashion have greater flexibility Absolutism is often linked to the
in their operations. Deontological views of ethics by Immanuel
Kant which suggests that an individual must

However, there is a school of thought which focus on meeting their moral duties rather
believes relativism is just a way for individuals and than making a decision based on the
organizations to do whatever they feel is right consequences of their actions
without any ethical consequences
Judge B thinks that a murder even in self-defence isn’t justified as the victim could opt for an
alternative course of action. Which of the following approach to ethics has Judge B followed?
A. Absolutist
B. Pluralist
C. Utilitarian
D. Relativist
Importance of Business Ethics to the Organisation and Individual
Businesses like any other stakeholder are a part of the society and are expected to behave and
operate within certain boundaries and in accordance with the appropriate standards
Importance to the Organisation
● Good ethics should not be viewed as just an optionable course of action or a burden but rather
as a driver of profitability
● An ethical framework is a crucial foundation for corporate governance and a sustaining,
successful business
● Investors of ethical businesses are often at ease since the company is less likely to be in the
news for wrong reasons
● Employees often like to be a part of ethical businesses and hence ethics in such cases acts as a
motivator
E.g. – Tata Group of companies is known for the high ethical standards it holds themselves with.
On the contrary, Nestle Group has been often been categorized by many as the most unethical
company due to its involvement in various scandals
Importance to the Individual
● There has been a drastic change in the thinking of individuals - both consumers and employees
● Employees will now more mindlessly follow the employers’ unethical actions
● Consumers prefer to purchase from companies with fair and just ethics
● E.g.- business reputation and ethics is an important and deciding factor when evaluating various
job offers from an employee’s perspective and consumers often choose environmentally friendly
companies over the others
The role of regulatory and professional bodies in promoting ethical and professional standards in
the accountancy profession
Syllabus area F2
- Recognise the purpose of international and organisational codes of ethics and codes of
conduct, IFAC, (IESBA), ACCA etc.
- Describe how professional bodies and regulators promote ethical awareness and prevent or
punish illegal or unethical behaviour.
- Identify the factors that distinguish a profession from other types of occupation.
- Explain the role of the accountant in promoting ethical behaviour.
- Recognise when and to whom illegal, or unethical conduct by anyone within or connected to
the organisation should be reported.
Purpose of international and organisational codes of ethics and codes of conduct, IFAC, (IESBA),
ACCA
These provide a standard guideline to be followed for the practising accountants.

IFAC also takes into notice that certain jurisdictions would have a specific requirement which the
accountant must adhere to even if contrasts the IFAC Code as local laws and regulations take
precedence over IFAC Code
IFAC Code of Ethics – 5 Fundamental Principles
These lay down the ethical standards to be applied by practicing accountants across the world.
IFAC code is based on a conceptual framework approach rather than a rule-based approach for
problem resolution and guide the professionals to act in public interests and for society as a whole.
IFAC member bodies are ACCA and CIMA thereby only issue guidelines however expect their
member bodies to take any disciplinary action in the event of an ethical breach.
The 5 Fundamental principles are:
1. Integrity – accountants should not be associated with any untrue and misleading information and
must always at act in a truthful manner
2. Objectivity – Accountants must make sure that their judgement remains unbiased and
uncompromised and if there is a conflict of interest, they must excuse themselves from the given
situation
3. Professional competence and due care - accountants must possess all the required skills common
knowledge and know about the current happenings in the areas with where they work in order to
ensure that they give their clients the relevant and applicable advice and guidance
4. Confidentiality - Certain information should not be disclosed to third party without approval from
the relevant authority unless there is a legal obligation to do so as the information could be misused.
Any confidential information must not be used by the accountant to advance his/her own causes
5. Professional Behaviour - Accountants must always conduct themselves in a professional manner
and make sure they don't bring any disrepute to the profession
Which of the following are one or more of the 5 Fundamental Principles of Accounting laid down by
ACCA?
1. Integrity
2. Professional Judgement
3. Reliability
4. Scepticism
A. 1
B. 1, 2
C. 3, 4
D. 1, 3, 4
How professional bodies and regulators promote ethical awareness and prevent or punish illegal
or unethical behaviour.
Professional bodies like ACCA and regulators like IFAC issue standard guidelines which can be
referred to when unsure about which course of action to undertake.
Those who fail to uphold the fundamental principles and standards laid down will be called before
the ACCA’s Disciplinary Committee for a hearing which may result in the membership being
suspended, cancelled or penalised by fines payable to the body.
Factors that distinguishing a profession from other types of occupation
The distinguishing factors are as follows:
1. Under no obligation to follow an ethical code

2. Compliant with the Ethics Code
3. Governance by a professional organisation
4. Acting and making decisions in accordance to the general public welfare
5. Acquiring of a set of pre-defined specialised skills during a period of training
6. Certification process to be cleared before being allowed to practice
Role of the accountant in promoting ethical behaviour
Often in board and other group meetings, it is the professional accountant who belongs to a
professional body and thereby has a duty to act in the general welfare of the public
Here the general welfare of the public or public interest refers to the common well-being of the
community as a whole.
This merely means that professional accountants have a duty towards the public and not only to
watch the business and its owners. A professional accountant plays a special role in promoting
ethical behaviour.
Recognise when and to whom illegal, or unethical conduct by anyone within or connected to the
organisation should be reported
Anytime there is an embezzlement of funds and misrepresentation of data to benefit a specific or a

group of individuals these are clear signs of illegal and unethical conduct and must be reported.
Corporate codes of ethics
Syllabus area F3
- Define corporate codes of ethics.
- Describe the typical contents of a corporate code of ethics.
- Explain the benefits of a corporate code of ethics to the organisation and its employees.
Corporate codes of ethics
● Most multinationals and other large companies have been adhering to the concept of
business ethics by implementing a Corporate Ethics Statement (Generalised) and a
Corporate Ethics Code (Specific)
● These ethics statement and codes have no standardized list of content and varies from
organisation to organisation
● Many organisations appoint ethics officers [also knows as compliance officers] to ensure
these corporate codes of ethics are adhered to and provide any guidance regarding the
same
Some might say that the reason for their existence can be to shift blame onto an employee by the
company in case of wrongdoing or as a marketing tool to stay in the public eye for the right reasons.
However, in practice this code of conduct will only work if there is full support from management
and holding regular seminars.
Obligation and Code of Ethics
The obligations in a company’s code of ethics is a two way street; both the company and its
stakeholders must conduct themselves in an ethical manner and abide by the code of ethics.
Ethical conflicts and dilemmas
Syllabus area F4
- Describe situations where ethical conflicts can arise.
- Identify the main threats to ethical behaviour.
- Outline situations at work where ethical dilemmas may be faced.
- List the main safeguards against ethical threats and dilemmas.
Threats to Ethical Behaviour
The key threats that the accountants should attempt to avoid. These include the following:
1. Self Interest Threat
2. Self-review Threat
3. Advocacy Threat
4. Familiarity Threat
5. Intimidation Threat

This is when the accountant’s judgement is impacted by a financial or other interest causing a
conflict of interest.
E.g. – Creative Accounting to inflate books to earn more performance linked bonuses or pay.
This is when an accountant is made to redo and re-evaluate their own decisions made and their
objectivity is compromised as questioning their own decisions and judgement.
E.g. – If the organization asks the accountant to evaluate the organisation’s existing accounting
system which is created by him/her then the accountant will have a partial bias and not complete
objectivity.
3. Advocacy Threat
This is if an accountant is supporting an opinion which will lead to his objectivity being compromised.
E.g. – Representing a client in an active litigation
This occurs when an accountant’s objectivity is compromised due to a close personal relationship
which clouds their judgement.
E.g.- If the accountant is asked to identify which department is inefficient so it can be dismissed
however the accountant’s wife is in the department A hence his objectivity is compromised.
5. Intimidation Threat
This is when the accountant is intimidated to not remain objective by being threatened with
dismissal or any other course of action that will not be in his favour.
E.g.-The accountant could be threatened with not paying him his bonus if he doesn’t do as said.
Safeguards by Professional Bodies and Businesses/Organizations against ethical threats and

dilemmas
Safeguards by Professional Bodies against Ethical Threats
There are various safeguards implemented by ACCA and other professional bodies to defend and
prevent any ethical threats and dilemmas from occurring:
● Continuous ethics training – as a part of curriculum and CPD [Continuous Professional

Development]
● Introduction and adherence to corporate governance requirements
● Regular monitoring and disciplinary procedures
● Clear guidelines and theory of professional standards laid out by the relevant professional
association
Safeguards by Businesses/Organizations against Ethical Threats
● Organization must also do its part in reducing the possibility of unethical behaviour and/or
any speeches by its employees via creating a professional culture, having a robust internal
system to resolve any complaints and regular seminars on ethics.
● Furthermore, organizations must promote, comply with and take necessary actions on any
internal complaints of ethical breaches made by employees
● Organizations can opt for applying the following six values to foster a culture wherein they
can minimize the ethical breaches
● The Six values are: [H O T T E R]
1. Honesty – this is one of the most basic virtues that is taught to an individual over his lifetime and
this should be applied in professional life as well.
E.g. – One must never understate the risk or overstate the profit potential when making a pitch for
the business’ product
2. Openness – A free flow of information will aid stakeholders in decision making
3. Transparency – Similar to openness, a regulated organisation with timely audit and detailed reports
on business’s performance will aid the stakeholders and prevent ethical breaches
4. Trust – Organisations must be worthy of the trust of the stakeholders and uphold it to the highest
standards
E.g.-Not evading tax payments to Government and not overcharging customers
5. Empowerment – Organisations must empower their employee by promoting them with more
responsibilities in order to improve their self-image and motivation
6. Respect – There must not be discrimination based on cast, creed and sex within and outside the
organisation through the organisation’s actions hence all must be treated with respect
Dealing with Unethical or illegal conduct in Workplace and Possible Courses of Action
If there is any unethical or illegal conduct within the organisation, one can follow these series of steps
to deal with those issues:
1. First consult with whoever is responsible for governance or ethics within the organization i.e., the
compliance officer and/or make the board of directors aware about this issue
2. If still the issue stands unresolved then take legal advice and/or reach out to the professional body
(E.g.-ACCA, AICPA, CIMA)
3. As a matter of last resort or in severe cases, the first course of action should be reporting to the
relevant authorities which regulate those activities and deal with it. One could also consider
withdrawing from the engagement
The accounting system devised by Mr A is in its final completion stage, the board of directors has
appointed a forensic audit team lead by Mr A’s wife to review the accounting system.
The above scenario refers to which type of threat to ethical behaviour.

3. Advocacy Threat
A. 2&3
B. 3&4
C. 2, 3 & 4
D. 1, 3 & 4
PO1 – ETHICS AND PROFESSIONALISM
Description
The fundamental principles of ethical behaviour mean you should always act in the wider public
interest. You need to take into account all relevant information and use professional judgement, your
personal values and scepticism to evaluate data and make decisions. You should identify right from
wrong and escalate anything of concern. You also need to make sure that your skills, knowledge and
behaviour are up-to-date and allow you to be effective in your role.
Elements
a. Act diligently and honestly, following codes of conduct, taking into account and keeping up-
to-date with legislation.
b. Act with integrity, objectivity, professional competence, due care and confidentiality. You
should raise concerns about non-compliance.
c. Develop a commitment to your personal and professional knowledge and development. You
should become a life-long learner and continuous improver, seeking feedback and reflect on
your contribution and skills.
d. Identify, extract, interrogate and evaluate complex data to make reliable, informed decisions.
e. Interrogate, critically analyse and assess data and other information with professional
scepticism. You should challenge opinion and facts through corroboration and robust testing.
Example activities
• Applying legislation appropriately to client needs.
• Continually reviewing legislation and regulation that affects your working environment.
• Briefing a team on a new standard and how to apply it.
• Keeping sensitive information confidential and disclosing it only to those who need it or when
disclosure is legally required.
• Recognising unethical behaviour and telling your line manager about what you have seen.
• Avoiding situations where there may be any threat to your professional independence.
• Deciding what information is important and reliable, using it to support your decision making.
• Completing all the code of conduct and/or professional ethics training provided by your
organisation.
• Checking transactions and supporting documents to verify the accuracy of accounting records.
• Use digital technology responsibly to analyse and evaluate data from a variety of sources,
ensuring the integrity and security of this data.
Apply Your Knowledge
Answers:
AYK 1:
Answer: A
AYK 2:
Answer: 1
AYK 3:
Answer: B [Advocacy & Familiarity Threat]
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+919004935888

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Mumbai

Weekday Weekend Sel

Best way to study

Planning how to study

How to approach the exam

Syllabus wise study material

Apply Your Knowledge

Nimbus™ Preparation tools

Interactive notes with gamification

Question Bank & Test Series

Flashcards and Interactive mind maps for revision

Examining team guidance/Exam technique & reports

On successful completion of this exam, candidates should be able to:

ACCA Performance Objectives

Objective Chapter in text

Style Description Marks

Business Organisation and Stakeholders

The purpose and types of business organisation

Business Organizations and the reasons they are formed

Why do we need Organizations?

Organizations enable people to do the following:-

1. Sharing of skills and knowledge

Whether it be monetary or non-monetary resources.

Apply your knowledge 1:

Which of the following advantages do business organisations have over individuals?

A. Sharing of skills, knowledge and resources

Different Types of Organisations

The common types of commercial companies are:

There are two types of Limited Companies: -

i. Private Limited [with ‘Ltd’ after their name]

ii. Public Limited [with ‘Plc’ after their name]

Not for Profit Organisations [NFPs or NPOs]

Public Sector Organizations

Private Sector Organizations

Apply your knowledge 2:

Which of the following are Public Sector Organisations?

Non-Governmental Organisations [NGO]

Sectors in which Organisations operate

1. Agriculture: production, processing and packaging of foodstuff

Key differences between various types of organisations

Ownership Government: Public organization [E.g. IRCTC Railway]

Private: Owned by shareholders and/or private owners

Objectives Private Organizations: Profit maximization

Every organisation has a different goal Public Organizations: Welfare of people

Activities Hyundai: Manufactures and sells automobiles with an intent

Sources of Funding Charities: Voluntary donations

Size Sole traders or large multinational companies

The reach and size of an organisation varies

Liability Company owners have limited liability.

Apply your knowledge 3:

Stakeholders in business organisations

Stakeholders and their groups

Three types of Stakeholders: Internal, Connected and External

Apply your knowledge 4:

Government is which type of Stakeholder from the below options

Types of stakeholders and their impact on the organisation

Stakeholder Needs Explanation

Shareholders Capital appreciation, going Shareholders are investors of

appreciation of share prices

Customers Value for money products, Expect that the company