Strategy illustration Strategy theory

Legal forms of business

There are a range of legal structures associated with different forms of business:

1. Sole trader businesses are the easiest to set up because there is no complex paperwork. The business and the owner are the same person in law. The sole trader does not have limited liability which means that they are responsible for all the debts of the business. The sole trader has to produce an annual accounting return for the Inland Revenue.

2. Partnerships are set up by a Deed of Partnership which is a document made out by the partners and witnessed by a solicitor. This Deed sets out the legal relationship between partners e.g. how profits will be shared out, responsibilities of partners etc. In traditional partnerships the partners had unlimited liability i.e. they were jointly responsible for the debts of their partnership. In 2001 this has been altered so that some large partnerships e.g. accountancy firms can have limited liability.

3. Companies are separate in law from the individual owners (shareholders) of the business. This means that should the business run up debts the shareholders are only liable for these debts up to the sum they have contributed to the company. A number of Companies Acts have been passed setting out ways in which companies should conduct their affairs.

To register as a company various documents must be registered at Companies House in Cardiff including a Memorandum and Articles of Association setting out internal relationships within the company, and external relationships with third parties. A public company can only start trading and sell shares on the Stock Exchange once it has carried out all the required paperwork.

A private company does not sell its shares to the wider public. Shares can only be traded with the permission of the Board of Directors. In contrast, public company shares are generally available through the Stock Exchange. A private company will have Ltd after its name and a public company PLC.

Public companies are obliged in law to have an Annual General Meeting of shareholders. The Companies Acts set out the power and responsibility of directors. Public companies have a number of legal obligations such as to produce an annual report and statement of accounts. There are far more formalities and paperwork associated with setting up a public rather than a private company.

Business structure and organisation

Every organisation made up of more than one person will need some form of organisational structure.

An organisational chart shows the way in which the chain of command works within the organisation.

The way in which a company is organised can be illustrated for a packaging company. The company will be owned by shareholders that choose directors to look after their interests. The directors then appoint managers to run the business on a day-to-day basis. In the company structure outlined below:

The Managing Director has the major responsibility for running of the company, including setting company targets and keeping an eye on all departments.

The Distribution Manager is responsible for controlling the movement of goods in and out of the warehouse, supervising drivers and overseeing the transport of goods to and from the firm.

The Production Manager is responsible for keeping a continuous supply of work flowing to all production staff and also for organising manpower to meet the customers' orders.

The Sales Manager is responsible for making contact with customers and obtaining orders from those contacts.

The Company Accountant controls all the financial dealings of the company and is responsible for producing management accounts and financial reports.

Other organisations will have different structures. For example most organisations will have a marketing department responsible for market research and marketing planning. A customer services department will look after customer requirements. A human resources department will be responsible for recruitment and selection of new employees, employee motivation and a range of other people focused activities.

In addition there will be a number of cross-functional areas such as administration and Information Technology departments that service the functional areas of the company. These departments will provide back up support and training.

Organisations are structured in different ways:

1. By function as described above

2. By regional area - a geographical structure e.g. with a marketing manager North, marketing manager South etc

3. By product e.g. marketing manager crisps, marketing manager drinks, etc

4. Into work teams, etc.

Reporting in organisations often takes place down the line. An employee might be accountable to a supervisor, who is accountable to a junior manager, who is then accountable to a senior manager - communication and instructions can then be passed down the line.

Formal organisation

An organisation chart outlines the formal chain of command and communications within an organisation. This is the official structure that is backed up by rules and procedures. You must remember however, that what you see on paper is often very different from the way that things work in the real world. An individual with a strong personality can play an important part in the running of an organisation, although he or she may appear near to the bottom of the chart.

In the formal organisational structure there will be patterns of communication and procedures for decision making. Some organisations will have tall structures with lots of layers of command. Other organisations are relatively flat.

Although the managing director typically appears at the top of an organisation chart, it is possible to think of an organisation in a different way. This is to invert the organisation chart - i.e. turn it on its head. This is particularly relevant in service organisations like insurance companies, and banks where often the most important employees are those that deal directly with customers. So we could set out a chart to illustrate a customer focused organisation in the following way:

In a customer facing organisation like the one illustrated above, the front line employees would typically work in teams, and often will be equipped with computers that are linked to a central database. These front line employees are empowered to make decisions within the framework of given boundaries.

Banks place a lot of emphasis on empowering teams of employees working in branches and call centres to make appropriate customer focused decisions. A similar picture applies for telecom services, e.g. those operated by the Inland Revenue staff deal directly with clients, as do retail employees at Argos and Homebase.

The formal organisation is based on official links and connections whereas the informal organisation is based on loose ad hoc connections. It is much easier to set out an organisation chart for formal structures than for informal ones, which may not be obvious and may change although some informal structures are deeply embedded in working practice.

Supporting Documents

These downloads will help to put strategy theory into context using real world examples from real businesses.

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