BT Business and Technology

A. The business organisation and its external environment

A business organisation is a body formed to carry out an activity, usually to provide goods or services. Organisations are formed to pool resources, share risk and achieve more than individuals could alone. They differ by ownership, size, sector and purpose. The main types are commercial (aimed at profit), not-for-profit, public sector, non-governmental organisations and co-operatives.

A stakeholder is anyone affected by or interested in the organisation. Internal stakeholders include employees and managers, connected stakeholders include shareholders, lenders, customers and suppliers, and external stakeholders include government, the community and pressure groups. The agency relationship exists when owners (principals) appoint managers (agents) to run the business for them, and the interests of the two can differ. Stakeholders differ in power and interest, and Mendelow's matrix suggests how to deal with each group: keep satisfied (high power, low interest), manage closely (high power, high interest), keep informed (low power, high interest) and monitor (low power, low interest).

The external environment can be reviewed using the PESTEL headings. Political and legal factors include government policy, sources of law, and data protection and security, where both individuals and organisations have legal responsibilities. Macroeconomic factors include inflation, unemployment, economic growth and the balance of international payments. Governments use fiscal policy (taxation and public spending) and monetary policy (interest rates and the money supply) to influence activity. Microeconomic factors include demand and supply, elasticity of demand, substitute and complementary goods, the behaviour of costs, and market structures (perfect competition, monopolistic competition, oligopoly and monopoly).

Social and demographic factors, such as an ageing population or migration, change demand and the labour market. Technological change can lead to downsizing, delayering and outsourcing, and it changes business processes and the role of the accountant. Environmental and sustainability factors include the impact of a business on the environment and ways of operating more sustainably. Competitive factors can be reviewed with a SWOT analysis (strengths, weaknesses, opportunities and threats), Porter's value chain (primary activities such as inbound logistics, operations, outbound logistics, marketing and sales, and service, and support activities) and Porter's five forces (threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitutes and rivalry between competitors).

Key terms

• Agency relationship: The relationship between owners who appoint and managers who act for them.
• Mendelow's matrix: A grid that plots stakeholders by power and interest.
• Fiscal policy: Government use of taxation and spending to influence the economy.
• Monetary policy: Use of interest rates and the money supply to influence the economy.

Study tip: For PESTEL questions, link every factor to an effect on the business. A list of headings earns little.

Practice questions for section A

B. Organisational structure, culture, governance and sustainability

The formal organisation is the structure set out by management, with defined roles and reporting lines. The informal organisation is the network of relationships between people that develops naturally. It can speed communication and improve morale, but it can also spread rumours or resist change.

Common structures are entrepreneurial (one person at the centre), functional (grouped by function), matrix (staff report to a functional manager and a project or product manager), divisional (by geographical area, product or customer type) and boundaryless forms (virtual, hollow or modular). Key concepts include the separation of ownership and management, the separation of direction and management, span of control (the number of subordinates a manager supervises), scalar chain (the line of authority from top to bottom), tall and flat structures, outsourcing, offshoring and shared services. Anthony's hierarchy divides management into strategic, tactical and operational levels. Centralisation keeps decisions at the top, which gives control and consistency, and decentralisation delegates decisions, which gives speed and motivation but less control. Marketing identifies and satisfies customer needs, and the marketing mix covers product, price, place and promotion (with people, process and physical evidence for services). The main departments are research and development, purchasing, production, service operations, marketing, administration and finance.

Organisational culture is the shared values, beliefs and ways of behaving. It is shaped by the history of the organisation, its founders, leaders, size, technology, and the environment. Schein describes three levels (artefacts, espoused values and basic assumptions), Handy describes four types (power, role, task and person), and Hofstede compares national cultures using dimensions such as power distance, individualism and uncertainty avoidance.

Governance is how an organisation is directed and controlled. Committees bring together expertise and give more than one view, and they can spread responsibility and give independent oversight. Disadvantages include slow decisions, compromise and cost. The chair runs the meetings and keeps discussion on track, and the secretary prepares the agenda and records the minutes. The agency problem is the risk that managers act in their own interests, and good governance reduces it. Best practice includes a balance of executive and non-executive directors, a remuneration committee, an audit committee and public oversight.

Sustainable business practice means that an organisation meets its social and environmental responsibilities as well as its financial ones. Corporate social responsibility is about the effect of the business on society. An organisation takes it into account by considering the needs of its internal, connected and external stakeholders, for example fair treatment of employees, honest dealing with customers and suppliers, and reducing harm to the environment.

Key terms

• Span of control: The number of people who report directly to one manager.
• Matrix structure: A structure in which staff report to two managers, such as a function and a project.
• Culture: The shared values and ways of working in an organisation.
• Non-executive director: A director who is not part of the day to day management and brings independent judgement.

Study tip: When comparing structures, give one advantage and one disadvantage of each. Questions often ask which structure suits a given situation.

Practice questions for section B

C. Business functions, regulation and technology

Accounting works with other functions. It supplies the information that procurement, production and marketing need to make decisions and to control costs. Production planning must consider the costs of materials, labour and capacity. Marketing involves costs such as advertising and market research, and pricing decisions need cost information. Good service has costs, but it can also bring benefits such as customer loyalty and repeat sales.

The accounting function records and processes information and prepares the financial statements. Management accounting records and analyses costs and revenues, provides information for decisions, and prepares budgets and exercises budgetary control. The finance and treasury functions manage tax, evaluate and obtain finance, manage working capital and manage risk. Internal audit is an independent review within the organisation of its controls and risk management, and external audit is an independent opinion on whether the financial statements give a true and fair view.

Organisations must keep proper accounting records and file accounts as the law requires, and failing to do so can bring fines and other penalties. The international accountancy profession regulates itself through standards and their monitoring. Fraud is more likely when there is pressure, opportunity and a way of rationalising the act. Types include theft of cash or inventory, false expense claims, payroll fraud and misreporting. Fraud harms the organisation through financial loss, damage to reputation and loss of trust. All managers have a duty to help to prevent and detect fraud, for example by applying controls and reporting concerns. Client money must be handled strictly in line with policy and kept separate. Money laundering is the process of making money from crime appear legitimate. Offences include concealing or transferring criminal property and failing to report suspicion. Methods of prevention include customer due diligence, monitoring transactions and reporting suspicious activity.

Financial information serves business purposes. The statement of profit or loss shows performance, the statement of financial position shows position, the statement of cash flows shows cash generation and use, and sustainability and integrated reports show wider impact and value. Management reports include cost schedules, budgets and variance reports. Financial systems include sales and purchase invoicing, payroll, credit control, and cash and working capital management. Weaknesses in a system can be found by looking for errors, duplication and delay. Businesses use spreadsheets, databases and accounting packages.

Internal controls are the policies and procedures that protect assets, ensure reliable records and make sure that laws are followed. Management is responsible for them. Effective controls include authorisation of transactions, segregation of duties, physical safeguards, checks and reconciliations. General controls apply to the whole IT environment, for example access and back-up, and application controls apply to a specific system, for example input checks.

Technology has changed accounting. Cloud computing gives access to systems and storage over the internet, with lower costs and easier access, but requires good security. Automation and artificial intelligence take over routine tasks, so accountants spend more time on analysis and advice. Big data and data analytics improve decision making and audit by testing whole populations. Blockchain and distributed ledgers keep a shared record that is hard to change, which can support verification. Cyber security protects systems from attack, and the main risks are loss or theft of data, disruption and financial loss. Protection includes firewalls, passwords and multi-factor authentication, encryption, updates and staff training.

Key terms

• Internal audit: An independent review within the organisation of its controls and risk management.
• Segregation of duties: Splitting tasks so that no one person controls a transaction from start to finish.
• Money laundering: Making the proceeds of crime appear to come from a legitimate source.
• Cloud computing: Access to computing resources and storage over the internet.

Study tip: For control questions, name the control and the risk it reduces. For example, segregation of duties reduces the risk of fraud.

Practice questions for section C

D. Leadership and management

Leadership sets direction and inspires people. Management plans, organises and controls resources, and supervision directs day to day work. The classical writers Fayol (planning, organising, commanding, coordinating and controlling) and Taylor (scientific management, with work study and incentive pay) described management as a set of functions, and Mintzberg described managerial roles (interpersonal, informational and decisional). Drucker described the manager's tasks of setting objectives, organising, motivating and communicating, measuring and developing people. Managers have authority (the right to give instructions), responsibility (the duty to complete them) and accountability for the result.

Leadership theories include Adair's action-centred leadership (task, team and individual needs), Fiedler's contingency theory (the best style depends on the situation), and Bennis (leaders as visionaries who create change). Leadership styles can be described using the Ashridge model (tells, sells, consults and joins) and Blake and Mouton's grid (concern for people and concern for production).

Individuals and groups have different characteristics and approaches to work. A group is a collection of people with a common interest, and a team is a group with a common goal in which members depend on each other. Belbin describes nine team roles that a balanced team needs, and Tuckman describes the stages of team development: forming, storming, norming, performing and adjourning. Effective teams have clear objectives, good communication, trust and a mix of skills, while ineffective teams have conflict, unclear roles and poor leadership.

Motivation is the drive to act. Maslow's hierarchy runs from physiological needs, safety, social needs and esteem to self-actualisation. Herzberg's two-factor theory says hygiene factors (such as pay and conditions) prevent dissatisfaction, and motivators (such as achievement and recognition) create satisfaction. McGregor's Theory X assumes people dislike work and need control, and Theory Y assumes people seek responsibility. Reward systems should be fair, linked to performance and valued by the people receiving them.

Learning and development improve performance. The learning process can be described using Honey and Mumford's learning styles (activist, reflector, theorist, pragmatist) and Kolb's learning cycle (experience, reflection, conceptualisation and experimentation). The training process identifies needs, sets objectives, designs the programme, delivers it and validates the results. Training is short term and job specific, development is longer term and about growth, and education is broad knowledge gained through formal study.

Appraisal reviews individual performance against agreed objectives. Its purposes include assessing performance, identifying training needs, planning careers and linking to reward. The process includes setting objectives, gathering evidence, the appraisal interview and agreeing actions. Benefits include clearer expectations and better motivation, and barriers include a lack of time, bias, a lack of trust and fear of criticism.

Key terms

• Authority: The right to give instructions and make decisions.
• Hygiene factor: In Herzberg's theory, a factor that prevents dissatisfaction but does not motivate.
• Theory Y: McGregor's view that people seek responsibility and can direct themselves.
• Appraisal: A formal review of an individual's performance.

Study tip: Learn each theory as a name and a one line idea. Exam questions usually test whether you can match them.

Practice questions for section D

E. Personal effectiveness and communication in business

Personal effectiveness means using time and abilities well. Good time management includes setting priorities, planning, delegating and avoiding interruptions. Barriers include poor planning, too many meetings and failing to say no, and they can be overcome with to-do lists, schedules and technology such as calendars and task apps. Ineffectiveness shows in missed deadlines, errors, poor relationships and stress. It reduces the performance of the team and the organisation, and it can raise costs.

A competence framework sets out the skills, knowledge and behaviours needed in a role, and it helps individuals to see where they need to develop. Personal and continuing professional development means keeping skills up to date through learning, experience and reflection, which professional bodies expect of their members.

Conflict arises from different aims, limited resources, unclear roles or personality clashes. Techniques for dealing with it include avoiding, accommodating, competing, compromising and collaborating (as in the Thomas-Kilmann model), together with negotiation, mediation and clear communication.

Communication passes information so that it is understood. Information flows at strategic, tactical and operational levels and can go up, down and across the organisation. Poor communication leads to mistakes, delay and low morale. Good quality information is accurate, complete, timely and understandable, and good communication is clear, suited to the audience and checks understanding. Barriers include noise, poor language, differences in culture, information overload and mistrust, and they can be overcome by using simple language, the right channel, feedback and active listening.

Key terms

• Competence framework: A description of the skills, knowledge and behaviours needed in a role.
• Continuing professional development: Keeping skills and knowledge up to date throughout a career.
• Feedback: Information that confirms whether a message has been understood.

Study tip: Link each barrier to a practical fix. Examiners like answers that go one step beyond naming the barrier.

Practice questions for section E

F. Professional ethics

The fundamental principles of ethical behaviour for accountants are integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. Integrity means being straightforward and honest. Objectivity means not letting bias, conflict of interest or the influence of others override judgement. Professional competence and due care means keeping knowledge up to date and acting diligently. Confidentiality means not disclosing information without proper authority unless there is a legal or professional duty to do so. Professional behaviour means complying with laws and avoiding actions that discredit the profession.

Regulatory and professional bodies promote ethical and professional standards by setting codes of conduct, requiring training and continuing professional development, monitoring members and taking disciplinary action. This protects the public interest and the reputation of the profession.

A corporate code of ethics sets out the values and standards expected of everyone in an organisation. It helps to guide behaviour, to show commitment and to build trust, but it works only if it is communicated, followed and enforced.

Ethical conflicts and dilemmas arise when the right course of action is not clear, for example when an accountant is pressured to change figures. Threats to the fundamental principles are self-interest, self-review, advocacy, familiarity and intimidation. Safeguards include policies, training, a second review, seeking advice and, in the last resort, refusing to act or resigning. A sensible approach is to gather the facts, identify the principles at stake, consider the options, apply safeguards and document the decision.

Key terms

• Integrity: Being straightforward and honest in all professional and business relationships.
• Objectivity: Not allowing bias or conflicts of interest to override professional judgement.
• Self-review threat: The risk of not evaluating properly one's own earlier work.

Study tip: In ethics scenarios, name the principle at risk first and then say what a professional accountant should do.

Practice questions for section F