Organisations and their goals
Organisations and the economy
The world of production
Business organisations are concerned with the production and sale of useful goods and
services. The vast majority of these goods and services are sold in markets and command
a market price. This market price will be determined by two sets of factors.
Demand
A useful good or service is one that customers are willing to pay for, that is there is
a demand for the product. In turn demand reflects the fact that consumers expect to derive
some benefit or satisfaction for the consumption of the good or service. Economists refer to
the benefit derived by consumers from the products they buy as utility.
Supply
In order to produce and sell a good or service, that is to supply it, organisations have to
employ a range of resources within the organisation as well as having to purchase inputs
from outside the organisation, such as energy, raw materials, capital equipment, etc.
The world of production
The resources that are employed within the organisation are called factors of production.
There are four factors of production organisations need to be able to supply a good or
service.
Land—The reward accruing to land in the production process is termed rent.
Labour—The reward of labour is termed wages.
Enterprise—The reward of risk-taking, organising and decision making earned by
the entrepreneurs is termed profit.
Capital—The reward accruing to capital in the production process is termed
interest.
Thus, the production of all goods and services involves a cost. The price of those goods
and services will reflect, at least in part, the costs that the organization bears in the
production process.
Sometimes, there are competing ends for which resources could be used. If these ends
are many and varied in importance and the means of achieving them are limited, then there
is an economic problem and someone has to decide which end will be satisfied through
production.
Relative scarcity of resources means that a choice has to be made. When a choice arises,
an alternative has to be given up. The sacrifice, when a choice is made, is termed
the opportunity cost because it is the alternative foregone. Usually, the opportunity cost
has a monetary value.
Opportunity costs represent the potential benefits an individual, investor, or
business misses out on when choosing one alternative over another.
The production decisions that need to be made when allocating scarce resources include
the following:
, o For whom to produce?
o What to produce?
o How to produce?
o How to distribute?
All organisations display some common features. This is true of organisations in both the
private and public (government) sectors and in both profit seeking and not-for-profit
organisations.
Social organisations: All organisations, whether large or small, are social
constructs. Organisations are combinations of resources, the most important of
which, are people. This represents a social organisation in which there are clear
relationships, channels of communication and reporting, and lines of authority.
Thus, a single person business CANNOT really be regarded as an organisation.
Goal orientation: Organisations are constructed with particular ends in mind, that
is, they exist to achieve the goals that have been set for them. These goals will
reflect the intentions and wishes of the various stakeholders that make up an
organisation. For profit seeking organisations, the goal is clearly profit. The various
not-for-profit organisations that exist in all economies also have goals even if these
are not so straightforward as those of profit seeking businesses.
Measured performance: Since organisations have goals, they will clearly need to
be able to measure the degree to which those goals have been achieved.
Organisations are thus identified by their attempts to measure their performance.
For profit seeking organisations, the measure of performance is some notion of profitability
since the objective is to raise shareholder wealth.
For not-for-profit organisations, measuring performance is more complicated since their
goals may be more complex and less clear cut than profit.
For all types of organisations, such measures are important since they are crucial in the
management decision making process.
Alternatively one might see organisations in terms of their relationship to the rest of the
economy and society. Here there is a distinction between internal and external contracts.
Internal Contracts: These are the contracts which specify the roles,
responsibilities and rewards of the factors of production that make up the
organisation. Thus the employees of an organisation have contracts that specify job
descriptions, line of authority and responsibilities, as well as rights and rates of pay.
Internal contracts are more expensive for the organisation (e.g. the prospect of
redundancy pay to workers no longer needed), but are also more flexible.
Employees can be moved around the organisation and required to undertake a
changing range of duties.
External Contracts: These are the contracts between the organisation and the rest
of the world. For example, most organisations do not produce their own energy, but
buy it in from specialist gas and electricity suppliers. Likewise, highly specialised
labour functions may be undertaken by specialists hired to do that task and no
other. External contracts tend to be cheaper, but are less flexible. An outside
provider of energy cannot be asked to also provide accounting auditing services.
The aims and activities of organisations are constrained, in practice, by certain factors such
as the law, the nature of the business and human nature.
Profit maximization as an objective
, The profit maximizing assumption is based on two premises:
1. Owners are in control of the everyday management of an organisation.
2. Owners always aim for the highest possible profit. This is considered a self-evident
truth of human nature in that people prefer 'more to less'.
The case for profit maximizing behaviour is undermined if either of these two premises fails
to exist in the real world of business.
Types of not-for-profit organisation
Although the not-for-profit organisations are not profit-orientated, as with most business
organisations they have some characteristics in common with them. These include:
o Use of resources (factors of production) in order to produce some good or
service
o Flow of expenditure to finance those resources and other operating costs
o Flow of income to finance the expenditure
o Sales of services or goods to its customers, clients or members to obtain
a flow of income
There are important economic constraints on organisations. These business organisations
need to:
o avoid making a financial loss.
o be efficiently managed to ensure that the organisation achieves its
objectives and ensures financial stability.
o choose investment projects carefully so that they contribute to the
achievement of the objectives of the business in an efficient manner.
Much of the management activity in not-for-profit organisations is similar to that which
occurs in profit-seeking businesses. Similar decisions have to be made concerning the:
o types of product and service to be produced.
o markets to focus on.
o level of output to be produced.
o prices to be charged for the product or services.
o choice of production methods and technologies.
o investment decisions.
o sources of finance.
not-for-profit organisations do not have shareholders
Organisations and the economy
The world of production
Business organisations are concerned with the production and sale of useful goods and
services. The vast majority of these goods and services are sold in markets and command
a market price. This market price will be determined by two sets of factors.
Demand
A useful good or service is one that customers are willing to pay for, that is there is
a demand for the product. In turn demand reflects the fact that consumers expect to derive
some benefit or satisfaction for the consumption of the good or service. Economists refer to
the benefit derived by consumers from the products they buy as utility.
Supply
In order to produce and sell a good or service, that is to supply it, organisations have to
employ a range of resources within the organisation as well as having to purchase inputs
from outside the organisation, such as energy, raw materials, capital equipment, etc.
The world of production
The resources that are employed within the organisation are called factors of production.
There are four factors of production organisations need to be able to supply a good or
service.
Land—The reward accruing to land in the production process is termed rent.
Labour—The reward of labour is termed wages.
Enterprise—The reward of risk-taking, organising and decision making earned by
the entrepreneurs is termed profit.
Capital—The reward accruing to capital in the production process is termed
interest.
Thus, the production of all goods and services involves a cost. The price of those goods
and services will reflect, at least in part, the costs that the organization bears in the
production process.
Sometimes, there are competing ends for which resources could be used. If these ends
are many and varied in importance and the means of achieving them are limited, then there
is an economic problem and someone has to decide which end will be satisfied through
production.
Relative scarcity of resources means that a choice has to be made. When a choice arises,
an alternative has to be given up. The sacrifice, when a choice is made, is termed
the opportunity cost because it is the alternative foregone. Usually, the opportunity cost
has a monetary value.
Opportunity costs represent the potential benefits an individual, investor, or
business misses out on when choosing one alternative over another.
The production decisions that need to be made when allocating scarce resources include
the following:
, o For whom to produce?
o What to produce?
o How to produce?
o How to distribute?
All organisations display some common features. This is true of organisations in both the
private and public (government) sectors and in both profit seeking and not-for-profit
organisations.
Social organisations: All organisations, whether large or small, are social
constructs. Organisations are combinations of resources, the most important of
which, are people. This represents a social organisation in which there are clear
relationships, channels of communication and reporting, and lines of authority.
Thus, a single person business CANNOT really be regarded as an organisation.
Goal orientation: Organisations are constructed with particular ends in mind, that
is, they exist to achieve the goals that have been set for them. These goals will
reflect the intentions and wishes of the various stakeholders that make up an
organisation. For profit seeking organisations, the goal is clearly profit. The various
not-for-profit organisations that exist in all economies also have goals even if these
are not so straightforward as those of profit seeking businesses.
Measured performance: Since organisations have goals, they will clearly need to
be able to measure the degree to which those goals have been achieved.
Organisations are thus identified by their attempts to measure their performance.
For profit seeking organisations, the measure of performance is some notion of profitability
since the objective is to raise shareholder wealth.
For not-for-profit organisations, measuring performance is more complicated since their
goals may be more complex and less clear cut than profit.
For all types of organisations, such measures are important since they are crucial in the
management decision making process.
Alternatively one might see organisations in terms of their relationship to the rest of the
economy and society. Here there is a distinction between internal and external contracts.
Internal Contracts: These are the contracts which specify the roles,
responsibilities and rewards of the factors of production that make up the
organisation. Thus the employees of an organisation have contracts that specify job
descriptions, line of authority and responsibilities, as well as rights and rates of pay.
Internal contracts are more expensive for the organisation (e.g. the prospect of
redundancy pay to workers no longer needed), but are also more flexible.
Employees can be moved around the organisation and required to undertake a
changing range of duties.
External Contracts: These are the contracts between the organisation and the rest
of the world. For example, most organisations do not produce their own energy, but
buy it in from specialist gas and electricity suppliers. Likewise, highly specialised
labour functions may be undertaken by specialists hired to do that task and no
other. External contracts tend to be cheaper, but are less flexible. An outside
provider of energy cannot be asked to also provide accounting auditing services.
The aims and activities of organisations are constrained, in practice, by certain factors such
as the law, the nature of the business and human nature.
Profit maximization as an objective
, The profit maximizing assumption is based on two premises:
1. Owners are in control of the everyday management of an organisation.
2. Owners always aim for the highest possible profit. This is considered a self-evident
truth of human nature in that people prefer 'more to less'.
The case for profit maximizing behaviour is undermined if either of these two premises fails
to exist in the real world of business.
Types of not-for-profit organisation
Although the not-for-profit organisations are not profit-orientated, as with most business
organisations they have some characteristics in common with them. These include:
o Use of resources (factors of production) in order to produce some good or
service
o Flow of expenditure to finance those resources and other operating costs
o Flow of income to finance the expenditure
o Sales of services or goods to its customers, clients or members to obtain
a flow of income
There are important economic constraints on organisations. These business organisations
need to:
o avoid making a financial loss.
o be efficiently managed to ensure that the organisation achieves its
objectives and ensures financial stability.
o choose investment projects carefully so that they contribute to the
achievement of the objectives of the business in an efficient manner.
Much of the management activity in not-for-profit organisations is similar to that which
occurs in profit-seeking businesses. Similar decisions have to be made concerning the:
o types of product and service to be produced.
o markets to focus on.
o level of output to be produced.
o prices to be charged for the product or services.
o choice of production methods and technologies.
o investment decisions.
o sources of finance.
not-for-profit organisations do not have shareholders
