KENYATTA UNIVERSITY

DIGITAL SCHOOL OF VIRTUAL &OPEN LEARNING

IN COLLABORATION WITH
SCHOOL OF BUSINESS-DEPARTMENT OF BUSINESS
ADMINISTRATION

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BBA 100: BUSINESS STUDIES

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WRITTENBY: EDITED BY:
PRISCILLA NDEGWA PRISCILLA NDEGWA
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INTRODUCTION
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This unit is expected to provide the students with a basic understanding of issues in business. It
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covers a broad overview of business social responsibilities and ethics, forms of business
ownership, business environment, managerial functions, authority and power in management.

Objectives
After studying this module the student should be able to:
1. Define the business and outline the main objective of a business
2. Discuss the business ethical and social responsibility concerns
3. Describe the various forms of business ownership
4. Critically analyze the business environment
5. Understand the managerial functions and authority bestowed on a manager

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INTRODUCTION TO BUSINESS
1.1 Introduction……………………………………………………………………………………...1
1.1.1 Definition of the term business………………………………………………………………..1
1.1.2 Aims / objectives of a business………………………………………………………………..2
1.13 Human needs and wants-Maslow theory of need……………………………………………...2
1.1.4 The concept of utility …………………………………………………………………………3
1.1.5 Input-output model of a business firm………………………………………………………...3

BUSINESS SOCIAL AND ETHICAL RESPONSIBILITY

1.2 Introduction……………………………………………………………………………………...8
1.2.1 Overview of business social responsibility……………………………………………………8
1.2.2 Areas of social responsibility………………………………………………………………….9
1.2.3 Business ethics……………………………………………………………………………….11
1.2.4 Ethical and unethical areas…………………………………………………………………...12
1.2.6 Reasons for ethical issues …………………………………………………………………...13
1.2.7 Why managers are involved in unethical behavior…………………………………………..13

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FORMS OF BUSINESS ORGANISATIONS
1.3 Introduction…………………………………………………………………………………….14

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1.3.1 Overview of forms of businesses ……………………………………………………………14
1.3.3 Sole proprietorship …………………………………………………………………………..15
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1.3.3.1 Formation of Sole proprietorship…………………………………………………………..15
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1.3.3.2 Features of Sole proprietorship…………………………………………………………….15
1.3.3.3 Sources of finance for sole proprietor……………………………………………………...15
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1.3.3.4 Advantages and disadvantages of Sole Proprietorship…………………………………….16

1.3.4 Partnership …………………………………………………………………………………..16
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1.3.4.1 Features of partnership……………………………………………………………………..17

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1.3.4.2 Formation of partnership…………………………………………………………………...17

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1.3.4.3 Contents of the partnership deed…………………………………………………………...17

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1.3.4.4 Contents of the Partnership act…………………………………………………………….18

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1.3.4.5 Types of partnership ………………………………………………………………………18

1.3.4.6 Types of partners…………………………………………………………………………...19
1.3.4.7 Dissolution of partnership………………………………………………………………….20
1.3.4.8 Advantages and disadvantages of Partnership……………………………………………..21

LIMITED COMPANIES (JOINT STOCK COMPANIES)

1.4 Introduction…………………………………………………………………………………….23
1.4.1 Overview of companies……………………………………………………………………...23
1.4.2 Features of a limited company……………………………………………………………….23
1.4.3 Management of limited companies…………………………………………………………..24
1.4.4 Limited liability concept……………………………………………………………………..24
1.4.5 Formation of limited company……………………………………………………………….24
1.4.6 Public limited company……………………………………………………………………...27
1.4.6.1 Features of public limited companies……………………………………………………...27
1.4.7 Private limited company……………………………………………………………………..28
1.4.7.1 Features of private limited companies……………………………………………………..28
1.4.8 Advantages and disadvantages of Limited Companies ……………………………………..28

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1.4.9 Sources of capital for limited companies…………………………………………………….30
1.4.10 Dissolution of a Joint Stock Company……………………………………………………...30
1.4.12 Differences between public and private companies………………………………………...31
1.4.13 Types of shares……………………………………………………………………………..31
1.4.14 Types of debentures………………………………………………………………………...34

COOPERATIVES
1.5 Introduction……………………………………………………………………………………36
1.5.1 Overview of cooperatives …………………………………………………………………...36
1.5.2 The principles of cooperatives……………………………………………………………….36
1.5.3 Types of cooperatives………………………………………………………………………..37
1.5.4 Advantages and disadvantages of cooperatives……………………………………………...40

PUBLIC ENTERPRISES
1.6 Introduction…………………………………………………………………………………….42
1.6.1 Overview of public enterprises………………………………………………………………42
1.6.2 Reasons for state undertakings ………………………………………………………………42

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1.6.3 Forms of public enterprises…………………………………………………………………..43
1.6.4 Advantages and disadvantages of public enterprises ………………………………………..44

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STOCK EXCHANGE MARKET PI
1.7 Introduction…………………………………………………………………………………….46
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1.7.1 Overview of stock exchange market…………………………………………………………46
1.7.2 Terms Used in Connection with Various Securities and stock exchange market……………46
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1.7.3 Functions of Stock Exchange………………………………………………………………...48

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1.7.4 Dealers in the stock exchange market………………………………………………………..48

BUSINESS ENVIRONMENT
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1.8 Introduction…………………………………………………………………………………….50
1.8.1 Overview of business environment ………………………………………………………….50
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1.8.2 Internal environment…………………………………………………………………………50

1.8.3 External business environment………………………………………………………………53

FUNCTIONS OF MANAGEMENT
1.9 Introduction…………………………………………………………………………………….57
1.9.1 Overview of management……………………………………………………………………57
1.9.2 Planning Function……………………………………………………………………………57
1.9.2.1 Activities involved in planning…………………………………………………………….58
1.9.2. 2 Characteristics of sound plans…………………………………………………………….58
1.9.2.3 Types of plans……………………………………………………………………………...58
1.9.2.4 Importance for planning……………………………………………………………………59
1.9.2.5 Limitations of planning ……………………………………………………………………59

ORGANIZING FUNCTION
1.10 Introduction………………………………………………………………………………...61
1.10.1 Overview of organizing ……………………………………………………………………61
1.10.2 Activities involved in organizing…………………………………………………………...61
1.10.3 Principles of organizing…………………………………………………………………….61

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1.10.4 Process of organization……………………………………………………………………..62
1.10.5 Organizational structures…………………………………………………………………...63
1.10.6 Organizational charts……………………………………………………………………….69
1.10.7 Departmentation ……………………………………………………………………………70

STAFFING, LEADING AND CONTROLLING FUNCTION

1.11 Introduction………………………………………………………………………………...73
1.11.1 Staffing function…………………………………………………………………………....73
1.11.1.1 Functions of Human resource Management ……………………………………………..73
1.11.2 Directing / leading function………………………………………………………………...75
1.11.2.1Activities involved in directing……………………………………………………………75
1.11.3 Controlling function………………………………………………………………………...75
1.11.3.1 Role of controls …………………………………………………………………………..76
1.11.3.2 Process of controlling…………………………………………………………………….76

POWER AND AUTHOITY

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1.12 Introduction………………………………………………………………………………...78
1.12.1 Concept of power and authority ……………………………………………………………78

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1.12.2 Sources of authority………………………………………………………………………...79
1.12.3 Sources of power……………………………………………………………………………79

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1.12.4 Centralization and decentralization of authority …………………………………………...81
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1.12.5 Delegation of authority……………………………………………………………………..82
1.12.6 Responsibility and accountability…………………………………………………………..83
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 LECTURE ONE
INTRODUCTION TO BUSINESS
1.13 Introduction
In this lecture you will learn the main objectives of the business and its ability to satisfy human
wants.
Lecture objectives
1. Define the term business
2. Understand Abraham Maslow’s hierarchy of needs
3. Evaluate input output model of a business

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1.1.1 Definition of the term business

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A business enterprise is an organization that exists to satisfy the needs of the society through the
provision and distribution of goods and services. This type of an organization is always profit

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seeking.We engage in business activity so that we can satisfy human wants. We do satisfy this
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wants through the very act of satisfaction and consumption of the useful good or service created
and we must start again to supply a further batch. Economists say that consumption destroy
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production and we must go back to the beginning again and start another cycle of production.
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This cycle goes from wants through enterprise production, distribution, marketing to consumption.
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And back to needs as shown by the diagaram below

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Business cycle
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Consumption & Wants

satisfaction
Enterprise
e.g. sole
Cycle of traders
business
Marketing

Production
Distribution
- Land, capital,
labour

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1.1.2 Aims / objectives of a business
a. To satisfy peoples’ wants by providing goods and services
b. To create employment for the owner and others.
c. To create wealth for the country through increased output. This wealth is divided amongst
various participants
d. It provides an outlet for invention and innovation
e. To stimulate economic growth for the country through income generation
f. To provide independence and control for the owners who desire to be their own bosses
g. To give an opportunity to people to exploit their potential and thus achieve self
actualization
h. To provide an opportunity to individuals to contribute to the society and be recognized for

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their efforts.

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1.13 Human needs and wants
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The most important objective of a business is to satisfy human needs and wants. Human wants
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can be either basic needs or secondary wants. Primary or basic needs are necessary for survival
while secondary wants are concerned with improvement of quality of life not necessarily for
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survival. Since businesses are concerned with satisfying both needs and wants the two terms
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are used synonymously. The most widely recognized and accepted classification of human
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needs is one provided by Abraham Maslow. He argued that human needs are arranged
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hierarchically with physiological/basic needs occupying the lowest level , followed by safety
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needs ,social and belonging needs , ego and esteem needs and self actualization needs in that
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order. Maslow’s hierarchy of needs model is depicted below :

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 a) Biological and Physiological needs - air, food, drink, shelter, warmth, sex, sleep.
b) Safety needs - protection from elements, security, order, law, limits, stability, and
freedom from fear.
c) Social Needs - belongingness, affection and love, - from work group, family,
friends, romantic relationships.
d) Esteem needs - achievement, mastery, independence, status, dominance, prestige,
self-respect, and respect from others.
e) Self-Actualization needs - realizing personal potential, self-fulfillment, seeking
personal growth and peak experiences.

1.1.4 The concept of Economic utility

If a good or service is capable of satisfying a certain human need then it is said to have an
economic utility. Economic utility is defined as the ability or capacity of a good or service to

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satisfy a human need. The following are the different types of economic utility:

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a. Form utility-it is created when a business converts a given raw material from its
original form into another form that yields greater or different satisfaction.

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b. Place utility-it is a type of utility which is created when a trader transports products to a
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place which is convenient to a consumer.
c. Possession utility-it is utility created by increasing the desire or willingness to own a
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product. It can be created through product promotion, marketing and when the
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customer finally buys the product.

d. Time utility- it is utility created by ensuring products are made available when
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consumers want them. It can be created by storing products up to the time consumers
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require them.
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1.1.5 Input-output model of a business firm

The input output model reflects the Production process through which goods and services are
created to satisfy human wants. It is concerned with bringing together labor, capital, land and
entrepreneurship to provide goods and services thereby satisfying wants of people at large.
The model has four major elements ie the inputs, the conversion process, outputs and the
environmental forces as depicted below:

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 FIRM

a. Management control systems

 Planning

 Organizing

INPUTS OUTPUTS
 Staffing

Land  Directing  Goods

Labour
 Controlling  Services

Capital
b. Functions of the firm
Entrepreneurship

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 Production operations

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 Accounting and finance

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 Marketing
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 Risk management and

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insurance FORCES
ENVIRONMENTAL
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Inputs  Transportation
These are factors of production that are used in the production process. Production is the process of
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warehousing
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creating utility in a good or the process of creating goods and services. The factors of production
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include;
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a. Land – payment is rent

b. Labour – payment is wages
c. Capital – payment is interest
d. Entrepreneurship – return is profit

Land
Land is all the resources on, below or above land eg minerals, soil, rivers, lakes etc.
Land is paid rent for engaging it into use
Characteristics of land
1. It is a basic factor of production
2. Its supply is fixed and cannot be increased
3. It is immobile

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 4. Its quality can be improved
5. It is subject to the law of diminishing returns- quality declines as you use it.
6. It’s quality is not homogenous (not uniform) - it has different level of fertility, minerals,
soil texture etc

Labor
Refers to physical and mental human effort applied in production. Labour can be provided in
skilled, semi-skilled or unskilled form depending on the level of education, training and experience
lab our is paid in wages, salaries, commission.
Characteristics of labour
1. It’s a basic factor of production as it manages all other factors

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2. It cannot be stored- if it is idle for some time, it is wasted

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3. Labour cannot be separated from the owner

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4. It is mobile
5. It is human and has emotions and ability to think
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Capital
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Refers to all man- made resources used in production of goods and services. In this case, it does
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not only refer to money but also to other items eg- equipments, machinery, tools that are used in
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operation of a business. These resources are also referred to as capital goods/ producer goods.
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There are two types of capital;

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a. Fixed capital- consists of immovable fixed assets eg buildings. It is normally durable.

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b. Working capital or circulating capital- it lasts for a short period of time and includes raw
materials, cash, stock etc
Characteristics of capital
1. Man-made therefore under owner’s control
2. Subject to depreciation (tear and wear)
3. It can be improved by technology

Entrepreneurship
It is the act of organizing other factors of production in appropriate proportion for effective
production. The entrepreneur is the person who combines the three factors of production in such a
way as to create goods and services. He is the owner of the production unit. His reward is profit.

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Functions of an entrepreneur
1. Identifies business opportunity and starts business
2. Provides and pays the other factors of production
3. Bears risks and losses of production as well as enjoy the profits of the business.
4. Makes the decision in the business
5. Organizes all other factors of production.

The firm
The firm is the mechanism that converts inputs or factors of production into output. It does this
through management control systems and functions of the firm.

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Environmental forces

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These are external factors that will affect the ability of the firm to achieve its objectives. They

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include political-legal factors. Economic factors, social-cultural factors, technological factors etc
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Output
The direct outputs of a business firm are goods and services. Goods are tangible items that can
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satisfy human wants while services are intangible and are offered directly ie there must be direct
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contact between the giver and the receiver of the service. Goods can be classified into the
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following categories:
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1. Durable goods- They last for a long period of time and can be consumed over and over
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again
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2. Non-durable goods-They last for a short period of time and their consumption last one or a
few days.
3. Producer goods- They are goods that can be used in further production. They are also
referred to as capital goods
4. Consumer goods- They are goods which are ready for final consumption

Review questions
 Define the term business
 Giving examples distinguish between human needs and wants
 Giving examples discuss the four major types of utility
 Discuss the major elements of input output model

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Further readings
1. Kibera F.N.(1996). Introduction to business Kenyan perspective. Nairobi Kenya literature
bureau.
2. Gichira R.N.(2000). Commerce for Kenya. Nairobi. Macmillan Kenya limited
3. Bitte, L.R.et al (1984). Introduction to business: Business in action 4th ED., London, Letts
Educational Ltd.
4. Danks, S.(1996), Business studies 3rd Ed. London, Letts Educational Ltd.
5. Rukunga (1999). Excelling in Business, Nairobi. Focus
6. Carpenter G.C (1987). The business success formula. Heinemann.

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 LECTURE TWO

BUSINESS SOCIAL AND ETHICAL RESPONSIBILITY

1.14 Introduction
In this lecture you will learn the ethical and social responsibilities of a business
Lecture objectives
1. Define the terms social responsibility and ethical issues
2. Explain arguments for and against business involvement in social issues
3. Identify areas of social and ethical issues

1.2.1 Business social responsibility

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The concept of business social responsibility is concerned with obligations that the business has in

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helping to promote the welfare of the society.

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There are two major reasons that have accounted for this:
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1. The society has become more enlightened and is more aware of its problems, rights and the
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role the business can play in social welfare.
2. The society’s problems have become more alarming. Therefore now more than ever the
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business cannot be allowed to just sit and wait but have to play a role in solving these
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problems.
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It is always argued as to whether or not business has any obligation to social responsibility with
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some scholars arguing for the social responsibilities and others against business social
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responsibility.
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Arguments for business involvement in social responsibility

1. Business received its charter from society and consequently has to respond to the needs of the
society.
2. The creation of a better social environment benefits both the society and the business. The
society gains through employment opportunities and the business benefits from workforce and
the demand for its products and services.
3. Social involvement enables the business to avoid government intervention. This results to
greater freedom in decision making for business.
4. The business has a great deal of power which should be accompanied by an equal amount of
responsibility.

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5. The modern society is an interdependent system and the internal activities of the enterprise
have an impact on the external environment.
6. Social involvement gives the business favourable public image and helps the business attract
customers, employees and investors.
7. Businesses are known to come up with noble ideas. They should therefore help to solve
problems that other institutions have been unable to solve.
8. The business has resources eg. Specialists, capital, managers which it should use to solve some
of the society’s problems.
9. It is better to prevent social problems through business involvement than to cure them eg. It
may be easier to employ the hard core unemployed than to cope with social unrest caused by
them.

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Arguments against business involvement in social responsibility

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1. The primary task of the business is to maximize profit by focusing strictly on economic
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activities. Social involvement diverts business attention from economic focus.
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2. It is also felt that in the final analysis the society must pay for the social involvement of
business through higher prices.
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3. Businesses already have enough power and their involvement in social activities would further
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increase its power and influence.

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4. Business people lack social skills to deal with societal problems because their training and
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experience is with economic matters.

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5. There’s lack of accountability of business to society unless accountability can be established,

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business should not get involved.

6. In pursuit of providing social responsibility, disagreements among groups with different view
point will cause friction.
7. It is likely to create unfavorable balance of payments (B.O.P) because the cost of social
responsibility would increase the price of exports therefore making them less attractive to the
international market. NB (Balance of payment it is the difference between receipts from
exports and payment for imports)

1.2.2 Areas of social responsibility

The business has an obligation to be socially responsible to various parties in the society as
follows:
1. Share Holders
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a) Increase shareholders earnings by paying the best dividends possible
b) Protect the shareholders property from fraud and damage
c) Make full disclosure of the business dealings to the share holders eg accounting records.

2. Employees
a) Rewarding them equitably
b) Safeguarding their health and safety
c) Giving them equal opportunities eg training and promotion
d) Taking care of employees’ welfare by providing facilities eg school, houses, recreational
facilities, transport.
e) Ensuring efficient personnel administration and industrial relations practices.

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3. Consumers

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a) Give high quality and not defective products
b) Educating consumers about the use of products
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c) Give them safe products
d) Being fair in quality and price of products
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e) Avoiding misleading advertisements.

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f) Making products available to consumers ie avoid hoarding

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g) Being fair in terms of sale to consumers eg credit terms

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h) Making after- scale services available and affordable.

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i) Responding to consumers complaints in goodtime

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j) Conducting enough research before allowing a product in the market.

4. Suppliers
a) Being fair in allocation of tenders to the suppliers
b) Paying suppliers in good time
c) Giving fair and reasonable terms of purchase

5. Creditors
d) Do not default payment
e) Paying fair and reasonable rates of interest.
f) Paying the principle amount and interest in time

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6. Government
a) Complying with government laws and regulations
b) Paying proper taxes
c) Supporting government in welfare and development programs

7. Community
a) Supporting and providing services eg education, health, recreation and transport
b) Active participation in community development programs
c) Putting in place welfare programs for the aged, handicapped, aids victims and malnourished
people orphans etc.

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8. General Public

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a) Creating employment opportunities and making them equal to all.

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b) Giving due consideration to the minorities and disadvantaged in society
c) Avoiding pollution of the environment
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9. Physical Resources and Environment

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a) Be actively involved in taking care of the natural resources within its environment. It may
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be costly to the firm but it’s only fair that rather than the society being burdened with the
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cost of ill- health the business should meet the cost.

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1.2.3 Business ethics

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These are principles and standards that determine acceptable conduct in business organizations. It
is concerned with good conduct, moral behaviour and right acts expected from a business. It is
actually about truth and justice. Managers have a responsibility to create an organizational
environment that fosters ethical decision by applying ethics. This can be accomplished in three
ways.
1. By establishing an appropriate code of ethics ie rules and principles that guide behaviour.
2. By establishing a formally appointed ethics committee
3. By teaching ethics in management and development programs for managers.

Ways of enforcing ethics in business

1. Ensure that businesses have a code of ethics
2. Government should set up controls to check on illegal or unethical deeds.
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3. Punishing unethical managers in public so that it may deter others.
4. Imposing laws that control unethical behaviors
5. Teach ethical subjects in school and universities

1.2.4 Ethical and unethical areas

Ethical areas in business
a) Fair competition
b) Advertising / truthful and accurate advertisements
c) Engaging in Social responsibility
d) Unexploitive Pricing
e) Health and safety

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f) Quality of products

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g) Equal Employment opportunities

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Unethical areas in business examples
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 Advertising which relies on sex, violence or which is directed at children or false and
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misleading advertisements is unethical.

 Unfair cut throat competition aimed at getting competitors out of business
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 Employing on the basis of nepotism.

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 Accepting bribes from suppliers so that they can receive tenders.

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 Bribing government agents so as to influence their decisions even when the business has
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violated the laws of the country.

 Producing counterfeit products.
 Providing underweight goods.
 Producing unsafe and low quality products
 Persecution of whistle blower eg employees who brings to the public attention business
malpractices.
 Bullying in the work place
 Sexual harassment.
 Mistreatment of HIV employees
 Political lobbying with the intention of getting favours
 Large payment to company executives compared to their juniors
 Using pirated soft ware.

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1.2.6 Reasons businesses should observe ethical issues
1. Business activities affect everyone in the society both as employees or as customers
2. Business operates in a society which is structured around moral valves. The society should
therefore determine what is morally right or wrong for a business to do.
3. A business that does not practice ethics may face political pressure, legal controls and even
customer boycotts.
4. To comply with the requirement of the law and avoid fines and other penalties.
5. To avoid tarnishing the business image.

1.2.7 Why managers are involved in unethical behaviour

a) The pressure to maximize profits for the business.

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b) To acquire political gains and favours.

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c) Lack of management competence.

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d) Some managers are pressured to compromise their ethical values to meet corporate demands
and objectives
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e) To have maximum personal benefits.
f) Poor remuneration
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g) General degradation of morals and values.

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h) Inability to separate between ethical and unethical behaviour ie determining what is and not
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ethical is sometimes difficult eg what is fair profit or fair salary?

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Review questions
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1. What do you understand by the term corporate social responsibility?

2. Identify practical ethical issues that government parastatals in Kenya are involved in.
3. Identify reasons why some of the managers in Kenya are corrupt.
Further readings
1. Kibera F.N.(1996). Introduction to business Kenyan perspective. Nairobi Kenya literature
bureau.
2. Mark A. (19870). Business studies, Edinburg. W & R chambers
3. Bitte, L.R.et al (1984). Introduction to business: Business in action 4th ED., London, Letts
Educational Ltd.
4. Danks, S.(1996), Business studies 3rd Ed. London, Letts Educational Ltd.
5. Rukunga (1999). Excelling in Business, Nairobi. Focus
6. Capenter G.C (1987). The business success formula. Heinmann.
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 LECTURE THREE AND FOUR
FORMS OF BUSINESS ORGANISATIONS
(SOLEPROPRIETORSHIP AND PARTNERSHIP)
1.15 Introduction
In these lectures you will learn about soleproprietoship and partnerships forms of business
ownership
Lecture objectives
4. Define the terms sole proprietorship and partnership
5. Discuss features, formation, management sources of capital, advantages and disadvantages
of both soleproprietorship and partnership

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1.3.1 Overview of forms of businesses

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Business enterprises /organizations are of diversified nature from the point of view of ownership,
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control and size. A business enterprise may be owned by one person or a group of persons or it
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may be controlled by the owners themselves or by managers on behalf of the owners. The forms of
business organizations can be classified as under
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1) Private sector- which comprises of businesses owned by private individuals either singly or
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in groups. Eg sole-proprietorships, partnerships and limited companies.

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2) Public sector-which comprises of business organizations owned by the government. The

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government owns them either wholly or through majority shareholding eg parastatals, local
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authorities.
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Private sector organizations can further be classified as incorporated and unincorporated

businesses.
3) Incorporated businesses- it is a business or a corporation with a separate entity from the
business owner and has natural rights eg public and private limited companies.
4) Unincorporated businesses- it is a business or a corporation where the owner and an
unincorporated business are the same, and the owner personally bears all risks and
liabilities of the business. Unincorporated businesses are usually sole proprietorships or
partnerships.

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1.3.3 Sole proprietorship / sole trader business
This is a business owned and operated by one person .He is the owner and manager of the business
although he may get assistance from family members or a few attendants that he may have
employed.
1.3.3.1 Requirement for formation of Sole proprietorship
Basically the sole trader is required to look for a business premises from which to run the business
and obtain a trading/single permit license from the local authority.

1.3.3.2 Characteristics of Sole proprietorship

a) Capital is contributed by the owner who cannot appeal to the public at large to subscribe to the
capital.

S
b) The owner is the organizer and manager of the business assisted by members of his family. He

ES
may also employ an outsider but all the risks fall upon the owner.

N
c) The owner takes all the profits and suffers all the losses and risks.
PI
d) The liability of a sole trader is unlimited ie in the eyes of the law there is no distinction
AP
between him and his business and in case of failure to pay debts the creditors of the business
can claim payment from his personal property.
H

e) It is the most common form of business ownership and is found in retail trade and persons
AH

engaged in direct services such as lawyers, doctors, accountants etc.

R
D

1.3.3.3 Sources of Finances for sole proprietor

N

a) Personal savings
SA

b) Sale of personal assets

c) Inheritance from parents
d) borrowing from relatives/ friends
e) Loans from micro finance institution eg Faulu kenya, Kenya women finance trust
f) Loans from SACCOS
g) Government grants in form of youth fund ,women fund and Uwezo fund
h) Conversion of personal assets into business assets
i) Donations/ grants from NGO’s

19
 1.3.3.4 Advantages and disadvantages of a soleproprietorof
Advantages
i. Requires little capital to start as compared to other forms of business ownership such as
partnerships and companies.
ii. Enjoys profit alone/ his efforts thus determines profits
iii. Easy formation process- requires only a premises and trading licence
iv. Enjoys business secrets
v. There is direct contact between the owner and the customer; this leads to customer
satisfaction.
vi. Control of the business is easy as the owner is the final decision maker; this often leads to
fast decision making

S
ES
Disadvantages

N
i. Lack of sharing of responsibility thus the owner may be forced to overwork. This can lead to
fatigue and sometimes health problems.
PI
AP
ii. The life of the business is pegged on the life of the owner ie business continuity/perpetual
succession is not guaranteed after the death of the owner
H

iii. Incurs the losses and risks alone

AH

iv. The sole proprietorship has unlimited liability- personal assets of the owner can be sold to
R

recover the liabilities of the business.

D

v. There are limited sources of capital due to high risk levels and lack of security for debt
N

finances
SA

vi. Lack of second opinion in decision making; this may lead to bad decisions.

1.3.4 Partnership
A partnership is an association between two or more persons carrying out a business in common
with a view of making profit; two or more people jointly run the partnership. The number of the
partners will depend on the type of the partnership eg trading business that do not require any
professionalism may have 2-20 partners while personal and Professional business partnership that
requires skills of operations such as medical and advocate practice may have 2-50 partners. The
partnership is managed by the partners. They share responsibilities and duties according to their
availability. However they can hire people to work for them.

20
1.3.4.1 Features of partnership

a) Just like sole proprietor partners have unlimited liabilities i.e. partners are held liable for
the debts of the business and they risk loosing their personal property to meet such debts.

a) The partners contribute the capital to start and run the business and no appeal is made to the
public to subscribe to the capital.
b) The partnership has a limited life i.e. it lacks continuity on death withdrawal, bankruptcy,
retirement of a partner.

b) Each partner act as an agent of the firm with authority to enter into contract on behalf of the
partnership.
c) Each partner is responsible for the debt and losses of the firm.

S
ES
d) Responsibility, profit and losses are shared on an agreed basis

N
1.3.4.2 Requirement for formation of partnership PI
In Kenya, all partnerships are formed in accordance with the partnership Act. The formation of
AP

partnership may be simply by agreement between the partners. Partners can agree to use their
H

personal name to constitute the name of the firm or use a name quite distinct from their own. If
AH

they use a name distinct from their own, the partnership’s name must be registered under the
registration of business names act. Partners should also agree on how the proposed business will be
R

run to avoid future misunderstanding. The partnership agreement can be oral or written. A written
D
N

legal agreement is referred to as a partnership deed.

SA

1.3.4.3 Contents of the partnership deed

 Name, address, location and nature of the business.
 Names, addresses, occupations, duties and rights of the partners.
 Types of partners.
 Salaries to be paid to the active partner
 Amount of capital to be contributed by each partner.
 Duration of the partnership.
 The procedure for sharing profits and losses.
 Method of dealing with the death, retirement and insolvency of a partner.
 Methods of admitting a new partner.
 Methods of solving disputes.

21
  Agree on what should be done on the dissolution of partnership
 Interest to be charged on capital and drawings.
NB: Drawings is anything taken by the partners for their own personal use and not for business
purposes.
In the absence of a partnership deed the business should be governed by a partnership Act as
provided by the laws of Kenya.

1.3.4.4 Contents of the Partnership act.

 All the partners must contribute equal capital.

 Every partner must take part in management of the partnership.

S
 No salary is payable to any partner.

ES
 No interest will be allowed on capital or drawings

N
 Losses and profit will be shared equally
PI
AP

 Every partner has a right to inspect the books of account

H

 No partner should carry a competing business

AH

 No admission of a new partner without the consent of all the partners

R
D

 Anyone partner who incur loss on behalf of the partnership must be compensated.
N
SA

1.3.4.5 Types of partnership

a. Ordinary/ general/unlimited partnership
This is a partnership in which all members have unlimited liability ie. They are answerable
for all debts of the firm to the extent of selling their personal property.
b. Limited Partnership
This is a partnership in which the liability of the members is restricted to the amount of
capital they have put into the business. Limited partners do not participate in the
management of the firm. Therefore there must be at least one partner whose liability is
unlimited.
c. Temporary Partnership

22
 This is a partnership formed for an agreed period of time. Its ripe period is known when it
is being formed eg. Two constructors may come into partnership to undertake a certain
project and after its completion, they dissolve the partnership.
d. Permanent Partnership
It’s meant to continue indefinitely and therefore its end is not known. e.g. the two
constructors mentioned above may continue taking one project after another indefinitely.
e. Trading partnership
This is a partnership whose major activity is production, purchasing and selling of goods.
f. Non –trading partnership
It is a partnership whose major activity is to provide services to the public eg medical,
advocacy and accounting services.

S
ES
1.3.4.6 Types of partners

N
i. Active partner
PI
He is involved in daily management/operation of the partnership on behalf of the other
AP
partners. He is normally paid a salary for assuming this role. However it should be noted that
the other partners are equally liable for the actions of the active partner.
H

ii. Sleeping / passive/ dormant/ silent partner

AH

This partner is not involved in the day to day affairs of the business. He invests capital into the
R

business but his share of profits will generally be lower than that of the active partner.
D

iii. Real partner

N

He is real partner in the sense that he contributes capital, shares in losses and debts of the business.
SA

He was also present when the partnership was coming to being.

iv. Quasi/ nominal partner
He is a half partner in the sense that he does not contribute capital or share in the losses and debts
of the firm but shares in the profits. He only allows the business to use his name as a partner. He is
normally a celebrity or a famous person who has been admitted into the partnership to influence
customers or for prestige.
v. Major partner
This is a partner who has attained the age of the majority (18years); this partner shares in the losses
and liabilities of the partnership
vi. Minor partner
This is a partner who has not attained the age of the majority and is admitted with the consent of
all existing partners. He does not share in the losses but shares profits. The liability of the minor is
23
limited only to the amount of capital contributed to the business since any liabilities arising may
not be part of his decision making. The minor partners can act on behalf the partnership and such
acts shall be binding on the other partners. When the minor partner attains the age of majority
he/she has up to six months to decide whether or not to continue with the partnership. If he/she
decides to stay, he has full responsibilities and rights of a major partner.

1.3.4.7 Dissolution of partnership

This is bringing a partnership to an end. A partnership may be dissolved in the following
circumstances:
a) Dissolution by the partners
i. When the fixed time if any are stated in the articles of the partnership expires.
ii. If the partnership was specifically entered into for a given venture, transactions or

S
ES
undertakings the completion of which or achievement will automatically dissolve
the partnership.

N
iii. If the partnership is a partnership at will, it can be dissolved by any partner giving
PI
notice of his intention to dissolve the partnership.
AP

iv. By mutual consent of all partners

H

v. By bankruptcy or death of one the partners.

AH

b) Dissolution by law
R
D

i. Withdrawal, bankruptcy or death of general partner.

N

ii. If any events occur which will make the partnership business illegal, the partnership will
SA

stand dissolved irrespective of the content of the partnership deed.

c) Dissolution by the court order
A court may order a partnership to be dissolved if a partner applies for the court order. It
may be based on the following circumstances.
i. By one partner’s shares in the partnership being changed or attached by a court
order for private debts.
ii. If any one of the general partners becomes insane
iii. If any of one partner becomes permanently incapacitated thus incapable of
performing his/her duties.
iv. Where a partner has acted in a manner which is pre-judicial to the carrying out
firm’s business and may bring the name of the business to its disable.
v. Where a partner was found guilty of breaching the partnership contract.

24
 vi. Where the firm has been operating in losses.
vii. Internal disagreements
viii. Incase of serious fraud

1.3.4.8 Advantages disadvantages of partnerships

Advantages
a) It is easy to form- there are few legal formalities required as compared to larger companies
b) There is freedom to undertake any business agreed upon
c) More capital can be raised from the members contribution making it easy to expand
d) There is specialization with each partner taking part in the areas they are best suited ie the
partnership enjoys a variety of skills and talents since people have different methods of

S
knowledge ideas and experience leading to efficiency.

ES
e) There is even distribution of work which reduces the work load and fatigue for each partner

N
f) Losses and liabilities are shared among the partners
PI
g) Better decision making as compared to sole proprietorship arising from consultation
AP
h) Easy to dissolve without legal formalities
H

Disadvantages
AH

a) Have unlimited liability except for limited partnership and limited partners ie the general
R

partners are liable for the debts of the firm and may loose their personal property to meet the
D

debts of the partnership

N

b) Partnership has a limited life- death, retirement, bankruptcy of a partner may suddenly cause
SA

dissolving of the partnership.

c) Continued disagreement may lead to dissolution of the partnership
d) Has limited access to capital since partnership is not a separate entity like joint stock
companies obtaining loans from banks may be difficult.
e) Less freedom of action compared to sole traders as all the partners must agree before a decision
is made.
f) Agency problem ie Any agreement entered by one partner on behalf of the other become
binding on all partners
g) A hardworking partners efforts are enjoyed by other partners
h) Slow decision making as all the partners must agree on issues.
i) Overreliance on one partner may affect the partnership adversely incase the partner retires, dies
or withdraws.
25
Review questions
1. Differentiate between sole proprietorships and partnerships
2. What is the difference between general partners and limited partners
3. In the absence of a partnership deed the partnership act prevails. Distinguish between
partnership deed from partnership Act and outline the contents of each.
4. outline the conditions under which a partnership may be dissolved

Further readings
1. Kibera F.N.(1996). Introduction to business Kenyan perspective. Nairobi Kenya literature

S
bureau.

ES
2. Mark A. (19870). Business studies, Edinburg. W & R chambers

N
3. Hammond s. (2000), business studies. Longman crop limited
PI
4. Gichira R.N.(2000). Commerce for Kenya. Nairobi. Macmillan Kenya limited
AP
5. Rwabutoga,.G.R. and Spencer( (1986). A text book of commerce. Nairobi. Heinemann
Kenya Limited.
H

6. Bitte, L.R.et al (1984). Introduction to business: Business in action 4th ED., London, Letts
AH

Educational Ltd.
R

7. Danks, S.(1996), Business studies 3rd Ed. London, Letts Educational Ltd.
D

8. Rukunga (1999). Excelling in Business, Nairobi. Focus

N

9. Capenter G.C (1987). The business success formula. Heinemann.

SA

26
 LECTURE FIVE AND SIX
LIMITED COMPANIES (JOINT STOCK COMPANIES)
1.16 Introduction
In these lectures you will learn about limited companies forms of business ownership
Lecture objectives
6. Define joint stock companies
7. Discuss features, formation, management sources of capital, advantages and disadvantages
of limited companies

1.4.1 Overview of companies

S
A company is an association of persons who contribute capital by buying shares in order to carry

ES
out business together with a view of making profit. A limited company is formed under the
companies act and is a legal entity, separate and distinct from its members. A company is formed

N
PI
to exist indefinitely until it is liquidated/ wound up or dissolved. It is an association recognized by
AP
the law as having an existence that is separate and distinct from its owners. It has the following
rights and obligations as a natural person:
H

 It can own and dispose property

AH

 It can enter into contract in its own name


R

It can hire and fire employees

D

 It can sue and be sued

N

 It can form agencies

SA

 It can disseminate information

1.4.2 Features of a limited company

1. It has a legal personality and has rights and obligation of a natural person – it is an artificial
person and has the right to own property, sue and be sued in a court of law, enter into contracts
in its own name etc
2. It has a legal entity, separate and distinct from its owners/members
3. Its capital is divided into transferable shares
4. It has a perpetual succession- continues indefinitely until it is liquidated- the company is not
affected by the death, retirement, bankruptcy of a share holder.
5. It is managed by a board of directors
6. Members cannot bind a company by their acts

27
7. It has limited liability

1.4.3 Management of limited companies

The management of a company is in the hands of the board of directors. The initial directors stay
in the office till the first meeting (AGM) is held at which new directors are elected. The size of the
board is usually determined by the size of the company. Board of directors is charged with the
responsibility of formulating and overseeing the implementation of company policies. The board is
normally supported by a team of professionals employed to be responsible for the day to day
management of various departments. For a public limited company, the directors are required by
law to present the company’s financial statement at the AGM meetings and filed with the registrar
of companies

S
ES
1.4.4 Limited liability concept

N
This concept arises due to the fact that liability of members is restricted to the amounts of capital
PI
contributed by members and members cannot be called upon to contribute any more money from
AP
their personal resources to meet the company’s debts. A company can be limited by shares or
guarantee.
H
AH

Companies limited by guarantee

R

These are companies in which each member guarantees to contribute a fixed sum of money
D

towards the liabilities of the company as long as he/she remains a member. In other words the
N

members’ liability is limited by the amount the members have agreed to contribute towards the
SA

payment of debts. The members can only be called upon to pay for companies debts up to the
amount guaranteed by them.

Companies limited by shares

The liability of each share holder is restricted to the value of the shares held by him/her ie
members can only be called upon to pay for company’s debts up to the capital they have
contributed.

1.4.5 Formation of limited company

In Kenya, limited companies are formed according to the company’s act of 1962(chapter 486)
For a company to be formed there must be some founder member who comes up with the idea of
forming the company. These founder members are referred to as promoters. Promoters oversee the

28
birth of a new company and they are in charge of all the requirements and operations until the
company is fully in operation. To form a private ltd company two promoters are required and a
public ltd co. requires seven promoters.
The promoters are supposed to submit to the registrar of companies these documents:-
i) Memorandum of association
ii) Articles of association
iii) List of directors (names, addresses, occupations and statement of agreement to serve as
directors)
iv)Declaration that registration procedure has been duly complied with

Memorandum of Association

S
It is a document that gives information to the outside world about the company ie it governs the

ES
relationship between the company and outsiders. It tells the outside world the objectives of the

N
company (what the company was formed to do) its powers, location, the capital it requires etc.
PI
AP
Contents of the Memorandum Of Association
i) Name clause- this clause states the name of the company with the word limited as the last
H

word in the name. The word limited shows the public that the liability of members is limited by
AH

shares or guarantee. A company can select any name as long as :

R

 It is not prohibited by the law

D

 Not similar to another

N


SA

It has no immoral intention

 It is not abusive especially to the government and presidency.

ii) Situation clause- it gives the location of the registered office of the company ie:
 Where the company is situated ie city, street, building
 Where the company’s letters can be delivered
 Where the company can be summoned

iii) Objectives clause- it outlines the objectives of the company ie activities it is authorized to
engage in. A company can only carry out the objectives specified in the memo and beyond
such powers it is termed ultra-vires. The objective clause serves the following purpose:
 Defines the limits of the company’s operations

29
  Informs the shareholders the purpose their money is put to
 Protects the subscriber from misuse of their money
 Protects outsiders by informing them the limits of the company’s operations

iv)Liability clause-Shows the liability of the members indicating that they are limited. It is meant
to protect the outsiders who may enter into contracts with the company.
v) Capital clause-it shows the nominal authorized capital ie amount of capital which the
company is authorized to raise by sale of shares, the subdivision of this capital into units of
shares and the value of each share.

Articles of Association

S
Gives a guideline on how the internal affairs of the company should be run i.e. it outline rules and

ES
regulations that should guide the relationship between the company and its share holders and

N
relationship between shareholders themselves.
PI
AP
Contents: of Articles of Association
H

a) Types of shareholders eg ordinary or preference shares

AH

b) Rights of shareholders eg voting rights

c) Procedure of Issuing and transferring of shares
R

d) Procedure of calling and conducting general meetings

D

e) Qualifications, duties, powers of directors

N
SA

f) Provides guidelines on how officials should be elected eg chairpersons, directors, auditors

g) Guidelines on how books of accounts should be audited
h) Procedure of altering share capital

When the above required documents are presented to the registrar of companies and found
satisfactory a certificate of incorporation is issued. The certificate gives the company legal
existence and a separate legal entity. After acquiring a certificate of incorporation a private ltd
company can start doing business while a public ltd company must wait for a certificate of trading
before it is allowed to start business activities. The certificate of trading gives the company power
to commence its business activities. The company must also acquire a trading licence from the
local authority in the area it is operating.

30
Differences between memorandum of association and articles of association

Memorandum of association Articles of association

It deals with relationship between company and It deals with relationship between company and
outsiders its members
It must be prepared by all companies before it is It is not mandatory before registration
registered
It is a main document required for registration It is a subsidiary document
Can only be amended by law Can by be amended by special resolution by the
members
Contain specific number of clauses for Contains varied information depending on the

S
companies company

ES
N
Types of limited companies companies
Companies can assume two forms:
PI
AP
1) Public limited companies
H

2) Private limited companies

AH

1.4.6 Public limited company.

R

Public limited companies invite any member of the public to subscribe to their shares ie it draws its
D

members from the whole country. Its membership ranges from seven shareholders to infinite.
N
SA

1.4.6.1 Features of public limited companies

i) It has a minimum of 7 shareholders and no maximum limit
ii) The liability of the members is limited
iii) It is allowed to subscribe its shares to members of the public i.e can sell share through the stock
exchange market.
iv) It must have an authorized share capital authorized by the government
v) Shares are freely transferable from one shareholder to another
vi) It is managed by a board of directors- minimum of three directors
vii) It cannot start its business activities after receiving a certificate of incorporation but has to wait
for a certificate of trading.
viii) It is required by the law to publish its final books of accounts in the news paper

31
1.4.7 Private limited company
Private limited companies draw their members from a selected group of people eg family
members, group of friends, work colleagues etc. its membership ranges between 2-50
shareholders.

1.4.7.1 Features of private limited companies

i) It has a minimum of 2 members and a maximum of 50 members
ii) It is not allowed to call upon members of the public to subscribe to its shares ie it cannot sell
shares through the stock exchange market. This is because its shares are sold privately to a
selected group of people
iii) Members cannot transfer shares freely without the approval of the board of directors

S
iv) It can be managed by one or two directors however a big private ltd company requires a board

ES
of directors

N
v) It can start business immediately after receiving a certificate of incorporation. It does not have
to wait for a certificate of trading.
PI
AP
vi)Its final accounts are confidential ie it is not required by law to publish its accounts
vii) It’s not necessarily required to prepare the memorandum of association.
H

viii) The liability of the members is limited

AH
R

1.4.8 Advantages and disadvantages of Limited Companies

D

Advantages of limited companies

N

1. They have access to large amount of capital raised by sale of shares

SA

2. Companies have perpetual succession- enjoy continuity of business ie not affected by death,
withdrawal or bankruptcy of a member.
3. Shareholders have limited liability
4. Practice specialization because companies have strong financial base to employ specialists
5. Risk of loss is spread to all the members
6. They enjoy economies of scale ie benefits of large scale operation eg discounts for purchasing
in large quantities
7. They enjoy service of experts in different fields
8. They enjoy separate legal entity from the members who own them
Additional advantages for public limited companies
1) They have a wider access of sources of capital than private limited companies

32
 2) Their books of accounts must be published and this safeguards shareholders against fraud
by management.
3) Their shares are freely transferable
Additional advantages for private limited companies
1) They can be formed more easily than public limited companies
2) Unlike public limited companies they can start their business operations immediately
after receiving a certificate of incorporation.
3) They are not necessarily required to prepare the memorandum and articles of
association.
4) Their final accounts are confidential ie they are not required by law to publish their
accounts

S
ES
Disadvantages of Limited Companies

N
1. They require large amount of capital to establish
2. They require to comply with complicated legal procedures
PI
AP
3. Slow decision making because all decision require approval of Board of directors
4. Shareholders do not participate in management of their own business.
H

5. It is difficult for shareholders to control the company as management is left in the hands of the
AH

board of directors
R

6. Companies are subjected to high taxes by the government

D

7. There are chances of mismanagement of shareholders property by directors

N

8. They must have their accounts audited before presentation to the shareholders
SA

9. They must hold shareholders annual general meetings

Additional disadvantages for public limited companies
1. Their operations are limited by the objectives clause in the memorandum of association
2. They are more costly to form than private limited companies
3. They are exposed to excess government control
4. Minority shareholders are neglected as they have little say in the affairs of the company
5. The accounts of the public company must be published; so there can be little secrecy or
privacy about its affairs
6. Sometimes a public limited company grow so big that it becomes difficult to manage
Additional disadvantages for private limited companies
1. They have limited access to a wider range of capital as compared to public limited
companies because they can’t invite members of the public to subscribe to their shares
33
 2. Share transfer is restricted to members only
3. They cannot achieve major benefits of economies of scale as much as public ltd companies

1.4.9 Sources of capital for limited companies

1. From the public through the sale of shares
2. Borrowing from commercial banks and other financial institutions
3. Overdrafts from banks
4. Government institutions eg KIE (Kenya Industrial Estate), ICDC (Industrial and
Commercial Development Corporation IDB ( Industrial Development Bank) e.t.c
5. Getting Supplies inform of trade credits.
6. The business itself inform of retained profits

S
7. Acquiring property on hire purchase

ES
8. Acquiring property on lease and mortgage

N
9. Rent revenue ie earnings from any investments
10. Profits ploughed back into the company
PI
AP

1.4.10 Dissolution of a Joint Stock Company

H
AH

When a company has started it’s expected to continue with its operations to the future since it is a
form of business with perpetual succession. Termination of the life of a company may be through;
R
D

1. Failure to commence business within one year of its formation – upon this it may be wound
N

up by a court order on application.

SA

2. The membership falling below the required minimum and this dissolution may be decided
by a court order.
3. Accomplishment of the purpose or expirely of the period of operation.
4. If it fails to comply with statutory requirements of registration e.g failure to file annual files
to the registrar of companies or engaging in illegal activities.
5. A resolution by members to voluntarily wind up the company which may arise through.;
a. where the company does not have a future on that line of business
b. The members wish to sell it as a going concern in order to share profits.
c. Where one company is acquired by another and the members wish to discontinue it
so as to terminate its existence as a separate legal entity.
d. Through a merger with a larger company
e. Insolvency – the company is not able to meet its obligations.

34
1.4.11 Differences between public and private limited companies
Public limited companies Private limited companies
Have a minimum of 7 shareholders and no Have a minimum of 2 shareholders and a
maximum maximum of 50 shareholderss
Shares are freely transferable Shares cannot be transferred freely without the
consent of other members

Invite members of the public to subscribe to Cannot invite members of the public to
shares- can sell through the stock exchange subscribe to shares
Required by the law to publish annual accounts Not required by the law to publish annual
accounts

S
ES
Cannot start operations after receiving Can start business operations immediately after

N
certificate of incorporation but must wait for receiving certificate of incorporation
certificate of trading
PI
AP
Must have authorized share capital as It’s not a requirement to have authorized share
H

authorized by the government capital

AH

Must always have a board of Can operate with even one director.
directors(minimum of three)
R

Must prepare memorandum of association It is not mandatory

D
N
SA

1.4.12 Types of shares

A public limited company should prepare a prospectus to invite the members of the public to
subscribe to its shares. A prospectus is a document that gives the necessary information about the
company eg the past history and all the information contained in the memorandum of association.
There are two major types of shares that can be issued by Joint stock companies:
1. Ordinary shares
2. Preference shares

Ordinary shares
All companies issue ordinary shares which are sometimes referred to as the risk capital of the
business. This is because the owner of the share receives a dividend on them only if there are

35
sufficient profits. If profits are too low or no profits are made the ordinary shareholders do not
receive dividend. In exchange for the risk the ordinary shareholders have the control of the
company in that they have one vote for each share when it comes to electing board of directors
who are responsible for the general policy of the company

Characteristics of ordinary shares

a) It is permanent in nature and can only be refunded in the event of liquidation/dissolution of
the company.

b) It earns ordinary dividends as a return to the investments.

c) The investors carry voting rights and usually each share is equal to one vote.

d) The ordinary shares are quoted at the stock exchange where they are sold and bought.

S
ES
e) It carries the highest risks in the company because it gets its return after other types of
shares have got theirs and also in the event of liquidation it is paid last.

N
PI
f) The ordinary dividends are not a legal obligation on the part of the company to pay.
AP
g) Where the profits are good ordinary shareholders get the highest return because their
dividends are varied.
H

h) This type of finance grows with time and this growth is equity which basically is facilitated
AH

by retention earnings.
R

Advantages of Ordinary Share to Shareholders

D

1. Ordinary shares have a right to vote and their votes influence the company’s activities.
N
SA

2. Ordinary shareholders can use their shares to secure loan.

3. Ordinary shares are easily transferable.

4. The owners of the ordinary shareholders earn dividends in perpetuity. .

5. The ordinary shareholders benefit from the residual claim in the event of liquidation ie they
are entitled to all the remaining profits and properties of the company after all other types
of shares and creditors have been paid

Disadvantages of Ordinary Shares.

1. Receives no dividend during low or non-profit years.

2. In case of liquidation an ordinary shareholder may lose everything.

3. The sale of more ordinary shares dilutes ownership of the existing shareholders.

36
 4. The dividends of an ordinary shareholder are double taxed.

Preference shares
While ordinary shares provide an attractive investment for those who do not mind the risk of
getting no reward in low income years others find that preference shares offer a safer investment
because they earn fixed dividend whether the company makes profits or not.

Preference shares falls into several groups

1. Basic preference shares
Holders of which receive a fixed dividend out of profit of the company
2. Accumulative preference shares

S
A dividend missed in one year is carried forward to the next year

ES
3. Non accumulative preference shares- A dividend missed in one year is not carried forward to
the next year ie it is foregone completely

N
4. Participating accumulative preference shares PI
AP
Not only carry a fixed rate of dividend but also entitle their holders to a further share of surplus
profits together with ordinary shares.
H

5. Reedemable preference shares-these are shares that are bought back by the company after a
AH

stated period of time.

R

6. Irredeemable preference shares - these are shares that are never bought back by the company
D

after a stated period of time. They keep on earning dividend as long as the company is in
N

operation.
SA

NB Most preference shareholders have no say in the control of the company as majority do not
offer permanent capital and have privileged position with respect to dividends payment.

Debentures
If a company does not raise enough capital by selling shares it can also issue debentures. A
debenture is a certificate that gives evidence that a company has borrowed money from the person
named on its face and undertakes to pay a fixed rate of interest for it. Debentures are simply loans
to the company on which a fixed rate of interest are paid even when preference or ordinary shares
holders do not receive anything. Unlike shares debenture holders do not share in the ownership of
the company.

37
1.4.13 Types of debentures
a. Secured debentures- They are secured ie some property is pledged against them ie the
company must secure them with some properties. That is to say if the company fails to pay
them, the agreed property must be sold and proceeds used to repay the debentures holders
b. Naked/unsecured debentures- They have no security pledged against them.
c. Redeemable debentures- they are redeemed back by the company after a specified period
where holders surrender them back and they are paid principle amount plus interest
accrued.
d. Irredeemable debentures- they are never bought back unless the company dissolves.

Advantages of debentures

S
a. The holders do not have management control of the company

ES
b. They do not share residual profits or assets

N
c. They are cheaper than to float shares
d. They can also be issued by private ltd companies
PI
AP

Disadvantages of debentures
H

a. Interest payable is mandatory whether profit are made or not

AH

b. Most of them require security in form of assets

R

c. Failure to pay interest can make creditors put the company into liquidation
D

d. The company has to put the money aside to redeem the shares when due
N

e. Debenture just like any other Creditors usually give many restrictions
SA

Differences between shares and debentures

Shares Debentures
a. Share is part of capital for the company a. A debenture is a loan to the company
b. A share create an owner of the company b. A debenture creates a creditor of the
company
c. A share receives dividend as a return c. A debenture receives interest as a return
d. Most Shares are paid dividend only d. Debenture holders are paid interest
when the company makes profit whether the company makes profit or
not
e. Share holders have voting rights e. Debenture holders do not have voting
rights

38
Review questions
1. What is a joint stock company
2. Identify and explain the documents that the persons forming a joint stock company are
required to furnish the registrar of companies with and the purposes of these documents.
3. Discuss the merits and demerits of different types of shares of a joint stock company
4. Critically discuss the pros and cons of limited companies

Further readings
1. Kibera F.N.(1996). Introduction to business Kenyan perspective. Nairobi Kenya literature
bureau.
2. Mark A. (19870). Business studies, Edinburg. W & R chambers

S
3. Hammond s. (2000), business studies. Longman crop limited

ES
4. Gichira R.N.(2000). Commerce for Kenya. Nairobi. Macmillan Kenya limited

N
5. Rwabutoga,.G.R. and Spencer( (1986). A text book of commerce. Nairobi. Heinmann
Kenya Limited.
PI
AP
6. Bitte, L.R.et al (1984). Introduction to business: Business in action 4th ED., London, Letts
Educational Ltd.
H

7. Danks, S.(1996), Business studies 3rd Ed. London, Letts Educational Ltd.
AH

8. Rukunga (1999). Excelling in Business, Nairobi. Focus

R

9. Capenter G.C (1987). The business success formula. Heinmann.

D
N
SA

39
 LECTURE SEVEN
COOPERATIVES
1.17 Introduction
In this lecture you will learn about cooperatives as a form of business unit
Lecture objectives
1. Define cooperatives
2. Discuss principles, types, benefits and problems of cooperatives

1.5.1 Overview of cooperatives

The origin of cooperatives dates back to the colonial times when the European. Farmers in East

S
Africa formed associations to undertake the task of collecting and purchasing in bulk the firm

ES
inputs as well as marketing the produce for farmers. A cooperative is an association of people with
a common interest who have found out that the best way to take care of their interest is to join

N
PI
together. The people involved in activities of the cooperative include individual members,
AP
executive committees (elected by members) and staff.
The people who desire to form cooperatives should be at least ten in number and must be willing
H

to abide with the by-laws of the cooperative.

AH
R

1.5.2 The principles of cooperatives

D

These are ground rules that guide the operation of cooperative movement:
N
SA

1. Voluntary and open membership

A cooperative should be open to all who meet the requirements of the by-laws and are
ready to accept them. There should be no discrimination on the basis of social, political,
racial or religious background. A person is therefore free to join and leave a cooperative at
his/ her discretion.
2. Democratic administration
A cooperative is run on the basis of one member one rote regardless of the number of
shares held by a person.
3. Dividend payment
The surplus profit of the cooperative should be distributed to the members in form of
dividend payments.

40
 4. Limited interest in share capital
Interest on share capital should be paid at a fixed rate as laid down by the cooperative rules
5. Promotion of education
There should be education for the members, committe and the staff about cooperative
ideals and principles and administration. This can be done though seminars, study tours and
in-service courses
6. Cooperation with other cooperatives
The cooperative should cooperate with other cooperatives at local, national and
international levels as they have a lot in common.
7. Non- profit making
They should meet the individual common interest such as looking for better market for

S
members’ products, savings for members without a profit- making motive. The moneys

ES
received should only go to the education expenses.

N
Duties of the Members of cooperatives
PI
AP
1. Contribute to the capital of the cooperative
2. Be loyal to the cooperative
H

3. Take part in the main activities of the cooperative

AH

4. Take part in the management by attending and voting at meetings

R

5. Where practical buy or sell from or to the cooperative

D
N

1.5.3 Types of cooperatives

SA

1. Producer cooperative societies

These are formed by producers who join together in order to improve the production and
marketing of their products eg. Kenya planters cooperative union, New KCC (Kenya creameries
cooperative

Functions for producer cooperatives

a) Negotiate for better prices with buyers of the produce
b) Collecting and grading members produce
c) Providing better storage facilities
d) Some producer cooperatives process the produce in order to improve its quality and its
marketability.
e) They market produce on behalf of the members
41
f) They avail credit facilities in form of loans to members
g) They act as government agencies through which funds, fertilizers, tools and equipment are
distributed.

Problems of producer cooperatives

1. Lack of specialized and qualified staff because they are managed by farmers who lack the right
skills.
2. Financial problems especially when members fail to pay loans given to them. This curtails the
improvement of these cooperatives
3. They suffer from political interference as they are linked and controlled by certain government
ministries.

S
ES
2. Consumer Cooperatives

N
These are cooperatives formed by consumers in order to try to keep down the cost of living for
PI
their members by running shops in which goods of good quality are sold at reasonable prices.
AP
Functions of consumer cooperatives
a) To offer goods to members at reasonable prices
H

b) Provide good quality goods to members

AH

c) Give members interest on their capital.

R

d) To ensure there’s continuous supply of the product for members and thus avoid hoarding of
D

goods by retailers
N

e) To provide a variety of goods to the members

SA

f) To offer goods on credit to the members.

Problems of consumer cooperatives

1. Competition from large scale retailers eg supermarkets which sell goods to consumer at
lower prices
2. Lack of sufficient capital for expansion since majority of members are low income earners
3. Non- members are reluctant to buy from the consumer cooperatives.
4. Inability to employ qualified staff as they can’t afford to pay employees.

42
3. SACCOS (savings and credit cooperative societies)
These are societies that are formed by employees in different professions to enable them save and
acquire loans at very competitive rates. The loans are given out of the members accumulative
saving and thus help employee to improve their living standards

Benefits of SACCOS.
1. Members are able to get loans on favourable and fair terms as compared to getting them
from banks
2. Members are able to raise their living standard because they can get loans to engage in
development projects.
3. Interest charged by SACCOS are relatively lower

S
4. There’s no collateral required as is the case with banks

ES
5. If a member died the dependants do not pay the loan

N
6. Members receive annual dividends based on their accumulated shares.
PI
AP
4. Housing societies/cooperatives
These are cooperatives that enable members to acquire residential houses at low costs. They are
H

also known to engage in real estate business.

AH
R

5. Marketing cooperatives
D

They are formed by producers to provide marketing facilities for their produce
N
SA

Typical structure of cooperatives

Ministry of cooperative development

Kenya national federation of cooperatives (KNFC) - Apex body for cooperation

Secondary cooperatives (national and district cooperatives)eg New KCC, Mwalimu SACCO

Primary cooperatives (local Cooperatives Mathira cooperative society In Nyeri)

Other cooperative bodies in Kenya include

1. Cooperative bank of Kenya- provides banking services to cooperatives in Kenya
43
 2. Cooperative college of Kenya – provides training to cooperative staffs
3. Cooperative insurance services limited- provides insurance services to cooperatives in Kenya
NB: The above bodies have opened their services to the members of the public

1.5.4 Advantages and disadvantages of cooperatives

Advantages of cooperatives
1. They operate on large scale therefore enjoy economies of scale and as a result provide
services to the members at low costs.
2. The interests of members are served more effectively through collective ownership
3. Members share in the profits of the cooperative according to the trading activities of the
cooperative

S
4. They are run on a democratic basis giving the members an opportunity to be actively

ES
involved in the running of the cooperative

N
5. Help members improve their standards of living
PI
6. Enable the government to ensure a fair distribution of wealth within the population.
AP

Disadvantages of cooperatives
H

1. They lack highly- skilled well- paid management to promote their efficiency
AH

2. The share capital is normally withdrawable posing problems of adequate finances to promote
R

successful expansion of cooperatives

D

3. Corruption and embezzlement of funds by management

N

4. Members of the cooperatives are not keen on how the affairs of the cooperatives are run giving
SA

the management an opportunity to exploit them

REVIEW QUESTIONS
1. What is a cooperative organization?
2. Discuss the typical structure of cooperatives in Kenya
3. Discuss the challenges faced by producer cooperatives in Kenya

Further readings
1. Kibera F.N.(1996). Introduction to business Kenyan perspective. Nairobi Kenya literature
bureau.
2. Rukunga, (1999).
3. Mark A. (19870). Business studies, Edinburg. W & R chambers
44
4. Hammond s. (2000), business studies. Longman crop limited
5. Gichira R.N.(2000). Commerce for Kenya. Nairobi. Macmillan Kenya limited
6. Rwabutoga,.G.R. and Spencer( (1986). A text book of commerce. Nairobi. Heinmann
Kenya Limited.

S
ES
N
PI
AP
H
AH
R
D
N
SA

45
 LECTURE EIGHT
PUBLIC ENTERPRISES
1.18 Introduction
In this lecture you will learn about public enterprises
Lecture objectives
3. Define public enterprises
4. Explain reasons for government involvement in business
5. Identify forms of business enterprises

1.6.1 Overview of public enterprises

S
These are enterprises owned and run by the government. The government gets involved in business

ES
in order to prevent private enterprises from exploiting the public.

N
1.6.2 Reasons for state undertakings PI
AP
1. To promote the general welfare of the public- some activities are undertaken by the state to
promote the health, safety and general welfare of the public especially those associated with
H

public health and safety eg water, power and drugs.

AH

2. To encourage private investment in activities which require heavy capital but take long to bring
R

returns eg provision of hydroelectric power, provision of education, rail transport etc. Very few
D

private individuals are willing to invest in such activities and being vital the government must
N

take the lead in order to encourage private investment in the areas.

SA

3. To avoid wastage and inefficiency- some establishments are nationalized to avoid duplication,
wastage and inefficiency eg provision of hydroelectric power which uses water – a scarce
resource.
4. Source of revenue- the state may also operate some enterprises to raise revenue for itself in
order to be able to carry out its public responsibilities.
5. To create employment- by running its own business enterprises the government is able to
create employment for the citizens.
6. To control prices of products- the government will offer competition to the private sector and
this will help bring down the cost of various products.
7. To take up business proving costly to private forms. The cost of management and operation
may force the private investor out of business or discourage them to invest in some industries;

46
 in such a case the government comes in handy to provide those services and products that the
private sector shies from.
8. Provide services that are too sensitive to be left in the hands of the private sector eg guns
provision and usage.

1.6.3 Forms of public enterprises

Government undertakings may take these forms
a) Government departments
b) Public corporations
c) Local authority.

S
a) Government Departments

ES
These are departments that directly depend on the central government with commercial or non-

N
commercial functions. Such departments are directly responsible to a minister eg, hospitals,
school, colleges and universities etc
PI
AP

b) Public corporations
H

They can be a) statutory corporations

AH

b) Non- statutory corporations

R
D

Statutory corporations (parastatals) - They are created through an act of parliament ie they are
N

formed by a law passed in parliament to serve certain important aspects of the public. Such
SA

corporations get their capital from the government and are controlled by a management board
appointed by the minister responsible to the parliament. These parastatals are expected to make
profits which go back to the government kitty but many times they rarely make the profits and the
government has to keep on funding them. Any loss that may accrue from their operations is borne
by the government and at times the citizens might be asked to pay more for services rendered.

Non- statutory bodies -These are government undertakings that have not been formed through an
act of parliament but the government obtain control of such business units through a majority
holding of shares.
These bodies are normally limited liability companies eg.
 Kenya commercial bank

47
  National bank of Kenya

c) Local Authority
Local authority includes city council, municipal councils, town council and county council. Today
we are referring to them as county governments. These councils or county governments provide
facilities such as roads, entertainment and recreation centres, libraries, social halls street lights
council houses, markets, stadiums etc in their areas of jurisdiction. The capital for local authority
undertakings is partly provided by the national government while the rest is raised through
charging of rents and rates on council properties or through private or public loans to be repaid
with interest for a number of years.

S
1.6.4 Advantages and disadvantages of public enterprises

ES
Advantages of public enterprises

N
1. They are able to charge low prices for their services and products because they operate not on
a profit – motive
PI
AP
2. Capital is readily available from the government or from other lenders at low interest rates.
H

3. Certain essential services eg education, health can be provided free or at low prices
4. State participations in these industries leads to more efficient control.
AH

5. The relationship between the management and labour are more cordial as the government is the
R

owner
D

6. Since the government undertakings operate in large scale, they are able to enjoy economies of
N
SA

scale.
7. Private monopoly which would overcharge for services is avoided.
8. Foreign domination of industries in the country is discouraged

Disadvantages of public enterprises

a) Governments bear the losses of the public undertakings and this lead to higher taxation for
the public.
b) State undertakings are usually monopoly; the consumer’s choice is therefore restricted.
c) The regulations may be passed by government to restrict the progress of private enterprises
and individual innovations.
d) Private undertakings are prone to political interference which hinders the progress of the
state undertakings.

48
 e) There’s a possibility of corruption and embezzlement of funds due to poor accounting and
auditing procedures.
f) Foreign investment may be discouraged due to fear of nationalization
g) The senior management of private undertakings is normally political appointees who
normally make poor business decisions to suit their personal interest.

Review questions
1. Explain why the government is involved in business activities
2. From where do the government owned businesses draw their capital and operational funds
3. Give a critical analysis of the performance of parastatals in Kenya
4. Explain the term ‘privatization’ and argue for and against privatization

S
5. Discuss the role of the government as a promoter and protector of business

ES
N
Further readings
PI
1. Kibera F.N.(1996). Introduction to business Kenyan perspective. Nairobi Kenya literature
AP
bureau.
2. Rukunga, (1999).
H

3. Gichira R.N.(2000). Commerce for Kenya. Nairobi. Macmillan.

AH

4. Rwabutoga,.G.R. and Spencer( (1986). A text book of commerce. Nairobi. Heinemann

R

5. Bitte, L.R.et al (1984). Introduction to business: Business in action 4th ED., London, Letts
D

Educational Ltd.
N

6. Danks, S.(1996), Business studies 3rd Ed. London, Letts Educational Ltd.
SA

7. Rukunga (1999). Excelling in Business, Nairobi. Focus

8. Capenter G.C (1987). The business success formula. Heinmann.

49
 LECTURE NINE
STOCK EXCHANGE MARKET
1.19 INTRODUCTION
In this lecture you will learn about stock exchange market and the terms commonly used in this
market.
Lecture objectives
1. Give the meaning of stock exchange market
2. Explain terms commonly used in the stock exchange market
3. Identify the various types of securities sold in the stock exchange market

S
1.7.1 Overview of stock exchange market

ES
This is a market where already issued shares and stocks are bought and sold ie it’s a market where
shares and stocks are traded.

N
PI
1.7.2 Terms Used in Connection With Various Securities and stock exchange market
AP
 House –it is a term that refers to the stock exchange market itself.
 Security- is the general term used to refer to all shares and stocks traded in the stock
H
AH

exchange market.
 Share – is a unit of capital for a company. Shares include ordinary shares and preference
R

shares.
D

 Stocks - It refers to securities other than shares that are dealt with at the stock exchange
N
SA

market. It includes those loans borrowed from individual members of the public and firms
in form of bonds and company debentures.
 Dividend- It is the return on investing in a share. It is paid out of the profits of the
company.
 Par /nominal value of shares- This is the face value of a share. It is the value written on the
share certificate.
 Market value of share- This is the price or value at which shares are actually traded in the
stock exchange market. Shares don’t always sell at their par value because their value
increases with the increase in the profits of the company.
 Bearer securities- securities that can be transferred by mere delivery without a transfer form
being registered by the assigning company.

50
 Blue chip stocks - these are shares of high reputable companies which are known of sound
financial history.
 Bonds- these are securities sold by government or companies and earn a fixed rate of
interest.
 Gilt – edged securities- these are securities considered as absolute secure in terms of
interest payment and capital refund. They are normally the government securities.
 Portfolio- It is a collection of various securities held by one investor or institution. A
person who makes his living by investing his money in various securities would invest in a
number of different companies to maximize his return and minimize his risk ie he would
choose a good portfolio.
 Bonus shares- These are shares issued freely by a company to its existing members out of

S
its accumulated reserves.

ES
 Capitalization of reserves- It is the process of issuing bonus shares; it is so called because

N
the aim of issuing bonus shares is to convert company’s reserves into permanent capital.
PI
 Script issue-This is the bonus issue or issue of bonus shares.
AP
 Rights issue of shares- this is a new issue of shares. The existing members of the company
are given a right to buy new issue of shares at a lower price than the non members.
H

 Speculators –These are the dealers in the stock exchange market who anticipate of changes
AH

in the prices of shares in the hope that they will make a gain out of the changes.
R

 To go public- This is the act of converting a private ltd company into a public ltd company
D

thereby enabling it to quote its shares in the stock exchange market.

N

 Institutional investor- this is an institution whose business is to invest its funds in various
SA

types of shares. Most insurance companies invest their large amount of funds in various
securities and therefore are described as institutional investors.
 Cum div vs ex div- These are terms used in relation to dividend payment. Cum div stands
for with dividend and it means that shares have been sold along with the right for the new
shareholder to receive the dividends declared. Ex div stands for without dividends and it
means that the seller of the shares retains the right to receive dividends already declared.
 Cum right or ex right- These are terms used in relation to new right issues of shares. Cum
right means that the new buyer has a right to buy shares out of the new right issue already
declared when the share is being sold. Ex right means that the seller retains the right to buy
shares out of the new right issue.
 Cum cap (cum capital) and ex cap (cum capital) - these are terms used in relation to bonus
issue of shares. Cum cap means that the buyer has the right to enjoy the free bonus shares
51
 already declared and ex cap means that the seller retains the right to enjoy the free bonus
shares already declared.
 Quoted companies-These are companies whose shares are bought and sold at the stock
exchange market. For a company to be quoted it must apply and be approved by the stock
exchange council.
 Underwriters- this is a person or a company that guarantees another company offering new
issue of shares that all its shares will be sold. If the shares are not bought the underwriter
will undertake to buy them.
 Daily list –this is a list issued officially by the stock exchange market showing the
quotation for all the stocks and other securities traded in the stock exchange.
 Transfer form or deed- it is a form used to transfer shares from one person to another.

S
 Stock splitting- it is the process of dividing shares of a company into units of smaller

ES
denominations so as to make them more marketable.

N
1.7.3 Functions of Stock Exchange
PI
AP
1. It provides a ready market for shares i.e. it enables free transfer of shares form one person
to another
H

2. It sets a price for every share keeping both the investor and the companies informed.
AH

3. It enables firms to obtain capital to finance their business activities.

R

4. It protects the public against fraud by ensuring that quoted companies publish their
D

accounts and disciplinary rules of the stock exchange are adhered to.
N

5. It enables companies to make new issues of shares when they wish to raise more capital
SA

6. It enables the members of the public to invest their money in joint stock companies leading
to the general development of the county.
7. It helps to keep an eye on the financial affairs of the quoted companies ensuring that the
money invested by the members of the public is safe.
8. It provides a ground/forum for measuring a country’s economic progress in that the price
and volume of shares traded each week are used as a measure of a country’s economic
development.

1.7.4 Members/ dealers in the stock exchange market

The traders in the stock exchange market are the stock brokers and stock jobbers

52
Stock brokers- They are the agents who act between the investing public and the stock exchange
market. Any member of the public who wish to buy or sell shares must approach a stock broker.
The broker offers advice on the type of shares one can buy. He earns a commission on the deals he
arranges. He acts in the best interests of his clients and use his knowledge and experience to that
end.

Stock jobbers-These are the actual dealers in the stock exchange market. They buy and sell
shares in their own names and a broker must buy and sell shares through a jobber ie jobbers
transact business only with brokers who act on the behalf of the investor. The jobber can be
equated to wholesalers in that they trade in shares in much the same way as wholesalers deal with
merchandise. The stock jobbers earns a jobbers turn which is the difference between the price they
buy securities and the price they sell the securities. The broker act in between the investor and the

S
ES
jobber and by so doing he protects the interest of the member of the public who stand to be
exploited by the jobber.

N
PI
There are three terms that are used to describe the activities of the jobbers as follows.
AP
1. Bulls- this is a stock jobber who buy shares when they are cheap in the expectation that the
price of these shares will soon rise and he will be able to sell them at a profit.
H

2. Bears- this is a stock jobber who sell shares when the prices are high in the expectation that
AH

the prices will fall in the near future and he will be able to buy them back at a low price.
R

3. Stags – this is a stock jobber who deals in companies’ new issue of shares. He buys newly
D

issued shares in the expectation that their valve will soon rise and he will be able to sell
N

them at a profit.
SA

NB/ a stock jobber is therefore a speculator

Review questions
1. Explain the functions of Nairobi stock exchange market
2. Distinguish between stock market and bond market
3. Describe the activities of stock jobbers in the stock exchange market

Further readings
1. Gichira R.N.(2000). Commerce for Kenya. Nairobi. Macmillan Kenya limited

53
 LECTURE TEN
BUSINESS ENVIRONMENT

1.20 Introduction
In this lecture you will learn about the effects of internal and external environment on the business
and how they affect the decisions of a manager.
Lecture objectives
4. Define the term environment in relation to business
5. Discuss the micro and macro environmental factors

1.8.1 Overview of business environment

S
ES
Businesses do not operate in a vacuum but are affected in some way by the environment in which
they operate. Successful businesses must recognize that the environment is constantly presenting

N
PI
new opportunities and threats and therefore must continuously monitor and adapt to the
AP
environment. Managers should therefore pay close attention to the environmental factors and make
timely adjustments to their day to day decisions.
H

Business environment refers to those factors and events that influence the operations of a business
AH

and affects the way managers make decisions.

R
D

There are two types of business environment

N
SA

1 Internal environment

2 External environments

1.8.2 Internal environment

This is the environment inside the organization which affects its operations. It consists of those
factors that affect the operation of a business and they can be controlled fully by the business
manager. These factors include:

1. Objectives of the business

2. Management policies and styles.

3. Human resources

54
 4. Physical resources

5. Financial resources

6. Marketing resources

7. Business structure

8. Technological resources

9. Organization culture

Objectives of business

These are targets set by the manager of business to be attained/ achieved. For a business enterprise

S
ES
to satisfy the various groups of people it is involved with, it must have clear objectives which it
strives to achieve. Such objectives should also be supported by strategies/action plans which an

N
organization intends to follow so as to achieve its goals. If the objectives are clearly stated then the
PI
strategies for achieving them will also be clear. Lack of clear objectives may lead to the failure of
AP

the business.
H

Management policies and styles

AH

Policies-refers to the established way or methods of doing things in an organization. Management

R

styles-refers to how managers run their organizations. Management policies and styles will affect
D
N

the operations of a business e.g. If the management adopts a policy that denies workers the right to
SA

join trade unions, it may create tension among workers which will interfere with their
performance. On the other hand if the management style adopted is one which allows workers to
give their views on how things should be done, it will help to improve worker’s performance. In
addition if the management style is one where the manager makes all the decisions irrespective of
what the workers feel, then the urge to work and produce more may be reduced.

Human resources

This refers to employees working in an organization. Employees should have the necessary
knowledge and skills to be able to carry out the assigned tasks successfully. If the right people with
the right knowledge and skills are not employed, then the business may not achieve its goals. (The
core values, beliefs and practices held by the management and the employees determine how the
organization responds to challenges.)

55
Physical resources

This refers to tangible facilities which belong to the business such as building, machinery stock;
furniture etc.These facilities are required in sufficient quantities to enable the organization to
produce goods and services. If the facilities are not available or are difficult to acquire then the
business may not achieve its goals.

Marketing resources

These include marketing factors such as the nature of sales forces, channels of distribution and
existing advertisements, labor relations factors etc. a good marketing network will lead to success
of a business.

S
Financial resources

ES
These are monies available to an organization to be allocated to various activities. For example if a

N
business intends to produce a new product which requires new machinery then the financial
PI
capability of the business will have to be considered. Success will therefore depend on the
AP

financial resources available to a business and the use to which they are put.Financial ability will
H

determine the effective of an organization e.g. it can employ highly qualified managers, employees
AH

& technology.
R

Business structure
D
N

This is a means of establishing authority and responsibility. It is a formal arrangement of functions

SA

and relationship of people such that authority and responsibility of each person can be clearly seen
in a flow chart. A good business structure will enhance coordination and team work thus enabling
the workers to achieve organizational objectives.

Technology

This refers to efficient use of scientific knowledge, tools and equipments in the production process.
It makes work easier, quicker and cheaper. Adoption of technology within the organization will
lead to improved productivity or better performance.

Organization culture/corporate culture

Corporate culture is a system of shared beliefs, values, assumptions and norms that unite the
members of an organization. It reflects common view about- the way things are done around here.

56
Culture is important to organization because as individuals act on shared values and other aspect of
organizational culture their behavior can have a significant impact on organization effectiveness.

1.8.3 External business environment

This is an environment outside the organization which affects its operation. No organization is
self-sufficient as each organization provides something to the outside environment and in turn
depends on the environment for survival. The external environment is dynamic rather than static. It
is changing continuously and rapidly. A change in the external environment may require a business
to re-adjust its business strategy (how it’s going about its business) in order to cope. The business
has no control of the external environment

External environment has two major components.

S
ES
1) Microenvironment- Also referred to as operational environment or immediate

N
environment
PI
2) Macro environment- Also referred to as remote environment
AP

Micro environment
H
AH

This is consisted of the external factors that affect the operation of a business and the manager can
influence or can control them.
R
D

The micro environmental factors include:

N
SA

1. Clients- a business organization’s customers are critical its success. Managers must
constantly be aware of the present needs and emerging needs of clients. This may involve
altering present products or services, developing new ones, or even entering into new
business.

2 Competitors- Two types of competition

1. Enterprises competition-competition from firms whose products are similar to

that of the other firm e.g. banking industry.
2. Generic competition-competition from firms whose products although different
from the firms products are used for the same purpose as that of the firm e.g. in
entertainment industry –magazines, newspapers, theatre, cultural centers etc

57
The firm should examine the entry and exit of major competitors taking into consideration the
competitors strategies of operations. A business should be in a position to gauge the strength and
weaknesses of its competitors by gathering information such as the products they offer, how they
distribute their products, prices they charge etc. By so doing the business can improve its
competitive edge against the competitors. The business should be aware of generic competition.
Pressure of competition may lead to development of new and better products, new methods of
sales promotion.

3. Suppliers -These are people who supply the business with inputs such as raw materials,
services, energy, funds, equipments etc. suppliers have an impact on a business and therefore good
relationship with them is critical. Suppliers can enable the business to have an advantage over
competing businesses eg they can offer discounts, credit terms, delivering on time

S
ES
4. National pressure groups such as consumer association and trade unions are an external

N
environment that the business should take care of.
PI
Macro environment
AP

It’s also referred to as remote environment. It is consisted of those external factors or forces
H

that are beyond the control of the business .These factors include
AH

 Political and legal environment

R

 Economic environment
D
N

 Social cultural factors

SA

 Technological environment
 Demographic environment
 Physical/ecological environment

Political and legal factors

This has to do with laws and policies passed by the government (both central and local
governments) to regulate business activities. The business should consider what the government
laws are before making a decision because going against the laws may lead to penalties e.g. laws
on disposal of waste products, laws on labor and industrial relations, safe products, formation and
location of business, advertisements, and tax policies.

58
On the other hand laws/policies may present an opportunity to the business e.g. government policy
of subsidization or exemption from taxes by meeting certain government requirement is likely to
favor a business. Political stability also creates a conducive environment for business to thrive.

Economic environment

Economic forces are changes in the economy reflected by such indicators as level of incomes,
bank rates (borrowing rates), unemployment rates, tax rates for firms and individuals, price levels
etc. These entire factors influence consumer’s purchasing power which in turn affects the business
profit and growth.

Social culture factors

S
These are factors that are based on the beliefs, values, attitudes, opinions and lifestyles of people.

ES
Changes in these factors affect consumers buying patterns e.g. Muslims do not eat pork and so a

N
pork selling business cannot thrive in a Muslims community. Businesses should therefore assess
PI
people’s social/cultural nature so as to know what business opportunity exist. Also how people
AP
worship will affect the business e.g. Muslim prayer life will affect time of work, cultural or
religious dressing may also affect the code of addressing in an organization.
H
AH

Technology environment
R

Changes in technology can impact on organizations either positively or negatively e.g. it can
D

enable a business to come up with better products or services. On the other hand it may increase
N

the costs of productions; lead to downsizing of the labor force thus putting the management into
SA

logger heads with trade unions .Management should thus keep abreast of the latest development in
technology so as to have a competitive edge against other competitors.

Demographic environment

This refers to population change in terms of age, gender, birthrates, literacy level etc. Knowledge
about these factors will create business opportunities e.g. a large population increase demand for
goods and services, age and sex distribution shape the line of business, literacy improves people’s
tastes and demand for quality goods and services.

Ecological /Physical environment.

This includes such factors as topography or relief, climate and infrastructure (roads, water supply,
electricity, telephone, security banks and insurance. These physical factors also may favor or

59
disfavor a firm in the pursuit of its objectives. The physical environment will also include location
of the firm e.g. suitability of the location, possibility of moving into other locations if necessary etc

Review Questions

a. Organizations are always interacting with the environment in their pursuit of organizational

objectives. Discuss the role of management in ensuring effective manipulation of the

environment for the achievement of the objectives

b. Discuss the characteristics of business environment

S
c. Discuss how the business environment affects the operation of the following businesses

ES
i. Transport industry

N
ii. Education industry eg universities PI
iii. The dairy industry
AP

iv. Manufacturing industries

H

v. Banking industry
AH

vi. Communication industry

d. Discuss the micro environmental factors and how they should be managed
R

e. Explain ways in which social cultural environment may negatively influence the operations
D
N

of a business.
SA

Further readings
1. Kibera F.N.(1996). Introduction to business Kenyan perspective. Nairobi Kenya literature
bureau.
2. Bruce R.J. (1996). An integrated approach to business studies.songapore.Longman.
3. Mark, A. (19870). Business studies, Edinburg. W & R chambers
4. Sooks, H.L.and Williams, J.C. (2005). Management and organizations
5. Eyre, E.C. (1994). Mastering basic management
6. Bruce R.J. (1996). An integrated approach to business studies.songapore.Longman.

60
 LECTURE ELEVEN
FUNCTIONS OF MANAGEMENT
(PLANNING FUNCTION)
1.21 Introduction
In this lecture you will learn about planning as a function of management and the activities
involved in it.
Lecture objectives
1. Define the term management
2. Define planning
3. Outline the activities involved in carrying out planning function

S
4. Identify types of plans

ES
5. Describe the importance and limitations of planning

N
1.9.1 Overview of management
PI
AP
Management is the process undertaken by one or more individuals to coordinate the activities of
others to achieve results not achievable by one individual acting alone. It is the accomplishment
H

of results through the efforts of other people. It is the act of getting things done though people
AH

and with informally organized group.

R
D

There are 5 basic functions that should be carried by a business manager.

N

1. Planning
SA

2. Organizing
3. Staffing
4. Directing
5. Controlling

1.9.2 Planning Function

It is the process of determining what is to be done how it will be done, who will do it and when it
will be done. Planning today helps to avoid crisis tomorrow; it has to be undertaken much in
advance so that unforeseen problems and events may be properly handled. In lay-man’s language
planning is said to be a trap laid to capture the future. It is concerned with meeting tomorrow
today.

61
1.9.2.1 Activities involved in planning
a) Setting objectives to determine what achievements are to be made.
b) Decide on how and when to implement the plans in order to achieve the stated objectives.
c) Decide on the programs, action plans, strategies, policies and standards which will facilitate the
achievement of objectives
d) Estimating the resources that will be needed
e) Considering the problems that will arise and deciding how these problems can be solved
f) Evaluating the proposed action plans
g) Revising and adjusting the plans in the light of changing conditions.

1.9.2. 2 Characteristics of sound plans

S
1) It should be based on clearly defined objectives

ES
2) It must be simple and easily understandable

N
3) It should be flexible or adaptable to changing conditions
4) It should be reasonably comprehensive
PI
AP
5) It should provide standards for the evaluation of performance and actions
6) It should be economical ie permit optimum use of available resources
H

7) It should be realistic, feasible and unambiguous.

AH

8) It should be prepared in consultation with all stakeholders that will be affected by the plan
R
D

1.9.2.3 Types of plans

N

a. Long term plans

SA

They are plans that cover a long period of time usually for more than five years. They are
mainly concerned with broad objectives which a business or department hopes to achieve.
They are usually prepared by senior management of the business.
b. Short term plans
They are plans that cover short periods. They are operational in nature since they outline
specific activities necessary to achieve the long term objectives. They are normally
prepared by departmental managers and senior supervisors.
c. Strategic plans
They are plans that are concerned with the future of the business in relation to the effects of
the external environment ie the PESTLE factors ie political legal factors, economic factors,
social cultural factors, technological factors, ecological factors etc. They are primarily the
responsibility of the top management of the organization.
62
 d. Tactical/operational plans
These are plans at departmental level that deal with specific steps on how strategic plans
should be achieved. They are prepared in much more details and are usually the
responsibility of middle level managers who consult with other line mangers before making
commitment to top management.

1.9.2.4 Reasons/importance for planning.

As it is commonly cited ‘failure to plan is planning to fail’. The following are some of the reasons
why planning is important:
1) To coordinate efforts of the employees- the plans prompts the manager to coordinate the
efforts of the employees to carry out the plans.

S
2) It guides decision making – it helps to guide decision making within certain boundaries to

ES
achieve objectives.

N
3) For effective utilization of resources- the methods, inputs cost and skills in planning for
PI
various activities are determined and this leads to more effective utilization of resources.
AP
4) To promote corporate image- organizations need to plan ahead when they want to make
themselves better understood and known by the public.
H

5) To face competition- as the economy of a country grows, more firms will enter the market
AH

offering similar products. This will out of necessity require a business to continually plan
R

for its marketing strategy in order to survive competition.

D

6) To project profitability- since profits are the basis of all company operations, they have to
N

be estimated in advance by making plans.

SA

7) Provides a sense of direction-planning saves an organization from drifting and avoids

aimless activities by directing human efforts into actions that contributes towards
accomplishments of goals.
8) Reduces uncertainty and risks- it enables organizations to predict future events and changes
and make due provisions for them.

1.9.2.5 Limitations of planning

a. Planning is based on forecasts which are never 100% accurate. Thus if reliable
forecasts and data are not available then planning becomes unrealistic.
b. Planning is a time consuming and expensive process. Time, effort and money are
required in the collection and analysis of data and in the formulation and revision of
plans.
63
 c. Plans are sometimes rigid and inflexible and this may discourage individual initiative
and freedom e.g. managers are tied to comply with budget limits even when there is
dire need to spend more,
d. Sometimes planning may cause delay in decision making ie a manager may be tied
down by rules and procedures when there is need for quick decisions.
e. Plans may create a false notion that all is well when plans are in place while in reality
management has to continuously revise the plans and regularly check on their
execution.
f. Powerful people and other vested interests may exert pressure to ensure that the plans
serve their own interests.
g. The effectiveness of planning may be affected by external forces which are beyond the

S
control of those responsible for preparing plans e.g. government controls, economic,

ES
technological and other external factors may impede implementation of plans.

N
Review questions
1. What is management?
PI
AP
2. Define planning giving its importance
3. Describe the managers tasks in planning
H

4. Describe types of operational plans giving relevant examples

AH

5. As a manager of a dairy enterprise discuss the types of plans you would put in place
R

Further readings
D

1. Kibera, F.N.(1996). Introduction to business Kenyan perspective. Nairobi Kenya literature

N

bureau.
SA

2. Sooks, H.L.and Williams, J.C. (2005). Management and organizations

3. Bruce R.J. (1996). An integrated approach to business studies.songapore.Longman.
4. Saleemi N.A.(1986) Principles and practice of management. Nairobi. Saleemi publishers

64
 LECTURE TWELVE
ORGANISING FUNCTION
1.22 Introduction
In this lecture you will learn about organizing as a function of management and the activities
involved in it.
Lecture objectives
1. Define the term organizing
2. Outline the activities involved in carrying out organizing function
3. Describe the process of planning
4. Discuss types of structures

S
ES
1.10.1 Overview of organizing
It is concerned with giving specific tasks and positions to employees, establishing departments,

N
PI
delegating authority and generally establishing organizational structures. The purpose of the
AP
organizing function is to achieve co-ordinated efforts through the design of structure, tasks and
authority relationships. In actual fact the process of organizing culminates in an organizational
H

structure.
AH
R

1.10.2 Activities involved in organizing

D

1. Identify and define the work to be done

N

2. Breakdown the work into duties

SA

3. Group the duties into positions

4. Define position requirements
5. Group the positions into manageable related units ie departments
6. Assign accountability and extent of authority.

1.10.3 Principles of organizing

a. Every employee should be answerable to only one supervisor. An employee is likely to be
frustrated and confused when he/ she receives instructions from different supervisors.
b. Authority to the employee should commensurate with their responsibility. A worker cannot
carry out his duty efficiently if he does not possess sufficient authority for the execution of
the work

65
 c. The span of control for each officer should be appropriate to the circumstances. The span
of control refers to the number of subordinates answerable to an officer. Such span of
control can be determined by factors such as education, experience, nature of work etc.
d. Best use should be made of specialization
e. The number of the levels of management should be reduced to a minimum to make both
the upward and the downward coordination easier.
f. Best use should be made of available resources including not only manpower but also
machines and equipments
g. Organization should be flexible and capable of adapting to changes in circumstances.

1.10.4 Process of organization

S
The process of organizing involves a series of steps which must be undertaken to create a logical

ES
structure of authority- responsibility relationships. These steps are as follows

N
a) Determination and division of work
PI
This is determining the tasks required for the accomplishment of established objectives.
AP

The tasks are then divided into activities such as financing, marketing, purchasing,
H

personnel e.t.c.
AH

b) Grouping activities
The various activities identified above are then classified into appropriate departments and
R

divisions according to their similarities.

D
N

c) Assignment of duties
SA

The individual departments are then allocated to different positions and individuals (who
are responsible for the specific job assigned to them) according to their area of
specialization or abilities. Clear definition of the responsibility of each is necessary to
avoid duplication of work and overlapping of efforts.
d) Definition of authority
Once the duties and responsibilities of every individual have been fixed, the individual
must be given the authority necessary to carry out the duties assigned. A chain of command
is created from top to bottom through successive delegations of authority.
NB: The process of organizing results in formation of departments and organizational structure.

66
1.10.5 Organizational structures
A structure is:
 A pattern of relationships among positions in the organization and among members
of the organization. It defines tasks & responsibilities work roles & relationship &
channels of communication.
 It is a formal pattern of relationships among positions in the organization designed
by management to link the tasks of individuals and groups in achieving
organizational goals. It shows the number of levels in the hierarchy and the span of
control of managers and supervisors.
 It is a channel of authority and communication showing/describing formal working
relationship among people.

S
 It identifies the grouping together of individuals into departments and of

ES
departments into the total organization.

N
Types of organizational structures
PI
AP
There are different organizational structures that can be adopted by business units. They include:
a. The line or military organizational structure
H

b. Line and staff organizational structure

AH

c. Functional organizational structure

R

d. Matrix organizational structure

D
N

Line/Military organizational structure

SA

It is a type of structure where authority is vested upon the superior only. The superior issues orders
& instructions which must be complied with by the subordinates. Every person in the organization
is supposed to be accountable to only one person who delegates authority & assigns duty to him. A
line structure can be presented as below:

67
 Board of directors

Managing directors/CEO

Manager

Supervisor

Shop floor worker

S
ES
Advantages of military structure


N
It is simple to establish & can easily be understood.
 PI
It ensures better discipline in an organization because everyone knows to whom he/she is
AP
responsible.
 There is a clear cut identification of authority & responsibility relationship.
H

 It facilitates unity of command ie orders come from a single person

AH
R

Disadvantages of military structure

D

 There is concentration of authority at the top level which may over burden the top
N

executive resulting into inefficiency.

SA

 Practically there is no communication from bottom-up which may demotivate the workers.
 It is always suitable to small organizations as compared to large ones.

Line and staff organizational structure

This is an organizational structure in which there are two authorities, one with line authority and
the other with staff authority. The person with line authority has a right to plan & make various
decisions in the organization & carry out general administration of the organization. The person
with the staff authority is a specialist in his area and has the right to give advice to the line
authority. A line and staff structure appears as below:

68
 Board of directors

Chief executive officer (CEO)

Assistant CEO

HRM Finance marketing general risk and audit Procurement legal advisor
Manager manager manager manager manager manager

Division manager

Represents staff authority

S
Represents line authority

ES
N
Advantages of line and staff structure PI
AP
 The line manager enjoys the benefits of specialized knowledge of the staff specialists.
 Many issues that are poorly handled by the line manager can easily be identified by the
H

specialists.
AH

 The staff specialist relieves the manager the bother of handling specialist functions of the
R

organization.
D

 The staff specialist helps the executive in making better decisions by providing them with
N

adequate information at the right time.

SA

Disadvantages of line and staff organizational structures

 Line and staff organization structure often leads to suspicion and conflict between the two
types of authority. eg
 The staff manager may try to surpass the chain of command since he may equate himself
with the line manager.
 The staff manager may not give right and adequate advice to the line manager portraying
the line manger as inefficient.
 The staff manager takes advantage of the ignorance of the line manager to steal credit in
the event of work performed well.
 The staff manager may feel that inadequate authority is delegated to him.

69
  The line manager may underutilize the specialized knowledge of the staff manager.
 The line manager may not recognize the advice given by the staff manager.

Functional organizational structure

It’s a type of organizational structure in which positions are grouped according to the main
function or specialized areas. It is the most common form of organizational structure in which
employees are put together according to similarities in tasks & skills to form departments. e.g.
sales people are allocated in marketing department, accounting people in finance department. This
means that the duties are grouped according to department e.g. finance department, procurement,
personnel department. The success of one department depends upon the success of the other. A
functional structure is as below:

S
ES
Board of directors

N
PI
AP
Managing director/CEO
H

Human Resource finance marketing production

AH

Department Department Department Department

R
D

Personnel officer accountant sales men technical

N

Messenger accounts clerk sales representative casual

SA

Advantages of Functional organizational structure

 It boosts efficiency through specialization because employee can concentrate on fostering
specialties within a single function. This helps in achieving organizational objectives.
 The functional managers have expertise in functional areas which make them more
efficient.
 The structure makes it easy to make future executives.
 It reduces the burden of the top executive.
 Skill development and training is possible due to similarities of skills & knowledge.
 It leads to clear career path within particular functions giving employees encouragement to
develop their expertise..

70
  It eliminates costly duplication of work.
 It leads to efficient use of resources because it is fairly easy to shift individuals from one
project to another as needed when they work in the same department.
 Economies of scale are possible because large amounts of work can be handled efficiently
when individuals specialize.
 It facilitates ease of coordination within departments since the activities are related in one
way or another.
 It increases the potential for developing specialized technical

Disadvantages of Functional organizational structure

 Workers may become less innovative because they focus mainly on departmental goals

S
rather than overall organizational goals.

ES
 It may be more difficult to coordinate the activities of different departments which are all

N
interdependent. PI
 Provides a fairly narrow training ground for managers because they tend to move up within
AP

one function and hence have only limited knowledge of other functions.
H

 It may be difficult to measure the performance of a particular department because various

AH

functions have a hand in the organizational performance

 The functional managers tend to create boundaries among themselves thinking only in
R

terms of their department and not the organization as a whole.

D
N

 There is lack of coordination among functional managers and this leads to delays in
SA

decision making.
 Functional organization at times violates the unity of command since the workers are
accountable to a large number of supervisors.

Matrix organizational structure

This kind of structure is adopted by organizations that operate other projects alongside their core
business. It combines the authority of functional managers & project managers in that the projects
draw their human and non-human resources from various functional departments in the main
organization with a project manager coordinating the activities of the project. Employees deployed
to the project are accountable to both the functional manager in the main office & the project
manager.
Matrix structure is common where the following conditions exist

71
 a. The work to be performed has a definite starting date and a definite completion date
b. Costs constraints are a critical factor
c. The large number of specialized skills on the project requires coordination for the
completion of the project
d. The activity to be performed is in some way new or unfamiliar to participants.
A typical matrix structures looks like below

General Manager/Managing Director

_______________________________________________________

S
Chief designer production manager finance manager purchasing manager

ES
Project x

N
Project y
PI
AP

Project Z
H
AH

Advantages of matrix design

R


D

It motivates the workers who are appointed at the project level.

N

 It adds diversity & flexibility to work.

SA

 Subordinates/workers are able to gain varied experience.

 It leads to optimum use of resources as organizations resources are shared between the
functional department in the main company and the project.

Disadvantages of matrix design

 It violates the principle of unity of command since orders and instructions have to be given
by different managers.
 The project may be too expensive to the organization because they require a lot of financial
& human support.
 The structures require highly competent staff which can work with little supervision.
 It is complex to understand.

72
  There is duplication of work because some of the roles performed in departments are also
carried out at the project level resulting in wastage.
 It demotivates the workers when the project comes to an end.
 Conflicts may arise over division of responsibility between project managers and functional
managers.

Essential requirements of a good original structure

 It must be organized for the business performance e.g. the more direct & simple the
structure the more efficient it is.
 It should contain the least possible number of management levels i.e. the chain of
command should be as short as possible. Long chains of command disrupt mutual

S
understanding, increase stress and make t difficult to develop future managers.

ES
 It should make it possible the training of future top managers by giving employee

N
autonomy to carry out managerial responsibilities.
PI
 It should enable decentralization of authority where power & authority is shifted from top
AP
to bottom levels.
H
AH

Importance of a good structure

 It encourages productivity/ performance & economic efficiency.
R

 It affects morale & job satisfaction of the workforce.

D

 It encourages willingly participation of members of an organization.

N

 It enables allocation of responsibilities.

SA

 It facilitates decision making.

 It enables coordination & control.

1.10.6 Organizational charts

An organization chart is a diagram in a mere piece of paper that shows the organizational structure
of a company. An organizational structure is therefore reflected in an organizational chart. The
purpose of an organizational chart is to show all concerned as to what is the organization structure,
how the company has been divided into departments and departments into sections and most
importantly what responsibility and duties are assigned to each officer.

73
Purpose of organization chart
a. It defines the spheres of authority for the supervising staff
b. It shows the various departments, departmental sections and their relationship to one
another
c. It shows the chain of command and delegation of authority
d. It portrays the span of control i.e the number of people who are under one supervisor or
manager
e. It is useful when explaining to new members of staff, the type of organization they are to
work in and their part in it

Advantages of organization chart

S
a. By reflecting the coordination among the various department it improves the efficiency of

ES
the organization

N
b. It indicates the lines of communication both upwards and downwards
c. It shows the line of command
PI
AP
d. It makes clear the responsibility for work at different levels
H

Disadvantages of organization charts

AH

a. It shows who is responsible for making certain decisions which may cause delays in actions
R

if the said authority is absent. The delays can result in great losses to the organization
D

b. The chart indicates that the responsibilities of different levels have been divided on
N

permanent basis. It becomes difficult to incorporate new changes

SA

c. The rivalry among different departments may be harmful to the organization

1.10.7 Departmentation
It is an element of organizing function. It is a means of dividing large and complex organizations
into small and flexible administrative units. It involves grouping of activities and employees into
departments in order to accomplish business goals.

Reasons/ Importance of departmentation

1. Specialization- It enables a business to take advantage of specialization and division of
labour in which every department performs one major function of a business.
2. Expansion of the organization- grouping of activities and personnel in a department makes
it possible to expand an organization to an indefinite degree.
74
 3. Autonomy –Departmentation results into division of the enterprise into semi- autonomous
units where every head of department is given adequate freedom. The feeling of autonomy
provides job satisfaction and motivation which in turn leads to efficiency.
4. Individual are held responsible for performance- It enables each person to know their
specific roles and the responsibility for results. Therefore roles are well defined with each
individual being held accountable for performance.
5. Basis for appraisal- Appraisal for managerial performance becomes easier when specific
tasks are assigned to departmental personnel.
6. Management development-It gives an opportunity to train and develop executives by
giving departmental heads an opportunity to take independent decisions and exercise
initiative.

S
7. Facilitates administrative control- Grouping of activities and personnel into manageable

ES
units facilitates administration of the whole organization.

N
Basis/types of departmentation
PI
AP
a. Functional departmentation
Each major functional area of an organization is organized as a separate department.eg
H

production department, sales department, finance department, HRM department, sales

AH

department, IT department, research and development department etc

R
D

b. Product departmentation
N

Every major product is organized as a separate department. In this case each product
SA

department looks after the production, financing and marketing of the product. It’s
common in big companies with diversified product lines.

c. Geographical or territory departmentation

It occurs where there are many branches of the same organization spread all over a region,
country, and town or even abroad. It’s common in large scale business organizations whose
activities are geographically spread.

d. Customer departmentation
Activities are grouped according to the type of customer and each department specializes in
serving a particular class of customer. It is common in the banking sector.

75
 e. Departmentation by Process or equipments
Activities are grouped on the basis of production processes or equipments used.eg in a
textile manufacturing factory there may be ginning department, spinning department,
weaving department. Dying department etc

f. Time departmentation
Activities are grouped on the basis of when they are performed. Eg for an industry
operating 24 hours, the day and night shifts are treated as separate departments

Review questions
1. Define the term planning

S
2. Describe what managers do when carrying the organizing function as part of their job

ES
3. Explain the matrix type of organizational structure showing its merits and demerits

N
4. Distinguish between an organizational structure and a chart
Further readings
PI
AP
1. Kibera, F.N.(1996). Introduction to business Kenyan perspective. Nairobi Kenya literature
bureau.
H

2. Sooks, H.L.and Williams, J.C. (2005). Management and organizations

AH

3. Eyre, E.C. (1994). Mastering basic management

R

4. Bruce R.J. (1996). An integrated approach to business studies.songapore.Longman.

D

5. Saleemi N.A.(1986) Principles and practice of management.Nairobi. Saleemi publishers

N
SA

76
 LECTURE THIRTEEN
FUNCTIONS OF MANAGEMENT
(STAFFING, LEADING AND CONTROLLING FUNCTION)
1.23 INTRODUCTION
In this lecture you will learn about staffing, leading and controlling functions of management.
Lecture objectives
5. Define the terms staffing, leading and controlling
6. Outline the activities involved in carrying out staffing, leading and controlling functions.

1.11.1 Staffing function

S
This is that part of management function which is concerned with the management of the

ES
organization’s most valued assets ie people working there and who individually and collectively

N
contribute to the achievement of the company’s objectives. In staffing the manager chooses the
PI
right people for the available vacancies in terms of skills, knowledge and attitudes.
AP

1.11.1.1 Functions Activities/ Practices of Human resource Management

H

The following are some of the activities involved in Human resource management:
AH

1. Recruitment and selection

R

2. Training and development

D

3. Performance appraisals
N

4. Reward management
SA

5. Employee relation/ industrial relations

6. Health and safety of workers
7. Motivation of workers

1. Recruitment
It is the process of identifying prospective employees and encouraging them to apply for a given
job. It is the first part of the process of filling a vacancy and it involves
1. Examination of the vacancy
2. Sources of suitable candles
3. Making contacts with those candidates
4. Attracting applications to those positions.

77
2. Selection
This is the process of placing individual whose knowledge, skills and abilities match the needs of
the organization. It comes after recruitment and is usually through interviews.

3. Training and development

Training is planned and systematic processes of changing people behavior through organized
learning programs to enable an individual acquire skills required to do his/her work effectively. It
is normally meant for non-managers. Development involves improvement of a person’s ability and
profession in the work place through the provision of learning and education experiences. It is
normally meant for managers.

S
4. Performance appraisal

ES
This is a final assessment and rating of individuals by the manager usually on an annual review

N
meeting. It is simply the process of evaluating the performance of an employee. It is used as a
basis for making training and pay decisions.
PI
AP

5. Reward management
H

It is concerned with formulation and implementation of policies aimed at rewarding people fairly
AH

and equitably in accordance to the valve they bring to the organization and thus help the
R

organization to achieve its strategic goal

D
N

6. Employee relations industrial relations

SA

Employee relations consist of all those areas of human resource management that involve
relationship between employer and employees and between employees themselves and also
include issues related to agreement of terms and conditions of employment. Industrial relations are
concerned with the dealings between management and trade unions on issues related to industrial
disputes.

7. Motivation of workers
It is concerned with what should be done to achieve and sustain high level of performance through
people. This means giving close attention to how individual can be best motivated through such
means as incentives and rewards.

78
Health and safety of workers
This is concerned with protecting employees and other people affected by what the company
produces and does against the hazards arising from their employment or links with the company.
The safety programmes will deal with the prevention of accidents and minimizing the resulting
loss and damage to the workers.

9. Separation of workers
This is concerned with the policies that relate to the exit of the employee form the organization. It
will therefore be concerned with resignation, retirement, lay offs and dismissals of employees.

1.11.2 DIRECTING / LEADING FUNCTION

S
This is the process of influencing people so that they perform assigned tasks willingly and in an

ES
efficient and effective manner. It involves getting people together and asking them either through

N
command or motivation to work willingly and effectively for the achievement of the organization
goals.
PI
AP

1.11.2.1Activities involved in directing or leading.

H

a) Motivation – employees should be inspired to take desired action and reinforce such action to
AH

be repeated willingly.
R

b) Communication- Telling / passing information to people so that they are aware of what is
D

expected from them

N

c) Coordination- unifying various efforts in the most effective harmony to create team work.
SA

d) Participation -Giving collective responsibility and encouraging participation

e) Inducing change- stimulating creativity and innovativeness by encouraging new ideas from
employees..

1.11.3 CONTROLLING FUNCTION

This is the process of setting standards and checking to see how actual performance compares with
these standards and taking collective actions when there are deviations. It involves regulating
organizational activities so that actual performance conforms to expected organizational standards
and goals. In the controlling process managers set up control systems; a control system is a set of
mechanisms designated to increase the probability of meeting organizational standards. It may be
developed to regulate an area that a manager considers important e.g. quality of services and
products, profit margins, client satisfaction, timeliness of deliveries, quality procedures etc.
79
1.11.3.1 Role of controls
Control assists managers in the following ways:
a) Coping with uncertainties- Uncertainty arises because organizational goals are based on
future estimates yet the actual often differs from such forecasts. Environmental factors
often bring about changes. Managers should therefore develop control system to monitor
specific activities and react swiftly to environment changes.
b) Detecting irregularities-Control helps managers detect undesirable irregularities such as
poor quality, cost overruns or rising personnel turnover. Early detection of such
irregularities helps prevent minor problems from mushrooming into major ones.
c) Identifying opportunities-Controls help highlight situations in which things are going on
better than expected thereby alerting management to possible future opportunities.

S
d) Handling complex situations-As organizations grow larger controlls enhance coordination.

ES
They help mangers keep track of various major elements to be sure that they are well

N
synchronized
PI
e) Decentralization of authority- Controls affords a manager an opportunity to appoint people
AP
at lower levels to monitor the progress of various organizational activities. He can therefore
foster decision making at lower levels in the organization but still maintain a hand on
H

progress of the same.

AH
R

1.11.3.2 Process/ activities involved in controlling

D

a) Establishing performance standards- these are targets against which the actual performance
N

is measure. It can be in terms of reduction in costs, timeliness, increasing profits etc Often
SA

standards are incorporated into the goals and help the employee to know what is expected
from them at the planning stage.
b) Monitoring results and measuring actual performance against set standards – for every
standard outlined the manager must be able to measure performance attuned. The means of
measuring performance may include; quantity and quality produced, money collected for
service rendered, amount of material used, profits made etc.
c) Identifying deviations- The actual performance is compared with the set standards and any
the deviation is established.
d) Providing feedback- where performance met or exceeded the standards set, employees
should be recognized for positive performance. Where the standards were not met all the
stakeholders should be involved in deciding the corrective actions.

80
 e) Taking collective action-When standards are not met managers must carefully assess the
reasons why and take corrective action eg check standards if they were realistic and revise
them, find out if the resources to do a job were availed, reallocate duties etc.

Review questions
1. Keith is the general manager of visionary enterprises limited. The organization has not
been optimizing the resources allocated to them. After a thorough investigation Keith has
traced the poor performance to lack of poor control systems. As a consultant explain to the
management committee what constitutes a good control system
2. Discuss critical areas when a manager is leading employees
3. Explain the main activities carried by a staffing officer in any organisation.

S
ES
Further readings

N
1. Kibera, F.N.(1996). Introduction to business Kenyan perspective. Nairobi Kenya literature
bureau.
PI
AP
2. Armstrong, M. (2006).A handbook of Human resource management practices (10th ed.).
London: Kogan page.
H

3. Desler, G. (2003). Human Resource Management. (9th Ed.).New Jersy: Prentice Hall.
AH

4. Sooks, H.L.and Williams, J.C. (2005). Management and organizations

R

5. Eyre, E.C. (1994). Mastering basic management

D

6. Bruce R.J. (1996). An integrated approach to business studies.songapore.Longman.

N

7. Saleemi N.A.(1986) Principles and practice of management.Nairobi. Saleemi publishers

SA

81
 LECTURE FOURTEEN
POWER AND AUTHOITY
1.24 INTRODUCTION
In this lecture you will learn about types and sources of power and authority
Lecture objectives
1. Distinguish between power and authority, accountability and responsibility, centralization
and decentralization of authority
2. Discuss the sources of power and authority
3. Define delegation and its importance in management

S
1.12.1 Concept of power and authority

ES
Authority- is the right to make decisions, carry out actions and direct others in matters related to
the duties and goals of an organization ie it is the right to ask other people to do something. No

N
PI
manager can get things done without authority and it is therefore seen as key to a manager’s job
AP
and the binding force in an organization.
Power – is the ability of a person to control or influence the behavior of other people with or
H

without their consent ie it is the ability to make other people do something. A manager should
AH

possess some degree of power to be able to exercise authority eg A manager may have authority to
R

demand high performance from his subordinates but may lack ability to carry out this right since
D

he/she lacks power to induce or to force them to work. On the other hand an informal leader may
N

lack legitimate or formal authority to demand high performance from co-workers but can possess
SA

some power to influence them to produce. A distinction can be made between authority & power
as follows:
AUTHORITY POWER
Authority vested in a position Power is a personal trait or quality

Authority is associated with managership Power is associated with leadership

It is a legal right It is not a legal right

NB Managerial effectiveness increases only when the manager possesses both authority and
power.

82
1.12.2 Sources of authority
There are three schools of thought regarding the source from which authority originates.
1. Formal authority theory
2. Acceptance theory
3. Competence theory

Formal authority theory

This school of thought believes that all authority originates from the formal structure of an
organization ie from the position one occupies in the organization.

Acceptance theory

S
According to this theory the real source of managerial authority lies in the acceptance of the

ES
superior orders by the subordinates. ie authority can be exercised by a superior on his subordinates

N
only when the subordinates accept the decisions of the superior. It is based on the believe that
PI
subordinates are free to accept or reject the formal authority of a manager. They will accept orders
AP
if they feel that the advantages of acceptance are greater than the disadvantages of non-acceptance.
A subordinate will accept the authority of his superior because of the following:
H

1) He can earn the approval of or appreciation of his fellow colleagues and that of
AH

management
R

2) To contribute to the attainment of enterprise objectives

D

3) As a response to the leadership qualities of his superior

N

4) He feels obedience is in accordance with conscience or moral standards

SA

Competence theory
According to this theory authority flows from the technical competence of a leader. This means
that subordinates accept authority of a manager by virtue of his knowledge, skills and competence.

1.12.3 Sources of power

A manager can derive power from the following sources:
1. Position power/bureaucratic power
This is power derived from the position one holds in an organization. The position gives
the person the legitimate right to exercise power over staff who in turn will readily
acknowledge this legitimate power.

83
 2. Reward power
It is derived from one’s ability to grant or withhold rewards. The staff will do as the
manager asks because he/she will reward them in some way. Managers can gain reward
power by being in managerial positions that control organizational resources.

3. Coercive power
It is power derived from the ability to force other people to act against their wishes. It is
that power vested in the ability of a manager to punish subordinates eg by firing them,
withholding or withdrawing promotions and pay raises, keeping them in undesirable jobs
etc. It can be used legitimately or illegitimately e.g legitimate coercive power can be used
against unproductive, inefficient or disobedient persons. It results in respect for the

S
manager. On the other hand illegimate coercive power is used unfairly or wrongly. eg when

ES
a manager dismisses or reprimands an employee because of personal grudges. It results in

N
unpopularity of the manager.
PI
AP
4. Expert power
It is power derived from having expert knowledge & information that is needed but not
H

held by other people. Managers exercise expert power over their subordinates because they
AH

have more job experience and knowledge than their subordinates.

R
D

5. Charismatic power
N

This is power derived from one’s special personal qualities such as public speaking ability,
SA

interpersonal style or high moral standards. People are attracted to the charismatic persons so
strongly that they want to imitate and be like them. For one to be considered a charismatic leader,
he/she must have a style that is unusual and pleasing.

6. Association power
It is power derived from association with someone who has power and can thus influence the
person with power e.g. Personal secretaries and PA’s (Personal assistants) possess association
power. Many people use someone close to the power to be able to cut through the complex
bureaucratic processes and have access to the source of power.

84
1.12.4 Centralization and decentralization of authority
It is the concentration of authority, power and decisions making at one point or in a few hands.eg
until recently the government functions in Kenya were centralized at the main city.

Advantages of centralization of authority

a) It promotes uniformity of decisions
b) It promotes integration throughout the organization
c) It facilitates personnel leadership

Disadvantages of centralization of authority

a) It increases the burden at the top levels of management

S
b) Decisions are made not at the point where the work is being done leading to delays in

ES
decision making

N
c) Quality decisions may not be arrived at because the managers at the top may be so busy to
think about the problems in details.
PI
AP
d) Centralization does not allow wider participation in decision making.
H

Decentralization of authority
AH

It refers to dispersal/devolution of decision making to the lower levels of the organization.

R
D

Advantages of decentralization of authority

N

a) Decision making process is transferred to the lower levels of management leaving the top
SA

managers in a position to concentrate on more important issues.

b) It results in quick and timely decision making since managers at lower levels are not
overburdened and as a result have more time to make decisions.
c) It leads to development of managers and prepare workers for top positions.
d) It motivates the workers in an organization because they are involved in the process of
decision making.
e) It leads to effective control and supervision.

Disadvantages of decentralization of authority

a. The principle of unity of command is violated- according to these principle an employee
b. Should receive orders from and be accountable to only one superior.
c. It results in inconsistencies in decision making
85
 d. It increases the administrative expenses as a result of the monetary benefits given to
officers to whom authority has been decentralized
e. It brings about a problem in coordination as decisions are made at different points.
f. The organization may lack able managers to run the decentralized units

1.12.5 Delegation of authority

Delegation is a process in which a superior assigns part of his authority to a subordinate in certain
defined areas and make him responsible for results. The main features of delegation are as follows:
1. Delegation occurs when a manager grants some rights to a subordinate
2. A manager cannot delegate authority unless he himself possesses the authority

S
3. A manager does not delegate all his authority to subordinates - he transfers only part of his

ES
authority

N
4. Delegation does not imply reduction in the status of a manager
PI
5. The manager retains the right to exercise control over the subordinate
AP

6. A manager can reduce, enhance or take back the delegated authority

H

7. The manager still remains responsible for the delegated work

AH

Reasons/importance for delegation

R

Need for delegation arises due to the following factors:

D
N

1) Through delegation an executive can transfer routine work to subordinates and thereby
SA

concentrate on more important tasks. This also reduces his workload.

2) Delegation enables the manager to benefit from the specialized knowledge and expertise of
persons at lower levels.
3) Delegation pushes authority near the point of action. As a result decisions can be taken
more quickly and without referring to higher authorities
4) Delegation improves the motivation and morale of subordinates by satisfying their need for
recognition
5) Delegation is a means of training and developing future executives by giving them an
opportunity to acquire skills through experience.
6) Delegation facilitates the growth and expansion of the organization. In the absence of
delegation a firm cannot expand and grow.

86
Reasons why managers fail to delegate
1) A manager may have a feeling that his subordinates are not capable enough to do any work
without close supervision.
2) An incompetent manager may avoid delegation because doing so will expose his
incompetence and disorganization.
3) The manager may have developed personal contacts with all aspects of work and therefore
may avoid delegation to sustain the deep seated habit pattern.
4) Some managers feel they are indispensable and want others to realize that they are
important and must depend on him for decision making.
5) Since the manager remains accountable for the actions of the subordinates he may avoid
the risk of leaving decision making to the care of subordinates.

S
6) A manager may feel delegation of authority will undermine his authority and deny him the

ES
importance enjoyed by him as the centre of authority.

N
Why subordinates do not accept delegation
PI
AP
1) Fear of risks and responsibilities associated with delegation. Subordinates may consider it
safer to carry out decisions handed down to them by superiors than to make decisions
H

themselves.
AH

2) Fear of criticism for making mistakes

R

3) Fear that adequate information and resources may not be availed to them to carry out their
D

decisions.
N

4) Lack of confidence in their ability to discharge new responsibilities.

SA

5) If delegation of authority is not accompanied by suitable incentives,

1.12.6 Responsibility and accountability

Responsibility
It is the obligation of a subordinate to carry out the duties assigned to him. By accepting delegated
authority, a subordinate incurs a responsibibility to use the authority as desired by the delegation

Accountability
It is the obligation of the subordinate to render a formal report (an account) to the superior on
discharge of his responsibility. In other words it is to be responsible for ones conduct in respect to
obligation fulfilled or unfulfilled.

87
Review questions
1. Some managers in certain organizations in Kenya what could be the possible source of
their powers?
2. Managers sometimes find it difficult to delegate part of their duties to subordinates. Why is
this so?
3. Discuss the pros and cons for both centralization and decentralization of authority

Further readings
1. Kreitner R. Kinicki A and Buelens M.(1999). Organizational behaviou. England, McGraw
hill
2. Saleemi N.A.(1986) Principles and practice of management. Nairobi. Saleemi publishers

S
ES
N
PI
AP
H
AH
R
D
N
SA

88
 REFERENCES
1. Armstrong, M. (2006).A handbook of Human resource management practices (10th ed.).
London: Kogan page.
2. Bitte, L.R.et al (1984). Introduction to business: Business in action 4th ED., London, Letts
Educational Ltd.
3. Bruce R.J. (1996). An integrated approach to business studies.songapore.Longman.
4. Carpenter G.C (1987). The business success formula. Heinemann.
5. Danks, S.(1996), Business studies 3rd Ed. London, Letts Educational Ltd.
6. Desler, G. (2003). Human Resource Management. (9th Ed.).New Jersey: Prentice Hall.
7. Eyre, E.C. (1994). Mastering basic management
8. Gichira, R.N.(2000). Commerce for Kenya. Nairobi. Macmillan Kenya limited

S
9. Hammond, S. (2000), business studies. Longman crop limited

ES
10. Kibera, F.N.(1996). Introduction to business Kenyan perspective. Nairobi Kenya literature

N
bureau.
PI
11. Kreitner R. Kinicki A and Buelens M.(1999). Organizational behaviou. England, McGraw
AP
hill
12. Mark, A. (19870). Business studies, Edinburg. W & R chambers
H

13. Rukunga (1999). Excelling in Business, Nairobi. Focus

AH

14. Rwabutoga,.G.R. and Spencer( (1986). A text book of commerce. Nairobi. Heinemann
R

Kenya Limited.
D

15. Saleemi N.A.(1986) Principles and practice of management. Nairobi. Saleemi publishers
N

16. Sooks, H.L.and Williams, J.C. (2005). Management and organizations

SA

89