CHAPTER I

CONCEPT OF ENTREPRENEURSHIP

Objectives
By the end of this chapter the student should be able to:
 Analyse the history of entrepreneurship in Zimbabwe
 Define entrepreneurship
 Describe the characteristics of successful entrepreneurs
 Discuss the roles of SMEs in the economy

History of entrepreneurship in Zimbabwe

Introduction

Zimbabwe has for centuries had strong entrepreneurial abilities. There has been evidence of
all industries stretching from primary, secondary and tertiary industry. Agriculture, mining,
trade, manufacturing industries were there before the 19 century. The only argument could
th

then be the scale and the technology level. In fact, the history of entrepreneurship in
Zimbabwe dates back to the civilization era. In the Mutapa and Rozvi States, there were
successful business initiators/ owners who became very wealthy.

By about 1200 to 1890 AD African Entrepreneurs on the plateau between Limpopo and
Zambezi Rivers became more advanced due to iron technology. The pre-colonial
entrepreneurs included the iron Smiths (boiler makers) or fitting and turning craftsmen
(mhizha), potters, farmers (hurudza), hunters (hombarume), among others.

As an evidence to disagree with the explanation of African history that the pre colonial
African societies were primitive and unchanging, and therefore any important changes were
brought by outsiders, archaeologists have found pottery and iron tools at Great Zimbabwe
and in other different parts of the plateau between Limpopo and Zambezi Rivers (Zimbabwe).

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.
Entrepreurship in the Primary industry

Farming
There were great farmers during the pre-colonial era. These were known, in shona, as
hurudza. These great entrepreneurs produced not only for their consumption, but for trade
and other fellow citizens. Crops like millet, rapoko, ground nuts, round nuts were grown.
That was crop farming. Animal farming was also popular. Great entrepreneurs could own as
many as 500 or more cattle. Goats and sheep were also kept. The cattle were a form of
wealth and could be traded or exchanged for jewellery and other commodities.

Mining
Zimbabweans have been great miners way before the arrival of the British in the 1880s.
Entrepreneur – miners extracted iron ore from the ground. Mining rights were given by the
King and his advisors. The minerals mined included gold, copper, iron, for instance.

Entrepreurship in the Manufacturing (secondary) Industry

There was a very successful value adding industry before colonization. The output from
agriculture and mining was processed. Great and useful items were made to serve the needs
of the people then.

Metallurgist and Iron smith (Mhizha)

Entrepreneur – metallurgists crushed iron ore and smelt it with very hot fire. At Great
Zimbabwe there is still evidence of clay furnace, forge and bellow. This smelting separated
the metal from the stone. As the pure iron cooled, it hardened again, and the village smiths
could hammer it into shape of hoes, axes and knifes. This was a revolutionary development
in the way of life of Africans.

These were the most skillful technicians, engineers, and business people who had the role of
processing, the iron, cooper, gold into useful products. The farmers needed hoes (mapadza),
axes (matemo) etc. The hunters needed spears (mapfumo), bows and arrows etc. Jewellery
such as golden necklaces was also needed by the wealthy people and the royal family. These
products could be traded to other kingdom for other products. The ironsmith were usually
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very wealth. These skilled artisans were entrepreneurs of the time in metallurgy... The iron
smith entrepreneurs were weapon and tool makers. The weapons and tools included arrows,
axes, knives, and hoes, among others. At first, iron was used only to make light arrow heads
and jewellery. Bigger items such as hoes and axes took much more time and labour

Entrepreneur – village smiths often paid tributes to their Chief or King with hoes, axe heads
and other items from iron. Hoes were used for special payments such as lobola.

The use of iron made it easier to hunt wild animals, till land and undertake domestic tasks.
People who lived near deposits became entrepreneurs in mining, smelting, and fabrication
(boiler making) and traded their products for other goods.

Entrepreneur-Potter
Some African Entrepreneurs were involved in pottery designing and making clay pots.

Brewing Industry
Millet, rapoko, and sorghum were processed and brewed into different beer flavors. As it is
today, after work villagers would gather and drink. This industry had strong competition and
successful entrepreneurs were known for exceptional brews and good customer care

Colonization and its effect on African entrepreneurship

Colonization negatively affected the Zimbabwean entrepreneurs and/or industrialists as well

as their governance.

Wars
When the British arrived, major wars were fought. These are the War of Dispossession or
Anglo-Ndebele War: 1893-4; First Chimurenga: 1896-7; and the 2 Chimurenga: 1966-79.
nd

These wars disturbed the smooth running of entrepreneurial activities by blacks in Zimbabwe
in so far as farming, mining, hunting, among others, were concerned.

Farming

The land Issue

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 When the British arrived they introduced the reserve system and translocated the native
Zimbabweans to infertile dry inhospitable areas.
 In 1894 the first reserves were set up in Shangani and Gwaai and this affected the entrepreneurs
in farming.
 After the defeat of the Ndebele, the settlers seized their 6 000 acres displacing many natives and
those displaced became fulltime labourers or squatters.
 The settlers started ill treating the Ndebele like they were doing the Shona.
 To solve their labour problems, the company introduced forced labour. The chiefs were
instructed to recruit able bodied men and hand them over to the BSAC as labourers- “chibharo”.
The Shona and Ndebele so enslaved ran away into the hills to escape. The presence of white
settlements contrary to the agreements entered into.
 Again this did not please the Ndebele who wanted to claim their ancestral land back as in the
reserves there was food shortage and starvation at times.

CATTLE

 Livestock was seized to force men to go to work for the settler

 Soon after the defeat of the Ndebele in the Anglo Ndebele war, the whites confiscated the
Ndebele cattle numbering about 250 000.
 This drastically reduced the Ndebele herd and the Ndebele wanted their cattle back as it was a
sign of prestige.

TAXATION
For example the Hut Tax of 1903 was enacted to raise revenue for settlers and to force
black men to go and work for the white men leaving their entrepreneurial activities. This
was also imposed to indirectly force the blacks to work in order to pay tax and it was
meant to increase the company income.

The Native Reserve Order in Council: 1898.

The Act created reserves in dry inhospitable areas. This affected the entrepreneurial activities of
blacks in agriculture. The Act also effectively removed all native chiefs who were anti- settlers
and replaced them with puppet settler administrators.

Land Bank acts: 1912.

The land bank act provided new white settler farmers with free tillage for five years and the same
period as grace before commencing to repay loans from the state owned Land bank.

The Morris Carter Commission: 1925.

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 Divided the whole country into agro-zones based on rainfall patterns from the highest rainfall
region 1 to the lowest rainfall region 5. Natives were trans- located to regions 4 and 5.

The Land Apportionment Act: 1930.In 1930 whites who numbered 50 000 were allocated 49
000 000 acres of prime land while blacks who numbered 1 000 000 were allocated 28 000 000

Acres of the worst land in regions 4 and 5. The translocation of blacks greatly affected their
farming entrepreneurial activities and was accompanied with untold violence and starvation and
malnutrition became endemic... The Land Apportionment Act of 1930 confirmed and legalized
the displacement of Africans that had been ongoing earlier.

Up until 1906, ninety percent of Southern Rhodesia’s agricultural produce came from black
farmers and many whites did not like this state of affairs. As a result, the Rhodesia Native
Labour Bureau (RNLB) stopped blacks from competing with whites and between 1908 and
1915, 1.5 million acres of the best land was taken from blacks and given to whites. New
boundaries were created to exclude fertile high rainfall areas from newly created reserves.
The latter were located in semi arid areas. Blacks in regions 1, 2 and 3 were made to pay
higher grazing fees and taxes. Since many could not pay they were removed and settled in
reserves which were situated far away from markets and rail and tarred motor roads. By the
1920s, 65% of the black population had been forced into reserves. This led to cycle of
poverty among Africans which persists up to today -2004.

The Land Husbandry Act: 1951.

The Act barred any African family from owning more than five herd of cattle or eight acres of land in
the communal lands.

The Tribal Trust Land Act: 1965.

The Act segregated the ownership of land between white areas and black areas. Natives could only
occupy land in communal lands without holding title to it. In Towns natives could only lease property
and no black man could own a house in town until after 1980.

The Land Tenure Act: 1969.

The act divided the land on racial lines and designated the best 45 000 000 acres as European land and
shared among the 250 000 whites and the worst 45 000 000acres was designated as native land to be
shared by the 5 000 000 blacks. The act also barred the races from encroaching in the other race’s
land.

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Mining
In mining, pieces of repressive legislation were put in place by the British upon their arrival.
For example Minerals and Mining Rights laws restricted the blacks from carrying on with
their entrepreneurial activities in mining. In fact, one had to secure a prospectus license for
mining of which it was difficulty for the blacks.
Hunting
Laws were also put in place in hunting. Wildlife Parks and Game Parks were created. It
became illegal to hunt in the parks. One would be treated as a poacher if found in the parks.
Thus, the blacks’ entrepreneurial activities were affected by such parks.

Post Colonial Era

During the colonial era black entrepreneurs were so limited. The reason being the inability of
blacks to access means of production. Technical Education was also biased. From 1980 we
saw the cropping of great entrepreneurs from the black populace. There were business Start
ups in the transport sector, retailing, manufacturing, farming, and many industries.

The government supporting schemes has been the major driver facilitating entrepreneurial
activities. Sources of funds be obtained from AGRIBANK, SEDCO, etc
From 2010 the Indigenization and Empowerment Act created a further empowering tool
leading to the starting up of business in areas like mining.
Zimbabwe remains one of the African countries with potential for vibrant entrepreneurial
activities.

Entrepreneurship and Patriotism

In Zimbabwe, as elsewhere in the world, patriotic entrepreneurs play a pivotal role in stabilizing and
resuscitating the economy. In other words, across the globe, nations largely depend on the
entrepreneurs in both the informal and formal sectors. Statistics, in Zimbabwe, shows that 3 000 000
(three million) people are employed in the informal sector (which is about 75% of the employed
people in Zimbabwe). This means that the remaining 25% is shared between the state-owned
enterprises and the private enterprises in the formal sector. Apart from being the largest employer, the
informal sector is the largest foreign currency earner, among other crucial roles it plays to the
economy.

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What is an entrepreneur?
An entrepreneur is the originator (initiator) of an enterprise (economic/business undertaking) in order
to satisfy an identified need or want profitably. That is a person who organizes and manages a
commercial undertaking especially one involving calculated commercial risks. In other words, an
entrepreneur is someone who identifies opportunities in terms of needs and wants of people and
mobilizes resources such as land, capital and labor to develop profit-making projects to meet the
identified needs and wants.
Successful entrepreneurs are not gamblers but take calculated and moderate risks in business. It
should, however, be noted that entrepreneurs believe so strongly in their business ideas that they are
willing to take full responsibility for developing them and to assume most of the risks should they fail.
What is entrepreneurship?
Various authors define entrepreneurship differently, but their definitions somewhat amount to the
same meaning.
The following are some of the definitions of entrepreneurship:
Appleby (1989) defines entrepreneurship as the process of bringing together creative and innovative
ideas and coupling these with management and organizational skills in order to combine people,
money and other resources to meet an identified need and thereby create wealth.
Whereas Appleby defines entrepreneurship as such, Stoner & Freeman (1992) view entrepreneurship
as seemingly a discontinuous process of combining resources to produce new goods and services.

Analysis of definitions
Both definitions do not fall short of the fact that entrepreneurship is a systematic and logical event as
shown by the term ‘Process’. That is entrepreneurship is not a haphazard activity. However, Stoner
& Freeman have moved a step further in an attempt to distinguish entrepreneurship from management
as they look at entrepreneurship as a discontinuous process. That is, it is a discontinuous phenomenon
appearing then disappearing until it reappears to initiate another change, unlike management which is
a continuous event.
The idea of ‘creative and innovative ideas,’ shows that the two definitions are complete. In business,
entrepreneurs should be able to come up with changes or new approaches, means, processes,
machinery, tools or techniques and new products in order to meet the needs of turbulent and dynamic
market environments. When a new venture is being contemplated on, risks arise involving
uncertainties which require initiativeness and process innovation.
Whereas Appleby clearly states, the idea of “management and organizational skills” in his definition,
Stoner & Freeman have remained silent about it. Organizational skills and management are crucial
for successful entrepreneurs. These relate to the ability of the entrepreneur to plan, organize, lead and

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control the organizational members’ activities and resources in order to achieve the stated goals of the
enterprise. In other words, the emphasis here is the ability to organize the other factors of production
or resources into creative combination for the purpose of producing goods and services in order to
satisfy human needs and wants profitably. The combination of resources is as follows:
Land
Labour
Capital
Entrepreneurship
Production of goods and services
For the business to be successful the ‘needs and wants’ should be identified first through a feasibility
study. Identification of needs and wants will indicate whether there is a potential market or not.
Thus, the viability of a business largely depends on an effective feasibility study to determine the
potentiality of the market. In this case, Appleby’s definition of entrepreneurship is clear about
identifying first the needs of customers, unlike Stoner & Freeman’s. Thus, for Appleby, new goods
and services should not just be produced for unknown customers as this is tantamount to wastage of
resources.

Moreover, Appleby’s definition appears to be more comprehensive than that of Stoner & Freeman as
he mentions the idea of ‘wealth creation’. The major aim of any business entity is to create wealth or
increase the owner’s equity by maximizing profit. Without profit maximization or creation of wealth,
the business will not survive.

Entrepreneurship distinguished from Intrapreneurship

Investor's or entrepreneurs are innovative and creative but not all of them are able to come up with
innovations, and as such they leave innovations to innovative managers or employees. An employee
or manager who is innovative and creative in an existing organization is known as an intrapreneur.
Managers or employees who carry out entrepreneurial roles are aware of opportunities and they
initiate changes to take full advantage of them.

The fundamental issue about the entrepreneur is that he/she has to have innovative ideas and
transforms them to profitable activities within an existing organization. In other words, he/she is an
initiator or originator of the commercial undertaking.

The word intrapreneurship is attributed to Gordon Pinchott an American who founded a school for
entrepreneurs to help managers from large corporations to take responsibility for creating innovations
and turning ideas into profitable reality.

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Relationship between entrepreneurship and Patriotism
Patriotism is the spirit of loyally supporting one’s nation. The major thrust of patriotism in the
context of entrepreneurship in an economy is to refrain from corruption and sabotage or subversion.
Thus, the relationship between entrepreneurship and patriotism is reflected in the following roles that
a patriotic entrepreneur plays to the nation that is the entrepreneur should have the spirit of:
a. Creating jobs without oppressing fellow citizen workers i.e. the entrepreneur will be expected
to provide good working conditions and be worker – centered.
b. Charging fair and affordable prices
c. Producing quality products which compare with international standards
d. Conserving natural resources
e. Practicing good ethics and social responsibility in business and the community
f. Generating foreign currency without externalizing it or taking it to the black or parallel
market for exchange, but to the registered banks for official exchange
g. Generating government revenue through paying corporate tax.
h. Playing supportive role to the giant firms by being subcontracted in construction,
manufacturing and distribution
i. Reducing anti-social activities such as theft, robbery, murder, promiscuity by creating
employment for self and other citizens
j. Reducing rural to urban migration by creating employment opportunities in rural areas

Entrepreneurial characteristics
In a new business, the entrepreneur is the most important person. The entrepreneur has the
responsibility to initiate, manage and see the success of the business. The success of a business
largely depends on the entrepreneurial or personal characteristics. The following are some of the
characteristics of successful entrepreneurs.

Action oriented
Successful entrepreneurs are action oriented, that is, they want to start producing results immediately.
The critical ingredient is getting off business and doing something. A lot of people have ideas but
they are a few who decide to do something about them now and not tomorrow.

Success oriented/optimism
Successful entrepreneurs are optimistic, that is successful entrepreneurs do not have ‘ifs’ or ‘buts’
about succeeding. All they think about is how they are going to succeed and not what they are going
to do if they fail.

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Perception of opportunity or opportunity seeking
Entrepreneurs should be able to see the unfilled areas or gaps in products, process and application of
services. That is successful entrepreneurs are able to see and act on new business opportunities.

Moderate risk taking

Entrepreneurs are expected to be able to take moderate and calculated risks. This is contrary to the
stereotype that entrepreneurs are gamblers or high-risk takers.

Goal setting
In setting a new business, entrepreneurs are expected to have the ability to set goals which are
specific, measurable, achievable, and realistic and time bound (SMART) basing on their
(ENTREPRENEURS) strengths, weaknesses, opportunities and threats (SWOT).
Moreover, their goals must be consistent with their interests, values and talents in order to achieve
them. Their belief in the reality of their goals is the primary factor in the fulfillment of those goals.
Their plans may seem illogical to others but they are perfectly logical in the context of their own
personal values and desires.

Long-term perspective
Successful entrepreneurs can tolerate considerable amount of frustration and delay in need
gratification and they devote a lot of time and effort in goals that often yield profits at a distant point
in the future. Entrepreneurs should be able to accommodate hurdles, difficulties and temporary
failures in business.

Self-motivation/self-esteem/self-faith/self confidence
Effective entrepreneurs have solid and stable self-esteem and self-motivation which stem from
healthy feeling of self-worth and self-acceptance. Entrepreneurs with a positive self-image are
basically satisfied to be the type of people they are. This self-faith is even important than self-
confidence especially when serious setbacks and failure occur.

Innovativeness/initiative ness/creativeness
Effective entrepreneurs have the ability to come up with new products, methods or techniques of
production and the accompanying machinery and tools.

Adventuresome ness

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Successful entrepreneurs are adventuresome i.e. they are interested in testing out and experimenting
phenomena in an endeavour to come up with solutions to the needs and wants of people.

Commitment
To succeed in business, you must be committed. Commitment means that you are willing to put your
business before almost everything else.

Some of the characteristics of an entrepreneur include; patience, friendliness, hardworking, reliability,

dedicated ness, responsibility, objectivity, rationality, honesty, determination, courage, flexibility,
imaginativeness and knowledge.

In a word, successful entrepreneurs must have appropriate personal characteristics, business skills
where necessary.

Roles of Small and Medium Enterprises

What is a small business?

A small business is generally a business that has low annual sales, few assets such as buildings,
equipment, vehicles, serves local markets rather than national and international markets, has small
number of employees and usually the owner is solely responsible for the success or failure of the
venture.
There are two kinds of small businesses that is survival and growth businesses
 Survival businesses are small businesses which allow owners to make a living but
the focus is on keeping the business alive e.g. backyard businesses/home based
businesses.
 Growth businesses are larger and allow owners to make more money e.g.
manufacturing operations in the industry.

Reasons for continued survival of small firms

 Small businesses are able to be more flexible, innovative and can react to changes
much quicker
 Small businesses play a supportive role to the giant firms by being subcontracted in
construction, distribution, service and manufacturing sectors
 Small businesses serve small markets (market niches) where large firms do not have
interest

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  Small firms receive government support through the Ministry of Small to Medium
Enterprises, ministry of Youth Development Gender and Employment Creation and
Ministry of Higher and Tertiary Education that is they receive support in form of
training and funds. Small firms also pay lower taxes.
 Small firms supply their goods and services in smallest lots than giant firms which
usually supply in bulk
 Small firms offer specialized and personalized services to customer’s e.g. electrical
businesses.
 Small firms remain small usually during the initial phases of new technology or
innovation or product introduction as the firms will be studying market reactions and
modifying the products.

Roles played by small firms to the economy

 Small businesses create employment for the business owner as well as the other
fellow citizens (employment creation)
 Small businesses increase the range of goods and services available to the local
community (provision of goods and services) especially in rural areas where goods
and services were previously unavailable.
 Small businesses reduce anti-social activities such as theft, robbery, promiscuity and
burglary
 Small businesses reduce rural-urban migration as more goods and services and
employment opportunities become available in rural areas. This will help to decrease
the pressures on urban in terms of sanitary problems, theft, robbery and promiscuity.
 Small firms contribute in the improvement of the standard of living of the community
 Small firms contribute in stabilizing the economy through increased employment,
reduced prices and improved standard of living
 Small businesses help in indigenizing the economy. If the economy is in the hand so
indigenous people, resources are not expatriated.
 Small firms help in the generation of foreign currency
 Small firms contribute in the production of quality and affordable products by being
in competition with giant businesses
 Small firms contribute to government revenue through payment of business and
employment taxes
 Small businesses contribute to the national income of the country (GDP – Gross
Domestic Products) and to the improvement of the balance of payment

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 Government Entrepreneurship initiatives
Government entrepreneurship initiatives are efforts by the government to promote self-sustenance,
entrepreneurship and indigenization in order to stabilize the economy. In an effort to promote
entrepreneurship and self-sustenance, the government established the Ministry responsible for
employment creation since 1980 i.e. Ministry of National Affairs and Employment creation now
Ministry of Youth Development, Gender and Employment Creation. Moreover, the following
institutions were introduced by the government to enable potential entrepreneurs to establish
themselves:
a. Small enterprise development corporation (SDECO)
b. Infrastructural Development Bank of Zimbabwe
c. Agribank
d. Affirmative Action Group (AAG)
e. Zimbabwe Cross Boarders Association
f. Zimbabwe Tuck shop Association

The government has also introduced the Ministry of Small and Medium Enterprises to ensure that
small businesses succeed. Black empowerment and indigenization policy was also put in place to
promote entrepreneurship. Land redistribution exercise is a good example to government
entrepreneurship initiatives to promote self-sustenance and the development of the country.

Activity
i. Analyze the history of entrepreneurship in Zimbabwe
ii. Examine the effects of colonization on entrepreneurship in Zimbabwe
iii) Analyze the government initiatives to promote entrepreneurship in Zimbabwe since 1980.
iv) Discuss the roles of the following in promoting entrepreneurship in Zimbabwe
a. AAG
b. Ministry of Small and Medium Enterprises
c. Zimbabwe Cross Boarders Association

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 CHAPTER 2

BUSINESS ENVIRONMENT IN ZIMBABWE

Objectives
By the end of this unit you should be able to:
 Describe the entrepreneurship environment in Zimbabwe
 Evaluate how the macro and micro environmental factors affect entrepreneurs
 Discuss entrepreneurial survival and growth strategies

Entrepreneurship environment
Entrepreneurship environment relates to the factors or variables which directly or indirectly affect the
activities of the entrepreneur either positively or negatively.

The environment is split into two. That is macro and microenvironments.

Macro – environment
This is also known as external environment. This environment consists of all those factors, which
indirectly affect the business activities of the entrepreneur either positively or negatively. The
external environment involves PEST analysis and natural phenomena.

PEST stands for Political, Economic, Social and Technological environmental variables.

Political Environment
Political factors may provide initiative situations towards the success of the entrepreneur especially
where the political climate is not stable. Political disturbances may result in the closure of business
either permanently or temporarily. Extreme political disturbances or instability such as tribal or civil
conflicts may cause permanent closure of enterprises. However, this depends on the nature of the
business of the entrepreneur. Some political climates may promote the success of the entrepreneur.
At first glance, it would seem that domestic politics should pose no threat and that a company should
have minimal problems at home. This is often not the case. Although a company’s major political
problems usually derive from political conditions overseas, it must still pay close attention to political
developments at home. Knowledge of the philosophies of all major political parties within the
country is very important since any of them might come to power and alter prevailing attitudes. It is

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important to know the direction each is likely to take for example in Britain the Labour party has
traditionally tended to be more restrictive on both foreign and home trade.

Economic nationalism is another factor which leads to an unfavourable business climate e.g. some
other organisations are said to be sponsoring foreign media which are said to be anti-government. If
the entrepreneur is not nationalistic in his or her business activities he/she may lose his/her business
license.

Political sanctions form yet another crucial factor that may hinder the entrepreneur’s progress in
business for instance in Zimbabwe there is fuel and foreign currency crisis due to political sanctions
based on the allegations by Britain and America that there is lack of rule of law, democracy and
violation of human rights. South Africa also faced political sanctions based on allegations that there
were apartheid, foreign currency crisis and fuel shortage can grossly affect the entrepreneur’s business
activities negatively.

Economic environment
The macroeconomics focuses on aggregate economic conditions that may affect the business either
positively or negatively e.g. inflation, exchange rates, lending or interest rates, and unemployment.
Macro-economic issues set the environment within which a business operates. Because of this,
entrepreneurs should keep abreast with developments in the macro-economic environment to enable
them make informed decisions. Thus, a full understanding of those issues enhances the ability of an
entrepreneur to make sound business decisions and to avoid surprises.

*For instance, inflation is the general uprise of the prices of commodities. If the prices of
commodities rise it means that the entrepreneur can now afford to buy less supplies or raw materials
or producer goods than he/she used to. That is, his/her business is being affected negatively. If the
inflationary rate drops, it means that the entrepreneur can now buy more producer goods.

Exchange rates are yet another factor of macroeconomics which may affect the activities of the
entrepreneur. Exchange rate defines the price for getting foreign currency. If the exchange rate rises,
the entrepreneur will afford to buy less of the foreign currency and vice versa. Foreign currency is
essential for the purchase of foreign products such as spare parts, ingredients, raw materials and fuel.

Lending rates are an important aspect of macroeconomics. Lending rate is the price of borrowed
funds or a loan. This is also known as interest rate. If the loan interest rises, it means that it is
expensive to get a loan for investment and vice-versa.

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Thus, given these macro-economic issues, the entrepreneur is expected to have a predictive mind for
efficient management of the enterprise.

Microeconomics is another fact of the economic environment which focuses on the economic forces
that influence the decisions made by individual consumers, firms and industries. These decisions are
often made in an instinctive way, yet consistent economic forces underlie them. Entrepreneurs are
encouraged to keep track of the trends of the behaviours of individual consumers, firms and industries
in business as their (entrepreneurs) investment activities are based on them.

Social environment
This relates to the cultural values, beliefs and artefacts of a group of people or society. These
determine the consumption patterns of consumers. Social environment also involves the religious
values. Thus, the products that people buy, the attributes they value, and the opinions they have are
based on culture. Food consumption, acquisition and preparation are interrelated with other aspects of
culture such as religious values and beliefs. For example, Christians consider pork unclean. Thus, to
the entrepreneur it is evident that customer’s actions in the society are shaped by their lifestyles and
behaviours which stem from their society’s culture. That is people of different social classes have
different lifestyles and behavioural patterns.
Language is another aspect of culture which has influence on the entrepreneur’s activities. Thus, a
successful entrepreneur must achieve expert communication. This requires a thorough understanding
of the language of the customer’s language as well as the ability to speak or write clearly.

Technological environment
Today, we are living in a global village which requires entrepreneurs to move with technological
breakthroughs and changes. Entrepreneurs are expected to be well versed with Internet systems for
effective communication with suppliers, customers and the publics in general.
Technology relates to the processes, techniques, tools and machinery used in business to produce or
offer products to customers. Poor technology results in inefficiency and ineffectiveness. Thus, the
advice to the entrepreneurs is that they should keep track of the technological trends in the business if
they are afraid of being out-competed by their rivals.

Natural phenomena
These are the situations or conditions which can adversely or positively affect the entrepreneur’s
activities. These may include natural disasters such as road accidents, fire outbreaks, floods, drought,

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earthquakes, good rains and natural resources such as minerals. Entrepreneurs are advised to study
the natural phenomenal trends as these provide threats or opportunities to the business.
Microenvironment
This relates to those conditions which directly affect the entrepreneurial investment activities either
positively or negatively. The microenvironment is made up of employees, providers of finance,
suppliers, customers and government among others.

Employees
These are the people who work for the entrepreneurs and those who are likely to work for him/her
(potential employees). People today have wider expectations of the quality of working life including:
justice in treatment, democratic functioning of the organization and opportunities for consultation and
participation, training in new skills and technologies effective personnel and industrial relations
policies and practices and provision of social and leisure facilities. Entrepreneurs should give due
consideration to the design of work methods and job satisfaction, make every reasonable effort to give
security of employment. If employees are not treated well, the entrepreneur will lose them to his/her
rivals.

Providers of finance
These are the financial institutions which supply financial services to the entrepreneurs.
Entrepreneurs need to consider the interest or lending rates together with the accompanying finance
changes fixed on them by the financial institutions as these costs of financial services have adverse
effect on their investment activities. Apart from that, the entrepreneurs also need to consider return
on investment in terms of the funds which they may need to invest with the financial institutions. On
the other hand, the entrepreneurs are expected to prove their credit worthiness and credibility by
paying back the borrowed funds (loans) within the contractual time frame as this will enable the
entrepreneurs to even receive preferential treatment and favour in times of need.

Customers
To many entrepreneurs, responsibilities to customers may be seen as no more than a natural outcome
of good business. Customers are people who make the business successful. The entrepreneurs need
to understand the needs and wants of customers first before production activities take place in order to
avoid wastage of resources by producing goods and services for unknown customers. Customers
must be put first by providing:
 Good value for money
 The safety and durability of products
 Prompt and courteous attention to queries and complaints

17
  Long-term satisfaction e.g. serviceability, adequate supply of products and
replacement of parts
 Full and unambiguous information to potential customers
If customers feel that they are ill-treated, the entrepreneur loses them to the customer-driven
enterprises.

Suppliers
These are firms that supply the entrepreneur with raw materials. These can affect the entrepreneur’s
activities adversely or positively in terms of prices, reliability, quality, delivery services and
convenience among others. Thus, a supplier of competitive prices, quality, delivery services and
convenience must be chosen. On the other hand, the entrepreneur should also prove creditworthiness
by settling accounts within the contractual time frame if future deferred payment business transactions
are to be upheld.

Government
Entrepreneurs should of course, respect and obey the law even where they regard as not in their best
interest. If certain laws are not followed the entrepreneur’s business may be forced to close down but
what is debatable is the extent to which organizations should co-operate with actions requested by the
government. Some examples are restraint from trading with certain overseas countries and the
acceptance of controls over imports or exports, price controls designed to combat inflation e.g. limits
on the level of wage settlement and assisting in the control of potential social problems such as
advertising and display of health warnings.

Competitors
These are the rivals of the entrepreneurs who produce substitute products or the same products. The
entrepreneur must keep track of the price levels, technology, quality, and delivery services, among
others of the competitors as these may pose negative impact on the acceptability of the entrepreneur’s
products by customers.

Entrepreneurship Strategies

Growth strategies
A. Intensive Growth Strategies

18
 According to Ansoff’s product market expansion grid, a company is exposed to growing
dimensions under intensive growth

1. Market penetration
 Gaining more market share with the current company market products in their current
markets.
 The strategy can be implemented as follows.
a. promoting more usage of the product
b. attracting competitors’ customers
c. convincing non users to use the existing product

2. Market development strategy

 company efforts to find or develop new markets for its current products
a. This can be done by identifying potential uses in the current sales area where interests
for a product or services can be stimulated.
b. Selling new products to existing or current markets.
c. Seeking additional distribution channels in its present location.

3. Product development
 in addition to penetrating and developing markets management should consider new
product possibilities
 Company develops a product’s new features; different quality levels and also tries to
come up with a technological breakthrough a potential product.

B. Integrative Growth
 business sales and profits can be increased through
a. Backward integration
b. Forward integration
c. Horizontal integration

Ansoff’s Growth Strategies Grid:

Current products. New products.

Market penetration Products development
Strategy strategy
Market development strategy Diversification strategy

19
Current markets.

New markets.

Ansoff’s Growth strategies

1. Market penetration
a. market development
b. product development

2. Integrative growth
a. backward integration
b. forward integration
c. horizontal integration

3. Diversification growth
a. Concentric diversification
b. Horizontal
c. Conglomerate
a. Backward Integration – is when a company acquires one or more of its suppliers to gain more
control and generate more profit.

b. Forward Integration – is when a company acquires some wholesalers and retailers especially
when they are they are highly profitable.

c. Horizontal Integration – is when a company acquires one or more competitors provided the
government policies allow e.g. monopoly, oligopoly.

Diversification Growth.
 Is the most favorable growth strategy if good opportunities can be found outside the present
business?
 An opportunity is one in which the industry is highly attractive and company has the mix of
business strength to be successful.

20
Types of diversification
a. Concentric diversification
 Holds that the company could seek new products that have technological and or marketing
synergies with the existing product lines even though the new products themselves may
appeal to different groups of customers.

b. Horizontal Diversification
 holds that a company can produce totally unrelated products using different manufacturing
methods or processes

c. Conglomerate Diversification
 Holds that a company seeks new business that have no relationship to the company’s current
technology products or market suppose a company is producing fax machines and now seeks
to produce furniture

Other Entrepreneurship strategies

 a strategy is a method used to achieve a goal

1. Franchising
 A system of distributing products/services through associated resellers.
 The franchiser gives rights to the franchisee to perform or use something that is the property
of the franchiser
 The objective is to achieve efficiency or profitable distribution of products/services within a
specific area
 Both parties contribute a trademark reputation, known products, managerial know-how
produces or equipment.

Advantages to the franchiser

 increased distribution
 some operating costs are transferred
 marketing/distribution costs shared
 production accepted by locals when local franchise ownership is held

21
  Retains quality control of products is a franchise agreement


Advantages to the franchisee

 less risk with market tested products

 pre established promotion and advertising programs provided
 Financial and may be provided.
 Credit available in buying inventory and supplies
 Decision making assistance, management procedure and training.

Disadvantages to the franchiser

 control of franchisees are far away

 expenses of training and keeping on travelling for supervisor
 risk in credit extensions

Disadvantages to the franchisee

 gives up freedom in management decisions

 obligatory purchases franchiser even if better prices elsewhere are available
 have become expensive

1. Buying an established business

Advantages

 a business with a goodwill increases the likelihood of successful operation

 has a proved location for successful operation
 has an established clientele
 its inventory is already on the shelves
 Its equipment is already available and its resources and capabilities are known.

22
Disadvantages
 the buyer inherits any ill will of the existing firm
 certain employees may be inherited which are not assets to the firm
 inherited clientele may not be the most desirable and changing the firms image is usually
difficult
 procedures of the former may be difficult to follow
 renovation expenses
 purchase price may not be satisfying

23
 CHAPTER 3

DEVELOPING A BUSINESS PLAN

OBJECTIVES

By the end of this unit you should be able to:

 Define a business idea.

 Generate a feasible and profitable business idea.
 Develop a Business Proposal.
 Define a Business Plan
 Discuss the elements/components of a business plan.
 Develop a viable business plan.

GENERATION/CREATION OF A BUSINESS IDEA

 Every business emerges from an idea.
 Businesses get started when people (customers) manifest
Their needs and wants.
 Entrepreneurs develop business ideas out of the needs and
wants of people.
 Usually entrepreneurs exploit the weakness of the existing
providers of goods and services to start their own ventures.

The term business idea defined:

A business idea is a short and precise description of the basic operations of the
business.

 A business idea must show the following :

24
 a. Product to be offered.
b. Target market/potential customers.
c. Target customers’ needs.
d. Selling approach.

Profitability and Feasibility of the business idea:

 A business idea must be profitable and feasible.
 To determine the profitability and feasibility of a business idea one needs to carry
out a feasibility study and SWOT analysis.
 Feasibility study relates to a detailed investigation of all aspects of a business idea
in order to determine if it is likely to be successful.
 Before starting a business, it is essential to research that business idea to find
if it is feasible.
 A business idea should be practical and profitable.

In terms of feasibility, the entrepreneur needs to consider the following:

 Availability of a viable market
 Competition
 Location
 Infrastructure and facilities
 Raw materials
 Machinery and equipment
 Labour and other costs such as electricity insurance, water, security etc.

BUSINESS PLANNING
Definitions of a Business Plan
Several definitions of a business plan can be observed.

 A business plan is a written statement setting forth the business mission and
objectives, its operational and financial details, its ownership and management
structure, and how it hopes to achieve its objectives.

25
 It is a written document describing all relevant internal and external elements and
strategies for achieving objectives of a business.

 A business plan is a document designed to provide sufficient information about a new

or existing business to convince financial backers to invest in the business.

The purpose/importance of a business plan:

 It provides a blueprint, or a plan, to follow in developing and operating the business.
It helps keep one’s creativity on target and helps one concentrate on taking the actions
that are needed to achieve the business goals and objectives.

 It helps to clarify the business idea. The process involved in creating a business plan
means that the entrepreneur has to ask a number of key questions about their idea.
This should ensure that before starting up, the business idea would have been
considered with care.

 It can serve as a powerful money-raising tool. The Plan will often be used as a
means of sharing potential investors of lenders the viability and profitability of the
business. Financial institutions insist on seeing a business plan before any loan is
granted. Private shareholders may invest if they believe in the entrepreneur.
Professional providers of venture capital demand evidence of careful planning first.

 It can be an effective communication tool for attracting and dealing with personnel,
suppliers, customers, providers of capital, etc. It helps them understand your goals
and operations.
 It can help you develop as manager/entrepreneur, because it provides practice in
studying competitive conditions, promotional opportunities and situations that can be
advantageous to your business.

 It provides an effective basis for controlling operations so one can monitor progress
over time, to see if your actions are following your plans.

HOW TO PREPARE A BUSINESS PLAN

26
 You should start by considering your business background, origins, philosophy,
mission and objectives. Then, you should determine the means for fulfilling the
mission and obtaining the objectives.

A sound approach is to:

1. Determine where the business is at present (if an ongoing
business) or what is needed to get the business going.
2. Decide where you would like the business to be at some point
in future.
3. Determine how to get there. In other words, determine the
best strategies for accomplishing the objectives in order to
achieve your mission.

The following is one feasible approach you can use in preparing a business plan
1. Survey consumer demands for your products and decide how
to satisfy those demands.
2. Ask questions that cover everything from you firm’s target
market to its long-run competitive prospects.
3. Establish a long–range strategic plan for the entire business
and it’s various parts.
4. Develop short-term detailed plans for every aspect of the
business, involving the owners, managers, and key
employees, if possible.
5. Plan for every facet of the business’ structure, including
finances, operation, sales, distribution, personnel, and
general administrative activities.
6. Prepare a business plan that will use your time and that of
your personnel most effectively.

COMPONENTS/ELEMENTS/CONTENTS OF A BUSINESS
PLAN

27
  The contents of a business plan vary tremendously, depending upon the type
of business, the expertise of the entrepreneur, who the plan is aimed at and
how much time is spent researching the plan.

 However, regardless the specific format used an effective plan should

include at least the following
1. Cover sheet
2. Table of contents
3. Executive summary
4. Description of The Business
5. Ownership and Management structure
6. Marketing Plan
7. Production/Operational Plan
8. Financial Plan/Analysis
9. Milestone schedule
10. Appendix

1. Cover Sheet

On the cover sheet you should include identifying information so that readers will
immediately know the business name, address, phone numbers, names and titles of
the principals (owners), and the date the Plan was prepared.

2. Table of Contents

Because the table of contents provides the reader an overview of what is

contained in the plan itself, it should be written and presented concisely in
outline form, using numerical and alphabetical designators for headings and
subheadings.

3. Executive Summary

28
 It is the most important part of the business plan. It should be designed to
motivate the reader to go on to the other section of the plan. It should convey
a sense of commitment, challenge, plausibility, credibility and integrity.

It can include:

 Major aims and objectives

 Marketing strategy
 Financial projections
 Financial requirements
 Current business position:
Legal form, when formed, principal owners and key
personnel.
 Major achievements.

NB Executive summary is written last, after the rest of the plan

has been developed and should just be that – a summary –so
keep it short.

4. Description of the Business

Include the following:

a. Introduction

 Relevant brief history and background of the proposed business

 How the idea for the business original and what has been done to
develop the idea up to this point.
 Owners and manager and their experiences
 Products – capitalization/sources of funds
 Brief outline of success and achievement
 Date or proposed date for commencement
 Name of business and trading name
29
  Legal identity/legal form
 Industry that it fall under
 location - business addresses
 SWOT Analysis

5. Ownership and Management Structure

 Describe the owners including those you identified by name and title
above
 Give more detail about their experience, qualifications
and expertise.
 Describe your management team, along with their abilities, training and
experience.
 Draw an organisation Chart
 Draw a table showing name, position, qualifications and experiences,
duties and responsibilities of managers and employees.
 Include organizational structure, including employee policies and
procedures.

6. Marketing Plan

Include information about:

a. Marketing objectives
b. The target market
c. Sales and marketing mix strategy
d. Competitors analysis
e. Research – that leading to product design – confirmation of demand and future
research planned.

7. Product/Operational Plan
 This motives the details of converting inputs to outputs valued by
customers

30
  Specify products/services to be produced
 Raw materials and suppliers
 Optional location for production activities
 Costing of the products offered.

8. Financial/Plan/Analysis

 Indicate the expected financial results of your

operations
 Show prospective investors or lenders
 Include projected financial statements at least up to
three trading periods i.e. Trading, Profit and Loss
 Account; Income and Expenditure Statements; Cash
 Flow statements; Balance Sheets etc.
 There should be an analysis of costs/volume/Profits
(CVP) where appropriate.
 Also include budget forecasting for : Production; Sales
and Expenses.
 Show the Financing of the business.

9. Milestone Schedule

 This involves the determination of objectives and the

timing of accomplishments.
 It is like a map of how you will go from one place/stage
in your business to the next.
 Deadlines should be established and monitored.

10. Appendix

This section includes supporting documentation for your Business Plan e.g.

 Names of References and Advisors and their addresses

31
 and phone numbers
 Bargains, Tables, Charts
 Resumes of officers
 Supportive market research
 Brochures of other published information describing
the products you provide.
 Letters of recommendations or endorsements etc.

Generate your own business idea and develop its viable business plan.

32
 CHAPTER 4

BUSINESS MANAGEMENT

Objectives
By the end of this unit you should be able to:
 Define management
 Discuss the management functions
 Describe the roles of management
 Outline the principles of management

Business
A business is a social and or a commercial entity that thrives to satisfy the needs and wants of
consumers at the same time making more profits. As such, entrepreneurs have to manage the
factors of production, i.e. land, labour and capital so as to achieve the business objectives.
Businesses can be in any of the following sectors of the economy; farming, mining, retailing,
art and craft, wholesaling etc. Thus, this chapter will focus on the functions of management
as well as the roles of management in an enterprise.

Management
Management has been described as a social process involving responsibility for economic
and effective planning and regulation of operation of an enterprise in the fulfillment of given
purposes. It is a dynamic process consisting of various elements and activities. These
activities are different from operative functions like marketing, finance, production,
purchasing, human resource etc. Rather these activities are common to each and every
manager irrespective of his level or status. According to Henry Fayol (the father of

33
management) managing means planning, forecasting, organizing, motivating, leading and
controlling activities in a business so as to achieve common objectives.

 Stoner and Freeman (1995) described management as the art of making things done
through other people.
 They went on to say that it means deciding what to do and getting others to do it.

Thus, management is a process (and not an event) that entails planning, leading, organizing
and controlling of resources (human resource, capital, financial resources etc)

Manager
Managers are people who get things done through other people. They make decisions;
allocate resources and direct activities of others to attain goals. A manager may be the
owner, operator or founder of an organisation as well as hired by an organisation to give it
direction. Managers are employed so that the operations of these organisations become more
efficient and effective.

FUNCTIONS OF MANAGEMENT
Different experts have classified functions of management. A manager must organize these
functions in order to reach company goals and maintain a competitive advantage. There are
four fundamental functions of management. For theoretical purposes, it may be possible to
separate the function of management but practically these functions are overlapping in nature
i.e. they are highly inseparable. Each function blends into the other and each affects the
performance of others. The functions are discussed below;

A. PLANNING

It is the first tool and the basic function of management. The difference between a
successful and an unsuccessful manager lies within the planning procedure. Planning is
the logical thinking through goals and making the decision as to what needs to be
accomplished in order to reach the organisation’s objectives. It deals with chalking out a
future course of action and deciding in advance the most appropriate course of actions for
achievement of pre-determined goals. Thus, planning is deciding in advance- what to do,

34
 when to do and how to do it. It bridges the gap from where the organisation is and where
it wants to be. Planning is necessary to ensure proper utilization of human and non-human
resources and helps in avoiding confusion, uncertainties, risks, wastages etc.

The following are involved in planning;

 defining objectives and standards to be achieved
 deciding who is going to do it
 determining the actions and activities to be done in order to achieve the objectives
and standards
 determining the resources to use
 determining the time-frame for the activities
 assigning responsibilities
 designing a control procedure

Manager’s questions in planning

1. where are we? -in terms of goals, resources, standards etc
2. where do we want to go? –objectives, markets, customers etc
3. how do we get there? –strategies to reach the intended destination ( time, resources,
marketing mix)
4. are we getting there?

B. LEADING

Leading is the ability to initiate action, guide, supervise and direct others (subordinates) in
pursuit of a common goal. Organizational success is determined by the quality of leadership
that is exhibited. “A leader can be a manager, but a manager is not necessarily a leader,” said
Gemmy Allen (1998). Those in leadership role must be able to influence/ motivate workers to
an elevated goal and direct themselves to the duties or responsibilities assigned during the
planning process (Allen, G., (1998). Leadership has the following elements;

35
  directing – it is that part of managerial function which actuates the organizational
methods to work efficiently for achievement of organizational goals, and sets in
motion the action of people because planning ii the mere preparation for doing work.
 staffing-the main purpose is to put the right man on the right job. There should be
proper and effective selection, appraisal and development of personnel to fill the roles
designed on the structure. It thus involves manpower planning, recruitment, selection,
placement, training and development, remuneration and promotion and transfer.

 supervision- implies overseeing the work of subordinates by their superiors. It is the

act of watching and directing work and others.

 motivation- means inspiring, stimulating or encouraging the subordinates to work

with zeal.

 communication- the process of passing information, experience, opinion etc from one
person to another. It is a bridge of understanding.

C. ORGANISING
It is the process of bringing together physical, financial and human resources and developing
productive relationships amongst them for the achievement of organizational objectives.
According to Henri Fayol, “To organize a business is to provide it with everything useful for
its functioning i.e. raw materials, tools, capital and personnel. To organize a business
involves determining and providing human and non-human resources to the organizational
structure. Thus, a manager must know his subordinates and what they are capable of in order
to organize the most valuable resource a company has, its employees. This is achieved
through management staffing the work division, setting up the training for the employees,
acquiring resources and organizing the work group into a productive team. The manager must
then go over the plans with the team, break assignments into units that one person can
compete, link related jobs together in an understandable well organized style and appoint the
jobs to individuals. Organising as a process involves;

 identification of activities
 classification or grouping of activities

36
  assignment of duties
 delegation of authority and creation of responsibility
 coordinating authority and responsibility relationships

Principles of organising
1. Unity of command –an employee must receive commands from one supervisor only.
2. Span of control-refers to the number of employees that report to one supervisor.
3. Full authority and responsibility.

D. CONTROLLING
It implies a measurement of accomplishment against the standards and correction of deviation
if any to ensure achievement of organizational goals. The purpose of controlling is to ensure
that everything occurs in conformities with the standards. An effective system of control
helps to predict deviation before they actually occur. According to Theo Haimann,
“Controlling is the process of checking whether or not proper progress is being made towards
the objectives and goals and acting if necessary, to correct any deviation.” Controlling
depends on accurate, reliable and enforceable standards and on monitoring of performance by
people, machines and processes. Therefore controlling has the following steps;
 establishment of standard performance
 measurement of actual performance
 comparison of actual performance with the standards and finding out if there are any
deviations
 taking of corrective action if necessary.

Work performance evaluations are a form of control as it connects performance assessments

to rewards and corrective actions. Evaluating employees is a continual process that takes
place regularly within a company.

ROLES OF MANAGEMENT

The ten management roles of a manager identified by Mintzberg

37
Mintzberg intensively studied five CEOs and their organizations, along with a calendar of
their scheduled appointments for a month. Additional data collected during a week of
structured observations included anecdotal data about specific activities, chronological
records of activity patterns, a record of incoming and outgoing mail, and a record of the
executive’s verbal contacts with others. On the basis of this data, Mintzberg divided
managerial activities into interpersonal, informational and decisional roles.

Mintzberg’s ten management roles are a complete set of behaviors or roles within a business
environment. Each role is different, thus spanning the variety of all identified management
behaviors. When collected together, as an integrated whole (gestalt), the capabilities and
competencies of a manager can be further in a role specific way. In a sense therefore they act
as evaluation criteria for assessing the performance of a manager in his role.

Mintzberg’s ten managerial roles

ROLES DESCRIPTION EXAMPLES

OF
ACTIVITIES
1. INTERPERSONA
L
Symbolic head, obliged to perform a number of Greeting
team duties of a legal or social nature visitors,
a. Figurehead
signing
Responsible for the motivation of subordinates, documents
staffing and training, selects and disciplines.

b. Leader Maintains a network of outside contacts and

Performing all
informers who provide favors and information
activities that
involves
subordinates
c. Liaison

38
 Acknowledgin
g mail,
external board
work
2. INFORMATION
AL
-Seeks and receives wide range of special -reading
information periodical and
a. Monitor
-nerve centre of internal and external information reports
about the organisation -maintaining
personal
contacts
-installation
Transmits information form outsiders or from the
and
subordinates to members of the organisation
maintenance
of information
Transmits information to outsiders on
b. Disseminator systems
organizational policies, actions, results etc
through speeches and reports.
Holding
meetings,
making phone
c. Spokesman calls to relay
information,
sending
memos

Holding board
meetings and
giving
information to
the media
3. DECISIONAL

39
 Initiates new projects, spot opportunities, identify Organising
a. Entrepreneur areas of business developments strategy
review
Responsible for corrective action when sessions to
organization faces unexpected disturbances and develop new
b. Disturbance
crises programmes
handler

Resolving
Responsible for the allocation of organizational
conflicts
resources of all kinds, setting of priorities,
among staff,
budgeting
adapt to
c. Resource allocator external
Responsible for representing the organisation at
changes and
major negotiations with unions, suppliers and
organising
generally defend interests
strategies that
involves
disturbances
d. Negotiator
and conflict

Scheduling,
requesting,
authorization
and budgeting
activities

Participating
in collective
bargaining

The roles point to managers needing to be organizational generalists and specialists because
of;

40
  system imperfections and environmental pressures
 their formal authority is needed even for certain basic routines
 in all of this they are still fallible and human

The explanations above justify managerial purposes in terms of;

 designing and maintaining stable and reliable systems for efficient operations in a
changing environments
 ensuring that the organisation satisfies those that own it
 boundary management- maintaining information links between the organisation and
players in the environment.

MANAGEMENT SKILLS

For a manager to carry out the management functions and roles effectively, some
management skills are required at defined levels.

Management skills and levels

1. Technical skills
Include knowledge of and proficiency in a certain specialized area such as
engineering, computers, and finance etc. e.g. an accounting manager should be
proficient and conversant with accounts receivables and account payable, to enable
him to help the accounting clerks who might have some problems. The first line
managers and middle management are more involved in the technical aspects than top
management.

2. Human skills

Refer to the ability to work with other people both individuals and in groups. The
human skills are important at the top levels of management, as they are at the lower
levels. Subordinates are more forthcoming and offer their best abilities when working
under a manager with good human skills. These managers are good communicators;
they motivate, lead and inspire enthusiasm and trust among their subordinates.

41
 3. Conceptual skills
Are defined as the ability to think and conceptualize lines and abstract situations,
to see the organisation as a whole and the relationships among its various sub-units and to
visualize how the organisation fits into its environment. Conceptual skills are needed by all
managers at all levels but these skills become more important as we move up to the top
management positions.

Principles of Management

Managers must observe Fayol’s 14 principles of management when carrying out their duties;
1. Division of labour-work should be divided into smaller units that permit
specialization.

2. Authority and responsibility-organizational structure should clearly show levels of

authority and responsibility.
3. Discipline-discipline results from good leadership at all levels of the organization. It
is necessary to develop obedience, diligence and respect.

4. Unity of command- an employee must receive commands from one supervisor only.

5. Unity of direction-all operations with the same objectives should have one manager
and one plan only.

6. Subordination of individual interest to the common good- the interests of an

individual or group should not take precedence over interests of the organization.

7. Remuneration-rewards for work should be fair to the worker and employer.

8. Centralization- the proper degree between centralization and decentralization should

be found.

42
9. Hierarchy- the line of authority in the organization should run in order of rank from
top management to the lowest level of the organization.

10. Order- resources should be in the right place at the right time.

11. Equity- managers should be fair to the employees and treat the equally.

12. Stability of staff- a low staff turnover rate enhances the attainment of goals.

13. Initiative- subordinates should be given the freedom to conceive and carry out their
plans, even though some mistakes may result.

14. Team spirit – team work gives the organization a sense of unity.

43
Motivation

- Definition
 Managers and entrepreneurs are tasked with ensuring that things are done through people. For the
work to be done efficiently and effectively, employees need to be motivated. Motivation is
concerned with inducing people to work to the best of their ability. Motivation refers to those
schemes designed to influence and encourage workers to perform outstandingly. It is therefore
very important to take a closer look at theories of motivation and consider motivation of workers
seriously.
 According to Appleby (1994), motivation refers to the way urges, aspirations, drives and needs of
human beings direct or control or explain their behavior. Maslow (cited in Stoner & Freeman
1989) defines motivation as those inner and outer factors which cause, channel and sustain the
behavior of a person in order to achieve specific organizational or personal goals.

Theories of Motivation and their implications to the entrepreneur

There are many theories of motivation and any theory or study which aids an understanding of how
best to motivate people at work must be useful. All entrepreneurs have a duty to motivate their
employees for the success of their enterprise. Motivated workers take more pride in their jobs and
work better. But many entrepreneurs do not know how to motivate their staff. Entrepreneurs must
know how to apply the theories of motivation in particular work situations. There are two contrasting
approaches that is the content theories and process theories (cognitive theories)
 Content theories attempt to explain those specific things which actually motivate the individual at
work. These theories are concerned with identifying people’s needs and their relative strengths
and the goals they pursue in order to satisfy these needs. Content theories place emphasis on the
nature of needs and what motivates.

44
 Process theories attempt to identify the relationship among the dynamic variables which make up
motivation. These theories are concerned more with how behavior is initiated, directed and
sustained. Process theories place emphasis on the actual process of motivation.

Major content theories of motivation include

 Maslow’s hierarchy of needs model
 Alderfer’s modified need hierarchy model
 Herzberg’s two-factor theory
 McClelland’s achievement motivation theory

Maslow’s hierarchy of needs theory

Maslow’s theory claims that human motives develop in sequence according to five levels of need
arranged in a hierarchy of importance. Maslow’s basic proposition is that people want beings, they
always want more, and what they want depends on what they have already. The hierarchy begins
with the lowest level i.e. physiological needs to the need for love (social), esteem needs to the need
for self-actualization at the highest level. Below is the pyramid to show the hierarchy

Self-actualization
(I.e. realizing one’s potential
For continued self-development)

Esteem (i.e.
Status, respect, recognition by others)

Social (love) (i.e. to belong, associate with, be accepted by

Safety (i.e. protection against danger

Physiological i.e. shelter, clothing, food

Achievement, self- confidence,

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Physiological needs include homeostasis such as satisfaction of hunger, thirst, shelter deficiency, and
clothing deficiency and so on. In fact homeostasis relates to the body’s automatic efforts to retain
normal functioning.

Safety needs include safety and security, freedom from plain or threat of physical attack, protection
from danger or deprivation, the need for predictability and orderliness.

Love needs that is social needs which include affection, sense of belonging, friendships and both the
giving and receiving of love.

Esteem needs are also referred to as ego needs which relate to self-respect which involves the desire
for confidence, strength, independence and freedom, and achievement. Esteem of others involves
reputation or prestige, status, recognition, attention and appreciation.

Self-actualization needs that is the desire to become more and more what one is capable of becoming
which simply means that one wants to realize his or her potentialities and capabilities.

IMPLICATIONS OF MASLOW’S HIERARCHY OF NEEDS TO THE ENTREPRENEUR

Once a lower need has been satisfied, it no longer acts as a strong motivator and only unsatisfied
needs motivate a person.

This hierarchy of needs implies that entrepreneurs need to consider seriously the lower level needs if
workers or staff is to cooperate at work. That is the remuneration (salary, wage, fringe benefits)
should meet decent or exclusive physiological needs (shelter, food, clothing). Pleasant working
conditions must also be ensured.

Successful entrepreneurs must consider the safety and security issues such as safe working conditions
like danger warning signs, clean work environment and good healthy facilities. It is also important to
employees and social security after employment i.e. pension and other related company benefits.

Social needs of workers have impact on the performance. Workers need to be loved and as such
entrepreneurs need to instill a sense of belonging in workers. Entrepreneurs also need to employ
friendly supervision, cohesive work group, and team spirit and general sound relations with
employees. Workers also need professional associations to meet their professional problems.

46
Another area of concern is self-esteem. In this case entrepreneurs should make use of social
recognition, job title, high status job and feedback from the job itself if employees are to be
motivated in their work.

Self actualization is one aspect that does motivate employees i.e. workers are motivated by
challenging job, opportunities for creativity, achievement in work and advancement in the
organisation and as such entrepreneurs should note that.

Herzberg’s two factor theory

Hygiene theory
He presents his tow factor theory of motivation which elaborates the differences between higher and
lower needs. This theory states that factors which create satisfaction at work are those stemming from
the intrinsic content of job e.g. recognition and responsibility, meaning and challenge. These satisfy
higher needs. These are called satisfiers or motivators or growth factors. Another set of factors which
entrepreneurs must take cognizance of is dissatisfies or hygiene factors. These factors stem from the
extrinsic job context e.g. working conditions, pay, and supervision. These satisfy lower needs. An
important point to note in this theory is that as dissatisfaction stems from lower needs not being
satisfied, when these are satisfied, this only removes dissatisfaction and does not increase motivation.

If hygiene factors did not reach a certain standard e.g. salary, working conditions, job security, and
poor supervision workers feel bad about their jobs and unhappy. Hygiene factors are also called
preventive factors. Positive motivation and a feeling of well-being could only be achieved, not by just
improving these hygiene factors but by improving genuine motivators such as recognition,
achievement responsibility, advancement and the work itself.

Below is a representation of Herzberg’s two-factor theory

Hygiene or Maintenance factors
Salary, job security, working conditions, Level of quality of supervision, company
Policy and administration, Interpersonal relations, The Dissatisfies

Motivation & job satisfaction

The satisfiers:
Sense of achievement, Recognition, Responsibility, Nature of work, Growth and advancement,
Opportunity of creativity

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Motivators/growth factors

NB: The Motivation – hygiene theory of Herzberg is an extension of Maslow’s Hierarchy. The
emphasis in this theory is that entrepreneurs must consider both the hygiene factors and the growth
factors/motivators.

Importance of motivating employees

 Increased productivity
 Increased efficiency and effectiveness
 Good corporate image building
 Increased sales and profits
 Good customer relations
 Promotes team spirit (team work) or cooperation and support by employees
 Promotes entrepreneurship by employees that is innovativeness, creativity and initiative ness
resulting in the growth or expansion of the enterprise

ACTIVITY

1. List the four management functions.

2. Match the following activities with the appropriate management function
a. monitoring to check whether a budget is being followed
b. deploying human resources to different departments
c. setting organizational goals and the mission statement
d. giving rewards to staff performing well?

3. State the role that is associated with each of the following statements

a. a manager representing his organisation at a special award ceremony

b. resolving conflicts between 2 divisions of the same organisation
c. restructuring the organisation so that it becomes more responsive to clients
d. making a presentation on the organisation
SUMMARY

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Management is a process of deciding what to do and getting others to do it. As such, it is
important for the management to perform the management functions (planning, leading,
organising and controlling- PLOC) with diligence so as to facilitate the accomplishment of
set organizational goal. Entrepreneurs should thus seek knowledge on how to be effective and
efficient in their various areas of operations considering the environments in which they
operate in. Thus management of business works shops, seminars and other discussion and
consultative forums can be organized to encourage exchange of ideas. Appropriate
management style should also be chosen depending on the environment.

CHAPTER 5

MARKETING

By the end of the study you must me able to:

 Define marketing
 Describe the marketing mix elements
 Apply the marketing mix to product and service situations
 Prepare a marketing plan

Marketing is the management process responsible for identifying, anticipating and satisfying
customer requirements profitably. (CIM)
There are many other definitions that expand on the CIM's own definition. Here is what Dibb
et al (2001) has to say:

Marketing consists of individual and organizational activities that facilitate and

expedite satisfying exchange relationships in a dynamic environment through the
creation, distribution, promotion and pricing of goods, services and ideas.

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This is a more detailed definition and identifies some specific activities. Marketing as an
activity differs from marketing as a concept. A market orientation can prevail outside the
marketing department. The related term 'marketing concept' is fundamental to the modern
approach to marketing. Kotler (1991) says this:

The marketing concept holds that the key to achieving organizational goals lies in
determining the needs and wants of target markets and delivering the desired
satisfactions more efficiently and effectively than the competition.

Needs are basic human requirements such as food, clothing, shelter, exercise, etc. Some
people might be able to satisfy their needs for exercise by going for a run in a public park.
Wants refer to needs directed to specific objectives that might satisfy the need, For example,
people might want to meet their needs for exercise by joining an exclusive country club to
play golf. The marketing manager of an exclusive country club may carry out various
marketing activities to transform the needs of people for exercise into wants to play golf at a
country club.
FAST FORWARD
Kotler (1991) also uses the word demand which refers to the wants being backed up by an
ability to prairie can the potential customer afford the membership fees to join an exclusive
country club? It is necessary for us to strike a clear distinction between marketing as an
activity, and marketing as a concept of how an organisation should go about its business.

The Marketing Mix

The marketing mix refers to a set of marketing variables which a firm can use to satisfy the
needs of its target market. McCarthy calls them the 4Ps of marketing. They are: price,
promotion, product and place.
Marketing activities
The basic marketing mix offers us a useful framework within which to discuss the
relationship of Marketing activities to other organizational functions
.
 Product
(a) Product development and enhancement of physical products is usually carried out in
conjunction with R&D and production. These often involve technically minded people who
may have different attitudes and approaches when perceiving and solving problems. With
50
regard to service marketing, there may be other kinds of technicality. For example, if a firm
of solicitors wishes to provide independent financial advice, the very demanding regulatory
regime governing such services is likely to be a key consideration in the marketing of the
new service.
(b) Packaging refers to 'all the activities of designing and producing the container for a
product'. (Kotler, 2003). Packaging serves various purposes and involves several
considerations.
(i) Protection of product e.g. sturdy boxes for breakable products
(ii) Preservation of the product e.g. plastic bags to keep bread and cakes fresh and
hygienic
(iii) Security of product e.g. small digital camera memory cards packaged in large plastic
packs to deter shoplifters
(iv) Convenience. Packaging is designed to facilitate storage by supplier or customer, as
Well as convenience of use e.g. different types of nozzles on drinks and sauce
containers
(v) Branding e.g. the Coca-Cola bottle is a huge source of promotion for the company
(vi) Profitability e.g. larger sized nozzles on tubes and bottles encourage more use.
Larger sized cans or bottles usually encourage greater consumption.

 Place
Distribution decisions address the question of 'where do our customers want to receive their
goods or services?' This is an aspect where there has been significant change and
development, and there is now much more scope for market decision making, especially with
the advent of e-commerce. Place decisions may also influence an organisation's globalization
strategy. If clients and/or customers have overseas locations it may be beneficial to set up
distribution facilities locally. The presence of overseas facilities enables the organisation to
extend its market coverage and global reach. It is important to understand the structure of
the distribution channel and the role of the players within it. A key concept is channel
captaincy, which refers to the organisations that hold the most power within a channel and
can drive changes in it. In the past, for example, food manufacturers controlled the retail food
industry as they were fewer in number, and bigger in size, than the supermarkets and other
independent retailers. Supermarkets have since become bigger and more successful, and can
usually dictate terms to manufacturers and other suppliers. Marketers are likely to be

51
involved in activities such as outlet planning, supply chain management, and route to market
decisions. They may be involved in order-processing, warehousing, logistics,
stockholding and control, transport operations, delivery tracking and IT systems
development. They may also be involved in export operations and the use of shipping and
forwarding skills.

 Promotion
Promotion is, of course, the focus of a great deal of marketing attention and might, with
justification, be regarded as the marketing specialist's home turf. Nevertheless, it does not
take place in a vacuum. It must not promise what cannot be delivered, it must work within
budget (particularly where sales promotion is concerned) and individual aspects of promotion
must not undermine the overall corporate image. It is important to remember the product or
service's Unique Selling Proposition (USP) or Basic Consumer
Benefit (BCB) and ensure that the message is in alignment with these. The medium of
communication must then match the message. Promotional tools include advertisements,
press releases, sales promotions, in-store demonstrations, exhibitions, trade fairs and public
relations.

 Price
Cost is a major consideration in price-setting and here the marketer must utilize the expertise
of the management accountant. Also associated with this aspect of the mix is the whole topic
of terms of sale: expert advice is necessary if maximum protection is to be obtained against
the customer who does not or cannot pay. Factors influencing price include costs,
competition, customer expectations and business objectives.

The purpose and content of the marketing plan

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A marketing plan is a specification of all aspects of an organisation's marketing intentions
and activities. It is a summary document, providing a framework that permits managers and
specialists to undertake the detailed work of marketing in a coordinated and effective fashion.
The creation of a good marketing plan is likely to be a time-consuming exercise, since it
should deal with both current circumstances and plans for the future.
(a) It should be based on detailed knowledge of both the target market and the company
involved.
(b) It should give sufficient detail of intentions to support the design and operation of all
marketing-related activities
.
The marketing plan and corporate strategy
It is important to remember how the marketing plan fits into overall corporate strategy.
Students are often confused by the appearance of environmental analysis in the marketing
planning process and assume that this means that the marketing plan is the same thing as the
overall corporate strategic plan. This may be true in some highly marketing-oriented
organisations, but it is not necessarily hence the marketing plan and the corporate strategic
plan are not the same thing. The difference is largely one of scope: the corporate plan has to
consider all aspects of the organisation's business, while a marketing plan is principally
about marketing activities. The marketing plan is aligned with the corporate plan and
supports it.
T FORWARD
What goes into the marketing plan?
There is no standard template or list of contents for a marketing plan. Different organisations
will find it
appropriate to consider different things at different times in their development. We will look
at one
possible detailed layout for a marketing plan in Section 3. In this section we will look in
general terms at
What is likely to appear in most marketing plans?

The marketing plan – an outline

1 Situation analysis
PESTEL – SWOT – Market analysis and
marketing objectives
53
2 Marketing strategy
Objectives – tactics – marketing mix
3 Numerical forecasts
Sales – expenses
4 Controls
Marketing organisation – performance measures
These four basic elements constitute a logical sequence of development for the basic building
blocks of the marketing plan. Ensure that you remember this basic structure. If all else fails in
the examination, it should enable you to organize your thoughts and make a creditable
attempt at preparing a marketing plan.

(a) Situation analysis. Any planning process should start with the collection and analysis of
basic data. In the marketing context this is often called situation analysis. It may be
appropriate for situation analysis to consider the items listed below.
• The wider environmental factors of the PESTEL model
• Strengths, weaknesses, opportunities and threats
• Marketing research data, including demographics data, trends, needs and growth
• Current and planned products and services
• Critical issues
(b) Marketing strategy. The statement of marketing strategy will describe in detail all the
marketing concepts, practices, activities and aids that will be used. It will reiterate the
marketing objectives in some form, and will probably give a detailed account of how the
chosen marketing mix will be applied. This section is likely to be of considerable size.
(c) Numerical forecasts. The marketing plan must include quantitative data about required
resources and forecast results. Costs must be given in detail and realistic sales estimates
must be provided. In particular, the cost of marketing activities must be specified.
(d) Controls. Planning is worthless unless control mechanisms are established to ensure that
the plan is properly executed. These may include intermediate organizational and sales
milestones, the design of routine performance measures, the establishment of an
appropriate marketing organisation, and the development of contingency plans.

The marketing plan in detail

1 Executive summary

54
It is common practice to place an executive summary at the beginning of the marketing plan.
Executive summaries are provided, as their name implies, for the convenience of senior
executives who require a fast overview in order to avoid the time involved in detailed study.
As a general rule, such summaries should be confined to a brief exposition of important
material.
(a) Background information that helps explain why particular proposals have been made or
decisions taken
(b) A description of proposed action with an indication of timescale
(c) A summary of the aims or targets that are intended to be achieved
(d) An assessment of any wider implications of the proposed action
(e) A statement of the required investment, where appropriate
The executive summary for a marketing plan is likely to include material on the following
specific matters.
• Marketing research
• Target markets and segments
• The proposed marketing mix
• Sales forecasts

2 Situation analysis
Situation analysis involves consideration of both the environment and internal factors. The
environment can be divided into the macro-environment, consisting of the six PESTEL
elements, and the micro- or market environment. Internal and environmental factors are
summarized in a SWOT analysis.
(a) The business environment. The operation of any business implies interaction with its
environment and the first stage of the detailed planning process is likely to be the collection
and analysis of environmental information. For this purpose, the business environment is
often split into two parts.
FAST FORWARD
(i) The macro-environment may be analyzed into six elements.
• Political • Technological
• Economic • Ecological or 'green'
• Social • Legal
The acronym PESTEL may be used. PEST and STEP are also common, when the legal
environment is included under politics and so-called 'green' issues are included under the
55
social heading. Your syllabus uses PESTEL, so that is what we will use in this Study Text. A
marketing plan need not include a detailed PESTEL analysis, but it should explain those
aspects of it that have affected its development.
Action Programme 1

(ii) The micro-environment consists of the markets in which the business operates or plans
to operate. It includes current and prospective customers and existing and potential
competitors. The micro-environment also includes any distribution systems used by the
business. Headings such as those below may be appropriate.
• Target markets • Products and services
• Market needs • Competition
• Market geography • Costs
• Market demographics • Suppliers
• Market trends • Critical issues
• Market forecasts
• Market growth
(b) Internal analysis.
Like the overall strategic plan it is derived from, a marketing plan should reflect the
characteristics of the business concerned. It will inevitably refer to current and planned
products and capabilities and be designed to exploit the organisation's resources to the full.
An important aspect of the internal analysis is product-market background, which sets the
scene for those less familiar with the products and markets involved. The environmental and
internal analyses are traditionally summarized and entered into the plan under the headings of
strengths, weaknesses, opportunities and threats. This SWOT analysis highlights aspects
of the overall situation that need action by the business. The aim is to exploit strengths and
opportunities, remedy areas of weakness and develop actions which minimize threats. The
analysis of SWOT must be prepared honestly and objectively as it is a key foundation on
which the marketing strategy is built.

3 Marketing strategy
Marketing strategy includes objectives and methods and may deal with such matters as gap
analysis, target markets, the marketing mix and marketing research. The marketing strategy
section of the marketing plan should describe in detail the organisation's marketing objectives
and methods.
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(a) Marketing objectives. The objectives of the marketing plan are derived from the
corporate plan, which is designed to support the overall corporate mission. A clear statement
of marketing objectives serves a number of purposes.
(i) It provides a focus for activity and a sense of purpose. This should stimulate activity,
particularly when overall objectives are broken down into personal targets.
(ii) It provides a framework for co-ordination of activity across the organisation.
(iii) IT is fundamental to the control process, since it defines success. Actual performance
is compared with what was intended, and control action taken to correct any discrepancy.
When objectives have been considered in detail, it is possible to use them to refine a plan by
means of gap analysis. Objectives will relate to both market dynamics and financial results,
and should be expressed in concrete form. Objectives may be set for such business
parameters as those below.
• Revenue growth
• Market share
• Profitability
• Number of outlets
• Customer retention
• Brand recognition
• Marketing expenses
• Staff levels and training
(b) Target markets. It will be appropriate to define clearly just what the target market is. The
nature of this definition will depend partly on the scale of the marketing operation envisaged.
For example, a company operating nationally in a lifestyle segment might target prosperous
retired people nationwide, while a locally based professional service business might target
start-ups and small traders within a 20-mile radius of its base.
(c) Products and their positioning. Product positioning is a continuation of the process of
determining the target market. Product positioning is about the way the target market
perceives the product's characteristics, in relation to those of competing products.
There are two basic product positioning strategies.
• 'Me too': the product is positioned to meet the competition head-on.
• Gap-filling: the product is positioned to exploit gaps in the market.
(d) The marketing mix. A marketing plan will not necessarily give complete details of every
component of the marketing mix. Instead, it will concentrate on those parts that are new or
57
crucial to success. For example, a plan built around a new or enhanced product that will be
distributed through established channels is likely to give significant product detail, and
explain the aim of the new features in market terms. Place, on the other hand, is unlikely to
receive more than a brief mention.
(e) Marketing research. Early marketing research should have played its part in supporting
the design of the marketing plan. However, it is not confined to this phase of operations.
Marketing research activities should form part of the marketing plan, so that continuing
feedback may be obtained upon the degree of success achieved.

4 Numerical forecasts
Numerical forecasts tie down what is to be achieved and form the basis of the control
process.
This section of the marketing plan could also be called a budget.
4.1 Typical forecast quantities
• Turnover
• Market share
• Marketing spend
• Units of sales
• Costs
• Breakeven analysis
Phasing and analysis. It will be appropriate to present numerical forecasts broken down in
two ways.
(a) Phased by time period. A year's total may be broken down into monthly or quarterly
increments.
(b) Analyzed by marketing characteristic. For example, sales and expenses might be
analysed by product type or by market segment.

4.2 Breakeven analysis

Breakeven analysis is a management accounting technique that should be of interest to
marketing managers. The cumulative sales of a product reach their breakeven point when the
total revenue is high enough to cover both the variable and fixed costs of producing and
selling that quantity of product. The breakeven point is a vital hurdle that must be cleared if

58
the marketing plan is to be considered successful, and a profit made on the sale of the
product.

4.5 Controls
Control is vital if management is to ensure that planning targets are achieved. The control
process involves three underlying components.
– Setting standards or targets
– Measuring and evaluating actual performance
– Taking corrective action
(a) Performance measures. The data contained within the numerical forecasts section of the
plan provides the raw material for performance measures. Mechanisms must be put in place
for collecting information on actual results, so that comparisons can be made and control
action taken. Overall performance is often judged by analyzing two main indicators: sales and
market share.
(i) Sales analysis is based on the comparison of actual with budgeted turnover, but this is
only the first stage. It is appropriate to delve deeper and consider the effects of differences in
unit sales and selling price. Further analysis by product, region, customer and so on may be
required.
(ii) Market share analysis. Market share is important to overall profitability, and the
attainment of a given market share is likely to be an important marketing objective.
Market share should always be analyzed alongside turnover, since the growth or decline of
the market as a whole has implications for the achievement of both types of objective.
FAST FORWARDAST FORWARD
(b) Marketing organisation. Individual responsibilities within the overall marketing plan
should be given and the persons responsible named. One example of a specific responsibility
is the preparation of performance reports. Other roles will include that of overall
responsibility (probably discharged by the Marketing Manager or Brand Manager),
management of promotional effort and management of marketing research effort.
(c) Implementation milestones. Progress in implementing a programme can be monitored
by the establishment of milestones and the dates by which they should be achieved.
Marketing at Work
Examples for the launch of a new car might include:
• First delivery to show rooms
• First thousand sold
59
• Breakeven sales achieved
(a) Contingency planning. Events in the real world very rarely go according to plan. It is
necessary for planners to consider problems that might arise and make appropriate
preparations to deal with them. There are several requirements.
(i) The organisation must have the capability to adapt to new circumstances. This will
almost certainly imply financial reserves, but may require more specific resources, such as
management and productive capacity.
(ii) There is a range of possible responses to any given contingency. The organisation should
consider its options in advance of needing to put them into action.
(iii) A prompt response will normally be appropriate. Achieving this depends to some extent
on having the resources and having done the planning mentioned above, but
It will also depend on a kind of organizational agility. In particular, decision-making
processes need to be rapid and effective.

CHAPTER 6

CUSTOMER CARE

Objectives
By the end of the unit you should be able to:
 Define customer care
 Discuss the tips of customer care
 Design a customer programme and charter

60
Customer care
 is the manner in which customers are treated by the business
 Customer care creates a new orientation in an organisation with and increasing focus on
improving the delivery of the needed services by the customers.
 This should always be viewed as the clientele having rights and expectations that must be
fulfilled.
 As an entrepreneur one needs to appreciate that customer care should be part and parcel of
his/her business operations if you intend to achieve success.
 The customer care vision by organisation embraces employees that put its customers first and
that is open transparent, accountable and responsive
 The customer is king and always right as a way of doing business
 The customer is always observed as having a right to demand quality services from the
organisation
 In the modern business world there is an increasing focus on enhancing service delivery and
on ascertaining that the delivered as promised
 An entrepreneur should be responsible, accessible and quick to help source problems
 Should be reliable and deliver what he/she promises on time
 Should be knowledgeable and courteous
 Should be empathetic and should understand the needs of customers
 Work area should always be clean and organized.

Ten tips for customer care

1. Reliability
 this refers to consistency of performance and dependability
 perform the service right the first time fulfill promises
 be impartial and avoid favouritism
 Be firm with friends and relatives as far as business transactions are concerned.

1. Responsiveness
 this refers to the willingness as well as readiness of the entrepreneur or his employees in
providing the services within reasonable time immediately if not sooner

2. Competence
-This refers to the possession of the required skills and knowledge by those who deliver the
services to the customer. This will create confidence.

61
3. Accessibility
 this refers to the degree of approachability and ease of contact of the entrepreneur or his
employees
 drop what you are doing ignored to greet and serve customer

4. Courtesy
 This refers to politeness, respect, consideration and friendliness of your organization’s contact
such as receptionist, secretaries, telephonist, etc, they must be polite and courteous at all times
– remember, a smile goes a long way.

5. Communication
 keep your customer well informed in a language and style they understand
 it is important to hear and understand what your customers are saying
 communicate effectively with your suppliers as well

6. Credibility
 this refers to being trustworthy and faithful
 put customers at heart
 they should feel that he/she is given priority and should have the trust that any order will be
executed and received when expected

7. Security
 customer should be protected from danger, risk or doubt within the premises

8. Knowledge of Customer
 the entrepreneur should know the client specific requirements
 be able to recognize regular clients
 strive to provide individualized attention
 Understand what makes them buy is it need Price?

9. Tangibles
 This could include the physical evidence (i.e. building, good handling, tools, equipment,
packages etc). This could also include the appearance of your personnel
 employees must be neat, orderly and clean

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Benefits/importance of customer care

 If customers are put first, the entrepreneur will be rewarded with new business and increased
profit margins and sales.
 Customer care creates new customers
 Constructive consumer dialogue enables the entrepreneur to know and understand what the
customers’ needs and wants
 It builds good relationships and loyalty with customers
 Can make passive customers become in violated participants (i.e. loyalty)
 Create corporate excellence
 Build good reputation and good image i.e. it is a tool for good corporate image building
 Business can become a market driven entity as you get information on what your customers
need and want.

Perquisites of meeting Customers’ expectations

1. be courteous and tactful

2. be friendly and helpful
3. deal promptly and decisively with customers
4. rectify faults quickly and keep promises
5. listen to customers attentively and respond promptly
6. avoid being sarcastic when dealing with customers
7. present information logically and comprehensively
8. stick to your commitments
9. Always inform your customers on what happens at your business if it may affect them (i.e. sale,
new product? Services
10. be fair and honest when dealing with customers
11. demonstrate the right skills at the right time
12. always give customers professional treatment
13. know the customers business and needs

Who gets to decide if a customer service is good?

1. customer service is a function of your customers perceptions not your standards in other words,
the customers gets to decide if he or she has received good services

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  even though all of your standards may have been met if the customer does not feel well
served, your customer service is poor
 customer satisfaction is ultimately the result of the sum total of the customer’s experience

2. Customer satisfaction is ultimately the result of the sum total of the customer’s experience at your
establishment.
 Customers come back to a place that has provided a pleasant experience for them. Thus
owners and managers need to focus not on tangible as ends themselves but on how all the
particulars combine to create a certain experience.

Prime examples of poor customer care

1. poor delivery and accessibility of services
2. poor quality and state of merchandise
3. existence of long queues of customers waiting to be served
4. dirty environment of business
5. failure in meeting client expectations

Dealing with unprincipled customers

 never show that customer is wrong or behaving badly
 always take it that he/she is right
 appreciate and understand at there should be some customer’s who visit your business with
hidden agenda and ulterior motives (i.e. competitors of those interested in policing I’ve price
control monitors
 make very attempt to deter their bad intentions by being upright in your dealings

You can defeat unprincipled customers by taking the following steps:

1. continue to show a good image of your business
2. smile when talking to customers
3. accept blunders where you can realize them promise to improve and make an apology
4. avoid arguing with customers
5. always hold your composure and avoid losing your temper in front of your customer

Building Customer Trust

From a customer’s point of view, there is probably no concept more important than trust. How can
you strengthen customer trust?

64
 1. Keep your promises
2. Make promises that you can keep
3. do everything to keep the commitments you make
4. if you cannot fulfill the promises let the customer know
5. call back if you promise even if you don’t have the information the customer is expecting
6. Following up on an order to be sure everything is okay.
7. Properly hold complaints all the time.
8. Make recommendations that are best for the customers.
9. Recommend a competitor when there’s a need that you can’t satisfy.
10. Make yourself available after the sale.

Creating Customer Comfort

Customer care is also defined as meeting needs and creating comfort. Meeting needs is a given,
creating comfort is a function of enabling the customer to feel a sense of control when he/she is at
your business. Customers feel in control when they know the drill i.e. when they know how things
work and how to get things done

Develop and maintain a customer charter

 Make sure that there is availability and visibility of both a mission statement and customer
charter. The customer’s charter will remind your workers always to abide by its contents and
will assure customers of their expectations of the services and what move to take if they are
not met. Your customers’ charter should indicate the standards of services to be delivered
and the way in which the worker will perform their duties

1. telephone
 number of rings before the telephone is answered are given


2. Enquires
 short turn around time
 follow up
 courtesy options offered to caller

3. Correspondence
 Correct

65
  Shorthorn around time
 Acknowledgement of receipt

4. Delivery deadlines met

Delays explained and apology given

5. Outgoing services
 automatic follow up
 customer feedback
 be sure that your customer’s charter informs clients about the availability of a system of
redress in case of grievances

CHAPTER 7

RECORD KEEPING AND STOCK CONTROL

Objectives
By the end of the unit you should be able to:
 differentiate between bookkeeping and accounting
 keep records and control stock in a business
 interpret and apply basic financial statements

What does it mean when someone asks you for an account of something?
 Giving a report of some event/activity that has taken place.
This is the major objective and purpose of this business activity, Accounting.

DIFFERENCE BETWEEN BOOKKEEPING AND ACCOUNTING

66
Bookkeeping: it is concerned with the recording of data only. This used to be done in
books, thus the name bookkeeping.
 A bookkeeper is responsible for this duty. Nowadays books may be used, but a lot of
accounting data is recorded using computers.

Definition of Accounting
The process of identifying, measuring and communicating economic information to permit
informed judgements and decisions by users of the information.
 An Accountant does the analysis and interpretation of the data which has been
recorded by the bookkeeper.

The accounting process

It involves:
Recording Classifying Summarising Interpreting of business activities capable
of being expressed in monetary terms.

Users of accounting information

i. Present and Potential Investors :they want to see whether or not the business is
profitable (viability of the business)
ii. Prospective buyers of the company: where to buy or not to buy
iii. Lenders : Banks and Financial institutions ,when the owner of a business wants to
borrow money
iv. Suppliers/Creditors: Whether it is safe to supply on credit and analyse if they will be
paid back their dues.
v. Customers: they need to know if there will be a constant supply of products from the
business
vi. Government/Taxman: for calculating tax payable by the business
vii. Managers of the firm: for internal decision making
viii. Employees: need to access their job security
ix. General public

67
Source documents

Information used in the process of completing financial transactions is called source

documents. These can include invoices, receipts, credit and debit notes, purchase orders,
customer billings, bank statements etc. These are the starting of any accounting process.

Source document

 Source documents are the documents from which original information to the books of primary
entry is obtained e.g. receipts, invoices, debit note, credit note and statement of account
 Receipts are used by the entrepreneur or supplier when the transactions involve cash e.g. where a
customer tenders cash, a receipt may be written out. Below is a sample of a receipt

Books of primary entry is obtained

Receipt 0023
Date: 25/02/04
Gobvu Manufacturing (Pvt) Ltd
P O Box 22

CHEGUTU

Telefax: 703301

Purchases Amount__
5 x 2l Mazoe Orange crush $30 000.00
Sub total$30 000.00
Less discount $ 3 000.00
Signature…………… Total $27 000.00

Thank You

68
Invoice is a note given by the supplier or seller to the customer when goods are bought on credit to
show that the customer has not paid for the goods. That is an invoice is used for credit sales. The
invoice should have the following details:

Date of purchase
Invoice number
Seller’s name, address, telephone, fax, email (not all of this information may be applicable)
Buyer’s name, address, telephone, fax, email (not all of this information may be applicable)
Goods or services bought
Amount to be paid
Terms of sale
Amount of discount if any
Appreciation message (e.g. Thank You for doing business with us)

The following is a sample of an invoice

Invoice 00214
Date: 26/02/04

Gobvu Manufacturing (Pvt) Ltd

P O Box 39
KWEKWE

69
Telefax: 055 50221

To: Makayepuva (Pvt) Ltd

Chuma street

MASVINGO

Tel: 039 62043

Item purchased Quantity Unit cost Total______

500ml super stick glue 500 $100.00 $50 000.00

less 5% discount if paid
within 30 days

Total $50 000.00

Debit Note is used to correct an undercharge on a customer’s account e.g. when the price shown on
the invoice is too low or when some items have not been shown. Sometimes a second invoice is
issued in this instance rather than a debit note.

Below is an example of a debit note

Debit Note
Supplier’s name & address
Supplier Ref:
Date:
Customer’s Name & Address
Debit Note No

Item description Quantity Unit price Total___________

Total to be debited:
Reasons for debit:

70
Credit Note is used to correct an overcharge e.g. if 25 items are sent, but only 20 were requested on
the order, then a credit note will be prepared to reduce the bill by the value of those 5 items. The
extra 5 items would be returned to the supplier. A credit note can also be used where goods or
services are unsatisfactory e.g. goods are damaged or wrong price charged.

The following is a layout of a credit note

Credit Note
Customer’s Name & Address
Customer Ref:
Date:
Supplier’s Name & Address
Credit Note No:

Item Description Quantity Unit price Total______

Total to be credited

Reason for credit:

Statement

Statement is a summary of all of the invoices, payments, and credit and debit notes during a period of
time. A running balance (total) is used to show the effect of each transaction i.e. invoices and debit
notes increase the total amount which is owed, and credit notes and payments reduce the amount
which is owed. This is essential as it helps the supplier and the buyer to keep a record of invoices sent
and paid during a period of time.

Below are the layout and a specimen of a statement

Statement
From………/…………/………To……./………/………
Customer’s Name & Address

71
 Customer Ref:
Date:
Supplier’s Name & Address

Date Details Amount Balance_________

Balance remaining

Specimen
Details Amount Balance

5/02/04 Invoice No. 011 $1 000.00 $1 000.00

10/02/0 Credit Note 005 $ 300.00 $ 700.00
4
20/02/0 Invoice No. 13 $ 800.00 $1 500.00
4
25/02/0 Payment Received $ 600.00 $ 900.00
4
28/02/0 Invoice No. 16 $1 200.00 $2 100.00
4

Balance remaining $2 100.00

NB: The balance column shows a running total of how much is owed at each date. Invoices and Debit
Notes are added to the balance as they increase the amount which is owed; credit notes and payments
are subtracted from the balance as they decrease the amount which is owed.
The other documents used by the business are enquiry, quotation, price list, delivery note and
consignment note.

Enquiry letter is a letter from the customer asking about prices, range of goods, specifications etc
Quotation is a reply to the enquiry giving details about the specific items or services that the customer
has enquired about.

Price list is a list showing all of the items for sale together with their prices.

72
Order Note is a letter requesting goods from the supplier.

Below is a layout of an order note

Order
Supplier’s Name & Address Customer’s Name & Address
Customer Ref:
Date:
____________________________________________________________
Item Description Quantity Unit price Total________

TOTAL_________________

NB: customer ref maybe used as a special code number given to the customer to help the supplier
identify any previous dealings with that customer. If a letter is used instead of an order form, these
columns should still be used as part of the body of the letter so that the order is clear and easy to
understand.

Delivery Note is a list of items sent and the quantities of each item. It is sent by the supplier for the
customer to check carefully that the correct items and quantities have been delivered and then sign.
The delivery note only shows items and quantity. The delivery note should be given a special number
so that he or she can find his copy easily.

Below is the layout of Delivery Note

Delivery note
Customer’s Name & Address:
Customer Ref:
Date:
Supplier’s name & Address
Delivery Note No:

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Item description Quantity___________

Customer’s signature………………_______________________________

Consignment Note is used with or instead of a delivery note where the goods are delivered by
someone other than the supplier e.g. for goods delivered by sea or rail.

Entrepreneurs should consider the following. When choosing a supplier: prices, quality, delivery,
customer service, location, terms of payment, discounts and business hours.

Appreciation of Books of Accounts

In business the entrepreneur should be able to appreciate books of accounts. These include the books
of original entry or prime entry and the ledger book. The books of prime entry include the cashbook,
purchases journal book, purchases returns book and the sales returns book and the general journal
book. The ledger book is the main book of accounts.

Cashbook
This is the book of original entry used to record all cash transactions that is all money that comes into
and goes out of the business on a daily basis. A cashbook can be used to determine the amount of
money left over at the end of the month. Below is a layout of a cashbook

Debit side (Receipts side) Dr Credit side (Payments side) Cr

Date Details Cash Ban Date Details (Payments) Cash Bank
(Receipts) k

Example
1/02 E Gobvu starts business with capital: Cash $ 5 000.00
Bank $50 000.00
8/02 Sales (cash) $15 000.00
5/02 Buys stock with cheque $10 000.00

74
15/02 Telephone bill paid by cheque $ 5 000.00
18/02 Pay cash into the bank $10 000.00
20/02 Sales (cheque) $20 000.00
22/02 Pay wages (cash) $10 000.00
23/02 Withdraw from the bank to keep in business $ 5 000.00
28/02 E Gobvu writes cheque for personal use $15 000.00

E Gobvu cash book for the month of February 2011

Date Receipts (Details) Cash Bank Date Payments (Details) Cash Bank
1/02 Capital 5 000 50 000 5/02 Purchases 10 000
8/02 Sales 15 000 15/0 Telephone bill 5 000
18/02 Deposit 10 000
10 000 2 Deposit
20/02 Sales 10 000
20 000 18/0 Wages
23/02 Withdrawal 5 000 2 Withdrawal 5 000

22/0 Drawings 15 000

2 Balance c/f 5 000 45 000

25 80 000 23/0 25 000 80 000
1/03 Balance b/f 000_ 2
45 000 28/0
5 000 2
29/0
2

Notes
The cash book is divided into two halves that are Debit Side (Dr) or Receipts side and the Credit Side
Payment side (Cr). This means that when money comes into the business, it is recorded on the left
hand side (Receipts) and on the right hand side (Payment) for money going out of the business.
 Capital refers to the money being invested by the entrepreneur into the business.
 Purchases refer to goods bought by the business for resale.
 Drawings relates to money taken out of business for personal use.
 Transfer from Bank to Cash refers to money taken out of bank account to be kept as cash in
business. This transaction has to be recorded in the cashbook to show that the money has been
moved from one place to the other, otherwise the totals for the money left in the bank and in cash
at the end of the month will be incorrect.

75
 When money is withdrawn from the bank account, money has gone out of the bank as such there
is need to record it I the Bank column on the Payments side of the Cash Book. This money is
added to our supply of cash in the business and a record has to be made on the cash column on the
Receipts side of the cashbook. The reverse is true when the business transfers cash from the
business into the bank.
 Balance carried forward (C/F) is determined at the end of the month by subtracting the total
payments (money out) from the total receipts are $25 000 and total cash payments are $20 000,
therefore $5 000 is left at the end of the month $25 000 has come in and $20 000 has gone out. $5
000 is the balance carried forward because it is the amount that will be starting the next month
and will be recorded as balance b/f (balance brought forward)

Purchases journal
This is a book of primary entry where goods on credit for re-sale are recorded. The transactions are
recorded as follows:

Example: Mutsvedu (Pvt) Ltd

10 February bought $5 000 stocks on credit from E Gobvu
18 February bought $5 000 stocks on credit from T Timothy

Mutsvedu D Purchase’s journal for the month of February 2011

Date Details Folio Dr Cr
10/0 E Gobvu $10 000.00
2 T Timothy $ 5 000.00
18/0 Dr Purchases A/C $15

2 000.00

Sales Journal
 This is a book of primary entry where goods returned by customers are recorded

Example: Mutsvedu (Pvt) Ltd

Mutsvedu D Sales Returns Journal for the Feb 2004

20/02 B Sali returned goods $2 000.00

22/02 T Tom returned goods $5 000.00

76
 Date Details Folio Dr Cr
20/02 B Sali $2 000.00
22/02 T Tom $5 000.00
Dr Sales $7 000.00

Returns

General Journal
This is used to enter all transactions which cannot conveniently be entered into one of the other
subsidiary books e.g. fixed assets bought on credit such as furniture.

Example; Mutsvedu (Pvt) Ltd

01/02 Received an invoice of $100 000.00 for office furniture bought on credit form Alice Mabinge
02/02 Bought stationary on credit from Alice Mabinge $10 000.00

Date Details Foli Dr Cr

o
01/0 Office furniture 100 000.00
2 Alice Mabinge 100 000.00
Stationery 10 000.00
02/0 Alice Mabinge
2

The Ledger Book

This is the main book of account. All other books of account are subsidiary to the ledger and are used
to record transactions as they occur, prior to their entry or posting to the ledger.

The ledger is ruled as follows:

Dr Cr
Dat Details Folio Amount Dat Details Folio Amount
e e

77
Notes:
 The ledger is divided into two halves that is the left-hand side called debit side and the right hand
side called credit side. The abbreviations Dr and Cr are used respectively at the top of each
account as shown above.
 The first column is for dates, the second for particulars of the transactions, the third, a folio
column (referred to hereafter) and the fourth, or money column for the amount of each
transaction.
 The two sides of the account (sometimes contained on two pages facing each other) are numbered
alike and are together called a folio.
 The universal rule in entering or posting transactions to the ledger is that credit the giver and debit
the receiver.

ACCOUNTING EQUATION
When an entrepreneur starts a business he supplies part of the resources (Capital).He seeks
assistance from other sources (Liabilities), so as to have adequate resources .These resources
are the assets of the business. At any point of time the assets of any entity must be equal (in
monetary terms) to the total of equities. This can therefore be expressed as
ASSETS = CAPITAL + LIABILITIES
What are the resources? Who supplies the equities to acquire the assets?
Account
It is a place where all information referring to a particular asset or liability or capital is
entered.

Business is not entirely carried out on cash basis, many of the things bought when a company
is established are not exhausted straight away e.g. buildings and machinery. It is necessary
therefore to have some method of showing the financial position of the business from time to
time and of calculating the amount of profit which is available for the entrepreneur. This is
the purpose of a system of accounts.

Asset Accounts
These are the actual resources in a business and can include:
i. Tangible/Fixed/Non Current assets :
 Buildings, Machinery ,Motor vehicles etc
ii. Intangible/Current assets:

78
  Cash: coins and paper currency, money orders
 Bank: bank deposits and withdrawals, cheques
 Stock at hand
 Accounts receivables: goods and services sold on credit to debtors which are
being expected to be paid at an agreed time.
 Prepaid expenses: when an entrepreneur has made a payment in advance, he
has done himself a favour.

Liability Accounts
This is money owing for goods supplied to the business and can include:
i. Long term /Non Current Liabilities
 Loans
ii. Short term/Current Liabilities
 Accounts payable :credit purchases/Creditors
 Accruals: Expenses we still have to pay at the end of a financial period e.g.
rent payable, wages payable.
 Unearned revenue: this is when a product or service was paid for in advance to
us before we have supplied it e.g. unearned wages, unearned rent
Appreciation of Books of Accounts
In business the entrepreneur should be able to appreciate books of accounts. These include the books
of original entry or prime entry and the ledger book. The books of prime entry include the cashbook,
purchases journal book, purchases returns book and the sales returns book and the general journal
book. The ledger book is the main book of accounts.

Cashbook
This is the book of original entry used to record all cash transactions that is all money that comes into
and goes out of the business on a daily basis. A cashbook can be used to determine the amount of
money left over at the end of the month. Below is a layout of a cashbook

Debit side (Receipts side) Dr Credit side (Payments side) Cr

Date Details Cash Ban Date Details (Payments) Cash Bank
(Receipts) k

Example

79
1/02 E Gobvu starts business with capital: Cash $ 5 000.00
Bank $50 000.00
8/02 Sales (cash) $15 000.00
5/02 Buys stock with cheque $10 000.00
15/02 Telephone bill paid by cheque $ 5 000.00
18/02 Pay cash into the bank $10 000.00
20/02 Sales (cheque) $20 000.00
22/02 Pay wages (cash) $10 000.00
23/02 Withdraw from the bank to keep in business $ 5 000.00
28/02 E Gobvu writes cheque for personal use $15 000.00

E Gobvu cash book for the month of February 2011

Date Receipts (Details) Cash Bank Date Payments (Details) Cash Bank
1/02 Capital 5 000 50 000 5/02 Purchases 10 000
8/02 Sales 15 000 15/0 Telephone bill 5 000
18/02 Deposit 10 000
10 000 2 Deposit
20/02 Sales 10 000
20 000 18/0 Wages
23/02 Withdrawal 5 000 2 Withdrawal 5 000

22/0 Drawings 15 000

2 Balance c/f 5 000 45 000

25 80 000 23/0 25 000 80 000
1/03 Balance b/f 000_ 2
45 000 28/0
5 000 2
29/0
2

Notes
The cash book is divided into two halves that is Debit Side (Dr) or Receipts side and the Credit Side
Payment side (Cr). This means that when money comes into the business, it is recorded on the left
hand side (Receipts) and on the right hand side (Payment) for money going out of the business.
 Capital refers to the money being invested by the entrepreneur into the business.
 Purchases refer to goods bought by the business for resale.
 Drawings relates to money taken out of business for personal use.
 Transfer from Bank to Cash refers to money taken out of bank account to be kept as cash in
business. This transaction has to be recorded in the cashbook to show that the money has been

80
 moved from one place to the other, otherwise the totals for the money left in the bank and in cash
at the end of the month will be incorrect.
 When money is withdrawn from the bank account, money has gone out of the bank as such there
is need to record it I the Bank column on the Payments side of the Cash Book. This money is
added to our supply of cash in the business and a record has to be made on the cash column on the
Receipts side of the cashbook. The reverse is true when the business transfers cash from the
business into the bank.
 Balance carried forward (C/F) is determined at the end of the month by subtracting the total
payments (money out) from the total receipts are $25 000 and total cash payments are $20 000,
therefore $5 000 is left at the end of the month $25 000 has come in and $20 000 has gone out. $5
000 is the balance carried forward because it is the amount that will be starting the next month
and will be recorded as balance b/f (balance brought forward)


Purchases journal
This is a book of primary entry where goods on credit for re-sale are recorded. The transactions are
recorded as follows:

Example: Mutsvedu (Pvt) Ltd

10 February bought $5 000 stocks on credit from E Gobvu
18 February bought $5 000 stocks on credit from T Timothy

Mutsvedu D Purchases journal for the month of February 2011

Date Details Folio Dr Cr
10/0 E Gobvu $10 000.00
2 T Timothy $ 5 000.00
18/0 Dr Purchases A/C $15

2 000.00

Sales Journal
 This is a book of primary entry where goods returned by customers are recorded

Example: Mutsvedu (Pvt) Ltd

Mutsvedu D Sales Returns Journal for the Feb 2004

20/02 B Sali returned goods $2 000.00

81
 22/02 T Tom returned goods $5 000.00

Date Details Folio Dr Cr

20/02 B Sali $2 000.00
22/02 T Tom $5 000.00
Dr Sales $7 000.00

Returns

General Journal
This is used to enter all transactions which cannot conveniently be entered into one of the other
subsidiary books e.g. fixed assets bought on credit such as furniture.

Example; Mutsvedu (Pvt) Ltd

01/02 Received an invoice of $100 000.00 for office furniture bought on credit form Alice Mabinge
02/02 Bought stationary on credit from Alice Mabinge $10 000.00
Date Details Foli Dr Cr
o
01/0 Office furniture 100 000.00
2 Alice Mabinge 100 000.00
Stationery 10 000.00
02/0 Alice Mabinge
2

The Ledger Book

This is the main book of account. All other books of account are subsidiary to the ledger and are used
to record transactions as they occur, prior to their entry or posting to the ledger.

The ledger is ruled as follows:

Dr Cr
Dat Details Folio Amount Dat Details Folio Amount
e e

82
Notes:
 The ledger is divided into two halves that is the left-hand side called debit side and the right hand
side called credit side. The abbreviations Dr and Cr are used respectively at the top of each
account as shown above.
 The first column is for dates, the second for particulars of the transactions, the third, a folio
column (referred to hereafter) and the fourth, or money column for the amount of each
transaction.
 The two sides of the account (sometimes contained on two pages facing each other) are numbered
alike and are together called a folio.
 The universal rule in entering or posting transactions to the ledger is that credit the giver and debit
the receiver.

DOUBLE ENTRY SYSTEM

It is based on the Double entry concept which is one of the universally acknowledges
accounting concepts. It says that for every transaction there is a debit and credit entry.

 Debit the receiver

 Credit the giver

Example 1

2010 Debit (Dr) Credit (Cr)

August 1 Started business with $1000 cash Cash Capital
Account Account
2 Paid $900 of the opening cash into the bank Bank a/c Cash a/c
4 Bought goods on credit $78 from S.Holmes Purchases S.Holmes a/c
a/c
5 Bought a motor van by cheque $500 Motor Van Bank a/c
a/c
7 Bought goods for cash $55 Purchases Cash a/c

83
 a/c
1 Sold goods on credit $98 to D.Moore D.Moore a/c Sales a/c
0
1 Returned goods to S.Holmes $18 S.Holmes a/c Purchases
2 Returns
1 Sold goods for cash $28 Cash a/c Sales a/c
9
2 Bought fixtures on credit from Kingston Equipment Fixtures a/c Kingston a/c
2 Company $150
2 D.Watson lent us $100 paying us the money by Bank a/c Loan-D.Watson
4 cheque
2 We paid S.Holmes his account by cheque $60 S.Holmes a/c Bank a/c
9
3 We paid Kingston Equipment Co. by cheque $150 Kingston a/c Bank a/c
1

Opening up accounts and closing them in the ledger

When transactions transpire within a month/financial period they are posted into the ledger of
the company’s books from subsidiary books. Accounts for related transactions are recorded
in the same accounts and these are balanced off at the end of a period.

 We are going to used T-Accounts for our ledger to open up accounts using Example
1 above. We are now practically entering the theoretically done debits and credits in
the example.

Capital a/c
Bal c/d 1000 Cash 1000
1000 1000

Bal b/d 1000

84
 Cash a/c
Capital 1000 Bank 900
Sales 28 Purchases 55
Bal c/d 73
1028 1028
Bal b/d 73

Bank a/c
Cash 900 M.Van 500
Loan 100 S.Holmes 60
Kingston 150
Bal c/d 290
1000 1000
Bal b/d 290

Purchases a/c
S.Holmes 78 Bal c/d 133
Cash 55

133 133
Bal b/d 133

S.Holmes a/c
P.Returns 18 Purchases 78
Bank 60
78 78

85
 Motor Van a/c
Bank 500 Bal c/d 500
500 500

Bal b/d 500

Sales a/c
Bal c/d 126 D.Moore 98
Cash 28
126 126

Bal b/d 126

D.Moore a/c
Sales 98 Bal c/d 98
98 98
Bal b/d 98
Purchases Returns a/c
Bal c/d 18 S.Holmes 18
18 18
Bal b/d 18

Fixtures a/c
Bank 150 Bal c/d 150
150 150
Bal b/d 150

Loan- D.Watson a/c

86
Bal c/d 100 Bank 100
100 100
Bal b/d 100

Kingston Equipment a/c

Bank 150 Fixtures 150

TRIAL BALANCE
We have been practising the double entry concept whereby each transaction has both a debit
and credit entry. All items recorded on the credit side should equal in total those on the debit
side of the books. To see if the two totals are equal or that they balance, a trial balance may
be drawn up at the end of a financial period.

Definition: A trial balance is simply a proof of the equality of debit and credit balances in
the accounts.

 Using Example 1 which we have just balanced off, taking the Bal b/d from each
account, the following is the extracted Trial Balance as at 31 August 2010.

Trial Balance as at 31 August 2010

Dr Cr

Capital 1000
Cash 73
Bank 290
Purchases 133
Motor Van 500
87
Sales 126
D.Moore 98
Purchases Returns 18
Fixtures 150
Loan-D.Watson 100
1244 1244

The two sides are equal therefore the trial balance has balanced. This shows that our
transactions that we posted into the ledger are correct.

FINAL ACCOUNTS OF A SOLE TRADER

 Income Statement/Trading Profit and Loss Account

 Balance Sheet

Income Statement
The main reason people set up businesses is to make profits. Losses can occur if the business
becomes unsuccessful. The calculation of profit/loss is the most important objective of the
accounting function. The profits are calculated by drawing up a special account called a
Trading Profit and Loss Account. The account is split into two sections, one in which the
Gross Profit is found and in the other, Net Profit is calculated
 Gross Profit-Calculated in the Trading Account .This is the excess of sales over the
cost of goods sold in the period.
 Net Profit-Calculated in the Profit and Loss Account. This is what is left of the gross
profit after all other expenses have been deducted.
 Expenses-The value of all the assets that has been used up to supply goods and
services and therefore obtain revenues.

To compile a Trading Profit and Los Account, one needs to have the Trial Balance first.

Balance Sheet

88
After compiling the Trading Profit and Loss Account, the balances that remain on the Trial
Balance pertain to the Balance Sheet. These will usually be balances for Assets, Liabilities
and Capital.

A Balance Sheet is a record of the business Assets, Liabilities and Resultant stockholders
equity (Capital + Profit-Drawings) to depict a financial situation on a specific date.

Example 2
The following is a Trial Balance of R.Graham as at 30 September 2010.
Dr Cr
$ $
Stock 1 October 2009 2368
Carriage outwards 200
Carriage inwards 310
Returns inwards 205
Returns outwards 322
Purchases 11874
Sales 18600
Salaries and wages 3862
Rent 304
Insurance 78
Motor Expenses 664
Office expenses 216
Lighting and Heating 166
General expenses 314
Premises 5000
Motor Vehicle 1800
Fixtures and Fittings 350
Debtors 3896
Creditors 1731
Cash at bank 482
Drawings 1200
Capital 12636

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 33 289 33 289

Stock at 30 September 2010 was $2946.

Required:
Draw up a:
1. Trading Profit and Loss Account for the year ended 30 September 2010.
2. Balance Sheet as at 30 September 2010.

Trading Profit and Loss Account for the year ended 30 September 2010.

Sales 18 600
Less Returns inwards (205)
18 395

Less Cost of goods sold:

Opening Stock 2 368
Add Purchases 11 874
Less Returns outwards (322)
Add Carriage inwards 310
Less Closing Stock (2 946) 11 284
GROSS PROFIT 7 111

Less Expenses:
Carriage outwards 200
Salaries and Wages 3 862
Rent 304
Insurance 78
Motor Expenses 664

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Office Expenses 216
Lighting and Heating 166
General Expenses 314 5 804
NET PROFIT 1 307

Balance Sheet as at 30 September 2010

Non Current Assets

Premises 5 000
Fixtures and Fittings 350
Motor Vehicle 1 800
7 150

Net Current Assets 5 593

Current Assets 7 324

Stock 2 946
Debtors 3 896
Bank 482
Current Liabilities 1 731
Creditors 1 731

Total Assets 12 743

Capital 12 636
Add Net Profit 1 307
Less Drawings (1 200)

12 743

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CAPITAL STRUCTURE & CAPITAL GEARING CONCEPT

Capital structure
The capital structure is how a company finances its overall operations and growth by using
different sources of funds. This is also related to the capitalisation of a company which
describes the composition of a company’s permanent or long term capital which consists of
debt and equity.

When people are talking refer to capital structure they are most likely referring to a
company’s debt-to-equity ratio, which provides insight into how risky a company is. Usually
a company more heavily financed by debt (debt capital) poses greater risk as this company is
relatively highly levered. A healthy proportion of equity capital as opposed to debt capital in
a company’s’ capital structure is an indication of financial fitness.

 Equity Capital: in a company’s’ capital structure, equity consists of a

company’s common and preferred stock plus retained earnings, which are
summed up in the shareholders equity account in the balance sheet.

 Debt Capital: the debt component of a company’s ’capitalisation should

consist of short term borrowings (notes payable), the current portion of long
term debt (interest), long term debt, 2/3 of the principal amount of operating
leases and redeemable preferred stock.

Debt-Equity relationship
Shrewd use of leverage (debt) increases the amount of financial resources available to a
company for growth and expansion. The assumption is that management can earn more on
borrowed funds than it pays in interest expense and fees on these funds.

A company considered too highly leveraged (too much debt versus equity) may find itself
restricted in action by its creditors and /or may have its profitability hurt because of paying
high interest charges.

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A company’s’ debt-equity relationship varies according to the industry it falls, line of
business and stage of development. However common sense tells us that generally no matter
what kind of business or level of development it is at, these companies should have lower
debt and higher equity levels. This status reflects a very positive sign of investment quality.

Capital Ratios and indicators

Three different ratios are used to assess the financial strength of a company’s’ capitalisation
structure.

 Debt ratio: total liabilities

Total assets.

More of total liabilities means less equity and therefore indicates a more leveraged
position.
 Debt/Equity Ratio: total liabilities
total shareholders equity.

 Capitalisation Ratio:total debt

total capitalisation

(Total debt = the sum of obligations categorised as debt + total shareholders

equity)
Expressed as a percentage, a low number is indicative of a healthy equity cushion, which
is always more desirable than a high percentage of debt.

N.B The first two are popular measurements; however it’s the capitalisation ratio that
delivers the key insights to evaluating a company’s capital position.

Capital gearing concept

Few people have the money to cover all the initial expenses in starting a business. This is
why bank loans are so vitally important to stimulate the economy. The million dollar question
93
is what percentage should the entrepreneur contribute and what should come from the bank or
finance institution.

The first thing that the banks check is if the entrepreneur’s contribution is in the form of
imaginative cash. The owner should not have made other loans or taken the money from the
house bond, but has the finance available in the form of cash in the bank. The reason is that
banks would often look for surety in the form of an asset, such as the owner’s primary
residence.

Once sufficient capital is raised, the outstanding amount can be borrowed. This is called
a geared deal, with gearing simply being the amount borrowed in relation to the total
set-up amount of the business.

In an ideal world, the business owner is able to contribute enough own capital to secure a
gearing ratio of 50%, ensuring that the repayments are generally manageable. If a prospective
business owner is able to put down 100% of the cost, he has the option of not having any
gearing or perhaps investing in a business worth twice as much, again with a 50% gearing
ratio. Investing in a larger business creates a possibility of better future returns.

It is also possible to secure gearing ratios of as high as 20% from finance institutions. These
higher ratios are not always advisable, because the higher the gearing ratio, the higher the
chance of business failure becomes because of higher monthly installments on the repayment
of the loan, as well as the effects of interest on the remaining 80% of the total cost of the
business. Obviously, the financiers expect a rate of return that is higher than the interest rate,
with the ability to pay off the loan within a specified time, usually five years. The higher the
gearing, the more difficult this becomes.

Finance institutions are generally a bit more lenient when it comes to franchise finance
because of these brands’ proven abilities to produce returns on investment. Most of these
institutions use a guideline of expecting gearing of between 30 and 50%, although when
economies are depressed few would consider a gearing ratio of lower than 40%.Some
financial institutions may allow higher gearing ratios when an existing business is being
bought out and there is a cash flow history, as opposed to starting from scratch.

Unfortunately, not every person buying or starting a business has massive amounts of capital
available, and a highly geared deal is all that is open to them. In these cases, alternative forms
of finance can be considered.

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  Capital Gearing ratio: owner's equity (or capital)

Borrowed funds

Gearing is a measure of financial leverage, demonstrating the degree to which a firm's

activities are funded by owner's funds versus creditor's funds.

ACCOUNTING RATIO ANALYSIS

The analysis of Accounting statements help in the diagnosis of trends which indicate the
magnitude , timing, or risk ness of the business’s future cash flows. Ratios compare
accounting variables and they are drawn from both the Income Statement and Balance Sheet.
Ratios need very careful handling. They are very useful if used correctly and very misleading
otherwise.

1. Liquidity Ratios: Indicate a business’s ability to pay its short term liabilities at
the correct time. Failure to do so could result in the shutting down of the business.
When a company is able to pay its debts as they fall due, that company is said to be
liquid.

 Current Ratio = Current Assets

Current Liabilities

This compares assets which will become liquid within 12 months with
liabilities which will be due for payment in the same period.

A current ratio of 2 is standard. Ratio of 1 or less is considered low and

indicative of financial difficulties. Very high rates suggest excess current
assets that are probably having an adverse effect on the long term profitability
of the business. If it is more than 2 that means that we are too liquid, so we
need to reduce or work on one of them.

 Quick/Acid Test Ratio = Current Assets - Stock

Current Liabilities

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 This indicates the business’s ability to meet its current liabilities without using
stock.

A ratio less than 1 is not alarming a very high ratio suggests excess cash, a
credit policy that needs revamping or a change needed in the composition of
current vs. long term assets. A ratio of 1.5 means you are holding up too much
stock or too much money. The ideal ratio should be less than 1.If it is too low
then you need loosen up your credit policies and increase your debtors.

2. Debt Management Ratios: Deal with the amount of debt in the business capital
structure and its ability to service the legal obligations.

High geared means high risk and requires you to acquire more borrowed money.
Low geared means low risk and requires you to inject more of your money.

 Total Debt to Total Assets Ratio = Total Debt

Total Assets

Indicates how much of the business funds are being supplied by creditors.
Total debt includes all current + non current debts + lease obligations.

A high ratio indicates the use of financial leverage to magnify earnings, while
a low ratio indicates relatively low use of creditors’ funds. E.g. manufacturing
and mining companies need to use more of creditors’ funds because can not
afford to buy all needed machinery at once. Their products are high priced and
can pay back their obligations wit time.

 Days Purchases Outstanding = Credit Purchases

Purchases/365

Indicates how prompt a business is at paying its bills.

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  Times Interest Earned Ratio = Earnings before Interest(EBIT)
Interest

Indicates the ability to meet the interest requirements on both short and long
term debts. How many times can you pay the interest from your EBIT?

A high ratio indicates a safe situation but that perhaps not enough financial
leverage is being used. A low ratio may call for immediate attention; more
sales will be needed to generate income.

 Fixed charges coverage Ratio = EBIT + Lease expenses

Interest + Lease expenses

Provides a more comprehensive picture of the business’s ability to meet its

legal financial requirements.

A high ratio is more desirable than a low one.

3. Profitability Ratios: Relate income to sales, assets or capital.

 Net Profit Margin = Net Profit

Net Sales

This ratio is used to measure the efficiency of management. A low margin

indicates that not too much sales are guaranteed relative to expenses or that
expenses are out of control or both.

 Return on Investment (ROI) = Net Profit

Total Assets

It indicates the ability of the business to earn satisfactory returns on all assets
it employs. The higher the rate the better because provides some indication of
future growth prospects.

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  Return on Equity (ROE) = Net Profit or Net Profit
Capital Market value of Equity

It indicates return on the owners’ investment in the business. It is an

accounting measure on how well management is performing

4. Asset Management Ratios: They indicate how efficiently the business is using
its assets .They can also be called Activity Ratios. If too much money is tied up in
certain types of assets that could be more productive elsewhere then the business is
not profitable as it should be.

 Days Sales outstanding = Credit Sales

Sales/365

The higher the DSO the higher the cash conversion cycle. This ratio estimates
the number of days it takes on average to collect the sales. By dividing sales
by 365 we are finding the average sales per day.

The ratio indicates how effective the credit granting and management
activities are. A high DSO probably indicates many uncollectible receivables.
A low ratio indicates that credit granting policies are very restrictive than
granting sales.

 Inventory turnover Ratio = Cost of goods Sold

Average stock

It measures the times in a year the business turns over its inventory/stock.

The lower the Inventory turnover the higher the cash conversion cycle. How
many times do you order? If you order more it means that you are selling more
on credit. Other things being equal and assuming that sales are moving
smoothly, a high turnover suggests efficient Inventory management, a low

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 turnover figure often indicates obsolete stock or lack of inventory
management.

 Long Term Asset Turnover Ratio = Sales

Non current Assets

It provides an indication of a business ability to create sales based on long

term asset base. The ratio provides an indication of how effective the business
in using its assets. The higher the ratio, the more effective the utilisation of
assets. A low ratio indicates that the marketing effort requires attention.

 Total Asset Turnover Ratio = Sales

Total Assets

It is an indication of the business ability to generate sales in relation to its total

asset base. A high turnover normally reflects good management, whereas a
low ratio suggests the need to reassess the overall strategy of the business,
marketing effort and the capital expenditure programme.

STOCK CONTROL

Why do we control stock?

 To maintain stock levels that will minimise the Total Stock Cost.

Objectives of Inventory Management

A firm wishing to maximise profits will have the following objectives:
 Maximise customer service
 Low cost plant operation
 Minimum inventory investment

Maximise customer service

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It describes the availability of items when needed and it is a measurement of inventory
management effectiveness. The customer in this case can be either one of the following; a
purchaser, distributor, another plant or work station where the next operation is to be
performed. Some measures of customer service are percentage of orders shipped on schedule,
percentage of line items shipped on schedule and order days out of stock. Safety stock is
essential in cases of uncertainty so as not to disappoint your customers.

Low cost plant operation

Efficient inventory build up allows continuous production to occur resulting in lower set up
costs and an increase in production capacity due to production resources being used a greater
portion of the time for processing as opposed to set up. Lower ordering costs per unit and
quantity discounts can be used to achieve this objective.

Minimum inventory investment

Batching economies in procurement shipments e.g. truckloads can reduce/minimise the
amount of money you use in inventory transportation and carrying costs.

METHODS OF STOCK CONTROL

To maintain effective control over stock, it is necessary to determine:
 What should be the maximum and minimum stocks
 What may be regarded as a standard order for a particular commodity and
 The point at which a further supply should be ordered.

There are several methods for controlling stock; you may opt for one method or a mixture of
two or more if you have various types of stock.

i. Just in Time (JIT)

It aims to reduce cost by cutting stock to a minimum. Items are delivered
when needed and used immediately. This method carries the risk of running
out of stock, so you need to be confident that your suppliers can deliver on
demand.

ii. Batch control/2 Bin System

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 A quantity of an item equal to the order quantity is set aside (frequently in a
separate / 2 bin), and not touched until all main stock is used up. When this
nd

stock (safety stock) needs to be used, the purchasing department is notified

and a replenishment order is placed. e.g. Book stores use red –tag system
where by a tag is placed in the stock at a point equal to order point. When a
customer takes that book to the checkout, the store is effectively notified that it
is time to reorder that title.

If your needs are predictable you may order a fixed quantity of stock every
time you place an order/order at a fixed interval.

iii. Economic Order Quantity(EOQ)

This is the quantity of materials used at each order point that minimises the
total annual stocking cost for a material n a fixed order quantity inventory
system.

It is a standard formula used to arrive at a balance between holding too much

or too little stock.

EOQ formula: Q = 2DS

C

Where Q=Quantity ordered at each order point

D=Annual demand for a material in units
S=Average cost of completing an order
C=Cost of carrying one unit in inventory for one year.

It is secured at the ‘least unit cost’ of stocking a material. The costs that enter
into the unit cost maybe divided into two groups:

 Costs which decrease as the size of the order are increased.

a. Purchase price (quantity discounts)
b. Cost of placing an order

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 c. Stock-out costs e.g. lost contribution through lost sale and cost of production
stoppages

 Costs which tend to increase as the size of the order is increased.

a. Cost of storage
b. Charges attributable to storage e.g. interest on investment,
insurance, damage, obsolescence, and cost of warehouse space.

iv. Stock Review

In this method you have regular reviews of stock. At every review you place
an order to return stocks to a predetermined level.

v. First in First Out(FIFO)

This system ensures that perishable stock is used efficiently so that it does not
deteriorate. Stock is identified by date received and moves on through each
stage of production in strict order

Stock Taking

 Stocktaking is an essential tool in checking that the stock records are accurate. There are several
reasons why the actual amount of items fails to tally or agree with the stock records.
 Stock taking is simply defined as the physical counting or checking of the stock items. The
physically counted stock items may fail to agree with the stock records because
a. The items were stolen or damaged and a record was not made
b. Goods were bought/sold but a record was to made
c. Sales or purchases have been recorded incorrectly

How to carry out a stock take

STEPS:
1 st
Set a date for stock takes and informs the publics if business hours are interrupted
2 nd
Organize the stock to facilitate easy counting
3 rd
Develop a stock list
4 th
Physically count every item as per stock list and enter the figure in the ‘stock take’ column

102
5th
Enter the last balance figure from the stock cards in the stock card column for each item
6th
Deduct the stock card figure form the stock take figure and enter this amount in the
Difference column
7th
Find out the reasons if there is a difference i.e. if there is more or less stock than shown on the
stock card

Below is a specimen of a stocktaking list

Stock taking list

Item Stock take Stock card Difference

Eversharp pen 1 000 1 150 -150

Pencil sharpener 200 200 0
Ruler 300 350 +50
Exercise book (A4) 1 000 1 000 0

As shown on the stock list, during the stock take there were 150 less of ever-sharp pens and 50 more
than recorded on the stock cards. The anomalies or differences should be corrected on the stock card.

CHAPTER 8

COSTING AND PRICING

OBJECTIVES
By the end of this unit you should be able to:

Define the following costing terms

 Costing

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  Costs
 Direct costs
 Direct labour
 Direct expenses
 Indirect costs

 Calculate total costs per item

 Discuss the importance of costing to the entrepreneur
 Define pricing
 Calculate prices of products
 Discuss the pricing factors

Definition of costing terms

Costing
This is the method or way of calculating the total costs of making or selling a product or providing a
service

Costs
These are all the money that the business spends to make and sell its products or services

Direct Costs
These relates to all costs that are directly related to the products or services that the business makes or
sells. There are two types of direct costs namely direct material costs and direct labour costs.

Direct Material costs

 These are all the money that the business/entrepreneur spends on the parts and materials that
become part of or are directly related or linked to the final product or service that it/he/she makes
or sells.
 NB: for a retailer’s or wholesalers, the costs of buying goods to resell are the direct material costs.
To be considered or counted as direct material costs, the amount of material must be easy to
calculate and the cost of the material must be big enough to add a considerable amount to the total
direct material costs.

104
Direct labour costs
 These are all the money that the business or entrepreneurs spends on wages, salaries and benefits
for the people who are directly involved in the production of its or his/her products or services
 The time spent on making the product must be easy to calculate and the cost of the direct labour
must be big enough to add a considerable amount to the total direct labour costs. Retailers and
wholesalers do not have employees working directly in making products, so they do not have any
direct labour costs. For retailers and wholesalers, all salaries and wages are indirect costs.

Direct expenses
 These are any expenses directly related to the production of the final product e.g. delivery costs
which relate only to delivery or raw materials used in production of one product, hiring of a
machine which is only used on one product.

Indirect costs
 These are all other costs that the entrepreneur/business incurs in running the business e.g. rent,
interest, electricity, and salaries of supervisor, managers, accounts clerks, secretary and other
administration expenses. Indirect costs are also known as overheads or expenses.

Calculate total cost per item

 Costing for a manufacturing or service operator. When calculating the cost of producing an item,
the entrepreneur should ensure that all costs are included. That is direct and indirect costs. The
entrepreneur must therefore, calculate the direct maternal cost, direct labour and direct expenses
of producing the item and then add a proportion of the indirect costs to find the TOTAL COST of
producing the item.
 Formula: Total Cost = Direct Cost + Indirect Cost
 Before we calculate the total cost per item, it is important to have the costing processes:
 Costing Process Where More Than One Product Is Produced

Direct Expense
Direct Cost per Item
Direct labour cost: - (hrs per item x number of workers x money
Direct Material Cost: - Add the cost of raw materials used to produce one product item
STEP I
Indirect Cost per year

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Add up all the indirect costs for the year
STEP II
Indirect Cost per item:
Total Indirect costs per year
Total number of items per year

Total cost per item:

Direct cost per item + indirect cost per item

STEP III

NB: In both costing processes, costs per item may be calculated using a month as the time factor
instead of a year that is “Instead of Indirect cost per year divided by Total number of items per year”
the Entrepreneur may use, “Indirect cost per month divided by number of items per month.

Costing calculations in detail (Manufacturer or service operator)

Stage I: Calculate Direct Material Costs

The entrepreneur should calculate the costs of all material
 That become part of or are directly related to the product or service
 That are easy to calculate and have a big enough cost to be counted

Stage II: Calculate Direct Labour Costs

 That is work out the costs of wages, salaries and benefits for the employees who work directly
in the production of the product or service

Stage III: Calculate Indirect Costs

 These are all other costs that the business incurs per month such as rent, electricity, insurance,
depreciation, water and so on.

Costing calculations where not more than one product is produced.

106
Exhibit
The entrepreneur – carpenter specializes in the manufacture of tables and has the following details for
costing. Calculate the total cost of one table.
Materials used: Timber 2 000.00
Nails 1 000.00
Varnish 500.00
Glue 500.00

One (1) worker takes 5 hours to produce one item. The carpenter is paid $1 000 per hour.
Other costs per month: Rent $ 5 000.00
Electricity $ 500.00
Other wages $10 000.00
Telephone $ 2 000.00
Transport $ 2 000.00

100 items are produced each month

Answer:
Direct Materials: Timber $2 000.00
Nails $1 000.00
Varnish $ 500.00
Glue $ 500.00
$4 000.00 (Direct Material/Cost)

Direct Labour:1 x 5 hours/item x $1000/hr = $5000.00

Indirect Cost/item: Rent $ 5 000.00

Electricity $ 500.00
Other wages $10 000.00
Telephone $ 2 000.00
Transport t $ 2 000.00
$19 500.00

Indirect Cost/item: $19 500.00

100 items/month
= $195.00/item

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 Total cost of one item: Direct material cost + Direct Labour Cost + Direct Expenses + Indirect Cost =
$4 000.00 + $195.00
=$4 195.00

NB: There are not direct expenses

Further Questions
i. The entrepreneur uses the following to make a garment:
Materials: Fabric $2 000.00
Thread $ 500.00
Elastic $ 500.00
A tailor takes 4 hours to produce the garment and charges $500.00 per hour. Other costs per year are
as follows:
Rent $100 000.00
Transport $ 20 000.00
Electricity $ 30 000.00

2000 items are produced each year. Calculate the total cost per item.

ii. The entrepreneur produces desks and uses the following:

Materials: Timber $10 000.00
Nails $ 1 000.00
Varnish $ 500.00
Paint $ 2 000.00

Direct expenses $5 000.00

Workers take 3 hours to make one desk. They are each paid $1 000.00 per hour. Other costs of
running the business per year are:
Rent $10 000.00
Electricity $ 5 000.00
Water $ 7 000.00
Transport $20 000.00
Other wages $20 000.00

1000 desks are produced each year. Calculate the total cost per item.

108
iii. The entrepreneur has the following to make a product item:

Materials $50 000/item

Indirect costs $2 000 000/year
40 000 items are produced per year
Workers take 2 hours to produce 1 (one) item. Calculate the total cost of product item.

Calculation of total cost of 1 (one) item where several different products are produced

If the entrepreneur produces several different types of products, it is not appropriate to allocate the
same amount of costs as in the case of one product type. This is because more time may be spent in
the making of one product and little in the other. As such, one product has a greater proportion of the
indirect costs than the other. This is achieved by calculating the Indirect cost per item and
multiplying by the number of hours to produce one item. This enables the entrepreneur to be able to
calculate a different cost for each different product which reflects the amount of time taken to produce
that product.

Exhibit:
The entrepreneur used the following in making the dress and a trouser:

Material Dress Trousers

Fabric $800.00 $1 000.00

Thread $300.00 $ 400.00
Zip $100.00 $ 100.00
Button $100.00 $ 100.00

Two workers are each paid $2 000.00 per hour. Working together, they take 4 hours to produce one
dress and 6 hours to produce one pair of trousers. Other costs each year:
Rent $600 000.00
Electricity $240 000.00
Transport $240 000.00

109
The two workers each work for 40 hours a week and fifty weeks a year. Calculate total cost per each
item.

Answer:
Direct costs:

1 calculate direct material cost:

st

Materials Dress Trousers

Fabric $800.00 $1 000.00

Thread $300.00 $ 400.00
Zip $100.00 $ 100.00
Buttons $100.00__ $ 100.00_
$1 300.00 $1 600.00 per item

2 calculate direct labour cost

nd

Dress: 2 workers x 4hrs x $2 000.00

= $16 000.00 per dress

Trousers 2 workers x 4 hours x $2 000.00

= $24 000.00 per pair of trousers

3 Total Direct Cost:

rd

Dress: Direct material cost + Direct Labour

= $1 300.00 + $16 000.00
= $17 300.00 per dress

Trousers: $1 600.00 + $24 000

= $25 600.00 per pair of trousers

4 calculate indirect costs:

th
Rent $6 000 000.00
Electricity $ 240 000.00
Transport $ 240 000.00_
$1 080 000/year

5th calculate production hours per year

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1. Workers x 40 hrs/week x 50 weeks/year = 4 000hrs/year

6 indirect cost per hour:

th

Formula: indirect cost/year

Production hrs/yr

= 1 080 000/yr
4 000 hrs/yr

= $270/hr

7 calculate indirect cost per item:

th

Dress: 2 workers x 4hrs x $270/hr

= $ 1 660.00/dress

Trousers: 2 workers x 6 hrs x $270/hr

= $ 3 240.00/pair

8 Total cost:
th
Dress: $1 300.00 + $16 000.00 + $1 660.00
= $18 960.00

Trousers: $1 600.00 + $24 000.00 + $3 240.00

= $28 840.00

Further Questions

The entrepreneur used the following to make a skirt and a Dress:

Materials Skirt Dress

Fabric $2 000.00 $3 000.00

Elastic $ 50.00 -
Zip - $ 80.00

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Lace $ 90.00 $ 100.00

2. Three)Workers take 4 hours for the skirt and 5 hours for the dress and are each paid $2 000.00
per hour.

Indirect costs per year:

Rent $600 000.00

Electricity $360 000.00
Transport $240 000.00

Each worker works for 50 hours/week and 50 weeks/year. Calculate the total cost per each item.

Costing for a retailer or wholesaler

Retailers and wholesalers have the same types of costs and can normally do costing in the same
manner. Some costs for retailers and wholesalers are different from the costs of manufacturers and
service operators.

To calculate the total cost of an item for the wholesaler or retailer, 3 steps are followed that is: Step 1
Calculate Direct Material Cost
Step 2 Calculate Indirect Costs
Step 3 Add up Total Costs

Total cost = Direct Material Cost + Indirect cost

NB retailers/wholesalers do not have direct labour as they buy and sell goods made by other
businesses. Their employees do not make products or manufacture, and as such all wages and salaries
are indirect costs.

The direct material costs of retailers and wholesalers take the form costs of buying goods.
The Indirect costs of the retailers and wholesalers are rent, electricity, insurance, depreciation and so
on.

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Pricing
Definition: is the process of calculating an amount of money to charge customers for goods and
services produced or to be provided by the entrepreneur.
Calculations of prices of product
After costing the next process is to calculate the price for which the products should be offered
The two major methods of pricing calculation are mark-up and margin.
Mark up is profit expressed as a fraction or percentage of cost
It is calculated as: Profit (P) x 100%
Cost ©

Margin is profit expressed as a fraction or percentage of selling price

It is calculated as: Profit (P)______ x 100%
Selling Price (SP

Note that Profit = Selling Price – Cost

Example: If the selling price is $250.00 and the cost is $200, calculate profit, mark up and
margin.

Solution
Profit = Selling Price – Cost
= $250.00 - $200.00
= $50.00

Mark up = 50 (Profit)
200 (Cost)
= ¼ as a fraction or 25% as percentage

Margin = 50 (Profit)______
250 (Selling Price)
= 1/5 as a fraction /25% as percent

Further Questions
a. The entrepreneur makes Dresses and skirts and uses the following:

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Material Dress Skirt
Fabric $2 000.00 $3 000.00
Thread $ 200.00 $ 700.00
Buttons $ 30.00 $ 30.00

Two (2) workers take 3 hrs to make a dress and 4 hours to make a skirt and are each paid $1 000.00
per hour. The indirect costs per year are:

Rent $600 000.00

Electricity $240 000.00
Other wages $ 30 000.00

The two workers each work for 40 hours a week and so weeks a year.
i. Calculate the profit and selling price, if the Dress is marked up by 10%.
ii. If the profit on skirt is $200, what is its selling price, mark up and margin.

b. The entrepreneur produces two products ‘A’ and ‘B’. The following are incurred by the business:

Materials Products: A B
Materials $2 000.00 $3 000.00

Two (2) workers take 6 hours to produce product ‘A’ and 10 hours to produce product ‘B’. The
workers are each paid $1 000 per hour. The indirect costs are 200 000 per year. Each worker works
for 50 hours a week and 50 weeks a year.

Find the profit and selling price of each product, if the products are marked up 50%.

Pricing factors
When setting prices the entrepreneur must consider the following variables or factors.

a. Customers

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The business is expected to carry out a survey to determine how much customers are prepared to pay
for the product. The selling price should not be higher than what customers are prepared to pay.

b. Competitors
The entrepreneur should carry out competitor’s analysis to determine the prices of competitors. If the
entrepreneur sets higher prices than its competitors, he/she will lose customers to competitors.
Customers are economic beings who always choose the cheapest (or best value for money) products.
As such, the highest selling price should be equal to or less than the price charged by competitors.

c. Cost and Profit

The entrepreneur must consider the costs incurred in producing the product or the costs that the
business is going to incur in producing the product. For the business to make a profit the entrepreneur
must set his/her selling price higher than the costs incurred.

NB: For a successful entrepreneur the lowest price = cost + profit need and the highest price = how
much competitors charge or customers will pay, which ever is lower.

Pricing strategies
A pricing strategy is an approach or means designed to achieve the pricing objectives. The price the
entrepreneur charges will be somewhere between one that is too low to produce a profit and that is too
high to produce any demand. Product costs set a floor to the price; consumer perceptions of the
product’s value set the ceiling. The entrepreneur must consider competitors’ prices and other external
and internal factors to find the best price between these two extremes. Entrepreneurs may opt to use
the following approaches or strategies in product pricing: cost based pricing, buyer-based approach
and competition-based approach.

 Cost based pricing includes cost-plus pricing, breakeven pricing and value-based pricing.
Break even pricing and value-based pricing.

 Cost-plus pricing is adding a standard mark to the cost of the product. Break even pricing
(target profit pricing) is setting price to break even on the costs of making and marketing a
product or setting price to make a target profit. Value based pricing is setting price based on
buyer’s perceptions of value rather than on the seller’s cost.

 Value pricing is offering the right combination of quantity and good service at a fair price.

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  Competition based pricing is setting prices based on the prices that competitors charge for
similar products. Consumers naturally base their judgments of a product’s value on the prices
that competitors charge for similar products. One form of competition based pricing is going
rate pricing, in which a firm bases it’s price largely on competitors’ prices with less attention
paid to it’s own costs or to demand. The firm might charge the, more, or less than its major
competitors.
Another competition based pricing form is sealed-bid pricing where the entrepreneur bases his/her
price on how he/she thinks competitors will price rather than it’s own costs or on the demand.

 Skimming Pricing comes into being when the entrepreneur sets a high price for a new
product to skim maximum revenues layer by buyer from the segments willing to pay the high
price. The firm makes fewer but more profitable sales.

 Market penetration pricing is when the entrepreneur sets a low price for a new product in
order to attract a large number of buyers and a large market share. Discount and allowance
pricing includes cash discount, quantity discount, functional discount (trade discount) and
seasonal discount.

CHAPTER 9
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 BUSINESS GROWTH
Objectives
By the end of this study unit you must be able to;
 define business growth
 distinguish internal from external growth
 distinguish a merger from an acquisition
 Use various business strategic analysis tools and appreciate their limitations.

Introduction
Business growth means an increase in size of an organization. Size covers aspects such as
operational capacity, number of employees and capital among other things. Growth is a
natural outcome for any positively performing organization. It can either be organic or
external. Organic growth is when a firm grows on its own efforts, resources and by ploughing
back profits. Organic growth occurs when a business combines its resources with those of
another business. The result will either be a merger or takeover (acquisition).

Important terms
 Merger-This is when two business organizations combine their shareholding and fixed
assets to become one business entity.
 Acquisition-This is when one business takes over the shareholding and assets of
another.

Internal growth
Internal business growth can best be understood by use of the Ansoff Product/market matrix.

Ansoff Product and Market Matrix

The Ansoff Growth matrix is a tool that helps businesses decides their product and market
growth strategy.

Ansoff’s product/market growth matrix suggests that a business’ attempts to grow depend on
whether it markets new or existing products in new or existing markets.

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The output from the Ansoff product/market matrix is a series of suggested growth strategies
that set the direction for the business strategy. These are described below:

Market penetration
Market penetration is the name given to a growth strategy where the business focuses on
selling existing products into existing markets.

Market penetration seeks to achieve four main objectives:

• Maintain or increase the market share of current products – this can be achieved by a
combination of competitive pricing strategies, advertising, sales promotion and perhaps more
resources dedicated to personal selling

• Secure dominance of growth markets

• Restructure a mature market by driving out competitors; this would require a much more
aggressive promotional campaign, supported by a pricing strategy designed to make the
market unattractive for competitors

• Increase usage by existing customers – for example by introducing loyalty schemes

A market penetration marketing strategy is very much about “business as usual”. The
business is focusing on markets and products it knows well. It is likely to have good
information on competitors and on customer needs. It is unlikely, therefore, that this strategy
will require much investment in new market research.

Market development
Market development is the name given to a growth strategy where the business seeks to sell
its existing products into new markets.

There are many possible ways of approaching this strategy, including:

• New geographical markets; for example exporting the product to a new country

• New product dimensions or packaging: for example

• New distribution channels

• Different pricing policies to attract different customers or create new market segments

Product development

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Product development is the name given to a growth strategy where a business aims to
introduce new products into existing markets. This strategy may require the development of
new competencies and requires the business to develop modified products which can appeal
to existing markets.

Diversification
Diversification is the name given to the growth strategy where a business markets new
products in new markets.

This is an inherently more risk strategy because the business is moving into markets in which
it has little or no experience.

For a business to adopt a diversification strategy, therefore, it must have a clear idea about
what it expects to gain from the strategy and an honest assessment of the risks.

BUSINESS PORTFOLIO ANALYSIS

A business portfolio is a collection of businesses and products that make up a company. The
best business portfolio is one that fits the company's strengths and helps exploit the most
attractive opportunities.

The company must:

(1) Analyze its current business portfolio and decide which businesses should receive more or
less investment, and

(2) Develop growth strategies for adding new products and businesses to the portfolio, whilst
at the same time deciding when products and businesses should no longer be retained.

The best known tool for business analysis is the Boston Consulting Group(BCG) model .

Using the BCG Box (as illustrated above) a company classifies all its SBU's(Strategic
Business Units) according to two dimensions:

On the horizontal axis: relative market share - this serves as a measure of SBU strength in
the market

On the vertical axis: market growth rate - this provides a measure of market attractiveness

By dividing the matrix into four areas, four types of SBU can be distinguished:

 STARS(high growth and high market share)

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High growth rate requires high levels of investments to cope with competitors in the markets.
This can cause significant cash outflows from the business. High market share should provide
cash for these investments. Cash generated from operations is to be re-invested into the
business.

Main challenge for the business is to maintain or even increase its market share to generate
cash for growing needs of the business.
Eventually, at the maturity of the market star will be turned into cash cow generating cash
that could be invested elsewhere.
Is the future of the organization.
Product development and innovation is the key to success as new competitor are emerging in
the market. This will keep the business ahead of others.
Cash generated from cash cows can be utilized on star.

 CASH COW (low growth rate/ high market share)

This is the main cash generating unit for the business.

There is very difficult to sustain growth rate because of market is at the maturity stage.
Business should focus on maintaining its market share.
Growth is only possible through increase market share probably at the expense of others.
Competition is robust at this stage; marketing is primarily activity at this stage.
Innovation would not help at this stage because new development can quickly be copied by
competitors.

 QUESTION MARK(high growth rate/low market share)

This is the part of portfolio demanding cash for his growing needs but does not generated
cash because of low market share.
It has potential to become star if market share is increased otherwise as the time passes it will
became dog rather than becoming cash cow.
Marketing and innovation both are useful tools at this stage.
It requires greater management time and resources to prevent the investment being eroded.
Either heavy investments should be made or it should be sold but this option only transfers
problem to the buyers, it does not solve the problem.

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Strategic alliance with other competitor facing the same problem or acquisition by successful
competitor may help resolve the issue.

 DOG (low growth rate/ low market share)

It does not provide any growth to business either way.

It may still generate some cash for the business so it is wise to retain it in absence of other
investment proposal, if not, it should be disposed to realize cash.
Strategies decided to re-position it to cash cow should be carefully considered otherwise it
will waste money which could be used on star.
Market share can be obtained by selling standard products at relatively low price as an
incentive to buy the product. Cost-efficiency is key to success. Perhaps by targeting people of
a lower – middle class.

Using the BCG Box to determine strategy

Once a company has classified its SBU's, it must decide what to do with them. In the diagram
above, the company has one large cash cow (the size of the circle is proportional to the SBU's
sales), a large dog and two, smaller stars and question marks.

Conventional strategic thinking suggests there are four possible strategies for each SBU:

(1) Build Share: here the company can invest to increase market share (for example turning a
"question mark" into a star)

(2) Hold: here the company invests just enough to keep the SBU in its present position

(3) Harvest: here the company reduces the amount of investment in order to maximise the
short-term cash flows and profits from the SBU. This may have the effect of turning Stars
into Cash Cows.

(4) Divest: the company can divest the SBU by phasing it out or selling it - in order to use the
resources elsewhere (e.g. investing in the more promising "question marks").

LIMITATIONS OF THE BCG MATRIX

It does not consider profit margin.
It does not take account of any ethical reason for holding an investment e.g. creation of an
employment in the region.
It does not identify any criteria for deciding acceptable growth rate and market share.

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There may be any other strategic reason for holding investment e.g. cross-selling benefits,
strengthening up-side or downside supply chain.

CHAPTER 10

RISK MANAGEMENT

Objectives
By the end of the topic students should be able to:

 Define risk
 Define risk management
 Assess risk
 Identify risk
 Outline principles of risk management

Example of risk management: A NASA model showing areas at high risk from impact for
the International Space Station.

Risk management is the identification, assessment, and prioritization of risks(defined in ISO

31000 as the effect of uncertainty on objectives, whether positive or negative) followed by
coordinated and economical application of resources to minimize, monitor, and control the
probability and/or impact of unfortunate events or to maximize the realization of
[

opportunities.

Risks can come from uncertainty in financial markets, project failures, legal liabilities, credit
risk, accidents, natural causes and disasters as well as deliberate attacks from an adversary.
Several risk management standards have been developed including the Project Management
Institute, the National Institute of Science and Technology, actuarial societies, and ISO
standards.

In ideal risk management, a prioritization process is followed whereby the risks with the
greatest loss and the greatest probability of occurring are handled first, and risks with lower
probability of occurrence and lower loss are handled in descending order. In practice the
process can be very difficult, and balancing between risks with a high probability of

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occurrence but lower loss versus a risk with high loss but lower probability of occurrence can
often be mishandled.

Intangible risk management identifies a new type of a risk that has a 100% probability of
occurring but is ignored by the organization due to a lack of identification ability. For
example, when deficient knowledge is applied to a situation, a knowledge risk materializes.
Relationship risk appears when ineffective collaboration occurs. Process-engagement risk
may be an issue when ineffective operational procedures are applied. These risks directly
reduce the productivity of knowledge workers, decrease cost effectiveness, profitability,
service, quality, reputation, brand value, and earnings quality. Intangible risk management
allows risk management to create immediate value from the identification and reduction of
risks that reduce productivity.

Risk management also faces difficulties in allocating resources. This is the idea of
opportunity cost. Resources spent on risk management could have been spent on more
profitable activities. Again, ideal risk management minimizes spending and minimizes the
negative effects of risks.

Method

For the most part, these methods consist of the following elements, performed, more or less,
in the following order.

1. identify, characterize, and assess threats

2. assess the vulnerability of critical assets to specific threats
3. determine the risk (i.e. the expected consequences of specific types of attacks on
specific assets)
4. identify ways to reduce those risks
5. prioritize risk reduction measures based on a strategy

Principles of risk management

The International Organization for Standardization (ISO) identifies the following principles
of risk management

Risk management should:

 create value

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  be an integral part of organizational processes
 be part of decision making
 explicitly address uncertainty
 be systematic and structured
 be based on the best available information
 be tailored
 take into account human factors
 be transparent and inclusive
 be dynamic, iterative and responsive to change
 be capable of continual improvement and enhancement

Process
According to the standard ISO 31000 "Risk management -- Principles and guidelines on
implementation," the process of risk management consists of several steps as follows:

Establishing the context

Establishing the context involves:

1. Identification of risk in a selected domain of interest

2. Planning the remainder of the process.
3. Mapping out the following:
o the social scope of risk management
o the identity and objectives of stakeholders
o The basis upon which risks will be evaluated, constraints.
4. Defining a framework for the activity and an agenda for identification.
5. Developing an analysis of risks involved in the process.
6. Mitigation or Solution of risks using available technological, human and
organizational resources.

Identification
 After establishing the context, the next step in the process of managing risk is to
identify potential risks. Risks are about events that, when triggered, cause problems.
Hence, risk identification can start with

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  Risk sources may be internal or external to the system that is the target of risk
management.

Examples of risk sources are: stakeholders of a project, employees of a company or the

weather over an airport.

 Problem analysis Risks are related to identified threats. For example: the threat of
-

losing money, the threat of abuse of privacy information or the threat of accidents and
casualties. The threats may exist with various entities, most important with
shareholders, customers and legislative bodies such as the government.

When either source or problem is known, the events that a source may trigger or the events
that can lead to a problem can be investigated. For example: stakeholders withdrawing during
a project may endanger funding of the project; privacy information may be stolen by
employees even within a closed network; lightning striking an aircraft during takeoff may
make all people onboard immediate casualties.

The chosen method of identifying risks may depend on culture, industry practice and
compliance. The identification methods are formed by templates or the development of
templates for identifying source, problem or event. Common risk identification methods are:

 Objectives-based risk identification Organizations and project teams have

objectives. Any event that may endanger achieving an objective partly or completely
is identified as risk.
 Scenario-based risk identification in scenario analysis different scenarios is
created. The scenarios may be the alternative ways to achieve an objective, or an
analysis of the interaction of forces in, for example, a market or battle. Any event that
triggers an undesired scenario alternative is identified as risk.
 Taxonomy-based risk identification the taxonomy in taxonomy-based risk
identification is a breakdown of possible risk sources. Based on the taxonomy and
knowledge of best practices, a questionnaire is compiled. The answers to the
questions reveal risks.
 Common-risk checking in several industries, lists with known risks is available.
Each risk in the list can be checked for application to a particular situation.
 Risk charting This method combines the above approaches by listing resources at
risk, Threats to those resources Modifying Factors which may increase or decrease the
risk and Consequences it is wished to avoid. Creating a matrix under these headings

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 enables a variety of approaches. One can begin with resources and consider the threats
they are exposed to and the consequences of each. Alternatively one can start with the
threats and examine which resources they would affect, or one can begin with the
consequences and determine which combination of threats and resources would be
involved to bring them about.

Assessment
Once risks have been identified, they must then be assessed as to their potential severity of
loss and to the probability of occurrence. These quantities can be either simple to measure, in
the case of the value of a lost building, or impossible to know for sure in the case of the
probability of an unlikely event occurring. Therefore, in the assessment process it is critical to
make the best educated guesses possible in order to properly prioritize the implementation of
the risk management plan.

The fundamental difficulty in risk assessment is determining the rate of occurrence since
statistical information is not available on all kinds of past incidents. Furthermore, evaluating
the severity of the consequences (impact) is often quite difficult for immaterial assets. Asset
valuation is another question that needs to be addressed. Thus, best educated opinions and
available statistics are the primary sources of information. Nevertheless, risk assessment
should produce such information for the management of the organization that the primary
risks are easy to understand and that the risk management decisions may be prioritized. Thus,
there have been several theories and attempts to quantify risks. Numerous different risk
formulae exist, but perhaps the most widely accepted formula for risk quantification is:

Rate of occurrence multiplied by the impact of the event equals risk

Risk Options
Risk mitigation measures are usually formulated according to one or more of the following
major risk options, which are:

1. Design a new business process with adequate built-in risk control and containment
measures from the start.

2. Periodically re-assess risks that are accepted in ongoing processes as a normal feature of
business operations and modify mitigation measures.

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3. Transfer risks to an external agency (e.g. an insurance company)

4. Avoid risks altogether (e.g. by closing down a particular high-risk business area)

Later research has shown that the financial benefits of risk management are less dependent on
the formula used but are more dependent on the frequency and how risk assessment is
performed.

In business it is imperative to be able to present the findings of risk assessments in financial

terms. Robert Courtney Jr. (IBM, 1970) proposed a formula for presenting risks in financial
terms. The Courtney formula was accepted as the official risk analysis method for the US
governmental agencies. The formula proposes calculation of ALE (annualized loss
expectancy) and compares the expected loss value to the security control implementation
costs (cost-benefit analysis).

Potential risk treatments

Once risks have been identified and assessed, all techniques to manage the risk fall into one
or more of these four major categories

 Avoidance (eliminate, withdraw from or not become involved)

 Reduction (optimize - mitigate)
 Sharing (transfer - outsource or insure)
 Retention (accept and budget)

Risk avoidance

This includes not performing an activity that could carry risk. An example would be not
buying a property or business in order to not take on the legal liability that comes with it.
Another would be not flying in order not to take the risk that the airplane were to be hijacked.
Avoidance may seem the answer to all risks, but avoiding risks also means losing out on the
potential gain that accepting (retaining) the risk may have allowed. Not entering a business to
avoid the risk of loss also avoids the possibility of earning profits.

Hazard Prevention
Hazard prevention refers to the prevention of risks in an emergency. The first and most
effective stage of hazard prevention is the elimination of hazards. If this takes too long, is too
costly, or is otherwise impractical, the second stage is mitigation.

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Risk reduction
Risk reduction or "optimization" involves reducing the severity of the loss or the likelihood
of the loss from occurring. For example, sprinklers are designed to put out a fire to reduce the
risk of loss by fire. This method may cause a greater loss by water damage and therefore may
not be suitable. Halon fire suppression systems may mitigate that risk, but the cost may be
prohibitive as a strategy.

Acknowledging that risks can be positive or negative, optimizing risks means finding a
balance between negative risk and the benefit of the operation or activity; and between risk
reduction and effort applied. By an offshore drilling contractor effectively applying HSE
Management in its organization, it can optimize risk to achieve levels of residual risk that are
tolerable

Modern software development methodologies reduce risk by developing and delivering

software incrementally. Early methodologies suffered from the fact that they only delivered
software in the final phase of development; any problems encountered in earlier phases meant
costly rework and often jeopardized the whole project. By developing in iterations, software
projects can limit effort wasted to a single iteration.

Outsourcing could be an example of risk reduction if the outsourcer can demonstrate higher
capability at managing or reducing risks. For example, a company may outsource only its
software development, the manufacturing of hard goods, or customer support needs to
another company, while handling the business management itself. This way, the company can
concentrate more on business development without having to worry as much about the
manufacturing process, managing the development team, or finding a physical location for a
call center.

Risk sharing
Briefly defined as "sharing with another party the burden of loss or the benefit of gain, from a
risk, and the measures to reduce a risk."

The term of 'risk transfer' is often used in place of risk sharing in the mistaken belief that you
can transfer a risk to a third party through insurance or outsourcing. In practice if the
insurance company or contractor go bankrupt or end up in court, the original risk is likely to
still revert to the first party. As such in the terminology of practitioners and scholars alike, the
purchase of an insurance contract is often described as a "transfer of risk." However,
technically speaking, the buyer of the contract generally retains legal responsibility for the
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losses "transferred", meaning that insurance may be described more accurately as a post-
event compensatory mechanism. For example, a personal injuries insurance policy does not
transfer the risk of a car accident to the insurance company. The risk still lies with the policy
holder namely the person who has been in the accident. The insurance policy simply provides
that if an accident (the event) occurs involving the policy holder then some compensation
may be payable to the policy holder that is commensurate to the suffering/damage.

Some ways of managing risk fall into multiple categories. Risk retention pools are technically
retaining the risk for the group, but spreading it over the whole group involves transfer
among individual members of the group. This is different from traditional insurance, in that
no premium is exchanged between members of the group up front, but instead losses are
assessed to all members of the group.

Methods of transferring

Partnership and: Joint venture brings client and contractor together to share the costs and
benefits on the project or business.

BOOT CONTRACT ( Build Own Operate and Transfer)

ROT (Refurbish Operate and Transfer)

PPP ( Public Private Partnership )

Insurance

-A 3 party accepts insurable risk for the payment of a premium. It covers: Direct property
rd

damage

-Indirect consequential loss

Legal liability

Personal liability.

Risk retention
Involves accepting the loss, or benefit of gain, from a risk when it occurs. True self insurance
falls in this category. Risk retention is a viable strategy for small risks where the cost of
insuring against the risk would be greater over time than the total losses sustained. All risks
that are not avoided or transferred are retained by default. This includes risks that are so large
or catastrophic that they either cannot be insured against or the premiums would be
infeasible. War is an example since most property and risks are not insured against war, so

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the loss attributed by war is retained by the insured. Also any amounts of potential loss (risk)
over the amount insured is retained risk. This may also be acceptable if the chance of a very
large loss is small or if the cost to insure for greater coverage amounts is so great it would
hinder the goals of the organization too much.

Individual Cover

This is usually a response measure undertaken by an individual through such measures as

taking medical aid scheme, Life assurance, employment cover, e.t.c

Group Cover

This is undertaken mainly when there are several people undertaking business within the
same entity e.g. in a partnership, cooperative e.t.c

Create a risk management plan

Select appropriate controls or countermeasures to measure each risk. Risk mitigation needs to
be approved by the appropriate level of management. For instance, a risk concerning the
image of the organization should have top management decision behind it whereas IT
management would have the authority to decide on computer virus risks.

The risk management plan should propose applicable and effective security controls for
managing the risks. For example, an observed high risk of computer viruses could be
mitigated by acquiring and implementing antivirus software. A good risk management plan
should contain a schedule for control implementation and responsible persons for those
actions.

According to ISO/IEC 27001, the stage immediately after completion of the risk assessment
phase consists of preparing a Risk Treatment Plan, which should document the decisions
about how each of the identified risks should be handled. Mitigation of risks often means
selection of security controls, which should be documented in a Statement of Applicability,
which identifies which particular control objectives and controls from the standard have been
selected, and why.

Implementation
Implementation follows all of the planned methods for mitigating the effect of the risks.
Purchase insurance policies for the risks that have been decided to be transferred to an
insurer, avoid all risks that can be avoided without sacrificing the entity's goals, reduce
others, and retain the rest.

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Review and evaluation of the plan
Initial risk management plans will never be perfect. Practice, experience, and actual loss
results will necessitate changes in the plan and contribute information to allow possible
different decisions to be made in dealing with the risks being faced.

Risk analysis results and management plans should be updated periodically. There are two
primary reasons for this:

1. to evaluate whether the previously selected security controls are still applicable and
effective, and
2. To evaluate the possible risk level changes in the business environment. For example,
information risks are a good example of rapidly changing business environment.

Limitations
If risks are improperly assessed and prioritized, time can be wasted in dealing with risk of
losses that are not likely to occur. Spending too much time assessing and managing unlikely
risks can divert resources that could be used more profitably. Unlikely events do occur but if
the risk is unlikely enough to occur it may be better to simply retain the risk and deal with the
result if the loss does in fact occur. Qualitative risk assessment is subjective and lacks
consistency. The primary justification for a formal risk assessment process is legal and
bureaucratic.

Prioritizing the risk management processes too highly could keep an organization from ever
completing a project or even getting started. This is especially true if other work is suspended
until the risk management process is considered complete.

It is also important to keep in mind the distinction between risk and uncertainty. Risk can be
measured by impacts x probability.

Areas of risk management

Enterprise risk management

In enterprise risk management, a risk is defined as a possible event or circumstance that can
have negative influences on the enterprise in question. Its impact can be on the very
existence, the resources (human and capital), the products and services, or the customers of
the enterprise, as well as external impacts on society, markets, or the environment. In a

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financial institution, enterprise risk management is normally thought of as the combination of
credit risk, interest rate risk or asset liability management, market risk, and operational risk.

In the more general case, every probable risk can have a pre-formulated plan to deal with its
possible consequences (to ensure contingency if the risk becomes a liability).

From the information above and the average cost per employee over time, or cost accrual
ratio, a project manager can estimate:

 The cost associated with the risk if it arises, estimated by multiplying employee costs
per unit time by the estimated time lost (cost impact, C where C = cost accrual ratio
* S).
 the probable increase in time associated with a risk (schedule variance due to risk, Rs
where Rs = P * S):
o Sorting on this value puts the highest risks to the schedule first. This is
intended to cause the greatest risks to the project to be attempted first so that
risk is minimized as quickly as possible.
o This is slightly misleading as schedule variances with a large P and small S
and vice versa are not equivalent. (The risk of the RMS Titanic sinking vs. the
passengers' meals being served at slightly the wrong time).
 the probable increase in cost associated with a risk (cost variance due to risk, Rc
where Rc = P*C = P*CAR*S = P*S*CAR)
o Sorting on this value puts the highest risks to the budget first.
o See concerns about schedule variance as this is a function of it, as illustrated
in the equation above.

Risk in a project or process can be due either to Special Cause Variation or Common Cause
Variation and requires appropriate treatment. That is to re-iterate the concern about external
cases not being equivalent in the list immediately above.

Risk management activities as applied to project management

In project management, risk management includes the following activities:

 Planning how risk will be managed in the particular project. Plans should include risk
management tasks, responsibilities, activities and budget.
 Assigning a risk officer - a team member other than a project manager who is
responsible for foreseeing potential project problems. Typical characteristic of risk
officer is a healthy skepticism.

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  Maintaining live project risk database. Each risk should have the following attributes:
opening date, title, short description, probability and importance. Optionally a risk
may have an assigned person responsible for its resolution and a date by which the
risk must be resolved.
 Creating anonymous risk reporting channel. Each team member should have
possibility to report risk that he/she foresees in the project.
 Preparing mitigation plans for risks that are chosen to be mitigated. The purpose of
the mitigation plan is to describe how this particular risk will be handled – what,
when, by who and how will it be done to avoid it or minimize consequences if it
becomes a liability.
 Summarizing planned and faced risks, effectiveness of mitigation activities, and effort
spent for the risk management.

Risk management for megaprojects

Megaprojects (sometimes also called "major programs") are extremely large-scale investment
projects, typically costing more than US$1 billion per project. Megaprojects include bridges,
tunnels, highways, railways, airports, seaports, power plants, dams, wastewater projects,
coastal flood protection schemes, oil and natural gas extraction projects, public buildings,
information technology systems, aerospace projects, and defence systems. Megaprojects have
been shown to be particularly risky in terms of finance, safety, and social and environmental
impacts. Risk management is therefore particularly pertinent for megaprojects and special
methods and special education have been developed for such risk management.

Risk management of Information Technology

Information technology is increasing pervasive in modern life in every sector.

IT risk is a risk related to information technology. This relatively new term due to an
increasing awareness that information security is simply one facet of a multitude of risks that
are relevant to IT and the real world processes it supports.

A number of methodologies have been developed to deal with this kind of risk.

Risk management and business continuity

Risk management is simply a practice of systematically selecting cost effective approaches
for minimizing the effect of threat realization to the organization. All risks can never be fully

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avoided or mitigated simply because of financial and practical limitations. Therefore all
organizations have to accept some level of residual risks.

Whereas risk management tends to be preemptive, business continuity planning (BCP) was
invented to deal with the consequences of realized residual risks. The necessity to have BCP
in place arises because even very unlikely events will occur if given enough time. Risk
management and BCP are often mistakenly seen as rivals or overlapping practices. In fact
these processes are so tightly tied together that such separation seems artificial. For example,
the risk management process creates important inputs for the BCP (assets, impact
assessments, cost estimates etc.). Risk management also proposes applicable controls for the
observed risks. Therefore, risk management covers several areas that are vital for the BCP
process. However, the BCP process goes beyond risk management's preemptive approach and
assumes that the disaster will happen at some point.

Risk communication
Risk communication is a complex cross-disciplinary academic field. Problems for risk
communicators involve how to reach the intended audience, to make the risk comprehensible
and relatable to other risks, how to pay appropriate respect to the audience's values related to
the risk, how to predict the audience's response to the communication, etc. A main goal of
risk communication is to improve collective and individual decision making. Risk
communication is somewhat related to crisis communication.

Bow tie diagrams

A popular solution to the quest to communicate risks and their treatments effectively is to use
bow tie diagrams. These have been effective, for example, in a public forum to model
perceived risks and communicate precautions, during the planning stage of offshore oil and
gas facilities in Scotland. Equally, the technique is used for HAZID (Hazard Identification)
workshops of all types, and results in a high level of engagement. For this reason (amongst
others) an increasing number of government regulators for major hazard facilities (MHFs),
offshore oil & gas, aviation, etc. welcome safety case submissions which use diagrammatic
representation of risks at their core.

Communication advantages of bow tie diagrams:

 Visual illustration of the hazard, its causes, consequences, controls, and how controls
fail.
 The bow tie diagram can be readily understood at all personnel levels.

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  "A picture paints a thousand words."

Seven cardinal rules for the practice of risk communication

(As first expressed by the U.S. Environmental Protection Agency and several of the field's
founders

 Accept and involve the public/other consumers as legitimate partners.

 Plan carefully and evaluate your efforts with a focus on your strengths, weaknesses,
opportunities, and threats.
 Listen to the public's specific concerns.
 Be honest, frank, and open.
 Coordinate and collaborate with other credible sources.

CHAPTER 11

LEGAL REQUIREMENTS

Objectives
By the end of the unit you should be able to:
Describe the various legal requirements applicable to business in Zimbabwe including;
 Labour legislation
 Taxation
 Collective bargaining
 Contacts
 Insolvency

Taxation

To tax is to impose a financial charge or other levy upon a taxpayer (an individual or legal
entity) by a state or the functional equivalent of a state such that failure to pay is punishable
by law.

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Taxes may be paid in cash or kind (although payments in kind may not always be allowed or
classified as taxes in all systems). The means of taxation, and the uses to which the funds
raised through taxation should be put, are a matter of hot dispute in politics and economics,
so discussions of taxation are frequently tendentious.

VAT
VAT stands for Value Added Tax. VAT is like a tax on sales and it is always charged to the
ultimate consumer of goods and services.
 Unlike sales tax, however, the value added tax is not collected solely at the final point
of sale.
 - VAT is added and collected at each stage of production and distribution when goods
pass from one firm to another.
 - At each stage, a trader must charge the tax on his customer at the stipulated rate, but
he may deduct from the tax collected any tax which he himself has on goods and
services supplied to him.

Refund of VAT
If a firm liable to VAT but has paid more than it has collected from its customers, then it may
be eligible for a refund of VAT. The entries will be
Debit- cash with refund received
Credit- VAT A/c with tax refund received
This will normally apply to firm which are zero rated for VAT. They apply a zero rate to their
sales but are eligible for refund on their payment for goods and services.
-All exports are zero rated

Exemption from VAT

Some firms are exempted from VAT. This means they do not need to charge VAT to their
customers but it also means that they cannot claim a refund of the tax they pay on materials
and supplies which they buy. Such firms should include VAT in the cost of materials and
supplies purchased or they may, as above debit the tax paid in a VAT a/c. the tax is an
expense to be debited in P&L

Corporate Tax

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Businesses liable for corporate tax under the tax act are called upon to pay tax on their
income in their profits/ income in the year following that in which they earn it.

The corporation tax on current profits will normally be payable until the following year, but
full provision should be made for the tax when the profit arises.
Due date for corporation tax- apart from the payments in advance, corporate tax becomes
within nine months of the end of company’s year, or one month after the assessment of the
corporation Tax payable is determined.
NB- Corporation tax is assessed and charged on the full amount of company’s profits arising
in its accounting period. Profits are to be computed by aggregating the company’s income
from all sources, together with its long term capital gains.

PAYE
This stands for PAY AS YOU EARN. Income tax is deducted from employees under The
PAYE Scheme.
-The tax due in respect of any pay is deducted from that pay as it is paid. The tax deducted is
remitted periodically to the Tax collector by the employer.

NSSA
This stands for National Social Security Authority. It is responsible for the Health and safety
of all Zimbabweans. It ensures that productivity,

Labour Legislation

The labour legislation is provided for by the labour relations Act, Chapter 28:01. The purpose
of the Act is to advance social justice and democracy in the work place.
1. Giving effect to the fundamental rights of employees provided for and part II of the
Act.
2. Provide a legal framework within which employees and employers can bargain
collectively for the improvement of conditions of employment.
3. the promotion of fair labour standards

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 4. The promotion of the participation by employees in decisions affecting their interest
in the work place.
5. Securing the just, effective and expeditious resolution of disputes and unfair labour
practices

Rights of Employees
1) Employees are entitled to membership of trade unions and workers committees.
Any employee as between himself and his employer has the right to be a member
or an officer of a trade union.
2) Prohibition of forced Labour-excludes the
 Any labour required by way of parental discipline
 Any labour required by virtue of an enactment during a period of
public emergency or in the event of any other emergency or disaster
that threatens the wellbeing of the community
 Any labour

3) Protection against discrimination

 No employer shall discriminate any employee on ground o race, tribe play of origin,
political opinion, colours, creed, gender, pregnancy, HIV/AIDS or any disability
4) Right to fair labour Standards
6) Right to democracy in the work place-No person shall hinder, obstruct or prevent any
employee from forming or conducting any workers committee for the purpose of airing
any grievance, negotiating any mater or advancement or protecting the rights or interest
of employees.
-No person shall threaten any employee with any reprisal for any lawful action taken by
him in advancing or protecting his rights or interest.

SICK LEAVE
Sick leave shall be granted in terms of this section to an employee who in terms of section 14
(Labour Relations Act ) is prevented from attending duties because he is ill or injured or
undergo medical treatment which was not occasioned by his failure to take reasonable
precautions.

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These are the conditions
a. Ninety days sick leave on full pay
b. Subject to section (3), one hundred and eighty days sick leave on full pay and half
pay.

Maternity Leave
Leave shall be granted for 90 days on full pay to a female who saved for at least one year.

COLLECTIVE BARGAINING
Formation of Workers Committees
Any employees may appoint or elect a workers committee to represent their interest.
 No managerial employee shall be appointed or elected to a workers committee nor
shall a workers committee represent the interest of managerial employees, unless such
workers committee is poised sorely of managerial employees appointed or elected to
represent their interest.

Functions of Workers Committee

1. Represent the employees concerned in any matter affecting their rights and interest
2. Negotiate with employer concerned a collective bargaining agreement of the
employees concerned
3. Recommend collective job action to the employees concerned
4. Where a works council is or is to be constituted at any work place, elect some of its
members to represent employees on the works council.

EFFECTS OF COLLECTIVE BARGAINING

Every collective bargaining agreement which has been negotiated by a workers committee
shall be referred by the workers to the employees and the trade union concerned and if
approved by the trade union and more than 50% of the employees, shall become binding on
the employer and the employees concerned.

WORKS COUNCIL
In every establishment in which a workers committee representing employees other than
managerial employees has been elected, there shall be a works council

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  A works council shall be composed of an equal number of members representing the
employer and the workers committee.
 The conditions shall be determined by the employer

FUNCTIONS OF WORKS COUNCIL

 To focus the best interest of the establishment and employees on the best possible use
of it human, capital, equipment and other resources so that maximum productivity and
optimum employment standards may be maintained.
 To foster, encourage and maintain good relations between employer and employees
at all levels
 To promote the general and common interest including health, safety and welfare of
both establishment and its workers.
 To promote and maintain the effective participation of employees in the
establishment, and to seek mutual corporation and trust of employees and employer.

TRADE UNIONS
-Any group of employees may form a trade union
-Any group of employers may form an employer’s organization
- Any trade unions or employers organizations may form a federation.

CONTRACTS
Employment contract
The essentials are simple to state i.e. the employee lets his services of a defined nature to the
employer in exchange for a fixed or ascertainable remuneration and until there is agreement
on these two points the contract is not complete
 By entering into the service of the employer the employee subjects himself to the
employer’s control.

GENERAL CONTRACTS-

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  A working definition of a contract is an agreement which is or is intended to be
enforceable at law. It is therefore important that an agreement be there before a
contact come into existence. Agreement by consent, true agreement, a meeting of
minds, a coincidence of the wills, consensus ad idem means the same (R.H. Christie)


SALE CONTRACT
A sale in Roman Dutch Law has been defined as “a contract in which one person promises to
deliver a thing to another, who on his part promises to pay a certain price”
- It is the exchange of property for a price or, because the equivalent Latin words are found in
Judgments, the exchange of merx for a premium.
The general requirements of the formation of a contract of sale are no different from those
applicable to any contract but identification as noted be an agreement to exchange property
for a price.
-The property must be defined with sufficient and there must be certainty that the parties are
in agreement on what is being bought and sold.
PRICE- According to R.H. Christie (1997) the price must be expressed in money. If it is
expressed in property or services the contract will not be a sale, but if it is expressed partly in
money and partly in goods or services (As with the common trade agreement) the contract
will be a sale only if money is the major consideration.

LEASE CONTRACTS
The nature of a contract of lease is best seen as a temporary sale, the lessor corresponding to
the seller, the lessee to the buyer and the rent to the price, the subject- matter of the contract
being transferred not permanently but temporarily ( for an agreed period) ( R.H. Christie
1997).
-To qualify for a treatment as a lease rather than an in nominate contract, the contract must
conform to the pattern of giving the use and occupation of specified property for a specified
period time in exchange for a specified rent.

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- There is the right to enjoy the benefit of property and take the fruits but not to destroy or
appropriate its substance.

Formalities
 According to Christie, no formalities are required for the formation of a lease which
may be made in writing, orally, tacitly or by combination of these methods.

INSOLVENCY
The current system is that a debtor who cannot pay his debt may be ordered by the High
Court, own his own application or that of a creditor to hand over his property to a trustee for
sale and distribution among his creditors.

Voluntary Surrender
A debtor may surrender his estate personally or by an agent and an executor, guardian or
curator of an estate for which he is responsible.
- A partnership estate may be surrendered by all the active partners, together with their own
estates.
- The debtor must file a petition with an additional copy of the statement of affairs.
- The petition must satisfy the court on four matters:
1. That the estate contains sufficient free residue ( i.e. assets which no creditor has a
particular right of Preference) to meet the cost of sequestration
2. The court must be satisfied that the surrender will be to the benefit of creditors
generally.
3. the court must be satisfied treat the estate is insolvent
4. The debtor must be careful to make a full and honest disclosure of all relevant facts
( Chpt 24:03 and Christie)

Compulsory Sequestration
A Creditor with a liquidated claim of not less than $ 100 or creditors with liquidated claims
totaling less than $200 or the agent of such a creditor may petition the court for the
compulsory sequestration of a debtor.

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- A liquidated claim means one based on an obvious and ascertainable legal ground and
capable of quick ready proof. A creditor whose claim is disputed and could be established by
action has no locus standi
- The creditor has to prove to be insolvent and the acts of insolvency which are:
A) Absenting him to evade payment of debts
B) Failing to satisfy a writ of execution
C) Disposing of property to the prejudice of creditors
D) Removing his property to meet the prejudice of creditors
E) Making offering a non-statutory assignment or arrangement with creditors ( Even if made
without prejudice)
F) Giving notice of suspension or suspending payment of his debts
CHAPTER 12

BUSINESS ETHICS
Objectives
By the end of the study unit you must be able to;
 define and appreciate the nature of business ethics
 relate ethics and social responsibility
 identify various business ethical issues
 describe various forms of social responsibility
 Outline strategies for dealing with social responsibility issues.
Nature of ethics
Ethics is the study of right and wrong actions and how conduct should be judged as to be
Good or bad. Ethics is about how we should live our lives and, in particular, how we should
behave towards other people. They are the moral principles which guide thinking, decision
making and action. It is therefore relevant to all forms of human activity. Business ethics is
not really separate or different from ideas that apply in the general context of human life.
Professionals of all specialisations, entrepreneurs included, should be aware of the general
principles of ethics and be capable of applying them in their everyday work. It is important,
however, to note that ethics and law are not the same.
Ethics and Social responsibility
An organisation exercises social responsibility when its acts respect the general public
interest.

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Social responsibility requires that organisations do not act in a way which harms the general
public or is socially irresponsible. Business ethics relate to business morality rather than
society's interests. On the other hand, social responsibility relates to society at large.
However, because corporate decisions subsume marketing decisions the terms ethics and
social responsibility are often used interchangeably.

Ethics and the law

Ethics deal with personal moral principles and values, but laws are the rules that can actually
be enforced in court. Behavior which is not subject to legal penalties may still be unethical.
Different cultures view business practices differently. While the idea of intellectual property
is widely accepted in Europe and the USA, in other parts of the world ethical standards are
quite different.Unauthorised use of copyrights, trademarks and patents is widespread in
countries such as Taiwan, Mexico and Korea. According to a US trade official, the Korean
view is that ' ... the thoughts of one man should benefit all', and this general value means that,
in spite of legal formalities, few infringements of copyright are punished.
ETHICAL ISSUES IN BUSINESS MARKETING
 M Product issues
Ethical issues relating to products usually revolve around safety, quality, and value and
frequently arise from failure to provide adequate information to the customer. This may range
from omission of uncomfortable facts in product literature to deliberate deception. A typical
problem arises when a product specification is changed to reduce cost. Clearly, it is essential
to ensure that product function is not compromised in any important way, but a decision must
be taken as to just what emphasis, if any, it is necessary to place on the changes. Another,
more serious, problem occurs when product safety is compromised. Product recall may
become necessary. At Work
 Promotion issues
Ethical considerations are particularly relevant to promotional practices. Advertising and
personal selling are areas in which the temptation to select, exaggerate, slant, conceal, distort
and falsify information is potentially very great. Questionable practices here are likely to
create cynicism in the customer and ultimately preclude any trust or respect. Also relevant
to this area is the problem of corrupt selling practices. It is widely accepted that a small gift
such as a diary is a useful way of keeping a supplier's name in front of an industrial

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purchaser. Most business people would condemn the payment of substantial bribes to
purchasing officers to induce them to favor a particular supplier. But where does the dividing
line lie between these two extremes?

(a) Extortion. Government officials in some countries have been known to threaten
companies with the complete closure of their local operations unless suitable payments are
made.
(b) Bribery. Payments may be made to obtain services to which a company is not legally
Entitled.
(c) Grease money. Multinational companies are sometimes unable to obtain services to
which they are legally entitled because of deliberate stalling by local officials. Cash payments
to the right people may then be enough to 'oil the wheels'.

(d) Gifts. In some cultures (such as Japan) gifts are regarded as an essential part of
civilisednegotiation, even in circumstances where to Western eyes they might appear
ethically dubious.Managers operating in such a culture may feel at liberty to adopt the local
custom.
 Pricing issues
There are several pricing practices that have attracted criticism. Not all can be described as
improper, however.
(a) Active collusion among suppliers to fix prices is illegal in most countries, but the
existence of a more or less fixed market price does not necessarily imply that collusion is
taking place. A tendency to compete in areas other than price is a natural feature of oligopoly
markets.
(b) Predatory pricing is an issue when newcomers attempt to break into a market.
Established suppliers utilize their cash reserves and economies of scale to sell at prices the
newcomer cannot match. Withdrawal from the market follows.
(c) Failure to disclose the full price associated with a purchase has been rightly criticized as
unethical. However, it must be recognized that there are occasions when it is impossible to
compute the eventual full price, as when cost escalation is accepted by both parties to a
contract. The measure of propriety is whether there is any intention to deceive.
 Place issues
Where long and complex distribution channels are used there is potential for disputes and
conflicts of interest. Even where relationships of trust have been built up over long periods of
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time, business pressures can lead to hard decisions and a perception by distributors that they
have been treated unfairly. Here are some examples of conduct by manufacturers that
distributors could reasonably complain of.
• Requiring high levels of stock holding by intermediaries
• Manipulating discount structures to the detriment of distributors
• Ending distribution agreements at short notice
• Dealing direct with end users at Work
Ethical codes
It is now common for businesses to specify their ethical standards. Some have even published
a formal declaration of their principles and rules of conduct. This would typically cover
payments to government officials or political parties, relations with customers or suppliers,
conflicts of interest, and accuracy of records. Ethical standards may cause individuals to act
against the organisation of which they are a part. More often, business people are likely to
adhere to moral principles which are 'utilitarian', weighing the costs and benefits of the
consequences of behavior. When benefits exceed costs, the behavior can be said to be ethical.
This the philosophical position upon which capitalism rests, and is often cited to justify
behavior which appears to have socially unpleasant consequences. For example, food
production regimes which
Appear inhumane are often justified by the claim that they produce cheaper food for the
Majority of the population.

The American Marketing Association has produced a statement of the code of ethics to which
it expects members to adhere. Members of the American Marketing Association (AMA) are
committed to ethical professional conduct. They have joined together in subscribing to this
Code of Ethics embracing the following topics. Marketers must accept responsibility for the
consequence of their activities and make every effort to ensure that their decisions,
recommendations, and actions function to identify, serve, and satisfy all
Relevant publics: customers, organisations and society.

AMA Code of ethics

Marketers' professional conduct must be guided by;
1 The basic rule of professional ethics: not knowingly to do harm.
2 The adherence to all applicable laws and regulations.

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3 The accurate representation of their education, training and experience.
4 The active support, practice and promotion of this Code of Ethics.
Honesty and Fairness
Marketers shall uphold and advance the integrity, honor and dignity of the marketing
profession
1 Being honest in serving consumers, clients, employees, suppliers, distributors and the
public.
2 Not knowingly participating in conflict of interest without prior notice to all parties
involved.
3 Establishing equitable fee schedules, including the payment or receipt of usual, customary
and/or legal compensation or marketing exchanges.ights and Dutiesarketing Exchange
Process
Participants in the marketing exchange process should be able to expect
1 Products and services offered are safe and fit for their intended uses.
2 Communications about offered products and services are not deceptive.
3 All parties intend to discharge their obligations, financial and otherwise, in good faith.
4 Appropriate internal methods exist for equitable adjustment and/or redress of grievances
concerning purchases.

It is understood that the above would include, but is not limited to, the following
responsibilities of the marketer; the area of product development and management
• Disclosure of all substantial risks associated with product or service usage.
• Identification of any product component substitution that might materially change the
product or impact on the buyer's purchase decision.
• Identification of extra-cost added features.
• Avoidance of false and misleading advertising.
• Rejection of high pressure manipulation, or misleading sales tactics.
• Avoidance of sales promotions that use deception or manipulation.I.n the area attribution
• Not manipulating the availability of a product for purpose of exploitation.
• Not using coercion in the marketing channel.
• Not exerting undue influence over the reseller’s choice to handle the product the area of
• Not engaging in price fixing.
• Not practicing predatory pricing.
• Disclosing the full price associated with any purchase in the area of marketing research
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• Prohibiting selling or fund raising under the guise of conducting research.
• Maintaining research integrity by avoiding misrepresentation and omission of pertinent
research data.
• Treating outside clients and suppliers fairly.
Any AMA members found to be in violation of any provision of this Code of Ethics may
have his or her Association membership suspended or revoked.
(Reprinted by permission of The American Marketing Association)ion Programme 3

Social responsibility
There is a growing feeling that the concerns of the community ought to be the concerns of
business, since businesses exist within society, and depend on it for continued existence.
Business therefore has a moral obligation to assist in the solution of those problems which it
causes. Businesses and businessmen are also socially prominent, and must be seen to be
taking a lead in addressing the problems of society. Enlightened self-interest is probably
beneficial to business. In the long term, concern over the damage which may result from
business activity will safeguard the interests of the business itself. In the short term,
responsibility is a very valuable addition to the public relations activities within a company.
As pressure for legislation grows, self-regulation can take the heat out of potentially
disadvantageous campaigns. More and more, it is being realized that it is necessary for
organisations to develop a sense of responsibility for the consequences of their actions within
society at large, rather than simply setting out to provide consumer satisfactions. Social
responsibility involves accepting that the organisation is part
Of society and, as such, will be accountable to that society for the consequences of the
actions which it takes. Three concepts of social responsibility are profit responsibility,
stakeholder responsibility and societal responsibilities at Work
 Profit responsibility
Profit responsibility argues that companies exist to maximize profits for their proprietors.
Milton
Friedman asserts:
'There is one and only one social responsibility of business: to use its resources and engage in
activities designed to increase its profits so long as it stays within the rules of the game –
which is to say, engages in open and free competition without deception or fraud.'
Thus, drug companies which retain sole rights to the manufacture of treatments for dangerous
diseases are obeying this principle. The argument is that intervention, to provide products at

148
affordable prices, will undermine the motivation of poorer groups to be self-sufficient, or to
improve their lot. Proponents of this view argue that unless the market is allowed to exercise
its disciplines, groups who are artificially cushioned will become victims of a 'dependency
culture', with far worse consequences for society at large.
 Stakeholder responsibility
Stakeholder responsibility arises from criticisms of profit responsibility, concentrating on the
obligations of the organisation to those who can affect achievement of its objectives, for
example, customers, employees, suppliers and distributors.
 Societal responsibility
Societal responsibility focuses on the responsibilities of the organisation towards the general
public. In particular, this includes a responsible approach to environmental issues and
concerns about employment. A socially responsible posture can be promoted by an
organisation via cause related marketing, when charitable contributions are tied directly to the
sales revenues from one of its products.
Strategies for social responsibility
An organisation can adopt one of four types of strategy for dealing with social responsibility
issues.
 Proactive strategy
A proactive strategy implies taking action before there is any outside pressure to do so and
without the need for government or other regulatory intervention. A company which
discovers a fault in a product and recalls the product without being forced to, before any
injury or damage is caused, acts in a proactive way.
 Reactive strategy
A reactive strategy involves allowing a situation to continue unresolved until the public,
government or consumer groups find out about it. The company might already know about
the problem. When challenged, it will deny responsibility, while at the same time attempting
to resolve the problem. In this way, it seeks to minimise any detrimental impact.
 Defensive strategy
A defensive strategy involves minimising or attempting to avoid additional obligations
arising from a particular problem. There are several defense tactics.
• Legal maneuvering
• Obtaining support from trade unions
• Lobbying government ting at Work

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 During 2001, a group of large pharmaceutical companies initiated proceedings in the South
African courts against the South African government. They wished to prevent the
government from importing cheap, private copies of their anti-AIDS drugs. The
pharmaceutical companies suffered predictable abuse for 'putting profits before people' and
worldwide negative publicity. The companies were following a defense strategy in that they
were attempting to prevent the financial damage that would follow the South African
government's taking the 'moral high ground'. This is also an excellent example of the tough
dilemmas that ethical considerations can induce.
 Accommodation strategy
An accommodation strategy involves acknowledging responsibility for actions, probably
when one of the following circumstances pertains.
(a) There is encouragement from special interest groups
(b) There is a perception that a failure to act will result in government intervention
The essence of the strategy is action to forestall more harmful pressure.
This approach sits somewhere between a proactive and a reactive strategy.

RRRRRRR

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2. McGuckin F (1998) Business for beginners: Step By Step to start your new business East Leigh
Management services .London
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Management Prentice Hall.NewDelhi
4. Hisrich.R.D and Peters M P (2002) Entrepreneurship Tatq McGraw Hill New Delphi
5. Holt,D T (1992) Entrepreneurship Prentice Hall London
6. Marcouse, I, Gillspie ,A, Martin , B Malcolm S and Wall N (2003) Business studies 2 Ed Hodder
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Arnold .London
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