Leadstar College of Management and Leadership

Contents Page
INTRODUCTION ........................................................................................................................................ 9
2.0 COURSE CONTENTS ........................................................................................................................... 9
3.0 COURSE AIMS ...................................................................................................................................... 9
4.0 OBJECTIVES ....................................................................................................................................... 10
5.0 COURSE MATERIALS ....................................................................................................................... 11
6.0 STUDY UNITS .................................................................................................................................... 11
7.0 ASSESSMENT ..................................................................................................................................... 12
8.0 SUMMARY .......................................................................................................................................... 13
TABLE OF CONTENTS ............................................................................................................................ 14
UNIT ONE .................................................................................................................................................. 15
THE NATURE OF BUSINESS CONTENTS ............................................................................................ 15
1.0 INTRODUCTION .......................................................................................................................... 16
2.0 OBJECTIVES ................................................................................................................................. 17
3.0 MAIN CONTENT .......................................................................................................................... 17
3.1 DEFINITION OF BUSINESS ........................................................................................................ 17
3.2 FEATURES/CHARACTERISTICS OF BUSINESS ..................................................................... 18
3.3 BENEFICIARIES OF BUSINESS ................................................................................................. 19
3.4 MEANING OF BUSINESS ENTERPRISE ................................................................................... 19
3.5 OBJECTIVES OF THE BUSINESS ENTERPRISE ...................................................................... 20
3.6 STRUCTURE OF THE BUSINESS ENTERPRISE ...................................................................... 21
3.7 STAKEHOLDERS OF THE BUSINESS ENTERPRISE .............................................................. 23
3.8 CONCLUSION ............................................................................................................................... 23
3.9 SUMMARY .................................................................................................................................... 23
3.10 TUTOR-MARKED ASSIGNMENT .............................................................................................. 24
3.11 REFERENCES/FURTHER READING ......................................................................................... 24
UNIT TWO ................................................................................................................................................. 25
BASIC FORMS OF BUSINESS OWNERSHIP ........................................................................................ 25
2.0 INTRODUCTION .......................................................................................................................... 26

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2.1 OBJECTIVES ................................................................................................................................. 26

2.2 MAIN CONTENT .......................................................................................................................... 26
2.2.1 SOLE PROPRIETORSHIP......................................................................................................... 26
2.2.2 PARTNERSHIP .......................................................................................................................... 27
2.2.3 LIMITED LIABILITY COMPANY .......................................................................................... 29
2.2.4 COMPANIES AND PARTNERSHIPS CONTRASTED .......................................................... 30
2.2.5 STRENGTHS AND WEAKNESSES OF THE BASIC FORMS OF BUSINESS
ORGANIZATIONS .................................................................................................................................... 31
2.2.6 CONCLUSION ........................................................................................................................... 32
2.2.7 SUMMARY ................................................................................................................................ 32
2.2.8 TUTOR – MARKED ASSIGNMENT ....................................................................................... 33
2.2.9 REFERENCES/FURTHER READING ..................................................................................... 33
UNIT THREE ............................................................................................................................................. 34
THE ENVIRONMENT OF BUSINESS ..................................................................................................... 34
INTRODUCTION ...................................................................................................................................... 35
3.1. OBJECTIVES ................................................................................................................................. 35
3.2. MAIN CONTENT .......................................................................................................................... 35
3.2.1. MEANING OF BUSINESS ENVIRONMENT.......................................................................... 35
3.2.2. NATURE OF THE BUSINESS ENVIRONMENT ................................................................... 36
3.2.3. 3.2.1 MICRO ENVIRONMENT ................................................................................................ 36
3.2.4. MACRO ENVIRONMENT ........................................................................................................ 39
3.2.5. INTERNATIONAL ENVIRONMENT ...................................................................................... 44
3.2.6. ENVIRONMENTAL SCANNING ............................................................................................ 45
3.2.7. CONCLUSION ........................................................................................................................... 46
3.2.8. SUMMARY ................................................................................................................................ 46
3.2.9. TUTOR-MARKED ASSIGNMENT .......................................................................................... 47
UNIT FOUR ............................................................................................................................................... 48
TYPES OF BUSINESSES .......................................................................................................................... 48
INTRODUCTION ...................................................................................................................................... 49
4.1 OBJECTIVES ................................................................................................................................. 49
4.2 MAIN CONTENT .......................................................................................................................... 49
4.2.1 PRODUCER ............................................................................................................................... 49

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4.2.2 PROCESSOR .............................................................................................................................. 50

4.2.3 MANUFACTURE ...................................................................................................................... 50
4.2.4 INTERMEDIARY ...................................................................................................................... 51
4.2.5 SERVICE BUSINESSES ........................................................................................................... 52
4.2.6 CONCLUSION ........................................................................................................................... 53
4.2.7 SUMMARY ................................................................................................................................ 53
4.2.8 TUTOR-MARKED ASSIGNMENT .......................................................................................... 53
4.2.9 REFERENCES/FURTHER READING ..................................................................................... 54
MODULE TWO ......................................................................................................................................... 55
UNIT FIVE ................................................................................................................................................. 55
MANAGEMENT IN THE BUSINESS ENTERPRISE ............................................................................. 55
5.1 INTRODUCTION .......................................................................................................................... 56
5.2 OBJECTIVES ................................................................................................................................. 56
5.3 MAIN CONTENT .......................................................................................................................... 56
5.3.1 MANAGEMENT DEFINED ...................................................................................................... 56
5.3.2 Concept of Efficiency and Effectiveness .................................................................................... 57
5.4 NEED FOR MANAGEMENT IN THE BUSINESS ENTERPRISE ............................................. 58
5.5 WHO IS A MANAGER? ................................................................................................................ 58
5.6 MANAGEMENT STRUCTURE ................................................................................................... 58
5.7 HIERARCHY OF AUTHORITY ................................................................................................... 60
5.8 MANAGEMENT OBJECTIVES ................................................................................................... 61
5.9 3.7 PROCESS OF MANAGING .................................................................................................... 64
5.10 CONCLUSION ............................................................................................................................... 71
5.11 SUMMARY .................................................................................................................................... 71
5.12 TUTOR-MARKED ASSIGNMENT .............................................................................................. 71
5.13 REFERENCES/FURTHER READING ......................................................................................... 72
UNIT SIX ................................................................................................................................................... 73
FINANCE IN BUSINESS .......................................................................................................................... 73
6.1 INTRODUCTION .......................................................................................................................... 74
6.2 OBJECTIVES ................................................................................................................................. 74
6.3 MAIN CONTENT .......................................................................................................................... 75
6.3.1 THE ROLE OF THE FINANCIAL MANAGER ....................................................................... 75

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6.3.2 GOALS OF THE FINANCIAL MANAGER ............................................................................. 75

6.3.3 FUNCTIONS OF FINANCIAL MANAGEMENT .................................................................... 76
6.4 WHY DO BUSINESSES NEED FUNDS? .................................................................................... 77
6.5 SOURCES OF FUNDS .................................................................................................................. 77
6.5.1 SHORT-TERM SOURCES ........................................................................................................ 78
6.5.2 LONG-TERM SOURCES .......................................................................................................... 80
6.6 CONCLUSION ............................................................................................................................... 83
6.7 SUMMARY .................................................................................................................................... 83
6.8 TUTOR-MARKED ASSIGNMENT ............................................................................................. 84
6.9 REFERENCES/FURTHER READING ......................................................................................... 84
UNIT SEVEN ............................................................................................................................................. 85
MARKETING IN BUSINESS ................................................................................................................... 85
7.1 INTRODUCTION .......................................................................................................................... 86
7.2 OBJECTIVES ................................................................................................................................. 86
7.3 MAIN CONTENT .......................................................................................................................... 87
7.3.1 Marketing Mix ............................................................................................................................ 87
7.3.2 Product ........................................................................................................................................ 87
7.3.3 Price ............................................................................................................................................ 87
7.3.4 Place ............................................................................................................................................ 88
7.3.5 Promotion.................................................................................................................................... 88
7.4 Product Planning ............................................................................................................................. 88
7.4.1 Types of Product ......................................................................................................................... 89
7.4.2 Product Life Cycle (PLC) ........................................................................................................... 91
7.4.3 Meeting Consumers‟ Needs ........................................................................................................ 92
7.4.4 Consumer Motivation ................................................................................................................. 92
[Link] Rational Motives ......................................................................................................................... 93
[Link] Emotional Motives ...................................................................................................................... 93
[Link] Patronage Motives ...................................................................................................................... 93
[Link] Market Research ......................................................................................................................... 93
7.5 Pricing ............................................................................................................................................. 94
7.6 Packaging ........................................................................................................................................ 95
7.7 Promotion........................................................................................................................................ 95

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7.8 Distributing Goods and Services..................................................................................................... 96

7.9 CONCLUSION ............................................................................................................................... 96
7.10 SUMMARY .................................................................................................................................... 97
7.11 TUTOR-MARKED ASSIGNMENT .............................................................................................. 97
7.12 REFERENCES/FURTHER READING ......................................................................................... 97
UNIT EIGHT .............................................................................................................................................. 98
ACCOUNTING IN BUSINESS ................................................................................................................. 98
8 INTRODUCTION .............................................................................................................................. 99
8.1 OBJECTIVES ................................................................................................................................. 99
8.2 MAIN CONTENT .......................................................................................................................... 99
8.2.1 Definition of Accounting ............................................................................................................ 99
8.2.2 Books of Accounts .................................................................................................................... 101
[Link] Ledger ....................................................................................................................................... 101
8.2.3 Journal ....................................................................................................................................... 102
[Link] Reasons for Using Journal ........................................................................................................ 102
[Link] Uses of Journals ........................................................................................................................ 103
[Link] Types of Journal ........................................................................................................................ 103
8.3 Cash Account ................................................................................................................................ 103
8.4 Accounting Terms ......................................................................................................................... 104
8.5 CONCLUSION ............................................................................................................................. 106
8.6 SUMMARY .................................................................................................................................. 107
8.7 TUTOR-MARKED ASSIGNMENT ............................................................................................ 107
8.8 REFERENCES/FURTHER READING ....................................................................................... 107
MODULE THREE.................................................................................................................................... 108
UNIT NINE .............................................................................................................................................. 108
COMMUNICATION IN BUSINESS ....................................................................................................... 108
INTRODUCTION .................................................................................................................................... 109
9.1 OBJECTIVES ............................................................................................................................... 109
9.2 MAIN CONTENT ........................................................................................................................ 109
9.2.1 WHAT IS COMMUNICATION? ............................................................................................ 109
9.2.2 THE PROCESS OF COMMUNICATION ............................................................................... 111
[Link] Actions ...................................................................................................................................... 111

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[Link] Reactions ................................................................................................................................... 111

9.2.3 Interaction ................................................................................................................................. 111
9.3 TYPES OF COMMUNICATION ................................................................................................ 112
9.3.1 Written Communication............................................................................................................ 112
9.3.2 Oral Communication ................................................................................................................. 113
[Link] Intrapersonal Communication ................................................................................................... 113
[Link] Interpersonal Communication ................................................................................................... 114
[Link] Group Communication.............................................................................................................. 114
9.3.3 QUALITIES OF A GOOD COMMUNICATOR ..................................................................... 115
9.3.4 BARRIERS OF COMMUNICATION ..................................................................................... 116
9.3.5 CONCLUSION ......................................................................................................................... 117
9.3.6 SUMMARY .............................................................................................................................. 118
9.3.7 TUTOR-MARKED ASSIGNMENT ........................................................................................ 118
9.3.8 REFERENCES/FURTHER READING ................................................................................... 118
UNIT TEN ................................................................................................................................................ 119
ENTREPRENEURSHIP AND THE BUSINESS ENTERPRISE ............................................................ 119
10 INTRODUCTION ........................................................................................................................ 120
10.1 OBJECTIVES ............................................................................................................................... 120
10.2 MAIN CONTENTS ...................................................................................................................... 121
10.3 DEFINITIONS OF ENTREPRENEURSHIP ............................................................................... 121
10.4 TYPES OF ENTREPRENEURS .................................................................................................. 122
10.5 FUNCTIONS OF ENTREPRENEUR .......................................................................................... 123
10.6 CHARACTERISTICS OF ENTREPRENEURS .......................................................................... 125
10.7 SELECTING A BUSINESS ENTERPRISE ................................................................................ 127
10.8 DIFFERENCES BETWEEN THE ENTREPRENEUR AND THE MANAGER ........................ 128
10.9 CONCLUSION ............................................................................................................................. 130
10.10 SUMMARY .............................................................................................................................. 131
10.11 TUTOR-MARKED ASSIGNMENT ........................................................................................ 131
10.12 REFERENCES/FURTHER READING ................................................................................... 132
UNIT ELEVEN ........................................................................................................................................ 133
BUSINESS SOCIAL RESPONSIBILITY ............................................................................................... 133
11 INTRODUCTION ........................................................................................................................ 134

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11.1 OBJECTIVES ............................................................................................................................... 135

11.2 MAIN CONTENT ........................................................................................................................ 136
11.3 DEFINITION OF CORPORATE SOCIAL RESPONSIBILITY ................................................. 136
11.4 ILLUSTRATIONS OF SOCIALLY RESPONSIBLE BEHAVIOUR OF BUSINESS
ENTERPRISES......................................................................................................................................... 137
11.4.1 Mining sector ............................................................................................................................ 137
11.4.2 Manufacturing sector ................................................................................................................ 138
11.4.3 Service sector ............................................................................................................................ 138
11.5 SPECIFIC SOCIALLY RESPONSIBLE ACTIVITIES .............................................................. 138
11.5.1 Arguments for Social Responsibility ........................................................................................ 141
11.5.2 Argument against Social Responsibility ................................................................................... 142
11.6 SOCIAL AUDIT ........................................................................................................................... 143
11.7 THE PRESSURE GROUPS ......................................................................................................... 144
11.8 EXTERNALITIES ........................................................................................................................ 144
11.9 DEALING WITH SOCIAL COSTS............................................................................................. 145
11.10 THE FUTURE OF SOCIAL RESPONSIBILITY .................................................................... 146
11.11 CONCLUSION ......................................................................................................................... 147
11.12 SUMMARY .............................................................................................................................. 147
11.13 TUTOR-MARKED ASSIGNMENT ........................................................................................ 147
11.14 REFERENCES/FURTHER READING ................................................................................... 148
UNIT TWELVE........................................................................................................................................ 149
BUSINESS ETHICS ................................................................................................................................. 149
12 INTRODUCTION ........................................................................................................................ 150
12.1 OBJECTIVES ............................................................................................................................... 150
12.2 MAIN CONTENT ........................................................................................................................ 150
12.3 Ethics............................................................................................................................................. 150
12.4 ETHICAL AND UNETHICAL BEHAVIOUR............................................................................ 152
12.5 DETERMINANTS OF ETHICS .................................................................................................. 153
12.5.1 Family influences ...................................................................................................................... 153
12.5.2 Peer influences .......................................................................................................................... 154
12.5.3 Personal experiences ................................................................................................................. 154
12.5.4 Values ....................................................................................................................................... 154

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12.5.5 Institutional or organizational affiliations: ................................................................................ 155

12.5.6 The law...................................................................................................................................... 156
12.5.7 Situational factors ..................................................................................................................... 156
12.6 ETHICS IN THE WORKPLACE ................................................................................................. 156
12.7 FUNDAMENTAL PRINCIPLES OF BUSINESS / MANAGERIAL ETHICS .......................... 157
12.8 MANAGERIAL ETHICS ............................................................................................................. 160
12.9 CODE OF ETHICS ....................................................................................................................... 163
12.10 CONCLUSION ......................................................................................................................... 163
12.11 SUMMARY .............................................................................................................................. 164
12.12 TUTOR-MARKED ASSIGNMENT ........................................................................................ 164
12.13 REFERENCES/FURTHER READING ................................................................................... 165

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INTRODUCTION

Introduction to Business is a foundation coursework equivalent to three credit hours. It is

available to all non-business students in the Master of Business Administration of Leadstar
College of Management and Leadership. The course is basically concerned with introducing you
into the world of business theory and practice. The course guide tells you what you will learn in
this course, the course aims and objectives, and the materials and support that you require to
make your study very successful. Also, this course guide contains information on assessment
which consists of the Tutor-Marked Assignments and the Final Examination.

2.0 COURSE CONTENTS

The course contents include: The Nature of Business; Basic Forms of Business Ownership; The
Environment of Business; Types of Businesses; Management in the Business Enterprise; Finance
in Business; Human Resource in Business; Marketing in Business; Accounting in Business;
Communication in Business; Entrepreneurship and the Business Enterprise; Business Social
Responsibility; and Business Ethics.

3.0 COURSE AIMS

This course is aimed exposing you to the complex world of business theory and practice.
Business can be said to be an economic activity which is related with continuous and regular
production and distribution of goods and services for satisfying human wants. It is an economic
system in which goods and services are exchanged for one another or money, on the basis of
their perceived worth. Every business requires some form of investment and a sufficient number
of customers to whom its output can be sold at profit on a consistent basis.

The business enterprise performs the following functions:

 Marketing;  Accounting; and
 Production;  Personnel.
 Finance;

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4.0 OBJECTIVES

o Define business;
o Highlight the features/characteristics of business;
o Discuss the beneficiaries of business;
o Describe what a business enterprise means;
o Enumerate and explain the objectives of a business enterprise;
o Explain the structure of a business enterprise;
o Discuss the stakeholders in the business enterprise;
o List the distinguishing features of each of the three basic forms of business organizations
– sole proprietorship, partnership, and limited liability company;
o Define a company in law;
o Enumerate the strengths and weaknesses of the three basic legal forms of business
organizations;
o Define business environment;
o Discuss the nature of business environment;
o Explain environmental scanning;
o Define types of businesses;
o Explain the features of the types of businesses;
o Define management;
o Differentiate between efficiency and effectiveness;
o State the role of management in business;
o Define and state the role of a manager;
o Describe the concept management structure;
o Discuss hierarchy of authority;
o Define and explain the concept management objectives;
o Define and discuss process management;
o Explain the role of the financial manager in a business organization;
o Discuss the functions of financial management;
o Explain why businesses need funds;
o Enumerate and explain the sources of short-term and long-term financing;
o State the place of marketing in today‟s business;

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o State reasons why accounting is needed in business;

o Explain the role of communication in business;
o Distinguish between the entrepreneur and the manager;
o Apply the principles of ethics in dealing with complex business problems involving
conflicting interests.

5.0 COURSE MATERIALS

The main components of the course are:

 The Course Guide
 Study Units
 References and Further Readings
 Assignment Guide

6.0 STUDY UNITS

There are fifteen (12) units in this course, and they are grouped into four (4) modules as follows:

Module 1
Unit 1 The Nature of Business
Unit 2 Basic Forms of Business Ownership
Unit 3 The Environment of Business
Unit 4 Types of Businesses
Module 2
Unit 1 Management in the Business Enterprise
Unit 2 Finance in Business
Unit 3 Marketing in Business
Unit 4 Accounting in Business
Module 3
Unit 1 Communication in Business
Unit 2 Entrepreneurship and the Business Enterprise

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Module 4
Unit 3 Business Social Responsibility
Unit 4 Business Ethics

Each study unit is made up of the introduction, objectives, main content, exercises (for self-
assessment), conclusion, summary, tutor-marked assignment questions, and references/ further
reading. This will take at least two hours. You are expected to study the materials carefully and
attempt the exercises. You are also expected to consult the textbooks under References/Further
Reading, for additional information. Practice the tutor-marked assignment questions as well. The
textbooks under References/Further Reading include the following:

Bantie Worke (2006). Introduction to Business. 3rd print, Addis Ababa: Alem Printing Press
Boone, Louis and Kurtz, David (2001). Contemporary Business, 9th Edition. New York: Dreden
Press.
Brown, Betty I. and Clon, John E. (1997). Introduction to Business: Our Business and Economic
World. New York: McGraw Hill Inc.
Inegbenebor, A. U. and Osaze, Esosa Bob (Ed.) (1999). Introduction to Business: A Functional
Approach. Lagos: Malthouse Press Limited.
Mathew J. (2006) Business Organizations (2nd ed.), Sheel Sons, New Delhi.
Mescon, Michael H., Bovee, Courtland L., and Thill, John V. (2002). Business Today. Upper
Saddle River, New Jersey: Prentice Hall.
Miller, Roger LeRoy and Farese Lois Schneider (1992). Understanding Business: A World of
Opportunities. New York: West Publishing Company.
Yolokwu P. O. (1999) Management: Concepts and Techniques, Peak Publishers

7.0 ASSESSMENT

The assessment for this course will be in two parts:

* Tutor-Marked Assignments (TMAS)
* Final Examination

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7.1 Tutor-Marked Assignments

The Tutor-Marked Assignments form the basis for Continuous Assessment for this course.
The College will decide on the form these assignments as well as schedule when they are to
be done as appropriate.

You are expected to utilize the information gathered from the study material and the
references in attempting the assignments. The assignments will account for 50% of the total
course mark.

7.2 Final Examination

The final examination in the course will attract the remaining 70% of the total course grade.
You are advised to note that all areas of the course will be assessed during the examination.

8.0 SUMMARY

The world of business is complex. On the successful completion of this course you would
have been well exposed to face business challenges.

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TABLE OF CONTENTS

Module 1
Unit 1 The Nature of Business
Unit 2 Basic Forms of Business Ownership
Unit 3 The Environment of Business
Unit 4 Types of Businesses

Module 2
Unit 1 Management in the Business Enterprise
Unit 2 Finance in Business
Unit 3 Marketing in Business
Unit 4 Accounting in Business

Module 3
Unit 1 Communication in Business
Unit 2 Entrepreneurship and the Business Enterprise

Module 4
Unit 3 Business Social Responsibility
Unit 4 Business Ethics

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MODULE 1

Unit 1 The Nature of Business

Unit 2 Basic Forms of Business Ownership
Unit 3 The Environment of Business
Unit 4 Types of Businesses

UNIT ONE

THE NATURE OF BUSINESS CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Meaning/Definition of Business
3.2 Features/Characteristics of Business
3.3 Beneficiaries of Business
3.4 Meaning of Business Enterprise
3.5 Objectives of the Business Enterprise
3.6 Structure of the Business Enterprise
3.7 Stakeholders of the Business Enterprise
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

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1.0 INTRODUCTION

In any organized society, several institutions exist to serve the needs of the people in that society.
Government creates several institutions to enable it carry out its function of providing law and
order, security of life and property, regulation and control of the activities of individuals and
groups in the society, development of infrastructure and promotion of the economic, social and
cultural welfare of the nation. Institutions are also established to serve the needs of the people for
goods and services. Such institutions provide these goods and services to people with the aim of
making profit for their owners. These institutions are non-governmental in many societies, but
there are quite a number of societies where government also engages in providing these goods
and services. Also, there exist non-profit and non-governmental institutions which are
established in to render certain services which neither government nor profit-oriented
organizations render. Amongst others, they are usually concerned with educational, cultural,
religious, human rights, and environmental issues.

Institutions or organizations whose primary objective is profit-making are generally known as

business enterprises, and those will be the focus of this introductory unit. We shall attempt to
answer the following questions:

 What is business?
 What are the features/characteristics of business?
 Who benefits from business?
 What is a business enterprise?
 What are the objectives of the business enterprise?
 How is the business enterprise structured?
 Who are the stakeholders in the business enterprise?

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2.0 OBJECTIVES

After a careful study of this Unit, you should be able to:

 Define Business;
 Highlight the Features/Characteristics of Business;
 Discuss the Beneficiaries of Business;
 Describe What a Business Enterprise Mean;
 Enumerate and Explain the Objectives of a Business Enterprise;
 Explain the Structure of a Business Enterprise; and
 Discuss the stakeholders in the business enterprise.

3.0 MAIN CONTENT

3.1 DEFINITION OF BUSINESS

Business can be said to be an economic activity which is related with continuous and regular
production and distribution of goods and services for satisfying human wants. Let us consider a
few definitions:

Brown and Clon (1997) define business as “The activities of an individual or group of
individuals in producing and distributing goods and services to customers.”

Stephenson defines business as “The regular production or purchase and sale of goods
undertaken with an objective of earning profit and acquiring wealth through the
satisfaction of human wants.”

According to Dicksee, “Business refers to a form of activity conducted with an objective of

earning profits for the benefit of those on whose behalf the activity is conducted.”

Lewis Henry defines business as “Human activity directed towards producing or acquiring
wealth through buying and selling of goods.”

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Thus, the term „business‟ means continuous production and distribution of goods and services
with the aim of earning profits under certain market conditions. It is an economic system in
which goods and services are exchanged for one another or money, on the basis of their
perceived worth. Every business requires some form of investment and a sufficient number of
customers to whom its output can be sold at profit on a consistent basis.

It is important to recognize that the term „business‟ can be used loosely. It may be used to
describe a wide variety of activities or transactions that an individual or group may engage in.
When business is defined as a commercial activity engaged in as a means of livelihood, a trade, a
profession, occupation or a particular field of endeavour, it is obvious that the term can be
applied as a general term for most human activities. Specifically, however, business is defined as
any lawful human activity which involves the production and distribution of goods or the
rendering of services for the purpose of making a profit.

3.2 FEATURES/CHARACTERISTICS OF BUSINESS

Here, let us highlight the features or characteristics of business as follows:

 Directly or indirectly concerned with the exchange of goods and services for money or
money‟s worth.
 Deals in numerous transactions.
 Profit is the main objective.
 Business skills are required for economic success.
 Business is subject to risks and uncertainties.
 Business involves a buyer and a seller.
 Business is connected with production of goods and services (industrial activity)
 Business activity may be concerned with marketing or distribution of goods (commercial
activity).

SELF ASSESSMENT EXERCISE 1

 In your own words, define, and describe the term “Business”.

 Explain the essential features of business.

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3.3 BENEFICIARIES OF BUSINESS

The following benefit from business activities:

(i) Business Owners: Apart from the profit that accrue to business owners (which is an
opportunity to invest more and generate more income), business owners have the
satisfaction of being their own bosses.

(ii) Employees: Workers are paid salaries and enjoy other benefits relating to loans, health care,
vacation bonuses and retirement/compensation plans. Therefore, it means they (workers)
earn income that enables them attend to their personal needs as well as the upkeep of their
families. They are enabled to choose what to buy, and have the opportunity of making
savings. Also, employees benefit from business training opportunities, in addition to gaining
great experience on the job. At the right time, they can establish businesses of their own.

(iii) The Government: Business pays, and government collects taxes to function as well as
provides basic amenities to the general public.

(iv) The Society: The society benefits immensely from the activities of business under corporate
social responsibility. Schools are built and equipped, access roads constructed, electricity
provided, and so on.

3.4 MEANING OF BUSINESS ENTERPRISE

A business enterprise is an organization engaged in the trade of goods, services, or both to

consumers. Miller and Farese (1992) refer to business enterprise as “any business organization
set up to exchange goods, services, and money in order to make a profit.” It can be said to be a
decision-making unit concerned with serving certain needs through the production and
distribution of goods and rendering services at a profit for the owners.

The distinguishing feature of business enterprises in relation to other institutions is profit. For
example, a government-owned medical laboratory may produce vaccines for controlling certain
animal diseases, but this activity is usually not carried out for the purpose of making a profit.

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Similarly, a non-profit and non-government organization may render services without the aim of
making a profit.

3.5 OBJECTIVES OF THE BUSINESS ENTERPRISE

Our working definition of business enterprise stresses that the primary objective of business is to
make profit by identifying and effectively serving the needs of customers. Profit is the primary
motive for establishing a business enterprise. It is a reward for investing one‟s savings in a
venture despite the fact that the future outcome of the venture is uncertain. This implies that
profit is a reward for assuming the risk of establishing a business enterprise.

Profit serves other functions. It is the principal source of growth and continued existence of the
business enterprise. Through re-investment of profit, the business enterprise can be expanded.
Profit also serves as a measure of performance. It is an index by which the performance of one
enterprise can be compared with that of another or the performance of the same enterprise can be
evaluated over time. Consequently, profit is an incentive for people to work harder and more
efficiently.

However, there are secondary objectives of business which are related to, and dependent on the
profitability objective. They include the following:

(i) Growth Objective: The expansion of the business enterprise is one of the objectives of
business. This may take the form of increased sales turnover, market share, number of
people employed, capital employed, and so on.

(ii) Innovation: Innovation is an important means of striving to satisfy the needs of

customers better than competitors. It involves introduction of new products, new method
of handling distribution, etc.

(iii) Productivity: It is particularly important to the business enterprise that productivity is

improved. Productivity is the ratio of output to input in a given period of time. It is the
extent to which a business enterprise is able to utilize a given set of resources to achieve
the highest possible value of output. Productivity may be measured over time in terms of

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output by employee, output per unit of capital invested or output per unit of the most
critical resource used.

(iv) Employee Satisfaction: Business enterprises seek to enhance the satisfaction of

employees as a means of optimizing their contribution to the growth and
competitiveness of the enterprise.

(v) Shareholder Satisfaction: To guarantee continued support of investors, business

enterprises seek to improve the returns to shareholders while at the same time
reducing their risk.

(vi) Public Image: A positive public image for the enterprise enables it to obtain the
resources it needs on favourable terms. Thus, the business enterprise strives in various
ways to improve its image as a good corporate citizen involved in the production and
distribution of high quality products. It also strives to project itself as an enterprise
which is concerned about its employees and the community in which it operates.

SELF ASSESSMENT EXERCISE 2

 Discuss business enterprise. What distinguishes business enterprise from others?

 Discuss the objectives of the business enterprise.

3.6 STRUCTURE OF THE BUSINESS ENTERPRISE

The production and distribution of goods and services involve a large number of activities. The
structure of a business enterprise is the pattern of grouping and allocation of these activities to
people as well as the distribution of authority among them in order to achieve the objectives of
the enterprise. These activities can be grouped in a large number of ways. Most often, they are
grouped according to the basic functions they serve. These functions are:

 Marketing;  Accounting; and

 Production;  Personnel.
 Finance;

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Marketing includes activities involved in ascertaining the needs of customers, developing

suitable goods to meet the needs, and distribution of the goods to customers. Production function
incorporates all activities through which raw materials are procured, and converted into needed
products. Finance involves activities needed to obtain the required funds, allocate and control the
utilization of the funds. Under Accounting, all activities by which financial transactions are
recorded, summarized, analyzed, and interpreted for business decision-making, are included.
Personnel function encompasses all activities by which human resources are procured and
utilized in the business enterprise.

The distribution of authority among people performing various functions in the enterprise is also
another aspect of the structure of the business enterprise. As with all human institutions,
authority is unevenly distributed. Some people are given more authority than others. However,
the basis of distribution of authority is the responsibility that a person has for people, money,
materials and information needed to produce and distribute goods and services. The higher the
responsibility that a person has in the business enterprise, the more the authority that is assigned
to such a person so that she or he can carry out the responsibilities assigned to her/him. Hence,
there is a hierarchy of authority in the business enterprise as shown in the following diagram:

Managing
Director

Marketing Prodicton Finance Personnel

Manager Manager Manager Manager

Figure 1: Structure of Business Enterprise

The diagram shows that the person with the highest level of authority in this business enterprise
is the Managing Director. The managers, in charge of the functional areas, have the same level of
authority over activities assigned to them but their authority is higher than their subordinates.

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3.7 STAKEHOLDERS OF THE BUSINESS ENTERPRISE

Stakeholders are persons or group of persons who have committed something in the business
enterprise and, therefore, have expectations from it. We can also refer to stakeholders as all those
involved in, affected by, or able to influence the business enterprise, and they include the
following:

o Owners, shareholders, and creditors o Media and advocacy groups

o Customers and consumers o Government
o Employees and agents o Families
o Suppliers o Communities
o Competitors o Society

3.8 CONCLUSION

Relative to other institutions, a business enterprise is regarded as such if it is established to serve

certain needs through the production and distribution of goods and rendering of services at profit
for the owners.

3.9 SUMMARY

In this Unit, we have been able to:

Define the term „business‟ and to highlight its characteristics;

numerate and discuss the beneficiaries of business to include the owners, employees,
government, and the general public;
Define an enterprise as any business organization set up to exchange goods, services, and
money in order to make a profit;
Discuss the objectives of the business enterprise, as well as its structure;
numerate the stakeholders of the business enterprise.

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3.10 TUTOR-MARKED ASSIGNMENT

 Enumerate and explain the stakeholders of the business enterprise.

 With the help of a diagram, describe the structure of a business enterprise you are
familiar with. Explain the authority relationships between the key positions in the
enterprise.

3.11 REFERENCES/FURTHER READING

Bantie Worke (2006). Introduction to Business. 3rd print, Addis Ababa: Alem Printing Press
Boone, Louis and Kurtz, David (2001). Contemporary Business, 9th Edition. New York: Dreden
Press.

Brown, Betty I. and Clon, John E. (1997). Introduction to Business: Our Business and Economic
World. New York: McGraw Hill Inc.

Inegbenebor, A. U. and Osaze, Esosa Bob (Ed.) (1999). Introduction to Business: A Functional
Approach. Lagos: Malthouse Press Limited.

Mathew J. (2006) Business Organizations (2nd ed.), Sheel Sons, New Delhi.
Mescon, Michael H., Bovee, Courtland L., and Thill, John V. (2002). Business Today. Upper
Saddle River, New Jersey: Prentice Hall.

Miller, Roger LeRoy and Farese Lois Schneider (1992). Understanding Business: A World of
Opportunities. New York: West Publishing Company.
Yolokwu P. O. (1999) Management: Concepts and Techniques, Peak Publishers

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UNIT TWO
BASIC FORMS OF BUSINESS OWNERSHIP

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Sole Proprietorship
3.2 Partnership
3.3 Limited Liability Company
3.4 Companies and Partnerships Contrasted
3.5 Strengths and Weaknesses of the Basic Forms of Business Organizations
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

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2.0 INTRODUCTION

One of the first decisions that must be made when a new business is to be started is the form in
which it will operate. There are three legal forms of business organizations. These are the Sole
proprietorship, Partnership, and Limited Liability Company. Each of these has its own
distinguishing features/characteristics, as well as merits and demerits. It is necessary to
understand the differences among these three forms. The knowledge of their strengths and
weaknesses is very important in our exposition on Business. And these will be the focus of this
unit.

2.1 OBJECTIVES

After studying this Unit, you should be able to:

 List the distinguishing features of each of the three basic forms of business organizations
–Sole Proprietorship, Partnership, and Limited Liability Company;
 Define a Company in law;
 Enumerate the strengths and weaknesses of the three basic legal forms of business
organizations.

2.2 MAIN CONTENT

2.2.1 SOLE PROPRIETORSHIP

A Sole proprietorship or one – man business, as the name implies, is a business concern owned
by one person who often is also engaged actively in the running of the business. The sole owner
subscribes to all of the equity capital of the business which in most cases are raised from
personal savings or soft loans obtained from relations and friends. All incomes also accrue to the
owner.

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Other characteristics/features of one – man business include the following:

o A sole proprietorship has no distinct legal entity. Even when it is registered by

the Ethiopian Revenue and Custom Authority, as required by the law, the owner and
the business cannot be separated;
o The owner has freedom to deal with the organization‟s assets without any restrictions
imposed by law;
o Because of the limited amount of assets which a sole proprietorship business controls,
it is often small and can be recognized easily;
o Its capacity to borrow (especially from banks) is limited by the asset base;
o It has very high risk because of the inseparability of the owner with the business;
o The business outfit often goes by the name of the owner, and operates within a
confined location, usually, not more than two branches;
o The structure is fairly simplistic in nature.

2.2.2 PARTNERSHIP

A partnership is generally defined as a legal relationship between two or more persons where
each person contributes something in order to carry on a lawful business with a view of profit
which is to be shared between the partners in a proportion agreed upon by them. Therefore, for a
partnership to exist:

 the association must be engaged in a business which may be a trade or a profession;

 the trade or the profession must be carried on together, jointly, for the benefit of all the
partners; and
 there must be an intention to earn a profit.

The above description, therefore, distinguishes a partnership from a political, religious, social,
or association. A partnership agreement, which need not necessarily be in written form
(although it is advisable or wiser that any agreements between the partners be reduced to
writing as this will tend to lead to fewer possibilities of misunderstandings and disagreements
between partners), will govern the relationships between the partners, including:

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 name of organization, the type of business, and duration;

 capital to be introduced by partners;
 sharing of profits between parties, including salaries since not all the partners may be
employed by the partnership on a full-time basis. Such salaries will be normal operating
expenses;
 drawings by partners;
 arrangements for dissolution, or on the death or retirement of partners;
 settling of disputes;
 preparation and audit of accounts.

At this juncture, it is necessary to note that, although the partnership agreement creates a legal
relationship between the partners, the partnership itself is not a legal entity.

We can highlight the essential features of a partnership as follows:

(i) Partnership is not separated from the partners.

(ii) Setting-up cost is low and it is easy to form.
(iii) Life of partnership is limited because it is a legal entity.
(iv) Regarding liability, the partners must risk all their personal assets, even those not
invested in the business, for under the partnership each partner is liable for the
business‟ debts.
(v) Partners share in the profits of the business according to their individual financial
contribution to the business.
(vi) The death of a partner can dissolve the partnership.

SELF-ASSESSMENT EXERCISE 1
 Distinguish between a sole proprietorship business and a partnership. In which ways are
they similar, if any?

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2.2.3 LIMITED LIABILITY COMPANY

A limited liability company (or company) may be defined as an artificial creature, invisible,
intangible, and existing only in contemplation of law. As a legal (artificial) person, it is separate
from the owners. It can enter into a contract, sue and be sued in its name, can affiliate with
another company, and open subsidiaries. Awash Bank, Abay Bank, Buna International Bank, etc.
are few examples in Ethiopia.

A company is legally formed by meeting the conditions stipulated in the Ministry of Finance and
Economic Development and Ethiopian Revenue and Customs Authority (ERCA) proclamations.
The promoters must apply for registration at the ERCA affairs together with both a
Memorandum and Articles of Association.

The Memorandum of Association must contain the following information:

 Name of the company, with the term “Limited” as the last word of the name;
 Objects for which the company is formed;
 Amount of the share capital with which the company proposes to be registered and the
division into shares of a fixed amount;
 Address of the registered office of the company; and
 A statement to the effect that the „liability‟ of the members or shareholders is „limited‟.

The Articles of Association, on the other hand, setting out the regulations for internal
organization, and contains provisions relating to:

 proceedings at meetings;
 alteration of capital;
 appointment of directors;
 borrowing powers of directors;
 transfer or transmission of shares;
 winding-up procedure, etc.

The Memorandum and Articles of Association, duly stamped for stamp duties and fees, and
accompanied by certain other forms, are lodged with the Registrar-General, who if everything is

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in order, issues a Certificate of Incorporation. At that point, a Limited Liability Company is

formed, and those who signed the memorandum are its “foundation members”.

From the foregoing, let us highlight the following distinguishing features of a company as
follows:
 Separate legal entity, which is not affected by changes in its ownership;
 Can own assets and incur liabilities in its own right;
 Can sue or be sued in its own name;
 Has perpetual succession – does not cease to exist upon the death of any or all of the
owners;
 Liability of owners/shareholders is limited to the amount paid for shares allocated;
 Has the right to borrow on its own account;
 External audit is compulsory;
 Profits are subject to Company Income Tax;

2.2.4 COMPANIES AND PARTNERSHIPS CONTRASTED

Let us attempt to outline the distinguishing features/characteristics of Limited Liability

companies and partnerships as follows:

S/N COMPANIES S/N PARTNERSHIPS

1 Separate legal entity which is not affected by No separate legal entity – not a juristic person.
changes in its membership.

2 Shareholders have limited liability for debts The liability of each member for debts of the firm is
– limited to the amount S/he agreed to pay unlimited. Partners are jointly and severally liable for
for shares allotted. debts.

3 Rights of management are delegated to the Every member can partake in the management of the
directors. business.

4 Powers and duties of directors are spelt out The rights of partners themselves are governed by the
in the Articles of Association and can be partnership agreement which can be varied.
varied by passing a special resolution of the
company in a general meeting.

5 The authorized capital is fixed by the Capital is contributed by the partners by agreement. The
Memorandum of Association. amount, which is not fixed, can be increased by

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undrawn profits or reduced by losses and withdrawals.

6 Shares are freely transferable in public The share in a partnership cannot be transferred except
companies; in private companies, shares are by the consent of all partners.
transferable subject to restrictions imposed
by the Articles of Association.

7 Audit is compulsory, and copies of accounts Audit is not compulsory; copies of accounts are not filed
are filed with the ERCA- tax authority with the tax authority.
annually.

8 Profits are distributed in the form of Profits are distributed as per agreed ratios; drawings
dividend. may be made by mutual agreement for accruing profits.

9 Profits are subject to Company Income Tax. Profits are subject to Personal Income Tax; partnership
is not taxed

10 Unlimited life. Partnerships have limited life.

SELF-ASSESSMENT 2
 Define a Company and explain how it is different from a Partnership.

2.2.5 STRENGTHS AND WEAKNESSES OF THE BASIC FORMS OF

BUSINESS ORGANIZATIONS

Let us highlight the strengths and weaknesses of the basic forms of business organizations – Sole
proprietorship, Partnership, Limited Liability Company – in a tabular format as shown below:

Sole Proprietorship Partnership Company

Strengths

 Can raise more funds  Owners have limited liability, which

than sole guarantees that they lose more than
 Owner receives all profits (as well as
proprietorship they invested
losses)
 Borrowing powers  Can achieve large size due to sale of
 Low organizational costs
enhanced by more stock
 Income included and taxed on
owners  Ownership (stock) is readily
proprietor‟s personal tax returns
 More available brain transferable
 Independence
power and managerial  Long life of firm
 Secrecy
skills  Can hire professional managers
 Ease of dissolution
 Income included and  Has better access to financing
taxed on partners‟ tax  Receives certain tax advantages
returns

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Weaknesses

 Owners have unlimited  Taxes generally higher, because

liability and may have corporate income is taxed and
 Owner has unlimited liability-total
to settle debts of other dividends paid to owners are also
wealth can be taken to satisfy debt
partners taxed
 Limited fund-raising power tends to
 Partnership is  More expensive to organize than other
inhibit growth
dissolved when a business forms
 Proprietor must be jack-of-all trades
partner dies  Subject to greater government
 Difficult to give employees long-term
 Difficult to liquidate or regulation
career opportunities
transfer partnership  Lacks secrecy, because stock holders
 Lacks continuity when proprietor dies –
must receive financial reports
life of the business is limited to the life
of the individual who created it

2.2.6 CONCLUSION

The form a business enterprise takes depends on various factors, among which are the nature of
the commodities to be produced, the way in which capital is to be raised, and most importantly,
the probable size of the new enterprise. Although the sole proprietorship and partnership are the
oldest forms of business ownership, Limited Liability Company is the most influential.

2.2.7 SUMMARY

In this unit, we have been able to consider that:

o The three basic legal forms of business organizations are the Sole proprietorship (one –man
business), Partnership, and Limited Liability Company;
o These forms of business organizations have their distinguishing features, as well as their
strengths and weaknesses;
o While the one-man business and the partnership may die following the death the owner/one
of the partners, the life of the Company is not affected by the death of the founders;
o Proprietors/partners have unlimited liability – their personal assets/wealth can be used to
satisfy debt;
o Shareholders‟ liabilities in a company are limited to the value of their investments in the
company.

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2.2.8 TUTOR – MARKED ASSIGNMENT

 Evaluate the strengths and weaknesses of the basic forms of business

organizations.

2.2.9 REFERENCES/FURTHER READING

ACCA (2004). Preparing Financial Statements. Middlesex: A.T. Foulks Lynch Ltd.
Bantie Worke (2006). Introduction to Business. 3rd print, Addis Ababa: Alem Printing Press
Beckett, D.W. (1980). Spicer and Pegler’s Book-Keeping and Accounts. London, Great Britain:
HFL Publishers Ltd.
Boone, Louis and Kurtz, David (2001). Contemporary Business, 9th Edition. New York: Dreden
Press.
Brown, Betty I. and Clon, John E. (1997). Introduction to Business: Our Business and Economic
Flynn, David [Link]. (2000). Fundamental Accounting, 4th Edition, Kenwyn: Juta & Co. Limited.
Gitman, Lawrence J. (2003). Principles of Managerial Finance, 10th Edition. New York:
Addison-Wesley Publishing.
Inegbenebor, A. U. and Osaze, Esosa Bob (Ed.) (1999). Introduction to Business: A Functional
Approach. Lagos: Malthouse Press Limited.
Kolb, Robert W. and Rodriguez, Ricardo J. (1994). Essential Financial Management. Miami,
Florida: Kolb Publishing Company.
Larson, K.D. (1989). Financial Accounting. Boston: Von Hoffman Press Inc.
World. New York: McGraw Hill Inc.
Mathew J. (2006) Business Organizations (2nd ed.), Sheel Sons, New Delhi.
Mescon, Michael H., Bovee, Courtland L., and Thill, John V. (2002). Business Today. Upper
Saddle River, New Jersey: Prentice Hall.

Miller, Roger LeRoy and Farese Lois Schneider (1992). Understanding Business: A World of
Opportunities. New York: West Publishing Company.
Yolokwu P. O. (1999) Management: Concepts and Techniques, Peak Publishers

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UNIT THREE

THE ENVIRONMENT OF BUSINESS

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Meaning of Business Environment
3.2 Nature of the Business Environment
3.2.1 Micro Environment
3.2.2 Macro Environment
3.2.3 International Environment
3.3 Environmental scanning
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

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INTRODUCTION

Business does not operate in a vacuum. Generally, business operates in a multifaceted

environment which is of itself subject to a large measure of change. The relationship between
business and its environment is one of mutuality; that is, the environment exerts pressure on
business while business, in turn, influences various aspects of its environment. Business also
depends on its environment for the supply of all its input and at the same time to absorb its
output. The environment provides opportunities or alternative avenues for investment which the
business manager can exploit to his/her advantage. The business environment may also
constitute a threat to business if changes in it are unfavourable to business operations. If the
business must survive in the long run, it must be capable of responding and adapting to
environmental conditions from time to time as these environmental factors are dynamic in
nature. Therefore, the business manager must make his/her plans, take decisions and execute
them within the limits imposed by the environment. Therefore, this Unit will discuss the
environmental factors or forces that influence the conduct of business in Ethiopia and elsewhere.

[Link]

After a careful study of this Unit, you should be able to:

 define business environment;
 discuss the nature of business environment; and
 explain environmental scanning.

3.2. MAIN CONTENT

3.2.1. MEANING OF BUSINESS ENVIRONMENT

Business environment can be defined as a series of factors or conditions that are external to the
business but which have influence on the operations of the business enterprise. By „external‟, we
mean that these factors or forces are not usually within the control of the business enterprise.
Business environment may also be seen as the web of forces which form the setting in which the
firm makes its decisions. For the firm to succeed, it must take its environment into account in
making its decisions.

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3.2.2. NATURE OF THE BUSINESS ENVIRONMENT

Basically, the business environment can be categorized into three categories: micro, macro and
international environment. The micro-environment consists of elements whose decisions and
activities have immediate impact on the operations of the business enterprise. These elements
include consumers or users, trade unions, competitors, creditors, government regulatory
agencies, marketing intermediaries, suppliers, investors, and the community. The micro-
environment is also called task environment or operating environment. The business enterprise
cannot survive without taking into cognizance the activities of these groups.

The macro-environment consists of those external forces over which the firm has no control.
They include economic, socio-cultural, political, legal, technological, and physical environment.
The international environment refers to all those elements or forces outside the national
boundaries but which are capable of having effect on the decisions and operations of the business
enterprise.

These three categories of the business environment exert pressure on the business enterprise
simultaneously. They also interact and affect one another.

3.2.3. 3.2.1 MICRO ENVIRONMENT

(i) Government Regulatory Agencies

There are several government agencies which regulate the activities of business. Their policies
and practices have a profound influence on business. Such government policies may affect the
conduct of business of the firm. For example, the shortage of imported wheat for backing bread
in Ethiopia some years back adversely affected the bakery industry in Ethiopia and the supply of
bread to the market. However, the same policies gave many flour mills the opportunity of
processing other locally produced grains such as local wheat and maize.

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(ii) Trade Unions

The agitation by trade unions for better conditions of service and higher wages also affects the
operations of the firm. This is because of the fact that their activities may bring production to a
halt, thereby seriously affecting the profit of the business enterprise.

(iii) Competitors

The activities of companies that produce similar products or services can also affect the
performance of the business enterprise. This is because they may either offer lower price or
produce higher quality products with the aim of securing a larger market share. Likewise, the
activities of competitors can opportunities to a business enterprise, by discovering and closing
the gap in the supply of certain type of product, for example, Beer factories in Ethiopia.

(iv) Consumers

The consumers on their own expect the firm to produce goods and services that can satisfy their
needs. Where alternatives are available, consumers usually prefer the goods and services of firms
that are able better to meet their needs. Thus, the behaviour of consumers has direct impact on
the sales of the business enterprise. That is, consumers‟ perception of a firm‟s products or
services may either bring success or failure to the business enterprise.

(v) Marketing Intermediaries

These are wholesalers and retailers that distribute the products of the firm. Intermediaries are
independent businesses that are selected by a business enterprise to distribute its products. In
some cases, they also distribute competitors‟ products. Therefore, in order to use them
effectively, a business enterprise must create a conducive atmosphere for them to operate.
However, being independent business units, the manner in which they operate their businesses
have direct implications for the business enterprise.

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(vi) Investors

Investors supply various forms of long-term finance to the business enterprise. In a sole
proprietorship, the investors are mainly the owners of the business. In a limited liability
company, they are shareholders.

(vii) Creditors

Creditors provide the business enterprise with short-term funds. They may be bankers that
provide overdraft facilities or trade creditors that supply goods and services on credit basis.
Creditors depend on the business firm to meet its obligations to them in accordance with the
agreed terms.

(viii) Suppliers

These provide various inputs to the business enterprise. Such inputs include raw materials and
semi-finished goods. The firm must ensure that they maintain good relationship with the
suppliers in order to guarantee constant supply of these raw materials. This is the only way in
which the production line can be kept going on a continuous basis.

(ix) The Community

The community is defined as the geographical area in which the business enterprise is located or
with which it frequently interacts in the course of its operations. The business enterprise depends
on the community as a source of certain inputs such as land, labour, energy, and other raw
materials. The community may also be an outlet for the disposal of the goods and services of the
business enterprise. Every community has unique characteristics in terms of social conditions,
availability of infrastructural facilities and expectations. Business enterprises consider these
factors in choosing their location because the conditions in one community may be more
favourable to business operations than others.

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SELF-ASSESSMENT EXERCISE 1

 What do you understand by the concept of business environment?

 Discuss the elements of micro-environment.

3.2.4. MACRO ENVIRONMENT

(i) Economic Environment

The economic environment is defined by elements such as the Gross Domestic Product (GDP),
capacity utilization rate, government fiscal and monetary policies, interest rate, unemployment
rate, exchange rate, inflation rate, etc. These elements operate simultaneously to define the
economic conditions which all business enterprises face. Business managers are usually
concerned with the changes that are occurring in these elements and the direction of the change.

Gross Domestic Product

This is a measure of the value of output of goods and services in a country during a given year.
GDP is an index of the gross performance of the economy during a given time period. While the
absolute value of GDP is important, it is the growth rate of it that business managers focus on to
indicate the well-being of the economy.

Capacity Utilization Rate

This is an indicator of the extent to which the installed capacity of firms has been used during a
given time period. For example, if Muger cement factory is capable of processing one million
tons of cement annually but actually processes 500,000 tons; its capacity utilization is actually
50%. The shortfall may be due to lack of imported raw materials, lack of skilled man power to
observe the capacity, lack of spare parts, power failure or other constraints. Capacity utilization
rate indicates the efficiency of the economy in which the business enterprise operates.

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Government Fiscal and Monetary Policies

Government fiscal policy is the level of government expenditure, debt management, and tax
structure during a given time period while monetary policy is the changes in the stock of money,
interest rate and credit policy during a period. Fiscal and monetary policies are instruments in the
hands of government and the Central Bank to guide and control the economy. For example, by
increasing government expenditure or by varying the interest rate, output can be stimulated. The
nature of fiscal and monetary policies as well as their effectiveness in achieving the desired
objectives is of interest to business firms in their planning efforts. Given the objectives of policy
and the seriousness of government in executing the programme, firms are able to forecast the
economic environment and plan for it.

Interest Rate

This is an important element of the economic environment. Interest rate can be defined as the
price paid to borrow capital. Since many business enterprises depend substantially on borrowed
funds, the level of interest rate and changes in it affects their cost of operations.

Unemployment Rate

This is another indicator of the health of the economy. When the level of unemployment is high,
business enterprises are in a better position to select more suitable employees from the pool
available. The wage-rate may be lower because the supply of labour is higher than its demand
while trade unions are at a disadvantage in bargaining for better conditions of work. On the other
hand, a high level of unemployment means low aggregate of purchasing power and hence low
sales for all businesses in the economy.

Exchange Rate

Exchange rate is the price of domestic currency for a unit of foreign currency. Business
enterprises import most of their equipment, spare parts, and raw materials. The prevailing
exchange rate, therefore, determines their cost of operations. The exchange rate is also important
to those enterprises that export goods and services because their revenue increases when the

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exchange rate increases. However, exchange rate stability is of great importance to business
enterprises. When the exchange rate is stable, business managers can easily forecast their cost of
operations and take appropriate decisions. Business planning is often difficult when the exchange
rate is unstable.

Inflation Rate

Inflation is defined as a general rise in the prices of goods and services in an economy. The rate
of inflation affects the purchasing power of consumers and hence the sales performance of
business enterprises. Since business enterprises also purchase goods and services in the course of
their operations, their cost of production tends to increase as production rate increases.

(ii) Socio-cultural Environment

The socio-cultural environment of business is the complex social and cultural conditions
prevailing in the society in which the business enterprise operates. These social and cultural
conditions are generally dynamic but unique to a given society. We can describe the
sociocultural environment of a society by examining the nature of the people, the groups they
form and the institutions they have created for themselves. In particular, we examine the values,
beliefs, attitudes, customs, and norms which regulate the behaviour of the people. We also
examine the composition of the society in terms of their religious and ethnic grouping, and social
class structure. The nature of these groups and the relationship between them determine the
extent to which harmony exists in the society.

The institutions that are created reflect the values, beliefs, norms and customs of the people.
They help to facilitate the administration of the rules of social behaviour among the people.
Examples are various traditional institutions such as traditional ruler-ship and chieftaincy
institution, family, age-grade, and governance by elders. Modern institutions include schools,
churches and mosques, and the mass media.

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(iii) Political Environment

The political arrangements in a country are important to the citizens and business entities of that
society. The pivotal organ of the political arrangement is government. The primary purpose of
government is to ensure maintenance of law and order, defense against external aggression,
security of lives and property and provision of basic infrastructure. These minimum conditions
must exist in a society for meaningful economic activities to take place. In addition to the above,
government has the responsibility of making policies, laws and regulations which are expected to
accelerate the social and economic development of the society and improve the well-being of its
citizens. The Federal Government of Ethiopia has been making far-reaching policies and
decisions. Examples of policies and decisions of government include:

o Control of strategic industries by government: Telecommunication, Ethiopian Electric

Power Corporation, banking, etc.
o Foreign Exchange Control Regulations;
o Deregulation of the economy;
o Privatization and Commercialization policies.

Several laws and regulations have also been made by government which affects every aspect of
business operations. Therefore, it is natural for business enterprises to be interested in the
decisions or policies that are made, how they are made and why, who makes them, the
ideological basis of decisions, the scope and stability of decisions, etc. In some cases, business
enterprises attempt to influence the decision-making processes so that the outcome is favourable
to their operations. By analyzing governmental decision-making in a country, business
enterprises are able to anticipate the direction of public policy and adjust their operations
accordingly. They would be in a position to determine whether the political conditions prevailing
are favourable or not to investment in the economy.

(iv) Legal Environment

The legal environment of business consists of the laws, regulations and procedures which
business enterprises are expected to comply with in the course of their operations. As a
corporate citizen, every company is expected to respect and obey the laws of the land as well as

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maintain ethical behaviour. Every aspect of the operations of a business organization is regulated
by law. Such laws or regulations may make it possible for business to operate in an unfettered
atmosphere or they may constitute a major handicap to successful performance. To ensure that
business organizations comply with the law, they are required to obtain licenses or permits from
the relevant government agencies. The major legislation which regulates the affairs of business
organizations in Ethiopia is through the tax authority‟s Income tax Proclamation No. 286, 2002
which is subject to amendments. This law, primarily, provides for the registration of private and
public companies, preparation, auditing and filing of annual accounts with the authority.

All business organizations have a responsibility to pay tax. The various types of taxes include the
income tax, value-added tax, capital gains tax, graduate tax ( on cost sharing collected from the
graduates), as well as import and excise duties. However, eligibility for the various taxes, the
rate of taxes, the conditions for relief or exemption, etc., are specified in the various tax
proclamations of the Federal Government. State and Local governments may also collect certain
taxes or rates allowed by the constitution.

Labour law provide for the national minimum wage that may be paid to employees, the
regulation of the contract of employment, relationship between employers and the union of their
employees, the prohibition of the employment of infants, employee compensation in case of
injury, etc. Patent laws, copyrights and trade mark laws enable companies to enjoy exclusive use
of inventions, creations, symbols, names, etc.

Business organizations that are involved in the production and distribution of processed food,
drugs, cosmetics, bottled water, and chemicals must register them with the Food, Medicine,
Health, Care Administration and Control Authority of Ethiopia. The purpose is to protect the
consuming public against the use or consumption of unsafe and poor quality products.

From the foregoing, business enterprises are subject to a large number of regulations by Federal,
State and Local governments. These regulations change from time to time. The implication is
that business managers must be familiar with existing laws and regulations and must continue to
update themselves with changes that take place.

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(v) Business Ethics

Ethics go beyond the law. They are standards of behaviour which, though not required by law,
are expected of a good citizen (including corporate) of a nation. Ethics define for the individuals
what is morally right or wrong. Business ethics require business managers to answer moral
questions such as:

o Is it right to inflate the price of a contract just to be able to maximize profit?

o Is it right to use substandard materials?
o Is it right to deny a female employee an opportunity for technical training?
o Is it right to create a monopoly situation through unfair means?

Business ethics, therefore, reflect the standard of morality in a society. Hence, what is acceptable
in one society may be unacceptable in another.

(vi) Technological Environment

Technology is the application of scientific knowledge and the use of mechanical arts to practical
tasks in industry. Technology is not limited to the use of machines as is often erroneously
believed. The concept of technology is applicable to any method used to carry out a task.
However, technology may be considered crude if the underlying scientific knowledge is little.
On the other hand, it is considered advanced if the scientific base is high. The technological
environment at a point in time is the state of the application of scientific principles and
mechanical arts to various tasks in the society.

3.2.5. INTERNATIONAL ENVIRONMENT

Where the business enterprise depends on imported inputs or exports some of its outputs, it must
of necessity be concerned about the conditions outside the national boundaries in which it is
located. The international environment of business refers to all those elements in the
international scene which are capable of having effect on the decisions and operations of a
business enterprise. The ability of the business enterprise to maintain a steady flow of its
imported inputs depends on the economic, social, political and technological changes in the

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country from which the inputs are sourced. Similarly, the prevailing conditions in the country to
which it exports its products critically affect its performance.

Several factors make it necessary for managers of business enterprise in Ethiopia to continuously
monitor the state of the international environment and the changes in it. They include the
following:

 Business enterprises in Ethiopia are heavily dependent on imported raw materials for
their operations. They also depend a great deal on imported technology.
 Foreign investment accounts for a substantial proportion of the capital of many
enterprises in Ethiopia.

SELF-ASSESSMENT EXERCISE 2

 Enumerate and explain the elements of the economic environment.

 Explain the international environment.

3.2.6. ENVIRONMENTAL SCANNING

The environmental factors identified so far in this unit are not all equally important to the
survival and growth of the business enterprise. Nevertheless, enterprise managers are expected to
establish a system by which they can monitor the nature and direction of changes in the
environmental factors and determine the action they must take to ensure a satisfactory
performance.

At any point in time, there are key factors which affect or are likely to affect the operations of an
enterprise. The first step in monitoring the environment is to identify these factors. There are
various processes by which managers monitor the key elements of interest as well as the general
environment. One process is a general and continuous surveillance of the environment. Without
any particular problem in mind, managers read newspapers, magazines, journal articles, listen to
the radio and television, in order to be informed about the developments in the society. They
participate in the activities of organizations such as the Manufacturers Association of Ethiopia
(MAN), and exchange views with colleagues in the industry. They also attend workshops,

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seminars and conferences where issues affecting business are discussed. Through these
processes, managers are generally informed about changes taking place in the environment.

When managers are faced with a specific problem and they require information about the
environment to make decisions, they may engage in a systematic study. This processed is more
focused on the problem at hand than a general environmental surveillance. A systematic study
involves a definition of the problem, identification of the key factors that may be useful in
analyzing the problem, measurement of the key factors, evaluation and selection of a preferred
course of action to solve the problem.

3.2.7. CONCLUSION

The purpose of environmental scanning is for managers to be able to determine the current state
or conditions in the environment and predict changes that are likely to take place in the future.
This way, managers build up a capability to deal with threats that may emanate from the
environment or take advantage of the opportunities available.

3.2.8. SUMMARY

In this Unit, we have been able to consider that:

o for the firm to succeed, it must take its environment into account in making its decisions;
o the business environment can be categorized into three categories: micro, macro and
international environment;
o the three categories of the business environment exert pressure on the business enterprise
simultaneously;
o the purpose of environmental scanning is for managers to be able to determine the current
state or conditions in the environment and predict changes that are likely to take place in
the future.

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3.2.9. TUTOR-MARKED ASSIGNMENT

 How does the economic environment affect the conduct of business?

 Explain the difference between the micro- and macro-environment of business.

1.0 REFERENCES/FURTHER READING

Bantie Worke (2006). Introduction to Business. 3rd print, Addis Ababa: Alem Printing Press
Boone, Louis and Kurtz, David (2001). Contemporary Business, 9th Edition. New York: Dreden
Press.
Brown, Betty I. and Clon, John E. (1997). Introduction to Business: Our Business and Economic
World. New York: McGraw Hill Inc.
Inegbenebor, A. U. and Osaze, Esosa Bob (Ed.) (1999). Introduction to Business: A Functional
Approach. Lagos: Malthouse Press Limited.
Mathew J. (2006) Business Organizations (2nd ed.), Sheel Sons, New Delhi.
Mescon, Michael H., Bovee, Courtland L., and Thill, John V. (2002). Business Today. Upper
Saddle River, New Jersey: Prentice Hall.

Miller, Roger LeRoy and Farese Lois Schneider (1992). Understanding Business: A World of
Opportunities. New York: West Publishing Company.
Yolokwu P. O. (1999) Management: Concepts and Techniques, Peak Publishers

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UNIT FOUR

TYPES OF BUSINESSES

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Producer
3.2 Processor
3.3 Manufacture
3.4 Intermediary
3.5 Service business
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

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INTRODUCTION

In Unit 2 of this Module, the basic forms of business ownership - the Sole proprietorship,
partnership, and Limited Liability Company – were considered. In this Unit, we shall look at the
various types of businesses that you can decide to enter into. Types of businesses are the distinct
business activities that one can enter into with the aim of satisfying customers, and we shall
discuss five of them.

4.1 OBJECTIVES

At the end of this unit, you should be able to:

 Define types of businesses;
 Explain the features of the types of businesses.

4.2 MAIN CONTENT

4.2.1 PRODUCER

A producer is that person who is involved in producing goods and services for distribution.
Producers are more involved in producing goods that we can refer to as raw materials. You take
an example of:

 Farmer: is a producer, involved in producing yam, beans, cassava, eggs.

 Mining: digs for minerals like gold, diamond etc.
 Fishing: goes into the sea and catches fishes for sale to others for consumption or for
producing other products.
 Forestry business: Bringing in timbers into the market to sell to builders etc.

All these people are involved in gathering products in their original forms, from natural
resources such as land and water.

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4.2.2 PROCESSOR

Processing businesses add value to products of the producer in order to sell it to another buyer.
Thus, businesses that change products from their original forms into more finished forms are
processors. Consider the following examples:

o Paper Mills: They get raw materials from woods, waste paper and produce exercise books,
tissue papers.
o Oil Refineries: Crude oil is gotten from the ground and refined into petrol, diesel, jelly, etc.
o Steel: Raw materials are gotten from various locations and they are turned into steel and
steel is produced into another product.

All businesses operating in this fashion are referred to as processors.

4.2.3 MANUFACTURE

Manufacturers could combine the activities of producers and processors together to get a finished
product. Gelana, for instance, may have a sugar cane farm that produces sugar cane. Gelana may
process the sugar cane into granulated sugar. Here, he is a processor. A situation where the sugar
is cubed and packaged makes Gelana a manufacturer, and combining all the characteristics of a
producer, processor and a manufacturer.

A manufacturer, therefore, turns raw or processed goods into finished goods. Finished goods are
those products that are produced and ready for the market. Other examples of manufacturers are
bakers; automobile factories (make cars out of processed goods like steel, aluminum, glass,
plastics). Manufacturers are involved in producing:
- Consumer goods;
- Consumables (food, drink, cigarettes);
- Consumer durables (radios, domestic appliances, televisions and cars).

SELF ASSESSMENT EXERCISE 1

 Who is a manufacturer?

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4.2.4 INTERMEDIARY

The function of intermediaries is for them to transport and distribute goods. An intermediary is a
business that moves goods from one business to another. These intermediaries are mostly
wholesalers and retailers.

A Wholesaler: Is that business man that buys goods from a manufacturer in large quantity and
resell to retailers in a smaller quantity. Wholesaler performs the following functions:


 Buying  Financing
 Selling  Risk bearing
 Dividing or bulk breaking  Market information
 Transportation  Management services and advice
 Ware housing

A retailer is that business that buys goods from a wholesale and resell them directly to the final
consumer. Retailers like wholesales perform the function of wholesalers but added are:
- Breaking the bulk
- Give credit to customer
- Located close to customer

These and more are the functions of retailers. The producer takes decision on either to sell
directly or through an intermediary. There are four main methods:

i. Direct from the producer to the customers- Is the system mostly used by mail order
companies.
ii. The traditional method is through a wholesale to a retailer outlets and then to the
consumer.
iii. Many companies deal directly with retailers, particularly, large retail chain.
iv. Manufacturers that produce goods for tradesmen usually distribute them via a specialist
merchant

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One important aspect of intermediation business is transportation. As a manufacturer you decide

on the best method of transporting goods. This will depend on:
 The distance involved  Cost
 Types of goods  The customer
 Urgency

Because of these factors, you have to choose any of these modes of transportation:
Air Transport

 It is faster than most methods  The disadvantage is air disaster is

 Used for goods that are needed always fatal
urgently

Road Transport

 More flexible  Cost- if driver travels a long distance

 Used for advertising

Rail Transport

 Carries heavy goods at a time  Not flexible

 Less accident

4.2.5 SERVICE BUSINESSES

Service businesses provide services instead of goods to consumers. The goods that service
industry sells are intangible, which you cannot touch. Examples of service businesses include:
- Movie theatres - Lawn care
- Car wash - Vehicle repairs
- Airlines - Medicals

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Service industries are operated to provide:

(i) Assistance for Business – Airlines, hotels, banks

(ii) Insurance is another service area that is required to reduce the risk of trading. It covers all
standard risk like theft, fire, goods on transit.
(iii) Communication is another service area that aid business. It helps because up-to- date
information is required. This information can be accessed through computers, satellite links
and fax machines.

4.2.6 CONCLUSION

A business group may combine the entire features of the types of businesses or may be involved
in almost all the types of business. Gelana, for instance, is found in all these classes of businesses
- production, processing, manufacturing, intermediating and service delivery. These activities if
well managed help in customer satisfaction.

4.2.7 SUMMARY

In this Unit, we have been able to:

 explain that types of businesses are the distinct business activities that one can enter into
with the aim of satisfying customers;
 discuss five types of businesses - production, processing, manufacturing, intermediating
and service delivery.

4.2.8 TUTOR-MARKED ASSIGNMENT

 Discuss the intermediation function of wholesalers and discuss four methods a producer
can get through to a customer.

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4.2.9 REFERENCES/FURTHER READING

Bantie Worke (2006). Introduction to Business. 3rd print, Addis Ababa: Alem Printing Press
Beckett, D.W. (1980). Spicer and Pegler’s Book-Keeping and Accounts. London, Great Britain:
HFL Publishers Ltd.
Boone, Louis and Kurtz, David (2001). Contemporary Business, 9th Edition. New York: Dreden
Press.
Brown, Betty I. and Clon, John E. (1997). Introduction to Business: Our Business and Economic
World. New York: McGraw Hill Inc.
Mathew J. (2006) Business Organizations (2nd ed.), Sheel Sons, New Delhi.
Mescon, Michael H., Bovee, Courtland L., and Thill, John V. (2002). Business Today. Upper
Saddle River, New Jersey: Prentice Hall.

Miller, Roger LeRoy and Farese Lois Schneider (1992). Understanding Business: A World of
Opportunities. New York: West Publishing Company.
Yolokwu P. O. (1999) Management: Concepts and Techniques, Peak Publishers

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MODULE TWO

UNIT FIVE MANAGEMENT IN THE BUSINESS ENTERPRISE

UNIT SIX FINANCE IN BUSINESS
UNIT SEVEN MARKETING IN BUSINESS
UNIT EIGHT ACCOUNTING IN BUSINESS

UNIT FIVE

MANAGEMENT IN THE BUSINESS ENTERPRISE

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Definition of Management
3.2 Need for Management in Business
3.3 Who is a Manager?
3.4 Management Structure
3.5 Hierarchy of Authority
3.6 Management Objectives
3.7 Process Management
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

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5.1 INTRODUCTION

Management means different things to different people. It is a term used to describe the process
whereby resources of all kinds are utilized for the purpose of achieving objectives in any social
system. Management may also be used to refer to a body of people who have primary
responsibility to ensure that the efforts of a group are harnessed and directed toward the
achievement of predetermined objectives. In this unit, we shall discuss the concept of
management in the business enterprise.

5.2 OBJECTIVES

At the end of this unit, you should be able to:

o define management;
o differentiate between efficiency and effectiveness;
o state the role of management in business;
o define and state the role of a manager;
o describe the concept management structure;
o discuss hierarchy of authority;
o define and explain the concept management objectives;
o define and discuss process management.

5.3 MAIN CONTENT

5.3.1 MANAGEMENT DEFINED

When we examine the different ways management is defined, it is clear that certain key words or
terms are common among all the definitions. We find terms such as objectives or goals, human
resources, material resources and financial resources. Thus, management can be defined as an
organized effort aimed at achieving set objectives or goals through the efficient utilization of
material, financial, and human resources. That management is an organized effort means that it
involves more than one person. A popular notion of management is that it is the art of getting
things done through and with other people. Management is concerned with those processes by
which the objectives of the enterprise are determined and accomplished. Also given that

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resources are scarce, management involves the use of certain skills and techniques to achieve
goal effectively.

5.3.2 Concept of Efficiency and Effectiveness

In the discussion above, we have used the concept of efficiency. It is necessary to define this
concept and distinguish it from a related one known as effectiveness. Efficiency and
effectiveness are used to describe the performance management in the business enterprise or
indeed, any organization. Efficiency is a ratio of output to input. It is expressed as follows:

Efficiency = Output/Input

Output may be goods and services such as units- of items produced or amber of person served.
Inputs are the resources used to produce the goods and services. Inputs may be stated as the
number of man hours, quantity of raw materials or machine-hours utilized. Management
generally desire to maximize the output for given number of inputs or minimize the inputs for a
given level of output. Efficiency measures how well the resources available to the organization
have been utilized to produce the desired output. Efficiency also means "doing things right", that
is, the ability to get things done correctly.

Effectiveness is the extent to which certain objectives or goals have been attained For example,
if a business enterprise sets Terms of Reference (ToR) itself the objective of making a sales
turnover of 5 million by the end of a given year, its effectiveness is determined by the extent to
which such an objective is actually realized at the end of the period. Effectiveness is "doing the
right things", the ability to choose or select the right things to do.

SELF-ASSESSMENT EXERCISE 1

 Differentiate between efficiency and effectiveness.

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5.4 NEED FOR MANAGEMENT IN THE BUSINESS ENTERPRISE

Why do we need management in the business enterprise?

Management is the life-wire of any enterprise. It is the bond which holds the enterprise together
as a unit.

a) Management makes decisions on the type of business to undertake, the goals to be sought
the resources to be used, the changes to be made to improve the performance of the
enterprise.
b) It ensures that the gears decided upon are achieved effectiveness.
c) It negotiates and acquires the resources needed.
d) It ensures that the resources obtained are allocated and used efficiently.
e) There are always unforeseen events in the life of an enterprise. Management anticipates
these events and deals with them.
f) Management speaks on behalf of the enterprise and ensures that satisfactory relationships
are established and maintained between the enterprise and the various stakeholders.

5.5 WHO IS A MANAGER?

People who have primary responsibility for the realization of the goals of the organization or
business enterprise efficiently and effectively are referred to as manager. A manager is anyone in
the organization who gets things done by working through and with other people. A manager
decides on the targets to be achieved by his subordinated and how the task is to be executed. In
different organizations, they may be referred to as Foreman, Supervisor, Head of Unit, Head of
Section or Department, Head of Division or Chief Executive. Irrespective of the level of
responsibility, a manager is one who is accountable for the work of other people.

5.6 MANAGEMENT STRUCTURE

The management structure is the basic framework within which the manger's decision-making
behavior occurs. The quality and nature of the decisions made are influenced by the nature of the
structure. Indeed, the practice of management usually takes place within a system that has clear
boundaries though this may not be visible but conceptual. The structure must be defined in such

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a way that it will be concerned with the grouping of activities in such manner -that the objectives
of the enterprise are attained, the assignment of these activities to appropriate departments and
the provision for authority, delegation, and coordination. Thus, the management structure, or the
structure in which managers carry out the task of management is designed to ensure that all the-
activities - within the structure or organization are grouped logically and authority granted to -the
right person to execute the right responsibility at the right time, in the right place to achieve the
result. This suggests that during the-process, conflict does not occur or is relegated to the
background.

In general, there are two dimensions to the structure of organization. The first is called Formal
organization, while the second, which exists within the first, is called Informal organization. The
formal organization can simply be defined as the network of communication in an enterprise. It
is the official channel through which communication passes. Thus, formal organization comes
into being when persons are willing to communicate with one another and are willing to share a
common purpose. Thus, the formal organization is designed to:

i. Establish efficient and logical patterns of inter-relationships among members of the

groups;
ii. Secure advantages of specialization or divisions of labour whereby the optimum
utilization of talents can be realized; and
iii. Co-ordinate activities of the component parts in order to facilitate the realization of the
goals of the organization.

The informal organization is the aspect of the organization which is not consciously designed. It
is the human group interaction that occurs spontaneously and naturally without conscious design.
Whereas, the formal organization can be represented on the organizational chart or the hierarchy
of authority, the informal organization cannot be represented in the organizational chart.
Management determines the formal structure but the social desires, needs or wants of persons are
expressed through the informal organization. Thus, the informal organization is important and
should not be neglected by managers. This is because human beings working in the organizations
form ideas, attitudes and have feelings towards the formal system. These could help or hinder the

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goals of the organization depending on how it is managed. Thus, managers must understand the
informal system and be able to use the knowledge for prediction and control.

5.7 HIERARCHY OF AUTHORITY

The hierarchy or levels of authority in organizations vary greatly. The number of levels depends,
among other things, upon the number and type of employees and their functions. Figure 2 shows
the Vertical and horizontal dimensions of the structure of the organization (or the organizational
hierarchy) in a simplified format.

Senior Executives
(Functional Heads)
Coordinate activities
to attain objectives

Senior Executives (Functional

Heads) Coordinate activities to
attain objectives
Assistant to Senior Executives Assist
Senior Executives and act as their
deputies

Supervisors e.g. Foreman Put Management‟s plans

into effective action, allocating individual work and
seeing that it is accomplished

Workers

Figure 2: Organizational pyramid or organizational hierarchy

The triangular shape indicates that lower down, there are a greater number of employees.
Towards the top, fewer workers are needed to carry out the managerial and administrative work
required in the enterprise.

From the simple organizational pyramid, one can prepare different organizational charts
depending on the type and size of the organization. The organizational chart is a map of positions
in an organization (indicated by boxes) and the lines of authority between the positions shown as
straight lines.

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Figure 3 is a typical organizational chart. It includes formal organization positions (symbolized

by boxes) and lines of authority (symbolized by straight, solid, connecting lines).

Manager

Supervisor Line of Authority

Workers Workers Workers

Workers

Figure 3: A typical organization chart

Organization chart is useful for the following reasons:

(i) It identifies the existence of certain positions.

(ii) It is useful in planning since different types of organization structure can be simulated on
paper, thus aiding the manager's mental process.
(iii) It is a very useful model which can be used to introduce a new person to the organization
or in explaining the working of an organization to interested outsiders (e.g. customers,
suppliers and visitors).
(iv) In cases of re-organization of formal authority, charts are short-hand methods for
identifying the changes.

It must be noted that organizational structure differs from organization to organization depending
on the size and the objectives of the business.

5.8 MANAGEMENT OBJECTIVES

Managers carry out different objectives within the organizational hierarchy. These objectives are
the goals that state definite courses of actions to be followed in the planning and other
management activities. From the enterprise's viewpoint, the goals to be attained should be clearly

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identified. A business objective implies clarity of actions on the part of managing executives.
Objectives stated in vague terms have little or no managerial value because they are subject to
varying interpretations and frequently result in confusion and frustration. Poorly conceived
objective can lead workers to frustration because they will not know the results they are expected
to achieve and will eventually lead to the collapse of the business.

It must be pointed out that business enterprises have multiple objectives which they seek to
achieve. Also, the major objectives can be broken down into sub-objectives. These sub-
objectives can then be assigned to groups of employees to perform. Figure 4 below shows the
various major objectives of business and their inter-relationships:

Innovation Profit Sales

Shareholder Objectives of
Productivity
Business

Employee
satisfaction Public image Stock

Figure 4: Objectives of business enterprise

There are some well-established business enterprises that will be able to pursue all these
objectives, whereas some others will be able to 'pursue only a few. One objective which is vital
to most business enterprises is the profit objective. No business can survive in the long run
without malting enough profit. For the business to make enough profit, it must be able to sell its
goods and/or services and carry enough stock (both raw materials and finished goods) so that the
business will be able to meet the demands of their customers whenever the need arises. On top
of this, the business enterprise must consistently innovate by embracing new ideas and 'open to
new experience. Also, the business must be able to meet the needs or shareholders who invest
their saving in the business. Moreover the business should be able to satisfy the needs of the

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work force in order to get the best from them and project a good image to the public (social
responsibility) by helping in solving some problems in the community in which the business
enterprise is located. From the explanation, all the objectives shown in figure 3 are unique and
inter-related and several business enterprises pursue them in varying degrees.

There is a very important role managers must play in the process of achieving business
objectives. This aspect has been well developed by Peter Drucker who in 1995 developed the
idea of Management by Objectives (MBO) in his book “The Practice of Management”.
Management by Objectives is also called managing by results. It involves a process by which the
manager and his/her subordinate jointly set a target which the subordinate is expected to achieve
during a given period of time. Subsequently, the performance of the subordinate is reviewed for
the purpose of appraisal.

The stages of MBO are (Appleby, R. C. 1981: 59 - 62):

i. The desired results (objectives) set by management are clarified and defined.
ii. Performance standards are set which must not conflict with main objectives of the
business.
iii. The organization structure must be provided, within which the manager has the
maximum freedom and flexibility to perform.
iv. Control information must be supplied at suitable times so that the manager can take
corrective action quickly.
v. Appraisal performance by identifying areas where a manager needs help, and providing
him with guidance.
vi. Motivating employees by relating results achieved to rewards and promotion
opportunities.

Some of the advantages of MBO are:

o The need to clarify objectives is stressed and suggestions for improvement are obtained
from all management levels.
o Each manager has a clear idea of the important areas of his work and standards required.
o The performance of Staff can be assessed and their needs for improvement highlighted.

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o Greater-participation may improve morale and communication.

o Managers have to plan to achieve results which aria means of achieving growth and profit.
o It makes individuals more aware of organizational goals.

Some of the disadvantages of MBO are:

i. It takes some time to become effective.
ii. Too much paper work and-difficulty in measuring key operations.
iii. Some business enterprises tend to raise targets always. If these are too high, staff become
frustrated.
iv. Appraisals are sometimes made on personality traits rather than on performance.
v. Some companies have geared their salary administration to appraisal by results (easy
target may be set to allow a promotion).
vi. Some-employees do not want to be held responsible and goals forced upon them lead to
ill-feeling.

5.9 PROCESS OF MANAGING

The process of managing is principally concerned with how managers carry out their various
activities. The process of management is not concerned with what managers actually do but how
managers do their work and under what conditions they do it. It is ideal to start our discussion
with figure 5.
Make Decisions

Set Objectives
Control

Managing
Processes
Plan and make
Direct and policies
supervise

Communication Communication

Figure 5: Managing Process

Source: Massie, J.L. and Douglas J. (1973)

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From figure 5, we discover that the managing processes help the manager to focus their attention
on all the managerial functions as a group. It helps them to develop a guideline for action, to do
their jobs well and set the necessary standard for managers to follow.

Thus, in managing, managers make decisions, set objectives, plan and make policies and
organized and start. Also, they communicate, direct, supervise and control.

(i) Managers Make Decisions

A decision is a choice whereby a course of action is consciously chosen from available

alternatives for the purpose of achieving a goal. This represents a course of behaviour about what
must or what must not be done. The process helps plans, policies, and objectives to be translated
into concrete actions. Therefore, when managers make decisions, they direct human behaviour
towards a future goal.

There are different types of decisions depending on the factors taken- at° consideration in the
process of taking the decisions and the reasons for taking the decision. Thus, decision can be
strategic, tactical, programmed, and unprogrammed.

Strategic decision is designed to help the business to survive in an environment of uncertainties

and competition. External factors or environmental actors usually affect strategic decisions.
Strategic decision is also known as unprogrammed decision. It is long range in scope and
includes investment decisions, product design decisions or locations' decisions. Tactical decision
is usually taken at the local organizational level to handle economic issue with fewer alternatives
than in strategic decisions. Routine or Programmed decisions are those decisions which are
repetitive. In general, a good knowledge of objectives and policies is needed before decisions can
be taken. Such decisions may be said to consist of the following steps:

(a) Define the problem to be solved;

(b) Find alternative solutions;
(c) Analyze and compare these alternatives;
(d) Select the alternative to be followed noting relevant factors;
(e) Make the decision by taking action at the right time to put the decision into effect.

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(ii) Managers focus on objectives

Objectives are ideas and statements which give the direction and goal to behaviour and effort.
Drucker (1979:59) says that "objectives are needed in every area where performance and results
directly and vitally affect the survival and prosperity of the business". Focusing on objectives
help the managers to provide realistic answers to these questions.

In focusing on objectives, managers can answer the questions "what are we doing and where are
we going”. It is planning that helps the managers to provide realistic answers to these questions.
Objectives can be general or specific and they usually require time before they can be achieved.
Objectives bring together basic ideas and theories concerning what the business enterprise must
accomplish if it wants to succeed. Objectives provide a basis for directing and guiding the
enterprises and provide targets which enable efforts to be observed and aided. Also, objectives
help to motivate people and provide a sense of being part of a team (team spirit) since everybody
must contribute, to the achievement of the objectives of the business enterprise if the business is
to succeed.

(iii) Managers plan and set policies

Managers anticipate what are likely to happen in the future and prepare themselves to take
alternative courses of action that will help them to achieve their goals. With time, they use this to
set guidelines for future decisions. It is from the guidelines for future decisions that policies
actually flow and this can eventually become the standard practice.

Planning helps managers, to define their purposes and activities. It enables performance
standards to be set and results can therefore be compared with the standard to enable managers to
see how the organization is proceeding towards its goals. This suggests that planning is the
linkage between objectives and results. Plans must be flexible to deal with a changing
environment so that if circumstances bring about the need for changes, these can be effected
without the plans being completely disrupted.

Policies aid planning because they, represent the official attitude of a business enterprise to a
course of action or behaviour. They spell out the "do and don'ts". They spell out behavior

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patterns which are acceptable and the extent to which an individual in the organization can use
his or her discretion solving the problems of the organization.

There are some advantages of specific policies (Appleby, 1982:45)

i. They are easy to refer to and absorb;

ii. Misunderstanding is reduced;
iii. New employees can easily be made aware of them during their induction;
iv. They are a good exercise for management, who must have thought about them seriously
before writing them out.

Some of the major types of policies in the business enterprise which managers formulate include
product policy which involves deciding on the type of product to make. This type of policy will
affect the type of policies to be formulated in marketing, finance and research and even
personnel policy (i.e. the type of workers to recruit for the production process, their training, etc).
Production policy will usually focus on the whole production process, job layout, what to make
or buy and waste management, etc. Marketing policy involves determining how the products or
services will be distributed, pricing structures, credit policy, advertising, etc. Purchasing policy
involves what firms to buy from and to what extent and what are alternative sources of supply.
Personnel policy is concerned with the method of training, remuneration, industrial relations etc.

(iv) Managers organize

Organizing is the process by which the individual roles required to accomplish the task of the
enterprise are defined and grouped into departments to ensure that the departments work together
for the achievement of the objectives of the enterprise. The flow of authority and communication
are then established. There are various criteria by which the roles of the enterprise are grouped.
The choice of the criteria depends on the task the enterprise is expected to accomplish, as well as
its size. The roles may be grouped by function; that is, production, purchasing, personnel,
marketing, finance and accounting etc. They may also be grouped by geography, process,
customer or time depending on what is convenient and efficient for the enterprise. The process of
grouping of roles is called departmentation.

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Another important element of organizing is the extent to which authority is concentrated in the
hands of top management or spread to lower levels of management. Authority is said to be
centralized if most of decisions are taken by top management and only a few are taken at other
levels of the hierarchy. On the other hand, authority is decentralized if middle and first-line
management are able to take decisions affecting the operations of the departments while the most
important decisions only are taken by top management. A related concept to decentralization is
delegation. Delegation is the process by which one manager permits his/her subordinate to act or
exercise authority over a function for which the manager is accountable. The authority to act
remains with the manager but he/she use his/her discretion to allow his/her subordinate to
exercise some of that authority. Therefore, to the extent that there is generalized delegation of
authority in the enterprise, there is decentralization of authority.

( v ) Managers staff

The objectives of the enterprise cannot be achieved until people are assigned to the roles
established through the process of organizing. Such people must be capable of carrying out the
functions allocated to them. Staffing is the process by which the roles or positions necessary to
accomplish enterprise, objectives are filled with competent employees. Staffing involves
recruitment, selection, placement, training and development, performance appraisal,
compensation, motivation and discipline. Thus staff-mg involves all those processes needed to
ensure that the appropriate people are engaged and utilized effectively for the achievement of the
objectives of the enterprise.

(vi) Managers communicate

The communication process is an integral aspect of the business enterprise without which the
organization may fail. In fact, managers communicate with subordinates, colleagues, and
superiors. This means that managers transmit beliefs, ideas, knowledge, and behaviour to others
for the purpose of achieving the desired result. The ultimate purpose of communication is to aid
decision making. There are different types of communication. These are verbal and non-verbal.
Verbal communication involves the use of spoken words or language. Non-verbal
communication involves the use of symbols or signals or what psychologists call "body

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language". Non-verbal communication includes written communication which involves

communication in writing. This is very common among managers. In communication, the choice
of media is vital and it is appropriate to choose the most appropriate media. For example:

(a) Face to face - for interviews, meetings, conferences;

(b) Oral - telephone, radio message, inter-communication systems; and
(c) Written - letters, queries, circulars books periodicals, manual reports, advertisements, etc.

For effective communication to take place, the barriers to communication must be reduced since
they cannot be completely removed. In general, the following will make communication more
effective:

(a) Clarity - the language used must be clear and concise.

(b) Attention should be paid by the person receiving the contents of the communication;
(c) Communication should flow in all directions in the business; and
(d) Feedback is an essential element in effective communication.

(vii) Managers direct and supervise

Managers guide and oversee the work of their subordinates in order to let them achieve the
target, which have been set for them. This means that managers secure actual performance from
the subordinates through their leadership role. Leadership occurs when a person induces another
to work toward some predetermined objective. Leadership is a means of direction and leaders
help a group (followers) to attain its objectives. Since the business enterprise involves people,
leadership is one of the most important managerial processes. There are different types of
leadership styles – the authoritarian, the democratic and laissez faire. The authoritarian leaders
rules with iron hand. He does not allow the subordinates to influence decisions. He uses fear of
punishment, threat, and coercion to get things done. On the other hand, the democratic leader
uses persuasion as a means of reaching out to all followers. He considers the feelings of the
followers and encourages them to contribute to decision making. The laissez-faire leader is
someone who allows his followers to do their work without much direction.

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In general, the type of leadership that a manager needs to adopt will have to depend on the type
of objectives being pursued, the personal characteristics of the leader, the personal characteristics
of the follower, the nature of the environment, and the time factor among other conditions.

(viii) Managers control activities

In this process, the manager measures the performance of subordinates and takes corrective
action to make sure that the objectives of the enterprise and the plans devised to attain them are
accomplished economically.

Control involves certain inter-related steps which can be identified as follows:

(a) Setting standard;

(b) Measuring performance against standard;
(c) Feedback of information about what has actually taken place; that is, comparison of
actual performance against standard;
(d) Correcting deviations from standard.

There are a number of principles for effective control:

(a) Control must be set according to the nature of the job to be performed.
(b) Deviations of actual performance from the standard set should be reported immediately.
(c) Those to effect the necessary corrections (of deviations from standards) must be clearly
identified so that there will be no buck passing.
(d) A system of control should not cost more than it is worth.
(e) Controls should be simple to understand and should indicate corrective action.

Examples of control include budgets. A budget is a plan for a given future period expressed in
quantitative terms. Budgets can be stated in financial terms e.g. capital and revenue expenditure
budgets, or in non-financial terms e.g. units of production. Non-budgetary controls include
break-even charts and statistical data and reports.

In general, controlling provide the means for managers to consciously know what is going on in
the business enterprise. this is because With a system of control put in place, people know what

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target they, are striving for, they know how they are doing in relationship with those targets and
they know what changes, if any, are needed-to keep their performance at a satisfactory level
expected of them in the business enterprise.

5.10 CONCLUSION

From the discussions above, we can draw the following general conclusions:

(i) Management is a process for achieving set goats through the utilization of different
resources;
(ii) Management is concerned with the efficiency and effectiveness of the enterprise.
(iii) Managers are responsible for carrying out the management functions using different
principles and techniques; and
(iv) Managers have many and interacting objectives in the business enterprise. organizing,
staffing, communicating, directing, and controlling.

5.11 SUMMARY

In this unit, we have,

 defined management;
 differentiated between efficiency and effectiveness;
 stated the role of management in business;
 defined and stated the role of a manager;
 described the concept management structure;
 discussed hierarchy of authority;
 defined and explained the concept management objectives;
 defined and discussed process management.

5.12 TUTOR-MARKED ASSIGNMENT

 What role does management play in the business enterprise?

 With a diagram, explain what you understand by management hierarchy.

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5.13 REFERENCES/FURTHER READING

Appleby, R. C. (1982). Modern Business Administration, 3rd Edition. London: Pitman Books
Limited.
Bantie Worke (2006). Introduction to Business. 3rd print, Addis Ababa: Alem Printing Press
Boone, Louis and Kurtz, David (2001). Contemporary Business, 9th Edition. New York: Dreden
Press.
Brown, Betty I. and Clon, John E. (1997). Introduction to Business: Our Business and Economic
World. New York: McGraw Hill Inc.
Inegbenebor, A. U. and Osaze, Esosa Bob (Ed.) (1999). Introduction to Business: A Functional
Approach. Lagos: Malthouse Press Limited.
Mathew J. (2006) Business Organizations (2nd ed.), Sheel Sons, New Delhi.
Mescon, Michael H., Bovee, Courtland L., and Thill, John V. (2002). Business Today. Upper
Saddle River, New Jersey: Prentice Hall.

Miller, Roger LeRoy and Farese Lois Schneider (1992). Understanding Business: A World of
Opportunities. New York: West Publishing Company.
Yolokwu P. O. (1999) Management: Concepts and Techniques, Peak Publishers

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UNIT SIX

FINANCE IN BUSINESS

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 The Role of the Financial Manager
3.1.1 Goals of the Financial Manager
3.1.2 Functions of Financial Management
3.2 Why do Businesses Need Funds?
3.3 Sources of Funds
3.3.1 Short-term sources
3.3.2 Long-term sources
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

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6.1 INTRODUCTION

All decisions made by a company are, in a sense, financial decisions. The purchase of
equipment, the hiring of employees or the remodeling of a new store all involves the use of one
of the scarcest resources an enterprise has – money. Every aspect of the business depends on
financing, including production, marketing, and human resource management.

Capital means the funds needed to finance the operation of a business. The term „capital‟ also
includes all goods used to produce other goods, but when we refer to capital in this unit, we are
talking about money – financial capital. When entrepreneurs open their own business, they
usually need a substantial amount of financial capital. Once a business is established, the firm‟s
capital must be managed effectively. Funds must be obtained and used so that the business‟
objectives can be accomplished. Poor financial management is one of the prime causes of
business failure. Efficiency in production, dynamic sales delivery, top-notch human resource
management – all of these activities take a distant second place to the skill needed for managing
a company‟s finances. Indeed, money is the fuel that fires the business engine. In this unit,
therefore, we shall discuss the place finance in the operation of a business.

6.2 OBJECTIVES

After a careful study of this Unit, you should be able to:

Explain the role of the financial manager in a business organization;
Discuss the functions of financial management;
Explain why businesses need funds;
Enumerate and explain the sources of short-term and long-term financing.

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6.3 MAIN CONTENT

6.3.1 THE ROLE OF THE FINANCIAL MANAGER

A financial manager is any executive responsible for determining the most appropriate sources
and uses of funds. In a small business, the person who manages the finances is often the owner.
In a large firm, there are often many individuals involved in financial management. The financial
manager is responsible for developing and implementing the firm‟s financial plan. The financial
plan is a document that specifies the funds needed by a firm for a period of time and outlines the
most appropriate uses of those funds.

The financial plan is based on forecasts of production and purchasing, as well as expected sales.
In a smaller firm, the owner is usually responsible for the planning. In larger firms, the financial
plan is the responsibility of a treasurer. Some companies have teams of specialists who perform
financial analyses, and some corporate boards of directors also have finance committees. In the
modern business world, the effectiveness of the financial managers has become critical to the
organization‟s success.

6.3.2 GOALS OF THE FINANCIAL MANAGER

The success of any organization is measured in terms of survival and profits. The goal of the
financial manager is to help the firm achieve these objectives. To do this, financial managers
have several major goals, such as maintaining liquidity and earning a satisfactory profit.

Liquidity is the ease with which assets can be converted to cash. A business must be able to pay
its bills when they are due. Ensuring that the firm has sufficient cash on hand is one of the
financial manager‟s primary jobs and is essential to the firm‟s survival. The cash flowing into the
business comes from several sources, including investments by the owner(s) and loans. These
funds are normally used to start a business or increase its size. The sale of goods or services is
the main outside source of cash flowing into the business.

Cash flows out of the business for loan repayments, the purchase of equipment and supplies,
operating expenses, or the owners‟ own use. Managing the cash flow of a business is using

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methods to speed the flow of cash into a business while carefully controlling the outflow of
funds. The purpose of cash management is to ensure that the flow of funds is maintained. If too
much cash flows out of business, the profitability or even the life of the business can be
damaged.

6.3.3 FUNCTIONS OF FINANCIAL MANAGEMENT

The activities of organizations whether business or non-business, have finance as their

centerpiece. The role of finance however reflects the objectives of an organization. Therefore,
financial management is a reflection of the nature and objectives of the organization. Financial
management is thus a very important aspect of finance although it is not easy to separate
financial management from the rest of other finance activities (Myres, 1976). However, an
attempt to limit the areas of financial management can be made if one agrees with the fact that
financial management itself requires the simultaneous consideration of three key financial
decisions (Christy and Roden, 1973), namely:

 anticipation of financial needs of the organization;

 acquisition of financial resources for the organization; and
 allocation of financial resources within the organization.

These three key financial decisions provide the basis for periodic financial analysis and
interpretation of historical financial practices. The control measures which may be contemplated
by management or re-orientation of management strategies in turn depend on the analysis and
interpretation of historical financial data.

Financial management is, therefore, a dynamic and evolving art of making daily financial
decisions and control in households, businesses, non-business organizations, and government. It
is a managerial activity which is concerned with planning, providing and controlling the financial
resources at the disposal of an organization. Thus, a financial manager continues to answer some
basic questions like:
What specific assets should the organization acquire?
How much of funds should the organization commit?
How can such funds be acquired?

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Financial management system is, therefore, very important for adaptation in government,
business and other organizations as it provides the theoretical concepts and analytical models and
insights for making skillful financial decisions. However, the definition of financial management
is influenced by its objectives. It can however, in general, be defined as the use of accounting
knowledge, financial models, mathematical rules and some aspects of systems analysis and
behavioural science for the specific purpose of assisting management in its function of financial
planning, implementation and control.

The role of financial management in a simplified form is the synchronization of receipts and
payments flows. Thus, payments must be planned against receipts in order that the firm may
remain liquid to the extent desired by management. In other words, financial management
involves the management of funds inflows and outflows efficiently and effectively in order to
guarantee the firm adequate liquidity. This implies effective management of financial resources
in order to achieve a firm‟s two most important objectives, namely: the maximization of profits
or maximization of shareholder‟s wealth and the maintenance of adequate liquidity level.

6.4 WHY DO BUSINESSES NEED FUNDS?

Businesses need funds for various reasons. Some of the business expenses that small companies
have include salaries and wages, utilities, rent, travel, maintenance, and insurance. Large
companies have the same expenses on a much larger scale. The primary uses of corporate money
are to pay bills, reduce liabilities, and distribute company profits to owners.

Recall that a major function of the financial manager is to manage assets – current assets and
fixed assets. While current assets refer to cash or assets that can readily be converted to cash,
fixed assets are the company‟s investment facilities and equipment. Fixed assets are expected to
be the primary income-producing assets of the firm in the long term. Different factors come into
play in the management of these two kinds of assets.

6.5 SOURCES OF FUNDS

Once a company has decided what types of investments it wants to make and how much it will
take to finance these projects, the company must decide what types of financing best meet its

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needs. It has to be noted that it costs money to borrow money. Interest is the rent paid for the use
of borrowed funds. The amount of interest charged varies with the type of borrowing and the
length of time the borrower takes to pay the money back. The rate of interest is a major
consideration for a business when it decides how to raise necessary funds. If too much interest is
paid, the profitability of the business suffers.

Generally, funds for businesses come from two major sources: debt and equity. Debt capital is
funds obtained through borrowing. Equity capital usually comes from the sale of stock in the
company. Equity capital could also come from contributions from other investors.

Sources of funds available to financial managers can be divided into two broad areas: short-term
funds and long-term funds. Short-term funds are used to finance supplies, payrolls, and are
obtained for one year or less. Long-term funds are used to purchase buildings, land, long-lived
machinery, and equipment. Good financial management requires that a funding source be
matched to the intended use of the funds.

6.5.1 SHORT-TERM SOURCES

Short-term sources of funds represent current liabilities (funds owed). They represent short-term
obligations. Since they are supposed to be settled by cash, they represent cash payments which
must be settled as at when due. Examples of current liabilities and their sources are explained as
follows.

Bank Overdraft

The source of overdraft is commercial banks, and they grant this to creditworthy firms. Funds
could be advanced to such firms within a period ranging between one day and one year. These
loans are supposed to be repaid on self-liquidating basis (paying from proceeds which accrue
from normal course of business operations).

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Account Payable

This can be referred to as trade credit. A firm can buy something on credit. Supplies could be
made on credit, and they give rise to trade credits. The repayment period and terms of payment
depend on the commercial and credit policies of the suppliers.

Bill Finance

In simple terms, a bill is a promissory note. But there are different types of bills and complexity
exists in their meanings. In our case, a bill is a trade bill of exchange which could be domestic or
foreign. If a bill of exchange (inland) is accepted from discounting operations, it could represent
an important source of fund.

Deferred Tax Payment

Tax payment could be looked at from two perspectives:

1. Self-imposed (a firm will not pay when it is supposed to pay and that becomes a source);
2. Late assessment.

Factoring

Debt could be factored. This is another source of short-term funds. Factoring involves handing
over of account receivable or any other debt to factors for collection with or without recourse.

Hire Purchase Finance Arrangement

Firms that engage in selling on installment basis can make arrangement with hire purchase firms
to make credit facilities available to customers. Alternatively, a firm may make hire purchase
agreement with its customers. This may be known as block discounting. Thirdly, a hire purchase
firm can buy the product directly from the manufacturer, and thereafter make direct arrangement
with customers.

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Stock Finance

Stocks could be used to raise short-term funds in a number of ways. They could be used as
collaterals for secured loans from commercial or merchant banks. Raw materials could be
financed en route by means of trade bills and/or warehouse receipt. This represents another type
of secured loans on the value of stock of raw materials. The bill could become negotiable if
endorsed by a reputable commercial house or bank, and could thereafter be sold outright or used
as collateral for a loan.

SELF-ASSESSMENT EXERCISE 1

 List and explain six short-term sources of funds for a firm.

6.5.2 LONG-TERM SOURCES

Common Stock

Equity shares, common stock and ordinary shares, all mean the same thing, but a stock is a group
of shares, that is, a stock is made up of shares. Ordinary shares could be issued by firms which
have been quoted on the stock exchange. Ordinary shares constitute the equity base of a firm,
and represent ownership of the firm on pro-rata basis. This implies that an individual investment
is a small proportion of total investment.

Thus, each equity shareholder is entitled to a proportionate part of the firm‟s residual profit and
asset. The capital contributed by the shareholders is, therefore, known as risk capital. But they
have some compensation like voting rights.

Preference Shares

The next class of shares which ranks above equity shares are the preference shares. They are also
known as preference stocks. Preference shares occupy an intermediate position between common
stock and debenture stocks. Preference shareholders are entitled to fixed dividend payment as
different from equity shareholders which are entitled to variable dividend payments. They are

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imperfect creditors because tax is paid before fixed dividend is paid to them; they are not
creditors and they are not the owners of the firm. They do not normally have voting rights unless
otherwise stipulated in the terms of the issue.

There are various types of preference shares:

(1) Cumulative preference shares (4) Redeemable and irredeemable
(2) Participating Non-Cumulative shares Preference shares
(3) Participating Cumulative shares (5) Convertible Preference shares

1. Cumulative Preference Shares

Preference shares could be cumulative or non-cumulative. Cumulative preference shares allow

for dividend payment to be deferred if a firm does not make adequate profit to pay such
dividend. Therefore, such firms are normally required to pay such dividends in arrears before
dividend could be paid to common shareholders. Non-cumulative preference shares do not allow
for any form of deferment of dividend payment. We can say that all preference shares are
deemed to be cumulative unless otherwise stated in the terms of the issue.

2. Participating Non-Cumulative Preference Shares

This class of shareholders is entitled to a non-cumulative dividend at a fixed rate but without a
right to participate in the residual profit of a firm after the equity shareholders has been paid.

3. Participating Cumulative Preference Shares

This class of shareholders is entitled to participate in the residual profit of a firm in addition to
the cumulative fixed dividend rate (i.e. they combine the features of cumulative and
participating).

4. Redeemable and Non-Redeemable/Irredeemable Preference Shares

Preference shares could be redeemable or irredeemable. Redeemable preference shares are

normally redeemed after a fixed period of time. We can say that this class of preference shares

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has a definite maturity period while irredeemable preference shares do not have definite maturity
period (but it could be sold at the security market – an artificial maturity period).

5. Convertible Preference Shares

Convertible preference shares convey upon the holders the right to convert these shares into
equity shares in accordance with the terms of issues. This is an issue with speculative features.
These shares are corporate fixed-income securities that the investor can choose to turn into a
certain number of shares of the company‟s ordinary shares after a predetermined time span or on
a specific date. The fixed income component offers a steady income stream and some protection
of the investors‟ capital. However, the option to convert these securities into stock gives the
investor the opportunity to gain from a rise in share price. It can be summarized that convertible
preference shares give the assurance of a fixed rate of return plus the opportunity for capital
appreciation.

Debenture Stocks

These are corporate bonds.

Two categories of debentures are:
(i) All banks debentures
This involves one to one relationship between a bank and a firm, and lending is based on
the assets.
(i) Debenture Stocks – Debenture stocks or corporate bonds are normally issued under a firm‟s
seal. This represents the legal evidence of a firm‟s indebtedness. A debenture stock holder is
a creditor to the firm, therefore, he is entitled to a fixed interest payment whether a firm
makes profit or not. Debenture stock holders do not have any voting right and their interest
in the firm is limited to the fixed interest payment no matter how successful the firm may
be.

Lease Financing

This is an important source of long-term funds. It may be used as a source of financing company
expansion or for modernization of the productive apparatus of the firm. Thus, through leasing, a

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company may make use of equipment without actually owning it. The main objective of leasing
is to put at the disposal of a firm a plant or any fixed asset which serve the productive need of
such a firm. The firm, in making use of that equipment, is obliged to pay to the lessor adequate
sum of money which constitutes cost on the part of the firm.

Three units are involved in lease and they are as follows:

A company which has the aim of expanding its productive capacity and/or requires equipment
for modernization;
A supplier which specializes in manufacturing specialized equipment;
A company which is in a position of buying equipment from the manufacturer or supplier and
placing the equipment at the disposal of other companies for productive use.

6.6 CONCLUSION

All decisions made by a company are, in a sense, financial decisions. The purchase of
equipment, the hiring of employees or the remodeling of a new store all involves the use of one
of the scarcest resources an enterprise has – money. Every aspect of the business depends on
financing, including production, marketing, and human resource management. Good financial
management requires that a funding source be matched to the intended use of the funds.

6.7 SUMMARY

In this Unit, we have able to consider that:

the financial manager is responsible for developing and implementing the firm‟s financial plan;
financial management involves the management of funds inflows and outflows efficiently and
effectively in order to guarantee the firm adequate liquidity;
sources of funds available to financial managers can be divided into two broad areas: short-
term funds and long-term funds. Short-term funds are used to finance supplies, payrolls, and
are obtained for one year or less. Long-term funds are used to purchase buildings, land, long-
lived machinery, and equipment.

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6.8 TUTOR-MARKED ASSIGNMENT

 Discuss the preference shares as source of long-financing available to a firm.

 Why do businesses need funds?

6.9 REFERENCES/FURTHER READING

Appleby, R. C. (1982). Modern Business Administration, 3rd Edition. London: Pitman Books
Limited.
Bantie Worke (2006). Introduction to Business. 3rd print, Addis Ababa: Alem Printing Press
Boone, Louis and Kurtz, David (2001). Contemporary Business, 9th Edition. New York: Dreden
Press.
Brown, Betty I. and Clon, John E. (1997). Introduction to Business: Our Business and Economic
World. New York: McGraw Hill Inc.
Inegbenebor, A. U. and Osaze, Esosa Bob (Ed.) (1999). Introduction to Business: A Functional
Approach. Lagos: Malthouse Press Limited.
Mathew J. (2006) Business Organizations (2nd ed.), Sheel Sons, New Delhi.
Mescon, Michael H., Bovee, Courtland L., and Thill, John V. (2002). Business Today. Upper
Saddle River, New Jersey: Prentice Hall.

Miller, Roger LeRoy and Farese Lois Schneider (1992). Understanding Business: A World of
Opportunities. New York: West Publishing Company.
Yolokwu P. O. (1999) Management: Concepts and Techniques, Peak Publishers

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UNIT SEVEN

MARKETING IN BUSINESS

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Marketing Mix
3.1.1 Product
3.1.2 Price
3.1.3 Place
3.1.4 Promotion
3.2 Product Planning
3.2.1 Types of Product
3.2.2 Product Life Cycle
3.2.3 Meeting Consumers Needs
3.2.4 Consumer Motivation
[Link] Rational Motives
[Link] Emotional Motives
[Link] Patronage Motives
3.2.5 Market Research
3.3 Pricing
3.4 Packaging
3.5 Promotion
3.6 Distributing Goods and Services
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

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7.1 INTRODUCTION

This unit provides you some insight into marketing as it affects the practice of business activities
of today. Marketing in today‟s business has gone beyond merely providing goods and services
for public to make money, instead the customers‟ needs and wants satisfaction is seen as the first
objective for business existence and the provision of qualitative goods and services as the means
to achieve the objective. The world‟s marketing environment is fast changing so much so that,
any business firm that lags behind fizzles out. For any company to remain in business therefore,
its marketing activities have to be closely coordinated and made compatible with one another and
with all other activities of the company.

The company also has to adapt itself to delivering the desired satisfaction in the areas of
qualitative and desired product or service development, right base price determination for the
product or service, most effective distribution method that provides time and place utility, and
the best ways to promote the product or service.

7.2 OBJECTIVES

At the end of this unit, you should be able to:

 state the place of marketing in today‟s business;
 explain what marketing mix is;
 identify the various marketing variables;
 say what product planning involves;
 identify types of product;
 state the stages involved in product life cycle;
 explain how consumers are motivated;
 define marketing research and state the importance;
 explain distribution of goods and services.

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7.3 MAIN CONTENT

7.3.1 Marketing Mix

Basically, marketing mix can be defined as the combination of marketing decisions that are used
to market specific products over a specified time period. The term is used to describe the way a
company continues or blends the four inputs or variables of marketing which are the product,
price, place, and promotion to appeal to its target customers. These four ingredients are popularly
called the four Ps of marketing and they are the controllable marketing variable because a
company can control them to achieve its objectives in the target market.

7.3.2 Product

This is defined as “everything the customer receives that is of value in terms of a perceived want,
need or problem”. Product can also be defined as “anything that can be offered to a market for
attention, acquisition, and consumption that might-satisfy a need or want” Kotler et al (2001). A
product represents an array of various benefits, attributes, characteristics or satisfactions that are
valuable according to your needs and desires. To manage the product attributes successfully,
marketer must find an unsatisfied need or want and a unique way of satisfying such a need.

7.3.3 Price

Price is what is paid in exchange for the product (goods) received or service enjoyed. It is also
defined as the kindness or money that has to be paid for a commodity or service. Kindness refers
to a bartering situation where parties involved exchange goods and services. Price can have more
than one meaning in non-businesses marketing. Thus, museums ask for donations, churches pass
collection plates and politicians seek votes, these are included in the general concept of price.

In pricing, a company must determine the right base price (the minimum price it is prepared to
receive in exchange for its products). It must then establish policies concerning discounts to be
offered, freight (transport) payments and many other price-related variables.

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7.3.4 Place

This is otherwise known as distribution which is a process of ensuring that product or service is
available when and where it is required. Distribution provides time and place utility and sets the
stage for possession utility since a product is of no use if it is not readily available at the time you
need it.

7.3.5 Promotion

This is a marketing mix variable that is used to inform, remind and persuade the customers to
make purchases of the company‟s products. It consists of such activities as; personal selling,
advertising, sales promotion, and public relations/publicity. This together are called the
promotional mix.

7.4 Product Planning

This involves all activities which enable producers and middlemen to determine what should
shoot up the company‟s line of products.

Product planning takes into consideration the strength of the firm, the firm‟s market potential, the
firms‟ sales potential and the profit possibilities of the product to determine whether product
development is feasible.

The activities centering on product planning and development include decision making in the
areas like:

(i) The product the company should make and the one it should buy.
(ii) Whether the company should expand or simplify its line.
(iii) The new uses available for each item.
(iv) The quality of the product for the intended use and in which market is it right?
(v) The fraud, package and label to be used for each product.
(vi) The style and design of the product and the size, colours and materials.
(vii) The quantities of each item to be produced and inventory controls to be established.

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7.4.1 Types of Product

Products and services fall into two broad classes depending on the types of consumers using
them:

Consumer products and;

Industrial products

Broadly defined, products also include other marketable entities such as experiences,
organization, persons, places etc.

1. Consumer Products: These are those products bought by final consumers for personal
consumption. Marketers usually classify these goods further based on how consumers go
about buying them. Consumer products include convenience products, shopping products,
specialty products and unsought products. They differ in the way they are bought and
marketed.

i. Convenience Products- are products and services that consumers buy frequently,
immediately and with less or minimum comparison and effort. Examples include
soap, candy, newspapers and fast food. They are usually low-priced and placed in
many locations for easy availability.

ii. Shopping products- are less frequently purchased consumer products and service that
consumers compare carefully on suitability, price, quality, and style. Consumers
spend more effort and time gathering information and comparing them. Examples are
furniture, clothing, used car, major appliances, and hotel and motel services.
Marketers of this class of products distribute them through fewer outlets but provide
deeper sales support to help customers in their comparison efforts.

iii. Specialty Products- are consumers‟ products that the customer really wants by,
making special effort to get them. Specialty products are products that customers are
willing to search for. They don‟t have to be expensive and may be once-in-a-lifetime
purchases. Any branded product that consumers insist on by name is in this category.

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iv. Unsought products- are consumer products that the consumer either does not know
about or knows about but does not normally think of buying. Most major new
innovations are unsought until the consumers don‟t search for products in this
category and in fact, they probably won‟t buy the products if they see them unless
advertising, personal selling, and other marketing efforts can show their value. There
are two other types of unsought products, new unsought and regularly unsought
products.

(a) New unsought products- are products offering really new ideas the potential customers don‟t
know about yet (innovations). Information promotion can help convince customers to accept
or even seek out the product.

(b) Regularly unsought products-are products (like encyclopedia and gravestone) that stay
unsought but are bought forever. There may be a need but potential customers are not
motivated to satisfy such need. Personal selling is very important for this class of product.

2. Industrial Products: These are products purchased for further processing or use in
conducting a business. Thus, the difference between a consumer product and an industrial
product is based on the purpose for which the product is bought. If you buy a tractor for use
personally, the tractor is a consumer product but where the same tractor is purchased for use
in an agricultural firm (commercial farm), it becomes an industrial product. The three groups
of industrial products and services are:

(a) Materials and parts which include raw materials and manufactured materials and parts. Raw
materials consist of farm products (wheat, livestock, vegetables, cotton, fruits) and natural
products like fish, crude petroleum, lumber, and iron ore). Manufactured materials and parts
consist of component materials (iron, wires, yarn, and cement) and component parts
(castings, small motors, tires). Most manufactured materials and parts are sold directly to
industrial users. Price and service are the major marketing factors, branding and advertising
seem less important.

(b) Capital items are industrial products that aid in the buyer‟s production or operations,
including installations and accessory equipment. Installations include major purchases like

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buildings (factories offices) and fixed equipment like generators, drill presses, large
computer systems, elevators). Accessory equipment includes portable factory equipment
and tools (hand tools, lift trucks) and office equipment (fax machines, desks). They have a
shorter life than installations and simply aid in the production process.

(c) Supplies and services: Supplies include operating supplies like (hurricanes, pencils paper,
coal) and repair, maintenance items like (paint, nails, brooms). Supplies are the convenience
products of the industrial field, as they are usually purchased with minimum effort or
comparison. Business services include maintenance and repair services (window cleaning,
computer repair) and business advisory services (legal, management consulting, advertising).
Such services are usually supplied under contract.

7.4.2 Product Life Cycle (PLC)

This is the course of a product‟s sales and profits over its lifetime. It involves five distinct stages:

i. Product development begins when the company finds and develops a new-product idea.
During product development, sales are zero and the company‟s investment costs mounts.
ii. Introduction: Is a period of slow sales growth as the product is introduced in the market.
Profits are nonexistent in this stage because of the heavy expenses of product introduction.
iii. Growth is a period of rapid market acceptance and increasing profits.
iv. Maturity is a period of slowdown in sales growth because the product has achieved
acceptance by most potential buyers‟ Profits level off or decline because of increased
marketing outlays to defend the product against competition.
v. Decline is the period when sales fall off and profits drop.

Not all products follow this product life cycle. Some products are introduced and die quickly;
others stay in the mature stage for a long time. Some enter the decline stage and are then cycled
back into the growth stage through strong promotion or repositioning.

The product life cycle concept can describe a product class (petrol-powered automobiles), a
product form (minivans), or a grand (the Toyota). The product life cycle concept applies
differently in each case. Product classes have the longest life cycles because their sales stay in

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the mature stage for a long time. Product forms, in contrast, tend to have the standard product life
cycle shape. Product forms such as “cream doctorates,” and the “dial telephone” passed through
a regular history of information rapid growth, maturity, and decline.

7.4.3 Meeting Consumers’ Needs

To sell products successfully, marketing exports must understand the needs of consumers. As a
consumer, you spend your money to meet three basic needs: physical needs, social needs, and
psychological needs. Physical needs include the necessities of life such as food, clothing,
housing, transportation, the need for health, safety, and security. When you go to the doctor,
purchase a life insurance policy, or put dead bolt locks on your doors, you are meeting physical
needs. Social needs are the need to be loved and accepted by others. The desire to be attractive,
especially to the opposite sex grows out of these needs.

Marketing specialists appeal to our social needs when they sell such items as skin care products
and deodorant. Psychological needs involve the need for approval and prestige. To meet
psychological needs, people buy things that show they have accomplished something. One
person might buy very expensive shoes. Another might go to a fashionable restaurant, what
“basic needs” is a debatable issue.

Since people buy items to meet their need, a distinction is made between non-discretionary and
discretionary income.

Non-discretionary income is used to buy items to meet basic needs. Discretionary income on the
other hand is the income left over after the basic needs are met. Knowing this distinction enables
the marketer to determine the marketing plan to use, for example, advertising; appealing to the
emotions is more frequently used for marketing items purchased with discretionary income,
rather than non-discretionary income.

7.4.4 Consumer Motivation

Two people cannot buy exactly the same goods and services to satisfy their needs. You buy one
brand of toothpaste, and your best friend buys another brand. Both brands, however, meet the

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same need. Each of us has different motives for buying the products that we do buy. There are
three types of motives.

[Link] Rational Motives

Consumers with this motive are motivated to think logically about a purchase. When you
compare the prices and quality of similar products, you are being rational.

[Link] Emotional Motives

Feelings or attitudes cause you to buy on impulse or to buy a product when logic tells you that
you really cannot afford it. They also influence you to select a particular model, colour, or style
of a product.

[Link] Patronage Motives

You may always go to the same hair stylist or drink the same brand of soft drink. Patronage
motivation also causes you to be loyal to certain shops and companies. You may like to shop at
one clothing store, even though it is farther away than another. Companies spend a great deal of
money each year trying to win the loyalty of consumers to their products and services.

[Link] Market Research

This involves the gathering of information that business can use to determine what kind of goods
or services to produce. Market researchers commonly, ask shoppers to take a few minutes to
answer questions, taste a new food or watch a new commercial. So, they study people to find out
what they want to buy and what they are buying. By using market research, forecasters predict
how many goods or services a business man can expect to sell.

Market researchers also gather information from a wider group of people. To do this, they use
demographics, which is the study of population. Where people live, how much income they have
to spend, and what newspapers they like to read are just a few examples of information that
market researchers collect.

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Researchers gather such information from maps, local businesses, census reports and chambers
of commerce, utility companies, and bus and rail lines. Please note some market research studies
are elaborate and expensive while others can be quite simple and cheap.

7.5 Pricing

Price is the value that products and sellers place on goods or services. There are many factors
involved in the pricing of a product or service. The price must cover the total costs of producing,
shipping, and promoting the product, plus a profit.

In determining the total cost of a product, say popcorn, oil, popping the corn, boxes, and salaries
of the workers are costs to be considered. Other costs could be fixed, costs that remain the same
regardless of how much popcorn is produced which may include rent for workspace, cooking
equipment, any executive salaries; variable costs change depending upon how much product
produced. The costs of oil, popping corn, boxes, and salaries for people who are making and
boxing the popcorn are included in the product‟s total costs.

Break-even point is the point reached when the money from product sales equals the costs of
making and distributing the product. After that point is reached, businesses begin to make a
profit on the product.

The way a product is priced delivers certain messages to consumers. If two similar products
range widely in price, the consumer may think that the higher priced product is of better quality.
A very high price suggests exclusiveness. A very low price may suggest low quality, even
though many low-priced products offer very good value for the money. Businesses must
remember that their pricing strategy conveys an image of their product in the market place.

In many cases, sellers set the price recommended by the manufacturers, some sellers base their
price on market research that has determined how much consumers are willing to pay for a
particular product. A change in consumer‟s demand may affect the price the seller has set. Price
can be used as a competitive strategy; marketing specialists may try to lure consumers away
from their favourite brands by offering nearly identical products at slightly lower prices.

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Marketing people also use pricing to make products more appealing. They might offer special
sale prices on certain products.

7.6 Packaging

The way products are packaged strongly influences consumers as a lot of thought goes into the
packaging. Packaging must be attractive. If the product is a good, the package must explain
clearly how to use it. It must prevent tempering and protect the contents from breaking or
spilling. Some goods such as medications are packaged with special tops so that, small children
cannot open them.

The labels on packages are advertisements for the product. Labels include the logos, which is the
symbol of the manufacturer, and the brand name of the product. The label also may give
directions for using the product and list the ingredients. Many food labels provide nutritional
information as well.

7.7 Promotion

This includes all of the activities involved in selling product. It means telling consumers about a
product and creating demand for it.

Advertising is paid promotion. Businesses and organizations use advertising to promote products
and services and to generate ideas and educate the public. The people who purchase
advertisements are sponsors and they advertise in many different ways. They use television
commercials, categories, magazines and newspaper ads, billboards, direct mail, and even the
products themselves. The makers of designer jeans and T-shirts display their logos and brand
names in a prominent place on their products. Consumers advertise the product whenever they
wear it.

Advertising firms are service business that design and produce advertisements. Advertising is a
highly competitive business. Some advertisements, particularly television commercials, are very
costly to make. A television commercials may cost N1 million to produce. It may cost another

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N500, 000 to purchase air time on television for the commercial. Although, television
commercials cost a lot to make, they usually generate many millions of Birr in product sales.

7.8 Distributing Goods and Services

The place decision that marketers have to take is how and where consumers will buy their goods
and services. To make this decision, marketers must decide on their channel of distribution
which includes all the people who direct products to consumers. Because these people work at
getting the product from the producer to the final user, they are called intermediaries. They
include:

i. Distributors who are intermediaries that represent a single manufacturer in a specific

geographical area. Cosmetics, cars, furniture, and shoes are sold through distributors.
ii. Wholesalers are another kind of intermediaries. They receive large shiponents of products
from many different producers. They break the shipments into smaller batches for resale. A
company that makes canned peas may sell a truckload of its peas to a wholesaler. The
wholesaler, in turn, will sell a few cases of peas to each of several local supermarkets.
iii. Retailers who sell goods directly to the consumer, the final stop in the channel of
distribution. When you buy something in a supermarket, drugstore, or department store, you
are dealing with a retailer.

7.9 CONCLUSION

For marketing activities to take place, decisions have to be reached concerning the product type
needed to satisfy the needs of prospects, the price affordable by them, the best way to distribute
such products or services and the corresponding promotional efforts that will sensitize people of
the product or service availability and perceived satisfaction packaging is also seen as a silent
salesperson for products as it gives a first-hand information about products whether on display or
on offer.

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7.10 SUMMARY

The marketing mix consists of product, price, place and promotion. Market planning entails
decision on whether to produce consumer or industrial goods and services and considering the
life cycle of the product. Producers of goods and services must understand the psychological
needs, rational, emotional and patronage motives of consumers for buying goods and services. It
was also gathered that market research helps producers determine what people need and want to
only, products are priced, packaged and promoted to persuade customers to try them.

7.11 TUTOR-MARKED ASSIGNMENT

 Differentiate between shopping and specialty products.

 With relevant examples, discuss the marketing mix.

7.12 REFERENCES/FURTHER READING

Adcock, Bradfield, Hallorg & Ross (1995). Marketing Principles and Practice, 2nd Ed. London:
Pitman Publishing.
Bantie Worke (2006). Introduction to Business. 3rd print, Addis Ababa: Alem Printing Press
Boone, Louis and Kurtz, David (2001). Contemporary Business, 9th Edition. New York: Dreden
Press.
Brown, Betty I. and Clon, John E. (1997). Introduction to Business: Our Business and Economic
World. New York: McGraw Hill Inc.
Kotler and Armstrong (2001). Principles of Marketing, 9th Ed. London: Prentice-Hall.
Mathew J. (2006) Business Organizations (2nd ed.), Sheel Sons, New Delhi.
Mescon, Michael H., Bovee, Courtland L., and Thill, John V. (2002). Business Today. Upper
Saddle River, New Jersey: Prentice Hall.
Miller, Roger LeRoy and Farese Lois Schneider (1992). Understanding Business: A World of
Opportunities. New York: West Publishing Company.
Yolokwu P. O. (1999) Management: Concepts and Techniques, Peak Publishers

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UNIT EIGHT

ACCOUNTING IN BUSINESS

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Definition of Accounting
3.2 Books of Accounts
3.2.1 Ledger
3.2.2 Journal
[Link] Reasons for using Journal
[Link] Uses of Journals
[Link] Types of Journal
3.3 Cash Account
3.4 Accounting Terms
3.5 Roles of Accounts in Business
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

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8 INTRODUCTION

This unit tries to see what accounting is, its roles in a business concerns like the one-man
business or corporate organization. Books like ledger, journal, cash book, balance sheet are used
regularly when relating accounting information.

8.1 OBJECTIVES

At the end of this unit, you should be able to:

 define accounting;
 differentiate between the various books of accounts;
 state reasons why accounting is needed in business;
 define balance sheet, trading, profit and loss account and trial balance.

8.2 MAIN CONTENT

8.2.1 Definition of Accounting

Accounting is generally regarded as the language of business, as used in describing the

transactions entered into, by business transactions and also the result of such transaction.
Accounting data in the contemporary society is the systematic formulation and communication
of economic data related to all types of business and government activities. The most important
function of accounting data is to provide information which will enable all that have anything to
do with a business concern know the result or activities of the business. Although accounting
records are empirical in nature as they show the results of the past activities of establishment. If
one assumes that the factors that shaped the past are likely to continue to shape the future, the
accounting records also have a predictive value. This is the major assumption that makes the
interpretation of accounts a worthwhile exercise.

Financial accounting is the art of identifying, recording, analyzing, summarizing, and finalizing
business transactions and interpretation of result because money, fund, capital, finance,
investment, dividend policy and profit and loses in business needs to be accounted for and
properly managed. This is therefore based on accounting equation which states that:-

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CAPITAL + LIABILITIES = ASSETS

The capital is the total amount supplied by owner of the business or owners‟ equity or net worth;
while liabilities consist of money owing on goods supplied to the firm, and for expenses and
loans given to the firm.

Assets include the resources possessed by the firm. Assets consist of properties of all kinds; such
as building, machinery, stocks of goods, motor vehicles, also, benefits such as debts owing by
customers and amount of money in the bank account. The accounting equation is assessed in a
financial position statement called the BALANCE SHEET.

Accounts have to obey the principles of double entry system in recording transactions so as to
make sure that the total naira amount of its most equals the total naira amounts of credits. The
RULE is (In every debit entry, there must be a corresponding credit entry and vice-visa). There,
it shows that our account must balance.

Henceforth, in recording any transaction, always debit the receiver and credit the giver.

Cash account Personal Account Real Account

Debit Credit Debit Credit Debit Credit

Receipts Payment Receiver Giver Property Acquired Property Realized

Nominal Accounts

Debit Credit

Expenses and Loses Income and Gains

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8.2.2 Books of Accounts

The books used in accounting are the following; (a) Ledger (b) Journal; and (c) Cash books.

[Link] Ledger

The principal book of accounts is the LEDGER which contains a permanent record in a
classified form, of all the transactions of trader. The ledger accounts are a means of accumulating
in one place, all information above changes in specific assets, liabilities and owner‟s equity. No
entry can come inside the ledger without going through the journal or the subsidiary book.
Hence, the journal is an instruction to the ledger. This will help to prevent fraud. A ledger is
ruled as:
DB CR

Date Particulars Folio No Date Particulars Folio No.

From the above, the ledger is divided into two namely:

1) Debit Column and (2) Credit Column. A page of a ledger is referred to as Folio. A folio
can contain many accounts and many accounts are contained in a folio.

The classification of entries into appropriate ledger accounts demands extreme accuracy on the
part of the book keeper, but provided a few simple rules are observed; the work presents no
difficulties which cannot be easily overcome.

Thus, the whole of a trader‟s transaction with another person, recorded in a ledger account,
bearing that person‟s name.

LEDGER ACCOUNTS

Ledger account is divided into Personal and Impersonal.

PERSONAL is divided into:

 Debtors-persons who owe money
 Creditors- persons to whom you owe money

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IMPERSONAL is divided into:

Real - Such as land, plant and machinery, furniture and fitting, Lorries and car etc. Debit the
account if receive (receiving value) but credit the account if giving value

For example ledger account for asset cash provides a record of the cash receipts, cash payments,
and the current cash balance. Maintaining a cash account, the internal management can keep
track of amount of cash available for meeting payrolls and for making current bases of assets or
services. The record of cash is also found useful, planning future operations and advance
planning of applications for loans. The development of the annual budget requires estimating
average; the expected receipts and payments of cash, those estimates cash flow are naturally
based to some extend on the ledger accounts using past cash receipts and payments.

8.2.3 Journal

A journal is a subsidiary book, a book of prime entry as book of original entry where, we record
our financial transactions in chronological order or as they occur. The journals are day-to-day
record of the business wherein both aspects of all transactions are recorded in chronological
order.

To the internal management thus, the journal is found useful in the following ways:

a) Shows all information about a transaction in one place and also provides an explanation of the
transaction.
b) Provides a chronological record of the entire event in the life of a business.
c) Helps to prevent errors and irregularities.
[Link] Reasons for Using Journal

(1) It removes dependence on the brain because, transactions are recorded as they are made.
(2) Omission is totally reduced or removed to the barest minimum.
(3) It encourages the use of staff in areas that they are best suited (specialization).
(4) Errors, irregularities and fraud are reduced to the barest minimum because; the journal
provides enough explanation of the entries and details the necessary supporting evidence.

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(5) Some transactions are of a complicated nature and without the journal the entries may be
difficult, if not impossible, to understand.
(6) If a book-keeper left a firm, the absence of a journal could leave many items unexplained.

[Link] Uses of Journals

 The purchase and sales of fixed  Opening entries

asset on credit,  Other transfers
 Correction of errors.

[Link] Types of Journal

There are about five types of journal, namely:

(1)Sales, (2) Purchase (3) Return inwards, (4) Return outwards and (5) Journal proper or
principal journal. All the above mentioned types of journal are all books of prime entry. The
journal in its usual form is divided by vertical lines into 5 columns in which you can enter, in
respect of each item, namely:

(1) Date (2) the particulars or the Narrative (3) the name of accounts to be debited (4) the
name of accounts to be credited and (5) The reference (folio).

8.3 Cash Account

Cash account or cash book is a part of ledger. Cash account is a book in which particulars of all
monies received or paid are recorded. Cash account thus fulfills the functions of both a ledger
account and a journal.
Cash receipts are values coming in; hence, amounts of cash received centered on the debit side of
the cash account and posted to the credit side of the appropriate ledger accounts. Cash payments
are values going out: such transactions must therefore be recorded on the credit side of his cash
book and posted to the debit side of the ledger account of the persons or things receiving the
value. The cashbook is merely the cash account and the bank account might be together in one
book. The cash book is ruled so that the debit column account and the credit columns of the cash
and bank accounts placed alongside each others.

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8.4 Accounting Terms

BALANCE: Trial balance is not an account itself and it is not part and parcel of the double entry
system. It only tests the arithmetic accuracy of the entries or postings in the ledger thus,
helping to show debit and credit balances on the ledger accounts.

TRAINING, PROFIT AND LOSS ACCOUNT: Is drawn by management to compare the

result obtained with the result expected because, the sole aim-of business venture is making
profit.

BALANCE SHEET: The balance sheet is a snap short picture of a business, owning its
financial position at a point in time and if properly interpreted, can provide the
management with a good deal of useful information as regards strengths and weakness of
the business as a whole and its individual sections as well.

3.5 Roles of Accounts in Business or Why do we Prepare Account

At this junction, having known the various accounts available to any business venture, we will
like to consider the role of accounting data in internal performance evaluation. An organization
can be looked at in the following functions performed:

1) Profit Determination: Once a profit can be determined, you will be able to know how much
one can spend out of profit without consuming capital and how much that can be set aside
for ploughing back or reinvested into the business. Also, he will want to know the actual
profits compared with the profits he had hope to make.
2) Credit Dealing: It helps in knowing one‟s debtors and creditors. This is made possible from
the available transactions (data) that has been recorded during the period.

3) Determination of Solvency Level: that is the capacity to pay debts of the business enterprise.
This also provides needed information as a basis for making business decisions that will
enable management guide the company on a profitable and solvent course. Management
therefore, need the assurance that the accounting data received are accurate and

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dependable through the development of internal control unit and that, all the following
will be measures, taken by the organization:

 For the purpose of protecting its resources against fraud, waste and inefficiency;
 Ensuring accuracy and reliability in accounting and operating data;
 Securing compliance with company‟s politics;
 Evaluating the level of performance in all divisions of the company.

The prospect for the solvency level are affected by an enterprise‟s ability to generate enough
cash to meet its obligation when due and its other cash operating needs to reinvest in income
operation and to pay cash dividends. Accounting data provides information for predicting
comparing and evaluating enterprise earning power.

4) It Helps Management as a Control Measure: financial accounting is found useful in

business development because it helps management as a control measure. It aids control, it
avoids pilferage of stock through the use of stock bin-cards, store requisition card, ushers,
vouchers etc.

5) Budget Planning: Another role of accounting data is the internal performance valuation of
an organization‟s budgeting vis-à-vis: - planning and control of daily operations of business
activities for the future. Management needs specialized information for long and short range
planning and for major decisions such as, the introduction of new product(s) or the closing of
older plant, arrangement or not to arrange short term borrowing to finance operations. They
use the best available quantifiable information to make the organization function in most
effective and efficient manner possible.

6) Furthermore, financial accounting in Ethiopia business environment aids planning by giving

direction to the organization so that, one can tailor ones actions towards achieving the set
goal, establish objectives for the organization; helps the business enterprise to manage
uncertainty thus, paving way in making certain assumptions of the future occurrences, and
also helps in strengthening and unifying the organization.

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7) Helps to know the financial position of a business as at a given time.

8) Serves as a tool to find out the efficiency of the management.

9) Serves as a bed-rock of decision making process for willing entrepreneur or investor.

10) Supplies information in judging management ability to utilize enterprise resources in the
most effective way.

11) It also provides factual and interpretive information to satisfy user‟s needs.

12) Gives a true and fair view of all transactions which may be useful to security analyst, stock
exchange and managers of other companies, analyzing the position of the company in the light
of circumstances and policies; proper valuation of assets and adequate provision can be made
for any loss or diminution in the value thereof.

13) It enables the company to rationalize their expansion, diversification, retrenchment, Mergers
and acquisition.

8.5 CONCLUSION

Accounting follows double entry system where debit is equal to credit. In accounting capital plus
liabilities is equal to assets.

We have three books of account which include:

- Ledger - Journal - Cash account
Accounting helps business in determining:
- Profit
We have three books of account which include:
- Ledger - Journal - Cash account

Accounting helps business in determining:

- Profit - Credit planning and a host of others
- How to manage a business

All these records are presented in trading profit and loss account and balance sheet.

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8.6 SUMMARY

We have been able to see how corresponding entry helps in accounting for a business
concern. Information can be collected from journal, ledger and cash account to help in
business plans which include profit making, future investment, and a host of others.

8.7 TUTOR-MARKED ASSIGNMENT

 Discuss briefly the role of accounting in business.

8.8 REFERENCES/FURTHER READING

ACCA (2004). Preparing Financial Statements. Middlesex: A.T. Foulks Lynch Ltd.
Appleby, R. C. (1982). Modern Business Administration, 3rd Edition. London: Pitman Books
Limited.
Bantie Worke (2006). Introduction to Business. 3rd print, Addis Ababa: Alem Printing Press
Beckett, D.W. (1980). Spicer and Pegler’s Book-Keeping and Accounts. London, Great Britain:
HFL Publishers Ltd.
Boone, Louis and Kurtz, David (2001). Contemporary Business, 9th Edition. New York: Dreden
Press.
Brown, Betty I. and Clon, John E. (1997). Introduction to Business: Our Business and Economic
World. New York: McGraw Hill Inc.
Wood, Frank and Omuya, Joshua (1999). Business Accounting I, West African Edition. Harlow,
Essex UK: Longman Group Limited Bank Mill.

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MODULE THREE

UNIT NINE

COMMUNICATION IN BUSINESS

CONTENTS

 Introduction
o Objectives
o Main Content
o What is Communication?
o The Process of Communication
 Actions
 Reactions
 Interaction
o Types of Communication
 Written Communication
 Oral Communication
 Intrapersonal Communication
 Interpersonal Communication
 Group Communication
o Qualities of a Good Communicator
o Barriers to Good Communication
o Telephoning
 Techniques of Making Phone Calls
 Techniques of Answering Phone Calls
o Conclusion
o Summary
o Tutor-Marked Assignment
o References/Further Reading

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INTRODUCTION

This unit introduces you to the study of communication in business, it deals with the strategies
and skills needed for effective communication in business and organizations. The quest for a new
information and communication order as a matter of fact brought to the fore, the need for
businesses to make a scientific study of communication and its processes within their immediate
environments and its contribution to international business relations. As a result, communication
studies have, within the last decade, become the focus of attention of many business and
organization. The universal nature of communication has led to countless definitions of the term
by different authorities.

9.1 OBJECTIVES

At the end of this unit, you should be able to:

define the term communication
explain the types of communication
differentiate between the communication types
highlight the qualities of a good communication
state the barriers to good communication
use telephone effectively to make and answer calls
identify the techniques involved in making and answering telephone calls.

9.2 MAIN CONTENT

9.2.1 WHAT IS COMMUNICATION?

Communication affects every sphere of human endavour. It informs all of your actions because,
it is occasioned by your need to interact with your fellow-men. It manifests itself in symbolic,
verbal forms. Animals and trees also communicate, but it is your ability to create symbols,
ascribe meanings and interpret massages that elevates you above the status of the lower animals
and gives form and character to your existence.

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Communication is a means by which power is acquired, exercised and sustained. It is the

medium through which relationships are established, extended and maintained. It provides a
means by which people in business, politics and the professions act and interact, exchange
information and ideas, develop plans, proposals and politics, make decisions and manage men
and materials. In business and industry, communication helps to orient workers to one another
and to the goals of the organization, and it is the means by which such goals can be pursued,
attained, sustained and improved.

It is the lubricant that keeps the machinery of the organization functioning; it is the means
through which roles are identified and assigned; it is the life-blood of any business. To organize
is to communicate. Thus, no business or organization can survive without communication. Dance
and Larson (1976) listed 126 published definitions of communication, but there are still others.
Let us examine some of these.

1. Communication is any means by which a thought is transferred from one person to

another (Chappell and Read, 1984).
2. Communication is the process by which one person (or a group) shares and imparts
information to another person (or group) so that both people (and groups) clearly
understand one another Udall and Udall, 1979:5).
3. Communication is not just the giving of information, it is the giving of understandable
information and receiving and understanding the message. Communication is the
transferring of a message to another party so that it can be understood and acted upon
(Eyre, 1983:1).
4. The communication process involves all acts of transmitting messages to channels which
link people, to the languages and symbolic codes which are used to transmit messages,
the means by which messages are received and stored, and the rules, customs, and
conventions which define and regulate human relationships and events (Frank Uatoajah,
1985:2).
5. At all levels in the business among and between executives, managers, staff, personnel,
supervisors and foremen and employees, the communication process is continuously in
action, conveying information, ideas, attitudes and feelings among individuals and among
groups of individuals (Chruden & Sherman, 1978:325).

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9.2.2 THE PROCESS OF COMMUNICATION

This is also known as communication models. You may also see diagrams and explanations on
how communication is carried out. The most influential of these models and discussions is that
of Shannon and Weaver, two mathematicians. It is known as the Shannon Weaver Model of
communication.

Gold Haber (1983) observes that we can talk about a process because, the phenomenon of
creating and exchanging messages is on going, ever-changing and continuous. What it really
means is that the communication process involves actions, reactions, and interactions. Let us see
what each of these terms means.

[Link] Actions

This refers to the initiative you take (as a sender) to share information, observations, or opinions
with others. You may do so by speaking or writing, drawing or gesturing.

[Link] Reactions

This is a response to the action taken by you (sender). In other words, the person addressed (the
receiver) responds to your initiative of starting the communication. Depending upon the type of
response given, we are able to determine whether or not the receiver is willing to be a party to
the communication encounter.

9.2.3 Interaction

This has to do with the exchange of messages between you the senders and receivers. If the
receiver is willing to participate, he sends his response to the initiator. The response may be
verbal or non-verbal; that is, he may write it, speak, or merely carry out an appropriate action.
An interaction can involve two or more persons provided those who take part in the encounter
share common experiences, codes or symbols. There will then be a see-saw of continuous
exchange among them as long as there is information to share, or ideas and thoughts to put
across.

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A practical example of the communication process:

You are an industrialist and your company manufactures Garment using imported cotton.
Suddenly the government announces a ban on imported cotton and urges manufacturers to find
local alternatives. Just as you are thinking about the serious implications of this action, a friend
tells you about ABC Cotton Farms Limited. You write a letter to enquiring about their line of
business and what they could do for you. They reply, giving details of the range of products and
their price list. You then place an order. The goods are sent, you are satisfied and you write back
to thank them and to effect payment, they acknowledge. You have now become their stable
customer and have continued to be involved in the business transactions as long as the natural
goodwill lasts.

This is the form of exchange, the flow of information desired, and the satisfaction that can
characterize a smooth flow of communication. It is this flow that makes people describes
communication as a process. This flow is also called the model of communication.

9.3 TYPES OF COMMUNICATION

Human communication falls into two broad categories, Verbal and non-Verbal. Verbal
communication may take the form of written or oral form.

9.3.1 Written Communication

This is the translation of oral messages into alphabetic symbols. These symbols are then
organized together to convey ideas, messages or information between those who participate in
the communication encounter. The process of learning to write and to organize your thought in
writing begins from childhood and continues into adulthood. Learning to write, what we want to
say and reading what others have written is a life-long pre-occupation of all serious minded
literate people. Once you have learnt to read and write, you could pick up a biro, a pencil, or any
writing instrument to record your message. It is also of major importance in the business world
because, faulty and imprecise written messages can lead to business losses, such as loss of time,
corporate image, potential customers and profits.

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Written communication is normally used in the following situations:

i. For personal and business letters.
ii. In queries (normally used to discipline erring staff).
iii. In reports.
iv. For circulars and memos.
v. In essays, compositions and all forms of creative writing.
vi. For questionnaires and forms designed for collecting information.
vii. In telegrams and telexes.

9.3.2 Oral Communication

This is a form of verbal communication in which your speech organs are used to produce sounds.
It is different from the written form where you make use of your muscles to produce symbols
(letters of the alphabet and words).

Oral communication is used in interpersonal, intrapersonal and group communication situations.

[Link] Intrapersonal Communication

It is a process of information transfer, which goes on within you as an individual. You know very
well that ideas and thoughts are not transmitted as soon as they are generated in you. Rather,
each idea or thought that develops is first weighted, tossed here and there, then you decide how
best to put it before you allow it to escape from within you. This process is necessary to ensure
effective and suitable construction of messages.

At times, during the process of tossing ideas up and down in your mind, you unconsciously
verbalize (say aloud) what is going on within you. In such situation, no particular receiver is
intended. But if somebody happens to be around then, and he learns you muttering, he might
accuse you of talking to yourself.

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[Link] Interpersonal Communication

Otherwise known as “face –to-face communications” it is the exchange of ideas and information
between two people – you and your friends, you and your boss in the office or you and your
tutor. In this case, you do not keep your ideas to yourself. You share them directly with someone
else, face-to-face or by telephone or other gadgets of communication. Interpersonal
communication dominates our activities at home, in the school, in the clinic, in the market, and
almost everywhere. In business, Industry and similar organizations, interpersonal communication
helps to break the barrier of formal relationships, generate warmth and create harmony, essential
for increased productivity. It is therefore a very significant form of communication. This form of
communication has a singular advantage of immediate response.

[Link] Group Communication

When three or more persons come together accidentally, or by design, to work towards a specific
goal, a group is formed. Group communication; therefore, involve the exchange of ideas and
information among members of a group. Groups exist in several areas of our lives-at school, at
home, in the office, in the club, etc. other examples of groups include members of a class, or a
social organization, and people who belong to the same political party. Members within a given
group share ideas and information with one another, and this enables them to accomplish the
tasks they set themselves. As a result, if you are a member of any of the groups mentioned
above, you will take part in group communication. The group decides collectively who should
lead, how to raise money, what tasks to undertake and how to carry out the tasks undertaken. In
this kind of situation, the mode of communication is peculiar to the group and essential to its
survival. You engage in one or other of the three forms of oral communication discussed in the
course of your daily activities whether in lectures, interviews and meetings. Oral communication
then can be described as concentric in nature. We begin with our own internal dialogues; move
on to sharing our thoughts with someone else, then with the group.

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9.3.3 QUALITIES OF A GOOD COMMUNICATOR

Already, a lot has been said on the art of oral communication and to wrap it up, every
communicator should aim at the following for a successful outing:

a. Ability to Maintain a Balanced Communication Flow: A good communicator is one

who is able to maintain a moderate and balanced flow of communication as too much and
inadequate flow adversely affects communication.
b. Ability to Manage Interference: The effectiveness of a communicator lies on his
capability in keeping under control, to the barest minimum, interferences like noise,
ridiculous gesticulations, inaudible presentation and so on which hamper communication
effectiveness.
c. Reality: A communicator could either be given a topic or asked to choose one. Once a
topic has been received, regardless of its source, it must be considered as very important.
The communicator therefore should ensure that it is ideal, realistic to the purpose of the
gathering and the target listeners or simple that the topic is authentic.
d. Sensitivity: Certain moves should be made by the communicator to demonstrate how
much he cares for the topic and audience. Such moves are being thorough in his search
for data and ensuring a complete design with a logical outline, in addition to being
responsive or sensitive to the purpose of the presentation.
e. Timing: A good communicator is one conscious of the timing of communication
message as it is only when message is sent at the right time that the desired result can be
obtained.
f. Ability to Select the Right Channel is Another Quality: A good communicator should
have the ability to select the might channel. Inappropriate channel selection brings about
obstacles in message delivery and comprehension.
g. Another quality is the ability of a communicator to articulate ideas and combine words in
the right order.

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9.3.4 BARRIERS OF COMMUNICATION

This can be defined as blockages that obstruct the flow of information. Many times, a well-
intended message does not achieve its purpose. This is because of several factors, which include
the speaker, the receiver and the environment in which the communication takes place. Some of
these barriers include:

Timing

On your part as the speaker, ineffective timing of the communicated message could be a barrier
to its being accepted. It is totally unacceptable to call a group of workers during the peak hour
(when they are feeling overworked and under severe pressure) and intimate them of
management‟s decision to cut wages. This can lead to a riot.

Channel Selection

Inappropriate channel selection could also lead to communication barrier. Some messages are
best related in a face–to-face situation while some are better written. It is left to the selector to
choose the appropriate one. For example, a reprimand given orally could have a more positive
effect than the one formally typed out like query. Also, a confidential thing is best expressed in a
face-to-face situation which is better than to write out formal reports or statistical analysis. A
wrong selection easily leads to obstacles.

Feedback

This is supposed to aid the progress and success of communication. The discerning speaker can
use feedback to adjust his message if it is not getting the desired effect or use it to intensify the
message if the effect it is producing is positive.

Geographic Distance

Distance between an organization‟s headquarters and its divisions could be a barrier if it is too
far. Messages can take a long time in reaching the divisions and when they do receive the
message, implementation may be late.

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Lack of Proper Consultation

If a person is affected by a decision, the person ought to have been consulted before such a
decision is made public. If this is not done, the intention could be misunderstood.

Personality and Ego Conflicts

These can lead to a block in communication because the parties would just be seeing their
personal differences instead of the message. The bias underneath would colour the message and
disport it. Of course, this generates misunderstanding.

Communication Load

If the flow of communication is too much, it can be a barrier to communication as there would be
overload which would lead to conflicting signals. Also, if the communication taking place in an
organization is too little, the organization cannot function properly. There are other barriers to
good communication that one can get from the speaker and the listener. On the part of the
speaker, these barriers tend to distract the attention of the listener and draw him away from the
substance of the communication to unimportant things. An example of these is noise, Ridiculous
gesticulations, too much loudness, inaudible presentation, inappropriate dressing. All this distract
one from communication.

9.3.5 CONCLUSION

Communication is the exchange of words between or among people in a way or manner that
produces understanding. You also learnt that communication can either be spoken or written.
Good and effective communication is not sustainable in a noisy environment and where the
sender and the receiver of message are relatively too far from each other.

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9.3.6 SUMMARY

Although what constitute good and poor communication factors may be dear, organizations
today are aware of the power of effective communication system in projecting the image of
their businesses. They are aware of the role communication plays as the activator of their
contacts especially as the world‟s business environment becomes globalized. Poor information
system sends danger signal to their business exploit while carefully organized system brings
about good interrelationship among organizations.

9.3.7 TUTOR-MARKED ASSIGNMENT

 Discuss five ways you can make yourself a good communicator.

 Enumerate and discuss the barriers to good communication.

9.3.8 REFERENCES/FURTHER READING

Bolaji and Alabi (1994). The Principles and Practice of Communication. Ilorin: Unilorin Press.
Deriedo, Charles and Mohammed, Sani (2004). Business Method Simplified. Bida: Blessed
Concepts Prints.
Diko, Koce Henry (2009). Introduction to Business. Lagos: NOUN.
Osasona and Orijearu (2003). Essentials of English for all Students, Administrative and Business
Forum. Kaduna: CABS.
Sybil, James et al (1998). Introduction to Communication for Business and Organizations.
Ibadan: Spectrum Books Limited.

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UNIT TEN

ENTREPRENEURSHIP AND THE BUSINESS ENTERPRISE

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Definitions of Entrepreneurship
3.2 Types of Entrepreneur
3.3 Functions of Entrepreneur
3.4 Characteristics of Entrepreneurs
3.5 Selecting a Business Enterprise
3.6 Differences between the Entrepreneur and the Manager
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings

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10 INTRODUCTION

Most young graduates of tertiary institutions look forward to the day they would start a career in
one of the established organizations in business or public service. If it ever crosses their mind,
they hope that someday when they retire, they might establish a business of their own. It was
possible to think in this manner up till the eighties because job opportunities existed in
multinational organizations and government establishments. The preoccupation of educational
institutions was the production of manpower capable of functioning in large organizations. The
Ethiopian Government, since the last two decades, is embarking on self-employment although it
was not new in practice. Currently, not only did employment opportunities in government and
large business corporations shrink, major reorganizations or restructuring of these organizations
left many people without employment. Unemployment of educated manpower became a visible
problem in the economy as graduates often had to wait for a long time before securing their first
jobs.

To tackle the unemployment problem, public policy focused on the development of small and
medium scale enterprises (SME) and entrepreneurship development. The goal was to stimulate
individuals to use their creative talents to spot market opportunities and establish businesses in
which they are their own bosses. Today, starting and owning one‟s own business is no longer
perceived as activities for those who are culturally, socially or educationally disadvantaged but
as at attractive route to success, wealth, independence and fame. Many professionals and
executives in business and government establishments are now taking early retirements and
staking their benefits and savings in business ventures.

10.1 OBJECTIVES
At the end of this unit, you should be able to:
 define entrepreneurship;
 list the types of entrepreneur;
 enumerate the functions of entrepreneur;
 describe the characteristics of entrepreneurs;
 describe how to select a business enterprise; and
 state the differences between the entrepreneur and the manager.

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10.2 MAIN CONTENTS

10.3 DEFINITIONS OF ENTREPRENEURSHIP

What is an entrepreneur? What is entrepreneurship?

There are many definitions of these concepts. According to one definition, an entrepreneur is an
agent (individual or collective) who champions a novel combination of productive resources as
the means of achieving an economic end. Another definition states that an entrepreneur is an
individual who perceives needs, conceives goods or services to satisfy the needs, organizes the
factors of production and creates and markets the products. Yet another definition states that
entrepreneurs are people who perceive profitable opportunities, are willing to take risks in
pursuing them and have the ability to organize the needed resources to start and operate a
business. These definitions indicate that entrepreneurs are single individuals or a group of people
who gather resources for the purpose of exploiting a market opportunity in order to make a profit
for themselves. It is not always that an entrepreneurial pursuit will result in profit. Sometimes
loss is incurred but the entrepreneur is willing to take the risk, bring his or her energy and talents
to bear on the business and work assiduously to earn a profit. Generally, entrepreneurs form new
enterprises. However, their creativity and innovativeness can be utilized to change the fortunes
of an existing enterprise.

The process of performing the roles of the entrepreneur is called entrepreneurship. This may
simply be defined as the willingness and ability of an individual (or a group of individuals) to
seek out investment opportunities, especially through innovation, establish and run the enterprise
successfully. Thus, entrepreneurship incorporates not only the process of enterprise creation but
also the process of managing it effectively.

It is not all those who become entrepreneurs that actually desired to do so from the outset. Some,
indeed the majority, become entrepreneurs because they failed to secure or to retain a
satisfactory regular employment. Others become entrepreneurs because they failed to make
significant progress in their careers. In effect, these people were pushed into entrepreneurship. A
large number of people however, become entrepreneurs out of an inner urge to do something
new, a burning desire to actualize an idea, a desire for autonomy or to be self-directed, a desire to

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earn higher income coupled with the prestige that comes with wealth. These are some of the
attractions which motivate certain people to engage in entrepreneurship in spite of the inherent
possibilities of failure.

10.4 TYPES OF ENTREPRENEURS

Broadly, there are two different types of entrepreneurs. It is possible to see these different types
in relation to the category of enterprise they operate.

Craftsmen Entrepreneur Opportunistic Entrepreneur

Self-employed Micro Enterprise Small-scale Medium-scale Large-scale

operator enterprise enterprise enterprise

The different types of enterprises can be arranged as shown above. At one extreme end are self-
employed people who earn some income by working for themselves. The capital they utilize is
very small and hence their scale of operation is small. They are usually engaged in activities such
as petty trade, repair services, food processing, tailoring and similar trades. They constitute the
bulk of the informal sector of the economy.

Next to this are entrepreneurs who operate micro enterprises. Micro enterprises are different
from the self-employment establishments because they utilize proportionately more capital, have
a fixed location, are generally registered with the appropriate authorities and may have some
paid nonfamily employees. After micro enterprises are small scale, medium scale and large scale
enterprises.

We can group entrepreneurs into two broad categories. These are craftsman entrepreneurs and
opportunistic entrepreneurs.

Craftsman entrepreneur: This type of entrepreneur generally establishes self-employment

establishments, micro enterprises and small-scale enterprises. They are technically oriented
following from a background of vocational training or technical education. Their job experience
is usually predominantly technical with little or no exposure to management and managerial
techniques. Their oral and written communication ability is limited. Craftsman entrepreneurs

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usually lack the ability or inclination to expand the enterprise beyond what they feel able to
control personally. Most craftsman entrepreneurs do not have long-term orientation regarding
their firms, and so, do not make adequate plans for continuity of the business.

Opportunistic entrepreneur: This refers to entrepreneurs who are willing and able to change the
mode of their operations in response to changes in their environment. That is, opportunistic
entrepreneurs can adapt their products, market niche, facilities, methods of operation to suit the
prevailing conditions in the external environment.

The opportunistic entrepreneur is characterized by a broadly-based formal education, varied

work experience which embraces technical and managerial functions and an orientation towards
management. He or she has adequate oral and written communication skills. This type of
entrepreneur is familiar with various management techniques which enable him or her to expand
the business enterprise and is able to plan for growth and continuity of the business.

A craftsman entrepreneur is unlikely to establish a large business but an opportunistic

entrepreneur can begin as a self-employed operator and gradually expand the business to become
large scale.

10.5 FUNCTIONS OF ENTREPRENEUR

Opportunistic entrepreneur: This refers to entrepreneurs who are willing and able to change the
mode of their operations in response to changes in their environment. That is, opportunistic
entrepreneurs can adapt their products, market niche, facilities, methods of operation to suit the
prevailing conditions in the external environment.

Entrepreneurs perform a variety of functions. The functions are:

(a) Perception of market opportunities (c) Managing the enterprise

Sourcing of resources (d) Risk bearing
(b) Launching the business enterprise (e) Innovation.

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Perception of market opportunities:

A business opportunity exists if individuals, households or organizations have needs which can
be satisfied with certain products or services at a price which the consumers or users are willing
to pay.

The primary function of the entrepreneur is to spot and evaluate such opportunities. The process
of identifying a market opportunity may be intuitive or through a systematic observation and
analysis of trends in the environment.

Sourcing of resources:

The resources needed to launch the business enterprise are long- term funds to purchase fixed
assets, working capital, key personnel, a suitable location and site, and information. The
responsibility of the entrepreneur is to assemble these resources and ensure their availability at
the appropriate time to implement the business idea. Sourcing resources requires that the
entrepreneur has high confidence with respect to the potential of his her business plans and is
able to ensure that this confidence, optimism and enthusiasm are shared by potential investors in
the business enterprise.

Launching the business-enterprise:

This includes various promotional activities such as choosing a business name, an

entrepreneurial team, registration of the business enterprise, obtaining various permits and
licenses; formulating a business plan and formally commencing trading activities.

Managing the enterprise:

This is one of the important functions of the entrepreneur. Managing the business begins with the
entrepreneur stating his or her idea of the primary reasons for the existence of the enterprise as
well as the products or services it will render. Managing the enterprise involves planning,
organizing, coordinating and controlling the production, staffing, financing, and selling activities
of the enterprise.

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Risk bearing: Having launched the business enterprise, there are bound to be unanticipated
events, crises, and difficulties arising from changes in the external environment. For example,
the demand for the product or services may be far less than anticipated; suppliers of raw
materials may raise their prices higher than expected; installation of production facilities may be
delayed; key personnel may decline risking their careers in the enterprise etc. While the
entrepreneur must persevere and continue to take measures to solve these problems, there is
always a risk of business failure and loss of the capital invested. The entrepreneur bears this risk.

Innovation: The success of the enterprise is determined by the extent to which it serves the
needs of its consumers better than other competitors. Innovation is the process by which the
entrepreneur evolves new and better products or services, develops new methods of production
which results in improved quality and lower costs, new methods of distributing or pricing the
products or service and new ways of presenting the products to consumers. Innovation may also
involve developing a new source by supplier of the raw materials or a new market for the
finished products. Innovation provides the enterprise with a competitive edge over competitors
and enables the enterprise to generate high profit for the owners of the enterprise.

SELF-ASSESSMENT EXERCISE 1

 Enumerate and discuss the functions of an entrepreneur.

10.6 CHARACTERISTICS OF ENTREPRENEURS

Entrepreneurs are not all alike. One entrepreneur is different from the other in many ways –
social background, education, life experiences, behaviour or idiosyncrasies. In spite--of these
differences, some personal qualities and behaviours can be identified which characterize
successful entrepreneurs.

The following characteristics are generally found among successful entrepreneurs:

(a) Drive and energy (physical and mental): This is the capacity to work for long, sometimes odd
hours, over a period of time.

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(b) Self-confidence: Entrepreneurs believe strongly in themselves and their ability to achieve
goals they have set for themselves. They also believe that it is they, rather than others,
who can shape their personal destinies.
(c) Long-term involvement: The involvement of entrepreneurs in business is a long term
commitment. They are not in business for quick money. They want to build a business
that will endure for a long time.
(a) Perseverance and persistent problem solving: Entrepreneurs are not intimidated by difficult
situations. At the same time, they are not foolhardy as they quickly recognize unsolvable
problems which they then abandon. They tackle difficult situations with determination
and zeal.
(b) Goal setting: Entrepreneurs are goal and action oriented. They are doers. They have clear,
measurable, challenging and attainable goals all the time. This enables them to set their,
priorities and to focus on their priority goals when roles conflict.
(c) Moderate risk taking: Entrepreneurs take moderate but challenging risks. They are aware of
their strengths and weaknesses and they take risks where they have reasonable chance of
success based on their knowledge, skills and experience.
(d) Dealing with failure: To entrepreneurs, failure in a specific venture or project is normal but a
learning opportunity. They recognize that serious setbacks and difficulties will come but
successful entrepreneurs convert them to opportunities rather than defeat.
(e) Use of feedback: As high achievers and in order to have a sense of personal achievement,
entrepreneurs want to know how well they are doing. They seek and use feedback so that
they can take corrective action where necessary.
(f) Initiative and personal responsibility: Entrepreneurs are independent and highly self-reliant.
They take personal responsibility for the success or failure of their business ventures.

Possession or acquisition of these characteristics is, of course, not a sufficient condition for
success in a business venture. In addition to having these characteristics, establishing and
running a business successfully requires total commitment of energy and time to the business,
possession, of appropriate knowledge, skill and experience relevant to the particular line of
business and ability to change or adapt to new competitive situations.

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10.7 SELECTING A BUSINESS ENTERPRISE

The entrepreneur may have more than one business idea and therefore needs to choose the one to
implement. Many business enterprises fail because the entrepreneur did not actually consider the
peculiar skills and other factors required to succeed in the line of business. Some factors to
consider in selecting a business venture are as follows:

(a) Personal capabilities: As mentioned above, there are certain core skills, knowledge and
experience that are required to succeed in a particular line of business. The entrepreneur
needs to determine these skills, knowledge and experience and ascertain that he or she
possesses them before selecting such line of business. In other words, the entrepreneur
should have a good knowledge of the business and as well have the personal
characteristics required to succeed in the business.

(b) Personal Interest: Establishing and running a business venture demands a great deal of the
time and energy of the entrepreneur. For the entrepreneur to sustain this devotion to the
enterprise, he or she should be able to derive satisfaction from the work he or she is
doing. The personal satisfaction derived from the work also enables him or her to
persevere in solving the myriad of problems encountered in the business.

(c) Support of the family: Just as the personal interest of the entrepreneur is important in
selecting a business venture, the interest and support of the family members of the
entrepreneur is equally important. Without the keen interest and support of family
member's, the interest of the entrepreneur will eventually be eroded. The willingness of
members of the family to make sacrifices especially at the initial stages of the formation
of the enterprise is critically important. Similarly, their willingness to share the
aspirations and frustrations of the entrepreneur helps substantially to lighten the burden
and to keep up the spirit of enterprise.

(d) Ability to raise the required capital: Every business venture requires a certain minimum
amount of capital to operate efficiently. The entrepreneur must be able to raise this sum
from various sources. In particular, they should be able to have a personal stake in the

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business by investing their personal savings or the savings of relations. This is because
having a personal stake encourages other investors to investors in the business.

(e) Size of-the market: This is of utmost importance. The entrepreneur must consider if a market
exists for the product or service and how large that market is. A market may exist for a
product or service but it may be too small for the scale of operation envisaged by the
entrepreneur. Hence the market must be large enough to yield a satisfactory profit for the
entrepreneur.

10.8 DIFFERENCES BETWEEN THE ENTREPRENEUR AND THE MANAGER

Compare the definitions and functions of the entrepreneur with those of the manager. Are there
differences? You will notice that in some business enterprises, the entrepreneur also performs the
functions of the manager. Similarly, managers in some large business organizations assume the
roles of the entrepreneur. Carefully examine the figure in the next page.

Combination of Entrepreneurial and Managerial Skills in the Business Enterprise

Craftsmen Entrepreneur Opportunistic Entrepreneur

Entrepreneur Managerial

Skills Skill

Self-employed Micro enterprise Small-scale Medium-scale Large-scale

Operator enterprise enterprise enterprise

The figure indicates that "one-man" businesses depend solely on the entrepreneurial skills of the
owner to succeed. Micro enterprises and small-scale enterprises depend substantially on
entrepreneurial skills but also require a significant dose of managerial skills to succeed. Medium
scale and large scale enterprises require proportionately more managerial skills than
entrepreneurial skills to perform well. Can you explain why the different types of enterprises
have different combinations of entrepreneurial and managerial skills?

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There are however significant differences between the entrepreneur and the manager in the
business enterprise.
(a) Both the entrepreneur and the manager make decisions but the most critical decisions in the
business enterprise are made by the entrepreneur. Issues that pertain to the survival of the
enterprise require the drive and bold moves of the entrepreneur while relatively routine
matters such as efficiency of operations are handled by managers. For example, decisions
regarding the goals of the enterprise or the acquisition of key resources are made by the
entrepreneur. Decisions made by the entrepreneur are usually bold and proactive compared to
those made by the manager.

(b) Time orientation: From the examples given above, it is clear that entrepreneur usually have
long term orientation regarding the business enterprise. Managers have shorter term concerns
such as annual, quarterly or monthly budget performances.

(c) Entrepreneurs take moderate risks: Managers on the other hand are risk averse. In an attempt
to avoid making mistakes and incur the loss of rewards associated with failure, managers
hardly take risks.

(d) The hallmark of entrepreneurs is creativity and innovation. They seek new and better ways of
doing things. Managers are hardly creative and are slow with regard to innovation. They
often desire stability and efficiency of operations rather than change.

(e) The incentives to entrepreneurs are independence (or autonomy), profit and capital gain.
They have no career path within the business organization along which to move. The major
incentives to the manager are executive rewards such as promotion, status and professional
excellence. Hence the existence of clear career paths in the business organization is
considered important by the manager.

(f) Managers are employees in the business enterprise. They occupy specific positions in the
organizational hierarchy. For example, they may be Production Managers, Sales Managers
etc. In the case of the entrepreneur, he or she is the ultimate employer. They usually occupy
the position of chairman/chief Executive in the business enterprise.

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10.9 CONCLUSION

There are different definitions of entrepreneurs just as there are different authors or experts.
However, these definitions indicate that entrepreneurs are single individuals or a group of people
who gather resources for the purpose of exploiting a market opportunity in order to make a profit
for themselves. It is not always that an entrepreneurial pursuit will result in profit. Sometimes
loss is incurred but the entrepreneur is willing to take the risk, bring his or her energy and talents
to bear on the business and work assiduously to earn a profit. Generally, entrepreneurs form new
enterprises. The process of performing the roles of the entrepreneur is called entrepreneurship.

Broadly speaking there are two types of entrepreneurs namely: craftsman and opportunistic. The
craftsman type of entrepreneur generally establishes self-employment establishments, micro
enterprises and small-scale enterprises. The opportunistic entrepreneurs are those willing and
able to change the mode of their operations in response to changes in their environment.

Entrepreneurs perform a variety of functions. The functions are:

o Perception of market opportunities o Managing the enterprise
Sourcing of resources o Risk bearing
o Launching the business enterprise o Innovation

The following characteristics are generally found among successful entrepreneurs:

(a) Drive and energy (physical and (e) Goal setting;

mental); (f) Moderate risk taking;
(b) Self confidence; (g) Dealing with failure;
(c) Long-term involvement; (h) Use of feedback;
(d) Perseverance and persistent problem (i) Initiative and personal responsibility.
solving;
Some factors to consider in selecting a business venture are as follows:
(a) Personal capabilities; (d) Ability to raise the required capital;
(b) Personal Interest; (e) Size of-the market.
(c) Support of the family;

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The differences between the entrepreneur and the manager in the business enterprise revolve
around the following:
(a) Both the entrepreneur and the manager make decisions but the most critical decisions in
the business enterprise are made by the entrepreneur;
(b) Time orientation;
(c) Entrepreneurs take moderate risks;
(d) The hallmark of entrepreneurs is creativity and innovation. Managers are hardly creative
and are slow with regard to innovation;
(e) The incentives to entrepreneurs are independence (or autonomy), profit and capital gain.
The major incentives to the manager are executive rewards such as promotion, status and
professional excellence;
(f) Managers are employees in the business enterprise. In the case of the entrepreneur, he or
she is the ultimate employer.

10.10 SUMMARY

In this unit, we have

 defined entrepreneurship;
 listed the types of entrepreneur;
 enumerated the functions of entrepreneur;
 described the characteristics of entrepreneurs;
 described how to select a business enterprise; and
 stated the differences between the entrepreneur and the manager.

10.11 TUTOR-MARKED ASSIGNMENT

 Why do you think entrepreneurship is important in a developing economy?

 List and explain five characteristics of successful entrepreneurs. Explain why these
characteristics are important.

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10.12 REFERENCES/FURTHER READING

Appleby, R. C. (1982). Modern Business Administration, 3rd Edition. London: Pitman Books
Limited.
Bantie Worke (2006). Introduction to Business. 3rd print, Addis Ababa: Alem Printing Press
Boone, Louis and Kurtz, David (2001). Contemporary Business, 9th Edition. New York: Dreden
Press.
Brown, Betty I. and Clon, John E. (1997). Introduction to Business: Our Business and Economic
World. New York: McGraw Hill Inc.
Inegbenebor, A. U. and Osaze, Esosa Bob (Ed.) (1999). Introduction to Business: A Functional
Approach. Lagos: Malthouse Press Limited.
Mathew J. (2006) Business Organizations (2nd ed.), Sheel Sons, New Delhi.
Mescon, Michael H., Bovee, Courtland L., and Thill, John V. (2002). Business Today. Upper
Saddle River, New Jersey: Prentice Hall.

Miller, Roger LeRoy and Farese Lois Schneider (1992). Understanding Business: A World of
Opportunities. New York: West Publishing Company.
Yolokwu P. O. (1999) Management: Concepts and Techniques, Peak Publishers

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UNIT ELEVEN

BUSINESS SOCIAL RESPONSIBILITY

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Definition of Corporate Social Responsibility
3.2 Illustrations of Socially Responsible Behaviour of Business Enterprise
3.3 Specific Social Responsible Activities
3.4 Social Audit
3.5 The Pressure Groups
3.6 Externalities
3.7 Dealing with Social Costs
3.8 The Future of Social Responsibility
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings

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11 INTRODUCTION

Probably no question has received more attention by business, governments, politicians and
people in general in the past few years than the question of what social responsibility of business
is. The same question, originally aimed at business, is now being addressed with increasing
frequency to government agencies and their leaders, non-profit and charitable organizations and
even churches

Various kinds of organizations have different missions that have been entrusted to them by
society. The mission of business is the production and distribution of goods and services. The
mission of a police department is protection of the safety and welfare of the people. We should
not hold business managers, for example, responsible for solving all manner of social problems,
any more than we should expect those responsible for a church to produce and distribute
economic goods.

There can hardly be any sense in making the job of business one of providing public school
education that government is ordinarily expected to provide. But business, like any other type of
organized enterprise, must interact with and live within, its environment. To live within an
environment is to take into account in our every action those elements of our surroundings which
are important to us and to others. Managers know that they may interact with, and live within, an
existing environment. This means that they must take into account every element in their
surroundings that is important to their success and important to other who may be affected by the
action taken. This is what they must do, since the survival of their enterprises depends upon
successful interaction with the critical elements of their environment.

But to live within an environment and be responsive to it does not mean that managers should
merely assume a reactive posture in the face of stress. There is a positive aspect as well, that is,
to pro-act. To respond require us to know what aspects-in our total environment have or will
have a significant influence on our operations. Since any enterprise cannot be expected to react
very quickly to unforeseen developments, it must practice way of anticipating them through
forecasts. An alert company, for example, does not wait until its product is obsolete and sales
have fallen off before coming out with a new or improved product. No enterprise should wait for

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problems to develop as a result of environmental forces before preparing to face them. Managers
of business enterprises may not voluntarily respond to protect or improve the environment in
which they operate. For example, business enterprises may, if left alone discharge their waste
product in such a way that pollutes the environment (Eg. Factories at Akaki, Cement factories,
small scale industries in the towns).

Society may therefore need to enact legislation to enforce proper discharge of waste from
business enterprises. However, many managers in business and elsewhere have found it to their
advantage to do something about pressing social problems (Eg. Dashen Beer). Many businesses
have profited by recycling their waste. Some companies and individuals have made a profit by
building low-cost apartments in areas surrounding universities in order to reduce accommodation
problems for faculty and students. All of these are voluntary actions.

Society however, through legislation, stipulates the minimum standard in certain critical areas,
that all organizations are expected to attain. Legislation forces business enterprises to adopt a
minimum acceptable standard of behaviour in relation to society.

11.1 OBJECTIVES

At the end of this unit, you should be able to:

 define and explain the concept corporate social responsibility;
 illustrate socially responsible behaviour of business enterprise;
 enumerate specific social responsible activities;
 define and discuss social audit;
 discuss the pressure groups;
 define and explain the concept externalities;
 describe how to deal with social costs;
 discuss the future of social responsibility.

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11.2 MAIN CONTENT

11.3 DEFINITION OF CORPORATE SOCIAL RESPONSIBILITY

The question to be answered with respect to corporate social responsibility is: What exactly are
corporate social responsibilities and how far do they extend? Raymond Bauer defines corporate
social responsibility as business seriously considering the impact of the company's actions on
society. This definition is quite broad, but it does provide us with a frame of reference which
suggests that business responsibility to the society within which it exists goes beyond simply
assuming the profit-maximizing, producing role. The weakness of this general definition is that it
does not pin down what the term means, operationally, for management.

Keith Davis and Robert Blomstrom define social responsibility as follows: Social responsibility
is the obligation of decision-makers to take actions which protect and improve the welfare of
society as a whole along with their own interest. The definition is somewhat more pointed in that
it addresses two key parts of parts of social responsibility: protect and improve. To protect
implies creating some positive benefits for society. One other definition that will be set forth is
that of McGuire, Joseph. McGuire asserts: The idea of social responsibilities presupposes that
the corporation has not only economic and legal obligations, but also certain responsibilities to
society which extend beyond this obligations. The attractiveness of this definition is that it
acknowledges the primacy to economic objectives and the importance of legal obligations but
also encompasses a view which more broadly conceives the firm's responsibilities.

Voluntary social action can be viewed at four levels: The first level is conformity to legal
requirements in fulfilling the economic function of the business. A profit-maximizing manager
would probably follow this course. The second level is going beyond legal requirements to meet
public expectations of social responsibility, a position the trusteeship manager might take. The
third level is anticipating new social demands and preparing in advance to meet them, a position
the "quality of life" people-oriented manager would take. The fourth level is serving as a leader
in setting new standards of business social performance.

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These four levels are illustrated below in the level of Corporate Social Responsibility.

1. Obeying the law

2. Meeting recognized public expectations
3. Anticipating new social demand
4. Leading the way.

SELF-ASSESSMENT EXERCISE 1

 What do you understand by „business social responsibility‟?

11.4 ILLUSTRATIONS OF SOCIALLY RESPONSIBLE BEHAVIOUR OF BUSINESS

ENTERPRISES

We have said that the concept of social responsibility spans through many sectors of the
economy. Although the various enterprises within the sector have different missions, they still
have to be socially responsible in order to survive. A cursory illustration of social responsibility
activities in the following sectors will assist in understanding the concept better.

11.4.1 Mining sector

Prospecting for oil in any area normally has associated environmental problems or consequences.
Oil production leads to environmental pollution and destruction of landscape. It leads to
permanent despoliation of land, the risk of air and water pollution, destruction of fish ponds and
other aquatic animals, landslides and in any other ecological problem like oil spillage. Therefore,
a company (oil producing company), will be socially responsible – through a continued policy of
adequate compensation to individuals whose property are destroyed and to the oil producing
areas for the destruction of their physical environment. To the extent that it pays adequate
compensation, the company will have obeyed the law. It may also seek to meet public
expectations by providing pipe-borne water, all season roads, schools, health facilities and most
importantly, resettlement in other safe areas. It is advisable that the oil producing companies
anticipate these needs and provide for them adequately before they are forced to do so.

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11.4.2 Manufacturing sector

The austere times, courtesy of the structural adjustment programme, have aided, directly and / or
indirectly, the production and marketing of sub-standard goods. Such goods or products are
normally unsafe for consumption. Again, some companies are unable to produce to the legal
specification and requirements as set out by the Quality Control Authority of Ethiopia.
Therefore, a company will be socially responsible by producing and marketing standard,
provision of adequate/safe work environments for its employees, provision of appropriate tools
like protective clothing for its employees, and most importantly, acting in anticipation, to the
dictates and expectations of the environment in which it is operating.

11.4.3 Service sector

Those rendering personal services, that is, professionals like Accountants, Architects, Lawyers,
Doctors and so on will be socially responsible through honest dealings with their clients. This
they can do by avoiding technicalities which might confuse their clients. They must be properly
guided by the ethics of their professions in the course of their dealing with clients.

11.5 SPECIFIC SOCIALLY RESPONSIBLE ACTIVITIES

Thus far, we have attempted to establish that social responsibility is difficult to define precisely.
It implies an obligation or debt.

Question: In the case of business, to whom is the obligation due? Certainly, business has
obligations to the government and its customers. Does it also owe a debt to the general public? Is
there an obligation to future generations to preserve and maintain the institutions which make
business possible? Here we must move beyond strict legal obligations into the realm of morals
and values. The business social responsibilities under reference are not legal debts; they are self-
imposed obligations which business people must accept if they are to preserve the structure
which makes possible their own way of life.

Since what is "responsibility" depends on one's value system, we have attempted below to
identify and classify some activities of businesses that reflect their responsibilities.

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1. To the customers:

Such activities may be classified into product line and marketing practices. Here, the marketing
concept must dominate. This concept requires that responsiveness to customer needs is
paramount. Whether it is through increased investment in research and development (R and D) to
produce high quality and safe products, ensuring truth in advertising, or providing adequate
replacement for warn-out parts, the corporation must ensure that it balances its profit motive with
consumer concern.

2. To the public at large:

The business derives its existence from the public. Through incorporation the public gives
business the right to exist. Hence business must conduct its affairs with Minimal disruption of
the environment or the traditions of the people. This is particularly significant where the given
business enterprise is an international or foreign one. In this regard, business assumes activities
including:

- The preservation of basic institutions as a good corporate entity, i.e. respect the customs and
traditions, the freedom to engage in contractual relations, and to avoid conduct detrimental to
the integrity of Ethiopia as a nation;
- contributing to increased standard of living and enhancing the quality of life of members of the
larger society engaging in beneficial ventures;
- preservation of resources by ensuring efficient use of the nation's resources which often can be
depleted: e.g. petroleum;
- economic activities must be pursued by continuously striving for efficiency.

Sub-optimal use of factory capacity and increasing high production costs and layoffs do not
enhance business image or help the community development through voluntary sponsorship of
recreational public;

- beautification of the community, providing scholarships for students, and facilities endowing
chairs in institutions of higher learning. No law forces business to contribute to education, or

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provide clinics and build roads. However, to assume these responsibilities enlarges corporate
good image and social good.

3. Responsibilities to the business owners

Except where there is sole proprietorship, every business, whether a partnership, or corporation,
has a responsibility to protect the interest of those who have invested their money and given
authority to manage. The primary responsibility of management here is to ensure adequate return
on investment, and protect the corporate assets, and as much as possible, reduce liabilities. By
encouraging investment of profit for corporate expansion, prospects are brightened for the
stockholder whose Birr value per stock is guaranteed to appreciate. Beyond this is the
desirability of providing adequate communication with stockholders through annual general
meetings.

4. Responsibility to government

Corporations and any other form of business are products of the law. Hence, the basic
responsibility is to obey the laws of the land and operate within the ambit of the Companies
(what is set in the income tax proclamation of Ethiopia). One other most observable
responsibility in this situation is for business to provide the financial support needed to maintain
governmental system, by paying taxes promptly, and generally ensuring that the environment of
business is not soured by incessant conflict between Government and business. As a corporate
citizen, the business should deem itself committed to the destiny and future of the country where
it operates, irrespective of whether it is foreign or domestic.

5. Responsibilities to employees

The law has provision for labour-management relations; and while the law cannot legislate what
are "good" jobs or "bad" jobs, perhaps the first task for business managers when making policy is
to attempt seriously and with a great amount of honesty to take into consideration the effects of
their policies upon the lives of the workers.

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Business firms engage in numerous activities intended to meet the need of their employees.
Some restrict their activities to providing safe working conditions and competitive pay while
others provide a wide range of employee-related services. Responsiveness to workers' needs may
show in the following ways:

- Provision of wages appropriate for the job, but which should go beyond meeting bare
necessities. Thus, wage policies should aim to make life as full as possible for the worker.
- Providing paid vacations or granting leave allowances.
- Ensuring that employees derive job satisfaction. With increasing emphasis on machine and the
computer, the worker is becoming less significant. Making the most of a worker's abilities, by
giving him or her satisfying jobs is perhaps the greatest future responsibility of business, and
one of the most difficult.
- Miscellaneous responsibilities include unemployment benefits, hazard allowance, provision of
clinics and recreational and nursery facilities to employees.

6. Political responsibilities of business

It is not unanimous that business operators should be involved in politics, in the belief that
politics should be left to professional politicians. However, management theories, and experience
from practice indicate that business leadership" and political leadership are often related. Apart
from the fact that business leadership should be conversant with the political/legal environment
of business to prosper, it is in their self-interest to help in the formulation of legal and economic
policies as these affect business. This participation in politics should be at all levels of
government: local; state and national. But participation must not be disruptive: the involvement
in politics must be responsible. Recent developments in Ethiopia testify to certain level of
arrogance and defiance of the law on the part of some large businesses.

11.5.1 Arguments for Social Responsibility

Advocate of corporate social responsibility generally agree that:

(a) industrial society faces serious human and social problems brought about largely by the rise
of large corporation, and

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(b) managers must conduct the affairs of the corporation in ways to solve or at least ameliorate
these problems.

On the basis of these assumptions, they argue that it is in the long-run self-interest of business to
be socially-responsible. This long-run self-interest view essentially holds that if business is to
have a healthy climate in which to exist in the future, it must take actions that will ensure its long
term viability. It is also argued that failure to take voluntary action to solve or ameliorate the
human and social problems generated by business will force government to intervene on behalf
of society and regulate the offending business activities. A third reason for advocating corporate
social responsibility is that business has the resources to solve some of the social problems that it
generates. Not only does business have the managerial know-how, and technology, it also has the
financial resources to fight environmental pollution, produce safe products, engage in fair
advertising etc.

Through involvement in social responsibility, the company is able to build and maintain its
corporate image and ensure its long-run survival. Generally, the firm that demonstrates a good
sense of social responsibility earns the respect and loyalty of customers, employees,
shareholders, suppliers, and the community in which it does business. As such it gains
government recognition, a merit award and generally improves its relations with government.

One final point is that "pro-acting is better than reacting". This position holds that if business
pro-acts - anticipates and initiates, then this is a preferable and less costly posture than simply
reacting to problems as they arise.

11.5.2 Argument against Social Responsibility

On the other hand, there are those who are strongly opposed to the idea of corporate social
responsibility. Milton Friedman, for example, argued that business only has one responsibility: to
maximize profit for owners; and that social matters are not the immediate concern of business
people. A second major objection to social responsibility is that business is not equipped to
handle social problems. This position holds that managers of business enterprises do not have the
necessary expertise, - social skills, - to make social decisions.

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Other reasons against the concept include: Involvement in social responsibility activities will
dilute business primary purpose.
- It will reduce the level of profit.
- The cost of social responsibility activities will lead to high production cost that will result in
high product prices. That is, the final consumer bears the ultimate burden.
- Business already has enough power-economic, technological and environmental. Why should
we place into business hands the opportunity to wield additional power?
- That business will be at a disadvantaged position in its international balance of payments
calculation, since added cost of product will make these companies increase prices and
thus become less competitive in international markets.
- That government intervention to compel organizations to embark on socially responsible
activities, will lead to corporate protectionism, withdrawal, breach of contracts, and
resultant litigations.

11.6 SOCIAL AUDIT

In order to show how the organization is fulfilling its social responsibilities, management can
make use of social audit. A social audit is an going evaluation of performance measured against
established goals in selected areas of social measurement Social audit has been defined as: a
commitment to systematic assessment of and reporting on, some meaningful, definable domain
of the company activities that have social impact.

There are several problems in implementing audit. It is rather difficult to determine what areas
the social audit should encompass. Often the items include pollution and the hiring, training, and
promotion of disadvantaged groups including women but there are more areas.

Another difficulty is to determine how social performance should be measured. One way is to
determine the amount of money an enterprise spends in selected areas. But cost alone is an
inadequate measure. It does not necessarily indicate the results of social involvement. Other
problems are the collection of the data and their presentation in a way that accurate reflects the
social involvement of an enterprise. There is no doubt that many companies and other
organizations honestly attempt to address themselves to this challenge. Indeed, social benefits are

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nearly impossible to measure. A case in point is the benefit to society from pollution control.
Although it is possible to measure the reduction in the amount of pollutants in the air, their
reduction cannot be quantified in monetary terms.

11.7 THE PRESSURE GROUPS

As a result of the activities of various pressure groups, such as consumer protection groups,
environmentalists, and various interest groups, many businesses have altered their views
regarding their social responsibilities, and this change has paralleled and partly reflected the
changing expectations and priorities of society at large about the social functions of business
enterprises. The idea underlying corporate social responsibility is the recognition that the
activities of business enterprises have social implications which are both internal and external to
individual enterprises. First, the enterprise may accept a responsibility for improving the social
effectiveness of its internal processes, and this may be defined as its internal social
responsibility. Included in this area of social responsibility would be the problems associated
with the management of the human organization: such as employee selection, training,
promotion and reward, as well as employee participation in decision making as a means of
providing a more cohesive framework of relationships within the firm.

It also includes the provision of good physical working conditions, and the efficient use of
physical resources from a social viewpoint. Second, the enterprise may accept responsibility for
the effects of its activities on stakeholders who are external to the firm. The debate about
corporate social responsibility has been focused on the external effects of corporate activities,
and these are often referred to as externalities.

11.8 EXTERNALITIES

Externalities occur whenever a firm's activities have a positive or negative effect on society.
Thus, a social benefit is an external benefit which society, rather than the owners of the firm,
enjoys. A social cost is an external cost which society must bear, rather than the owners of the
firm. Consider, for example, a firm which manufactures detergents. The firm's costs are related
to the production and sale of detergent. The firm's benefits stem from the revenues derived from
the sale of detergent to customers. The production of detergent results in the discharge of

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effluent, and dealing with the presence of this effluent either in rivers or in sewage systems is a
burden which usually falls on the local community. Hence, the costs associated with the disposal
of effluent need not be taken into account by the firm in deciding whether or not to produce
detergents or in assessing the profitability of this activity.

Public concern has tended to focus on the external social costs of enterprise activity, rather than
on the external social benefits. The most obvious social benefit is the provision of employment.
Much of the debate about the social costs is addressed to two questions:
(a) how to control and reduce the undesirable by-products and effects of enterprise activity;
(b) how to calculate the financial costs involved with a view to determining the responsibility
for these costs.

Ideally, social costs should be identified and incorporated into the total enterprise costs of
production. By bringing such costs to the knowledge of management, the information relevant to
enterprise decisions is broadened to include financial and social costs.

11.9 DEALING WITH SOCIAL COSTS

Social costs, as well as social benefits, are a function of Society's perception of what is bad and
good about business activity. There are different degrees of social costs. Some are insignificant
but others are perceived to be significant as to attract the response of government. This may take
three forms:

(a) Legislation which out-law undesirable social activities.

(b) Licensing systems may be employed to limit the extent of activities which are useful to
society, but present a potential social problem. For example, licensing of vehicles makes
it to ensure that vehicles that are not road worthy are kept off the roads.

(i) Taxation can be used to discourage business enterprises from engaging in certain activities
that are considered to have social costs.

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11.10 THE FUTURE OF SOCIAL RESPONSIBILITY

One anticipates that issues concerning social responsibility will continue to be important to
managers for some time in the future. Society is becoming more complex, and social problems
are increasing. Business organizations are major institutions in society. As such, they are likely
to be concerned with social responsibility at two levels. First, should organization take actions
that will have undesirable outcomes? Organizations will probably have little choice. If they are
not responsive to "public" needs, they will be faced with social protests, and additional
government regulation.

At the second level, should organizations develop programmes to take care of social ill? The
answer to this question depends on the values of managers in an organization. Some
organizations, acting on their enlightened self-interest or social concern, will be involved in such
programmes. Large organizations, like the multinational corporations, are highly visible and
have a substantial impact on society: and they are the most likely to initiate this type of action.
One expects however, that government will retain primary responsibility for curing social ills.

Consumer activism will definitely be on the increase since consumers are becoming better
educated, and as such are more aware of their rights. Thus, the organizations of the future must
adapt to change and of necessity, become more consumer-oriented, or face more government
intervention.

As business management becomes more professionalized, and there is a separation of ownership

and management in modern business, there will be more interest in corporate social
responsibility.

The modern professional manager is trained to examine business problems in the widest possible
context, and to show concern for both long-range and short-range effects of business policy.
Although short-range gains cannot be ignored, the long range effect of policy carries more
weight with the modern professional manager than it did with his or her predecessor who owned
the firm. Because of the importance attached to long-range policy, the Ethiopian business is
today better led, and hence, in a better position to accept and carry out its social responsibility
expectations than it was in the past.

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11.11 CONCLUSION

Managers of business enterprises may not voluntarily respond to protect or improve the
environment in which they operate. For example, business enterprises may, if left alone
discharge their waste product in such a way that pollutes the environment. To that extent, society
may need to enact legislation to enforce proper discharge of waste from business enterprises.

11.12 SUMMARY

In this unit, we have,

 defined and explained the concept corporate social responsibility;
 illustrated socially responsible behaviour of business enterprise;
 enumerated specific social responsible activities;
 defined and discussed social audit;
 discussed the pressure groups;
 defined and explained the concept externalities;
 described how to deal with social costs;
 discussed the future of social responsibility.

11.13 TUTOR-MARKED ASSIGNMENT

1. Assess the future of business social responsibility in Ethiopia.

2. What are the arguments for and against business social responsibility?

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11.14 REFERENCES/FURTHER READING

Appleby, R. C. (1982). Modern Business Administration, 3rd Edition. London: Pitman Books
Limited.
Boone, Louis and Kurtz, David (2001). Contemporary Business, 9th Edition. New York: Dreden
Press.
Brown, Betty I. and Clon, John E. (1997). Introduction to Business: Our Business and Economic
World. New York: McGraw Hill Inc.
Inegbenebor, A. U. and Osaze, Esosa Bob (Ed.) (1999). Introduction to Business: A Functional
Approach. Lagos: Malthouse Press Limited.
Mescon, Michael H., Bovee, Courtland L., and Thill, John V. (2002). Business Today. Upper
Saddle River, New Jersey: Prentice Hall.
Miller, Roger LeRoy and Farese Lois Schneider (1992). Understanding Business: A World of
Opportunities. New York: West Publishing Company.

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UNIT TWELVE

BUSINESS ETHICS

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Definition of the Concept Ethics
3.2 Ethical and Unethical Behaviour
3.3 Determinants of Ethics
3.4 Ethics in the Workplace
3.5 Fundamental Principles of Ethics/Managerial Ethics
3.6 Managerial Ethics
3.7 Code of Ethics
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings

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12 INTRODUCTION

In this unit, we shall examine business ethics. It discusses what constitutes ethical and unethical
conduct in business. It also examines ethical concerns and the moral duties of business firms,
their owners and managers.

12.1 OBJECTIVES

At the end of this unit, you should be able to:

define and explain the concept of ethics;
explain how various factors play a role in shaping our ethical standards;
state the importance of ethical standards in business;
explain the role of codes of ethics in business and in the professions;
apply the principles of ethics in dealing with complex business problems involving
conflicting interests.

12.2 MAIN CONTENT

12.3 Ethics

What is ethics?

According to Chamber's Twentieth Century Dictionary, the word ethics refers to “the science of
morals, that branch of philosophy which is concerned with human character and conduct: a
system of morals, rules of behaviour: a treatise on morals". In a more formal sense, the term has
been defined in the following ways: ethics is "in philosophy, the study and evaluation of human
conduct in the light of moral principles which may be viewed as the individual's standard of
conduct or as a body of social obligations and duties".

Crompton's Interactive Encyclopedia says that "Ethics is primarily concerned with attempting to
define what is good for the individual and for society. It also tries to establish the nature of

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obligations, or duties that people owe themselves and each other". In Griffin's view, ethics refer
to "an, individual's personal beliefs about what is right and wrong or good and bad".
John B. Miner defines ethics as “concepts of right and wrong that stem from the values and
expectations of society; or they may derive from some major sectors of society”. We can infer
from these definitions that ethics relate to our concept of what behaviour is right or wrong and
what behaviour is good or bad. Some of the definitions cited above suggest that our concept of
what is right or wrong depends upon the standards of behaviour of the society in which we
operate. Those standards define for us our obligations and duties.

Since the values and expectations, of society define for us what is wrong or right, it is expected
that within a given society, there will be agreement on what behaviour is right and what behavior
is wrong. Unfortunately, this may not always be the case. There may be situations in which
people differ in terms of what they consider to be wrong or right behaviour. For example, some
people believe that it is perfectly in order for a seller to seek to sell at the highest possible price
he can get. Others think that to do so is to profiteer, which they consider to be bad or unethical.
Nevertheless, it will be correct to say that, generally speaking, there is agreement within a
society on what is bad or unethical behaviour.

Furthermore, two or more people may agree that a particular kind of behaviour is wrong. But
they may not both accept to refrain from that bad behaviour. Consider the following situation.
Alex and Ahmed may both believe that it is unethical for anyone to take what does not belong to
him without permission. Suppose further that both of them go to the bank to make cash
withdrawals from their accounts. If each of them is overpaid by say Br.10,000. 00 by the cashier,
would they return the money? It is quite possible that one will and that the other will not. The
point is that both of them may or may not respond in the same way. This possibility of
individuals behaving differently where matters of ethics are concerned is underscored by
Griffin's controversial definition which states pointedly that ethics is an individual affair. In spite
of this, we should always bear in mind that in the final analysis, it is the society and not the
individual who defines whether an act is ethical or unethical.

Ultimately, according to Elegido, the concern of ethics "is to determine how to behave in order
to ensure that our life is flourishing, successful, worth living, fulfilling".

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In summing up the meaning of ethics, it should be noted that the question as to whether a given
behavior is ethical or unethical is a societal affair. But the decision to engage in, or to refrain
from a given behaviour which society considers unethical is usually left to the individual.
However, unethical behaviour may attract scorn or other kinds of sanctions from other members
of society.

SELF-ASSESSMENT EXERCISE 1

 What do you understand by „ethics‟?

12.4 ETHICAL AND UNETHICAL BEHAVIOUR

Now, we know that ethics are concerned with the society's concept of what is wrong and what is
right. We are, therefore, in a position to consider what ethical or unethical behaviour is. Ethical
behaviour is some action or conduct which conforms to the generally accepted norms of society.
It is behaviour which accords with society's established standards of behaviour and society's
expectations. Unethical behaviour is the opposite; it refers to behaviour that violates or that does
not conform to the generally accepted standards of behaviour or expectations of society.

Two important observations need to be made at this point. First, it makes sense to talk only of
ethical and unethical behaviour. It does not make sense to talk about an ethical or an unethical
person. This is so because some aspects of any particular person's behaviour may be ethical
while others may not be. In other words, there is no one whose every behaviour is wholly ethical
or unethical.

The second observation is that ethical standards will, tend to differ from person to person and
from one society to another as a result of cultural differences. In Ethiopia of today, lobbying to
get a job which one does not otherwise merit or for which one is not even qualified has become
normal behaviour - that is, behaviour that is not considered unethical. In some other societies,
such acts would be unethical. As noted earlier, even within the same society, it is sometimes
difficult to have general agreement on what constitutes unethical behaviour. In the final analysis,

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every person must draw his own line to separate what he considers ethical from what he
considers unethical behaviour.

12.5 DETERMINANTS OF ETHICS

We have already noted that ethics or the concept of what is wrong and what is right tends to vary
from one culture to another. Furthermore, some individuals have high ethical and moral
standards while others have very low ethical and societal variations in ethical standards? In other
words, what factors shape our ethics? At least seven broad sets of factors or forces play a role in
the formation of our ethics. These are family influences, peer influences, personal experiences,
values, institutional or organizational affiliations, law, and situational factors.

12.5.1 Family influences

The family in which we are brought up plays a major role in moulding us, especially in our early
years as children and teenagers. Our parents instill their own values and ethical standards in us in
various ways. They encourage iron engage in only certain kinds of behaviour. They also dissuade
us specifically front behaving in certain ways. In addition, they teach us and preach to us on a
variety of issues.

Children are told things like:

"Good children do not take what does not belong to them".
"Do unto others as you would want them do unto you."
"Do not tell lies."
"Do not betray your friends".
"Don't take undue advantage of people".
"It is nice to help people in need, especially friends".

Precepts such as these go a long way in influencing the future ethical standards of many children.
Therefore, the ethical standards of our parents sometimes get passed on to us either in whole or
in part. Even more importantly, many children follow the examples set consciously or
unconsciously by their parents.

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12.5.2 Peer influences

One's peer group consists of one's equals. Such peers are usually one's school mates, play mates,
work mates and friends. There can be no doubt that we are influenced in a variety of ways by
these and other similar groups. Invariably, people who end up as thieves, drug peddlers, drug
addicts and who engage in other forms of questionable behaviours were introduced into such
illegal and unethical life styles or encouraged by friends. In the same manner, whether an
individual‟s ethical standards are high or low will be determined largely by the norms of his peer
groups. This is, perhaps, one reason why many parents take a keen interest in determining who
their children befriend.

12.5.3 Personal experiences

One major lesson which we have learned from psychology is that the individual's experiences
especially in are early life play a key role in shaping his personality. We adjust our behaviours in
the light of past experience. An experience that is rewarding tends to be repeated and reinforced.
An experience whose consequences are unpleasant will tend to be avoided. In the course of
moving through life, our experiences shape our lives in very profound ways. The philanthropic
bent of some rich people in our society today is the result of their earlier experiences involving
various forms of deprivation. Some people have become deeply religious because of some
critical experiences they have had in life. In a sense, the sum total of our past is to be found in
our ethical standards.

12.5.4 Values

According to Schiffman and Kanuk, values are "accumulated feelings and priorities that
individuals have about 'things'. A society‟s values are by nature relatively few in numbers,
widely accepted by members of the society and enduring or difficult to change. In addition, they
serve as guide for "culturally appropriate behaviour.

A person's values help in the formation of his ethical standards. Usually, the ethical standards to
which a person subscribes must be such as to permit and indeed promote the attainment of those
things which he values. Take for example, the case of individuals who place a lot of premium on

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money and the acquisition of material wealth. As the saying goes, "no person becomes rich
without putting a hole in another person's pocket". The Inordinate pursuit of money may lead a
trader to pass off used "second hand" goods for new ones, to sell cheap imitation at the prices of
higher quality versions or to engage in "hard selling" which means pressurizing people to buy
things which they do not need.

Take other examples. Why do some teachers force students to buy their handouts or text books
or accept bribes to pass students? Why would some pastors ask for money in order to pray for a
person in difficulty? Why do some medical doctors ask for and receive side-payments from their
patients as a condition for performing surgical operations? The answer is that, to them, money is
a much higher ideal than service. On the other hand, those who believe that there is more to life
than making money may shun these and other questionable ways of acquiring wealth. Thus, in
the final analysis, our values play a role in shaping our ethical standards.

12.5.5 Institutional or organizational affiliations:

It is common knowledge that various organizations play a role in shaping our personality,
attitudes and behaviours. They also have an influence on our ethical standards. Examples of such
organizations would be the schools we attended, professional/trade associations, ethnic-based
organizations, social clubs, the organizations for which we work and the religious organizations
we belong to.

There are at least three major ways in which such organizations influence our ethical standards.
First, each of them subscribes to a set of ethical standards. These standards may or may not be
codified. Either way, the individual is expected to adopt the set of standards. Many indeed
uphold the standards even when they cease to be members of the organization. Second, each
member's experiences within the organization play a role in defining, redefining or reinforcing
his ethical standards. Finally, some members may choose their role models from organizations of
which they are members. They may imitate such role models in their attitudes, behaviours and
ethical standards.

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12.5.6 The law

Every society is governed by a body of laws. Laws constrain our behaviour by defining the
boundaries within which our behaviour must fall. They forbid us to infringe on the rights of
others. Laws require us to engage in, or to refrain from certain behaviours. Infringement on the
law is punishable in courts of law. Through the enactment and enforcement of laws, society
requires (rather than merely expect) us to behave in particular ways under certain situations.
Clearly, a society chooses which ethics to elevate to the status of law. Laws affect our ethical
standards by forcing certain standards of behaviour on us.

12.5.7 Situational factors

The particular circumstance surrounding an individual at a particular point in time could make
him engage in behaviours that he would otherwise not contemplate. The frequent occurrence of
such situations or even a single occurrence could alter the individual‟s ethical standards. We
know of many social critics in Ethiopia who have committed a volte face or abandoned their
causes either as a result of physical threats to their lives or as a result of appointment to certain
„lucrative‟ positions. In some cases, some have been tempted with huge sums of money,
otherwise generally referred to in popular parlance as “settlement”. It may be argued that
tempting or trying situations do not force people to redefine their ethical standards. Rather, such
situations are a real test of established ethical standards. This may well be the case for some
people. For many, they really redefine their ethical standards in the light of so-called realities of
the new situation.

12.6 ETHICS IN THE WORKPLACE

We shall discuss the question of ethics in the work place under two headings: ethics amongst
workers (non-managers) and managerial ethics. Ethics in the workplace are concerned with the
wrongness and rightness of employee behaviour both in the workplace and in relation to his
work. The ethical standards exhibited by employees at work are important in various ways. Low
standards might mean that workers can engage in behaviours which have negative consequences
for themselves and their peers. They, could demoralize other employees or be imitated by them.

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Such behaviours could attract reproach and reprimand from management. In the final analysis,
the company could suffer in various ways – financially, economically and 'reputationally'.

For example, consider the impact of the following attitudes and behaviours on the part of
employees:
 pilfering in the workplace;
 falsification of overtime records for selfish personal gains;
 abuse of corporate time or working hours;
 systematic soldiering on the job, that is, a deliberate cut-back on output by the individual
worker;
 divulging official secrets to outsiders;
 submission of fake sick reports;
 deliberately withholding vital information from other workers and thereby occasioning
avoidable costs for the company;
 lying against other staff; and
 persistent lateness to work.

The above list of work situations involving ethics is by no means exhaustive. However, the list
serves the purpose of illustrating potential forms of unethical behaviour at work. The ethical
standards which workers are prepared to uphold will depend substantially on the values and
overall moral tone of the society in which they live and the ethical tone or standards established
by the management of the company for which they work.

12.7 FUNDAMENTAL PRINCIPLES OF BUSINESS / MANAGERIAL ETHICS

The subject of ethics is very complex and sometimes quite controversial especially where the
attempt is to establish principles of general application. It should be noted that the subject of
business and managerial ethics is only a part of the general subject of ethics. In order to serve as
a guide to the understanding of the ethical responsibilities of business and managers, Elegido has
outlined a number of fundamental principles which relate to business ethics. We shall present
them first since they provide a background to the understanding of the managerial ethics which

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we are about to explore. These principles which are discussed below can also serve as a guide to
non-managerial staff.

1. Principle of solidarity: We should be concerned not only with seeking to promote our self-
interest but also with promoting the well-being of others. It may therefore be unethical to
trample upon the interests of others in our search for self-fulfillment. For example, a business
owner would be violating this principle if he became insensitive, to the plight of his
underpaid workers.

2. Principle of rationality: Rather than acting irrationally by allowing emotions and feelings to
becloud our better sense of judgement, we should seek to act logically and intelligently always
by consciously considering the impact of the various courses of action open to us. Acting
rationally could enable us avoid actions which we could have regretted later.

3. Principle of fairness or impartiality: Fairness or impartiality demands that we should apply

the same standards in judging others include strangers as we would when judging ourselves or
those dear to us. In the language of the layman, this means that we should be "objective" or
"unbiased" irrespective of whose interests are involved. Consider the following example. A
cousin of the Executive Director of a certain government-owned company was involved in a
case of theft of company property, an offence for which the Executive Director had on several
occasions in the past promptly approved dismissal as provided by company policy. In this
particular case, the Human Resources Manager recommended that the employee concerned be
dismissed as usual. The Executive Director was infuriated because he had asked the Human
Resources Manager to look for a way to exonerate the thief. The Executive Director ensured
that for his role in sacking his cousin, the Human Resources Manager was himself relieved of
his appointment.

4. Principle of efficiency: According to this principle, it is not enough to have good intentions as
far as promoting human fulfillment or the wellbeing of people is concerned. Such good
intentions must be backed up with honest or genuine efforts to realise or actualise the
intentions. Otherwise the good intentions will amount to nothing but mere lip-service.

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5. Principle of refraining from willing harm to a human being: One should not inflect harm on
others as an end in itself or as a means to an end. Harm may be physical, psychological, social
or economic.

6. Principle of role-responsibility: This rather complex principle has been explained as follows:
One does not have equal responsibility for all aspects of the well-being of all human beings.
One‟s special circumstances, capacities, role and commitments give one a priority
responsibility for certain aspects of the well-being of certain people.

7. Principle of acceptance of harmful side-effects: “Under certain circumstance it can be

reasonable to perform actions which are likely or even certain to cause harmful side effects”.
Consider a very simple case:

A company interviewed fifty-five persons for a certain job. The three applicants who
performed best in the interview had the same score. Nevertheless, the personnel manager
offered the job to one of them. The harmful side effect of the personnel manager‟s action is
that the other two applicants did not get the job. Has the personnel manager acted
unethically? No.

8. Principle of cooperation in immorality: This principle affirms that “under certain

circumstances it can be reasonable to cooperate in some ways in the immoral actions of other
people”. Consider this scenario. One afternoon, a band of four robbers armed with automatic
rifles rudely edged you to a stop on the highway. They ordered you at gun-point to surrender
the key to the company car you were driving at the time. You “cooperated” and they made
away with the car and some vital personal and official documents which you had in it. Did
you not “cooperate?” In the circumstance, did you act ethically by “assisting” them to rob
you? No! The usefulness of the above principles is that each time a manager is unsure of the
ethical path to tow in a given situation, one principle or the other can pinpoint the way.

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12.8 MANAGERIAL ETHICS

Managers, like everyone else, have ethical responsibilities or obligations which do not derive
from their special positions as business managers. In this discussion, we are not concerned with
those general ethical issues which are applicable to virtually every member of our society. Our
concern here is with those ethical issues which confront managers because of the managerial
positions which they occupy in the society.

In order to keep the discussions simple as possible, we shall merely outline the ethical
responsibilities of managers. Most of these responsibilities arise because managers occupy
fiduciary positions. A manager is said to occupy a fiduciary position because he is put in position
of trust in which he is expected to utilize the powers entrusted to him and the assets or properties
of the company, not for his personal benefit, but for promoting or advancing the interest of the
owners of company. The points to note are that a manager's fiduciary position, according to
Elegido, involves the following:

(i) he occupies a position of trust;

(ii) the position gives him access-to power (authority) and assets;
(iii)the power and assets are not his but are assigned to him by his employers (who own the
business);
(iv) he is expected not to abuse the power or assets or to use them to promote his personal or
selfish interest;
(v) he is required to use them to serve and advance the interest of his employers; and he is
accountable to his employers for the proper use of the powers and assets.
(vi) The ethical responsibilities of the manager, some of which flow from the fiduciary nature
of his position are as discussed below:

Conflict of interest: Conflict of interest arises "whenever a manager is placed in a position he

has to make decision which will influence both his personal interest and the interest of the firm
for which he works, and these two sets of interests are in conflict with each other." An example
will help to clarify this point. A company of which you are the managing director is about to
buy a parcel of land belonging to your elder brother. The conflict arises because you should

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want your company to pay the lowest price possible for the parcel of land. At the same time, at
the personal level you would be pleased if your elder brother sold his parcel of land for the
highest price possible. It has been suggested that the solution to this problem is that a manager
should prevent such a situation from occurring in the first instance. If it is inevitable, the
manager‟s ethical duty is to disclose his interest and/or disqualify him from making the
decision.

Acceptance of gifts: Ultimately the question of whether it is ethical or unethical for a manager to
accept a gift from those who engage in business transactions with his company borders on
whether he would not thereby have “bought”? In other words, the gift could serve as a bribe.
Even if the manager accepts the gift but refuses to be influenced by it, would other managers
and his employers be sure that he has not been compromised? The same situation occurs
when a teacher accepts gifts or favours from his students. Perhaps the best option for a
manager is to refuse gifts which are beyond what is customary, such as hampers at
Christmas.

Insider trading: Insider trading refers to a situation "which a director or an employee of a

company buys or sells shares of that company on the basis of confidential information which
once it becomes public, is likely to have a significant impact on the price of the shares."
Consider the following example: Your, company has just discovered a major defect in the
new car which it introduced into the market six months earlier. You are aware that the
company has no choice but to recall all the cars sold during the period so that the defects can
be rectified. You also know that when the decision is announced, the company's share price
will crash. To benefit from this privileged information, you have decided to sell your shares
now possibly with the intention of buying them after the share price fall. That way you will
make a profit on the sale and yet retain your shareholding after the re-purchase. This and
similar situations raise the question of ethics.

Duty to be honest: Managers are entrusted with a lot of decision-making powers, money and
other assets. A manager can easily be dishonest in the use of such company property.
Examples of such possible acts of dishonesty would be following:

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Using company property for unauthorized and illegitimate personal purposes. An instance of
this would be a case where a manager 'uses the guest house facilities of his company for
unapproved personal purposes;
Making fictitious financial claims; for example, in respect of non-company trips or trips that
are fictitious.

Confidentiality: Managers usually have access to a lot of information about the companies they
manage. Some of the information are of a confidential nature. Disclosing them to competitors
or to the general public could harm the company and its owners economically. For example,
some products such as soft drinks and beer have their unique formulations which are business
secrets. It would be unethical for a manager or reveal such information whether or not for
some personal benefits.

In other cases, disclosing confidential information could hurt a company‟s customers or its other
publics. For example, no bank customer would want thebank to divulge information about his
accounts to unauthorized third parties. Finally, doctors are expected to treat the information
about their patients in very strict confidence. Doing otherwise amounts to unethical conducts.

Others: Managers have other ethical responsibilities. One such responsibility is the duty to be
diligent in their work by exercising utmost care, showing competence in what they do and
engaging in continuous learning. Secondly, the manager owes his firm loyalty and obedience
while in the service of the company. While a loyal manager is faithful to his commitment to the
company, an obedient manager will follow company policies and instruction unless doing so will
jeopardise the company.

In order to conclude this section, it is useful. to note that ethical considerations arise in a
manager's relationship with different groups or publics. These groups and publics include
employees, labour unions, trade association, customers, suppliers, competitors, shareholders,
creditors, dealers or distributors, government, society at large and the firm itself. Since there are
right and wrong ways of dealing with each group, it follows that issues of ethics arise in each
case.

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12.9 CODE OF ETHICS

Ethics or unethical concerns and conduct of managers occur against the background of the
overall ethical climate of the wider society and the ethical climate within their organizations. At
the level of the wider society, ethical guides are sometimes enacted into laws in order to enhance
compliance. On the other hand, individual organizations including professional bodies
sometimes establish and formalize their ethical guides by putting in place certain ethical codes of
conduct. Such codes of ethics are "written statements of the values and ethical standards that
guide the firm's actions. Such codes should be seen as one way in which companies seek to
manage the ethical behaviour of their personnel. Of course, many organizations do not have such
formal statements. As Griffin has pointed out, "no code, guideline or training can truly replace
an individual's judgement about what is right or wrong in any particular situation.

12.10 CONCLUSION

Ethics are concerned with notions of right and wrong ad good and bad against the background of
accepted societal standards and expectations. Although society supplies the standards, the
question of what is ethical or unethical varies from individual to individual and from one culture
to another. Even what an individual accepts that a particular behaviour is unethical; we cannot be
sure that he will avoid it.

Variations in individual and cross-cultural ethical standards can be explained in terms of the
different determinants of ethical standards. These determinants are family influences, peer group
influences, past personal experiences, values and situational factors.

Ethical issues confront both the manager and non-manager at the workplace. These issues arise
in the relationships between the employee and the organization, for which he works, between one
employee and his co-workers and between the employee and outsiders or third parties such as
government, customers, suppliers, labour unions and so on and so forth.

The basic principle which should guide business/managerial ethics are those of solidarity,
rationality, acceptance of harmful side-effects and the principle of cooperation in immorality.

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Others are principles of impartiality, efficiency, refraining from willing harm to human beings
and the principle of role-responsibility.

Some of the specific ethical issues that confront the manager are those of conflict of interest,
acceptance of gifts, insider trading, honesty, confidentiality, loyalty, obedience and diligence in
the discharge of his duties. These ethical concerns do not occur in a vacuum but within the
ethical climate of the wider society and the ethical climate established within the firm. One way
in which firms and professional bodies seek to guide their managers in handling issues bordering
on ethics is by establishing and enforcing codes of conduct.

12.11 SUMMARY

In this unit, we have

 defined the Concept Ethics
 discussed Ethical and Unethical Behaviour
 stated the determinants of Ethics
 explained Ethics in the Workplace
 enumerated the Fundamental Principles of Ethics/Managerial Ethics
 discussed Managerial Ethics
 listed and explained Code of Ethics

12.12 TUTOR-MARKED ASSIGNMENT

1. What is business ethics? What is the relationship between ethics and behaviour?
2. Discuss the importance of ethical standards in business.

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12.13 REFERENCES/FURTHER READING

Appleby, R. C. (1982). Modern Business Administration, 3rd Edition. London: Pitman Books
Limited.
Boone, Louis and Kurtz, David (2001). Contemporary Business, 9th Edition. New York: Dreden
Press.
Brown, Betty I. and Clon, John E. (1997). Introduction to Business: Our Business and Economic
World. New York: McGraw Hill Inc.
Elegido, J.M. (1996). Fundamentals of Business Ethics: A Developing Country Perspective.
Ibadan: Spectrum Books Limited.
Inegbenebor, A. U. and Osaze, Esosa Bob (Ed.) (1999). Introduction to Business: A Functional
Approach. Lagos: Malthouse Press Limited.
Mescon, Michael H., Bovee, Courtland L., and Thill, John V. (2002). Business Today. Upper
Saddle River, New Jersey: Prentice Hall.
Miller, Roger LeRoy and Farese Lois Schneider (1992). Understanding Business: A World of
Opportunities. New York: West Publishing Company.

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