ENTREPRENEURSHIP SKILLS DEVELOPMENT

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 CHAPTER I

CONCEPT OF ENTREPRENEURSHIP
Objectives
By the end of the unit you should be able to:
· Define entrepreneurship
· Describe the characteristics of successful entrepreneurs
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 · Discuss the roles of SMEs in the economy

History of entrepreneurship in Zimbabwe

Introduction

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

Evidence of entrepreneurship in the pre colonial era

Primary industry

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

Mining

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Zimbabweans have been great miners while before the arrival of British in the 1880s. Mining rights were given by the
King and his advisors. The minerals mined included gold, copper and iron.

Manufacturing (secondary Industry)

There was a very successful value adding industry before colonization. The output from agriculture and mining was
proceeding and great and useful items were made to serve the needs of the people then.
Brewing Industry
Mhunga, mapfunde, rukweza were processed and brewed into different beer flavors. As it is today, after work villagers
would gather and drink. This industry had strong competition and successful entrepreneurs were known for exceptional
brews and good customer care.

Metallurgy or Iron smith (Mhizha)

These were the most skillful technicians, engineers, and business people who had the role of processing, the iron, cooper,
gold into useful products. The farmers needed mapadza, matemo ets. The hunters needed spears (mapfumo), makano,
miseve etc. jewellery such as golden, necklaces were also needed to the wealthy people and the royal family. These
products could be traded to other kingdom for other products. The ironsmith were usually very wealth. These skilled
artisans were entrepreneurs of the time in metallurgy.

Colonisation and its effect on African entrepreneurship

Colonization negatively affected the Zimbabweans as well as their system, government and most importantly
entrepreneurship and industry.

The history of entrepreneurship in Zimbabwe dates back to the civilization era. In the Mutapa and Rozvi state there were
successful business initiators/ owners who became very wealth. It however follows that like today, as recognized by

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Alfred Marshal in 1890 in the book Principles of Economics was affected by the ability to combine factors of production:
Land , labour, capital, and organization

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

Some African Entrepreneurs were involved in pottery designing and making clay pots. The iron smith entrepreneurs were
weapon and tool makers. The weapons and tools included arrows, axes, knives, and hoes, among others.

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

At first, iron was used only to make light arrow heads and jewellery. Bigger items such as hoes and axes took much more
time and labour.

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

Entrepreneur – miners extracted iron ore from the ground, entrepreneur – metallurgists crushed iron ore and smelt it with
very hot fire. At Great Zimbabwe there is still evidence of clay furnace, forge and bellow. This smelting separated the
metal from the stone. As the pure iron cooled, it hardened again, and the village smiths could hammer it into shape of
hoes, axes and knifes. This was a revolutionary development in the way of life of Africans.
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The use of iron made it easier to hunt wild animals, till land and undertake domestic tasks. People who lived near deposits
became entrepreneurs in mining, smelting, and fabrication (boiler making) and traded their products for other goods.

For over two (2) centuries great products like farming equipment, military equipment was made. It is from these that
successful and powerful states were created.
During the colonial era black entrepreneurs were so limited. The reason being inability by blacks to access means of
production and suppressed talent. Technical Education was also biased. From 1980 we saw the cropping of great
entrepreneurs from the black populace. There were business Start ups in the transport sector, retailing, manufacturing,
farming, and many industries.

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

Entrepreneurship and Patriotism

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

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 What is an entrepreneur?
An entrepreneur is the originator (initiator) of an enterprise (economic/business undertaking) in order to satisfy an
identified need or want profitably. That is a person who organizes and manages a commercial undertaking especially one
involving calculated commercial risks. In other words, an entrepreneur is someone who identifies opportunities in terms
of needs and wants of people and mobilizes resources such as land, capital and labor to develop profit-making projects to
meet the identified needs and wants.
Successful entrepreneurs are not gamblers but take calculated and moderate risks in business. It should, however, be noted
that entrepreneurs believe so strongly in their business ideas that they are willing to take full responsibility for developing
them and to assume most of the risks should they fail.

What is entrepreneurship?
Various authors define entrepreneurship differently, but their definitions somewhat amount to the same meaning.
The following are some of the definitions of entrepreneurship:
Appleby (1989) defines entrepreneurship as the process of bringing together creative and innovative ideas and coupling
these with management and organizational skills in order to combine people, money and other resources to meet an
identified need and thereby create wealth.
Whereas Appleby defines entrepreneurship as such, Stoner & Freeman (1992) view entrepreneurship as seemingly a
discontinuous process of combining resources to produce new goods and services.

Analysis of definitions
Both definitions do not fall short of the fact that entrepreneurship is a systematic and logical event as shown by the term
‘Process’. That is entrepreneurship is not a haphazard activity. However, Stoner & Freeman have moved a step further in
an attempt to distinguish entrepreneurship from management as they look at entrepreneurship as a discontinuous process.

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That is, it is a discontinuous phenomenon appearing then disappearing until it reappears to initiate another change, unlike
management which is a continuous event.
The idea of ‘creative and innovative ideas,’ shows that the two definitions are complete. In business, entrepreneurs should
be able to come up with changes or new approaches, means, processes, machinery, tools or techniques and new products
in order to meet the needs of turbulent and dynamic market environments. When a new venture is being contemplated on,
risks arise involving uncertainties which require initiativeness and process innovation.
Whereas Appleby clearly states, the idea of “management and organizational skills” in his definition, Stoner & Freeman
have remained silent about it. Organizational skills and management are crucial for successful entrepreneurs. These relate
to the ability of the entrepreneur to plan, organize, lead and control the organizational members’ activities and resources in
order to achieve the stated goals of the enterprise. In other words, the emphasis here is the ability to organize the other
factors of production or resources into creative combination for the purpose of producing goods and services in order to
satisfy human needs and wants profitably. The combination of resources is as follows:
Land Labour Capital

Entrepreneurship

Production of goods and services

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For the business to be successful the ‘needs and wants’ should be identified first through a feasibility study. Identification
of needs and wants will indicate whether there is a potential market or not. Thus, the viability of a business largely
depends on an effective feasibility study to determine the potentiality of the market. In this case, Appleby’s definition of
entrepreneurship is clear about identifying first the needs of customers, unlike Stoner & Freeman’s. Thus, for Appleby,
new goods and services should not just be produced for unknown customers as this is tantamount to wastage of resources.

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

Entrepreneurship distinguished from Intrapreneurship

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

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

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

Relationship between entrepreneurship and Patriotism

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

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

Action oriented

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

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

Perception of opportunity or opportunity seeking

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

Moderate risk taking

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

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

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

Self-motivation/self esteem/self faith/self confidence

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

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

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

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

Some of the characteristics of an entrepreneur include; patience, friendliness, hardworking, reliability, dedicated ness,
responsibility, objectivity, rationality, honesty, determination, courage, flexibility, imaginativeness and knowledge.

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

Roles of Small and Medium Enterprises

What is a small business?

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

Reasons for continued survival of small firms

· Small businesses are able to be more flexible, innovative and can react changes much quicker
· Small businesses play a supportive role to the giant firms by being subcontracted in construction, distribution,
service and manufacturing sectors
· Small businesses serve small markets (market riches) where large firms do not have interest
· Small firms receive government support through the Ministry of Small to Medium Enterprises, ministry of
Youth Development Gender and Employment Creation and Ministry of Higher and Tertiary Education that is
they receive support in form of training and funds. Small firms also pay lower taxes.
· Small firms supply their goods and services in smallest lots than giant firms which usually supply in bulk
· Small firms offer specialized and personalized services to customers e.g. electrical businesses.

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 · Small firms remain small usually during the initial phases of new technology or innovation or product
introduction as the firms will be studying market reactions and modifying the products.

Roles played by small firms to the economy

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

Government Entrepreneurship initiatives

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

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

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

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 CHAPTER 2

BUSINESS ENVIRONMENT IN ZIMBABWE

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Natural phenomena
These are the situations or conditions which can adversely or positively affect the entrepreneur’s activities. These may
include natural disasters such as road accidents, fire outbreaks, floods, drought, earthquakes, good rains and natural
resources such as minerals. Entrepreneurs are advised to study the natural phenomenal trends as these provide threats or
opportunities to the business.
Microenvironment
This relates to those conditions which directly affect the entrepreneurial investment activities either positively or
negatively. The microenvironment is made up of employees, providers of finance, suppliers, customers and government
among others.

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

Providers of finance
These are the financial institutions which supply financial services to the entrepreneurs. Entrepreneurs need to consider
the interest or lending rates together with the accompanying finance changes fixed on them by the financial institutions as
these costs of financial services have adverse effect on their investment activities. Apart from that, the entrepreneurs also
need to consider return on investment in terms of the funds which they may need to invest with the financial institutions.
On the other hand, the entrepreneurs are expected to prove their credit worthiness and credibility by paying back the

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borrowed funds (loans) within the contractual time frame as this will enable the entrepreneurs to even receive preferential
treatment and favour in times of need.

Customers
To many entrepreneurs, responsibilities to customers may be seen as no more than a natural outcome of good business.
Customers are people who make the business successful. The entrepreneurs need to understand the needs and wants of
customers first before production activities take place in order to avoid wastage of resources by producing goods and
services for unknown customers. Customers must be put first by providing:
· Good value for money
· The safety and durability of products
· Prompt and courteous attention to queries and complaints
· Long-term satisfaction e.g. serviceability, adequate supply of products and replacement of parts
· Full and unambiguous information to potential customers
If customers feel that they are ill treated, the entrepreneur loses them to the customer-driven enterprises.

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

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

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

Entrepreneurship Strategies

Growth strategies
A. Intensive Growth Strategies
According to Ansoff’s product market expansion grid, a company is exposed to growing dimensions under intensive
growth

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

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

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

B. Integrative Growth
- business sales and profits can be increased through
a) Backward integration
b) Forward integration
c) Horizontal integration
Ansoff’s Growth Strategies Grid:

Current products. New products.

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 Market Products
penetration development Current markets.
Strategy strategy
Market Diversification
development strategy New markets.
strategy

Ansoff’s Growth strategies

[Link] penetration
a) market development
b) product development

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

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

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

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

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

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

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

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

Other Entrepreneurship strategies

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

Advantages to the franchiser

- increased distribution
- some operating costs are transferred
- marketing/distribution costs shared
- production accepted by locals when local franchise ownership is held
- Retains quality control of products is a franchise agreement
-

Advantages to the franchisee

- less risk with market tested products

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

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Disadvantages to the franchiser

- control of franchisees are far away

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

Disadvantages to the franchisee

- gives up freedom in management decisions

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

2) Buying an established business

Advantages

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

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

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

28
 CHAPTER 3

DEVELOPING A BUSINESS PLAN

OBJECTIVES

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

· Define a business idea.

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

GENERATION/CREATION OF A BUSINESS IDEA

· Every business emerges from an idea.
· Businesses get started when people (customers) manifest
their needs and wants.
· Entrepreneurs develop business ideas out of the needs and
wants of people.
· Usually entrepreneurs exploit the weakness of the existing
providers of goods and services to start their own ventures.
29
 The term business idea defined:
A business idea is a short and precise description of the basic
operations of the business.

v A business idea must show the following :

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

Profitability and Feasibility of the business idea:

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

30
In terms of feasibility the entrepreneur needs to consider the following:
· Availability of a viable market
· Competition
· Location
· Infrastructure and facilities
· Raw materials
· Machinery and equipment
· Labour and other costs such as electricity insurance, water,
security etc.

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

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

· It is a written document describing all relevant internal and

external elements and strategies for achieving objectives of
a business.

· A business plan is a document designed to provide sufficient

31
 Information about a new or existing business to convince
financial backers to invest in the business.

The purpose/importance of a business plan:

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

· It helps to clarify the business idea. The process involved in

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

· It can serve as a powerful money-raising tool. The Plan will

often be used as a means of sharing potential investors of
lenders the viability and profitability of the business.
Financial institutions insist on seeing a business plan before
any loan is granted. Private shareholders may invest if they
believe in the entrepreneur. Professional providers’ of venture
capital demand evidence of careful planning first.

· It can be an effective communication tool for attracting and

dealing with personnel, suppliers, customers, providers of
32
 capital, etc. It helps them understand your goals and
operations.

· It can help you develop as manager/entrepreneur, because it

provides practice in studying competitive conditions,
promotional opportunities, and situations that can be
advantageous to your business.

· It provides an effective basis for controlling operations so one

can monitor progress over time, to see if your actions are
following your plans.

HOW TO PREPARE A BUSINESS PLAN

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

A sound approach is to :
1. Determine where the business is at present (if an ongoing
business) or what is needed to get the business going.
2. Decide where you would like the business to be at some point
in future.
3. Determine how to get there. In other words, determine the
best strategies for accomplishing the objectives in order to
33
 achieve your mission.

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

COMPONENTS/ELEMENTS/CONTENTS OF A BUSINESS PLAN

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

· However, regardless the specific format used an effective plan should include at least the following
34
 1. Cover sheet
2. Table of contents
3. Executive summary
4. Description of The Business
5. Ownership and Management structure
6. Marketing Plan
7. Production/Operational Plan
8. Financial Plan/Analysis
9. Milestone schedule
10. Appendix

1. Cover Sheet

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

2. Table of Contents

Because the table of contents provides the reader an overview of what is contained in the plan itself, it should
be written and presented concisely in outline form, using numerical and alphabetical designators for headings
and subheadings.

3. Executive Summary

35
 It is the most important part of the business plan. It should be designed to motivate the reader to go on to the
other section of the plan. It should convey a sense of commitment, challenge, plausibility, credibility and
integrity.

It can include:

· Major aims and objectives

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

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

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

4. Description of the Business

Include the following :

a) Introduction

36
 v Relevant brief history and background of the proposed business
v How the idea for the business original and what has been done to develop the idea up to this point.
v Owners and manager and their experiences
v Products – capitalization/sources of funds
v Brief outline of success and achievement
v Date or proposed date for commencement
v Name of business and trading name
v Legal identity/legal form
v Industry that it fall under
v location - business addresses
v SWOT Analysis

5. Ownership and Management Structure

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

6. Marketing Plan

37
 Include information about:

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

7. Product/Operational Plan
· This motives the details of converting inputs to outputs valued by customers
· Specify products/services to be produced
· Raw materials and suppliers
· Optional location for production activities
· Costing of the products offered.

8. Financial/Plan/Analysis

· Indicate the expected financial results of your

operations
· Show prospective investors or lenders
· Include projected financial statements at least up to
three trading periods i.e. Trading, Profit and Loss
· Account; Income and Expenditure Statements; Cash
· Flow statements; Balance Sheets etc.
· There should be an analysis of costs/volume/Profits
38
 (CVP) where appropriate.
· Also include budget forecasting for : Production; Sales
and Expenses.
· Show the Financing of the business.

9. Milestone Schedule

· This involves the determination of objectives and the

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

10. Appendix

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

· Names of References and Advisors and their addresses

and phone numbers
· Bargains, Tables, Charts
· Resumes of officers
· Supportive market research
· Brochures of other published information describing
the products you provide.
39
 · Letters of recommendations or endorsements etc.

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

CHAPTER 4

BUSINESS MANAGEMENT

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

Business
A business is a social and or a commercial entity that thrives to satisfy the needs and wants of consumers at the same time
making more profits. As such, entrepreneurs have to manage the factors of production, i.e. land, labour and capital so as to
achieve the business objectives. Businesses can be in any of the following sectors of the economy; farming, mining,
40
retailing, art and craft, wholesaling etc. Thus, this chapter will focus on the functions of management as well as the roles
of management in an enterprise.

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

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

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

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

FUNCTIONS OF MANAGEMENT
41
 Different experts have classified functions of management. A manager must organize these functions in order to reach
company goals and maintain a competitive advantage. There are four fundamental functions of management. For
theoretical purposes, it may be possible to separate the function of management but practically these functions are
overlapping in nature i.e. they are highly inseparable. Each function blends into the other and each affects the performance
of others. The functions are discussed below;

A. PLANNING

It is the first tool and the basic function of management. The difference between a successful and an unsuccessful
manager lies within the planning procedure. Planning is the logical thinking through goals and making the decision as
to what needs to be accomplished in order to reach the organisation’s objectives. It deals with chalking out a future
course of action and deciding in advance the most appropriate course of actions for achievement of pre-determined
goals. Thus, planning is deciding in advance- what to do, when to do and how to do it. It bridges the gap from where the
organisation is and where it wants to be. Planning is necessary to ensure proper utilization of human and non-human
resources and helps in avoiding confusion, uncertainties, risks, wastages etc.

The following are involved in planning;

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

42
Manager’s questions in planning
1. where are we? -in terms of goals, resources, standards etc
2. where do we want to go? –objectives, markets, customers etc
3. how do we get there? –strategies to reach the intended destination ( time, resources, marketing mix)
4. are we getting there?

B. LEADING

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

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

Ø supervision- implies overseeing the work of subordinates by their superiors. It is the act of watching and directing
work and others.
43
 Ø motivation- means inspiring, stimulating or encouraging the subordinates to work with zeal.

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

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

Ø identification of activities
Ø classification or grouping of activities
Ø assignment of duties
Ø delegation of authority and creation of responsibility
Ø coordinating authority and responsibility relationships

Principles of organising
44
 1. unity of command –an employee must receive commands from one supervisor only.
2. span of control-refers to the number of employees that report to one supervisor.
3. full authority and responsibility.

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

Work performance evaluations are a form of control as it connects performance assessments to rewards and corrective
actions. Evaluating employees is a continual process that takes place regularly within a company.

ROLES OF MANAGEMENT

45
The ten management roles of a manager identified by Mintzberg
Mintzberg intensively studied five CEOs and their organizations, along with a calendar of their scheduled appointments
for a month. Additional data collected during a week of structured observations included anecdotal data about specific
activities, chronological records of activity patterns, a record of incoming and outgoing mail, and a record of the
executive’s verbal contacts with others. On the basis of this data, Mintzberg divided managerial activities into
interpersonal, informational and decisional roles.

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

Mintzberg’s ten managerial roles

ROLES DESCRIPTION EXAMPLES OF

ACTIVITIES
1. INTERPERSONAL

a. Figurehead Symbolic head, Greeting visitors,

obliged to perform a signing documents
number of team
duties of a legal or
social nature
b. Leader Performing all
Responsible for the activities that
46
 motivation of involves
subordinates, subordinates
staffing and training,
c. Liaison selects and
disciplines.
Acknowledging
Maintains a network mail, external board
of outside contacts work
and informers who
provide favours and
information
2. INFORMATIONAL

a. Monitor -Seeks and receives -reading periodical

wide range of special and reports
information -maintaining
-nerve centre of personal contacts
internal and external -installation and
information about maintenance of
the organisation information systems

b. Disseminator Holding meetings,

Transmits making phone calls
information form to relay information,
47
 outsiders or from the sending memos
subordinates to
members of the
c. Spokesman organisation Holding board
meetings and giving
Transmits information to the
information to media
outsiders on
organizational
policies, actions,
results etc through
speeches and reports.

3. DECISIONAL

a. Entrepreneur Initiates new Organising strategy

projects, spot review sessions to
opportunities, develop new
identify areas of programmes
b. Disturbance handler business
developments Resolving conflicts
among staff, adapt to
Responsible for external changes and
corrective action organising strategies
48
 when organization that involves
c. Resource allocator faces unexpected disturbances and
disturbances and conflict
crises
Scheduling,
requesting,
Responsible for the authorization and
d. Negotiator allocation of budgeting activities
organizational
resources of all
kinds, setting of
priorities, budgeting Participating in
collective bargaining
Responsible for
representing the
organisation at major
negotiations with
unions, suppliers and
generally defend
interests

The roles point to managers needing to be organizational generalists and specialists because of;
· system imperfections and environmental pressures
· their formal authority is needed even for certain basic routines
49
 · in all of this they are still fallible and human

The explanations above justify managerial purposes in terms of;

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

MANAGEMENT SKILLS

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

Management skills and levels

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

2) Human skills

50
 Refer to the ability to work with other people both individuals and in groups. The human skills are important at the
top levels of management, as they are at the lower levels. Subordinates are more forthcoming and offer their best
abilities when working under a manager with good human skills. These managers are good communicators; they
motivate, lead and inspire enthusiasm and trust among their subordinates.

3) Conceptual skills

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

Principles of Management

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

2. Authority and responsibility-organisational structure should clearly show levels of authority and responsibility.
3. Discipline-discipline results from good leadership at all levels of the organization. It is necessary to develop
obedience, diligence and respect.

4. Unity of command- an employee must receive commands from one supervisor only.
51
5. Unity of direction-all operations with the same objectives should have one manager and one plan only.

6. Subordination of individual interest to the common good- the interests of an individual or group should not take
precedence over interests of the organization.

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

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

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

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

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

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

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

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

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

Theories of Motivation and their implications to the entrepreneur

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

Major content theories of motivation include

53
 · Maslow’s hierarchy of needs model
· Alderfer’s modified need hierarchy model
· Herzberg’s two-factor theory
· McClelland’s achievement motivation theory

Maslow’s hierarchy of needs theory

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

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

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

accepted by
achievement, self- confidence,
Safety (i.e. protection against danger

Physiological i.e. shelter, clothing, food

54
Physiological needs include homeostasis such as satisfaction of hunger, thirst, shelter deficiency, clothing deficiency and
so on. In fact homeostasis relates to the body’s automatic efforts to retain normal functioning.

Safety needs include safety and security, freedom from plain or threat of physical attack, protection from danger or
deprivation, the need for predictability and orderliness.
Love needs that is social needs which include affection, sense of belonging, friendships and both the giving and receiving
of love.

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

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

IMPLICATIONS OF MASLOW’S HIERARCHY OF NEEDS TO THE ENTREPRENEUR

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

55
This hierarchy of needs implies that entrepreneurs need to consider seriously the lower level needs if workers or staff are
to cooperate at work. That is the remuneration (salary, wage, fringe benefits) should meet decent or exclusive
physiological needs (shelter, food, clothing). Pleasant working conditions must also be ensured.

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

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

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

Self actualization is one aspect that does motivate employees i.e. workers are motivated by challenging job, opportunities
for creativity, achievement in work and advancement in the organisation and as such entrepreneurs should not that.

Herzberg’s two factor theory

Hygiene theory
He presents his tow factor theory of motivation which elaborates the differences between higher and lower needs. This
theory states that factors which create satisfaction at work are those stemming from the intrinsic content of job e.g.
recognition and responsibility, meaning and challenge. These satisfy higher needs. These are called satisfiers or
56
motivators or growth factors. Another set of factors which entrepreneurs must take cognizance of is dissatisfiers or
hygiene factors. These factors stem from the extrinsic job context e.g. working conditions, pay, and supervision. These
satisfy lower needs. An important point to note in this theory is that as dissatisfaction stems from lower needs not being
satisfied, when these are satisfied, this only removes dissatisfaction and does not increase motivation.

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

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

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

Motivation & job satisfaction

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

Motivators/growth factors

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

57
 Importance of motivating employees
- Increased productivity
- Increased efficiency and effectiveness
- Good corporate image building
- Increased sales and profits
- Good customer relations
- Promotes team spirit (team work) or cooperation and support by employees
- Promotes entrepreneurship by employees that is innovativeness, creativity and initiative ness resulting in the growth or
expansion of the enterprise

ACTIVITY

1. List the four management functions.

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

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

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

58
 b. resolving conflicts between 2 divisions of the same organisation
c. restructuring the organisation so that it becomes more responsive to clients
d. making a presentation on the organisation

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

CHAPTER 5

MARKETING

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

· Define marketing
· Describe the marketing mix elements
· Apply the marketing mix to product and service situations
· Prepare a marketing plan
59
Marketing is the management process responsible for identifying, anticipating and satisfying customerrequirements
profitably. (CIM)
There are many other definitions that expand on the CIM's own definition. Here is what Dibb et al (2001)have to say:

Marketing consists of individual and organisational activities that facilitate and expedite satisfying exchange
relationships in a dynamic environment through the creation, distribution, promotion and pricing of goods, services
and ideas.

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

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

Needs are basic human requirements such as food, clothing, shelter, exercise, etc. Some people might be able to satisfy
their needs for exercise by going for a run in a public park.
Wants refer to needs directed to specific objectives that might satisfy the need, For example, people might want to meet
their needs for exercise by joining an exclusive country club to play [Link] marketing manager of an exclusive country
club may carry out various marketing activities to transform the needs of people for exercise into wants to play golf at a
country club.
FAST FORWARD
Kotler (1991) also uses the word demand which refers to the wants being backed up by an ability to pay,ie can the
potential customer afford the membership fees to join an exclusive country club?It is necessary for us to strike a clear
60
distinction between marketing as an activity, and marketing as a concept of how an organisation should go about its
business.

The Marketing Mix

The marketing mix refers to a set of marketing variables which a firm can use to satisfy the needs of its target
[Link] calls them the 4Ps of [Link] are,namely,price,[Link] and place.

tMarketing activities
The basic marketing mix offers us a useful framework within which to discuss the relationship of
marketing activities to other organisational functions.

· Product
(a) Product development and enhancement of physical products is usually carried out in
conjunction with R&D and production. These often involve technically minded people who
may have different attitudes and approaches when perceiving and solving problems. With
regard to service marketing, there may be other kinds of technicality. For example, if a firm
of solicitors wishes to provide independent financial advice, the very demanding regulatory
regime governing such services is likely to be a key consideration in the marketing of the
new service.
(b) Packaging refers to 'all the activities of designing and producing the container for a
product'. (Kotler, 2003). Packaging serves various purposes and involves several
considerations.
61
(i) Protection of product eg sturdy boxes for breakable products
(ii) Preservation of the product eg plastic bags to keep bread and cakes fresh and
hygienic
(iii) Security of product eg small digital camera memory cards packaged in large plastic
packs to deter shoplifters
(iv) Convenience. Packaging is designed to facilitate storage by supplier or customer, as
well as convenience of use eg different types of nozzles on drinks and sauce
containers
(v) Branding eg the Coca-Cola bottle is a huge source of promotion for the company
(vi) Profitability eg larger sized nozzles on tubes and bottles encourage more use.
Larger sized cans or bottles usually encourage greater consumption.

· Place
Distribution decisions address the question of 'where do our customers want to receive their goods or services?' This is an
aspect where there has been significant change and development, and there is now much more scope for market decision
making, especially with the advent of [Link] decisions may also influence an organisation's globalisation
strategy. If clients and/or customers have overseas locations it may be beneficial to set up distribution facilities locally.
The presence of overseas facilities enables the organisation to extend its market coverage and global [Link] is
important to understand the structure of the distribution channel and the role of the players within it. A key concept is
channel captaincy, which refers to the organisations that hold the most power within a channel and can drive changes in
it. In the past, for example, food manufacturers controlled the retail food industry as they were fewer in number, and
bigger in size, than the supermarkets and other independent retailers. Supermarkets have since become bigger and more
successful, and can usually dictate terms to manufacturers and other [Link] are likely to be involved in
activities such as outlet planning, supply chain management, and route to market decisions. They may be involved in
order-processing, warehousing, logistics,
62
stockholding and control, transport operations, delivery tracking and IT systems development. They may also be involved
in export operations and the use of shipping and forwarding skills.

· Promotion
Promotion is, of course, the focus of a great deal of marketing attention and might, with justification, be regarded as the
marketing specialist's home turf. Nevertheless, it does not take place in a vacuum. It must not promise what cannot be
delivered, it must work within budget (particularly where sales promotion is concerned) and individual aspects of
promotion must not undermine the overall corporate image. It is important to remember the product or service's Unique
Selling Proposition (USP) or Basic Consumer
Benefit (BCB) and ensure that the message is in alignment with these. The medium of communicationmust then match
the message. Promotional tools include advertisements, press releases, sales promotions, in-store demonstrations,
exhibitions, trade fairs and public relations.
· Price
Cost is a major consideration in price-setting and here the marketer must utilise the expertise of the management
accountant. Also associated with this aspect of the mix is the whole topic of terms of sale: expert advice is necessary if
maximum protection is to be obtained against the customer who does not or cannot pay. Factors influencing price include
costs, competition, customer expectations and business objectives.

63
Product Life Cycle

The product life cycle is defined as the period that starts with the initial product design (research
and development) and ends with the withdrawal of the product from the marketplace. It is
characterized by specific stages, including research, development, introduction, maturity,
decline, and obsolescence. Each stage is often linked with changes in sales,profits ,objectives and
strategies. Conventionally, four main stages compose a product's life cycle:

· Introduction. This stage mainly concerns the development of a new product, from the
time is was initially conceptualized to the point it is introduced on the market. The great
majority of ideas do not reach to promotion stage. The corporation having an innovative
idea first will often have a period of monopoly until competitors start to copy and/or
improve the product (unless a patent is involved as it is the case in industries such as
pharmaceuticals). Generally, associated freight flows take place within developed
countries and/or close to markets where to product is likely to be adopted.
· Growth. If the new product is successful (many are not), sales will start to grow and new
competitors will enter the market, slowly eroding the market share of the innovative firm.
The product starts to be exported to other markets and substantial efforts are made to
improve its distribution since competition mainly takes place more on the innovative
capabilities of the product than on its price. This phase tends to be associated by high
levels of profits.
· Maturity. At this stage, the product has been standardized, is widely available on the
market and its distribution is well established. Competition increasingly takes place over
cost and a growing share of the production is moved to low cost locations, particularly for
labor intensive parts. Associated freight flows are consequently modified to include a
greater transnational dimension.
· Decline. As the product is becoming obsolete, production essentially takes place in low
costs locations while developing countries become net importers. Production and
distribution economies are actively sought as profit margins decline. Eventually, the
product will be retired, an event that marks the end of its life [Link] life cycle

For the various stages of the cycle ,different objectives and strategies can [Link] are
digrammatically shown on the next page:
64
65
The purpose and content of the marketing plan
A marketing plan is a specification of all aspects of an organisation's marketing intentions and [Link] is a summary
document, providing a framework that permits managers and specialists to undertake the detailed work of marketing in a
co-ordinated and effective fashion.
The creation of a good marketing plan is likely to be a time-consuming exercise, since it should deal with both current
circumstances and plans for the future.
66
(a) It should be based on detailed knowledge of both the target market and the company
involved.
(b) It should give sufficient detail of intentions to support the design and operation of all
marketing-related activities

The marketing plan and corporate strategy

It is important to remember how the marketing plan fits into overall corporate strategy. Students are often confused
by the appearance of environmental analysis in the marketing planning process and assume that this means that the
marketing plan is the same thing as the overall corporate strategic [Link] may be true in some highly marketing-
oriented organisations, but it is not necessarily [Link] marketing plan and the corporate strategic plan are not the same
thing. The difference is largely one of scope: the corporate plan has to consider all aspects of the organisation's business,
while a marketing plan is principally about marketing activities. The marketing plan is aligned with the corporate plan
and supports it.

FAST FORWARD
What goes into the marketing plan?
There is no standard template or list of contents for a marketing plan. Different organisations will find it
appropriate to consider different things at different times in their development. We will look at one
possible detailed layout for a marketing plan in Section 3. In this section we will look in general terms at
what is likely to appear in most marketing plans.

The marketing plan – an outline

1 Situation analysis
PESTEL – SWOT – Market analysis and
marketing objectives
67
2 Marketing strategy
Objectives – tactics – marketing mix
3 Numerical forecasts
Sales – expenses
4 Controls
Marketing organisation – performance measures
These four basic elements constitute a logical sequence of development for the basic building blocks of
the marketing [Link] that you remember this basic structure. If all else fails in the examination, it should enable you
to organise your thoughts and make a creditable attempt at preparing a marketing plan.

(a) Situation analysis. Any planning process should start with the collection and analysis of
basic data. In the marketing context this is often called situation analysis. It may be
appropriate for situation analysis to consider the items listed below.
• The wider environmental factors of the PESTEL model
• Strengths, weaknesses, opportunities and threats
• Marketing research data, including demographics data, trends, needs and growth
• Current and planned products and services
• Critical issues
(b) Marketing strategy. The statement of marketing strategy will describe in detail all the
marketing concepts, practices, activities and aids that will be used. It will reiterate the
marketing objectives in some form, and will probably give a detailed account of how the
chosen marketing mix will be applied. This section is likely to be of considerable size.
(c) Numerical forecasts. The marketing plan must include quantitative data about required
resources and forecast results. Costs must be given in detail and realistic sales estimates
must be provided. In particular, the cost of marketing activities must be specified.
68
(d) Controls. Planning is worthless unless control mechanisms are established to ensure that
the plan is properly executed. These may include intermediate organisational and sales
milestones, the design of routine performance measures, the establishment of an
appropriate marketing organisation, and the development of contingency plans.

The marketing plan in detail

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

2 Situation analysis

69
Situation analysis involves consideration of both the environment and internal factors. The environment can be divided
into the macro-environment, consisting of the six PESTEL elements, and the micro- or market environment. Internal and
environmental factors are summarised in a SWOT analysis.
(a) The business environment. The operation of any business implies interaction with its
environment and the first stage of the detailed planning process is likely to be the collection
and analysis of environmental information. For this purpose, the business environment is
often split into two parts.
FAST FORWARD
(i) The macro-environment may be analysed into six elements.
• Political • Technological
• Economic • Ecological or 'green'
• Social • Legal
The acronym PESTEL may be used. PEST and STEP are also common, when the legal environment is included under
politics and so-called 'green' issues are included under the social heading. Your syllabus uses PESTEL, so that is what we
will use in this Study Text. A marketing plan need not include a detailed PESTEL analysis, but it should explain those
aspects of it that have affected its development.
Action Programme 1

(ii) The micro-environment consists of the markets in which the business operates or
plans to operate. It includes current and prospective customers and existing and
potential competitors. The micro-environment also includes any distribution systems
used by the business. Headings such as those below may be appropriate.
• Target markets • Products and services
• Market needs • Competition
• Market geography • Costs
70
• Market demographics • Suppliers
• Market trends • Critical issues
• Market forecasts
• Market growth
(b) Internal analysis. Like the overall strategic plan it is derived from, a marketing plan should
reflect the characteristics of the business concerned. It will inevitably refer to current and
planned products and capabilities and be designed to exploit the organisation's resources to
the full. An important aspect of the internal analysis is product-market background, which
sets the scene for those less familiar with the products and markets involved.
The environmental and internal analyses are traditionally summarised and entered into the
plan under the headings of strengths, weaknesses, opportunities and threats. This SWOT
analysis highlights aspects of the overall situation that need action by the business. The
aim is to exploit strengths and opportunities, remedy areas of weakness and develop
actions which minimise threats. The analysis of SWOT must be prepared honestly and
objectively as it is a key foundation on which the marketing strategy is built.
3 Marketing strategy
Marketing strategy includes objectives and methods and may deal with such matters as gap analysis,target markets, the
marketing mix and marketing [Link] marketing strategy section of the marketing plan should describe in detail the
organisation's
marketing objectives and methods.

(a) Marketing objectives. The objectives of the marketing plan are derived from the corporate
plan, which is designed to support the overall corporate mission. A clear statement of
marketing objectives serves a number of purposes.
(i) It provides a focus for activity and a sense of purpose. This should stimulate
71
activity, particularly when overall objectives are broken down into personal targets.
(ii) It provides a framework for co-ordination of activity across the organisation.
(iii) IT is fundamental to the control process, since it defines success. Actual
performance is compared with what was intended, and control action taken to
correct any [Link] objectives have been considered in detail, it is possible to use them to refine a plan bymeans
of gap analysis. Objectives will relate to both market dynamics and financial results, and should beexpressed in concrete
form. Objectives may be set for such business parameters as those
below.
• Revenue growth
• Market share
• Profitability
• Number of outlets
• Customer retention
• Brand recognition
• Marketing expenses
• Staff levels and training
(b) Target markets. It will be appropriate to define clearly just what the target market is. The
nature of this definition will depend partly on the scale of the marketing operation
envisaged. For example, a company operating nationally in a lifestyle segment might target
prosperous retired people nationwide, while a locally based professional service business
might target start-ups and small traders within a 20-mile radius of its base.
(c) Products and their positioning. Product positioning is a continuation of the process of
determining the target market. Product positioning is about the way the target market
perceives the product's characteristics, in relation to those of competing products.
There are two basic product positioning strategies.
72
• 'Me too': the product is positioned to meet the competition head-on.
• Gap-filling: the product is positioned to exploit gaps in the market.
(d) The marketing mix. A marketing plan will not necessarily give complete details of every
component of the marketing mix. Instead, it will concentrate on those parts that are new or
crucial to success. For example, a plan built around a new or enhanced product that will be
distributed through established channels is likely to give significant product detail, and
explain the aim of the new features in market terms. Place, on the other hand, is unlikely to
receive more than a brief mention.
(e) Marketing research. Early marketing research should have played its part in supporting the
design of the marketing plan. However, it is not confined to this phase of operations.
Marketing research activities should form part of the marketing plan, so that continuing
feedback may be obtained upon the degree of success achieved.

4 Numerical forecasts
Numerical forecasts tie down what is to be achieved and form the basis of the control process.
This section of the marketing plan could also be called a budget.
4.1 Typical forecast quantities
• Turnover
• Market share
• Marketing spend
• Units of sales
• Costs
• Breakeven analysis
Phasing and analysis. It will be appropriate to present numerical forecasts broken down in two ways.
73
(a) Phased by time period. A year's total may be broken down into monthly or quarterly
increments.
(b) Analysed by marketing characteristic. For example, sales and expenses might be analysed
by product type or by market segment.

4.2 Breakeven analysis

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

4.5 Controls
Control is vital if management is to ensure that planning targets are achieved. The control process involves three
underlying components.
– Setting standards or targets
– Measuring and evaluating actual performance
– Taking corrective action
(a) Performance measures. The data contained within the numerical forecasts section of the
plan provides the raw material for performance measures. Mechanisms must be put in
place for collecting information on actual results, so that comparisons can be made and
control action taken. Overall performance is often judged by analysing two main indicators:
sales and market share.
(i) Sales analysis is based on the comparison of actual with budgeted turnover, but
this is only the first stage. It is appropriate to delve deeper and consider the effects
of differences in unit sales and selling price. Further analysis by product, region,
74
customer and so on may be required.
(ii) Market share analysis. Market share is important to overall profitability, and the
attainment of a given market share is likely to be an important marketing objective.
Market share should always be analysed alongside turnover, since the growth or
decline of the market as a whole has implications for the achievement of both types
of objective.
FAST FORWARD
FAST FORWARD
(b) Marketing organisation. Individual responsibilities within the overall marketing plan should
be given and the persons responsible named. One example of a specific responsibility is the
preparation of performance reports. Other roles will include that of overall responsibility
(probably discharged by the Marketing Manager or Brand Manager), management of
promotional effort and management of marketing research effort.
(c) Implementation milestones. Progress in implementing a programme can be monitored by
the establishment of milestones and the dates by which they should be achieved.
Marketing at Work
Examples for the launch of a new car might include:
• First delivery to show rooms
• First thousand sold
• Breakeven sales achieved
(a) Contingency planning. Events in the real world very rarely go according to plan. It is
necessary for planners to consider problems that might arise and make appropriate
preparations to deal with them. There are several requirements.
(i) The organisation must have the capability to adapt to new circumstances. This will
almost certainly imply financial reserves, but may require more specific resources,
75
such as management and productive capacity.
(ii) There is a range of possible responses to any given contingency. The organisation
should consider its options in advance of needing to put them into action.
(iii) A prompt response will normally be appropriate. Achieving this depends to some
extent on having the resources and having done the planning mentioned above, but
it will also depend on a kind of organisational agility. In particular, decision-making
processes need to be rapid and effective.

CHAPTER 6

CUSTOMER CARE

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

Customer care
- is the manner in which customers are treated by the business
- Customer care creates a new orientation in an organisation with and increasing focus on improving the delivery of
the needed services by the customers.
76
 - This should always be viewed as the clientele having rights and expectations that must be fulfilled.
- As an entrepreneur one needs to appreciate that customer care should be part and parcel of his/her business
operations if you intend to achieve success.
- The customer care vision by organisation embraces employees that put its customers first and that is open
transparent, accountable and responsive
- The customer is king and always right as a way of doing business
- The customer is always observed as having a right to demand quality services from the organisation
- In the modern business world there is an increasing focus on enhancing service delivery and on ascertaining that the
delivered as promised
- An entrepreneur should be responsible, accessible and quick to help source problems
- Should be reliable and deliver what he/she promises on time
- Should be knowledgeable and courteous
- Should be empathetic and should understand the needs of customers
- Work area should always be clean and organized.
-
Ten tips for customer care
1. Reliability
- this refers to consistency of performance and dependability
- perform the service right the first time fulfill promises
- be impartial and avoid favouritism
- Be firm with friends and relatives as far as business transactions are concerned.
2. Responsiveness
- this refers to the willingness as well as readiness of the entrepreneur or his employees in providing the services
within reasonable time immediately if not sooner

77
3. Competence
-This refers to the possession of the required skills and knowledge by those who deliver the services to the customer.
This will create confidence.
4. Accessibility
- this refers to the degree of approachability and ease of contact of the entrepreneur or his employees
- drop what you are doing ignored to greet and serve customer
5. Courtesy
- This refers to politeness, respect, consideration and friendliness of your organization’s contact such as receptionist,
secretaries, telephonist, etc, they must be polite and courteous at all times – remember, a smile goes a long way.
6. Communication
- keep your customer well informed in a language and style they understand
- it is important to hear and understand what your customers are saying
- communicate effectively with your suppliers as well

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

8. Security
- customer should be protected from danger, risk or doubt within the premises

9. Knowledge of Customer
- the entrepreneur should know the client specific requirements
78
 - be able to recognize regular clients
- strive to provide individualized attention
- Understand what makes them buy is it need Price?

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

Benefits/importance of customer care

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

Perquisites of meeting Customers expectations

1) be courteous and tactful
2) be friendly and helpful
79
3) deal promptly and decisively with customers
4) rectify faults quickly and keep promises
5) listen to customers attentively and respond promptly
6) avoid being sarcastic when dealing with customers
7) present information logically and comprehensively
8) stick to your commitments
9) Always inform your customers on what happens at your business if it may affect them (i.e. sale, new product? Services
10) be fair and honest when dealing with customers
11) demonstrate the right skills at the right time
12) always give customers professional treatment
13) know the customers business and needs

Who gets to decide if a customer service is good?

1. customer service is a function of your customers perceptions not your standards in other words, the customers gets to
decide if he or she has received good services
- even though all of your standards may have been met if the customer does not feel well served, your customer
service is poor
- customer satisfaction is ultimately the result of the sum total of the customer’s experience

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

Prime examples of poor customer care

1. poor delivery and accessibility of services
80
 2. poor quality and state of merchandise
3. existence of long queues of customers waiting to be served
4. dirty environment of business
5. failure in meeting client expectations

Dealing with unprincipled customers

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

You can defeat unprincipled customers by taking the following steps:

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

Building Customer Trust

From a customer’s point of view, there is probably no concept more important than trust. How can you strengthen
customer trust?
1. Keep your promises
2. Make promises that you can keep
81
 3. do everything to keep the commitments you make
4. if you cannot fulfill the promises let the customer know
5. call back if you promise even if you don’t have the information the customer is expecting
6. Following up on an order to be sure everything is okay.
7. Properly hold complaints all the time.
8. Make recommendations that are best for the customers.
9. Recommend a competitor when there’s a need that you can’t satisfy.
10. Make yourself available after the sale.

Creating Customer Comfort

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

Develop and maintain a customer charter

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

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

2. Enquires
82
 - short turn around time
- follow up
- courtesy options offered to caller

3. Correspondence
- Correct
- Shorthorn around time
- Acknowledgement of receipt

4. Delivery deadlines met

Delays explained and apology given

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

CHAPTER 7

RECORD KEEPING AND STOCK CONTROL

Objectives
By the end of the unit you should be able to:
· differentiate between bookkeeping and accounting
83
 · keep records and control stock in a business
· interpret and apply basic financial statements

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

DIFFERENCE BETWEEN BOOKKEEPING AND ACCOUNTING

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

Definition of Accounting
The process of identifying, measuring and communicating economic information to permit informed judgements and
decisions by users of the information.
· An Accountant does the analysis and interpretation of the data which has been recorded by the bookkeeper.
The accounting process
It involves:
Recording Classifying Summarising Interpreting of

business activities capable of being expressed in monetary terms.

Users of accounting information

84
 (i) Present and Potential Investors :they want to see whether or not the business is profitable (viability of the
business)
(ii) Prospective buyers of the company: where to buy or not to buy
(iii) Lenders : Banks and Financial institutions ,when the owner of a business wants to borrow money
(iv) Suppliers/Creditors: Whether it is safe to supply on credit and analyse if they will be paid back their dues.
(v) Customers: they need to know if there will be a constant supply of products from the business
(vi) Government/Taxman: for calculating tax payable by the business
(vii) Managers of the firm: for internal decision making
(viii) Employees: need to access their job security
(ix) General public

Source documents

Information used in the process of completing financial transactions are called source documents. These can include
invoices, receipts, credit and debit notes, purchase orders, customer billings, bank statements etc. These are the starting of
any accounting process.

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

Books of primary entry is obtained

85
 Receipt 0023
Date: 25/02/04
Gobvu Manufacturing (Pvt) Ltd
P O Box 22

CHEGUTU
Telefax: 703301

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

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

Date of purchase
Invoice number
Seller’s name, address, telephone, fax, email (not all of this information may be applicable)
Buyer’s name, address, telephone, fax, email (not all of this information may be applicable)
86
Goods or services bought
Amount to be paid
Terms of sale
Amount of discount if any
Appreciation message (e.g. Thank You for doing business with us)

The following is a sample of an invoice

Invoice 00214
Date: 26/02/04

Gobvu Manufacturing (Pvt) Ltd

P O Box 39
KWEKWE
Telefax: 055 50221

To: Makayepuva (Pvt) Ltd

Chuma street

MASVINGO

Tel: 039 62043

Item purchased Quantity Unit cost Total______

500ml super stick glue 500 $100.00 $50 000.00

less 5% discount if paid
within 30 days

Total $50 000.00

87
Debit Note is used to correct an undercharge on a customer’s account e.g. when the price shown on the invoice is too low
or when some items have not been shown. Sometimes a second invoice is issued in this instance rather than a debit note.

Below is an example of a debit note

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

Item description Quantity Unit price Total___________

Total to be debited:
Reasons for debit:

88
Credit Note is used to correct an overcharge e.g. if 25 items are sent, but only 20 were requested
on the order, then a credit note will be prepared to reduce the bill by the value of those 5 items. The extra 5 items would
be returned to the supplier. A credit note can also be used where goods or services are unsatisfactory e.g. goods are
damaged or wrong price charged.

The following is a layout of a credit note

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

Item Description Quantity Unit price Total______

Total to be credited

Reason for credit:

Statement is a summary of all of the invoices, payments, credit and debit notes during a period of time. A running balance
(total) is used to show the effect of each transaction i.e. invoices and debit notes increase the total amount which is owed,

89
and credit notes and payments reduce the amount which is owed. This is essential as it helps the supplier and the buyer to
keep a record of invoices sent and paid during a period of time.

Below is the layout and a specimen of a statement

Statement
From………/…………/………To……./………/………
Customer’s Name & Address
Customer Ref:
Date:
Supplier’s Name & Address

Date Details Amount Balance_________

Balance remaining

Specimen
Date Details Amount Balance
5/02/04 Invoice No. $1 000.00 $1 000.00
011
10/02/04 Credit Note $ 300.00 $ 700.00
005
90
20/02/04 Invoice No. 13 $ 800.00 $1 500.00
25/02/04 Payment $ 600.00 $ 900.00
Received
28/02/04 Invoice No. 16 $1 200.00 $2 100.00

Balance $2 100.00
remaining

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

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

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

Order Note is a letter requesting goods from the supplier.

Below is a layout of an order note

Order
Supplier’s Name & Address Customer’s Name & Address
Customer Ref:
Date:
____________________________________________________________
Item Description Quantity Unit price Total________
91

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

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

Below is the layout of Delivery Note

Delivery note
Customer’s Name & Address:
Customer Ref:
Date:
Supplier’s name & Address
Delivery Note No:
92
Item description Quantity___________

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

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

Appreciation of Books of Accounts

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

93
Cashbook
This is the book of original entry used to record all cash transactions that is all money that comes into and goes out of the
business on a daily basis. A cashbook can be used to determine the amount of money left over at the end of the month.
Below is a layout of a cashbook

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

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

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

E Gobvu cash book for the month of February 2011

94
Date Receipts Cash Bank Date Payments Cash Bank
(Details) (Details)
1/02 Capital 5 50 5/02 Purchases 10
8/02 Sales 000 000 15/02 Telephone 000
18/02 Deposit 15 18/02 bill 10 000 5
20/02 Sales 000 10 22/02 Deposit 10 000 000
23/02 Withdrawal 000 23/02 Wages 5 000
20 28/02 Withdrawal 15 000
5 000 29/02 Drawings 5 000
000 Balance c/f 25 000
1/03 Balance b/f 45
25 80 000
000_ 000 80
000
5 000 45
000

Notes
The cash book is divided into two halves that is Debit Side (Dr) or Receipts side and the Credit Side Payment side (Cr).
This means that when money comes into the business, it is recorded on the left hand side (Receipts) and on the right hand
side (Payment) for money going out of the business.
- Capital refers to the money being invested by the entrepreneur into the business.
- Purchases refer to goods bought by the business for resale.
- Drawings relates to money taken out of business for personal use.
95
- Transfer from Bank to Cash refers to money taken out of bank account to be kept as cash in business. This transaction
has to be recorded in the cashbook to show that the money has been moved from one place to the other, otherwise the
totals for the money left in the bank and in cash at the end of the month will be incorrect.
- When money is withdrawn from the bank account, money has gone out of the bank as such there is need to record it I
the Bank column on the Payments side of the Cash Book. This money is added to our supply of cash in the business
and a record has to be made on the cash column on the Receipts side of the cashbook. The reverse is true when the
business transfers cash from the business into the bank.
- Balance carried forward (c/f) is determined at the end of the month by subtracting the total payments (money out) from
the total receipts are $25 000 and total cash payments are $20 000, therefore $5 000 is left at the end of the month $25
000 has come in and $20 000 has gone out. $5 000 is the balance carried forward because it is the amount that will be
starting the next month and will be recorded as balance b/f (balance brought forward)

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

Example: Mutsvedu (Pvt) Ltd

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

Mutsvedu D Purchases journal for the month of February 2011

Date Details Folio Dr Cr
10/02 E Gobvu $10 000.00
18/02 T Timothy $ 5 000.00
Dr Purchases A/C $15 000.00

96
Sales Journal
- This is a book of primary entry where goods returned by customers are recorded

Example: Mutsvedu (Pvt) Ltd

Mutsvedu D Sales Returns Journal for the Feb 2004

20/02 B Sali returned goods $2 000.00

22/02 T Tom returned goods $5 000.00

Date Details Folio Dr Cr

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

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

Example; Mutsvedu (Pvt) Ltd

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

97
 Date Details Folio Dr Cr
01/02 Office furniture 100
Alice Mabinge 000.00 100
02/02 Stationery 000.00
Alice Mabinge 10
000.00

The Ledger Book

This is the main book of account. All other books of account are subsidiary to the ledger and are used to record
transactions as they occur, prior to their entry or posting to the ledger.
The ledger is ruled as follows:
Dr Cr
Date Details Folio Amount Date Details Folio Amount

Notes:
- The ledger is divided into two halves that is the left-hand side called debit side and the right hand side called credit side.
The abbreviations Dr and Cr are used respectively at the top of each account as shown above.
- The first column is for dates, the second for particulars of the transactions, the third, a folio column (referred to
hereafter) and the fourth, or money column for the amount of each transaction.

98
- The two sides of the account (sometimes contained on two pages facing each other) are numbered alike and are together
called a folio.
- The universal rule in entering or posting transactions to the ledger is that credit the giver and debit the receiver.

ACCOUNTING EQUATION
When an entrepreneur starts a business he supplies part of the resources (Capital).He seeks assistance from other sources
(Liabilities), so as to have adequate resources .These resources are the assets of the business. At any point of time the
assets of any entity must be equal (in monetary terms) to the total of equities. This can therefore be expressed as

ASSETS = CAPITAL + LIABILITIES

What are the resources? Who supplies the

equities to acquire the assets?

Account
It is a place where all information referring to a particular asset or liability or capital is entered.

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

Asset Accounts
These are the actual resources in a business and can include:
(i) Tangible/Fixed/Non Current assets :
· Buildings, Machinery ,Motor vehicles etc
99
 ·
(ii) Intangible/Current assets:
· Cash: coins and paper currency, money orders
· Bank: bank deposits and withdrawals, cheques
· Stock at hand
· Accounts receivables: goods and services sold on credit to debtors which are being expected to be paid at an
agreed time.
· Prepaid expenses: when an entrepreneur has made a payment in advance, he has done himself a favour.

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

Cashbook

100
This is the book of original entry used to record all cash transactions that is all money that comes into and goes out of the
business on a daily basis. A cashbook can be used to determine the amount of money left over at the end of the month.
Below is a layout of a cashbook

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

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

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

E Gobvu cash book for the month of February 2011

Date Receipts Cash Bank Date Payments Cash
(Details) (Details)
101
1/02 Capital 5 50 5/02 Purchases
8/02 Sales 000 000 15/02 Telephone
18/02 Deposit 15 18/02 bill 10 000
20/02 Sales 000 10 22/02 Deposit 10 000
23/02 Withdrawal 000 23/02 Wages 5 000
20 28/02 Withdrawal 15 000
5 000 29/02 Drawings 5 000
000 Balance c/f 25 000
1/03 Balance b/f
25 80
000_ 000

5 000 45
000

Notes
The cash book is divided into two halves that is Debit Side (Dr) or Receipts side and the Credit Side Payment side (Cr).
This means that when money comes into the business, it is recorded on the left hand side (Receipts) and on the right hand
side (Payment) for money going out of the business.
- Capital refers to the money being invested by the entrepreneur into the business.
- Purchases refer to goods bought by the business for resale.
- Drawings relates to money taken out of business for personal use.
102
- Transfer from Bank to Cash refers to money taken out of bank account to be kept as cash in business. This transaction
has to be recorded in the cashbook to show that the money has been moved from one place to the other, otherwise the
totals for the money left in the bank and in cash at the end of the month will be incorrect.
- When money is withdrawn from the bank account, money has gone out of the bank as such there is need to record it I
the Bank column on the Payments side of the Cash Book. This money is added to our supply of cash in the business
and a record has to be made on the cash column on the Receipts side of the cashbook. The reverse is true when the
business transfers cash from the business into the bank.
- Balance carried forward (c/f) is determined at the end of the month by subtracting the total payments (money out) from
the total receipts are $25 000 and total cash payments are $20 000, therefore $5 000 is left at the end of the month $25
000 has come in and $20 000 has gone out. $5 000 is the balance carried forward because it is the amount that will be
starting the next month and will be recorded as balance b/f (balance brought forward)

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

Example: Mutsvedu (Pvt) Ltd

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

Mutsvedu D Purchases journal for the month of February 2011

Date Details Folio Dr Cr
10/02 E Gobvu $10 000.00
18/02 T Timothy $ 5 000.00
Dr Purchases A/C $15 000.00

103
Sales Journal
- This is a book of primary entry where goods returned by customers are recorded

Example: Mutsvedu (Pvt) Ltd

Mutsvedu D Sales Returns Journal for the Feb 2004

20/02 B Sali returned goods $2 000.00

22/02 T Tom returned goods $5 000.00

Date Details Folio Dr Cr

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

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

Example; Mutsvedu (Pvt) Ltd

01/02 Received an invoice of $100 000.00 for office furniture bought on credit form Alice Mabinge
02/02 Bought stationary on credit from Alice Mabinge $10 000.00
Date Details Folio Dr Cr
01/02 Office furniture 100
104
 Alice Mabinge 000.00 100
02/02 Stationery 000.00
Alice Mabinge 10
000.00

The Ledger Book

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

The ledger is ruled as follows:

Dr Cr
Date Details Folio Amount Date Details Folio Amount

Notes:
- The ledger is divided into two halves that is the left-hand side called debit side and the right hand side called credit side.
The abbreviations Dr and Cr are used respectively at the top of each account as shown above.
- The first column is for dates, the second for particulars of the transactions, the third, a folio column (referred to
hereafter) and the fourth, or money column for the amount of each transaction.
- The two sides of the account (sometimes contained on two pages facing each other) are numbered alike and are together
called a folio.
- The universal rule in entering or posting transactions to the ledger is that credit the giver and debit the receiver.
105
DOUBLE ENTRY SYSTEM
It is based on the Double entry concept which is one of the universally acknowledges accounting concepts. It says that for
every transaction there is a debit and credit entry.

· Debit the receiver

· Credit the giver

Example 1
2010 Debit Credit (Cr)
(Dr)
August Started business with Cash Capital Account
1 $1000 cash Account
Paid $900 of the Bank a/c Cash a/c
2 opening cash into the
bank
Bought goods on credit Purchases [Link] a/c
4 $78 from [Link] a/c
Bought a motor van by Motor Bank a/c
5 cheque $500 Van a/c
Bought goods for cash Purchases Cash a/c
7 $55 a/c
Sold goods on credit $98 [Link] Sales a/c
10 to [Link] a/c
Returned goods to [Link] Purchases Returns
106
12 [Link] $18 a/c
Sold goods for cash $28 Cash a/c Sales a/c
19
Bought fixtures on Fixtures Kingston a/c
22 credit from Kingston a/c
Equipment Company
$150
[Link] lent us $100 Bank a/c [Link]
24 paying us the money by
cheque
We paid [Link] his [Link] Bank a/c
29 account by cheque $60 a/c
We paid Kingston Kingston Bank a/c
31 Equipment Co. by a/c
cheque $150

Opening up accounts and closing them in the ledger

When transactions transpire within a month/financial period they are posted into the ledger of the company’s books from
subsidiary books. Accounts for related transactions are recorded in the same accounts and these are balanced off at the end
of a period.
· We are going to used T-Accounts for our ledger to open up accounts using Example 1 above. We are now
practically entering the theoretically done debits and credits in the example.

Capital a/c
Bal c/d 1000 Cash 1000
107
 1000 1000

Bal b/d 1000

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

Bank a/c
Cash 900 [Link] 500
Loan 100 [Link] 60
Kingston 150
Bal c/d 290
1000 1000
Bal b/d 290
Purchases a/c
[Link] 78 Bal c/d 133
Cash 55

133 133
Bal b/d 133
108
 [Link] a/c
[Link] 18 Purchases 78
Bank 60
78 78

Motor Van a/c

Bank 500 Bal c/d 500
500 500

Bal b/d 500

Sales a/c
Bal c/d 126 [Link] 98
Cash 28
126 126

Bal b/d 126

[Link] a/c
Sales 98 Bal c/d 98
98 98
Bal b/d 98
Purchases Returns a/c
109
Bal c/d 18 [Link] 18
18 18
Bal b/d 18

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

Loan- [Link] a/c

Bal c/d 100 Bank 100
100 100

Bal b/d 100

Kingston Equipment a/c

Bank 150 Fixtures 150

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

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

Trial Balance as at 31 August 2010

Dr Cr

Capital 1000
Cash 73
Bank 290
Purchases 133
Motor Van 500
Sales 126
[Link] 98
Purchases Returns 18
Fixtures 150
[Link] 100
1244 1244
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The two sides are equal therefore the trial balance has balanced. This shows that our transactions that we posted into the
ledger are correct.

FINAL ACCOUNTS OF A SOLE TRADER

· Income Statement/Trading Profit and Loss Account

· Balance Sheet

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

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

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

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

Example 2
The following is a Trial Balance of [Link] as at 30 September 2010.
Dr Cr
$ $
Stock 1 October 2009 2368
Carriage outwards 200
Carriage inwards 310
Returns inwards 205
Returns outwards 322
Purchases 11874
Sales 18600
Salaries and wages 3862
Rent 304
Insurance 78
Motor Expenses 664
Office expenses 216
Lighting and Heating 166
General expenses 314
Premises 5000
113
Motor Vehicle 1800
Fixtures and Fittings 350
Debtors 3896
Creditors 1731
Cash at bank 482
Drawings 1200
Capital 12636
33 289 33 289

Stock at 30 September 2010 was $2946.

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

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

Sales 18 600
Less Returns inwards (205)
18 395

Less Cost of goods sold:

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

Less Expenses:
Carriage outwards 200
Salaries and Wages 3 862
Rent 304
Insurance 78
Motor Expenses 664
Office Expenses 216
Lighting and Heating 166
General Expenses 314 5 804
NET PROFIT 1 307

Balance Sheet as at 30 September 2010

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

Net Current Assets 5 593

115
Current Assets 7 324
Stock 2 946
Debtors 3 896
Bank 482
Current Liabilities 1 731
Creditors 1 731

Total Assets 12 743

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

12 743

CAPITAL STRUCTURE & CAPITAL GEARING CONCEPT

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

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

· Equity Capital: in a company’s’ capital structure, equity consists of a company’s common and preferred stock
plus retained earnings, which are summed up in the shareholders equity account in the balance sheet.

· Debt Capital: the debt component of a company’s ’capitalisation should consist of short term borrowings
(notes payable), the current portion of long term debt (interest), long term debt, 2/3 of the principal amount of
operating leases and redeemable preferred stock.

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

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

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

117
Capital Ratios and indicators
Three different ratios are used to assess the financial strength of a company’s’ capitalisation structure.

· Debt ratio: total liabilities

total assets.

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

· Capitalisation Ratio: total debt

total capitalisation

(Total debt = the sum of obligations categorised as debt + total shareholders equity)
Expressed as a percentage, a low number is indicative of a healthy equity cushion, which is always more desirable than
a high percentage of debt.

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

Capital gearing concept

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

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

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

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

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

Finance institutions are generally a bit more lenient when it comes to franchise finance because of these brands’ proven
abilities to produce returns on investment. Most of these institutions use a guideline of expecting gearing of between 30
and 50%, although when economies are depressed few would consider a gearing ratio of lower than 40%.Some financial

119
institutions may allow higher gearing ratios when an existing business is being bought out and there is a cash flow history,
as opposed to starting from scratch.

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

· Capital Gearing ratio: owner's equity (or capital) Borrowed funds

Gearing is a measure of financial leverage, demonstrating the degree to which a firm's activities are funded by owner's
funds versus creditor's funds.

ACCOUNTING RATIO ANALYSIS

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

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

· Current Ratio = Current Assets

Current Liabilities

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

A current ratio of 2 is standard. Ratio of 1 or less is considered low and indicative of financial difficulties. Very
high rates suggest excess current assets that are probably having an adverse effect on the long term profitability
of the business. If it is more than 2 that means that we are too liquid, so we need to reduce or work on one of
them.

· Quick/Acid Test Ratio = Current Assets - Stock

Current Liabilities

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

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

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

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

· Total Debt to Total Assets Ratio = Total Debt

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 Total Assets

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

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

· Days Purchases Outstanding = Credit Purchases

Purchases/365

Indicates how prompt a business is at paying its bills.

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

Interest

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

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

· Fixed charges coverage Ratio = EBIT + Lease expenses

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 Interest + Lease expenses

Provides a more comprehensive picture of the business’s ability to meet it’s legal financial requirements.
A high ratio is more desirable than a low one.

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

· Net Profit Margin = Net Profit

Net Sales

This ratio is used to measure the efficiency of management. A low margin indicates that not too much sales
are guaranteed relative to expenses or that expenses are out of control or both.

· Return on Investment (ROI) = Net Profit

Total Assets

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

· Return on Equity (ROE) = Net Profit or Net Profit

Capital Market value of Equity
It indicates return on the owners’ investment in the business. It is an accounting measure on how well
management is performing

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

· Days Sales outstanding = Credit Sales

Sales/365

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

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

· Inventory turnover Ratio = Cost of goods Sold

Average stock

It measures the times in a year the business turns over its inventory/stock.
The lower the Inventory turnover the higher the cash conversion cycle. How many times do you order? If you
order more it means that you are selling more on credit. Other things being equal and assuming that sales are
moving smoothly, a high turnover suggests efficient Inventory management, a low turnover figure often
indicates obsolete stock or lack of inventory management.

· Long Term Asset Turnover Ratio = Sales

Non current Asset
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 It provides an indication of a business ability to create sales based on long term asset base. The ratio provides
an indication of how effective the business in using its assets. The higher the ratio, the more effective the
utilisation of assets. A low ratio indicates that the marketing effort requires attention.

· Total Asset Turnover Ratio = Sales

Total Assets

It is an indication of the business ability to generate sales in relation to its total asset base. A high turnover
normally reflects good management, whereas a low ratio suggests the need to reassess the overall strategy of
the business, marketing effort and the capital expenditure programme.

STOCK CONTROL

Why do we control stock?

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

Objectives of Inventory Management

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

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

Low cost plant operation

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

Minimum inventory investment

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

METHODS OF STOCK CONTROL

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

There are several methods for controlling stock; you may opt for one method or a mixture of two or more if you have
various types of stock.
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(i) Just in Time (JIT)
It aims to reduce cost by cutting stock to a minimum. Items are delivered when needed and used immediately.
This method carries the risk of running out of stock, so you need to be confident that your suppliers can deliver
on demand.

(ii)
(iii) Batch control/2 Bin System
A quantity of an item equal to the order quantity is set aside (frequently in a separate / 2nd bin), and not touched
until all main stock is used up. When this stock (safety stock) needs to be used, the purchasing department is
notified and a replenishment order is placed. e.g. Book stores use red –tag system where by a tag is placed in
the stock at a point equal to order point. When a customer takes that book to the checkout, the store is
effectively notified that it is time to reorder that title.

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

(iv) Economic Order Quantity(EOQ)

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

It is a standard formula used to arrive at a balance between holding too much or too little stock.

EOQ formula: Q = 2DS

C
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 Where Q=Quantity ordered at each order point
D=Annual demand for a material in units
S=Average cost of completing an order
C=Cost of carrying one unit in inventory for one year.

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

· Costs which decrease as the size of the order is increased.

a. Purchase price (quantity discounts)
b. Cost of placing an order
c. Stock-out costs e.g. lost contribution through lost sale and cost of production stoppages

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

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

(v) Stock Review

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

(vi) First in First Out(FIFO)

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

Stock Taking

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

How to carry out a stock take

STEPS:
1st Set a date for stock take and inform the publics if business hours are interrupted
2nd Organize the stock to facilitate easy counting
3rd Develop a stock list
4th Physically count every item as per stock list and enter the figure in the ‘stock take’ column
5th Enter the last balance figure from the stock cards in the stock card column for each item
6th Deduct the stock card figure form the stock take figure and enter this amount in the Difference column
7th Find out the reasons if there is a difference i.e. if there is more or less stock than shown on the stock card

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Below is a specimen of a stocktaking list

Stock taking list

Item Stock take Stock card Difference

Eversharp pen 1 000 1 150 -150

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

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

CHAPTER 8

COSTING AND PRICING

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

Define the following costing terms

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 · Costing
· Costs
· Direct costs
· Direct labour
· Direct expenses
· Indirect costs

Ø Calculate total costs per item

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

Definition of costing terms

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

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

Direct Costs
These relates to all costs that are directly related to the products or services that the business makes or sells. There are two
types of direct costs namely direct material costs and direct labour costs.
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 Direct Material costs
- These are all the money that the business/entrepreneur spends on the parts and materials that become part of or are
directly related or linked to the final product or service that it/he/she makes or sells.
- NB: for a retailer’s or wholesaler’s, the costs of buying goods to resell are the direct material costs. To be considered or
counted as direct material costs, the amount of material must be easy to calculate and the cost of the material must be
big enough to add a considerable amount to the total direct material costs.
Direct labour costs
- These are all the money that the business or entrepreneurs spends on wages, salaries and benefits for the people who are
directly involved in the production of its or his/her products or services
- The time spent on making the product must be easy to calculate and the cost of the direct labour must be big enough to
add a considerable amount to the total direct labour costs. Retailers and wholesalers do not have employees working
directly in making products, so they do not have any direct labour costs. For retailers and wholesalers, all salaries and
wages are indirect costs.

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

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

Calculate total cost per item

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

STEP I Direct Direct Direct Direct

Material labour Expense
Cost: - + cost: - (hrs + = Cost Per
Add the per item x Item
cost of

STEP II Indirect Cost per year

Add up all the Indirect costs for the year

Indirect Cost per item:

Total Indirect costs per year
Total number of items per year

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 Total cost per item:
STEP III Direct cost per item + indirect cost per
item

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

Costing calculations in detail (Manufacturer or service operator)

Stage I: Calculate Direct Material Costs

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

Stage II: Calculate Direct Labour Costs

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

Stage III: Calculate Indirect Costs

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

Costing calculations where not more than one product is produced.

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

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

100 items are produced each month

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

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

Indirect Cost/item: Rent $ 5 000.00

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

Indirect Cost/item: $19 500.00

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

NB: There are not direct expenses

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

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

ii) The entrepreneur produces desks and uses the following:

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

Direct expenses $5 000.00

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

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

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

Materials $50 000/item

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

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

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

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

Material Dress Trousers

Fabric $800.00 $1 000.00

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

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

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

1st calculate direct material cost:

Materials Dress Trousers

Fabric $800.00 $1 000.00

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

2nd calculate direct labour cost

Dress: 2 workers x 4hrs x $2 000.00
= $16 000.00 per dress

Trousers 2 workers x 4 hours x $2 000.00

= $24 000.00 per pair of trousers
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3rd Total Direct Cost:
Dress: Direct material cost + Direct Labour
= $1 300.00 + $16 000.00
= $17 300.00 per dress

Trousers: $1 600.00 + $24 000

= $25 600.00 per pair of trousers

4th calculate indirect costs: Rent $6 000 000.00

Electricity $ 240 000.00
Transport $ 240 000.00_
$1 080 000/year

5th calculate production hours per year

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

6th indirect cost per hour:

Formula: indirect cost/year

Production hrs/yr

= 1 080 000/yr
4 000 hrs/yr

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 = $270/hr

7th calculate indirect cost per item:

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

= $ 1 660.00/dress

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

= $ 3 240.00/pair

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

= $18 960.00

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

= $28 840.00

Further Questions

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

Materials Skirt Dress

Fabric $2 000.00 $3 000.00

Elastic $ 50.00 -
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Zip - $ 80.00
Lace $ 90.00 $ 100.00

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

Indirect costs per year:

Rent $600 000.00

Electricity $360 000.00
Transport $240 000.00

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

Costing for a retailer or wholesaler

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

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

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Total cost = Direct Material Cost + Indirect cost

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

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

Pricing

Definition: is the process of calculating an amount of money to charge customers for goods and services produced or
to be provided by the entrepreneur.

Calculations of prices of product

After costing the next process is to calculate the price for which the products should be offered
The two major methods of pricing calculation are mark-up and margin.
Mark up is profit expressed as a fraction or percentage of cost
It is calculated as: Profit (P) x 100%
Cost ©

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

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

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Note that Profit = Selling Price – Cost

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

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

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

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

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

Material Dress Skirt

Fabric $2 000.00 $3 000.00
Thread $ 200.00 $ 700.00
Buttons $ 30.00 $ 30.00

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

Rent $600 000.00

Electricity $240 000.00
Other wages $ 30 000.00

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

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

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

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

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

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

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

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

c) Cost and Profit

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

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

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

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

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

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

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

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

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

CHAPTER 9

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

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

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

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

A ns off Pr oduct a nd M ar ket M a tri x

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

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

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

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

Market penetration seeks to achieve four main objectives:

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

• Secure dominance of growth markets

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

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

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

Market development

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

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

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

• New product dimensions or packaging: for example

• New distribution channels

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

Product development

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

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

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

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

BUSINESS PORTFOLIO ANALYSIS

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

The company must:

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

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

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

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The BCG Model

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

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

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

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

· STARS(high growth and high market share)

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

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

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

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

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

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

· DOG (low growth rate/ low market share)

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

Using the BCG Box to determine strategy

Once a company has classified its SBU's, it must decide what to do with them. In the diagram above, the company has one
large cash cow (the size of the circle is proportional to the SBU's sales), a large dog and two, smaller stars and question
marks.
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Conventional strategic thinking suggests there are four possible strategies for each SBU:

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

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

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

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

LIMITATIONS OF THE BCG MATRIX

It does not consider profit margin.
It does not take account of any ethical reason for holding an investment e.g. creation of an employment in the region.
It does not identify any criteria for deciding acceptable growth rate and market share.
There may be any other strategic reason for holding investment e.g. cross-selling benefits, strengthening up-side or
downside supply chain.

CHAPTER 10

RISK MANAGEMENT

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

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

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

Risk management is the identification, assessment, and prioritization of risks(defined in ISO 31000 as the effect of
uncertainty on objectives, whether positive or negative) followed by coordinated and economical application of resources
to minimize, monitor, and control the probability and/or impact of unfortunate events[or to maximize the realization of
opportunities.

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

In ideal risk management, a prioritization process is followed whereby the risks with the greatest loss and the greatest
probability of occurring are handled first, and risks with lower probability of occurrence and lower loss are handled in

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descending order. In practice the process can be very difficult, and balancing between risks with a high probability of
occurrence but lower loss versus a risk with high loss but lower probability of occurrence can often be mishandled.

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

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

Method

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

1. identify, characterize, and assess threats

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

Principles of risk management

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

Risk management should:

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

Process

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

Establishing the context

Establishing the context involves:

1. Identification of risk in a selected domain of interest

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

Identification

· After establishing the context, the next step in the process of managing risk is to identify potential risks. Risks are
about events that, when triggered, cause problems. Hence, risk identification can start with
· Risk sources may be internal or external to the system that is the target of risk management.

Examples of risk sources are: stakeholders of a project, employees of a company or the weather over an airport.

· Problem analysis- Risks are related to identified threats. For example: the threat of losing money, the threat of abuse
of privacy information or the threat of accidents and casualties. The threats may exist with various entities, most
important with shareholders, customers and legislative bodies such as the government.

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

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

· Objectives-based risk identification Organizations and project teams have objectives. Any event that may
endanger achieving an objective partly or completely is identified as risk.
· Scenario-based risk identification In scenario analysis different scenarios are created. The scenarios may be the
alternative ways to achieve an objective, or an analysis of the interaction of forces in, for example, a market or battle.
Any event that triggers an undesired scenario alternative is identified as risk.
· Taxonomy-based risk identification The taxonomy in taxonomy-based risk identification is a breakdown of
possible risk sources. Based on the taxonomy and knowledge of best practices, a questionnaire is compiled. The
answers to the questions reveal risks.
· Common-risk checking In several industries, lists with known risks are available. Each risk in the list can be
checked for application to a particular situation.
· Risk charting This method combines the above approaches by listing resources at risk, Threats to those resources
Modifying Factors which may increase or decrease the risk and Consequences it is wished to avoid. Creating a
matrix under these headings enables a variety of approaches. One can begin with resources and consider the threats
they are exposed to and the consequences of each. Alternatively one can start with the threats and examine which
resources they would affect, or one can begin with the consequences and determine which combination of threats and
resources would be involved to bring them about.

Assessment

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

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

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

Risk Options

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

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

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

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

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

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

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

Potential risk treatments

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

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

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

Risk avoidance

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

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

Risk reduction

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

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

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

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

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Risk sharing

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

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

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

Methods of transfering

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

BOOT CONTRACT ( Build Own Operate and Transfer)

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ROT (Refurbish Operate and Tranfer)

PPP ( Public Private Partnership )

Insurance

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

-Indirect consequential loss

Legal liability

Personal liability.

Risk retention

Involves accepting the loss, or benefit of gain, from a risk when it occurs. True self insurance falls in this category. Risk
retention is a viable strategy for small risks where the cost of insuring against the risk would be greater over time than the
total losses sustained. All risks that are not avoided or transferred are retained by default. This includes risks that are so
large or catastrophic that they either cannot be insured against or the premiums would be infeasible. War is an example
since most property and risks are not insured against war, so the loss attributed by war is retained by the insured. Also any
amounts of potential loss (risk) over the amount insured is retained risk. This may also be acceptable if the chance of a
very large loss is small or if the cost to insure for greater coverage amounts is so great it would hinder the goals of the
organization too much.

Individual Cover

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This is usually a response measure undertaken by an individual through such measures as taking medical aid scheme, Life
assurance, employment cover, e.t.c

Group Cover

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

Create a risk management plan

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

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

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

Implementation

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

Review and evaluation of the plan

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

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

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

Limitations

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

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

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

Areas of risk management

Enterprise risk management

In enterprise risk management, a risk is defined as a possible event or circumstance that can have negative influences on
the enterprise in question. Its impact can be on the very existence, the resources (human and capital), the products and
services, or the customers of the enterprise, as well as external impacts on society, markets, or the environment. In a
financial institution, enterprise risk management is normally thought of as the combination of credit risk, interest rate risk
or asset liability management, market risk, and operational risk.

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

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

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

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 · the probable increase in cost associated with a risk (cost variance due to risk, Rc where Rc = P*C = P*CAR*S =
P*S*CAR)
o sorting on this value puts the highest risks to the budget first.
o see concerns about schedule variance as this is a function of it, as illustrated in the equation above.

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

Risk management activities as applied to project management

In project management, risk management includes the following activities:

· Planning how risk will be managed in the particular project. Plans should include risk management tasks,
responsibilities, activities and budget.
· Assigning a risk officer - a team member other than a project manager who is responsible for foreseeing potential
project problems. Typical characteristic of risk officer is a healthy skepticism.
· Maintaining live project risk database. Each risk should have the following attributes: opening date, title, short
description, probability and importance. Optionally a risk may have an assigned person responsible for its resolution
and a date by which the risk must be resolved.
· Creating anonymous risk reporting channel. Each team member should have possibility to report risk that he/she
foresees in the project.
· Preparing mitigation plans for risks that are chosen to be mitigated. The purpose of the mitigation plan is to describe
how this particular risk will be handled – what, when, by who and how will it be done to avoid it or minimize
consequences if it becomes a liability.

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 · Summarizing planned and faced risks, effectiveness of mitigation activities, and effort spent for the risk
management.

Risk management for megaprojects

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

Risk management of Information Technology

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

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

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

Risk management and business continuity

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Risk management is simply a practice of systematically selecting cost effective approaches for minimising the effect of
threat realization to the organization. All risks can never be fully avoided or mitigated simply because of financial and
practical limitations. Therefore all organizations have to accept some level of residual risks.

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

Risk communication

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

Bow tie diagrams

A popular solution to the quest to communicate risks and their treatments effectively is to use bow tie diagrams. These
have been effective, for example, in a public forum to model perceived risks and communicate precautions, during the
planning stage of offshore oil and gas facilities in Scotland. Equally, the technique is used for HAZID (Hazard

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Identification) workshops of all types, and results in a high level of engagement. For this reason (amongst others) an
increasing number of government regulators for major hazard facilities (MHFs), offshore oil & gas, aviation, etc. welcome
safety case submissions which use diagrammatic representation of risks at their core.

Communication advantages of bow tie diagrams:

· Visual illustration of the hazard, its causes, consequences, controls, and how controls fail.
· The bow tie diagram can be readily understood at all personnel levels.
· "A picture paints a thousand words."

Seven cardinal rules for the practice of risk communication

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

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

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

CHAPTER 11

LEGAL REQUIREMENTS

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

Taxation

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

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

VAT
VAT stands for Value Added Tax. VAT is like a tax on sales and it is always charged to the ultimate consumer of goods
and services.
- Unlike sales tax, however, the value added tax is not collected solely at the final point of sale.
- - VAT is added and collected at each stage of production and distribution when goods pass from one firm to another.
- - At each stage, a trader must charge the tax on his customer at the stipulated rate, but he may deduct from the tax
collected any tax which he himself has on goods and services supplied to him.
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Refund of VAT
If a firm liable to VAT but has paid more than it has collected from its customers, then it may be eligible for a refund of
VAT. The entries will be
Debit- cash with refund received
Credit- VAT A/c with tax refund received
This will normally apply to firm which are zero rated for VAT. They apply a zero rate to their sales but are eligible for
refund on their payment for goods and services.
-All exports are zero rated

Exemption from VAT

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

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

The corporation tax on current profits will normally be payable until the following year, but full provision should be made
for the tax when the profit arises.

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

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

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

Labour Legislation

The labour legislation is provided for by the labour relations Act, Chapter 28:01. The purpose of the Act is to advance
social justice and democracy in the work place.
1. Giving effect to the fundamental rights of employees provided for and part II of the Act.
2. Provide a legal framework within which employees and employers can bargain collectively for the improvement of
conditions of employment.
3. the promotion of fair labour standards
4. the promotion of the participation by employees in decisions affecting their interest in the work place.
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 5. Securing the just, effective and expeditious resolution of disputes and unfair labour practices

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

3) Protection against discrimination

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

SICK LEAVE

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Sick leave shall be granted in terms of this section to an employee who in terms of section 14 (Labour Relations Act ) is
prevented from attending duties because he is ill or injured or undergo medical treatment which was not occasioned by his
failure to take reasonable precautions.
These are the conditions
a) Ninety days sick leave on full pay
b) Subject to section (3), one hundred and eighty days sick leave on full pay and half pay.

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

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

Functions of Workers Committee

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

EFFECTS OF COLLECTIVE BARGAINING

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

WORKS COUNCIL
In every establishment in which a workers committee representing employees other than managerial employees has been
elected, there shall be a works council
- A works council shall be composed of an equal number of members representing the employer and the workers
committee.
- The conditions shall be determined by the employer

FUNCTIONS OF WORKS COUNCIL

- To focus the best interest of the establishment and employees on the best possible use of it human, capital,
equipment and other resources so that maximum productivity and optimum employment standards may be
maintained.
- To foster, encourage and maintain good relations between employer and employees at all levels
- To promote the general and common interest including health, safety and welfare of both establishment and its
workers.
- To promote and maintain the effective participation of employees in the establishment, and to seek mutual
corporation and trust of employees and employer.
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TRADE UNIONS
-Any group of employees may form a trade union
-Any group of employers may form an employers organization
- Any trade unions or employers organizations may form a federation.

CONTRACTS

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

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

SALE CONTRACT
A sale in Roman Dutch Law has been defined as “a contract in which one person promises to deliver a thing to another,
who on his part promises to pay a certain price”

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- It is the exchange of property for a price or, because the equivalent Latin words are found in Judgments, the exchange of
merx for a premium.
The general requirements of the formation of a contract of sale are no different from those applicable to any contract but
identification as noted be an agreement to exchange property for a price.
-The property must be defined with sufficient and there must be certainty that the parties are in agreement on what is being
bought and sold.
PRICE- According to R.H. Christie (1997) the price must be expressed in money. If it is expressed in property or services
the contract will not be a sale, but if it is expressed partly in money and partly in goods or services (As with the common
trade agreement) the contract will be a sale only if money is the major consideration.

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

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

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

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

Compulsory Sequestration
A Creditor with a liquidated claim of not less than $ 100 or creditors with liquidated claims totaling less than $200 or the
agent of such a creditor may petition the court for the compulsory sequestration of a debtor.
- A liquidated claim means one based on an obvious and ascertainable legal ground and capable of quick ready proof. A
creditor whose claim is disputed and could be established by action has no locus standi
- The creditor has to prove to be insolvent and the acts of insolvency which are:
A) Absenting him to evade payment of debts
B) Failing to satisfy a writ of execution
C) Disposing of property to the prejudice of creditors
D) Removing his property to meet the prejudice of creditors
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E) Making offering a non-statutory assignment or arrangement with creditors( Even if made without prejudice)
F) Giving notice of suspension or suspending payment of his debts

CHAPTER 12

BUSINESS ETHICS
Objectives
By the end of the study unit you must be able to;
· define and appreciate the nature of business ethics
· relate ethics and social responsibility
· identify various business ethical issues
· describe various forms of social responsibility
· outline strategies for dealing with social responsibility issues.

Nature of ethics
Ethics is the study of right and wrong actions and how conduct should be judged as to be

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good or bad. Ethics is about how we should live our lives and, in particular, how we should behave towards other people.
They are the moral principles which guide thinking, decision making and action. It is therefore relevant to all forms of
human activity. Business ethics is not really separate or different from ideas that apply in the general context of human
life. Professionals of all specialisations, entrepreneurs included, should be aware of the general principles of ethics and be
capable of applying them in their everyday work. It is important, however, to note that ethics and law are not the same.

Ethics and Social responsibility

An organisation exercises social responsibility when its acts respect the general public interest.

Social responsibility requires that organisations do not act in a way which harms the general public or is socially
irresponsible. Business ethics relate to business morality rather than society's interests. On the other hand, social
responsibility relates to society at large. However, because corporate decisions subsume marketing decisions the terms
ethics and social responsibility are often used interchangeably.
Ethics and the law
Ethics deal with personal moral principles and values, but laws are the rules that can actually be enforced in court.
Behaviour which is not subject to legal penalties may still be unethical.

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Different cultures view business practices differently. While the idea of intellectual property is widely accepted in Europe
and the USA, in other parts of the world ethical standards are quite different. Unauthorized use of copyrights, trademarks
and patents is widespread in countries such as Taiwan, Mexico and Korea. According to a US trade official, the Korean
view is that ' ... the thoughts of one man should benefit all', and this general value means that, in spite of legal formalities,
few infringements of copyright are punished.

ETHICAL ISSUES IN BUSINESS MARKETING

· M Product issues
Ethical issues relating to products usually revolve around safety, quality, and value and frequently arise from failure to
provide adequate information to the customer. This may range from omission of uncomfortable facts in product literature
to deliberate deception. A typical problem arises when a product specification is changed to reduce cost. Clearly, it is
essential to ensure that product function is not compromised in any important way, but a decision must be taken as to just
what emphasis, if any, it is necessary to place on the changes. Another, more serious, problem occurs when product safety
is compromised. Product recall may become necessary.
Markeing at k
· Promotion issues

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Ethical considerations are particularly relevant to promotional practices. Advertising and personal selling are areas in
which the temptation to select, exaggerate, slant, conceal, distort and falsify information is potentially very great.
Questionable practices here are likely to create cynicism in the customer and ultimately preclude any trust or respect.
Also relevant to this area is the problem of corrupt selling practices. It is widely accepted that a small gift such as a diary
is a useful way of keeping a supplier's name in front of an industrial purchaser. Most business people would condemn the
payment of substantial bribes to purchasing officers to induce them to favour a particular supplier. But where does the
dividing line lie between these two extremes?

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

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(d) Gifts. In some cultures (such as Japan) gifts are regarded as an essential part of civilisednegotiation, even in
circumstances where to Western eyes they might appear ethically [Link] operating in such a culture may feel
at liberty to adopt the local custom.

· Pricing issues
There are several pricing practices that have attracted criticism. Not all can be described as improper, however.
(a) Active collusion among suppliers to fix prices is illegal in most countries, but the existence of a more or less fixed
market price does not necessarily imply that collusion is taking place. A tendency to compete in areas other than price is a
natural feature of oligopoly markets.

(b) Predatory pricing is an issue when newcomers attempt to break into a market. Established suppliers utilize their cash
reserves and economies of scale to sell at prices the newcomer cannot match. Withdrawal from the market follows.

(c) Failure to disclose the full price associated with a purchase has been rightly criticized as unethical. However, it must
be recognized that there are occasions when it is impossible to compute the eventual full price, as when cost escalation is
accepted by both parties to a contract. The measure of propriety is whether there is any intention to deceive.

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 · Place issues
Where long and complex distribution channels are used there is potential for disputes and conflicts of interest. Even where
relationships of trust have been built up over long periods of time, business pressures can lead to hard decisions and a
perception by distributors that they have been treated unfairly. Here are some examples of conduct by manufacturers that
distributors could reasonably complain of.
• Requiring high levels of stock holding by intermediaries
• Manipulating discount structures to the detriment of distributors
• Ending distribution agreements at short notice
• Dealing direct with end users at Work
Ethical codes
It is now common for businesses to specify their ethical standards. Some have even published a formal declaration of
their principles and rules of conduct. This would typically cover payments to government officials or political parties,
relations with customers or suppliers, conflicts of interest, and accuracy of records. Ethical standards may cause
individuals to act against the organisation of which they are a part. More often, business people are likely to adhere to
moral principles which are 'utilitarian', weighing the costs and benefits of the consequences of behaviour. When benefits
exceed costs, the behaviour can be said to be ethical. This the philosophical position upon which capitalism rests, and is

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often cited to justify behaviour which appears to have socially unpleasant consequences. For example, food production
regimes which
appear inhumane are often justified by the claim that they produce cheaper food for the
majority of the population.

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

AMA Code of ethics

Marketers' professional conduct must be guided by;
1 The basic rule of professional ethics: not knowingly to do harm.
2 The adherence to all applicable laws and regulations.
3 The accurate representation of their education, training and experience.
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4 The active support, practice and promotion of this Code of Ethics.
Honesty and Fairness
Marketers shall uphold and advance the integrity, honor and dignity of the marketing profession
1 Being honest in serving consumers, clients, employees, suppliers, distributors and the public.
2 Not knowingly participating in conflict of interest without prior notice to all parties involved.
3 Establishing equitable fee schedules, including the payment or receipt of usual, customary and/or legal compensation or
marketing [Link] and Duties of Parties in the Marketing Exchange Process
Participants in the marketing exchange process should be able to expect
1 Products and services offered are safe and fit for their intended uses.
2 Communications about offered products and services are not deceptive.
3 All parties intend to discharge their obligations, financial and otherwise, in good faith.
4 Appropriate internal methods exist for equitable adjustment and/or redress of grievancesconcerning purchases.

It is understood that the above would include, but is not limited to, the following responsibilities of the marketer;
In the area of product development and management
• Disclosure of all substantial risks associated with product or service usage.

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• Identification of any product component substitution that might materially change the product or impact on the buyer's
purchase decision.
• Identification of extra-cost added features.
• Avoidance of false and misleading advertising.
• Rejection of high pressure manipulation, or misleading sales tactics.
• Avoidance of sales promotions that use deception or manipulation.I.n the area of distribution
• Not manipulating the availability of a product for purpose of exploitation.
• Not using coercion in the marketing channel.
• Not exerting undue influence over the reseller’s choice to handle the product the area of pricin
• Not engaging in price fixing.
• Not practicing predatory pricing.
• Disclosing the full price associated with any purchaseIn the area of marketing research
• Prohibiting selling or fund raising under the guise of conducting research.
• Maintaining research integrity by avoiding misrepresentation and omission of pertinent research data.
• Treating outside clients and suppliers fairly.
Organisational relationshi

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Any AMA members found to be in violation of any provision of this Code of Ethics may have his or her Association
membership suspended or revoked.
(Reprinted by permission of The American Marketing Association)
A Social responsibility
There is a growing feeling that the concerns of the community ought to be the concerns of business, since businesses exist
within society, and depend on it for continued existence. Business therefore has a moral obligation to assist in the solution
of those problems which it causes. Businesses and businessmen are also socially prominent, and must be seen to be taking
a lead in addressing the problems of society. Enlightened self-interest is probably beneficial to business. In the long term,
concern over the damage which may result from business activity will safeguard the interests of the business itself. In the
short term, responsibility is a very valuable addition to the public relations activities within a company. As pressure for
legislation grows, self-regulation can take the heat out of potentially disadvantageous campaigns. More and more, it is
being realised that it is necessary for organisations to develop a sense of responsibility for the consequences of their
actions within society at large, rather than simply setting out to provide consumer satisfactions. Social responsibility
involves accepting that the organisation is part
of society and, as such, will be accountable to that society for the consequences of the actions which it takes. Three
concepts of social responsibility are profit responsibility, stakeholder responsibility and societal responsibility.
Mketing at Work
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 · Profit responsibility
Profit responsibility argues that companies exist to maximize profits for their proprietors. Milton
Friedman asserts:
'There is one and only one social responsibility of business: to use its resources and engage in
activities designed to increase its profits so long as it stays within the rules of the game – which is to say, engages in open
and free competition without deception or fraud.'
Thus, drug companies which retain sole rights to the manufacture of treatments for dangerous diseases are obeying this
principle. The argument is that intervention, to provide products at affordable prices, will undermine the motivation of
poorer groups to be self-sufficient, or to improve their lot. Proponents of this view argue that unless the market is allowed
to exercise its disciplines, groups who are artificially cushioned will become victims of a 'dependency culture', with far
worse consequences for society at large.

· Stakeholder responsibility
Stakeholder responsibility arises from criticisms of profit responsibility, concentrating on the obligations of the
organisation to those who can affect achievement of its objectives, for example, customers, employees, suppliers and
distributors.

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 · Societal responsibility
Societal responsibility focuses on the responsibilities of the organisation towards the general public. In particular, this
includes a responsible approach to environmental issues and concerns about employment. A socially responsible posture
can be promoted by an organisation via cause related marketing, when charitable contributions are tied directly to the sales
revenues from one of its products.

Strategies for social responsibility

An organisation can adopt one of four types of strategy for dealing with social responsibility issues.

· Proactive strategy
A proactive strategy implies taking action before there is any outside pressure to do so and without the need for
government or other regulatory intervention. A company which discovers a fault in a product and recalls the product
without being forced to, before any injury or damage is caused, acts in a proactive way.

· Reactive strategy

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A reactive strategy involves allowing a situation to continue unresolved until the public, government or consumer groups
find out about it. The company might already know about the problem. When challenged, it will deny responsibility, while
at the same time attempting to resolve the problem. In this way, it seeks to minimise any detrimental impact.

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

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Marketing at Work

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