ENTREPRENEURSHIP SKILLS

DEVELOPMENT

CHAPTER I

CONCEPT OF ENTREPRENEURS HIP

Objectives
By the end of the unit you should be able to:
 Define entrepreneurship
 Describe the characteristics of successful entrepreneurs
 Discuss the roles of SM Es 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. M ining rights Entrepreneur – village smiths often paid tributes to their Chief or King with hoes, axe heads and other
were given by the King and his advisors. The minerals mined included gold, copper and iron. items from iron. Hoes were used for special payments such as lobola.

Manufacturing (secondary Industry) Entrepreneur – miners extracted iron ore from the ground, entrepreneur – metallurgists crushed iron ore
There was a very successful value adding industry before colonization. The output from agriculture and smelt it with very hot fire. At Great Zimbabwe there is still evidence of clay furnace, forge and
and mining was proceeding and great and useful items were made to serve the needs of the people then. bellow. This smelting separated the metal from the stone. As the pure iron cooled, it hardened again,
Brewing Industry and the village smiths could hammer it into shape of hoes, axes and knifes. This was a revolutionary
M hunga, mapfunde, rukweza were processed and brewed into different beer flavors. As it is today, development in the way of life of Africans.
after work villagers would gather and drink. This industry had strong competition and successful
entrepreneurs were known for exceptional brews and good customer care. 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
Metallurgy or Iron smith (Mhizha) traded their products for other goods.
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 For over two (2) centuries great products like farming equipment, military equipment was made. It is
needed spears (mapfumo), makano, miseve etc. jewellery such as golden, necklaces were also needed from these that successful and powerful states were created.
to the wealthy people and the royal family. These products could be traded to other kingdom for other During the colonial era black entrepreneurs were so limited. The reason being inability by blacks to
products. The ironsmith were usually very wealth. These skilled artisans were entrepreneurs of the access means of production and suppressed talent. Technical Education was also biased. From 1980 we
time in metallurgy. 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.
Colonisation and its effect on African entrepreneurship
Colonization negatively affected the Zimbabweans as well as their system, government and most The government supporting schemes has been the major driver facilitating entrepreneurial activities.
importantly entrepreneurship and industry. Sources of funds be obtained from AGRIBANK, SEDCO, etc
From 2010 the Indigenization and Empowerment Act created a further empowering tool leading to the
The history of entrepreneurship in Zimbabwe dates back to the civilization era. In the M utapa and starting up of business in areas like mining.
Rozvi state there were successful business initiators/ owners who became very wealth. It however Zimbabwe remains one of the African countries with potential for a vibrant entrepreneurial activity.
follows that like today, as recognized by Alfred M arshal in 1890 in the book Principles of Economics
was affected by the ability to combine factors of production: Land , labour, capital, and organization Entrepreneurship and Patriotism
In Zimbabwe, as elsewhere in the world, patriotic entrepreneurs play a pivotal role in stabilizing and
By about 1200 to 1890 AD African Entrepreneurs on the plateau between Limpopo and Zambezi Rivers resuscitating the economy. In other words, across the globe, nations largely depend on the
became more advanced due to iron technology. The pre-colonial entrepreneurs included the iron entrepreneurs in both the informal and formal sectors. Statistics, in Zimbabwe, shows that 3 000 000
Smiths (boiler makers) or fitting and turning craftsmen (mhizha), potters, farmers (hurudza), hunters (three million) people are employed in the informal sector (which is about 75% of the employed people
(hombarume), among others. 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
Some African Entrepreneurs were involved in pottery designing and making clay pots. The iron smith is the largest foreign currency earner, among other crucial roles it plays to the economy.
entrepreneurs were weapon and tool makers. The weapons and tools included arrows, axes, knives, and
hoes, among others. What is an entrepreneur?
An entrepreneur is the originator (initiator) of an enterprise (economic/business undertaking) in order to
As an evidence to disagree with the explanation of African history that the pre colonial African societies satisfy an identified need or want profitably. That is a person who organizes and manages a commercial
were primitive and unchanging, and therefore any important changes were brought by outsiders, undertaking especially one involving calculated commercial risks. In other words, an entrepreneur is
archaeologists have found pottery and iron tools at Great Zimbabwe and in other different parts of the someone who identifies opportunities in terms of needs and wants of people and mobilizes resources
plateau between Limpopo and Zambezi Rivers (Zimbabwe). 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,
At first, iron was used only to make light arrow heads and jewellery. Bigger items such as hoes and however, be noted that entrepreneurs believe so strongly in their business ideas that they are willing to
axes took much more time and labour. take full responsibility for developing them and to assume most of the risks should they fail.

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What is entrepreneurship? the viability of a business largely depends on an effective feasibility study to determine the potentiality
Various authors define entrepreneurship differently, but their definitions somewhat amount to the same of the market. In this case, Appleby’s definition of entrepreneurship is clear about identifying first the
meaning. needs of customers, unlike Stoner & Freeman’s. Thus, for Appleby, new goods and services should not
The following are some of the definitions of entrepreneurship: just be produced for unknown customers as this is tantamount to wastage of resources.
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 M oreover, Appleby’s definition appears to be more comprehensive than that of Stoner & Freeman as he
and other resources to meet an identified need and thereby create wealth. mentions the idea of ‘wealth creation’. The major aim of any business entity is to create wealth or
Whereas Appleby defines entrepreneurship as such, Stoner & Freeman (1992) view entrepreneurship as increase the owner’s equity by maximizing profit. Without profit maximization or creation of wealth,
seemingly a discontinuous process of combining resources to produce new goods and services. the business will not survive.

Entrepreneurship distinguished from Intrapreneurship

Analysis of definitions Investor's or entrepreneurs are innovative and creative but not all of them are able to come up with
Both definitions do not fall short of the fact that entrepreneurship is a systematic and logical event as innovations, and as such they leave innovations to innovative managers or employees. An employee or
shown by the term ‘Process’. That is entrepreneurship is not a haphazard activity. However, Stoner & manager who is innovative and creative in an existing organization is known as an entrepreneur.
Freeman have moved a step further in an attempt to distinguish entrepreneurship from management as M anagers or employees who carry out entrepreneurial roles are aware of opportunities and they initiate
they look at entrepreneurship as a discontinuous process. That is, it is a discontinuous phenomenon changes to take full advantage of them.
appearing then disappearing until it reappears to initiate another change, unlike management which is a
continuous event. The fundamental issue about the entrepreneur is that he/she has to have innovative ideas and transforms
The idea of ‘creative and innovative ideas,’ shows that the two definitions are complete. In business, them to profitable activities within an existing organization. In other words, he/she is an initiator or
entrepreneurs should be able to come up with changes or new approaches, means, processes, machinery, originator of the commercial undertaking.
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 The word intrapreneurship is attributed to Gordon Pinchott an American who founded a school for
require initiativeness and process innovation. entrepreneurs to help managers from large corporations to take responsibility for creating innovations
Whereas Appleby clearly states, the idea of “management and organizational skills” in his definition, and turning ideas into profitable reality.
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 Relationship between entrepreneurship and Patriotism
control the organizational members’ activities and resources in order to achieve the stated goals of the Patriotism is the spirit of loyally supporting one’s nation. The major thrust of patriotism in the context
enterprise. In other words, the emphasis here is the ability to organize the other factors of production or of entrepreneurship in an economy is to refrain from corruption and sabotage or subversion. Thus, the
resources into creative combination for the purpose of producing goods and services in order to satisfy relationship between entrepreneurship and patriotism is reflected in the following roles that a patriotic
human needs and wants profitably. The combination of resources is as follows: 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.
Land Labour Capital 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
Entrepreneurship 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
Production of goods and services i) Reducing anti-social activities such as theft, robbery, murder, promiscuity by creating
employment for self and other citizens
For the business to be successful the ‘needs and wants’ should be identified first through a feasibility j) Reducing rural to urban migration by creating employment opportunities in rural areas
study. Identification of needs and wants will indicate whether there is a potential market or not. Thus,

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 Entrepreneurial characteristics Innovativeness/initiative ness/creativeness
In a new business, the entrepreneur is the most important person. The entrepreneur has the Effective entrepreneurs have the ability to come up with new products, methods or techniques of
responsibility to initiate, manage and see the success of the business. The success of a business largely production and the accompanying machinery and tools.
depends on the entrepreneurial or personal characteristics. The following are some of the
characteristics of successful entrepreneurs. Adventuresome ness
Successful entrepreneurs are adventuresome i.e. they are interested in testing out and experimenting
Action oriented phenomena in an endeavor to come up with solutions to the needs and wants of people.
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 Commitment
are a few who decide to do something about them now and not tomorrow. To succeed in business, you must be committed. Commitment means that you are willing to put your
business before almost everything else.
S uccess oriented/optimism
Successful entrepreneurs are optimistic, that is successful entrepreneurs do not have ‘ifs’ or ‘buts’ about Some of the characteristics of an entrepreneur include; patience, friendliness, hardworking, reliability,
succeeding. All they think about is how they are going to succeed and not and not what they are going dedicated ness, responsibility, objectivity, rationality, honesty, determination, courage, flexibility,
to do if they fail. imaginativeness and knowledge.

Perception of opportunity or opportunity seeking In a word, successful entrepreneurs must have appropriate personal characteristics, business skills
Entrepreneurs should be able to see the unfilled areas or gaps in products, process and application of where necessary.
services. That is successful entrepreneurs are able to see and act on new business opportunities.
Roles of S mall and Medium Enterprises
Moderate risk taking
Entrepreneurs are expected to be able to take moderate and calculated risks. This is contrary to the What is a small business?
stereotype that entrepreneurs are gamblers or high-risk takers. 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
Goal setting number of employees and usually the owner is solely responsible for the success or failure of the
In setting a new business, entrepreneurs are expected to have the ability to set goals which are specific, venture.
measurable, achievable, realistic and time bound (SM ART) basing on their(ENTREPRENEURS) There are two kinds of small businesses that is survival and growth businesses
strengths, weaknesses, opportunities and threats (SWOT).  S urvival businesses are small businesses which allow owners to make a living but
M oreover, their goals must be consistent with their interests, values and talents in order to achieve the. the focus is on keeping the business alive e.g. backyard businesses/home based
Their belief in the reality of their goals is the primary factor in the fulfillment of those goals. Their businesses.
plans may seem illogical to others but they are perfectly logical in the context of their own personal  Growth businesses are larger and allow owners to make more money e.g.
values and desires. manufacturing operations in the industry.

Long-term perspective Reasons for continued survival of small firms

Successful entrepreneurs can tolerate considerable amount of frustration and delay in need gratification  Small businesses are able to be more flexible, innovative and can react changes
and they devote a lot of time and effort in goals that often yield profits at a distant point in the future. much quicker
Entrepreneurs should be able to accommodate hurdles, difficulties and temporary failures in business.  Small businesses play a supportive role to the giant firms by being subcontracted in
construction, distribution, service and manufacturing sectors
S elf-motivation/self esteem/self faith/self confidence  Small businesses serve small markets (market riches) where large firms do not have
Effective entrepreneurs have solid and stable self-esteem and self-motivation which stem from healthy interest
feeling of self worth and self-acceptance. Entrepreneurs with a positive self-image are basically  Small firms receive government support through the M inistry of Small to M edium
satisfied to be the type of people they are. This self-faith is even important than self-confidence Enterprises, ministry of Youth Development Gender and Employment Creation and
especially when serious setbacks and failure occur.
M inistry of Higher and Tertiary Education that is they receive support in form of
training and funds. Small firms also pay lower taxes.

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  Small firms supply their goods and services in smallest lots than giant firms which d) Affirmative Action Group (AAG)
usually supply in bulk e) Zimbabwe Cross Boarders Association
 Small firms offer specialized and personalized services to customers e.g. electrical f) Zimbabwe Tuck shop Association
businesses.
 Small firms remain small usually during the initial phases of new technology or The government has also introduced the M inistry of Small and M edium Enterprises to ensure that small
innovation or product introduction as the firms will be studying market reactions businesses succeed. Black empowerment and indigenisation policy was also p ut in place to promote
and modifying the products. entrepreneurship. Land redistribution exercise is a good example to government entrepreneurship
initiatives to promote self-sustenance and the development of the country.
Roles played by small firms to the economy
 Small businesses create employment for the business owner as well as the other Activity
fellow citizens (employment creation) i) Analyze the government initiatives to promote entrepreneurship in Zimbabwe since
 Small businesses increase the range of goods and services available to the local 1980.
community (provision of goods and services) especially in rural areas where goods ii) Discuss the roles of the following in promoting entrepreneurship in Zimbabwe
and services were previously unavailable. a) AAG
 Small businesses reduce anti-social activities such as theft, robbery, promiscuity b) M inistry of Small and M edium Enterprises
and burglary c) Zimbabwe Cross Boarders Association
 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
CHAPTER 2
promiscuity.
 Small firms contribute in the improvement of the standard of living of the
BUS INES S ENVIRONMENT IN ZIMBABWE
community
 Small firms contribute in stabilizing the economy through increased employment, Objectives
reduced prices and improved standard of living By the end of this unit you should be able to:
 Small businesses help in indigenizing the economy. If the economy is in the hand  Describe the entrepreneurship environment in Zimbabwe
so indigenous people, resources are not expatriated.
 Evaluate how the macro and micro environmental factors affect entrepreneurs
 Small firms help in the generation of foreign currency
 Discuss entrepreneurial survival and growth strategies
 Small firms contribute in the production of quality and affordable products by being
in competition with giant businesses
Entrepreneurship environment
 Small firms contribute to government revenue through payment of business and Entrepreneurship environment relates to the factors or variables which directly or indirectly affect the
employment taxes activities of the entrepreneur either positively or negatively.
 Small businesses contribute to the national income of the country (GDP – Gross
Domestic Products) and to the improvement of the balance of payment The environment is split into two. That is macro and microenvironments.
Government Entrepreneurship initiatives Macro – environment
Government entrepreneurship initiatives are efforts by the government to promote self-sustenance, This is also known as external environment. This environment consists of all those factors, which
entrepreneurship and indeginisation in order to stabilize the economy. In an effort to promote indirectly affect the business activities of the entrepreneur either positively or negatively. The external
entrepreneurship and self-sustenance, the government established the M inistry responsible for environment involves PEST analysis and natural phenomena.
employment creation since 1980 i.e. M inistry of National Affairs and Employment creation now
M inistry of Youth Development, Gender and Employment Creation. M oreover, the following PEST stands for Political, Economic, Social and Technological environmental variables.
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
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Political Environment Lending rates are an important aspect of macroeconomics. Lending rate is the price of borrowed funds
Political factors may provide initiative situations towards the success of the entrepreneur especially or a loan. This is also known as interest rate. If the loan interest rises, it means that it is expensive to
where the political climate is not stable. Political disturbances may result in the closure of business get a loan for investment and vice-versa.
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 Thus, given these macro-economic issues, the entrepreneur is expected to have a predictive mind for
business of the entrepreneur. Some political climates may promote the success of the entrepreneur. At efficient management of the enterprise.
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 M icroeconomics is another fact of the economic environment which focuses on the economic forces
usually derive from political conditions overseas, it must still pay close attention to political that influence the decisions made by individual consumers, firms and industries. These decisions are
developments at home. Knowledge of the philosophies of all major p olitical parties within the country often made in an instinctive way, yet consistent economic forces underlie them. Entrepreneurs are
is very important since any of them might come to power and alter prevailing attitudes. It is important encouraged to keep track of the trends of the behaviors of individual consumers, firms and industries in
to know the direction each is likely to take for example in Britain the Labour party has traditionally business as their (entrepreneurs) investment activities are based on them.
tended to be more restrictive on both foreign and home trade.
S ocial environment
Economic nationalism is another factor which leads to an unfavorable business climate e.g. some other This relates to the cultural values, beliefs and artifacts of a group of people or society. These determine
organisations are said to be sponsoring foreign media which are said to be anti-government. If the the consumption patterns of consumers. Social environment also involves the religious values. Thus,
entrepreneur is not nationalistic in his or her business activities he/she may lose his/her business license. 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
Political sanctions form yet another crucial factor that may hinder the entrepreneur’s progress in religious values and beliefs. For example, Christians consider pork unclean. Thus, to the entrepreneur
business for instance in Zimbabwe there is fuel and foreign currency crisis due to political sanctions it is evident that customer’s actions in the society are shaped by their lifestyles and behaviours which
based on the allegations by Britain and America that there is lack of rule of law, democracy and stem from their society’s culture. That is people of different social classes have different lifestyles and
violation of human rights. South Africa also faced political sanctions based on allegations that there bahavioural patterns.
were apartheid, foreign currency crisis and fuel shortage can grossly affect the entrepreneur’s business Language is another aspect of culture which has influence on the entrepreneur’s activities. Thus, a
activities negatively. 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.
Economic environment
The macroeconomics focuses on aggregate economic conditions that may affect the business either Technological environment
positively or negatively e.g. inflation, exchange rates, lending or interest rates, and unemployment. Today, we are living in a global village which requires entrepreneurs to move with technological
M acro-economic issues set the environment within which a business operates. Because of this, breakthroughs and changes. Entrepreneurs are expected to be well versed with Internet systems for
entrepreneurs should keep abreast with developments in the macro-economic environment to enable effective communication with suppliers, customers and the publics in general.
them make informed decisions. Thus, a full understanding of those issues enhances the ability of an Technology relates to the processes, techniques, tools and machinery used in business to produce or
entrepreneur to make sound business decisions and to avoid surprises. 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
*For instance, inflation is the general upraise of the prices of commodities. If the prices of commodities they are afraid of being out-competed by their rivals.
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 Natural phenomena
drops, it means that the entrepreneur can now buy more producer goods. 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,
Exchange rates are yet another factor of macroeconomics which may affect the activities of the earthquakes, good rains and natural resources such as minerals. Entrepreneurs are advised to study the
entrepreneur. Exchange rate defines the price for getting foreign currency. If the exchange rate rises, natural phenomenal trends as these provide threats or opportunities to the business.
the entrepreneur will afford to buy less of the foreign currency and vice versa. Foreign currency is Microenvironment
essential for the purchase of foreign products such as spare parts, ingredients, raw materials and fuel. 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.

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Employees government. Some examples are restraint from trading with certain overseas countries and the
These are the people who work for the entrepreneurs and those who are likely to work for him/her acceptance of controls over imports or exports, price controls designed to combat inflation e.g. limits on
(potential employees). People today have wider expectations of the quality of working life including: the level of wage settlement and assisting in the control of potential social problems such as advertising
justice in treatment, democratic functioning of the organization and opportunities for consultation and and display of health warnings.
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 Competitors
to the design of work methods and job satisfaction, make every reasonable effort to give security of These are the rivals of the entrepreneurs who produce substitute products or the same products. The
employment. If employees are not treated well, the entrepreneur will lose them to his/her rivals. 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
Providers of finance products by customers.
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 Entrepreneurship S trategies
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 Growth strategies
entrepreneurs are expected to prove their credit worthiness and credibility by paying back the borrowed A. Intensive Growth S trategies
funds (loans) within the contractual time frame as this will enable the entrepreneurs to even receive According to Ansoff’s product market expansion grid, a company is exposed to growing
preferential treatment and favour in times of need. dimensions under intensive growth

Customers 1. Market penetration

To many entrepreneurs, responsibilities to customers may be seen as no more than a natural outcome of - Gaining more market share with the current company market products in their current
good business. Customers are people who make the business successful. The entrepreneurs need to markets.
understand the needs and wants of customers first before production activities take place in order to - The strategy can be implemented as follows.
avoid wastage of resources by producing goods and services for unknown customers. Customers must a) promoting more usage of the product
be put first by providing: b) attracting competitors’ customers
 Good value for money c) convincing non users to use the existing product
 The safety and durability of products
 Prompt and courteous attention to queries and complaints 2. Market development strategy
 Long-term satisfaction e.g. serviceability, adequate supply of products and - company efforts to find or develop new markets for its current products
replacement of parts a) This can be done by identifying potential uses in the current sales area where
 Full and unambiguous information to potential customers interests for a product or services can be stimulated.
If customers feel that they are ill treated, the entrepreneur loses them to the customer-driven enterprises. b) Selling new products to existing or current markets.
c) Seeking additional distribution channels in its present location.
S uppliers
These are firms that supply the entrepreneur with raw materials. These can affect the entrepreneur’s 3. Product development
activities adversely or positively in terms of prices, reliability, quality, delivery services and - in addition to penetrating and developing markets management should consider new
convenience among others. Thus, a supplier of competitive prices, quality, delivery services and product possibilities
convenience must be chosen. On the other hand, the entrepreneur should also prove creditworthiness - Company develops a product’s new features; different quality levels and also tries to
by settling accounts within the contractual time frame if future deferred payment business transactions come up with a technological breakthrough a potential product.
are to be upheld.
B. Integrative Growth
Government - business sales and profits can be increased through
Entrepreneurs should of course, respect and obey the law even where they regard as not in their best a) Backward integration
interest. If certain laws are not followed the entrepreneur’s business may be forced to closedown but b) Forward integration
what is debatable is the extent to which organizations should co-operate with actions requested by the c) Horizontal integration

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Ansoff’s Growth Strategies Grid: - Is the most favourable growth strategy if good opportunities can be found outside the present
business.
Current products. New products. - An opportunity is one in which the industry is highly attractive and company has the mix of
M arket penetration Products development strategy business strength to be successful.
Strategy Current markets.
Types of diversification
a) Concentric diversification
M arket development Diversification strategy New markets. - Holds that the company could seek new products that have technological and or marketing
strategy
synergies with the existing product lines even though the new products themselves may
appeal to different groups of customers.
Ansoff’s Growth
strategies b) Horizontal Diversification
[Link] penetration - holds that a company can produce totally unrelated products using different manufacturing
a) market development methods or processes
b) product development
c) Conglomerate Diversification
2. Integrative growth - Holds that a company seeks new business that have no relationship to the company’s current
a) backward integration technology products or market suppose a company is producing fax machines and now seeks
b) forward integration to produce furniture
c) horizontal integration
Other Entrepreneurship strategies
3. Diversification growth - a strategy is a method used to achieve a goal
a) Concentric diversification
b) Horizontal 1) Franchising
c) Conglomerate - A system of distributing products/services through associated resellers.
a) Backward Integration – is when a company acquires one or more of its suppliers to gain more - The franchiser gives rights to the franchisee to perform or use something that is the property
control and generate more profit. of the franchiser
- The objective is to achieve efficiency or profitable distribution of products/services within a
b) Forward Integration – is when a company acquires some wholesalers and retailers especially specific area
when they are they are highly profitable. - Both parties contribute a trademark reputation, known products, managerial know-how
produces or equipment.
c) Horizontal Integration – is when a company acquires one or more competitors provided the
government policies allow e.g. monopoly, oligopoly.

Diversification Growth.
Advantages to the franchiser Advantages to the franchisee

- increased distribution
- less risk with market tested products
- some operating costs are transferred
- pre established promotion and advertising programs provided
- marketing/distribution costs shared
- Financial and may be provided.
- production accepted by locals when local franchise ownership is held
- Credit available in buying inventory and supplies
- Retains quality control of products is a franchise agreement - Decision making assistance, management procedure and training.
-

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Disadvantages to the franchiser Disadvantages to the franchisee

- control of franchisees are far away - gives up freedom in management decisions

- expenses of training and keeping on travelling for supervisor - obligatory purchases franchiser even if better prices elsewhere are available
- risk in credit extensions - 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.

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

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 CHAPTER 3 to be successful.
 Before starting a business, it is essential to research that
DEVELOPING A BUS INES S PLAN  business idea to find if it is feasible.
 A business idea should be practical and profitable.

OBJECTIVES

By the end of this unit you should be able to : In terms of feasibility the entrepreneur needs to consider the following:
 Availability of a viable market
 Define a business idea.  Competition
 Generate a feasible and profitable business idea.  Location
 Develop a Business Proposal.  Infrastructure and facilities
 Define a Business Plan  Raw materials
 Discuss the elements/components of a business plan.  M achinery and equipment
 Develop a viable business plan.  Labour and other costs such as electricity insurance, water,
security etc.
GENERATION/CREATION OF A BUS INES S IDEA
 Every business emerges from an idea.
 Businesses get started when people (customers) manifest BUS INES S PLANNING
their needs and wants. Definitions of Business Plan
 Entrepreneurs develop business ideas out of the needs and Several definitions of a business plan can be observed.
wants of people.
 Usually entrepreneurs exploit the weakness of the existing  A business plan is a written statement setting forth the business mission and
providers of goods and services to start their own ventures. objectives, its operational and financial details, its ownership and management
structure, and how it hopes to achieve its objectives.
The term business idea defined:
A business idea is a short and precise description of the basic  It is a written document describing all relevant internal and
operations of the business. external elements and strategies for achieving objectives of
a business.
 A business idea must show the following :
 A business plan is a document designed to provide sufficient
a) Product to be offered. Information about a new or existing business to convince
b) Target market/potential customers. financial backers to invest in the business.
c) Target customers’ needs.
d) Selling approach. The purpose/importance of a business plan:
 It provides a blueprint, or a plan, to follow in developing and
Profitability and Feasibility of the business idea: operating the business. It helps keep one’s creativity on
 A business idea must be profitable and feasible. target and helps one concentrate on taking the actions that
 To determine the profitability and feasibility of a business are needed to achieve the business goals and objectives.
 idea one needs to carryout a feasibility study and SWOT
analysis.  It helps to clarify the business idea. The process involved in
 Feasibility study relates to a detailed investigation of all creating a business plan means that the entrepreneur has to
 aspects of a business idea in order to determine if it is likely ask a number of key questions about their idea. This should

10
 ensure that before starting up, the business idea would have market to its long-run competitive prospects.
been considered with care. 3. Establish a long–range strategic plan for the entire business
and its various parts.
 It can serve as a powerful money-raising tool. The Plan will 4. Develop short-term detailed plans for every aspect of the
often be used as a means of sharing potential investors of business, involving the owners, managers, and key
lenders the viability and profitability of the business. employees, if possible.
Financial institutions insist on seeing a business plan before 5. Plan for every facet of the business’ structure, including
any loan is granted. Private shareholders may invest if they finances, operation, sales, distribution, personnel, and
believe in the entrepreneur. Professional providers’ of venture general administrative activities.
capital demand evidence of careful planning first. 6. Prepare a business plan that will use your time and that of
your personnel most effectively.
 It can be an effective communication tool for attracting and
dealing with personnel, suppliers, customers, providers of
capital, etc. It helps them understand your goals and COMPONENTS /ELEMENTS /CONTENTS OF A BUS INES S PLAN
operations.
 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
 It can help you develop as manager/entrepreneur, because it time is spent researching the plan.
provides practice in studying competitive conditions,
promotional opportunities, and situations that can be  However, regardless the specific format used an effective plan should include
advantageous to your business. at least the following
1. Cover sheet
 It provides an effective basis for controlling operations so one 2. Table of contents
can monitor progress over time, to see if your actions are 3. Executive summary
following your plans. 4. Description of The Business
5. Ownership and M anagement structure
6. M arketing Plan
HOW TO PREPARE A BUS INES S PLAN 7. Production/Operational Plan
You should start by considering your business background, origins, philosophy, mission and 8. Financial Plan/Analysis
objectives. Then, you should determine the means for fulfilling the mission and obtaining the 9. M ilestone schedule
objectives. 10. Appendix

A sound approach is to : 1. Cover S heet

1. Determine where the business is at present (if an ongoing
business) or what is needed to get the business going. On the cover sheet you should include identifying information so that readers will
2. Decide where you would like the business to be at some point immediately know the business name, address, phone numbers, names and titles of the
in future. principals (owners), and the date the Plan was prepared.
3. Determine how to get there. In other words, determine the
best strategies for accomplishing the objectives in order to 2. Table of Contents
achieve your mission.
Because the table of contents provides the reader an overview of what is contained
The following is one feasible approach you can use in preparing a business plan in the plan itself, it should be written and presented concisely in outline form, using
1. Survey consumer demands for your products and decide how numerical and alphabetical designators for headings and subheadings.
to satisfy those demands.
2. Ask questions that cover everything from you firm’s target 3. Executive S ummary
11
  Describe your management team, along with their abilities, training and
It is the most important part of the business plan. It should be designed to motivate experience.
the reader to go on to the other section of the plan. It should convey a sense of  Draw an organisation Chart
commitment, challenge, plausibility, credibility and integrity.  Draw a table showing name, position, qualifications and experiences,
duties and responsibilities of managers and employees.
It can include:  Include organisational structure, including employee policies and
procedures.
 M ajor aims and objectives
 M arketing strategy
 Financial projections 6. Marketing Plan
 Financial requirements
 Current business position: Include information about:
Legal form, when formed, principal owners and key
personnel. a) M arketing objectives
 M ajor achievements. b) The target market
c) Sales and marketing mix strategy
NB Executive summary is written last, after the rest of the plan d) Competitors analysis
e) Research – that leading to product design – confirmation of demand and
has been developed and should just be that – a summary –so
keep it short. future research planned.

4. Description of the Business 7. Product/Operational Plan

 This motives the details of converting inputs to outputs valued by
Include the following : customers
 Specify products/services to be produced
a) Introduction  Raw materials and suppliers
 Optional location for production activities
 Relevant brief history and background of the proposed business  Costing of the products offered.
 How the idea for the business original and what has been done to
develop the idea up to this point. 8. Financial/Plan/Analysis
 Owners and manager and their experiences
 Products – capitalization/sources of funds  Indicate the expected financial results of your
 Brief outline of success and achievement operations
 Date or proposed date for commencement  Show prospective investors or lenders
 Name of business and trading name  Include projected financial statements at least up to
 Legal identity/legal form three trading periods i.e. Trading, Profit and Loss
 Industry that it fall under  Account; Income and Expenditure Statements; Cash
 location - business addresses  Flow statements; Balance Sheets etc.
 SWOT Analysis  There should be an analysis of costs/volume/Profits
(CVP) where appropriate.
5. Ownership and Management S tructure  Also include budget forecasting for : Production; Sales
 Describe the owners including those you identified by name and title and Expenses.
above  Show the Financing of the business.
 Give more detail about their experience, qualifications
and expertise. 9. Milestone S chedule

12
 any of the following sectors of the economy; farming, mining, retailing, art and craft, wholesaling etc.
 This involves the determination of objectives and the Thus, this chapter will focus on the functions of management as well as the roles of management in an
timing of accomplishments. enterprise.
 It is like a map of how you will go from one place/stage
in your business to the next. Management
 Deadlines should be established and monitored. M anagement 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
10. Appendix 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
This section includes supporting documentation for your Business Plan e.g. Fayol (the father of management) managing means planning, forecasting, organizing, motivating,
leading and controlling activities in a business so as to achieve common objectives.
 Names of References and Advisors and their addresses
and phone numbers  Stoner and Freeman (1995) described management as the art of making things done through
 Bargains, Tables, Charts other people.
 Resumes of officers  They went on to say that it means deciding what to do and getting others to do it.
 Supportive market research
 Brochures of other published information describing Thus, management is a process (and not an event) that entails planning, leading, organizing and
the products you provide. controlling of resources (human resource, capital, financial resources etc)
 Letters of recommendations or endorsements etc.
Manager
M anagers 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. M anagers are
Generate your own business idea and develop its viable business plan.
employed so that the operations of these organisations become more efficient and effective.

FUNCTIONS OF MANAGEMENT
Different experts have classified functions of management. A manager must organize these functions
CHAPTER 4
in order to reach company goals and maintain a comp etitive 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.
BUS INES S MANAGEMENT
Each function blends into the other and each affects the performance of others. The functions are
discussed below;
Objectives
By the end of this unit you should be able to:
A. PLANNING
 Define management
 Discuss the management functions It is the first tool and the basic function of management. The difference between a successful and
 Describe the roles of management an unsuccessful manager lies within the planning procedure. Planning is the logical thinking
 Outline the principles of management 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
Business advance the most appropriate course of actions for achievement of pre-determined goals. Thus,
A business is a social and or a commercial entity that thrives to satisfy the needs and wants of planning is deciding in advance- what to do, when to do and how to do it. It bridges the gap from
consumers at the same time making more profits. As such, entrepreneurs have to manage the factors of where the organisation is and where it wants to be. Planning is necessary to ensure proper
production, i.e. land, labour and capital so as to achieve the business objectives. Businesses can be in

13
 utilization of human and non-human resources and helps in avoiding confusion, uncertainties,  communication- the process of passing information, experience, opinion etc from one person
risks, wastages etc. to another. It is a bridge of understanding.

The following are involved in planning;

 defining objectives and standards to be achieved C. ORGANIS ING
 deciding who is going to do it It is the process of bringing together physical, financial and human resources and developing productive
 determining the actions and activities to be done in order to achieve the objectives and relationships amongst them for the achievement of organizational objectives. According to Henri Fayol,
standards “To organize a business is to provide it with everything useful for its functioning i.e. raw materials,
 determining the resources to use tools, capital and personnel. To organize a business involves determining and providing human and
 determining the time-frame for the activities non-human resources to the organizational structure. Thus, a manager must know his subordinates and
 assigning responsibilities what they are capable of in order to organize the most valuable resource a company has, its employees.
 designing a control procedure 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,
Manager’s questions in planning link related jobs together in an understandable well organized style and appoint the jobs to individuals.
1. where are we? -in terms of goals, resources, standards etc Organising as a process involves;
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  identification of activities
mix)  classification or grouping of activities
4. are we getting there?  assignment of duties
 delegation of authority and creation of responsibility
 coordinating authority and responsibility relationships
B. LEADING
Principles of organising
Leading is the ability to initiate action, guide, supervise and direct others (subordinates) in pursuit of a 1. unity of command –an employee must receive commands from one supervisor only.
common goal. Organisational success is determined by the quality of leadership that is exhibited. “A 2. span of control-refers to the number of employees that report to one supervisor.
leader can be a manager, but a manager is not necessarily a leader,” said Gemmy Allen (1998). Those in 3. full authority and responsibility.
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; D. CONTROLLING
It implies a measurement of accomplishment against the standards and correction of deviation if any to
 directing – it is that part of managerial function which actuates the organizational methods to ensure achievement of organizational goals. The purpose of controlling is to ensure that everything
work efficiently for achievement of organizational goals, and sets in motion the action of occurs in conformities with the standards. An effective system of control helps to predict deviation
people because planning ii the mere preparation for doing work. before they actually occur. According to Theo Haimann, “Controlling is the process of checking
 staffing-the main purpose is to put the right man on the right job. There should be proper and whether or not proper progress is being made towards the objectives and goals and acting if necessary,
effective selection, appraisal and development of personnel to fill the roles designed on the to correct any deviation.” Controlling depends on accurate, reliable and enforceable standards and on
structure. It thus involves manpower planning, recruitment, selection, placement, training and monitoring of performance by people, machines and processes. Therefore controlling has the following
development, remuneration and promotion and transfer. steps;
 establishment of standard performance
 supervision- implies overseeing the work of subordinates by their superiors. It is the act of  measurement of actual performance
watching and directing work and others.  comparison of actual performance with the standards and finding out if there are any
deviations
 motivation- means inspiring, stimulating or encouraging the subordinates to work with zeal.  taking of corrective action if necessary.

14
Work performance evaluations are a form of control as it connects performance assessments to rewards range of special information reports
and corrective actions. Evaluating employees is a continual process that takes place regularly within a -nerve centre of internal and -maintaining personal
company. external information about the contacts
organisation -installation and maintenance
of information systems
ROLES OF MANAGEMENT

The ten management roles of a manager identified by Mintzberg Transmits information form Holding meetings, making
M intzberg intensively studied five CEOs and their organizations, along with a calendar of their b. Disseminator outsiders or from the phone calls to relay
scheduled appointments for a month. Additional data collected during a week of structured observations subordinates to members of information, sending memos
included anecdotal data about specific activities, chronological records of activity patterns, a record of the organisation
incoming and outgoing mail, and a record of the executive’s verbal contacts with others. On the basis of
this data, M intzberg divided managerial activities into interpersonal, informational and decisional roles. Transmits information to Holding board meetings and
outsiders on organizational giving information to the
M intzberg’s ten management roles are a complete set of behaviours or roles within a business c. Spokesman policies, actions, results etc media
environment. Each role is different, thus spanning the variety of all identified management behaviours. through speeches and reports.
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.
3. DECIS IONAL
Mintzberg’s ten managerial roles
a. Entrepreneur Initiates new projects, spot Organising strategy review
ROLES DES CRIPTION EXAMPLES OF opportunities, identify areas sessions to develop new
ACTIVITIES of business developments programmes
1. INTERPERS ONAL
b. Disturbance handler Responsible for corrective Resolving conflicts among
a. Figurehead Symbolic head, obliged to Greeting visitors, signing action when organization staff, adapt to external
perform a number of team documents faces unexpected disturbances changes and organising
duties of a legal or social and crises strategies that involves
nature disturbances and conflict

b. Leader Responsible for the Performing all activities that c. Resource allocator Responsible for the allocation Scheduling, requesting,
motivation of subordinates, involves subordinates of organizational resources of authorization and budgeting
staffing and training, selects all kinds, setting of priorities, activities
and disciplines. budgeting

c. Liaison M aintains a network of Acknowledging mail, Responsible for representing

outside contacts and informers external board work d. Negotiator the organisation at major Participating in collective
who provide favours and negotiations with unions, bargaining
information suppliers and generally defend
interests

2. INFORMATIONAL

a. M onitor -Seeks and receives wide -reading periodical and

15
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 Principles of Management
 in all of this they are still fallible and human
M anagers must observe Fayol’s 14 principles of management when carrying out their duties;
The explanations above justify managerial purposes in terms of; 1. Division of labour-work should be divided into smaller units that permit specialization.
 designing and maintaining stable and reliable systems for efficient operations in a changing
environments 2. Authority and responsibility-organisational structure should clearly show levels of authority
 ensuring that the organisation satisfies those that own it and responsibility.
 boundary management- maintaining information links between the organisation and players in 3. Discipline-discipline results from good leadership at all levels of the organization. It is
the environment. necessary to develop obedience, diligence and respect.

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

MANAGEMENT S KILLS 5. Unity of direction-all operations with the same objectives should have one manager and one
plan only.
For a manager to carry out the management functions and roles effectively, some management skills are
6. Subordination of individual interest to the common good- the interests of an individual or
required at defined levels.
group should not take precedence over interests of the organization.

Management skills and levels

1) Technical skills 7. Remuneration-rewards for work should be fair to the worker and employer.
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 8. Centralization- the proper degree between centralization and decentralization should be
with accounts receivables and account payable, to enable him to help the accounting clerks found.
who might have some problems. The first line managers and middle management are more
involved in the technical aspects than top management. 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.

2) Human skills 10. Order- resources should be in the right place at the right time.

Refer to the ability to work with other people both individuals and in groups. The human 11. Equity- managers should be fair to the employees and treat the equally.
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 12. Stability of staff- a low staff turnover rate enhances the attainment of goals.
manager with good human skills. These managers are good communicators; they motivate,
lead and inspire enthusiasm and trust among their subordinates. 13. Initiative- subordinates should be given the freedom to conceive and carry out their plans,
even though some mistakes may result.

3) Conceptual skills 14. Team spirit – team work gives the organization a sense of unity.

Are defined as the ability to think and conceptualise lines and abstract situations, Motivation - Definition
to see the organisation as a whole and the relationships among its various sub-units - M anagers 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. M otivation is
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 concerned with inducing people to work to the best of their ability. M otivation refers to those
move up to the top management positions. schemes designed to influence and encourage workers to perform outstandingly. It is therefore

16
 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. M aslow (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 Physiological needs include homeostasis such as satisfaction of hunger, thirst, shelter deficiency,
to motivate people at work must be useful. All entrepreneurs have a duty to motivate their employees clothing deficiency and so on. In fact homeostasis relates to the body’s automatic efforts to retain
for the success of their enterprise. M otivated workers take more pride in their jobs and work better. normal functioning.
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 Safety needs include safety and security, freedom from plain or threat of physical attack, protection
is the content theories and process theories (cognitive theories) from danger or deprivation, the need for predictability and orderliness.
- Content theories attempt to explain those specific things which actually motivate the individual at Love needs that is social needs which include affection, sense of belonging, friendships and both the
work. These theories are concerned with identifying people’s needs and their relative strengths giving and receiving of love.
and the goals they pursue in order to satisfy these needs. Content theories place emphasis on the
nature of needs and what motivates. Esteem needs are also referred to as ego needs which relate to self-respect which involves the desire for
- Process theories attempt to identify the relationship among the dynamic variables which make up confidence, strength, independence and freedom, and achievement. Esteem of others involves
motivation. These theories are concerned more with how behaviour is initiated, directed and reputation or prestige, status, recognition, attention and appreciation.
sustained. Process theories place emphasis on the actual process of motivation.
Self-actualization needs that is the desire to become more and more what one is capable of becoming
Major content theories of motivation include which simply means that one wants to realize his or her potentialities and capabilities.
 M aslow’s hierarchy of needs model
 Alderfer’s modified need hierarchy model IMPLICATIONS OF MAS LOW’S HIERARCHY OF NEEDS TO THE ENTREPRENEUR
 Herzberg’s two-factor theory Once a lower need has been satisfied, it no longer acts as a strong motivator and only unsatisfied needs
 M cClelland’s achievement motivation theory motivate a person.

Maslow’s hierarchy of needs theory This hierarchy of needs implies that entrepreneurs need to consider seriously the lower level needs if
M aslow’s theory claims that human motives develop in sequence according to five levels of need workers or staff are to cooperate at work. That is the remuneration (salary, wage, fringe benefits)
arranged in a hierarchy of importance. M aslow’s basic proposition is that people want beings, they should meet decent or exclusive physiological needs (shelter, food, clothing). Pleasant working
always want more, and what they want depends on what they have already. The hierarchy begins with conditions must also be ensured.
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 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.
Self-actualization
(i.e. realizing one’s potential Social needs of workers have impact on the performance. Workers need to be loved and as such
for continued self development) 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
Esteem (i.e.
achievement, self- confidence, professional problems.
Status, respect, recognition by others)

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

accepted by 17

Safety (i.e. protection against danger

Physiological i.e. shelter, clothing, food

Another area of concern is self-esteem. In this case entrepreneurs should make use of social - Increased productivity
recognition, job title, high status job and feedback from the job itself if employees are to be motivated - Increased efficiency and effectiveness
in their work. - Good corporate image building
- Increased sales and profits
Self actualization is one aspect that does motivate employees i.e. workers are motivated by challenging - Good customer relations
job, opportunities for creativity, achievement in work and advancement in the organisation and as such - Promotes team spirit (team work) or cooperation and support by employees
entrepreneurs should not that. - Promotes entrepreneurship by employees that is innovativeness, creativity and initiative ness
resulting in the growth or expansion of the enterprise

Herzberg’s two factor theory

Hygiene theory ACTIVITY
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 1. List the four management functions.
the intrinsic content of job e.g. recognition and responsibility, meaning and challenge. These satisfy 2. M atch the following activities with the appropriate management function
higher needs. These are called satisfiers or motivators or growth factors. Another set of factors which a. monitoring to check whether a budget is being followed
entrepreneurs must take cognizance of is dissatisfiers or hygiene factors. These factors stem from the b. deploying human resources to different departments
extrinsic job context e.g. working conditions, pay, and supervision. These satisfy lower needs. An c. setting organizational goals and the mission statement
important point to note in this theory is that as dissatisfaction stems from lower needs not being d. giving rewards to staff performing well?
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 3. State the role that is associated with each of the following statements
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 a. a manager representing his organisation at a special award ceremony
these hygiene factors but by improving genuine motivators such as recognition, achievement b. resolving conflicts between 2 divisions of the same organisation
responsibility, advancement and the work itself. c. restructuring the organisation so that it becomes more responsive to clients
d. making a presentation on the organisation

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

Hygiene or Maintenance factors S UMMARY
Salary, job security, working conditions, Level of quality of supervision, company M anagement is a process of deciding what to do and getting others to do it. As such, it is important for
Policy and administration, Interpersonal relations, The Dissatisfiers 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
Motivation & job satisfaction should thus seek knowledge on how to be effective and efficient in their various areas of operations
The satisfiers: considering the environments in which they operate in. Thus management of business works shops,
Sense of achievement, Recognition, Responsibility, Nature of work, Growth and advancement, seminars and other discussion and consultative forums can be organized to encourage exchange of
Opportunity of creativity ideas. Appropriate management style should also be chosen depending on the environment.

Motivators/growth factors

NB: The M otivation – hygiene theory of Herzberg is an extension of M aslow’s Hierarchy. The CHAPTER 5
emphasis in this theory is that entrepreneurs must consider both the hygiene factors and the growth
factors/motivators.
MARKETING

Importance of motivating employees By the end of the study you must me able to:

18
  Define marketing marketing activities to other organisational functions.
 Describe the marketing mix elements
 Apply the marketing mix to product and service situations  Product
 Prepare a marketing plan (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
Marketing is the management process responsible for identifying, anticipating and satisfying may have different attitudes and approaches when perceiving and solving problems. With
customerrequirements profitably. (CIM ) regard to service marketing, there may be other kinds of technicality. For example, if a firm
There are many other definitions that expand on the CIM 's own definition. Here is what Dibb et al of solicitors wishes to provide independent financial advice, the very demanding regulatory
(2001)have to say: regime governing such services is likely to be a key consideration in the marketing of the
new service.
Marketing consists of individual and organisational activities that facilitate and expedite (b) Packaging refers to 'all the activities of designing and producing the container for a
satisfying exchange relationships in a dynamic environment through the creation, product'. (Kotler, 2003). Packaging serves various purposes and involves several
distribution, promotion and pricing of goods, services and ideas. considerations.
(i) Protection of product eg sturdy boxes for breakable products
This is a more detailed definition and identifies some specific activities.M arketing as an activity differs (ii) Preservation of the product eg plastic bags to keep bread and cakes fresh and
from marketing as a concept. A market orientation can prevail outside the marketing [Link] hygienic
related term 'marketing concept' is fundamental to the modern approach to marketing. Kotler (iii) S ecurity of product eg small digital camera memory cards packaged in large plastic
(1991)says this: packs to deter shoplifters
(iv) Convenience. Packaging is designed to facilitate storage by supplier or customer, as
The marketing concept holds that the key to achieving organisational goals lies in well as convenience of use eg different types of nozzles on drinks and sauce
determining the needs and wants of target markets and delivering the desired satisfactions containers
more efficiently and effectively than the competition. (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.
Needs are basic human requirements such as food, clothing, shelter, exercise, etc. Some people might Larger sized cans or bottles usually encourage greater consumption.
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  Place
might want to meet their needs for exercise by joining an exclusive country club to play [Link] Distribution decisions address the question of 'where do our customers want to receive their goods or
marketing manager of an exclusive country club may carry out various marketing activities to transform services?' This is an aspect where there has been significant change and development, and there is now
the needs of people for exercise into wants to play golf at a country club. much more scope for market decision making, especially with the advent of [Link]
FAS T FORWARD decisions may also influence an organisation's globalisation strategy. If clients and/or customers have
Kotler (1991) also uses the word demand which refers to the wants being backed up by an ability to overseas locations it may be beneficial to set up distribution facilities locally. The presence of overseas
pay,ie can the potential customer afford the membership fees to join an exclusive country club?It is facilities enables the organisation to extend its market coverage and global [Link] is important to
necessary for us to strike a clear distinction between marketing as an activity, and marketing as a understand the structure of the distribution channel and the role of the players within it. A key concept
concept of how an organisation should go about its business. 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
The M arketing M ix manufacturers and other suppliers.M arketers are likely to be involved in activities such as outlet
The marketing mix refers to a set of marketing variables which a firm can use to satisfy the needs of its planning, supply chain management, and route to market decisions. They may be involved in order-
target market.M cCarthy calls them the 4Ps of [Link] are,namely,price,[Link] and processing, warehousing, logistics,
place. 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.

tM arketing activities  Promotion

The basic marketing mix offers us a useful framework within which to discuss the relationship of

19
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.

20
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 cycle. he life cycle

For the various stages of the cycle ,different objectives and strategies can [Link] are
digrammatically shown on the next page:
21
The purpose and content of the marketing plan basic data. In the marketing context this is often called situation analysis. It may be
A marketing plan is a specification of all aspects of an organisation's marketing intentions and appropriate for situation analysis to consider the items listed below.
[Link] is a summary document, providing a framework that permits managers and specialists to • The wider environmental factors of the PESTEL model
undertake the detailed work of marketing in a co-ordinated and effective fashion. • Strengths, weaknesses, opportunities and threats
The creation of a good marketing plan is likely to be a time-consuming exercise, since it should deal • M arketing research data, including demographics data, trends, needs and growth
with both current circumstances and plans for the future. • Current and planned products and services
(a) It should be based on detailed knowledge of both the target market and the company • Critical issues
involved. (b) Marketing strategy. The statement of marketing strategy will describe in detail all the
(b) It should give sufficient detail of intentions to support the design and operation of all marketing concepts, practices, activities and aids that will be used. It will reiterate the
marketing-related activities 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.
The marketing plan and corporate strategy (c) Numerical forecasts. The marketing plan must include quantitative data about required
It is important to remember how the marketing plan fits into overall corporate strategy. Students resources and forecast results. Costs must be given in detail and realistic sales estimates
are often confused by the appearance of environmental analysis in the marketing planning process and must be provided. In particular, the cost of marketing activities must be specified.
assume that this means that the marketing plan is the same thing as the overall corporate strategic (d) Controls. Planning is worthless unless control mechanisms are established to ensure that
[Link] may be true in some highly marketing-oriented organisations, but it is not necessarily [Link] the plan is properly executed. These may include intermediate organisational and sales
marketing plan and the corporate strategic plan are not the same thing. The difference is largely one of milestones, the design of routine performance measures, the establishment of an
scope: the corporate plan has to consider all aspects of the organisation's business, while a marketing appropriate marketing organisation, and the development of contingency plans.
plan is principally about marketing activities. The marketing plan is aligned with the corporate plan
and supports it. The marketing plan in detail
1 Executive summary
FAS T FORWARD It is common practice to place an executive summary at the beginning of the marketing plan. Executive
What goes into the marketing plan? summaries are provided, as their name implies, for the convenience of senior executives who require a
There is no standard template or list of contents for a marketing plan. Different organisations will find it fast overview in order to avoid the time involved in detailed study. As a general rule, such summaries
appropriate to consider different things at different times in their development. We will look at one should be confined to a brief exposition of important material.
possible detailed layout for a marketing plan in Section 3. In this section we will look in general terms (a) Background information that helps explain why particular proposals have been made or
at decisions taken
what is likely to appear in most marketing plans. (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
The marketing plan – an outline (d) An assessment of any wider implications of the proposed action
1 S ituation analysis (e) A statement of the required investment, where appropriate
PESTEL – SWOT – M arket analysis and The executive summary for a marketing plan is likely to include material on the following specific
marketing objectives matters.
2 Marketing strategy • M arketing research
Objectives – tactics – marketing mix • Target markets and segments
3 Numerical forecasts • The proposed marketing mix
Sales – expenses • Sales forecasts
4 Controls
M arketing organisation – performance measures 2 S ituation analysis
These four basic elements constitute a logical sequence of development for the basic building blocks of S ituation analysis involves consideration of both the environment and internal factors. The
the marketing [Link] that you remember this basic structure. If all else fails in the examination, it environment can be divided into the macro-environment, consisting of the six PESTEL elements, and
should enable you to organise your thoughts and make a creditable attempt at preparing a marketing the micro- or market environment. Internal and environmental factors are summarised in a SWOT
plan. analysis.
(a) The business environment. The operation of any business implies interaction with its
(a) S ituation analysis. Any planning process should start with the collection and analysis of environment and the first stage of the detailed planning process is likely to be the collection

22
and analysis of environmental information. For this purpose, the business environment is activity, particularly when overall objectives are broken down into personal targets.
often split into two parts. (ii) It provides a framework for co-ordination of activity across the organisation.
FAS T FORWARD (iii) IT is fundamental to the control process, since it defines success. Actual
(i) The macro-environment may be analysed into six elements. performance is compared with what was intended, and control action taken to
• Political • Technological correct any [Link] objectives have been considered in detail, it is possible to use them to
• Economic • Ecological or 'green' refine a plan bymeans of gap analysis. Objectives will relate to both market dynamics and financial
• Social • Legal results, and should beexpressed in concrete form. Objectives may be set for such business parameters as
The acronym PES TEL may be used. PES T and S TEP are also common, when the legal environment is those
included under politics and so-called 'green' issues are included under the social heading. Your syllabus below.
uses PES TEL, so that is what we will use in this Study Text. A marketing plan need not include a • Revenue growth
detailed PESTEL analysis, but it should explain those aspects of it that have affected its development. • M arket share
Action Programme 1 • Profitability
• Number of outlets
(ii) The micro-environment consists of the markets in which the business operates or • Customer retention
plans to operate. It includes current and prospective customers and existing and • Brand recognition
potential competitors. The micro-environment also includes any distribution systems • M arketing expenses
used by the business. Headings such as those below may be appropriate. • Staff levels and training
• Target markets • Products and services (b) Target markets. It will be appropriate to define clearly just what the target market is. The
• M arket needs • Competition nature of this definition will depend partly on the scale of the marketing operation
• M arket geography • Costs envisaged. For example, a company operating nationally in a lifestyle segment might target
• M arket demographics • Suppliers prosperous retired people nationwide, while a locally based professional service business
• M arket trends • Critical issues might target start-ups and small traders within a 20-mile radius of its base.
• M arket forecasts (c) Products and their positioning. Product positioning is a continuation of the process of
• M arket growth determining the target market. Product positioning is about the way the target market
(b) Internal analysis. Like the overall strategic plan it is derived from, a marketing plan should perceives the product's characteristics, in relation to those of competing products.
reflect the characteristics of the business concerned. It will inevitably refer to current and There are two basic product positioning strategies.
planned products and capabilities and be designed to exploit the organisation's resources to • 'Me too': the product is positioned to meet the competition head-on.
the full. An important aspect of the internal analysis is product-market background, which • Gap-filling: the product is positioned to exploit gaps in the market.
sets the scene for those less familiar with the products and markets involved. (d) The marketing mix. A marketing plan will not necessarily give complete details of every
The environmental and internal analyses are traditionally summarised and entered into the component of the marketing mix. Instead, it will concentrate on those parts that are new or
plan under the headings of strengths, weaknesses, opportunities and threats. This S WOT crucial to success. For example, a plan built around a new or enhanced product that will be
analysis highlights aspects of the overall situation that need action by the business. The distributed through established channels is likely to give significant product detail, and
aim is to exploit strengths and opportunities, remedy areas of weakness and develop explain the aim of the new features in market terms. Place, on the other hand, is unlikely to
actions which minimise threats. The analysis of SWOT must be prepared honestly and receive more than a brief mention.
objectively as it is a key foundation on which the marketing strategy is built. (e) Marketing research. Early marketing research should have played its part in supp orting the
3 Marketing strategy design of the marketing plan. However, it is not confined to this phase of operations.
Marketing strategy includes objectives and methods and may deal with such matters as gap M arketing research activities should form part of the marketing plan, so that continuing
analysis,target markets, the marketing mix and marketing [Link] marketing strategy section of the feedback may be obtained upon the degree of success achieved.
marketing plan should describe in detail the organisation's
marketing objectives and methods.
4 Numerical forecasts
(a) Marketing objectives. The objectives of the marketing plan are derived from the corporate Numerical forecasts tie down what is to be achieved and form the basis of the control process.
plan, which is designed to support the overall corporate mission. A clear statement of This section of the marketing plan could also be called a budget.
marketing objectives serves a number of purposes. 4.1 Typical forecast quantities
(i) It provides a focus for activity and a sense of purpose. This should stimulate • Turnover

23
• M arket share (c) Implementation milestones. Progress in implementing a programme can be monitored by
• M arketing spend the establishment of milestones and the dates by which they should be achieved.
• Units of sales M arketing at Work
• Costs Examples for the launch of a new car might include:
• Breakeven analysis • First delivery to show rooms
Phasing and analysis. It will be appropriate to present numerical forecasts broken down in two ways. • First thousand sold
(a) Phased by time period. A year's total may be broken down into monthly or quarterly • Breakeven sales achieved
increments. (a) Contingency planning. Events in the real world very rarely go according to plan. It is
(b) Analysed by marketing characteristic. For example, sales and expenses might be analysed necessary for planners to consider problems that might arise and make appropriate
by product type or by market segment. preparations to deal with them. There are several requirements.
(i) The organisation must have the capability to adapt to new circumstances. This will
4.2 Breakeven analysis almost certainly imply financial reserves, but may require more specific resources,
Breakeven analysis is a management accounting technique that should be of interest to marketing such as management and productive capacity.
managers. The cumulative sales of a product reach their breakeven point when the total revenue is high (ii) There is a range of possible responses to any given contingency. The organisation
enough to cover both the variable and fixed costs of producing and selling that quantity of product. The should consider its options in advance of needing to put them into action.
breakeven point is a vital hurdle that must be cleared if the marketing plan is to be considered (iii) A prompt response will normally be appropriate. Achieving this depends to some
successful,and a profit made on the sale of the product. 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
4.5 Controls processes need to be rapid and effective.
Control is vital if management is to ensure that planning targets are achieved. The control process
involves three underlying components.
– Setting standards or targets
– M easuring and evaluating actual performance CHAPTER 6
– Taking corrective action
(a) Performance measures. The data contained within the numerical forecasts section of the CUS TOMER CARE
plan provides the raw material for performance measures. M echanisms must be p ut in
place for collecting information on actual results, so that comparisons can be made and Objectives
control action taken. Overall performance is often judged by analysing two main indicators: By the end of the unit you should be able to:
sales and market share.  Define customer care
(i) S ales analysis is based on the comparison of actual with budgeted turnover, but  Discuss the tips of customer care
this is only the first stage. It is appropriate to delve deeper and consider the effects  Design a customer programme and charter
of differences in unit sales and selling price. Further analysis by product, region,
customer and so on may be required.
(ii) Market share analysis. M arket share is important to overall profitability, and the Customer care
attainment of a given market share is likely to be an important marketing objective. - is the manner in which customers are treated by the business
M arket share should always be analysed alongside turnover, since the growth or - Customer care creates a new orientation in an organisation with and increasing focus on
decline of the market as a whole has implications for the achievement of both types improving the delivery of the needed services by the customers.
of objective. - This should always be viewed as the clientele having rights and expectations that must be
FAS T FORWARD fulfilled.
FAS T FORWARD - As an entrepreneur one needs to appreciate that customer care should be part and parcel of
(b) Marketing organisation. Individual responsibilities within the overall marketing plan should his/her business operations if you intend to achieve success.
be given and the persons responsible named. One example of a specific responsibility is the - The customer care vision by organisation embraces employees that put its customers first and
preparation of performance reports. Other roles will include that of overall responsibility that is open transparent, accountable and responsive
(probably discharged by the M arketing M anager or Brand M anager), management of - The customer is king and always right as a way of doing business
promotional effort and management of marketing research effort.

24
 - The customer is always observed as having a right to demand quality services from the 9. Knowledge of Customer
organisation - the entrepreneur should know the client specific requirements
- In the modern business world there is an increasing focus on enhancing service delivery and - be able to recognize regular clients
on ascertaining that the delivered as promised - strive to provide individualized attention
- An entrepreneur should be responsible, accessible and quick to help source problems - Understand what makes them buy is it need Price?
- Should be reliable and deliver what he/she promises on time
- Should be knowledgeable and courteous 10. Tangibles
- Should be empathetic and should understand the needs of customers - This could include the physical evidence (i.e. building, good handling, tools, equipment,
- Work area should always be clean and organized. packages etc). This could also include the appearance of your personnel
- - employees must be neat, orderly and clean

Ten tips for customer care

Benefits/importance of customer care
1. Reliability
- If customers are put first, the entrepreneur will be rewarded with new business and increased
- this refers to consistency of performance and dependability
profit margins and sales.
- perform the service right the first time fulfill promises
- Customer care creates new customers
- be impartial and avoid favouritism
- Constructive consumer dialogue enables the entrepreneur to know and understand what the
- Be firm with friends and relatives as far as business transactions are concerned.
customers needs and wants
2. Responsiveness
- It builds good relationships and loyalty with customers
- this refers to the willingness as well as readiness of the entrepreneur or his employees in
- Can make passive customers become in violated participants (i.e. loyalty)
providing the services within reasonable time immediately if not sooner
- Create corporate excellence
3. Competence
- Build good reputation and good image i.e. it is a tool for good corporate image building
-This refers to the possession of the required skills and knowledge by those who deliver the
- Business can become a market driven entity as you get information on what your customers
services to the customer. This will create confidence.
need and want.
4. Accessibility
- this refers to the degree of approachability and ease of contact of the entrepreneur or his
Perquisites of meeting Customers expectations
employees
1) be courteous and tactful
- drop what you are doing ignored to greet and serve customer
2) be friendly and helpful
5. Courtesy
3) deal promptly and decisively with customers
- This refers to politeness, respect, consideration and friendliness of your organization’s contact
4) rectify faults quickly and keep promises
such as receptionist, secretaries, telephonist, etc, they must be polite and courteous at all times
5) listen to customers attentively and respond promptly
– remember, a smile goes a long way.
6) avoid being sarcastic when dealing with customers
6. Communication
7) present information logically and comprehensively
- keep your customer well informed in a language and style they understand
8) stick to your commitments
- it is important to hear and understand what your customers are saying
9) Always inform your customers on what happens at your business if it may affect them (i.e. sale,
- communicate effectively with your suppliers as well
new product? Services
10) be fair and honest when dealing with customers
7. Credibility
11) demonstrate the right skills at the right time
- this refers to being trustworthy and faithful
12) always give customers professional treatment
- put customers at heart
13) know the customers business and needs
- they should feel that he/she is given priority and should have the trust that any order will be
executed and received when expected
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
8. S ecurity
customers gets to decide if he or she has received good services
- customer should be protected from danger, risk or doubt within the premises

25
 - even though all of your standards may have been met if the customer does not feel well 9. Recommend a competitor when there’s a need that you can’t satisfy.
served, your customer service is poor 10. M ake yourself available after the sale.
- customer satisfaction is ultimately the result of the sum total of the customer’s experience
Creating Customer Comfort
2. Customer satisfaction is ultimately the result of the sum total of the customer’s experience at your Customer care is also defined as meeting needs and creating comfort. M eeting needs is a given,
establishment. creating comfort is a function of enabling the customer to feel a sense of control when he/she is at your
- Customers come back to a place that has provided a pleasant experience for them. Thus business. Customers feel in control when they know the drill i.e. when they know how things work and
owners and managers need to focus not on tangible as ends themselves but on how all the how to get things done
particulars combine to create a certain experience.
Develop and maintain a customer charter
Prime examples of poor customer care - M ake sure that there is availability and visibility of both a mission statement and customer
1. poor delivery and accessibility of services charter. The customer’s charter will remind your workers always to abide by its contents and
2. poor quality and state of merchandise will assure customers of their expectations of the services and what move to take if they are
3. existence of long queues of customers waiting to be served not met. Your customers’ charter should indicate the standards of services to be delivered and
4. dirty environment of business the way in which the worker will perform their duties
5. failure in meeting client expectations
1. telephone
- number of rings before the telephone is answered are given
Dealing with unprincipled customers -
- never show that customer is wrong or behaving badly
- always take it that he/she is right 2. Enquires
- appreciate and understand at there should be some customer’s who visit your business with - short turn around time
hidden agenda and ulterior motives (i.e. competitors of those interested in policing I’ve price - follow up
control monitors - courtesy options offered to caller
- make very attempt to deter their bad intentions by being upright in your dealings
3. Correspondence
You can defeat unprincipled customers by taking the following steps: - Correct
1. continue to show a good image of your business - Shorthorn around time
2. smile when talking to customers - Acknowledgement of receipt
3. accept blunders where you can realize them promise to improve and make an apology
4. avoid arguing with customers 4. Delivery deadlines met
5. always hold your composure and avoid losing your temper in front of your customer Delays explained and apology given

Building Customer Trust 5. Outgoing services

From a customer’s point of view, there is probably no concept more important than trust. How can you - automatic follow up
strengthen customer trust? - customer feedback
1. Keep your promises - be sure that your customer’s charter informs clients about the availability of a system of
2. M ake promises that you can keep redress in case of grievances
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 CHAPTER 7
expecting
6. Following up on an order to be sure everything is okay. RECORD KEEPING AND S TOCK CONTROL
7. Properly hold complaints all the time.
8. M ake recommendations that are best for the customers. Objectives

26
By the end of the unit you should be able to: S ource documents
 differentiate between bookkeeping and accounting
 keep records and control stock in a business Information used in the process of completing financial transactions are called source documents. These
 interpret and apply basic financial statements can include invoices, receipts, credit and debit notes, purchase orders, customer billings, bank
statements etc. These are the starting of any accounting process.
What does it mean when someone asks you for an account of something?
 Giving a report of some event/activity that has taken place. - Source documents are the documents from which original information to the books of primary
This is the major objective and purpose of this business activity, Accounting. 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
DIFFERENCE BETWEEN BOOKKEEPING AND ACCOUNTING
Bookkeeping: it is concerned with the recording of data only. This used to be done in books, thus the Books of primary entry is obtained
name bookkeeping.
 A bookkeeper is responsible for this duty. Nowadays books may be used, but a lot of Receipt 0023
accounting data is recorded using computers. Date: 25/02/04
Gobvu Manufacturing (Pvt) Ltd
Definition of Accounting P O Box 22
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 CHEGUTU
the bookkeeper. Telefax: 703301
The accounting process
It involves:
Recording Classifying Summarising Interpreting of
Purchases Amount__
5 x 2l Mazoe Orange crush $30 000.00
business activities capable of being expressed in monetary terms. Sub total$30 000.00
Less discount $ 3 000.00
Signature…………… Total $27 000.00
Users of accounting information
Thank You
(i) Present and Potential Investors :they want to see whether or not the business is Invoice is a note given by the supplier or seller to the customer when goods are bought on credit to
profitable (viability of the business) show that the customer has not paid for the goods. That is an invoice is used for credit sales. The
(ii) Prospective buyers of the company: where to buy or not to buy invoice should have the following details:
(iii) Lenders : Banks and Financial institutions ,when the owner of a business wants to
borrow money Date of purchase
(iv) Suppliers/Creditors: Whether it is safe to supply on credit and analyse if they will be Invoice number
paid back their dues. Seller’s name, address, telephone, fax, email (not all of this information may be applicable)
(v) Customers: they need to know if there will be a constant supply of products from the Buyer’s name, address, telephone, fax, email (not all of this information may be applicable)
business Goods or services bought
(vi) Government/Taxman: for calculating tax payable by the business Amount to be paid
(vii) M anagers of the firm: for internal decision making Terms of sale
(viii) Employees: need to access their job security Amount of discount if any
(ix) General public Appreciation message (e.g. Thank You for doing business with us)

27
The following is a sample of an invoice 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.
Invoice 00214
Date: 26/02/04
The following is a layout of a credit note
Gobvu M anufacturing (Pvt) Ltd
P O Box 39
KWEKWE Credit Note
Telefax: 055 50221 Customer’s Name & Address
Customer Ref:
To: M akayepuva (Pvt) Ltd Date:
Chuma street Supplier’s Name & Address
Credit Note No:
MAS VINGO
Item Description Quantity Unit price Total______
Tel: 039 62043 Total to be credited

Item purchased Quantity Unit cost Total______ Reason for credit:

500ml super stick glue 500 $100.00 $50 000.00
less 5% discount if paid Statement is a summary of all of the invoices, payments, credit and debit notes during a period of time.
within 30 days A running balance (total) is used to show the effect of each transaction i.e. invoices and debit notes
increase the total amount which is owed, and credit notes and payments reduce the amount which is
Total $50 000.00 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.
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 Below is the layout and a specimen of a statement
this instance rather than a debit note.
Statement
Below is an example of a debit note From………/…………/………To……./………/………
Customer’s Name & Address
Customer Ref:
Debit Note
Date:
Supplier’s name & address Supplier’s Name & Address
Supplier Ref:
Date:
Customer’s Name & Address Date Details Amount Balance_________
Debit Note No
Balance remaining
Item description Quantity Unit price Total___________

Total to be debited:
Reasons for debit: S pecimen
Credit Note is used to correct an overcharge e.g. if 25 items are sent, but only 20 were requested Date Details Amount Balance

28
5/02/04 Invoice No. 011 $1 000.00 $1 000.00 Delivery Note is a list of items sent and the quantities of each item. It is sent by the supplier for the
10/02/04 Credit Note 005 $ 300.00 $ 700.00 customer to check carefully that the correct items and quantities have been delivered and then sign. The
20/02/04 Invoice No. 13 $ 800.00 $1 500.00 delivery note only shows items and quantity. The delivery note should be given a special number so
25/02/04 Payment Received $ 600.00 $ 900.00 that he or she can find his copy easily.
28/02/04 Invoice No. 16 $1 200.00 $2 100.00
Below is the layout of Delivery Note
Balance remaining $2 100.00
Delivery note
NB: The balance column shows a running total of how much is owed at each date. Invoices and Debit Customer’s Name & Address:
Notes are added to the balance as they increase the amount which is owed; credit notes and payments Customer Ref:
are subtracted from the balance as they decrease the amount which is owed. Date:
The other documents used by the business are enquiry, quotation, price list, delivery Supplier’s name & Address
note and consignment note. Delivery Note No:

Item description Quantity___________

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. Customer’s signature………………_______________________________

Order Note is a letter requesting goods from the supplier.

Below is a layout of an order note 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.

Order Entrepreneurs should consider the following. When choosing a supplier: prices, quality, delivery,
Supplier’s Name & Address Customer’s Name & Address customer service, location, terms of payment, discounts and business hours.
Customer Ref:
Date: Appreciation of Books of Accounts
____________________________________________________________ In business the entrepreneur should be able to appreciate books of accounts. These include the books of
Item Description Quantity Unit price Total________ 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.
TOTAL_________________

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
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 Debit side (Receipts side) Dr Credit side (Payments side) Cr
columns should still be used as part of the body of the letter so that the order is clear and easy to Date Details (Receipts) Cash Bank Date Details (Payments) Cash Bank
understand.

29
Example - Balance carried forward (c/f) is determined at the end of the month by subtracting the total
1/02 E Gobvu starts business with capital: Cash $ 5 000.00 payments (money out) from the total receipts are $25 000 and total cash payments are $20 000,
Bank $50 000.00 therefore $5 000 is left at the end of the month $25 000 has come in and $20 000 has gone out. $5
8/02 Sales (cash) $15 000.00 000 is the balance carried forward because it is the amount that will be starting the next month and
5/02 Buys stock with cheque $10 000.00 will be recorded as balance b/f (balance brought forward)
15/02 Telephone bill paid by cheque $ 5 000.00
18/02 Pay cash into the bank $10 000.00 Purchases journal
20/02 Sales (cheque) $20 000.00 This is a book of primary entry where goods on credit for re-sale are recorded. The transactions are
22/02 Pay wages (cash) $10 000.00 recorded as follows:
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 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

E Gobvu cash book for the month of February 2011 M utsvedu D Purchases journal for the month of February 2011
Date Receipts Cash Bank Date Payments Cash Date
Bank Details Folio Dr Cr
(Details) (Details) 10/02 E Gobvu $10 000.00
1/02 Capital 5 000 50 000 5/02 Purchases 18/02
10 000 T Timothy $ 5 000.00
8/02 Sales 15 000 15/02 Telephone bill 5 000 Dr Purchases A/C $15 000.00
18/02 Deposit 10 000 18/02 Deposit 10 000
20/02 Sales 20 000 22/02 Wages 10 000
23/02 Withdrawal 5 000 23/02 Withdrawal 5 000 S ales Journal
28/02 Drawings 15 000 - This is a book of primary entry where goods returned by customers are recorded
25 000_ 80 000 29/02 Balance c/f 5 000 45 000
25 000 80 000
Example: Mutsvedu (Pvt) Ltd
1/03 Balance b/f 5 000 45 000 M utsvedu D Sales Returns Journal for the Feb 2004

20/02 B Sali returned goods $2 000.00

Notes 22/02 T Tom returned goods $5 000.00
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 Date Details Folio Dr Cr
side (Receipts) and on the right hand side (Payment) for money going out of the business. 20/02 B Sali $2 000.00
- Capital refers to the money being invested by the entrepreneur into the business. 22/02 T Tom $5 000.00
- Purchases refer to goods bought by the business for resale. Dr Sales Returns $7 000.00
- Drawings relates to money taken out of business for personal use.
- Transfer from Bank to Cash refers to money taken out of bank account to be kept as cash in
business. This transaction has to be recorded in the cashbook to show that the money has been General Journal
moved from one place to the other, otherwise the totals for the money left in the bank and in cash This is used to enter all transactions which cannot conveniently be entered into one of the other
at the end of the month will be incorrect. subsidiary books e.g. fixed assets bought on credit such as furniture.
- 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 Example; Mutsvedu (Pvt) Ltd
to our supply of cash in the business and a record has to be made on the cash column on the 01/02 Received an invoice of $100 000.00 for office furniture bought on credit form Alice M abinge
Receipts side of the cashbook. The reverse is true when the business transfers cash from the 02/02 Bought stationary on credit from Alice M abinge $10 000.00
business into the bank.

30
 Date Details Folio Dr Cr Business is not entirely carried out on cash basis, many of the things bought when a company is
01/02 Office furniture 100 000.00 established are not exhausted straight away e.g. buildings and machinery. It is necessary therefore to
Alice M abinge 100 000.00 have some method of showing the financial position of the business from time to time and of
02/02 Stationery 10 000.00 calculating the amount of profit which is available for the entrepreneur. This is the purpose of a system
Alice M abinge of accounts.

The Ledger Book Asset Accounts

This is the main book of account. All other books of account are subsidiary to the ledger and are used These are the actual resources in a business and can include:
to record transactions as they occur, prior to their entry or posting to the ledger. (i) Tangible/Fixed/Non Current assets :
The ledger is ruled as follows:  Buildings, M achinery ,M otor vehicles etc
Dr Cr 
Date Details Folio Amount Date Details Folio Amount (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.
Notes:  Prepaid expenses: when an entrepreneur has made a payment in advance, he has
- The ledger is divided into two halves that is the left-hand side called debit side and the right hand done himself a favour.
side called credit side. The abbreviations Dr and Cr are used respectively at the top of each
account as shown above. Liability Accounts
- The first column is for dates, the second for particulars of the transactions, the third, a folio column This is money owing for goods supplied to the business and can include:
(referred to hereafter) and the fourth, or money column for the amount of each transaction. (i) Long term /Non Current Liabilities
- The two sides of the account (sometimes contained on two pages facing each other) are numbered  Loans
alike and are together called a folio. (ii) Short term/Current Liabilities
- The universal rule in entering or posting transactions to the ledger is that credit the giver and debit  Accounts payable :credit purchases/Creditors
the receiver.  Accruals: Expenses we still have to pay at the end of a financial period e.g. rent
payable, wages payable.
ACCOUNTING EQUATION  Unearned revenue: this is when a product or service was paid for in advance to us
When an entrepreneur starts a business he supplies part of the resources (Capital).He seeks assistance before we have supplied it e.g. unearned wages, unearned rent
from other sources (Liabilities), so as to have adequate resources .These resources are the assets of the Appreciation of Books of Accounts
business. At any point of time the assets of any entity must be equal (in monetary terms) to t he total of In business the entrepreneur should be able to appreciate books of accounts. These include the books of
equities. This can therefore be expressed as 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.
ASSETS = CAPITAL + LIABILITIES
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
What are the resources? Who supplies the equities to acquire the assets? money left over at the end of the month. Below is a layout of a cashbook

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

It is a place where all information referring to a particular asset or liability or capital is entered. Date Details (Receipts) Cash Bank Date Details (Payments) Cash Bank

31
Example Receipts side of the cashbook. The reverse is true when the business transfers cash from the
1/02 E Gobvu starts business with capital: Cash $ 5 000.00 business into the bank.
Bank $50 000.00 - Balance carried forward (c/f) is determined at the end of the month by subtracting the total
8/02 Sales (cash) $15 000.00 payments (money out) from the total receipts are $25 000 and total cash payments are $20 000,
5/02 Buys stock with cheque $10 000.00 therefore $5 000 is left at the end of the month $25 000 has come in and $20 000 has gone out. $5
15/02 Telephone bill paid by cheque $ 5 000.00 000 is the balance carried forward because it is the amount that will be starting the next month and
18/02 Pay cash into the bank $10 000.00 will be recorded as balance b/f (balance brought forward)
20/02 Sales (cheque) $20 000.00
22/02 Pay wages (cash) $10 000.00 Purchases journal
23/02 Withdraw from the bank to keep in business $ 5 000.00 This is a book of primary entry where goods on credit for re-sale are recorded. The transactions are
28/02 E Gobvu writes cheque for personal use $15 000.00 recorded as follows:

Example: Mutsvedu (Pvt) Ltd

10 February bought $5 000 stock on credit from E Gobvu
E Gobvu cash book for the month of February 2011 18 February bought $5 000 stock on credit from T Timothy
Date Receipts (Details) Cash Bank Date Payments Cash
(Details) M utsvedu D Purchases journal for the month of February 2011
1/02 Capital 5 000 50 000 5/02 Purchases Date Details Folio Dr Cr
8/02 Sales 15 000 15/02 Telephone 10/02 E Gobvu $10 000.00
18/02 Deposit 10 000 18/02 bill 10 000 18/02 T Timothy $ 5 000.00
20/02 Sales 20 000 22/02 Deposit 10 000 Dr Purchases A/C $15 000.00
23/02 Withdrawal 5 000 23/02 Wages 5 000
28/02 Withdrawal 15 000
25 000_ 80 000 29/02 Drawings 5 000 S ales Journal
Balance c/f 25 000 - This is a book of primary entry where goods returned by customers are recorded
1/03 Balance b/f 5 000 45 000
Example: Mutsvedu (Pvt) Ltd
M utsvedu D Sales Returns Journal for the Feb 2004

20/02 B Sali returned goods $2 000.00

Notes 22/02 T Tom returned goods $5 000.00
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 Date Details Folio Dr Cr
side (Receipts) and on the right hand side (Payment) for money going out of the business. 20/02 B Sali $2 000.00
- Capital refers to the money being invested by the entrepreneur into the business. 22/02 T Tom $5 000.00
- Purchases refer to goods bought by the business for resale. Dr Sales Returns $7 000.00
- Drawings relates to money taken out of business for personal use.
- Transfer from Bank to Cash refers to money taken out of bank account to be kept as cash in General Journal
business. This transaction has to be recorded in the cashbook to show that the money has been This is used to enter all transactions which cannot conveniently be entered into one of the other
moved from one place to the other, otherwise the totals for the money left in the bank and in cash subsidiary books e.g. fixed assets bought on credit such as furniture.
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 Example; Mutsvedu (Pvt) Ltd
to our supply of cash in the business and a record has to be made on the cash column on the 01/02 Received an invoice of $100 000.00 for office furniture bought on credit form Alice M abinge
02/02 Bought stationary on credit from Alice M abinge $10 000.00

32
 Date Details Folio Dr Cr 19 Sold goods for cash $28 Cash a/c Sales a/c
01/02 Office furniture 100 000.00 22 Bought fixtures on credit from Kingston Fixtures a/c Kingston a/c
Alice M abinge 100 000.00 Equipment Company $150
02/02 Stationery 10 000.00 24 [Link] lent us $100 paying us the money Bank a/c [Link]
Alice M abinge by cheque
29 We paid [Link] his account by cheque [Link] a/c Bank a/c
The Ledger Book $60
This is the main book of account. All other books of account are subsidiary to the ledger and are used 31 We paid Kingston Equipment Co. by Kingston a/c Bank a/c
to record transactions as they occur, prior to their entry or posting to the ledger. cheque $150

The ledger is ruled as follows: Opening up accounts and closing them in the ledger
Dr Cr When transactions transpire within a month/financial period they are posted into the ledger of the
Date Details Folio Amount Date Details Folio Amount 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.

Notes: Capital a/c

- The ledger is divided into two halves that is the left-hand side called debit side and the right hand Bal c/d 1000 Cash 1000
side called credit side. The abbreviations Dr and Cr are used respectively at the top of each 1000 1000
account as shown above.
- The first column is for dates, the second for particulars of the transactions, the third, a folio column Bal b/d 1000
(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 Cash a/c
alike and are together called a folio. Capital 1000 Bank 900
- The universal rule in entering or posting transactions to the ledger is that credit the giver and debit Sales 28 Purchases 55
the receiver. Bal c/d 73
1028 1028
DOUBLE ENTRY S YS TEM Bal b/d 73
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. Bank a/c
Cash 900 M .Van 500
 Debit the receiver Loan 100 [Link] 60
 Credit the giver Kingston 150
Bal c/d 290
Example 1 1000 1000
2010 Debit (Dr) Credit (Cr) Bal b/d 290
August 1 Started business with $1000 cash Cash Account Capital Account Purchases a/c
2 Paid $900 of the opening cash into the bank Bank a/c Cash a/c [Link] 78 Bal c/d 133
4 Bought goods on credit $78 from [Link] Purchases a/c [Link] a/c Cash 55
5 Bought a motor van by cheque $500 M otor Van a/c Bank a/c
7 Bought goods for cash $55 Purchases a/c Cash a/c
133 133
10 Sold goods on credit $98 to D.M oore D.M oore a/c Sales a/c
Bal b/d 133
12 Returned goods to [Link] $18 [Link] a/c Purchases Returns

33
 [Link] a/c TRIAL BALANCE
[Link] 18 Purchases 78 We have been practising the double entry concept whereby each transaction has both a debit and credit
Bank 60 entry. All items recorded on the credit side should equal in total those on the debit side of the books. To
78 78 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.

M otor Van a/c Definition: A trial balance is simply a proof of the equality of debit and credit balances in the accounts.
Bank 500 Bal c/d 500
500 500  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.
Bal b/d 500

Sales a/c Trial Balance as at 31 August 2010

Bal c/d 126 D.M oore 98
Cash 28
126 126
Dr Cr
Bal b/d 126

D.M oore a/c Capital 1000

Sales 98 Bal c/d 98 Cash 73
98 98 Bank 290
Bal b/d 98 Purchases 133
Purchases Returns a/c M otor Van 500
Bal c/d 18 [Link] 18 Sales 126
18 18 D.M oore 98
Bal b/d 18 Purchases Returns 18
Fixtures 150
Fixtures a/c [Link] 100
Bank 150 Bal c/d 150 1244 1244
150 150
Bal b/d 150
The two sides are equal therefore the trial balance has balanced. This shows that our transactions that
Loan- [Link] a/c we posted into the ledger are correct.
Bal c/d 100 Bank 100
100 100 FINAL ACCOUNTS OF A S OLE TRADER

Bal b/d 100  Income Statement/Trading Profit and Loss Account

 Balance Sheet

Kingston Equipment a/c Income S tatement

Bank 150 Fixtures 150 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.

34
The account is split into two sections, one in which the Gross Profit is found and in the other, Net Profit 33 289 33 289
is calculated
 Gross Profit-Calculated in the Trading Account .This is the excess of sales over the cost of Stock at 30 September 2010 was $2946.
goods sold in the period. Required:
 Net Profit-Calculated in the Profit and Loss [Link] is what is left of the gross profit after Draw up a:
all other expenses have been deducted. 1. Trading Profit and Loss Account for the year ended 30 September 2010.
 Expenses-The value of all the assets that has been used up to supply goods and services and 2. Balance Sheet as at 30 September 2010.
therefore obtain revenues.
Trading Profit and Loss Account for the year ended 30 S eptember 2010.
To compile a Trading Profit and Los Account, one needs to have the Trial Balance first.
Sales 18 600
Less Returns inwards (205)
Balance S heet 18 395
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. Less Cost of goods sold:
Opening Stock 2 368
A Balance Sheet is a record of the business Assets, Liabilities and Resultant stockholders equity Add Purchases 11 874
(Capital + Profit-Drawings) to depict a financial situation on a specific date. Less Returns outwards (322)
Add Carriage inwards 310
Example 2 Less Closing Stock (2 946) 11 284
The following is a Trial Balance of [Link] as at 30 September 2010. GROS S PROFIT 7 111
Dr Cr
$ $ Less Expenses:
Stock 1 October 2009 2368 Carriage outwards 200
Carriage outwards 200 Salaries and Wages 3 862
Carriage inwards 310 Rent 304
Returns inwards 205 Insurance 78
Returns outwards 322 M otor Expenses 664
Purchases 11874 Office Expenses 216
Sales 18600 Lighting and Heating 166
Salaries and wages 3862 General Expenses 314 5 804
Rent 304 NET PROFIT 1 307
Insurance 78
M otor Expenses 664
Office expenses 216 Balance S heet as at 30 S eptember 2010
Lighting and Heating 166 Non Current Assets
General expenses 314 Premises 5 000
Premises 5000 Fixtures and Fittings 350
M otor Vehicle 1800 M otor Vehicle 1 800
Fixtures and Fittings 350 7 150
Debtors 3896
Creditors 1731 Net Current Assets 5 593
Cash at bank 482
Drawings 1200 Current Assets 7 324
Capital 12636 Stock 2 946

35
Debtors 3 896 A company considered too highly leveraged (too much debt versus equity) may find itself restricted in
Bank 482 action by its creditors and /or may have its profitability hurt because of paying high interest charges.
Current Liabilities 1 731
Creditors 1 731 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
Total Assets 12 743 level of development it is at, these companies should have lower debt and higher equity levels. This
status reflects a very positive sign of investment quality.
Capital 12 636
Add Net Profit 1 307
Less Drawings (1 200) Capital Ratios and indicators
Three different ratios are used to assess the financial strength of a company’s’ capitalisation structure.
12 743
 Debt ratio: total liabilities
total assets.

M ore of total liabilities means less equity and therefore indicates a more leveraged position.
CAPITAL S TRUCTURE & CAPITAL GEARING CONCEPT  Debt/Equity Ratio: total liabilities
total shareholders equity.
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.  Capitalisation Ratio: total debt
total capitalisation
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 (Total debt = the sum of obligations categorised as debt + total shareholders equity)
financed by debt (debt capital) poses greater risk as this company is relatively highly levered. A healthy Expressed as a percentage, a low number is indicative of a healthy equity cushion, which is always
proportion of equity capital as opposed to debt capital in a company’s’ capital structure is an indication more desirable than a high percentage of debt.
of financial fitness.
N.B The first two are popular measurements; however it’s the capitalisation ratio that delivers the
 Equity Capital: in a company’s’ capital structure, equity consists of a company’s key insights to evaluating a company’s capital position.
common and preferred stock plus retained earnings, which are summed up in the
shareholders equity account in the balance sheet.
Capital gearing concept
 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 Few people have the money to cover all the initial expenses in starting a business. This is why bank
redeemable preferred stock. 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.

Debt-Equity relationship The first thing that the banks check is if the entrepreneur’s contribution is in the form of imaginative
Shrewd use of leverage (debt) increases the amount of financial resources available to a company for cash. The owner should not have made other loans or taken the money from the house bond, but has the
growth and expansion. The assumption is that management can earn more on borrowed funds than it finance available in the form of cash in the bank. The reason is that banks would often look for surety in
pays in interest expense and fees on these funds. the form of an asset, such as the owner’s primary residence.

36
Once sufficient capital is raised, the outstanding amount can be borrowed. This is called a geared 1. Liquidity Ratios: Indicate a business’s ability to pay its short term liabilities at the correct
deal, with gearing simply being the amount borrowed in relation to the total set-up amount of the time. Failure to do so could result in the shutting down of the business. When a company is
business. able to pay its debts as they fall due, that company is said to be liquid.

In an ideal world, the business owner is able to contribute enough own capital to secure a gearing ratio  Current Ratio = Current Assets
of 50%, ensuring that the repayments are generally manageable. If a prospective business owner is able Current Liabilities
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 This compares assets which will become liquid within 12 months with liabilities
possibility of better future returns. 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

It is also possible to secure gearing ratios of as high as 20% from finance institutions. These higher of financial difficulties. Very high rates suggest excess current assets that are
ratios are not always advisable, because the higher the gearing ratio, the higher the chance of business probably having an adverse effect on the long term profitability of the business. If it
failure becomes because of higher monthly installments on the repayment of the loan, as well as the is more than 2 that means that we are too liquid, so we need to reduce or work on
effects of interest on the remaining 80% of the total cost of the business. Obviously, the financiers one of them.
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.  Quick/Acid Test Ratio = Current Assets - Stock
Current Liabilities
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. M ost of these institutions use a guideline of This indicates the business’s ability to meet its current liabilities without using
expecting gearing of between 30 and 50%, although when economies are depressed few would consider stock.
a gearing ratio of lower than 40%.Some financial institutions may allow higher gearing ratios when an
existing business is being bought out and there is a cash flow history, as opposed to starting from A ratio less than 1 is not alarming a very high ratio suggests excess cash, a credit
scratch. 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
Unfortunately, not every person buying or starting a business has massive amounts of capital available, much money. The ideal ratio should be less than [Link] it is too low then you need
and a highly geared deal is all that is open to them. In these cases, alternative forms of finance can be loosen up your credit policies and increase your debtors.
considered.
2. Debt Management Ratios: Deal with the amount of debt in the business capital structure and
its ability to service the legal obligations.
 Capital Gearing ratio: owner's equity (or capital)
Borrowed funds 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.
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.  Total Debt to Total Assets Ratio = Total Debt
Total Assets

ACCOUNTING RATIO ANALYS IS Indicates how much of the business funds are being supplied by creditors. Total
The analysis of Accounting statements help in the diagnosis of trends which indicate the magnitude , debt includes all current + non current debts + lease obligations.
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 A high ratio indicates the use of financial leverage to magnify earnings, while a low
are very useful if used correctly and very misleading otherwise. 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.

37
  Days Purchases Outstanding = Credit Purchases 4. Asset Management Ratios: They indicate how efficiently the business is using its assets
Purchases/365 .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
Indicates how prompt a business is at paying its bills. be.

 Times Interest Earned Ratio = Earnings before Interest(EBIT)  Days S ales outstanding = Credit Sales
Interest Sales/365

Indicates the ability to meet the interest requirements on both short and long term The higher the DSO the higher the cash conversion cycle. This ratio estimates the
debts. How many times can you pay the interest from your EBIT? number of days it takes on average to collect the sales. By dividing sales by 365 we
are finding the average sales per day.
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 The ratio indicates how effective the credit granting and management activities are.
needed to generate income. A high DSO probably indicates many uncollectible receivables. A low ratio
indicates that credit granting policies are very restrictive than granting sales.
 Fixed charges coverage Ratio = EBIT + Lease expenses
Interest + Lease expenses  Inventory turnover Ratio = Cost of goods Sold
Average stock
Provides a more comprehensive picture of the business’s ability to meet it’s legal
financial requirements. It measures the times in a year the business turns over its inventory/stock.
A high ratio is more desirable than a low one. 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.
3. Profitability Ratios: Relate income to sales, assets or capital. Other things being equal and assuming that sales are moving smoothly, a high
turnover suggests efficient Inventory management, a low turnover figure often
 Net Profit Margin = Net Profit indicates obsolete stock or lack of inventory management.
Net Sales
 Long Term Asset Turnover Ratio = Sales
This ratio is used to measure the efficiency of management. A low margin indicates Non current Asset
that not too much sales are guaranteed relative to expenses or that expenses are out
of control or both. 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
 Return on Investment (ROI) = Net Profit its assets. The higher the ratio, the more effective the utilisation of assets. A low
Total Assets ratio indicates that the marketing effort requires attention.

It indicates the ability of the business to earn satisfactory returns on all assets it  Total Asset Turnover Ratio = Sales
employs. The higher the rate the better because provides some indication of future Total Assets
growth prospects.
It is an indication of the business ability to generate sales in relation to its total asset
 Return on Equity (ROE) = Net Profit or Net Profit base. A high turnover normally reflects good management, whereas a low ratio
Capital M arket value of Equity suggests the need to reassess the overall strategy of the business, marketing effort
and the capital expenditure programme.
It indicates return on the owners’ investment in the business. It is an accounting
measure on how well management is performing

38
S TOCK CONTROL (iii) Batch control/2 Bin S ystem
A quantity of an item equal to the order quantity is set aside (frequently in a
Why do we control stock? separate / 2nd bin), and not touched until all main stock is used up. When this stock
 To maintain stock levels that will minimise the Total Stock Cost. (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
Objectives of Inventory Management is placed in the stock at a point equal to order point. When a customer takes that
A firm wishing to maximise profits will have the following objectives: book to the checkout, the store is effectively notified that it is time to reorder that
 M aximise customer service title.
 Low cost plant operation
 M inimum inventory investment If your needs are predictable you may order a fixed quantity of stock every time you
place an order/order at a fixed interval.
Maximise customer service
It describes the availability of items when needed and it is a measurement of inventory management (iv) Economic Order Quantity(EOQ)
effectiveness. The customer in this case can be either one of the following; a purchaser, distributor, This is the quantity of materials used at each order point that minimises the total
another plant or work station where the next operation is to be performed. Some measures of customer annual stocking cost for a material n a fixed order quantity inventory system.
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 It is a standard formula used to arrive at a balance between holding too much or too
customers. little stock.

Low cost plant operation EOQ formula: Q = 2DS

Efficient inventory build up allows continuous production to occur resulting in lower set up costs and an C
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 Where Q=Quantity ordered at each order point
achieve this objective. D=Annual demand for a material in units
S=Average cost of completing an order
Minimum inventory investment C=Cost of carrying one unit in inventory for one year.
Batching economies in procurement shipments e.g. truckloads can reduce/minimise the amount of
money you use in inventory transportation and carrying costs. 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:

METHODS OF S TOCK CONTROL  Costs which decrease as the size of the order is increased.
To maintain effective control over stock, it is necessary to determine: a. Purchase price (quantity discounts)
 What should be the maximum and minimum stocks b. Cost of placing an order
 What may be regarded as a standard order for a particular commodity and c. Stock-out costs e.g. lost contribution through lost sale and cost
 The point at which a further supply should be ordered. of production stoppages

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.  Costs which tend to increase as the size of the order is increased.
a. Cost of storage
(i) Just in Time (JIT) b. Charges attributable to storage e.g. interest on investment,
It aims to reduce cost by cutting stock to a minimum. Items are delivered when insurance, damage, obsolescence, and cost of warehouse space.
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. (v) S tock Review
In this method you have regular reviews of stock. At every review you place an
(ii) order to return stocks to a predetermined level.

39
 (vi) First in First Out(FIFO) CHAPTER 8
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 COS TING AND PRICING
production in strict order

S tock Taking OBJECTIVES

By the end of this unit you should be able to:
- 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. Define the following costing terms
- Stock taking is simply defined as the physical counting or checking of the stock items. The  Costing
physically counted stock items may fail to agree with the stock records because  Costs
(a) The items were stolen or damaged and a record was not made  Direct costs
(b) Goods were bought/sold but a record was to made  Direct labour
(c) Sales or purchases have been recorded incorrectly  Direct expenses
 Indirect costs
How to carry out a stock take  Calculate total costs per item
 Discuss the importance of costing to the entrepreneur
S TEPS :  Define pricing
1st Set a date for stock take and inform the publics if business hours are interrupted  Calculate prices of products
2nd Organize the stock to facilitate easy counting  Discuss the pricing factors
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 Definition of costing terms
6th Deduct the stock card figure form the stock take figure and enter this amount in the
Difference column Costing
7th Find out the reasons if there is a difference i.e. if there is more or less stock than shown on the
This is the method or way of calculating the total costs of making or selling a product or providing a
stock card service
Below is a specimen of a stocktaking list Costs
These are all the money that the business spends to make and sell its products or services
Stock taking list
Item Stock take Stock card Difference Direct Costs
These relates to all costs that are directly related to the products or services that the business makes or
Eversharp pen 1 000 1 150 -150 sells. There are two types of direct costs namely direct material costs and direct labour costs.
Pencil sharpener 200 200 0
Ruler 300 350 +50 Direct Material costs
Exercise book (A4) 1 000 1 000 0 - 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.
As shown on the stock list, during the stock take there were 150 less of ever-sharp pens and 50 more
To be considered or counted as direct material costs, the amount of material must be easy to
than recorded on the stock cards. The anomalies or differences should be corrected on the stock card. calculate and the cost of the material must be big enough to add a considerable amount to the total
direct material costs.

40
 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 S TEP III Total cost per item:
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 cost per item + indirect cost per
direct labour costs. For retailers and wholesalers, all salaries and wages are indirect costs. item

Direct expenses NB: In both costing processes, costs per item may be calculated using a month as the time factor instead
- These are any expenses directly related to the production of the final product e.g. delivery costs of a year that is “ Instead of Indirect cost per year divided by Total number of items per year” the
which relate only to delivery or raw materials used in production of one product, hiring of a Entrepreneur may use, “ Indirect cost per month divided by number of items per month.
machine which is only used on one product.
Costing calculations in detail (M anufacturer or service operator)
Indirect costs
- These are all other costs that the entrepreneur/business incurs in running the business e.g. rent, Stage I: Calculate Direct M aterial Costs
interest, electricity, salaries of supervisor, managers, accounts clerks, secretary and other The entrepreneur should calculate the costs of all material
administration expenses. Indirect costs are also known as overheads or expenses.  That become part of or are directly related to the product or service
 That are easy to calculate and have a big enough cost to be counted
Calculate total cost per item
- Costing for a manufacturing or service operator. When calculating the cost of producing an item, S tage II: Calculate Direct Labour Costs
the entrepreneur should ensure that all costs are included. That is direct and indirect costs. The  That is work out the costs of wages, salaries and benefits for the employees who work directly
entrepreneur must therefore, calculate the direct maternal cost, direct labour and direct expenses of in the production of the product or service
producing the item and then add a proportion of the indirect costs to find the TOTAL COST of
producing the item. S tage III: Calculate Indirect Costs
- Formula: Total Cost = Direct Cost + Indirect Cost  These are all other costs that the business incurs per month such as rent, electricity, insurance,
- Before we calculate the total cost per item, it is important to have the costing processes: depreciation, water and so on.
- Costing Process Where M ore Than One Product Is Produced
Costing calculations where not more than one product is produced.
S TEP I
Direct Direct Direct Exhibit
M aterial Direct
+ labour + Expense = Cost Per The entrepreneur – carpenter specializes in the manufacture of tables and has the following details for
Cost: - costing. Calculate the total cost of one table.
cost: - (hrs
Add the Materials used: Timber 2 000.00
cost of
per item x Item
number of Nails 1 000.00
raw workers x Varnish 500.00
materials Glue 500.00
money
used to
S TEP II produce One (1) worker takes 5 hours to produce one item. The carpenter is paid $1 000 per hour.
one Indirect Cost per year Other costs per month: Rent $ 5 000.00
product Electricity $ 500.00
item Add up all the Indirect costs for the year Other wages $10 000.00
Telephone $ 2 000.00
Transport $ 2 000.00
Indirect Cost per item:
Total Indirect costs per year 100 items are produced each month
Total number of items per year
41
 Direct expenses $5 000.00
Answer: Workers take 3 hours to make one desk. They are each paid $1 000.00 per hour. Other costs of running
Direct Materials: Timber $2 000.00 the business per year are:
Nails $1 000.00 Rent $10 000.00
Varnish $ 500.00 Electricity $ 5 000.00
Glue $ 500.00 Water $ 7 000.00
$4 000.00 (Direct M aterial/Cost) Transport $20 000.00
Other wages $20 000.00
Direct Labour: 1 x 5 hours/item x $1000/hr = $5000.00
1000 desks are produced each year. Calculate the total cost per item.
Indirect Cost/item: Rent $ 5 000.00
Electricity $ 500.00 iii) The entrepreneur has the following to make a product item:
Other wages $10 000.00
Telephone $ 2 000.00 M aterials $50 000/item
Transportt $ 2 000.00 Indirect costs $2 000 000/year
$19 500.00 40 000 items are produced per year
Workers take 2 hours to produce 1 (one) item. Calculate the total cost of product item.
Indirect Cost/item: $19 500.00
100 items/month Calculation of total cost of 1 (one) item where several different products are produced
= $195.00/item
Total cost of one item: Direct material cost + Direct Labour Cost + Direct Expenses + Indirect Cost = If the entrepreneur produces several different types of products, it is not appropriate to allocate the same
$4 000.00 + $195.00 amount of costs as in the case of one product type. This is because more time may be spent in the
=$4 195.00 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
NB: There are not direct expenses by the number of hours to produce one item. This enables the entrepreneur to be able to calculate a
Further Questions different cost for each different product which reflects the amount of time taken to produce that product.
i) The entrepreneur uses the following to make a garment:
Materials: Fabric $2 000.00 Exhibit:
Thread $ 500.00 The entrepreneur used the following in making the dress and a trouser:
Elastic $ 500.00
A tailor takes 4 hours to produce the garment and charges $500.00 per hour. Other costs per year are as Material Dress Trousers
follows:
Rent $100 000.00 Fabric $800.00 $1 000.00
Transport $ 20 000.00 Thread $300.00 $ 400.00
Electricity $ 30 000.00 Zip $100.00 $ 100.00
Button $100.00 $ 100.00

2000 items are produced each year. Calculate the total cost per item. 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:
ii) The entrepreneur produces desks and uses the following: Rent $600 000.00
Materials: Timber $10 000.00 Electricity $240 000.00
Nails $ 1 000.00 Transport $240 000.00
Varnish $ 500.00
Paint $ 2 000.00 The two workers each work for 40 hours a week and fifty weeks a year. Calculate total cost per each
item.

42
Answer: 7th calculate indirect cost per item:
Direct costs:
Dress: 2 workers x 4hrs x $270/hr
1st calculate direct material cost:
M aterials Dress Trousers = $ 1 660.00/dress

Fabric $800.00 $1 000.00 Trousers: 2 workers x 6 hrs x $270/hr

Thread $300.00 $ 400.00 = $ 3 240.00/pair
Zip $100.00 $ 100.00
Buttons $100.00__ $ 100.00_ 8th Total cost: Dress: $1 300.00 + $16 000.00 + $1 660.00
$1 300.00 $1 600.00 per item = $18 960.00

2nd calculate direct labour cost Trousers: $1 600.00 + $24 000.00 + $3 240.00
Dress: 2 workers x 4hrs x $2 000.00 = $28 840.00
= $16 000.00 per dress

Trousers 2 workers x 4 hours x $2 000.00 Further Questions

= $24 000.00 per pair of trousers
The entrepreneur used the following to make a skirt and a Dress:
3rd Total Direct Cost: M aterials Skirt Dress
Dress: Direct material cost + Direct Labour
= $1 300.00 + $16 000.00 Fabric $2 000.00 $3 000.00
= $17 300.00 per dress Elastic $ 50.00 -
Zip - $ 80.00
Trousers: $1 600.00 + $24 000 Lace $ 90.00 $ 100.00
= $25 600.00 per pair of trousers
2 three)Workers take 4 hours for the skirt and 5 hours for the dress and are each paid $2 000.00 per
4th calculate indirect costs: Rent $6 000 000.00 hour.
Electricity $ 240 000.00
Transport$ 240 000.00_
$1 080 000/year Indirect costs per year:

5th calculate production hours per year Rent $600 000.00

1 Workers x 40 hrs/week x 50 weeks/year = 4 000hrs/year Electricity $360 000.00
Transport$240 000.00
6th indirect cost per hour:
Each worker works for 50 hours/week and 50 weeks/year. Calculate the total cost per each item.
Formula:indirect cost/year
Production hrs/yr
Costing for a retailer or wholesaler
= 1 080 000/yr
4 000 hrs/yr 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
= $270/hr operators.

43
To calculate the total cost of an item for the wholesaler or retailer, 3 steps are followed that is: Step 1 M argin = 50 (Profit)______
Calculate Direct M aterial Cost 250 (Selling Price)
Step 2 Calculate Indirect Costs = 1/5 as a fraction /25% as percent
Step 3 Add up Total Costs
Further Questions
Total cost = Direct M aterial Cost + Indirect cost a) The entrepreneur makes Dresses and skirts and uses the following:

NB retailers/wholesalers do not have direct labour as they buy and sell goods made by other businesses. M aterial Dress Skirt
Their employees do not make products or manufacture, and as such all wages and salaries are indirect Fabric $2 000.00 $3 000.00
costs. Thread $ 200.00 $ 700.00
Buttons $ 30.00 $ 30.00
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. 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:

Pricing Rent $600 000.00

Electricity $240 000.00
Definition: is the process of calculating an amount of money to charge customers for goods and Other wages $ 30 000.00
services produced or to be provided by the entrepreneur.
The two workers each work for 40 hours a week and so weeks a year.
Calculations of prices of product i) Calculate the profit and selling price, if the Dress is marked up by 10%.
After costing the next process is to calculate the price for which the products should be offered ii) If the profit on skirt is $200, what is its selling price, mark up and margin.
The two major methods of pricing calculation are mark-up and margin.
M ark up is profit expressed as a fraction or percentage of cost b) The entrepreneur produces two products ‘A’ and ‘B’. The following are incurred by the business:
It is calculated as: Profit (P) x 100%
Cost © Materials Products: A B
M aterials $2 000.00 $3 000.00
M argin is profit expressed as a fraction or percentage of selling price
It is calculated as: Profit (P)______ x 100% Two (2) workers take 6 hours to produce product ‘A’ and 10 hours to produce product ‘B’. The
Selling Price (SP 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.
Note that Profit = Selling Price – Cost
Find the profit and selling price of each product, if the products are marked up 50%.
Example: If the selling price is $250.00 and the cost is $200, calculate profit, mark up and
margin. Pricing factors
When setting prices the entrepreneur must consider the following variables or factors.
S olution
Profit = Selling Price – Cost a) Customers
= $250.00 - $200.00 The business is expected to carry out a survey to determine how much customers are prepared to pay for
= $50.00 the product. The selling price should not be higher than what customers are prepared to pay.

M ark up = 50 (Profit) b) Competitors

200 (Cost) The entrepreneur should carry out comp etitor’s analysis to determine the prices of competitors. If the
= ¼ as a fraction or 25% as percentage 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.

44
As such, the highest selling price should be equal to or less than the price charged by competitors.  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
c) Cost and Profit pricing includes cash discount, quantity discount, functional discount (trade discount) and
The entrepreneur must consider the costs incurred in producing the product or the costs that the business seasonal discount.
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 CHAPTER 9
much competitors charge or customers will pay, which ever is lower.

Pricing strategies BUS INES S GROWTH

A pricing strategy is an approach or means designed to achieve the pricing objectives. The price the Objectives
entrepreneur charges will be somewhere between one that is too low to produce a profit and that is too By the end of this study unit you must be able to;
high to produce any demand. Product costs set a floor to the price; consumer perceptions of the  define business growth
product’s value set the ceiling. The entrepreneur must consider competitors’ prices and other external  distinguish internal from external growth
and internal factors to find the best price between these two extremes. Entrepreneurs may opt to use the  distinguish a merger from an acquisition
following approaches or strategies in product pricing: cost based pricing, buyer-based approach and  use various business strategic analysis tools and appreciate their limitations.
competition-based approach.
Introduction
 Cost based pricing includes cost-plus pricing, breakeven pricing and value-based pricing. Business growth means an increase in size of an organization. Size covers aspects such as operational
Break even pricing and value-based pricing. 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
 Cost-plus pricing is adding a standard mark to the cost of the product. Break even pricing grows on its own efforts, resources and by ploughing back profits. Organic growth occurs when a
(target profit pricing) is setting price to break even on the costs of making and marketing a business combines its resources with those of another business. The result will either be a merger or
product or setting price to make a target profit. Value based pricing is setting price based on takeover (acquisition).
buyer’s perceptions of value rather than on the seller’s cost.
Important terms
 Value pricing is offering the right combination of quantity and good service at a fair price.  M erger-This is when two business organizations combine their shareholding and fixed assets
to become one business entity.
 Competition based pricing is setting prices based on the prices that competitors charge for  Acquisition-This is when one business takes over the shareholding and assets of another.
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 Internal growth
going rate pricing, in which a firm bases it’s price largely on competitors’ prices with less Internal business growth can best be understood by use of the Ansoff Product/market matrix.
attention paid to it’s own costs or to demand. The firm might charge the, more, or less than
it’s major competitors.
An s o f f Pro du ct a n d Ma rk e t Ma t ri x
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.
The Ansoff Growth matrix is a tool that helps businesses decides their product and market growth
strategy.
 S kimming 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 Ansoff’s product/market growth matrix suggests that a business’ attempts to grow depend on whether it
price. The firm makes fewer but more profitable sales. markets new or existing products in new or existing markets.

45
The output from the Ansoff product/market matrix is a series of suggested growth strategies that set the Product development
direction for the business strategy. These are described below:
Market penetration 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
M arket penetration is the name given to a growth strategy where the business focuses on selling existing requires the business to develop modified products which can appeal to existing markets.
products into existing markets.
Diversification
M arket penetration seeks to achieve four main objectives:
Diversification is the name given to the growth strategy where a business markets new products in new
• M aintain or increase the market share of current products – this can be achieved by a combination of markets.
competitive pricing strategies, advertising, sales promotion and perhaps more resources dedicated to
personal selling This is an inherently more risk strategy because the business is moving into markets in which it has
little or no experience.
• Secure dominance of growth markets
For a business to adopt a diversification strategy, therefore, it must have a clear idea about what it
• Restructure a mature market by driving out competitors; this would require a much more aggressive expects to gain from the strategy and an honest assessment of the risks.
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 BUS INES S PORTFOLIO ANALYS IS
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 A business portfolio is a collection of businesses and products that make up a company. The best
market research. business portfolio is one that fits the company's strengths and helps exploit the most attractive
opportunities.
Market development
The company must:
M arket development is the name given to a growth strategy where the business seeks to sell its existing
products into new markets. (1) Analyse its current business portfolio and decide which businesses should receive more or less
investment, and
There are many possible ways of approaching this strategy, including:
(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.
• New geographical markets; for example exporting the product to a new country

The best known tool for business analysis is the Boston Consulting Group(BCG) model .
• New product dimensions or packaging: for example

• New distribution channels

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

46
The BCG M odel  CAS H 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.

 QUES TION MARK(high growth rate/low market share)

This is the part of portfolio demanding cash for his growing needs but does not generated cash because
of low market share.
It has potential to become star if market share is increased otherwise as the time passes it will became
dog rather than becoming cash cow.
M arketing and innovation both are useful tools at this stage.
It requires greater management time and resources to prevent the investment being eroded.
Using the BCG Box (as illustrated above) a company classifies all its SBU's(Strategic Business Units) Either heavy investments should be made or it should be sold but this option only transfers problem to
according to two dimensions: the buyers, it does not solve the problem.
Strategic alliance with other competitor facing the same problem or acquisition by successful
On the horizontal axis: relative market share - this serves as a measure of SBU strength in the competitor may help resolve the issue.
market
 DOG (low growth rate/ low market share)
On the vertical axis: market growth rate - this provides a measure of market attractiveness
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
By dividing the matrix into four areas, four types of SBU can be distinguished: 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
 S TARS (high growth and high market share) money which could be used on star.
M arket 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.
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. Using the BCG Box to determine strategy

M ain challenge for the business is to maintain or even increase its market share to generate cash for Once a company has classified its SBU's, it must decide what to do with them. In the diagram above,
growing needs of the business. the company has one large cash cow (the size of the circle is proportional to the SBU's sales), a large
Eventually, at the maturity of the market star will be turned into cash cow generating cash that could be dog and two, smaller stars and question marks.
invested elsewhere.
Is the future of the organization. Conventional strategic thinking suggests there are four possible strategies for each SBU:
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. (1) Build Share: here the company can invest to increase market share (for example turning a "question
Cash generated from cash cows can be utilized on star. mark" into a star)

47
(2) Hold: here the company invests just enough to keep the SBU in its present position management standards have been developed including the Project M anagement Institute, the National
Institute of Science and Technology, actuarial societies, and ISO standards.
(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. 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
(4) Divest: the company can divest the SBU by phasing it out or selling it - in order to use the resources occurrence and lower loss are handled in descending order. In practice the process can be very difficult,
elsewhere (e.g. investing in the more promising "question marks"). 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.

LIMITATIONS OF THE BCG MATRIX Intangible risk management identifies a new type of a risk that has a 100% probability of occurring but
It does not consider profit margin. is ignored by the organization due to a lack of identification ability. For example, when deficient
It does not take account of any ethical reason for holding an investment e.g. creation of an employment knowledge is applied to a situation, a knowledge risk materializes. Relationship risk appears when
in the region. ineffective collaboration occurs. Process-engagement risk may be an issue when ineffective operational
It does not identify any criteria for deciding acceptable growth rate and market share. procedures are applied. These risks directly reduce the productivity of knowledge workers, decrease
There may be any other strategic reason for holding investment e.g. cross-selling benefits, strengthening cost effectiveness, profitability, service, quality, reputation, brand value, and earnings quality.
up-side or downside supply chain. 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
CHAPTER 10 risk management minimizes spending and minimizes the negative effects of risks.

RISK M ANAGEM ENT Method

Objectives
By the end of the topic students should be able to: For the most part, these methods consist of the following elements, performed, more or less, in the
following order.

 Define risk
1. identify, characterize, and assess threats
 Define risk management
2. assess the vulnerability of critical assets to specific threats
 Assess risk
3. determine the risk (i.e. the expected consequences of specific types of attacks on specific
 Identify risk assets)
 Outline principles of risk management
4. identify ways to reduce those risks
5. prioritize risk reduction measures based on a strategy
Example of risk management: A NASA model showing areas at high risk from impact for the
International Space Station. Principles of risk management

Risk management is the identification, assessment, and prioritization of risks(defined in ISO 31000 as The International Organization for Standardization (ISO) identifies the following principles of risk
the effect of uncertainty on objectives, whether positive or negative) followed by coordinated and management
economical application of resources to minimize, monitor, and control the probability and/or impact of
unfortunate events [or to maximize the realization of opportunities.
Risk management should:
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  create value
48
  be an integral part of organizational processes  Problem analysis - Risks are related to identified threats. For example: the threat of losing
 be part of decision making money, the threat of abuse of privacy information or the threat of accidents and casualties.
 explicitly address uncertainty The threats may exist with various entities, most important with shareholders, customers and
legislative bodies such as the government.
 be systematic and structured
 be based on the best available information
When either source or problem is known, the events that a source may trigger or the events that can lead
 be tailored
to a problem can be investigated. For example: stakeholders withdrawing during a project may
 take into account human factors endanger funding of the project; privacy information may be stolen by employees even within a closed
 be transparent and inclusive network; lightning striking an aircraft during takeoff may make all people onboard immediate
 be dynamic, iterative and responsive to change casualties.
 be capable of continual improvement and enhancement
The chosen method of identifying risks may depend on culture, industry practice and compliance. The
Process identification methods are formed by templates or the development of templates for identifying source,
problem or event. Common risk identification methods are:
According to the standard ISO 31000 "Risk management -- Principles and guidelines on
implementation," the process of risk management consists of several steps as follows:  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.
Establishing the context  S cenario-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
Establishing the context involves:
alternative is identified as risk.
 Taxonomy-based risk identification The taxonomy in taxonomy-based risk identification is
1. Identification of risk in a selected domain of interest a breakdown of possible risk sources. Based on the taxonomy and knowledge of best
2. Planning the remainder of the process. practices, a questionnaire is compiled. The answers to the questions reveal risks.
3. Mapping out the following:
 Common-risk checking In several industries, lists with known risks are available. Each risk
o the social scope of risk management in the list can be checked for application to a particular situation.
o the identity and objectives of stakeholders
o the basis upon which risks will be evaluated, constraints.  Risk charting This method combines the above approaches by listing resources at risk,
4. Defining a framework for the activity and an agenda for identification. Threats to those resources M odifying Factors which may increase or decrease the risk and
5. Developing an analysis of risks involved in the process. Consequences it is wished to avoid. Creating a matrix under these headings enables a variety
6. Mitigation or S olution of risks using available technological, human and organizational of approaches. One can begin with resources and consider the threats they are exposed to and
resources. 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.
Identification
Assessment
 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
Once risks have been identified, they must then be assessed as to their potential severity of loss and to
identification can start with
the probability of occurrence. These quantities can be either simple to measure, in the case of the value
 Risk sources may be internal or external to the system that is the target of risk management. of a lost building, or impossible to know for sure in the case of the probability of an unlikely event
occurring. Therefore, in the assessment process it is critical to make the best educated guesses possible
Examples of risk sources are: stakeholders of a project, employees of a company or the weather over an in order to properly prioritize the implementation of the risk management plan.
airport.

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The fundamental difficulty in risk assessment is determining the rate of occurrence since statistical  Avoidance (eliminate, withdraw from or not become involved)
information is not available on all kinds of past incidents. Furthermore, evaluating the severity of the  Reduction (optimize - mitigate)
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  S haring (transfer - outsource or insure)
of information. Nevertheless, risk assessment should produce such information for the management of  Retention (accept and budget)
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 Risk avoidance
different risk formulae exist, but perhaps the most widely accepted formula for risk quantification is:
This includes not performing an activity that could carry risk. An example would be not buying a
Rate of occurrence multiplied by the impact of the event equals risk 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
Risk Options 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.
Risk mitigation measures are usually formulated according to one or more of the following major risk
options, which are:
Hazard Prevention

1. Design a new business process with adequate built-in risk control and containment measures from the
start. 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.
2. Periodically re-assess risks that are accepted in ongoing processes as a normal feature of business
operations and modify mitigation measures.
Risk reduction

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

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.
4. Avoid risks altogether (e.g. by closing down a particular high-risk business area) 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
Later research has shown that the financial benefits of risk management are less dependent on the negative risk and the benefit of the operation or activity; and between risk reduction and effort applied.
formula used but are more dependent on the frequency and how risk assessment is performed. By an offshore drilling contractor effectively applying HSE M anagement in its organisation, it can
optimise risk to achieve levels of residual risk that are tolerable
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 M odern software development methodologies reduce risk by developing and delivering software
Courtney formula was accepted as the official risk analysis method for the US governmental agencies. incrementally. Early methodologies suffered from the fact that they only delivered software in the final
The formula proposes calculation of ALE (annualised loss expectancy) and compares the expected loss phase of development; any problems encountered in earlier phases meant costly rework and often
value to the security control implementation costs (cost-benefit analysis). jeopardized the whole project. By developing in iterations, software projects can limit effort wasted to a
single iteration.
Potential risk treatments
Outsourcing could be an example of risk reduction if the outsourcer can demonstrate higher capability
Once risks have been identified and assessed, all techniques to manage the risk fall into one or more of 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
these four major categories

50
business management itself. This way, the company can concentrate more on business development -Indirect consequential loss
without having to worry as much about the manufacturing process, managing the development team, or
finding a physical location for a call center. Legal liability

Risk sharing Personal liability.

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

Involves accepting the loss, or benefit of gain, from a risk when it occurs. True self insurance falls in
The term of 'risk transfer' is often used in place of risk sharing in the mistaken belief that you can this category. Risk retention is a viable strategy for small risks where the cost of insuring against the
transfer a risk to a third party through insurance or outsourcing. In practice if the insurance company or risk would be greater over time than the total losses sustained. All risks that are not avoided or
contractor go bankrupt or end up in court, the original risk is likely to still revert to the first party. As transferred are retained by default. This includes risks that are so large or catastrophic that they either
such in the terminology of practitioners and scholars alike, the purchase of an insurance contract is cannot be insured against or the premiums would be infeasible. War is an example since most property
often described as a "transfer of risk." However, technically speaking, the buyer of the contract and risks are not insured against war, so the loss attributed by war is retained by the insured. Also any
generally retains legal responsibility for the losses "transferred", meaning that insurance may be amounts of potential loss (risk) over the amount insured is retained risk. This may also be acceptable if
described more accurately as a post-event compensatory mechanism. For example, a personal injuries the chance of a very large loss is small or if the cost to insure for greater coverage amounts is so great it
insurance policy does not transfer the risk of a car accident to the insurance company. The risk still lies would hinder the goals of the organization too much.
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. Individual Cover

Some ways of managing risk fall into multiple categories. Risk retention pools are technically retaining This is usually a response measure undertaken by an individual through such measures as taking
the risk for the group, but spreading it over the whole group involves transfer among individual medical aid scheme, Life assurance, employment cover, e.t.c
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. Group Cover

Methods of transfering 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
Partnership and: Joint venture brings client and contractor together to share the costs and benefits on the
project or business. Create a risk management plan

BOOT CONTRACT ( Build Own Operate and Transfer) 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
ROT (Refurbish Operate and Tranfer) organization should have top management decision behind it whereas IT management would have the
authority to decide on computer virus risks.
PPP ( Public Private Partnership )
The risk management plan should propose applicable and effective security controls for managing the
risks. For example, an observed high risk of comp uter viruses could be mitigated by acquiring and
Insurance implementing antivirus software. A good risk management plan should contain a schedule for control
implementation and responsible persons for those actions.
-A 3rd party accepts insurable risk for the payment of a premium. It covers: Direct property damange

51
According to ISO/IEC 27001, the stage immediately after completion of the risk assessment phase Areas of risk management
consists of preparing a Risk Treatment Plan, which should document the decisions about how each of
the identified risks should be handled. M itigation of risks often means selection of security controls, Enterprise risk management
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.
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
Implementation (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
Implementation follows all of the planned methods for mitigating the effect of the risks. Purchase normally thought of as the combination of credit risk, interest rate risk or asset liability management,
insurance policies for the risks that have been decided to be transferred to an insurer, avoid all risks that market risk, and operational risk.
can be avoided without sacrificing the entity's goals, reduce others, and retain the rest.
In the more general case, every probable risk can have a pre-formulated plan to deal with its possible
Review and evaluation of the plan consequences (to ensure contingency if the risk becomes a liability).

Initial risk management plans will never be perfect. Practice, experience, and actual loss results will From the information above and the average cost per employee over time, or cost accrual ratio, a project
necessitate changes in the plan and contribute information to allow possible different decisions to be manager can estimate:
made in dealing with the risks being faced.
 the cost associated with the risk if it arises, estimated by multiplying employee costs per unit
Risk analysis results and management plans should be updated periodically. There are two primary time by the estimated time lost (cost impact, C where C = cost accrual ratio * S).
reasons for this:  the probable increase in time associated with a risk (schedule variance due to risk, Rs where
Rs = P * S):
1. to evaluate whether the previously selected security controls are still applicable and effective, o Sorting on this value puts the highest risks to the schedule first. This is intended to
and cause the greatest risks to the project to be attempted first so that risk is minimized
2. to evaluate the possible risk level changes in the business environment. For example, as quickly as possible.
information risks are a good example of rapidly changing business environment. 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 RM S Titanic sinking vs. the
passengers' meals being served at slightly the wrong time).
Limitations
 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)
If risks are improperly assessed and prioritized, time can be wasted in dealing with risk of losses that o sorting on this value puts the highest risks to the budget first.
are not likely to occur. Spending too much time assessing and managing unlikely risks can divert o see concerns about schedule variance as this is a function of it, as illustrated in the
resources that could be used more profitably. Unlikely events do occur but if the risk is unlikely enough equation above.
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. 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.
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. Risk management activities as applied to project management

It is also important to keep in mind the distinction between risk and uncertainty. Risk can be measured In project management, risk management includes the following activities:
by impacts x probability.

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  Planning how risk will be managed in the particular project. Plans should include risk mitigated simply because of financial and practical limitations. Therefore all organizations have to
management tasks, responsibilities, activities and budget. accept some level of residual risks.
 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 Whereas risk management tends to be preemptive, business continuity planning (BCP) was invented to
skepticism. deal with the consequences of realised residual risks. The necessity to have BCP in place arises because
 M aintaining live project risk database. Each risk should have the following attributes: opening even very unlikely events will occur if given enough time. Risk management and BCP are often
date, title, short description, probability and importance. Optionally a risk may have an mistakenly seen as rivals or overlapping practices. In fact these processes are so tightly tied together
assigned person responsible for its resolution and a date by which the risk must be resolved. that such separation seems artificial. For example, the risk management process creates important inputs
 Creating anonymous risk reporting channel. Each team member should have possibility to for the BCP (assets, impact assessments, cost estimates etc.). Risk management also proposes
report risk that he/she foresees in the project. 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
 Preparing mitigation plans for risks that are chosen to be mitigated. The purpose of the and assumes that the disaster will happen at some point.
mitigation plan is to describe how this particular risk will be handled – what, when, by who
and how will it be done to avoid it or minimize consequences if it becomes a liability.
 Summarizing planned and faced risks, effectiveness of mitigation activities, and effort spent Risk communication
for the risk management.
Risk communication is a complex cross-disciplinary academic field. Problems for risk communicators
Risk management for megaprojects 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
M egaprojects (sometimes also called "major programs") are extremely large-scale investment projects, collective and individual decision making. Risk communication is somewhat related to crisis
typically costing more than US$1 billion per project. M egaprojects include bridges, tunnels, highways, communication.
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. M egaprojects have been shown to be particularly risky in terms of Bow tie diagrams
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 A popular solution to the quest to communicate risks and their treatments effectively is to use bow tie
management. 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.
Risk management of Information Technology Equally, the technique is used for HAZID (Hazard Identification) workshops of all types, and results in
a high level of engagement. For this reason (amongst others) an increasing number of government
regulators for major hazard facilities (M HFs), offshore oil & gas, aviation, etc. welcome safety case
Information technology is increasing pervasive in modern life in every sector. submissions which use diagrammatic representation of risks at their core.

IT risk is a risk related to information technology. This relatively new term due to an increasing Communication advantages of bow tie diagrams:
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.
 Visual illustration of the hazard, its causes, consequences, controls, and how controls fail.
A number of methodologies have been developed to deal with this kind of risk.  The bow tie diagram can be readily understood at all personnel levels.
 "A picture paints a thousand words."
Risk management and business continuity
S even cardinal rules for the practice of risk communication
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 (as first expressed by the U.S. Environmental Protection Agency and several of the field's founders

53
  Accept and involve the public/other consumers as legitimate partners. Refund of VAT
 Plan carefully and evaluate your efforts with a focus on your strengths, weaknesses, If a firm liable to VAT but has paid more than it has collected from its customers, then it may be
opportunities, and threats. eligible for a refund of VAT. The entries will be
Debit- cash with refund received
 Listen to the public's specific concerns. Credit- VAT A/c with tax refund received
 Be honest, frank, and open. This will normally apply to firm which are zero rated for VAT. They apply a zero rate to their sales but
 Coordinate and collaborate with other credible sources. 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
CHAPTER 11
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,
LEGAL REQUIREMENTS
as above debit the tax paid in a VAT a/c. the tax is an expense to be debited in P&L
Objectives
By the end of the unit you should be able to:
Describe the various legal requirements applicable to business in Zimbabwe including; Corporate Tax
 Labour legislation Businesses liable for corporate tax under the tax act are called upon to pay tax on their income in their
 Taxation profits/ income in the year following that in which they earn it.
 Collective bargaining
 Contacts The corporation tax on current profits will normally be payable until the following year, but full
 Insolvency provision should be made for the tax when the profit arises.
Due date for corporation tax- apart from the payments in advance, corporate tax becomes within nine
months of the end of company’s year, or one month after the assessment of the corporation Tax payable
Taxation is determined.
NB- Corporation tax is assessed and charged on the full amount of company’s profits arising in its
To tax is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a accounting period. Profits are to be computed by aggregating the company’s income from all sources,
state or the functional equivalent of a state such that failure to pay is punishable by law. together with its long term capital gains.

Taxes may be paid in cash or kind (although payments in kind may not always be allowed or classified PAYE
as taxes in all systems). The means of taxation, and the uses to which the funds raised through taxation This stands for PAY AS YOU EARN. Income tax is deducted from employees under The PAYE
should be put, are a matter of hot dispute in politics and economics, so discussions of taxation are Scheme.
frequently tendentious. -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.
VAT
VAT stands for Value Added Tax. VAT is like a tax on sales and it is always charged to the ultimate NS S A
consumer of goods and services. This stands for National Social Security Authority. It is responsible for the Health and safety of all
- Unlike sales tax, however, the value added tax is not collected solely at the final point of sale. Zimbabweans. It ensures that productivity,
- - 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 Labour Legislation
deduct from the tax collected any tax which he himself has on goods and services supplied to
him. 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.

54
 1. Giving effect to the fundamental rights of employees provided for and part II of the Act. COLLECTIVE BARGAINING
2. Provide a legal framework within which employees and employers can bargain collectively Formation of Workers Committees
for the improvement of conditions of employment. Any employees may appoint or elect a workers committee to represent their interest.
3. the promotion of fair labour standards - No managerial employee shall be appointed or elected to a workers committee nor shall a
4. the promotion of the participation by employees in decisions affecting their interest in the workers committee represent the interest of managerial employees, unless such workers
work place. committee is poised sorely of managerial employees appointed or elected to represent their
5. Securing the just, effective and expeditious resolution of disputes and unfair labour practices interest.

Rights of Employees Functions of Workers Committee

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 1) Represent the employees concerned in any matter affecting their rights and interest
of a trade union. 2) Negotiate with employer concerned a collective bargaining agreement of the employees
2) Prohibition of forced Labour-excludes the concerned
 Any labour required by way of parental discipline 3) Recommend collective job action to the employees concerned
 Any labour required by virtue of an enactment during a period of public 4) Where a works council is or is to be constituted at any work place, elect some of its members
emergency or in the event of any other emergency or disaster that to represent employees on the works council.
threatens the wellbeing of the community
 Any labour EFFECTS OF COLLECTIVE BARGAINING
Every collective bargaining agreement which has been negotiated by a workers committee shall be
3) Protection against discrimination 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 emp loyer and the employees
- No employer shall discriminate any employee on ground o race, tribe play of origin, political concerned.
opinion, colours, creed, gender, pregnancy, HIV/AIDS or any disability
4) Right to fair labour Standards WORKS COUNCIL
6) Right to democracy in the work place-No person shall hinder, obstruct or prevent any employee In every establishment in which a workers committee representing employees other than managerial
from forming or conducting any workers committee for the purpose of airing any grievance, employees has been elected, there shall be a works council
negotiating any mater or advancement or protecting the rights or interest of employees. - A works council shall be composed of an equal number of members representing the
-No person shall threaten any employee with any reprisal for any lawful action taken by him in employer and the workers committee.
advancing or protecting his rights or interest. - The conditions shall be determined by the employer

S ICK LEAVE FUNCTIONS OF WORKS COUNCIL

Sick leave shall be granted in terms of this section to an employee who in terms of section 14 (Labour - To focus the best interest of the establishment and employees on the best possible use of it
Relations Act ) is prevented from attending duties because he is ill or injured or undergo medical human, capital, equipment and other resources so that maximum productivity and optimum
treatment which was not occasioned by his failure to take reasonable precautions. employment standards may be maintained.
These are the conditions - To foster, encourage and maintain good relations between employer and employees at all
a) Ninety days sick leave on full pay levels
b) Subject to section (3), one hundred and eighty days sick leave on full pay and half pay. - To promote the general and common interest including health, safety and welfare of both
establishment and its workers.
Maternity Leave - To promote and maintain the effective participation of employees in the establishment, and to
Leave shall be granted for 90 days on full pay to a female who saved for at least one year. seek mutual corporation and trust of employees and employer.

TRADE UNIONS
-Any group of employees may form a trade union
-Any group of employers may form an employers organization

55
- Any trade unions or employers organizations may form a federation. 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.
CONTRACTS

Employment contract INS OLVENCY

The essentials are simple to state i.e the employee lets his services of a defined nature to the employer The current system is that a debtor who cannot pay his debt may be ordered by the High Court, own his
in exchange for a fixed or ascertainable remuneration and until there is agreement on these two points own application or that of a creditor to hand over his property to a trustee for sale and distribution
the contract is not complete among his creditors.
- By entering into the service of the employer the employee subjects himself to the employer’s
control. Voluntary S urrender
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.
GENERAL CONTRACTS - - A partnership estate may be surrendered by all the active partners, together with their own estates.
- A working definition of a contract is an agreement which is or is intended to be enforceable at - The debtor must file a petition with an additional copy of the statement of affairs.
law. It is therefore important that an agreement be there before a contact come into existence. - The petition must satisfy the court on four matters:
Agreement by consent, true agreement, a meeting of minds, a coincidence of the wills, 1. That the estate contains sufficient free residue ( i.e. assets which no creditor has a particular
consensus ad idem means the same (R.H. Christie) 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
S ALE CONTRACT 4. The debtor must be careful to make a full and honest disclosure of all relevant facts ( Chpt
A sale in Roman Dutch Law has been defined as “a contract in which one person promises to deliver a 24:03 and Christie)
thing to another, who on his part promises to pay a certain price”
- It is the exchange of property for a price or, because the equivalent Latin words are found in Compulsory S equestration
Judgments, the exchange of merx for a premium. A Creditor with a liquidated claim of not less than $ 100 or creditors with liquidated claims totaling less
The general requirements of the formation of a contract of sale are no different from those applicable to than $200 or the agent of such a creditor may petition the court for the compulsory sequestration of a
any contract but identification as noted be an agreement to exchange property for a price. debtor.
-The property must be defined with sufficient and there must be certainty that the parties are in - A liquidated claim means one based on an obvious and ascertainable legal ground and capable of
agreement on what is being bought and sold. quick ready proof. A creditor whose claim is disputed and could be established by action has no locus
PRICE- According to R.H. Christie (1997) the price must be expressed in money. If it is expressed in standi
property or services the contract will not be a sale, but if it is expressed partly in money and partly in - The creditor has to prove to be insolvent and the acts of insolvency which are:
goods or services (As with the common trade agreement) the contract will be a sale only if money is the A) Absenting him to evade payment of debts
major consideration. B) Failing to satisfy a writ of execution
C) Disposing of property to the prejudice of creditors
LEAS E CONTRACTS D) Removing his property to meet the prejudice of creditors
The nature of a contract of lease is best seen as a temporary sale, the lessor corresponding to the seller, E) M aking offering a non-statutory assignment or arrangement with creditors( Even if made without
the lessee to the buyer and the rent to the price, the subject- matter of the contract being transferred not prejudice)
permanently but temporarily ( for an agreed period) ( R.H. Christie 1997). F) Giving notice of suspension or suspending payment of his debts
-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. CHAPTER 12

BUS INES S ETHICS

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Objectives M exico and Korea. According to a US trade official, the Korean view is that ' ... the thoughts of one
By the end of the study unit you must be able to; man should benefit all', and this general value means that, in spite of legal formalities, few
 define and appreciate the nature of business ethics infringements of copyright are punished.
 relate ethics and social responsibility
 identify various business ethical issues ETHICAL IS S UES IN BUS INES S MARKETING

 describe various forms of social responsibility  M Product issues

 outline strategies for dealing with social responsibility 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

Nature of ethics uncomfortable facts in product literature to deliberate deception. A typical problem arises when a

Ethics is the study of right and wrong actions and how conduct should be judged as to be product specification is changed to reduce cost. Clearly, it is essential to ensure that product function is

good or bad. Ethics is about how we should live our lives and, in particular, how we should behave not compromised in any important way, but a decision must be taken as to just what emphasis, if any, it

towards other people. They are the moral principles which guide thinking, decision making and action. is necessary to place on the changes. Another, more serious, problem occurs when product safety is

It is therefore relevant to all forms of human activity. Business ethics is not really separate or different compromised. Product recall may become necessary.

from ideas that apply in the general context of human life. Professionals of all specialisations, M arkeing at k

entrepreneurs included, should be aware of the general principles of ethics and be capable of applying  Promotion issues

them in their everyday work. It is important, however, to note that ethics and law are not the same. 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
Ethics and S ocial responsibility information is potentially very great. Questionable practices here are likely to create cynicism in the

An organisation exercises social responsibility when its acts respect the general public interest. 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
S ocial responsibility requires that organisations do not act in a way which harms the general public or keeping a supplier's name in front of an industrial purchaser. M ost business people would condemn the

is socially irresponsible. Business ethics relate to business morality rather than society's interests. On payment of substantial bribes to purchasing officers to induce them to favour a particular supplier. But
the other hand, social responsibility relates to society at large. However, because corporate decisions where does the dividing line lie between these two extremes?
subsume marketing decisions the terms ethics and social responsibility are often used interchangeably .
Ethics and the law (a) Extortion. Government officials in some countries have been known to threaten companieswith the

Ethics deal with personal moral principles and values, but laws are the rules that can actually be complete closure of their local operations unless suitable payments are made.
enforced in court. Behaviour which is not subject to legal penalties may still be unethical. (b) Bribery. Payments may be made to obtain services to which a company is not legally
Different cultures view business practices differently. While the idea of intellectual property is widely entitled.

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,

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(c) Grease money. M ultinational companies are sometimes unable to obtain services to whichthey are • Requiring high levels of stock holding by intermediaries
legally entitled because of deliberate stalling by local officials. Cash payments to theright people may • M anipulating discount structures to the detriment of distributors
then be enough to 'oil the wheels'. • Ending distribution agreements at short notice
• Dealing direct with end users at Work
(d) Gifts. In some cultures (such as Japan) gifts are regarded as an essential part of civilisednegotiation, Ethical codes
even in circumstances where to Western eyes they might appear ethically dubious.M anagers operating It is now common for businesses to specify their ethical standards. Some have even published a formal
in such a culture may feel at liberty to adopt the local custom. 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
 Pricing issues accuracy of records. Ethical standards may cause individuals to act against the organisation of which
There are several pricing practices that have attracted criticism. Not all can be described as improper, they are a part. M ore often, business people are likely to adhere to moral principles which are
however. 'utilitarian', weighing the costs and benefits of the consequences of behaviour. When benefits exceed
(a) Active collusion among suppliers to fix prices is illegal in most countries, but the existence of a costs, the behaviour can be said to be ethical. This the philosophical position upon which capitalism
more or less fixed market price does not necessarily imply that collusion is taking place. A tendency to rests, and is often cited to justify behaviour which appears to have socially unpleasant consequences.
compete in areas other than price is a natural feature of oligopoly markets. For example, food production regimes which
appear inhumane are often justified by the claim that they produce cheaper food for the
(b) Predatory pricing is an issue when newcomers attempt to break into a market. Established majority of the population.
suppliers utilize their cash reserves and economies of scale to sell at prices the newcomer cannot match.
Withdrawal from the market follows. The American M arketing Association has produced a statement of the code of ethics to which it expects
members to adhere. M embers of the American M arketing Association (AM A) are committed to ethical
(c) Failure to disclose the full price associated with a purchase has been rightly criticized as unethical. professional conduct. They have joined together in subscribing to this Code of Ethics embracing the
However, it must be recognized that there are occasions when it is impossible to compute the eventual following topics. M arketers must accept responsibility for the consequence of their activities and make
full price, as when cost escalation is accepted by both parties to a contract. The measure of propriety is every effort to ensure that their decisions, recommendations, and actions function to identify, serve, and
whether there is any intention to deceive. satisfy all
relevant publics: customers, organisations and society.
 Place issues
Where long and complex distribution channels are used there is potential for disputes and conflicts of AMA Code of ethics
interest. Even where relationships of trust have been built up over long periods of time, business M arketers' professional conduct must be guided by;
pressures can lead to hard decisions and a perception by distributors that they have been treated 1 The basic rule of professional ethics: not knowingly to do harm.
unfairly. Here are some examples of conduct by manufacturers that distributors could reasonably 2 The adherence to all applicable laws and regulations.
complain of. 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. • Disclosing the full price associated with any purchaseIn the area of marketing research
Honesty and Fairness • Prohibiting selling or fund raising under the guise of conducting research.
M arketers shall uphold and advance the integrity, honor and dignity of the marketing profession • M aintaining research integrity by avoiding misrepresentation and omission of pertinent research data.
1 Being honest in serving consumers, clients, employees, suppliers, distributors and the public. • Treating outside clients and suppliers fairly.
2 Not knowingly participating in conflict of interest without prior notice to all parties involved. Organisational relationshi
3 Establishing equitable fee schedules, including the payment or receipt of usual, customary and/or Any AM A members found to be in violation of any provision of this Code of Ethics may have his or her
legal compensation or marketing [Link] and Duties of Parties in the M arketing Exchange Association membership suspended or revoked.
Process (Reprinted by permission of The American Marketing Association)
Participants in the marketing exchange process should be able to expect A S ocial responsibility
1 Products and services offered are safe and fit for their intended uses. There is a growing feeling that the concerns of the community ought to be the concerns of business,
2 Communications about offered products and services are not deceptive. since businesses exist within society, and depend on it for continued existence. Business therefore has a
3 All parties intend to discharge their obligations, financial and otherwise, in good faith. moral obligation to assist in the solution of those problems which it causes. Businesses and
4 Appropriate internal methods exist for equitable adjustment and/or redress of grievancesconcerning businessmen are also socially prominent, and must be seen to be taking a lead in addressing the
purchases. 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
It is understood that the above would include, but is not limited to, the following responsibilities of the business itself. In the short term, responsibility is a very valuable addition to the public relations
marketer; activities within a company. As pressure for legislation grows, self-regulation can take the heat out of
In the area of product development and management potentially disadvantageous campaigns. M ore and more, it is being realised that it is necessary for
• Disclosure of all substantial risks associated with product or service usage. organisations to develop a sense of responsibility for the consequences of their actions within society at
• Identification of any product component substitution that might materially change the product or large, rather than simply setting out to provide consumer satisfactions. Social responsibility involves
impact on the buyer's purchase decision. accepting that the organisation is part
• Identification of extra-cost added features. of society and, as such, will be accountable to that society for the consequences of the actions which it
• Avoidance of false and misleading advertising. takes. Three concepts of social responsibility are profit responsibility, stakeholder responsibility and
• Rejection of high pressure manipulation, or misleading sales tactics. societal responsibility.
• Avoidance of sales promotions that use deception or manipulation.I.n the area of distribution M keting at Work
• Not manipulating the availability of a product for purpose of exploitation.  Profit responsibility
• Not using coercion in the marketing channel. Profit responsibility argues that companies exist to maximize profits for their proprietors. M ilton
• Not exerting undue influence over the reseller’s choice to handle the product the area of pricin Friedman asserts:
• Not engaging in price fixing. 'There is one and only one social responsibility of business: to use its resources and engage in
• Not practicing predatory pricing.

59
activities designed to increase its profits so long as it stays within the rules of the game – which is to  Reactive strategy
say, engages in open and free competition without deception or fraud.' A reactive strategy involves allowing a situation to continue unresolved until the public, government
Thus, drug companies which retain sole rights to the manufacture of treatments for dangerous diseases or consumer groups find out about it. The company might already know about the problem. When
are obeying this principle. The argument is that intervention, to provide products at affordable prices, challenged, it will deny responsibility, while at the same time attempting to resolve the problem. In this
will undermine the motivation of poorer groups to be self-sufficient, or to improve their lot. Proponents way, it seeks to minimise any detrimental impact.
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  Defensive strategy
society at large. A defensive strategy involves minimising or attempting to avoid additional obligations arising from a
particular problem. There are several defense tactics.
 S takeholder responsibility • Legal manoeuvering
Stakeholder responsibility arises from criticisms of profit responsibility, concentrating on the • Obtaining support from trade unions
obligations of the organisation to those who can affect achievement of its objectives, for example, • Lobbying government
customers, employees, suppliers and distributors. M arketing at Work
During 2001, a group of large pharmaceutical companies initiated proceedings in the South African
 S ocietal responsibility courts against the South African government. They wished to prevent the government from importing
Societal responsibility focuses on the responsibilities of the organisation towards the general public. In cheap, private copies of their anti-AIDS drugs. The pharmaceutical companies suffered predictable
particular, this includes a responsible approach to environmental issues and concerns about abuse for 'putting profits before people' and worldwide negative publicity. The companies were
employment. A socially responsible posture can be promoted by an organisation via cause related following a defense strategy in that they were attempting to prevent the financial damage that would
marketing, when charitable contributions are tied directly to the sales revenues from one of its products. 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.
S trategies for social responsibility
An organisation can adopt one of four types of strategy for dealing with social responsibility issues.  Accommodation strategy
An accommodation strategy involves acknowledging responsibility for actions, probably when one of
 Proactive strategy the following circumstances pertains.
A proactive strategy implies taking action before there is any outside pressure to do so and without the (a) There is encouragement from special interest groups
need for government or other regulatory intervention. A company which discovers a fault in a product (b) There is a perception that a failure to act will result in government intervention
and recalls the product without being forced to, before any injury or damage is caused, acts in a The essence of the strategy is action to forestall more harmful pressure.
proactive way. This approach sits somewhere between a proactive and a reactive strategy .

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M arketing at Work

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