SECTION 1: THE NATURE OF BUISNESS

LECTURE 1: EARLY ECONOMIES:

The Economic Problem:

Our unlimited needs and wants far exceed the limited resources available to satisfy our needs.
Scarcity: is the fundamental economic problem of having seemingly unlimited human wants in a
world of limited resources. It states that society has insufficient productive resources to fulfil all
human wants and needs.
Scarcity leads to Choice–making a decision between several choices eg. Having to make choices
at the grocery store.
Economy: This is any place or location where economic activity exists i.e consumers and
producers interact. Economies also interact with government and the international sector.

SUBSISTENCE ECONOMY:
This occurred amongst early humans whose basic needs and wants were food shelter and
clothing. These are called our primary needs. The needs of a village were satisfied from nature
only providing for themselves. This is also called Direct Production.

Division of Labour and Specialisation

Nomadic people settled to different areas such as around rivers they began to specialise in
different tasks.

Definition of Specialisation:
This is the focusing of effort on one particular task or product.

Specialisation can exist in 6 different ways:

1. By Product – eg. Fish farming, Poultry or Cattle
2. By Process – eg Oil extraction, Refining, By product (Lubricants, Gas)
3. By Firm – eg Microsoft – Software, Tablets, Cell Phones. Or Google
4. By Industry –eg Tourism, Transportation, Agriculture, Extractive.
5. By Region- eg Northern Region of Trinidad for Chive

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 6. By Nation- eg Trinidad’s Oil, Switzerland’s Chocolates, Germany’s Automobiles.

Advantages and Disadvantages of Specialisation:

Advantages
1. Less time to train a person performing one job.
2. Tools are less expensive because the jobs are less complex.
3. Output or production is increased. (Repetitive)
4. Machines can be used to speed up production.
5. Efficiency is improved (Time related)
6. The skill of the worker is improved through repetition
7. Standardised product (lower cost)

Disadvantages
1. Cannot work for niche or small markets
2. Difficult to motivate workers doing repetitive tasks
3. Industrial action is easier to organise and more effective (Workers cannot be easily
replaced)
4. Machines allow for individual craftsmanship to be lost.
5. Can be disruption in the chain of production if worker is ill or absent.
6. Occupational Immobility- unable to transfer skills learnt to other jobs.

BARTER:
In simpler economies before the advent of money bartering was used.
Definition:
Exchange (goods or services) for other goods or services without using money.

Disadvantages to Bartering:
1. A double coincidence of wants. Can only exchange if each party desires what the other
party has.
2. Rate of exchange could be difficult to be decided upon.
3. Some goods are not divisible.
4. Goods are bulky and difficult to transport.
5. Store of Value – Some goods are perishable and cannot be stored for a long time.

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TERMS AND CONCEPTS

Capital/ Producer goods- Tangible assets or goods that are used to produce other goods eg.
Buildings, Vehicles, Stock, Raw materials
Consumer goods- are goods that are ultimately consumed rather than used in the production of
another good. (Final Product)
Primary goods- are those goods that are utilised in the production of consumer goods eg. Raw
materials, agriculture, fishing, farming.
Consumer - a person who purchases goods and services for personal use and plays a vital role in
the economy.
Free good – A good that is not scare and available without limits eg. Air, Desert sand, water in
the oceans.
Private good- is defined in economics as "an item that yields positive benefits to people that is
excludable, i.e. its owners can exercise private property rights, preventing those who have not
paid for it from using the good or consuming its benefits eg Bread
Public Goods- These goods are non-exclusive i.e no one individual can exclude another
individual from receiving its benefits eg. Roads, Bridges
Merit Goods – These are goods that when used contributes a benefit to the wider society eg.
Education
Demerit Goods – These goods when used or consumed have a negative impact on the wider
society eg. Cigarettes
Labour – The human mental and physical effort in the production process.
Market – A mechanism which allows buyers and sellers to interact in their interest eg. Online
buying, financial market, commodity market.
Opportunity Cost – is the value of the loss incurred as the result of the sacrifice of the second
best option.
Organisation – The provision and coordination of the firms inputs to achieve the goals and
objective of the firm
Producer –A person that satisfies human wants by the organisation of resources to produce
goods and services.
Profit – Total Revenue Exceeds total Cost

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Loss – Total Cost of Production exceeds Total Revenue
Service – Intangible actives that are provided to satisfy human wants eg. Banking, Cleaning,
Insurance
Direct Services – a service that is incurred for their own sake eg. Haircut, repairs.
Indirect Services – service that is received along with benefiting from a direct service or good
eg. Delivery of Pizza
Trade or Exchange – the exchange of goods and services for money eg international trade.
Distinguishable from barter which is exchange of goods for goods.
Commodity – This is a good that is traded, usually raw materials or primary agricultural
products such as copper or coffee.
Enterprise- This could mean a business. This is used to describe an undertaking of an activity
with some degree of difficulty or risk. This undertaking has specific purpose such as monetary
goals. Enterprise can also mean initiative which is daring to do something new or different,
challenging or risky.
Entrepreneurship- The practice of identifying a new innovation or opportunity, organising the
financing and other resources and taking the risk in the hope of creating wealth. The entrepreneur
is the individual who identifies the opportunity and risks the time and money to start to organise
this new adventure.
Trade- This is the process of buying and selling. Business engage in trade to make a profit.

LECTURE 2 – THE DEVELOPMENT OF MONEY

Definition of Money- A commonly accepted instrument or medium of exchange eg. Coins, bank
notes, paper notes.

History of Money-
 The drawbacks of barter led to the development of money.
 Traditionally cowrie shells, cattle, salt and sugar were used as money.
 Then precious metals were used such as silver and gold but it became burdensome and
heavy.
 The goldsmiths kept the gold while issuing receipts to precious metal owners to represent
the value of gold owned.
 The owner would present the receipt when the gold was required.
 The bearer of the receipt would be paid the gold.
 Gold smiths started to issue smaller denominations such $10 and $5
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  Now receipts became a representation of money.
 Goldsmiths became bankers and the amount of money exceeded the amount of gold or
silver in reserve due to loans being given out which led to greater economic activity.
 Central banks took over the issuing of money to stabilize the system.

Characteristics of Money:
1. Generally acceptable
2. Relatively Scarce
3. Easily divisible
4. Homogenous in nature
5. Fairly durable
6. Portable

Functions of Money:
1. As a medium of exchange
2. As unit of account - pricing
3. As a store of value – stored for future use eg. savings
4. Means of deferred payment- makes credit possible.

Legal Tender-
Legal tender is a medium of payment recognized by a legal system to be valid for meeting a
financial obligation. Paper currency and coins are common forms of legal tender in many
countries.

Fiat- An official order or decree by someone in power.

Limited legal tender money is accepted as legal tender only up to a certain limit eg coins
because of bulk.

Coins are token money and legal tender up to a small amount.

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Banknotes or paper money- faith money and not valued to gold or silver.

Bank Deposits – upon which cheques can be drawn. Cheques are not legal tender the deposit is.

Near Money- Cheques, credit cards, debit cards, electronic transfer, bills of exchange, money
orders, bank drafts.

Medium of exchange- a commonly accepted form of payment for goods and services.

Representative money- Money of no intrinsic value that is used as money to claim value.

Legal Tender- money that has been accepted by law to be a medium of exchange

Cheques

A cheque is an order to the bank to make payments to the payee stated on it.

Credit Cards/Debit Cards

This allows the card holder to make payments by simply presenting the card to the seller. A
credit card facility is actually a loan given to a customer and thus it is repaid at an interest. A
debit card is issued against a customer’s account balance and is therefore not a loan.

Money Order

They can be used to make payments locally or overseas, as they are made out in the currency in
which they are to be paid. The payee will cash the money order at his bank.

A money order is basically a tool to transfer money or make payments. Think of it as an

alternative to a cheque. However, while cheques and money orders can serve a similar function,
and they also look quite similar, there are some important differences to consider.

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Unlike regular cheques, money orders are prepaid. That means they're backed by large agencies
or corporations instead of individuals, making them especially valuable because of the safety and
reliability they provide.

Bank Draft

A bank draft is a cheque which guarantees payment to the receiver from the issuing bank. Bank
drafts can be made out to a payee in foreign currency and thus used for making overseas
payments. Bank drafts are obtained for a fee from a commercial bank.

 Getting a banker’s draft is like asking a bank to write a cheque for you – you give them
your money, and they give you a cheque for that amount to give to the person you’re
paying.

Bill of Exchange

This is used to pay for goods bought overseas on credit. It is an order in writing from an
exporter (drawer) to an importer (drawee) requiring payments of a certain sum of money at a
fixed future date. The time period allowed is normally three months.

Electronic Transfer

This is a system used to transfer funds electronically rather than paper-based payment methods.

Funds are transferred over a computer network and makes payments fast, safe and easy.

Examples include credit and debit card transactions, remittances (through companies such as
Western Union) and money transfers.

Tele-Banking

This system allows a bank’s customer to simply use the telephone to get his banking services
done rather than visiting the bank. Services include; checking account balances and transaction
history, opening a new account, transferring funds etc.

Internet Banking

This differs from tele-banking in that the internet is used to access the same services. Customers
can go on-line to view their balances and transaction history and transfer funds etc.

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Ecommerce

Electronic commerce more popularly called ecommerce is the buying and selling of goods and
service using the internet. It allows for a full range of trading activities over the internet such as
advertising, placing orders, delivery and making payments.

LECTURE 3: ECONOMIC SYSTEMS

Economic Systems

Every economy is faced with a fundamental economic problem. In every economy, whether rich
or poor, there are limited resources and unlimited wants i.e., the resources of a country are not
enough to satisfy the wants of all its citizens. Since the resources of a country is limited and
wants unlimited, choices will have to be made. For example, the government may have to decide
whether to spend more money on schools, hospitals, transportation or on road work. The process
of choice begins with a scale of preference. This is a list of all options in order of preference.
For example

Scale of Preference:

 hospitals
 transportation
 schools
 road work

The option to build hospitals being placed at the top of the scale of preference indicates that this
choice is most preferred as it yields the greatest satisfaction from the resources to be spent.
Transportation is the opportunity cost of this choice as it is the second most preferred option that
had to be given up to accommodate the building of hospitals. Opportunity cost is defined as the
next best alternative foregone as a result of making a choice.

Economic Systems

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An economic system refers to the way that a country uses its resources to organize production
and the distribution of goods and services, to maximize the benefits to its society. Economic
systems vary worldwide.

In this lesson we will discuss four types. These are the:

1. Subsistence,
2. Free Market,
3. Planned and
4. Mixed economic systems.

Governments choose particular economic programmes that will effectively manage their
economies, bring about economic growth and improve the lifestyles of its citizens. The following
economic questions must be answered by managers of economies.

1. What to produce?

2. How much to produce?

3. What methods of production are to be used?

4. How will goods and services be distributed?

Answers to questions 1, 2, & 4 will depend on the economic system of each country.

Subsistence Economic Systems

The Subsistence economic system as its name suggests are economies in which just enough is
produced by its citizens for their survival. Since there is no surplus wealth is not created.
Subsistence economies exist in many villages in Africa and South America among peoples who
live in simple societies.

Advantages:

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  Every member of the society knows their role.
 The social network is strong

Disadvantages

 This society is slow to changes

 Does not take advantage of technological change
 Little or no development of intellectual or scientific initiatives

Free Market Economic System also called Free Enterprise or Laissez Faire

Private individuals own the greater share of the property and capital resources that are used in the
production process. There is little or no government intervention in the economic activities of the
country. The government may provide essential services e.g. transportation and water. Therefore
the private sector provides the majority of goods and services.

Advantages

 Competition among business will result in increased quality of output and lower prices.
 Competition also leads to innovation i.e. newly invented goods, services and production
processes.
 Consumers are free to choose the goods and services that they wish to purchase and therefore
production is based on their demands.
 Freedom from government interference
 The invisible hand or price mechanism determines the price

Disadvantages

 Consumer exploitation by suppliers may go unchecked by government as there is little or no

government intervention.

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 There is an unequal distribution of wealth as goods are purchased by only those who can
afford it.
 In the case of no government intervention public goods such as postal service, streetlights
and roads are not provided
 Large companies such as monopolies or cartels may exert influence on prices and limit
competition.
 May lead to overuse of demerit goods
 Wastage of resources in advertising and excessive competition.

The Planned or Controlled Economic System

Property and capital resources are owned by the government on behalf of the society. The
government makes all decisions concerning the use of the country’s resources and the
distribution of its output. Goods and services are provided through government-owned and run
operations. These include factories, telephone services, newspapers, television stations, etc.

Advantages

 There is a fair distribution of goods and services as the government determines how goods
are distributed.
 Citizens in these economies enjoy a least a basic standard of living as the government
provides all goods and services.
 There is full employment of all available resources.
 Wasteful competition is avoided.

Disadvantages

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 Resources are inefficiently allocated as consumers are not free to indicate their demand for
goods and services. Therefore resources are not sent to where they are most needed but into
industries based on the government’s decision.
 The lack of competition reduces innovation and the motivation to produce quality output.
 Too rigid system that is inflexible to changes such as shortages
 Too much bureaucracy, procedures and paperwork.
 No freedom of choice for producers and consumers.

The Mixed Economic System

 The private and public sector are both involved in the production of goods and services.
 The economic resources are owned by government and private individuals.
 Economic decisions are made by the price system and the state.
 Private sector to maximise profits and Public sector to maximise social welfare.
 Public sector produces the goods that the private sector is unwilling to provide.

Advantages

 Consumer protection through the regulation of businesses by government.

 Economic benefits of competition coupled with goods and services provided by government
for those who cannot afford to access these through the market system.

Disadvantage

 Public sector companies tend to be inefficient as they are supported by taxpayer’s money.
 Government regulatory policies may reduce the enthusiasm of the private sector e.g. the
setting of prices of goods and services resulting in the closure of businesses.
 State demand for factors of production may limit the amount available to the private sector.

 Disparities exists in earnings and productivity between the state and private sector.

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Decision makers in a mixed economy-

1. Consumer- to satisfy wants

2. Firm- producer to make profits
3. Factor owner- person who owns the factors of production
4. Government-Provides regulation and guides overall economic activity.

LECTURE 4

FORMS OF BUSINESS ORGANIZATIONS

Functions of a business:
1. To produce goods and services
2. Creating jobs and training employees
3. Purchase goods and services for resale
4. Raise money by borrowing

Objectives of a business:

1. To produce a stream of income

2. To create employment
3. Security of employment
4. Corporate social responsibility

Reasons Businesses are established

Starting a business is a lot of hard work. Therefore persons who decide to start a business must
be ready to dedicate a lot of time and energy to its start-up. It is also very costly and therefore
capital will have to be identified to inject into a new business.

Reasons for starting a Business:

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1. Financial Independence

Some persons feel restricted financially with the income received from their job. Starting a
business would give them the opportunity to be a successful business person and achieve
financial independence.

2. Being your own boss

You are able to make decisions about the direction and operation of the business.

3. To use your skills and knowledge for yourself

The skills, knowledge and experience that you have acquired can be put to work for you.

4. Self-actualization/fulfilment

Owning and operating a successful business will give a feeling of accomplishment.

5. To create employment for relatives, friends and community members

Business can assist in providing jobs for persons in communities with high levels of
unemployment.

Forms of Business Organizations

An organization is a system that groups people together towards establishing a common goal.
Business organizations are centered on creating goods and services for profit. There are several
types of business organizations that one can start.

Forms of Business Organizations:

1. Sole Trader
2. Partnership
3. Private Limited Liability companies
4. Public limited Liability Companies
5. Multinationals
6. Franchise
7. Conglomerates
8. Cooperatives
9. Nationalized Industries
10. Local and Municipal Authorities
11. Government Departments

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All forms of business organizations can either be characterized as a part of the private sector or
the public sector.

The Private and Public Sector

Public Sector

 Government control of factors of production on behalf of citizens

 Motive to provide services to citizens
 Consists of nationalized industries, executive agencies, local and municipal authorities,
government departments, public corporations.

Advantages

 Government provides public goods that the private sector will not provide.
 Government provides welfare services to poorer members of society.
 Government sets the control mechanisms on place for the conduct of business.

Disadvantages

 Government can increase taxes to finance expenditure

 Inefficient use of state resources
 Political interference in private sector

Private Sector

 Private individuals or businesses own the factors of production

 Motive to maximise profits
 Consists of sole traders, partnerships, public and private companies multinationals,
conglomerates, franchises

Advantages

 Brings more competition and product variety to the market

 Increased use of technology
 Provides investment and employment

Disadvantages

 Will only provide products that citizens can pay for

 Engages in the production of demerit goods once there is demand

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 FEATURES PRIVATE SECTOR PUBLIC SECTOR

Ownership and Control Private citizens/individuals The state, national/local

and firms. Only persons government, municipalities.
who purchased shares in The enterprise is owned by
the company are owners tax payers in general.

Objective To earn/make profits To provide essential goods

and services to the country.

Source of capital Private individuals and  Taxes, rates, levies and

persons who choose to buy statutory deductions.
shares in the enterprise.  Loans from
Loans from banks, credit governments/institutions
unions, friends, family  Funding from donor
members, personal savings. agencies.

Terms and concepts:

Insolvent – unable to repay debts or bankrupt

Liquidate – This occurs when a business sells off its assets to repay debts

Limited liability- it means that he or she is not personally responsible for business debts and
obligations of the corporation.

Unlimited liability - refers to the legal obligations general partners and sole proprietors because
they are liable for all business debts if the business can't pay its liabilities.

The Sole Trader

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The sole trader is a single business owner. This person may employ several other persons to
work in the organization, but he has to make all decisions, acquire all the capital required and
other resources needed for the business on his own.

Characteristics

 He or she manages the business and may have the help of family and friends.
 He or she enjoys all the profit and bears all the risks
 Capital is limited since the savings of the owner fund the business
 Personal contact with clients
 Performs a large variety of tasks related to the operations of the business
 This type of business is not incorporated (not given a separate identity) and therefore
easy to set up.

Examples: Electrician, Plumber, small farmers, doctors and lawyers.

Formation

There are no legal formalities in the setting up of a business as a sole trader except for the
registration of a trade name or the acquisition of a license. For example a license is required for
the sale of alcohol or for the sale of food items.

Management and Advantages

1. Enjoys all profits

2. Ease of formation – no legal requirements
3. Independence – find personal satisfaction in working for themselves
4. Simple organisational structure
5. Personal Control – decision making is quick
6. Personal Service
7. Secrecy – No need to disclose info. Except to tax authorities or to creditors
8. Personal Commitment to succeed

Disadvantages

1. Limited source of finance

2. Lack of specialised staff
3. Over reliance upon one’s personal health and vigour
4. Unlimited Liability
5. Lack of leisure time
6. Lack of technology
7. He bears all the risks

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Partnership

A partnership business is formed legally by a minimum of two (2) and a maximum of (20)
twenty persons in a business. There are two types of partnership forms:

Limited Liability Partnership – at least one partner must have unlimited liability

Unlimited liability Partnership- All partners have unlimited liability.

Formation

A deed of partnership must be drafted which set out the terms and conditions of the partnership.
This written agreement helps to settle disputes and in the absence of the deed the partnership will
be governed by the Partnership Act.

A deed will entail:

 Number of partners
 Amount of capital contributed by each partner
 Type of trade engaged in
 Share profits and losses accruing to each partner
 Name of partnership
 Salary of each partner mechanism for dissolution.

Types of Partners

Ordinary/General Partners: take an active part in the running of the business.

 Unlimited liability of partners

 Change of members ends partnership
 Assets and liabilities are owned and shared equally
 Each partner plays a part in the management of the firm
 Partnerships cannot exist without an agreement

Sleeping Partners: invest in the business but do not take an active part in the business.

Limited Liability Partners: assets will not be lost if the business goes bankrupt.

 limited liability of partners but one must have unlimited liability

 Change of members does not end partnership
 Does not play a part in the management of the firm

Advantages

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 1. More capital
2. Specialisation – partners use their different skills and knowledge
3. Simple Organisation – easy to form
4. Continuity – more continuity than sole trader
5. Limited Liability
6. Workload Shared
7. Decision making – shares knowledge and expertise

Disadvantages

1. Unlimited liability
2. Binding – all partners lose if mistake is made
3. Limited Capital
4. Disagreement
5. Concentrated risk – risk not spread enough
6. Decision-making
7. Continuity – broken partnership upon death
8. Profits are shared, irrespective of effort in the absence of a partnership agreement.

Limited Liability Companies

A company is a business entity that has been incorporated, that is, the company has a separate
legal identity from that of the owner.

Limited Liability Companies are companies in which shareholders/investors are protected as

they will not lose their personal assets if the business goes bankrupt. They are not liable for the
debts of the company beyond their level of investment. Therefore if a shareholder buys shares in
a company valuing $5000 then he will only lose that $5000 invested and his personal assets.

There are two types of limited liability companies.

1. Private Limited Liability Company

2. Public Limited Liability Company

The Private Limited Company only allows friends, relatives and co-workers to purchase shares
and to be a part of the company. Its privacy is also protected by the fact that unlike the public
limited liability company, it does not have to publish its balance sheet in the newspaper. Legally
the private limited company can only have a minimum of two and a maximum of fifty
persons to join.

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The Public limited company allows members of the public to purchase shares. The shares/stocks
of public limited companies are traded on the stock market. The public limited liability
company has a minimum of (7) seven members and there is no limit to the number of
shareholders that can join.

The legal procedures for both these types of companies are lengthy as they must submit the
several documents.

The Companies Act contains the laws relating to companies. To comply with certain
requirements which were laid down by the Companies Act, the promoters of the company must
present the following documents:

The Memorandum of Association

 Company name , which must contain the word limited

 Address of the company’s registered office
 Objectives of the company
 Statement that the liability of the shareholders is limited
 Authorized share capital and the types of shares to be issued.

The Articles of Association

 Procedures for calling an Annual General meeting.

 Rights and obligations of the directors
 Procedures governing the election of Directors
 Statement concerning the borrowing power of the company
 Procedures dealing with the payment of dividends

Statements of authorised, Registered or Nominal Capital

This is the amount stated in the MOA, which is the maximum amount which the company is
authorized to raise.

Prospectus

This is an invitation to the public to buy shares in a public company. It contains detailed
information to enable investors to estimate its prospects. It is important that the public should not
be misled.

Statutory Declaration

Statutory declarations are commonly used to allow a person to declare something to be true for
the purposes of satisfying some legal requirement or regulation.

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Certificate of Incorporation

This is a legal document relating to the formation of a company or corporation. It is a license to

form a corporation issued by state government. Its precise meaning depends upon the legal
system in which it is used.

Certificate of Trading

It is the certificate issued by the registrar of companies to the public limited company to grant
permission to commence its business.

The private limited company may begin trading after receiving the certificate of incorporation,
but the public limited company must issue a prospectus inviting the public to subscribe for shares
before a certificate of trading is issued.

Advantages of Private Limited Companies

1. A larger capital base than sole trader or partnership.

2. The company has continuity and thus can obtain loans easily.
3. The company has a separate legal identity from ownership.
4. Shareholders have limited liability

Disadvantages

1. Capital is limited since the membership is limited to fifty person.

2. Must file reports with the registrar of companies
3. Selling of shares is restricted to the private grouping.

Advantages of a Public Limited Company

1. It is easier to obtain financing

2. Shareholders have limited liability
3. Share can be quoted on the stock exchange and sold to the public
4. Company able to grow and obtain economies of scale
5. It has a separate legal existence. Changes in shareholders and directors do not affect
continuity of the company.

Disadvantages

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 1. The legal requirements may be costly and time consuming
2. The accounts have to be made public
3. Because of large size, decision making can be long
4. Differences in opinion may develop owners and directors.
5. Loss of control of company if sufficient shares are obtained.
6. These companies lack a personal element.

Multinationals

A multinational company is a company that has headquarters in a home country and operates
businesses in various host countries. Examples of Multinational companies in the Caribbean are
Shell, Kentucky Fried chicken and Digicel.

Advantages

 They provide employment.

 They introduce advanced technology.
 Provide well needed goods and services.

Disadvantages

 Profits earned are repatriated to the main centre in their home country.
 They may exploit the workers by paying low wages and having them work long hours.
 They cause unemployment when they close down to take advantage of cheaper labour and
lower operational cost in another country.

Franchise

A franchise is an agreement between a franchisee (the person requesting permission to set up

business) and the parent company to allow the franchisee to sell its products or services. Some
businesses begin by the owner acquiring a franchise to operate under an already existing business
name. Many multinational companies expand into new regions through franchises.

The franchisee bears the name of the parent company. They must abide by all the rules and
guidelines outlined by the parent company to sell its products. It pays royalties (a fee) to the
parent company to operate under its business name.

Advantages

 Access to new markets for the franchisor

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  Source of revenue for the franchisor
 The franchisee bears some of the risks
 Franchisee benefits form the support provided by the franchisor eg. Training
 The franchisee’s risk is reduced because it is selling a recognised brand.

Disadvantages

 The Franchisee must pay the royalties regardless of business size

 The franchisee has to operate under supervision of the franchisor
 The franchisee is legally bound to sell only the products of the franchisor

Conglomerates

This is a group of unrelated companies (e.g. a restaurant, shoe store a travel agency etc,) under
one umbrella. A parent company owns a controlling stake in each company which conducts
business separately.

Advantages

 The risk is spread over multiple businesses

 Economies of scale
 Easier to access financing due to asset base

Disadvantages

 Management can be difficult

 Some businesses may increase the risk of the conglomerate

Cooperatives

These are business entities owned by their members who purchase shares to join them. They are
usually established because of a need existing among a number of persons who wish to acquire
particular goods and services at a reasonable cost.

Principles of Cooperatives

1. Open membership- All persons over the age of 16 may join for a fee
2. Democratic Controls- Governed by its own members who attend a general meeting
where members elect a committee to run the cooperative

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 3. Limited interest on capital invested – low interest rates for members
4. Distribution of Surpluses- surpluses are distributed amongst members fairly- ploughed
back into business to expand and to sometimes for health care or education.

Types of Cooperatives

1. Consumer
2. Producer
3. Financial
4. Services
5. Worker

For example, members of a credit union purchase shares in these entities in order to obtain loans
at low interest rates.

There are several types of cooperative, for example, Retail/Consumer cooperatives and Producer
cooperatives. Shares invested in a retail cooperative are used to buy goods in bulk at a very low
cost and then resold to members. Producer cooperatives may include a group of farmers who will
obtain raw material at a low cost.

Profits are distributed to members based on the amount of goods that they buy and not on the
amount of investment that they make in the business. At the annual general meeting,
shareholders elect their management committees from among their members and vote on
proposals put forward. Benefits of being a part of a cooperative are therefore obtaining goods
and services at low costs and a guaranteed market as members are also customers. A
disadvantage is that its management may be inexperienced as they are chosen from their
membership.

Advantages

 Creates employment for members

 Democratic Management
 Benefit from economies of scale
 Support services such as purchasing and marketing for members
 Profit shared among the members

Disadvantages

 Limited capital input depending on the size of the cooperative or the credit union
 May lack managerial expertise in membership

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Nationalized Industries

Definition

Nationalized industries are firms which were once privately owned, but have been taken
over by the government. Government seek to nationalize the key industries that is the
industries on which the government depends for the country’s economic survival for
example Trinidad’s oil industry or bauxite in Jamaica.

Formation

A company becomes nationalised when the government purchases all or the majority of
shares in the company

Management

Like State corporations, a Board of Governors is appointed. The board reports to the line
Minister. The Executive Director heads the company. The audited accounting reports of
these companies must be laid with the Audit General or Government accounting firm.

Characteristics

 They are legal entities

 The state is the only shareholder
 They are managed by Boards of Directors that are appointed by the state

Advantages

 State has Ownership and control, hence profits remain in the country.
 The company is in a better position to service the needs of the community, for
example the funding of community projects in education, sporting and cultural
projects.
 Nationalization prevents private monopolies from being formed.

Disadvantages

 Relatively low salaries paid to Executive Directors may not attract the best
expertise.
 The industries may be a drain on the Governments revenues.

State Corporations

25
These are independent organisations set up by the government to carry out a service. The
Government does not control their daily operations but can fix the overall strategy and
nominate their board of directors. These are usually non-profit making, but in the long
term, they have to be self-financing. State Corporations are usually in the broadcasting
field, transportation, power and telecommunications industries.

Formation

State Corporations are formed by legislation i.e passing of laws in Parliament.

Management

The government appoints a Board of Governors or Directors for a stipulated time frame.
An Executive Director is also appointed to head each organisation. The Executive Director
reports to the board of Directors or Directors.

Characteristics

 Funding is mainly done by the state providing grants, although some legislation allows
the organisations to raise their own funds.
 The state or state appointed auditors monitor all accounting procedures
 Annual accounting reports must be sent to the Auditor General.
 The aim of the state is not to make a profit but it is expected that these corporations
may break even

Government Departments

These include the government ministries e.g. the Ministries of Finance and Education. A
minister is appointed in charge of each ministry. These departments are very important to the
running of government.

Local and Municipal Authorities are government bodies which are run by elected local
officials, e.g., the Kingston and St. Andrew Corporation (K.S.A.C.) in Jamaica. These bodies
fulfil local needs and allow for more balanced local development. They carry out duties such as
cleaning gullies and drains and fixing community roads.

STAKEHOLDERS AND THEIR ROLE IN BUSINESS ACTIVITIES

Stakeholders – are the various groups within and outside an organisation that stand to
potentially gain or lose as a result of the organisation’s actions.

26
List of Stakeholders:

 Owners/Employers/Investors
 Employees
 Customers/Consumers
 Suppliers Government
 Members of society (media, special interest groups, communities)
 Lenders/Investors and other creditors.

Business owners must be aware of the various groups that they interact with for the successful
running of the business.

Owners

A business may be owned by a single individual (a sole trader), partners or by a group of

shareholders forming a company.

Role of Owners

They must provide the resources that are required for the business to operate efficiently. These
include the employment of workers, identifying suitable premises and procuring machinery,
equipment and raw materials. They must make timely decisions to ensure that the business
remains profitable. They must motivate employees to perform well.

Employees

They are employed to carry out assigned tasks to achieve the company’s objectives.

Role of Employees

Employees must work efficiently to accomplish tasks assigned. Accomplishing tasks may
require teamwork and therefore employees must have good interpersonal skills. Employees must
adhere to the rules and regulations of the company.

Customers

They are the supporters of businesses in the economy. They purchase goods and services to
satisfy their needs and wants.

Role of Customers

They assist businesses in identifying the goods and services to be produced based on their
demands. They also help business to identify changing trends in the market and so prepare
business operators for future demands.

27
Society

Businesses must be aware of the society as a whole, how its activities affect it and not only those
who are customers.

Role of Society

The production process may cause air pollution and discharge of harmful waste into rivers and
seas. The society keeps businesses in check by making them aware of their impact on society.
They write letters to the company and the media and speak on talk shows.

Government

They are the managers of the economy within which the business operates.

Role of Government

Regulate business activities to protect consumers. Government agencies ensure product

standards as well as that various legislations are adhered to ensure the protection of consumers’
rights.

RESPONSIBILITIES OF A BUSINESS

The functions of a business are:

1. To produce high quality goods and services that will satisfy needs and wants.

Entrepreneurs enter business to make profits. They must be very keen in identifying those goods
and services that will create high demand make profits.

2. To create employment

Business will need all categories of workers to carry out the various tasks required to achieve its
goals. If the business is profitable and expands then more workers will be needed for its
operations.

3. To make a profit

The reason for the establishment of a business is to make profits. If businesses are not profitable,
its owners will not be encouraged to continue operating. Profits are used to reinvest in the
business for its expansion.

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Role of a Business within a Community

Corporate citizen is the term used to describe the responsibilities that businesses have within
their environment. As a good corporate citizen business must strive to have a good relationship
with their community.

Good corporate citizenship includes:

 Support for the community through community projects, sports and youth clubs.
 Being environmentally aware by reducing pollution
 Providing job opportunities for community members e.g. a holiday work programme

There are five major responsibilities:

1. Economic
- Produce a good or service to satisfy the needs and wants of society
- Stimulate economic growth
2. Financial
- Pay a fair wage to employees
- Provide reasonable returns on investments
3. Political
- Act as pressure groups to lobby governments for changes that will benefit business
activity
- Operate along the democratic principles of equality and fair play
- Act in accordance with the laws; for example, paying taxes when they are due.
- Assist in setting policies by giving feedback, making suggestions.
4. Ethical
- Design ethical guidelines for their behaviour/decisions and follow these guidelines
- Encourage good business ethics of their stakeholders by refusing to do business with
unethical firms or persons.
5. Social
- Protecting the environment and avoiding social costs (borne society as a result of
business operations, for example, pollution.
- Developing the culture of a country
- Educate consumers and community members on safety tips and proper use and
disposal of the product.

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 - Use some of the profits to help develop and benefit the community, as well as the
culture of the country.

LECTURE 5

THE ORGANISATIONAL STRUCTURE OF A BUSINESS

Divison of Labour:

As businesses grow from sole trader to medium size to large different persons had to specialise
in different functional departments as follows:

Functional Areas in the Operation of Businesses

Departments in a business organization are structured according to certain functions. The

departments of various organizations will differ depending on the type of business.

Production

The production department is responsible for transforming raw materials into finished products.
They are also responsible for quality control to ensure that required standards are met.

- Input to output
- Quality control
- Purchase and storage of stock
- Organising production schedules

Finance/Accounts

The accounts department makes and receives all payments on behalf of the business and records
all financial transactions

- Producing end of year financial statements – Annual reports, Balance sheets and Profit
and Loss.
- Advising Management
- Payments and receipts
- Managing cash flow

Marketing

This department creates awareness for the firm products and motivates consumers to buy. They
also carry out market research to identify customer’s needs.

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 - Market research and sales forecasting
- Advertising and sales promotion
- Distribution of products

Human Resources/Personnel

The human resource department recruits and selects staff for the business organization. They are
also responsible for staff training and welfare.

- Hiring and firing

- Promotion criteria
- Training
- Employee record keeping
- Interviews
- Wage negotiation
- Public Relations

The Purchasing Department

This department is responsible for the purchasing of the firms raw material, stationery and goods
for re-sale.

Customer Service/ Customer Relations Department

This Department bridges the gap between a business and its customers. It deals with customers’
queries, advising and assisting customers to place orders and handling customers’ complaints.

Legal Department
This department is concerned with legal problems that might arise for the company. For
example, compensation for employees and customers, who have brought lawsuits against the
company.

Research and Development (R&D)

This department is involved with research to explore ways of improving the company’s existing
products, developing new ones and identifying efficient processes to increase production. This
department works closely with the marketing department as products developed must satisfy
consumers’ needs.

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Organisational Structure- refers to the way a business is structured to achieve maximum
efficiency. An organizational structure defines how activities such as task allocation,
coordination and supervision are directed towards the achievement of organizational aims
Formal Structure - Formal organization is a fixed set of rules of intra-organization procedures
and structures. As such, it is usually set out in writing eg. Org Chart.
Informal Structure – the unofficial relationships that exist in the firm.
Span of Control - refers to the number of subordinates a supervisor has.

Factors that influence the span of control

- Competence, skill and experience of the workers
- The nature of the job i.e. complexity
- The actual skill of the manager
- How motivated workers are

Lines of Communication- this represents the standards and procedures associated with the
movement of information

Organizational Charts

An organizational chart is a diagram of the organization of an enterprise. Its pyramid shape

illustrates the hierarchy system that exists in the organization. The most senior position in the
organization is placed by itself at the apex. The pyramid gets wider towards the bottom depicting
the greater number of workers at its base.

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Those who have the power to issue commands have authority in an organization. In the
organization chart above the sales manager has the authority in the Sales department. All
persons with the same level of authority are placed at the same level on the chart. For example
the sales manager and the accounts manager have the same level of authority in their various
departments.

Responsibility is the capacity to accept duties and to carry out their tasks. For example, both
sales supervisors are responsible to the sales manager.

The chart shows the following:

-each person’s position

-the number of levels of managers

-to whom each employee is responsible (reports) to

-the span of or (area) of control for senior staff members.

Types of Organizational Charts

1. Line
2. Staff
3. Functional
4. Committee

Line or Direct

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The line organizational chart depicts a straight line of command. Authority is said to flow
downwards only in the line organization. The line organizational structure is found in schools or
in the military.

Advantages

1. Simplicity- simple to understand and implement.

2. Responsibility is fixed- Every employee is clear about whom he is answerable to and
who is accountable for him.
3. Unified Control – Good control and direction.
4. Quick decisions made.
5. Flexibility- changes to circumstances

Disadvantages

1. Overloading of the executive as several duties are managed independently.

2. Lack of Specialisation – because different jobs are supervised.

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Functional Organizational Chart

The Functional organization chart is a diagram of an organization that is arranged by its

functions. For example, there is a manager in charge of marketing, and another in charge of
production. This type of organization has an advantage over the Line as experts are appointed to
run each department. All managers report to the General Manager.

The Functional organizational chart combines the straight line of command of the line
organization with horizontal dotted diagonal lines representing functional authority. The dotted
diagonal lines in the figure above show the authority that the Human Resource Manager has over
other departments. The Human Resource Manager is allowed authority in these department over
human resource matters only e.g. to hire and fire workers. He therefore cannot give directives on
production or marketing matters.

Advantages

1. Specialisation – allows for specialisation by function thereby developing their skills.

2. Efficiency and Productivity improved.

Disadvantages

1. Lack of Teamwork- difficulty working with other units.

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 2. Difficult Management Control- Difficult to manage a growing organisation.

Line and Staff Organizational Chart

The Line and Staff organizational chart combines the line and functional organization with the
addition of staff personnel. Staff workers assist and advise line workers. Staff workers include
consultants, advisors, company lawyers, executive secretary, auxiliary workers etc. Staff officers
do not have authority, that is, the power to delegate tasks to subordinates in the organization.
Their main role is to advise and assist line officers. This is why there are no vertical lines
connecting staff officers to any other member of staff on the chart. They are therefore, placed at
the side directly below the line officer whom they assist or advise.

Advantages

1. Decision efficiency- able to use staff specialist skills without interference of a

hierarchy.
2. Expert Advice
3. Productivity increases because line managers can have more free time to focus on
other duties.

Disadvantages

1. Authority- confusion between the line and staff positions for authority.
2. Decision Making- line position relies heavily on a staff position for decision making.
3. Conflict between staff and line positions.
4. It is more costly to hire staff specialist.

36
Committee Organizational Chart

Committees are advisory bodies. They are usually appointed to advise organizations. Examples
of committees include; parent teachers associations and student councils which are committees
within a school organization. Committees usually delegate certain duties to sub-committees. For
example, an executive committee may appoint a finance committee to advise it on financial
matters. Note that an element of the line organization exists in the committee organization as all
sub-committees are responsible to the executive committee.

Advantages

1. Improved problem solving because of differing ideas.

2. Authority is shared
3. Different interest groups are represented.
4. Assist in coordination amongst various divisions.

Disadvantages

1. High cost and long time to make decision.

2. Conflict among members.
3. Dominant members may control decision making.
4. No one particular person can be held responsible.

Matrix structure:

This is a combination structure that joins functional areas with structures for projects and teams.
The functional areas flow vertically down the chain of command. Simultaneously, a worker can
be horizontally attached to a project team. Matrix structures offer flexibility for organisation
employees to utilize skills and competencies. It is based on the individual having expertise in
functional areas and be able to transfer these skills to projects. Difficulties can occur in areas of
control of tasks, role ambiguity and role conflict.

37
Advantages
1. Efficient Information Exchange
2. Increased Motivation – shared decision making encourages employees

Disadvantages
1. Internal Complexity- this may cause miscommunication and confusion because of dual
authority.
2. Expensive to Maintain and Internal Conflict

Chain of Command- The definition of a chain of command is an official hierarchy of authority

that dictates who is in charge of whom and of whom permission must be asked. An example of
chain of command is when an employee reports to a manager who reports to a senior manager
who reports to the vice president who reports to the CEO.

Types of Org Charts:

1. Vertical
2. Circular
3. Horizontal

Departmentalization- is an aspect of organizational design that includes the subdivision of a

business into units based on their function or other criteria.

Types of Departmentalization:

1. By Function
2. By Process or Equipment
3. By Geographic Territory
4. By Product
5. By Customer and Client

TEAMWORK

Definition of Team:

A group of two or more persons interacting regularly and coordinating their work to accomplish
a common objective.

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Role of Teamwork

Many firms adopt a teamwork approach to complete tasks more efficiently. For example a major
Caribbean airline encourages its workers to work as a team to achieve the main task of having
each flight leave on time. Workers therefore move to various positions if needed, to have each
flight leave on time.

Advantages

1. It improves the working relationship among workers

2. It increases communication

3. Skills and knowledge are passed on through the interaction

4. It satisfies the social needs of workers

5. Ability to solve problems constructively.

6. Ensures continuity, i.e. if one team member is absent the other will complete the task.

7. The quantity and quality of work will improve due to collaboration.

Disadvantages

1. Adds unnecessary bureaucracy (slow to make decisions)

2. Only effective with clear objectives
3. Personality clashes (Conflict)
4. Additional cost in terms of time and human resources (training)
5. Unwieldy and Unproductive

Groups are formed naturally by persons with similar interest, common goals and similar past
experiences in an organization. The establishment of various clubs, work socials and outings will
encourage greater interaction among workers, better relationships and a teamwork approach to
completing tasks.

LECTURE 6
THE FUNCTIONS OF MANAGEMENT

39
Definition: Management
The art of combining the resources of the organisation with the aim of achieving the goals of the
organisation.

THE FUNCTIONS OF MANAGEMENT

1. Planning

This is the process of defining goals for future organisational performance and deciding on the
tasks and resources needed to attain them.

All managers must plan, that is, setting out steps for the attainment of future organizational
objectives. It involves formulating the policies and programmes for the firm.

2. Organizing

This involves the bringing together of the factors of production, namely, land, labour, capital and
enterprise.

Organising usually occurs after planning. Organization reduces cost, time, chaos and conflicts.
Managers must obtain all the necessary tools, machinery and personnel for each task and arrange
all tasks so that they are done in the most efficient manner.

It involves:

 Designing structure
 Assigning duties and responsibilities to departments
 Determining the workflow
 Establishing schedules
 Providing the raw materials
 Technology and the related skills needed to accomplish the goals

3. Directing

Managers must guide subordinates by giving them instructions to perform the tasks assigned.

40
 4. Delegating

Delegating duties involves giving others (e.g. supervisors) the authority to have specific tasks
completed through the management of others. Therefore, supervisors will ensure that workers
complete tasks assigned. Delegation reduces the workload of the manager.

5. Controlling

Managers must continually measure the activities of subordinates, ensuring that all activities
conform to plan.

6. Coordinating

Managers must bring together all the various organizational tasks so that the organization may
function harmoniously.

7. Motivating

This is process by which workers are influenced to take the right action to get the task done. It
inspires workers to give of their best.

Theories of Motivation:

1. Maslow’s Hierarchy of Needs

2. Herzberg’s Two Factor Theory
3. Douglas McGregor Theory X and Theory Y

Maslow’s Hierarchy of Needs

Maslow divided needs into higher and lower order needs.

Lower Order Needs

Physiological (Bodily, Function) needs- relates to survival and physiological maintenance of

the human being. Eg. Food, Water Shelter, Clothing.

41
Safety Needs – refer to desire for freedom from threatening events and surroundings. Eg
Physical safety and security, continual employment, adequate flow of income, free from fear of
illness, expenses or loss of property.

Belonging or Social need (Love and Affection Needs) - this includes the need for friendship,
affiliation and interaction from others. Human beings are social creatures and need to feel a sense
of belonging.

Higher Order Needs

Esteem needs - the need to feel self-worth and self-respect. They also want respect from others.
Eg. a good reputation, prestige, status, fame, glory, recognition. Mangers use the difficulty of the
job and the skills required to motivate workers. Motivation can be achieved through publicly
rewarding workers and bonuses.

Self-Actualising Needs – the need to reach ones full potential. Involves including employees in
the decision making process, challenging assignments. Problem solving can help with achieving
self-actualisation.

Frederick Herzberg Two Factor Theory

Motivational factors - builds high level of satisfaction but the absence will not cause
dissatisfaction. Examples are:

- Achievement
- Recognition
- Advancement
- Pleasure in the work itself
- Responsibility

Hygiene factors – necessary to maintain a reasonable level of satisfaction. Examples are:

- Adequate salary
- Job security
- Working conditions
- Status
- Clear company policies and administration
- Good interpersonal relationships with supervisors and peers

Mc Gregor Theory X and Y

42
Theory X-

Manager’s view subordinates as:

 Inherently dislikes work and must be coerced into performing adequately

 Ambiguous, irresponsible, lazy and not to be trusted
 Self-centred and indifferent to achieving the organisational goals
 Having to be controlled
 Desires job security and economic rewards above all others.

Theory Y-

They are viewed as:

 Enjoying work.
 Seeking responsibility.
 Exercising self-direction and self-control to accomplish objectives to which they are
committed.
 Not wanting to be controlled.
 Having desires to satisfy social and self-actualising needs.

Characteristics of a Good Leader

A leader is someone who has been given authority over a group of individuals. His job is to
motivate the group to achieve the goals set out for it. Leadership is therefore about influencing
or inspiring an organized group towards the accomplishment of goals. Below are the
characteristics of a good leader.

Integrity

It is important for a leader to possess this quality as it makes them trustworthy. They are
perceived as honest and therefore command the respect of their subordinates.

Good communication skills

Leaders should be able to communicate effectively with persons at all levels of the organization.
Manager must pass down directives as well as listen to workers opinions complaints and ideas.
This will foster good working relations among leader and followers.

Intelligent

43
This is a very important characteristic for leaders. It refers to being rational and having good
judgment when making decisions. Leaders are decision makers and therefore need to be
intelligent. This characteristic also refers to shrewdness and therefore describes someone who is
smart, perceptive and wise.

Devoted and Committed

A leader must be a role model for others. He/she should therefore believe in the goals of the
group and motivate others to achieve it. His/her continuous hard work will portray dedication
and loyalty to duty.

TYPES OF LEADERSHIP

1. Autocratic

This type of leader makes all decisions and asks members only to be obedient in following
orders. He will give detailed instructions and closely supervise subordinates.

Advantage

Time is not wasted consulting with others to reach a decision.

Disadvantage

Workers must comply with directives given by the leader and therefore the organization will not
benefit from workers initiative and innovative ideas

2. Democratic

A democratic leader allows the participation of subordinates in decision making. The leader asks
for progress reports at intervals instead of continuous close supervision.

Advantage

Discussion between management and workers leads an improved relationship.

Disadvantage

The variety of opinions to consider may slow down the decision making process.

3. Laissez-Faire

This type of leader will give minimum directives and allow maximum freedom for workers to
make decisions about completing their tasks.

Advantage

44
The firm will benefit from the initiative and innovation of workers.

Disadvantage

It may lead to chaos in the organization. This type of style can only be used with persons that are
very self- motivated and disciplined.

4. Charismatic Leader
Inspires and motivates through skills and personality.

COMMUNICATION

Communication – This is the transmission or relaying of information, ideas, opinions or

understanding from a person or group to another person or group.

What is the Communication Process?

 Sender
 Message
 Receiver
 The Channel (Medium)
 Feedback

45
Strategies for Effective Communication

The sender’s strategies:

 Decide what exactly is to be communicated and who the receiver will be
 Choose the most appropriate medium for the message
 Identify any possible barriers to communication and take steps to overcome these barriers
 Decide on the most appropriate type of feedback
 Continue the process but make the necessary changes if communication fails

The receiver’s strategies:

 Try to understand the message
 Identify any possible barriers to communication and take steps to overcome these barriers
 Send the required feedback

Methods of Communication

46
1. Oral – This includes all types of spoken communication:

Examples Advantages Disadvantages

- Direct Speech - Direct contact - More difficult to control
- Meetings - Benefits from sight - May not provide
- Seminar sound and physical adequate time to think
- Interviews proximity - There might not be any
- Speeches - Allows for instant written record.
feedback
- More persuasive

2. Written – This includes all things that are written:

Examples Advantages Disadvantages

- Memorandum - Provides written - Can be time consuming
- Company letter documentary evidence. - Can be expensive
- Manuals eg contract. - Getting instant feedback
- Notice board - Can be dispatched to may not be possible.
- Suggestion box persons far away
- Company newsletter or - Can be used for complex
bulletin detailed message.
- Minutes - Can confirm, explain or
- Annual reports clarify oral messages.

3. Visual – This includes all things which can be seen:

Examples Advantages Disadvantages

- Bar graphs - Demonstrates through a - May be difficult to
- line chart visual stimulus. interpret by itself
- pie chart - Simplifies oral and - Requires additional
- Flow chart written communication skills of comprehension
and interpretation.
- May require time to

47
 interpret
- May be expensive.

TYPES OF COMMUNICATION

Internal Communication- Communication that occurs within the organisation.

External Communication- Communication that occurs outside of the organisation

- Telecommunications
- Advertising
- Letter post
- Registered letters – offers proof of delivery for the sender by providing a receipt signed
by the receiver.
- Insurance
- Private boxes and post office bags
- Business reply service

Formal Communication -These are official methods approved by management.

These includes meetings, announcement on notices boards, memoranda, messages over public
address systems, interviews, performance appraisals, company magazines. etc.

Informal Communication -These are unofficial methods of communication.

These include: rumours and the grapevine, secret signs and gestures as well as casual
conversation between employees.

Barriers to Communication

1. Distortion of messages e.g. rumours or the grapevine can easily distort messages.
2. Inappropriate forms of transmission e.g. a notice of a formal meeting must be conveyed in
writing and not by word of mouth. If this type of meeting is not conveyed in writing it may
seem casual and unimportant.
3. Physical barriers e.g. faulty telephone connections, defects in mechanical or electronic
equipment, and poor postal services.

48
4. Information overload.
5. Specialized jargon used or technical language.

LECTURE 7

LABOUR RELATIONS (CONFLICT RESOULTION)

Definition of Work:
Activity involving mental or physical effort done in order to achieve a purpose or result.

Why do we work?

 People need money to buy things. If you go to work, your boss will pay you. You will
have money to pay the rent and to go shopping. You will be more independent.
 People want to be busy. They go to work because it is boring to stay at home and do
nothing. At work one learns new things and meets new people. It can be fun to have a
job.
 Going to work makes people feel useful. Other people have more respect for people
that work.

Definition of Trade Union-

An organization of workers in the same skilled occupation or related skilled occupations who act
together to secure for all members favourable wages, hours, and other working conditions. The
key function of the trade union is to represent the interest of workers. The trade union seeks to
promote the interest of workers through the process of collective bargaining.

Role and Functions of Trade Unions:

1) Collective bargaining
2) Social activities
3) Political activities
4) Educational activities

49
 5) Act as a pressure group to influence government decision making
6) Negotiate for better or competitive salaries
7) Set regulatory standards for some unions eg. provide training and negotiate rights of
workers
8) Enhancement of workforce
9) Seek welfare of workers
10) Promote a system of democracy for electing union officials.

Collective Bargaining- is a process of negotiation between employers and a group of employees

aimed at reaching agreements to regulate working conditions. The interests of the employees are
commonly presented by representatives of a trade union to which the employees belong.

There are two aspects of collective bargaining:

1) Negotiation-

A process of trying to reach a mutual agreement between parties.

2) Settlement of Disputes-

Disputes can be elevated from local union representatives (on the job) to the District Office,
Union Executive, Chief Labour Officer, then to arbitration, Industrial Courts or Minister of
Labour.

FUNCTIONS OF TRADE UNIONS

Social Activities-

They take care of their sick, retired and unemployed

Political Activities-

Have linkages with political parties

50
Educational Activities-

Have special fund to educate their member and children of their members.

Types of Unions:

 Craft
 Industrial
 General
 Staff

Industrial Relations- Definition-

The relationship between the employees and employer.

Reasons why unions will be able to negotiate a high wage.

- A strong economy
- Increased productivity and profitability.
- Increased risk and cost of living.

Sources of Conflict within the organisation:

1. Competition between employees over performance or promotion

2. Employees or Departments regarding allocation of resources
3. Worker groups share diff. needs and interest.
4. Diff. objectives, attitudes and values between employee and the organisation.
5. Breakdown in communication leading to misunderstandings

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 6. Management and Leadership style not suitable to workers or task
7. Industrial relations [Link]
- Breach of Labour Law
- Work regulations
- Break of agreement or policy
- Unfair treatment
- Unfair dismissal
- Threat to Health and Safety Issues

Conflict Resolution Strategies-

1) Grievance Procedures – a set series of stages that work related grievances must be
referred to before it is resolved. It is reported to the immediate supervisor, then manger
then to the executive of the trade union then onto the industrial court.
2) Conciliation- A third party, usually from the Ministry of Labour will be present during
the discussions to encourage communication and reaching a resolution without offering
solutions.
3) Mediation- This is where the third party offers solutions upon which the parties can
decide to accept or reject.
4) Arbitration – This is where all parties make their declarations and the third party called
the arbitrator makes the final decision which is legally binding.

Guidelines for establishing good relations between managers and employees:

1. Maintain good communication with workers

2. Establish Grievance Procedures
3. Practice good leadership
4. Motivate workers with adequate compensation and incentives
5. Provide more interesting work through job enrichment and enlargement.
6. Improve working conditions.

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Methods of Industrial Action by employees-

1) Go Slow – workers complete their tasks very slowly.

2) Overtime ban- No overtime is offered by the employees
3) Work to Rule- Stick to Job Specifications
4) Picketing- Public sympathy is achieved
5) Closed shop- force employees to join union
6) Strike action- work stops completely.

Methods of industrial action by employers-

1) Lockouts are used to avoid sabotage

2) Firing all workers.
3) Scab Labour- Alternate labour is hired.

Local Examples –

 Airline Superintendents Association

 All Trinidad General Workers' Trade Union
 Banking, Insurance and General Workers Union
 Communication, Transport and General Workers Union
 Communication Workers Union
 Contractors and General Workers Trade Union
 Oilfields Workers' Trade Union
 Public Services Association
 Trinidad and Tobago Postal Workers Union
 Trinidad and Tobago Unified Teachers Association

SECTION 2: INTERNAL ORGANISATIONAL ENVIRONMENT

LECTURE 8

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 MANAGEMENT INFORMATION SYSTEMS (MIS)

MIS Definition:
MIS is the formal mechanism for making available to management, the accurate and timely
information necessary to facilitate the decision making process and assist the organisation in
planning, controlling and carrying out its operational functions efficiently and effectively.

Main activities of an MIS:

1. Accepting instructions
2. Receiving information
3. Processing information
4. Sending information to devices
5. Storing information

Design of an MIS:
1. Set objectives
2. Identify constraints
3. Determine information needs and sources
4. Put system together

Role of MIS:
1. Provides managers with information (reports) to help them perform activities that directly
relate to their specific areas of responsibility.
2. Provides a coordinated system of information processing among the functional
departments. i.e departments share data
3. Speeds up decision making and enables precise decisions to be made
4. Facilitates trade
5. Facilitates problem solving by testing different scenarios using computerized data.

USES OF MIS IN COMMERCE AND INDUSTRY:

1. As an aid to Management
2. Control by MIS
3. Computerised research and design
4. Computerised information systems
5. Computerised clerical operations

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BENEFITS OF MIS:
1. Provides a data bank
2. Facilitates decision making and effective communication
3. Improves productivity
4. Allows immediate communication
5. Improves competitive advantage
6. Up to date, accurate and easy to access information.

Challenges of MIS:
1. Can be costly to acquire and implement.
2. Needs skilled and trained staff.
3. Technology may become outdated.
4. User-designer communication gap.

Examples of Management Information Systems:

 Transaction Processing System: Supports the day to day operations of the business eg.
Electronic transfer of funds
 Decision support systems: Provides information for managerial decision making eg.
Sales figures for reports.
 Office Automation System: Provides support for office operations eg. Communication
 Executive Support System: Provides information for high level management or
executive decision making.
 Human Resource Information System: Provide information related to the people aspect
of the organisation eg. Performance management.
 Marketing Information System: Provides information on the marketing aspects of the
organisation eg. Market research, pricing strategies.

LECTURE 9
ESTABLISHING A BUSINESS

Entrepreneur- Person who identifies successful business opportunities, risks time and money to
start and operate a business, bringing resources together with the intention of generating wealth.

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Role of an Entrepreneur

An entrepreneur is one who undertakes the risk of investment to create and market a good or
service for financial gains. He is very perceptive and takes advantage of business opportunities
that will generate high profits. Entrepreneurs can be sole traders, partners in a business or a
group of shareholders.

Entrepreneurs are of vital importance to an economy. They are motivated by their own self-
interest to make profits and in so doing provide employment, create goods and services and
generate revenue impacting on the economy’s level of national income and hence potential for
economic growth.

The entrepreneur is a shrewd investor and takes calculated risks i.e. ones that minimize loss
when choosing investment opportunities. The entrepreneur is the conceptualizer of the initial
business idea. He must identify the best resources that suit the business operation and ensure the
efficiency of each resource employed. For example, training workers, using machinery to
increase labour productivity, maximizing the use of factory and shop space and borrowing
money at low interest rates. The entrepreneur must continuously evaluate the performance of his
ventures. Information can be garnered from the balance sheets and Management Information
Systems.

Role of entrepreneur

1. Conceptualising
2. Planning
3. Accessing funds or financing
4. Organising the business
5. Operating the business
6. Evaluating the performance of the business
7. Risk bearing

Importance of entrepreneur

1. Provide goods and services

2. Create jobs
3. Increases the GDP or value of goods produced.
4. Utilize local raw materials
5. Earns foreign exchange

Personal Qualities of an Entrepreneur

Entrepreneurship requires the following characteristics for success:

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1. The creativity to innovate new product and ideas.

2. Innovation

3. The drive and determination to be successful.

4. The ability to take calculated risks.

5. The flexibility to adapt to changes in the market and industry.

6. Very goal- oriented to purposely and aggressively accomplish task and meet objectives.

Reasons Persons Establish their own Businesses

1. Financial Independence

Some persons feel restricted financially with the income received from their job. Starting a
business would give them the opportunity to be a successful business person and achieve
financial independence.

2. Being your own boss

You are able to make decisions about the direction and operation of the business.

3. To use your skills and knowledge for yourself

The skills, knowledge and experience that you have acquired can be put to work for you.

4. Self-actualization/fulfilment

Owning and operating a successful business will give a feeling of accomplishment.

5. To create employment for relatives, friends and community members

Businesses can assist in providing jobs for persons in communities with high levels of
unemployment.

Steps in Establishing a Business

1. Conceptualization

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All business ventures begin with the conceptualization of an idea. At this initial stage the product
or service idea is envisioned. Most Entrepreneurs identify a need in the market i.e. a service that
is not being provided or a product that does not exist. If the product or service already exists then
ideas to make improvements may be conceptualized.

2. Research

The entrepreneur is a shrewd investor and takes calculated risks. Before investing money in a
business venture a market research must therefore be done to ascertain the extent of the need for
the product or service. This helps to minimize losses. A market research involves gathering
information about a potential market to help an investor make decisions about entering that
market.

3. Identification of resources

What resources are needed to start the business?

If the market research is favourable the entrepreneur must now identify the necessary resources
to operate business. The resources required are land, labour and capital. Land refers to location
or place used to set up a business. This may be bought, rented or family home. Labour employed
must be qualified and skilled to efficiently carry out their duties. Capital includes money, raw
material and assets such as machinery and equipment.

4. Creation of a business plan

Preparing a business plan is very important before the start of a business. This will help the
business to ascertain whether or not the business will be profitable. A business plan outlines the
goals of a business and the strategies that will be employed to achieve them. Usually financial
institutions require that a business plan be presented when a loan is requested for business
investment.

5. Acquisition of funds

There are several ways of acquiring funds to start a business. There are a myriad of financial
institutions that are willing to assist small businesses once their business plans are deemed
workable. The investor must weigh the advantages and disadvantages of acquiring funds from
the various financial institutions. The cost of borrowing i.e. the interest rate charged and the
length of the repayment period are factors to consider.

Funds may be borrowed from friends and relatives that may attract a lower or no repayment cost
and a more flexible repayment schedule. Funds can also be acquired from personal savings.
Encouraging partners or selling shares are ways of avoiding high costs of capital.

6. Operation of a business

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A business must be efficiently operated to ensure high quality goods and service. This is
important to keep existing customers and for business growth. Many companies employ an
operation manager to design and oversee its operations. This person develops and manages the
various processes used to create goods and services efficiently to ensure customer satisfaction.

Sources of Research in Establishing a Business

Firms embark on research to uncover information about consumer preferences, the level of
competition in the market, responses to advertisement etc.

Sources of Information

Data may be collected from primary or secondary sources.

(a)Primary Data

Primary data is originally collected data. This data will be obtained by interviewing, observing or
distributing questionnaires to the sample population.

(b) Secondary Data

Secondary data is information that has already been collected by someone else originally. This
data will be therefore obtained from books, newspapers, magazines, libraries and publications of
various institutions.

Process between Planning and the Operation of a Business

Managers must continue to plan in order to ensure that its operations meet all long – term,
medium- term and short- term goals.

Long- term plans are made for 3 to 5 year periods. Long-term plans determine the direction of
the company. These plans set out the firm’s overall strategy to move from its present position to
where it intends to be. Long-term plans include expansion plans and plans to create new products
and services. Long-term plans are made by the directors or persons in senior management
positions of a company.

Medium-term plans range from 1 to 2 years. They are made by department managers or persons
in middle management positions. Medium term plans include increasing the efficiency of a
department in order to increase the quality and quantity of output. This would involve
implementing training programmes for staff and identifying equipment that would increase
efficiency.

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Short-term plans are made daily, weekly and monthly by supervisors or persons in lower level
management positions. These plans are centred on meeting daily, weekly and monthly
production targets.

Regulatory Practices Instituted by Governments

A business is not considered a legal entity if it is not registered as business in the country where
it operates. All persons desirous of starting a business must first be registered with the
government agency authorized to carry out registration of business in their country.

A sole trader only needs to register his business by meeting the requirements outlined for sole
traders by the registering office and filling out the required documents.

Partnerships are also registered by the completion of a registration document. The names of all
the partners must be listed on the document. Partners in a business are advised to draft a Deed of
Partnership. This document sets out all the rules that govern the partnership and will thus help to
prevent conflict among partners.

The formation of public and private limited liability companies involves the preparation of a
number of documents.

The Companies Act contains the laws relating to companies. To comply with certain
requirements which were laid down by the Companies Act, the promoters of the company must
present the following documents:

1. The Memorandum of Association – this document governs the company’s relationship with
the outside world. It contains:

(a) The name of the company

(b) The address of the registered office

(c) The objectives of the A statement of limited liability to members

(d) The amount of capital to be raised by the selling of shares and the types of shares to be issued

(e) The number of shares to be taken by the directors

(f) Statement of intent to form a limited liability

2. Articles of Association – this document contain the internal rules and regulations which
govern the company. It contains:

(a) The rights and obligations of the directors

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(b) The procedures for calling an annual general meeting

(c) Procedures for electing directors

(d) The borrowing powers of the company

In order to effect the registration of a company, the Memorandum and Articles of Association
must be prepared by a lawyer or any person named in the articles as a director or company
secretary and sent to the companies registering office.

3. Statutory Declaration – this document states that the promoters of the company have
compiled with the Companies Act. It is a signed statement from each director certifying their
willingness to serve.

4. Certificate of Incorporation

Once all three documents above have been submitted and the Registrar of Companies is satisfied
that all is in order, it will enter the name of the company on the register, and issue a certificate of
incorporation. The certificate of incorporation is proof that all requirements of the Companies
Act have been complied with. The certificate of incorporation establishes the firm as a legal
body.

5. The Incorporated Company

A company always means an incorporated company. If a company is not incorporated, it is really
a large partnership. Every business that has more than twenty shareholders must be registered as
an incorporated company. The advantage of incorporation is that each member’s liability is
limited. At this stage it is only the private limited company that may begin trading.

6. The Prospectus
The public limited liability company must first publish its prospects inviting the public to
subscribe for shares. This may be a publication in the newspaper or in another public media. The
prospectus will contain information on the assets, liabilities and profit levels of the company.

7. Certificate of Trading
Once the public limited liability company has collected the total amount of share capital stated in
the memorandum, the company will then be issued with a Certificate of Trading. This will allow
the company to start trading.

Sources of Capital in Setting up a Business

Capital is one of the resources required to set up a business establishment.

Capital mainly refers to those assets that are used to start and continuously operate a business.

Fixed capital includes machinery, equipment and vehicles owned by the company. These assets
are so called because they cannot easily be turned into cash.

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Circulating capital includes raw materials, finished and semi-finished, goods, bank and cash
balances. These assets can easily be converted into cash.

Sources of Capital

- Personal savings of the owner or owners

- Assistance from friends and family

- Loan from a financial institution

- Selling shares

- Forming Partnerships

- Debentures

- Venture Capitalist

Collateral – is money or property that is pledged as security for repayment of a loan.

Guarantor – someone who gives a legally binding promise to be responsible for the debt of
another person or to carry out some other legal obligation of the other person.

The significance of collateral in accessing capital to establish a business

Collateral is anything of value that is used to secure a loan. It is required by financial institutions
for the approval of loans. If the loan is not repaid then the financial institution has the authority
to seize the borrower’s collateral. Forms of collateral include: bank balances, motor vehicle,
dwelling house, land, machinery and equipment etc.

Evaluation of Different types of collateral

Property- used for large loans for a long time
Stocks- Any size loans
Bonds- Any size loans
Money- Any size loans
Cash surrender on insurance policies- Any size loans
Motor Vehicles- small and medium loans for a short period
Other assets (Appliances)- small and medium loans for a short period

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The value or importance of collateral
Important to an entrepreneur to raise finance for business.

Features of a Business Plan

A business plan is a document outlining the goals of a business and the strategies to achieve
these goals. It is mainly prepared by new businesses or by ones making major changes.

Executive Summary

The Executive Summary is a synopsis of the full business plan. It presents the salient points of
the plan. It contains information on the purpose of the business, its methods of operation and
future expectations.

History of the business

This section gives full details on previous operations of a business. For a new business it will
explain where the idea came from and the reasons for starting the business.

Mission Statement

The Mission Statement gives the overall goal of a business as well as its values. It serves as a
guide to the operation of the business. For example: providing the highest quality goods and
services.

Business goals and objectives

The firms’ short-term, medium-term and long-term goals and the time in which these are to be
achieved is outlined in this section.

Organization

The business must state the ownership structure and give details of the management team.

SWOT Analysis

Looks at the strength and weaknesses of the business

E.g. Strengths – strategic location, years of experience

Weakness – Loans at affordable interest rates,

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Industry Analysis

How has the industry changed in the past few years and who are the other firms in the industry.

Product /Service Description

Describe clearly the product or service that you will be offering.

Market Analysis

Describe your target market and your competitors.

Marketing Strategy

Explain the various promotional, pricing and distribution strategies.

Operations

Explain how the business will function on a day-to-day basis. For example: Procurement of raw
materials, the use of technology and operating methods.

Sales Forecast

What amount of sales the business expects to make on a monthly basis.

Start –up Cost

The total amount needed to start the new business, giving a detailed description of what the
money will be used for.

Operating costs

E.g. fixed Costs (rent, insurance and salary) and variable costs (utilities and wages)

Projected Cash Flow

An estimate of how much you expect to earn periodically once you start operating.

Acquisition of Funds

Information on how funds will be obtained e.g. personal savings, borrowing from friends and
family, borrowing from financial institutions or by selling shares.

Benefits of a Plan

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 - Ensures that careful research is conducted into the feasibility of the business.
- Anticipates needs and problems which can be planned for in advance.
- Provides a written document that can be used when requesting financing.

Purpose of Feasibility Study

This is an analysis of the viability of a business idea, and an examination of the different aspects
of operating a business. It will show whether a business venture is worthwhile.
It will analyse:
- Market demand
- Target market
- Profitability
- Production methods
- Operating expenses
- Distribution channels
- Competition
- Promotional requirements
- Cash flow
- Resources required
- Any special legal requirements

Ethical and Legal Issues

Business owners are required to obey all legislation concerning the operations of a business.
These include, paying taxes, business registration, obtaining licenses when required etc. Business
owners should also operate their business based on integrity. This involves:

- Environmental awareness – reducing pollution and harmful effluents in the rivers and seas.

- Avoiding tied selling (marrying of goods)

- Misleading advertising (untruths about goods advertised)

- Untrue sale price – For example, writing the word sale on items for which the price remains the
same.

- The use of market dominance to squeeze firms out of the industry- For example large firms
may drop the price of their goods so low that small firms are unable to compete with them.

Consequences of Unethical and Illegal Practices

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Illegal business practices will result in legal consequence for business. This may include large
fines the loss of the business. Legislation also protects consumers, competitors and society from
unethical practices of a business.

Ethical and Ethical and Legal Description Consequences

Legal Issues practices
Advertising Misleading Honest and realistic Cause citizens to
Advertising advertisements waste a purchase
Taxation Withholding tax Mandatory Tax avoidance

Environmental Issues Unethical disposal of Law mandates Pollution

waste protection of
environment
Money (gained Money laundering- Illegal business Too much money
legally vs illegally) use of illegal money activity circulating.
in legitimate business
Distortion of National
Income

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 LECTURE 10
CONTRACTS

Definition of Contract- A legally binding agreement made between two or more persons,
intended to create legal obligation between them and to be legally enforceable.

An agreement is an exchange of promises between two or more parties. (Offer and acceptance)

Concept of a Contract

A contract is an agreement that is enforceable by law. A contract therefore has legal implications
for the parties who enter into a contract. A mere agreement is not legally binding and
therefore neither of the parties is liable if anyone breaks the agreement.

What makes a contract different from an agreement?

A contract requires not only an agreement between parties but also something of value must be
passed from one party to the next to make the contract binding. For example, you offer to sell a
friend your used text books for $1000.00. After inspecting your textbooks the friend agrees and
pays $1000.00. The $1000.00 paid here is the consideration i.e. something of value that is passed
from one party to the next. Consideration is the price paid for a promise. You promised to let
your friend have your textbooks if he paid $1000.00. This $1000.00 makes the agreement
binding. You are therefore obligated to deliver the books to your friend and cannot decide to sell
the books to someone else or to ask for a higher price.

Your neighbour asks you to mow his lawn after which he will pay you $200.00. You accept this
offer and mow the lawn. The work done here is an act of forbearance. You are giving something
of value to your neighbour to receive payment for the job. The consideration in this case is the
work done by you. It is the price that you have paid for the promise to be paid money for the job.
Consideration passes from promise to promise.

Characteristics of a Simple Contract

There must be offer and acceptance. The offerer is the party that makes the offer and the offeree
is the person that the offer is being made to. There must a clear offer and clear acceptance for a
contract to be binding. There is an agreement of the minds.

An offer is a promise in exchange for performance by another party. An offer can be revoked or
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 Chapter 10
CONTRACTS

Definition of Contract- A legally binding agreement made between two or more persons,
intended to create legal obligation between them and to be legally enforceable.

An agreement is an exchange of promises between two or more parties. (Offer and acceptance)

Concept of a Contract

A contract is an agreement that is enforceable by law. A contract therefore has legal implications
for the parties who enter into a contract. A mere agreement is not legally binding and
therefore neither of the parties is liable if anyone breaks the agreement.

What makes a contract different from an agreement?

A contract requires not only an agreement between parties but also something of value must be
passed from one party to the next to make the contract binding. For example, you offer to sell a
friend your used text books for $1000.00. After inspecting your textbooks the friend agrees and
pays $1000.00. The $1000.00 paid here is the consideration i.e. something of value that is passed
from one party to the next. Consideration is the price paid for a promise. You promised to let
your friend have your textbooks if he paid $1000.00. This $1000.00 makes the agreement
binding. You are therefore obligated to deliver the books to your friend and cannot decide to sell
the books to someone else or to ask for a higher price.

Your neighbour asks you to mow his lawn after which he will pay you $200.00. You accept this
offer and mow the lawn. The work done here is an act of forbearance. You are giving something
of value to your neighbour to receive payment for the job. The consideration in this case is the
work done by you. It is the price that you have paid for the promise to be paid money for the job.
Consideration passes from promise to promise.

Characteristics of a Simple Contract

There must be offer and acceptance. The offerer is the party that makes the offer and the offeree
is the person that the offer is being made to. There must a clear offer and clear acceptance for a
contract to be binding. There is an agreement of the minds.

An offer is a promise in exchange for performance by another party. An offer can be revoked or
terminated under certain conditions. There are also times when an offer can be negotiated to
create a counter-offer.

Acceptance occurs when an offeree agrees to be mutually bound to the terms of the contract by
giving consideration, or something of value like money, to seal the deal. Keep in mind that

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acceptance follows the mirror image rule, in that acceptance is valid if the product or service
rendered is exactly what was contained in the offer.

Consideration is the price paid by one party for the promise of the other. Thus if one party
promises to provide goods or services, something of value must be given in exchange. This may
be in the form of money, goods, services or it may be an act of forbearance.

The capacity to contract – Parties to the contract must be over 18 years, of sound mind, not
under the influence of drugs or incarcerated.

There must be no force, misrepresentation or fraud. Persons should not be forced to sign a
contract e.g. blackmail. They should not be lied to e.g. giving the wrong year of a car. Fraud may
involve forging someone’s signature.

There must be an obvious intention to create legal relations. This is based on the actions of the
parties e.g. offer, acceptance and consideration.

A contract must be legal- thus, agreements made between parties concerning illegal drugs and
any other illegal activity is not a contract.

Terms and Concepts

Misrepresentation- referring to a false statement of fact made by one party to another party,
which has the effect of inducing that party into the contract

Types of Misrepresentation-

Innocent – untrue statement with reasonable grounds for belief

Negligent- untrue but without reasonable grounds.
Fraudulent – untrue with the knowledge of the truth to mislead.

 Breach - Breach of contract is a legal cause of action in which a binding agreement or

bargained-for exchange is not honored by one or more of the parties to the contract by non-
performance or interference with the other party's performance
 Void -Contract is the contracts that cannot be enforceable.
 Voidable- the Voidable Contract is the contract in which one party has the right to enforce or
rescind the contract.

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Rules governing offer and acceptance

1. An offer must be communicated to the other party

2. The offer may be made generally or a specific person, but acceptance must be made by a
specific person/s
3. Conditions attached must be brought to the attention of the offeree at the time of the offer
for the offeree to be bound.
4. Acceptance must be communicated to the offerer. The offeree must act positively to
constitute acceptance.
5. Offer can be revoked before acceptance unless consideration was given.
6. Revocation has to reach the offeree before the offeree has accepted.
7. Acceptance must be unconditional. No counter offers.
8. An offer can be accepted by the person to whom the offer is made.
9. Offer must be within a specified or reasonable time.
10. Offer lapses if time is expired, rejected by offeree, death of offerer or offerree
11. Use the post – Offer is only made when the post reaches the offeree and it is accepted
once offeree posts the acceptance whether it is lost or not.

Consideration – consideration should either be good or valuable since it is the price one pays
to secure the legal obligation on the part of the other.

Consideration must be :

 Real – that is it should be well defined. One should be able to convert it to cash or
something of value. Transferable and not already obligated to do by law.
 Lawful – the subject should be a lawful act or the contract is void.
 Consideration must not be past i.e past payments not considered

Executed – When both parties have fulfilled their obligations (eg Purchase of goods on credit)

Executory – The contract still has to be completed.

Differences between a Simple & a Speciality Contract & Contract of record.

A simple contract can be made orally, in writing or by the implications deemed from the actions
of the parties. A specialty contract must be signed by the parties sealed, for example with a
company seal and finally it must be delivered.

Simple contracts:

- Be in writing
- Oral

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 - Implied by conduct
- Consideration is the most important element
- No special form

Examples of specialty contracts include:

1. Mortgages and leases for over three years

2. Sale of land

3. Contracts of insurance

4. Hire purchase agreements

5. Transfer of company shares

6. Assignments of copyright

Characteristics of a Speciality Contract

1. Conditions of Simple Contracts must be present.
2. Must be in writing
3. Signed by both parties
4. Stamped or sealed
5. Attestation or witness
6. Delivered by a promisor.
7. Delivery may be made subject to a condition to be performed later giving rise to a
escrow.

Something of value, such as a deed, stock, money, or written instrument, that is put into the
custody of a third person by its owner, a grantor, an obligor, or a promisor, to be retained until
the occurrence of a contingency or performance of a condition.

An escrow also refers to a writing deposited with someone until the performance of an act or the
occurrence of an event specified in that writing. The directions given to the person who accepts
delivery of the document are called the escrow agreement and are binding between the person
who promises and the person to whom the promise is made. The writing is held in escrow by a
third person until the purpose of the underlying agreement is accomplished. When the condition
specified in the escrow agreement is performed, the individual holding the writing gives it over
to the party entitled to receive it. This is known as the second delivery.

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Difference between an Offer & an Invitation to Treat

An invitation to treat is not an offer but an invitation to bid or bargain for an item. For example,
at an auction persons may bid on various items presented. An invitation to treat also occurs also
when goods are advertised for sale in the media or in shop windows. Goods in a shop window or
goods advertised are not an offer by the owners of the goods but are technically an invitation for
interested persons to make an offer.

Conditions under which Offer and Acceptance are communicated

An offer must be very clearly made. An offer can be made to one person, a group or to the whole
world. For example, offering a reward for a lost wallet is an offer to anyone finding the wallet.
In cases where there is a counter-offer the original offer is no longer valid. A counter offer is an
implied rejection of the original offer. For example: John offers to sell Paula a laptop for
$10,000. Paula subsequently offers him $8000.00 as she thought $10,000 was too expensive.
Paula has rejected John’s original offer and has made a counter-offer of $8,000.

Acceptance must also be clear. In the case of a counter offer a clear acceptance to the new offer
must be identified.

Contracts may be made orally, in writing or they may be implied.

Oral Contracts

Are based on what the parties said. For example, asking someone to wash your car for payment

Written Contracts

Both offerer and offeree must sign the contract document

Implied Contracts

Implied Contracts are made by the observed actions of the parties involved. For example,
someone who sits at a table in a restaurant and places an order has implied that he will pay for
the food that will be served.

Ways in which Contracts may be Terminated

Contracts may be brought to an end:

(a) By performance of the parties i.e. each party completing his obligations as stipulated by the
contract.
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(b) By frustration i.e. an event through no fault of the parties that make one party unable to
perform the contract. For example: if one party suffers a prolonged illness which makes him
unable to perform the contract.

(c) By lapse of time i.e. if the time limit set for the contract to be executed by both parties has
been passed. For example, sellers of real estate usually require that the buyers pay the full
balance on the property within a certain time period after the initial down payment has been
made.

(d) By the mutual agreement of all parties.

(e)If one of the parties become bankrupt after the contract has been signed.

(f) By changes in law i.e. where a legal contract is rendered illegal through changes in law.

(g) By notice e.g. some firms require that employees give at least one month notice when
resigning their positions.

(h) If one party dies.

(i) By breach of contract-When one party defaults on his part of the agreement i.e. he does not
perform his part of the contract.

REMEDIES FOR BREACH OF CONTRACT

- Damages –compensation in case of a breach contract

- Rescission –to cancel the contract to return parties to former state before contract by
mutual agreement of both parties
- Restitution – Returning property, money and goods after a breach.
- Waiver of Breach- Non breaching party acceptance of substandard performance
- Limitation of Liability – a clause that limits liability to a certain point such as the
purchase price
- Specific performance – When damages are not an appropriate remedy the breaching
party will have to perform a specific act.
- Liquidated damages- stipulated amount in a contract that the injured party would
receive in the event of a breach of contract.

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Validity of Contracts

Mr. Larry was delighted to see a 50% discount on his favourite brand of shoes at a shoe store 15
miles away. He took sometime off from work to travel to the store. When he arrived at the store
he was told that that the brand advertised was sold out but he could choose from other brands
available. Mr. Larry was very angry and requested that he be refunded his travelling expenses.

Is the owner of the store obligated to refund Mr. Larry his travelling expenses?

Answer

The advertisement appearing in the newspaper is not an offer by the store but an invitation to
treat. Therefore readers were being invited to make an offer for items advertised. The owners of
the store are therefore in no way obligated to Mr. Larry.

Hope stopped at a convenience store on her way home to purchase a few items. She handed the
cashier her credit card and was surprised when she was told that it declined. She apologized and
explained that she did not know why her card declined but she will call the bank in the morning.
Susan further explained that she had just enough cash with her to get home and so she could not
pay for the goods. The cashier was very angry and asked the manager to intervene. The manager
insisted that she pay for the goods.

Is Sandra obligated to pay for the goods?

Answer

Sandra has entered into a contract with the convenience store. She made the offer at the cashier
counter when she presented the goods to be cashed. The cashier accepted the offer by cashing the
goods. In this situation it is up to the manager of the convenience store to accept Hope’s
apology.

LECTURE 11

BUSINESS DOCUMENTS

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Why Documentation is Necessary in Business Transactions

 Business documents provide information needed for the business to function efficiently.
 Information is required for accounting purposes to ascertain whether profits or losses are
being made.
 Documents are also needed as evidence for example orders placed for goods and payments
made.
 Documents also provide information on commodities in stock and prices.

Business Documents for Various Purposes

Stock cards are used to keep a record of all stocks entering and leaving the stockroom. This
procedure ensures that stock level do not fall below a minimum resulting in the depletion of
stocks.

Purchase requisition – This is a document sent by the purchaser or buyer to the seller
requesting goods that may be available.

Letter of Enquiry is sent by persons who wish to be informed of what goods and services and
the prices of these that a company offers for sale.

Cover letter (information received) – A response to a letter of enquiry with the supplier
providing details of their products through mediums such as catalogues.

Request for quotation – A request to quote for specific goods.

Quotation - The company may resend either a quotation or a catalogue

Order (information provided) – order form or letter requesting the supply of specific
goods.

A catalogue is a booklet with a brief description and pictures of articles for sale. Since a
catalogue is costly, some companies opt to send a quotation instead. A quotation lists all the
goods in stock along with their prices.

(c) If there is an interest to purchase an item in the catalogue then an order letter is sent
requesting goods to be supplied.

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The following three documents accompany goods delivered:

Delivery Note must be signed by the person receiving the items ordered. This is proof that goods
were delivered. A copy of the delivery note is given to the buyer.

Consignment note is sent when the firm does not have its own transportation. A transport
company is paid to deliver the goods. A consignment note will be prepared by the consignor (the
sender) and given to the transport company. It contains information about the destination of
goods and the name of the consignee (the receiver). (Proof of receipt by Transport Company)

An Invoice is a bill sent with goods delivered. Invoices may also be sent after goods have been
delivered.

Terms 5% 30 days – A Discount of 5% will be given if the customer pays within 30 days. E &
OE – means errors and omissions, i.e. if any mistakes were made on the invoice the company
will make the correction.

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Pro forma Invoice is a temporary invoice. It is used in cases where funds are being borrowed
from financial institutions to purchase items. The institution may request a pro forma invoice as
proof of items to be purchased when the loan is disbursed. It may also be sent with goods not
ordered and in this instance is a form of advertising. If the customer is interested in the items
sent, an actual invoice is sent.

Credit note is issued to a customer when there has been an overcharge on an invoice due to
faulty arithmetic, when goods have been returned because of damage or refunds requested for
goods not received. A credit note is printed in red.

Debit note is sent to a customer whenever there is an undercharge or omission on the invoice.

Statement of Account is a document from a supplier to a customer outlining all the transactions
carried out over a particular period. A statement is usually sent monthly.

A receipt is given for cash payment.

TERMS and Concepts-

C/PD – Carriage paid by seller.

FOB – Free on board. All expenses paid up until putting goods on the ship.

CIF – Cost, Insurance and Freight. All costs and expenses up until the port of destination

FAS – Free alongside ship. Expenses up until delivery to the docks. Loading costs not included.

Certificate of Origin – is a document used in international trade as proof of origin of the

commodity. It accompanies duty free goods to confirm that they were produced in the exporting
country to prevent non-member countries from taking advantage of the free trade agreement.

This document states the country in which the goods were manufactured. This is important for
Caribbean countries as goods from other Caribbean countries enter duty free. Goods imported
from outside the region are taxed.

Certificate of Health – This relates to the inspection of foods such as fruits and meat.

Carriage forward – This is where the customer pays for all expenses.

Franco- Free delivery by seller

FOR- Free on rail – Free until the nearest railway

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Bill of Lading - The Bill of Lading is a contract of carriage between the seller of the goods
(exporter) and the shipping company transporting the goods. It is also a document of title as a
copy must be presented by the importer before he can claim the goods.

It includes the following information: The number of packages, the weight of each piece, the
contents, the port of departure and destination, the name of the ship, the senders name and
address and receivers name and address

Shipping Note - This document provides details about the goods to be shipped, e.g. type and
number of items and the destination of the goods.

The Airway bill – is used in the transportation of goods or other commodities by air. If you
receive or send items by courier service you are required to fill out an airway bill.

This document is used when goods are transported by air. It contains similar information as the
bill of lading. It is not a document of title and the consignee named need not have a copy to
collect the goods. Air consignment note is a receipt issued by an international airline for goods
and an evidence of the contract of carriage, but it is not a document of title to the goods. Hence,
the air waybill is non-negotiable.

Import License

This document gives a business permission to import goods into a county. It is used by
governments to restrict the importation or to limit the amount of certain goods imported. Quotas
are sometimes used to protect local industries as they specify the quantity of certain goods
importers are allowed to import.

Dirty Bill

If the words dirty are added to the bill of lading, then the goods delivered are damaged vs a clean
bill of lading

Insurance Certificate – (Marine Insurance)

This document provides protection for the goods being shipped against loss or damage at sea.

h. Bill of Sight

This document is completed if for any reason the documents required for importing goods are
not available. It is completed giving details of the consignment and method of transportation.

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Instruments of Payment

The instrument used to make payments will depend on:

1. The amount
2. The distance
3. Safety
4. Date when due
5. Urgency
6. Does the debtor have a bank account

Notes and Coins

Cheques

A cheque is an order to the bank to transfer payments from an individual’s account (the
payer’s/drawer’s account) to credit another individual’s account (the payee’s account) or to pay
the payee on presentation of that cheque.

Credit Transfer

A customer of a bank may use this system by instructing the bank to transfer money from his
account to an account at any other bank.

Standing Order/Banker’s Order

This allows regular monthly payments to be made from a customer’s bank account to a named
payee. The customer must complete and sign a standing order form instructing the bank to make
payments.

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Credit Cards/Debit Cards

This allows the card holder to make payments by simply presenting the card to the seller. A
credit card facility is actually a loan given to a customer and thus it is repaid at an interest. A
debit card is issued against a customer’s account balance and is therefore not a loan.

Postal Order

A customer may purchase a document known as postal order at the post office up to a specific
sum. The sender will have to fill in the name of the payee and the post office to which the order
is being sent for payment. This method may be used for both local and foreign payments.

Postal orders are cheques issued in specific values by a post office. The value of each postal
order is printed on it and a price depending on its value is paid for each. The postal order will be
sent to the post office of the payee as designated by the payer.

Money Order

These can be purchased from a bank or a post office. They can be used to make payments locally
or overseas, as they are made out in the currency in which they are to be paid. The payee will
cash the money order at his bank.

Telegraphic Money Order

The sender must first pay the sum to be sent over the counter of the post office. A telegram is
sent to the payee informing him to collect money at his local post office. He must present proof
of his identity.

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Bank Draft

This is a cheque that is used to make payments overseas. Bank drafts are obtained for a fee from
a bank and are made out to a named payee in foreign currency.

Sight draft

A type of bill of exchange in which the exporter holds the title to the transported goods
until the importer receives and pays for them.

Bill of exchange

This is used to pay for goods bought overseas on credit. It is an order in writing from an exporter
to an importer requiring payments of a certain sum of money at a fixed future date. The time
period allowed is normally three months.

Letters of Credit/ Documentary Credit

This is a sent from an importer’s bank to an exporter guaranteeing payment to the exporter for
goods to be supplied. The exporter must present a clean bill of lading, certificate of origin and a
certificate of insurance to the importers bank.

Enables the exporter to receive money for the goods before the documents are given to importer.

Irrevocable Letter of Credit

Once an exporter receives this letter of credit the importer cannot cancel payments for goods to
be supplied without the exporter’s permission.

Documentary Bill

The documentary bill is intended to provide an overview of the order as well as to supply the
buyer with a document that can be used as the authorization to extend payment for that order.
Typically, the detail found on the bill will include information that is also reflected in the other
documents prepared for the order, such as the bill of lading, the certificate of insurance secured
for the order, and a document known as a certificate of origin, which clearly identifies the seller
and relevant information about the goods offered by that seller. In a sense, the bill serves the
purpose of providing a summary of the transaction by drawing on key information found in the
other supporting documents.

Promissory Note

These are instruments used in indicating the details to pay the creditor within a certain time. The
note is an unconditional promise made in writing by a debtor to creditor signed by the debtor
indicating to pay on demand or at a fixed date or determinable fixed time, a certain sum of
money to the order of a specific person or to a bearer.

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 LECTURE 12

Insurance and Assurance

Insurance: A legal contract in which an insurer promises to pay a specified amount to another
party, the insured, if a particular event happens and the insured suffers a financial loss as a result.

Insurance is a means of protection from financial loss. Insurance is generic for all types of
insurance and assurance. However, insurance differs from assurance in that insurance covers
risks that may occur e.g. theft, fire, accident etc., and assurance covers events that will occur
such as death (that must occur).

The parties to the insurance contract are the insurer (the company offering protection) and the
insured (the person seeking protection). Payments are made by the insured for this service. The
price charged for insurance is called a premium. The contract is known as the policy.

Insurance Principles

The purpose of insurance is to compensate persons insured who suffer loss. It is based on the
principle of indemnity, that is, to restore the insured to his original position before he suffered
loss. Insurance therefore as a principle neither makes the insured worse off or better off than
before loss was incurred. For example, if Mr. Green suffered damages valuing $500,000
subsequent to a fire at his home, he will be compensated exactly $500,000 to repair his house.

Principles of Insurance

Indemnity- Restoring the insured to his original position

Insurable interest- The insured must have a vested interest in what is being insured. For
example, someone is not allowed to insure his neighbour’s house.

Utmost Good Faith- The insured must be truthful concerning the information pertaining to the
policy contract.

Proximate Cause - The damage caused must be close or proximate to the event insured
against. For example, if someone has an accident policy that includes death occurring as a result
of an accident, this person will not be compensated if death is caused by disease.

Contribution – This principle prevents persons insuring identical risks on the same property
with several companies and thus profiting if they suffer loss. For example, an individual may
insure his car with three insurance companies hoping to be compensated by all three. He will not
succeed as the insurance companies will each only pay a portion of the claim.

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Average Clause – This clause sets a limit to the size of the compensation, which depends on the
proportion of the true value of the asset paid up by the insured. For example, a homeowner
insures his home for $100,000 which is half the true value of $200,000. His house was partially
destroyed by fire on the insurance company for $50,000 worth of damage. The insurance
company only paid him $25,000 as he was only insured for 50% of the true value of the house
presently.

Subrogation -This is an extension of the principle of indemnity, that is, the insured should be
reinstated to his exact position before the loss. For example, if a vehicle is totally wrecked and
the insurance company pays the insured the value of the car, the wrecked vehicle will be claimed
by insurance company.

How does insurance Work?

How are insurance companies able to pay its clients large sums of money to compensate them for
loss? They operate on the basis of risk pooling. Premiums from large numbers of persons with
the same risks are pooled and only those who suffer loss are compensated. The insurance
company can predict the percentage of losses based on past data. The premiums charged are
based on the number of losses predicted plus the cost to operate the business and profits to be
realized. For example, a particular insurance company may insure one thousand persons for risk
against car theft. Only two percent of those insured may suffer loss and therefore the insurance
company can afford to assist those persons.

Types of Insurance Policies

[Link] Assurance
(a)Whole Life Assurance
Payment will be made upon the death of the insured. The beneficiaries of the insured will be
paid.

(b) Endowed Assurance

Payments are made at the end of specific periods. The Endowment policies may be paid at the
end of twenty or thirty years or at the age of retirement. If death occurs before the end of the
endowment period insured, then the beneficiaries of the insured will be paid.

[Link] and Business Insurance

(a) Fire Insurance
Covers loss or damages to assets by fire

(b) Burglary Insurance

Covers loss due to goods stolen and damages to property caused by theft

(c) Bad Debts Insurance

Covers debts that cannot be collected

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(d) Plate Glass Insurance
Covers the replacement of shop windows as well as any injury to staff and customers that may be
caused by its breakage

(e) Fidelity Guarantee Insurance

This protects a firm against loss due to the misappropriation of funds by employee, customers or
other persons.

(f) Employers’ Liability Insurance and Public Liability

Covers injury incurred by staff or visitors on a business location due to the negligence of the
firm, e.g., customers slipping on a wet floor.

(g) Motor Insurance

Third party – Only third parties e.g. passengers are covered. The driver and car is not covered.
Comprehensive – Covers loss due to damages to the driver and third parties.

(h) Marine Insurance

This policy covers loss due to damages of ships and cargo at sea.

Importance of Insurance to Businesses

Entrepreneurs invest a wealth of resources into the start-up and continuous operation of a
business. If the entrepreneur suffers any form of loss such as fire or burglary etc. the business
may take a long time to recover. Insurance is therefore very important to the business
community. The principle of indemnity ensures that an entrepreneur receives enough
compensation to continue the business with minimum effects.

 It encourages enterprise or industry by covering risk of business firms

 Facilitates trade between countries whereby, businesses would be compensated for losses
during transit.
 Provides a source of capital for business investors.
 Provides coverage against personal risk when an individual is not able to manage it.

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 LECTURES 13 & 14

PRODUCTION
Factors of Production

The term ‘factors of production’ refers to the resources that are combined in the production
process to create goods and services.

These are:

Land - natural resources

Labour – human resource

Capital – man made resource

Entrepreneur – human resource

Land includes all natural resources such as soil, seas, rivers, forests, minerals, vegetation etc.

Labour is categorized as skilled, semi-skilled, unskilled or professional workers

Capital includes assets such machinery, equipment and vehicle owned by the company. Capital
also includes raw materials, finished and semi-finished, goods, bank and cash balances.

Entrepreneur is the owner and risk taker in a business venture. He is responsible for combining
all the factors of production.

Industries Developed from Natural Resources in the Caribbean

Caribbean countries have been blessed with a plethora of natural resources. The industries
developed from these natural resources have created employment as well as foreign exchange
earnings from exports.

Examples:

Crude oil is a natural resource of Trinidad. The petroleum industry employs nationals and earns
foreign exchange for the country.

Clay is found in abundance in Barbados. Pottery making is a large industry in Barbados.

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 CHAPTERS 13 & 14

PRODUCTION
Factors of Production

The term ‘factors of production’ refers to the resources that are combined in the production
process to create goods and services.

These are:

Land - natural resources

Labour – human resource

Capital – man made resource

Entrepreneur – human resource

Land includes all natural resources such as soil, seas, rivers, forests, minerals, vegetation etc.

Labour is categorized as skilled, semi-skilled, unskilled or professional workers

Capital includes assets such machinery, equipment and vehicle owned by the company. Capital
also includes raw materials, finished and semi-finished, goods, bank and cash balances.

Entrepreneur is the owner and risk taker in a business venture. He is responsible for combining
all the factors of production.

Industries Developed from Natural Resources in the Caribbean

Caribbean countries have been blessed with a plethora of natural resources. The industries
developed from these natural resources have created employment as well as foreign exchange
earnings from exports.

Examples:

Crude oil is a natural resource of Trinidad. The petroleum industry employs nationals and earns
foreign exchange for the country.

Clay is found in abundance in Barbados. Pottery making is a large industry in Barbados.

Bauxite is found in abundance in both Jamaica and Guyana. The Alumina industry is an
important foreign exchange earner. Alumina is exported to be further processed to make
aluminium products.

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Guyana also has very large forest areas and has developed a very vibrant lumber and timber
industry. Lumber is used in the construction industry.

Limestone is processed to make cement in Jamaica.

Difference between Production and Productivity

Production is the process of combining units of inputs (natural, man-made and human resources)
to create output (goods and services) capable of satisfying human needs and wants.

Productivity is the increase of output from each unit in the production process. There are several
ways of achieving productivity. These include the training of workers and the introduction of
machinery and equipment into the production process.

Importance of Productivity

Productivity increases output. High productivity results in lower cost per unit of output resulting
in higher levels of profit for a business. For example, a factory worker can produce 10 items in
an hour and he subsequently produces 20 units in the same hour after some training. His
productivity has doubled and the business will benefit from a fall in unit cost as more units are
being produces at the same costs of production.

Higher profits for the firm will mean more funds available for its expansion, new business
ventures and community support. It may also wish to pass on the benefits of lower costs to
consumers in the form of lower prices.

Labour Productivity = Output / Number of employees = 200 watches/ 10 employees

= 20 watches per employee.

Effects of Migration

Migration is the permanent movement of workers from one location to the next in search of
better opportunities.

Internal Migration

Migration within a country e.g rural –urban migration. This is migration of persons from rural
communities to the city areas.

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External Migration

Migration of persons from one country to another – For example, the migration of Caribbean
people to developed countries such as the United States and England.

Effects of Migration

Internal (Rural –Urban migration)

 The loss of persons from rural areas impacts on the level of output and development of these
areas.
 It also impacts negatively on the level of commodities available for export form these
regions.
 The influx of workers in urban areas increases competition for jobs, houses, health facilities,
schools etc.

External Migration (Caribbean to developed countries)

 Professional and skilled workers who migrate reduce the level of skills available in their
countries resulting in a brain drain effect. This will impact on growth and development.
 They increase competition for jobs, houses, health facilities and schools in their new
territory.
 Money earned by Caribbean nations in foreign countries is sent home to support their
families reducing poverty and making foreign exchange available for their respective
countries.
 Caribbean professional and skilled workers contribute to the growth of developed countries

Role of the Entrepreneur: Decision Making Process

The entrepreneur organizes the factors of production to create goods and services. The most
suitable location, qualified workers, and the right equipment and machinery will ensure efficient
production. It is therefore important for him to make the right decisions concerning the
employment of the required resources for his business. He must also make decisions on systems
and processes to be applied in the production process.

Role of Capital in Production

Capital refers to assets such as machinery, equipment, inventory and cash that are used to start
and continuously operate a business.

Fixed capital includes machinery, equipment and vehicles owned by the company. These assets
are so called because they cannot easily be turned into cash.

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Circulating capital or Current Assets includes raw materials, finished and semi-finished,
goods, bank and cash balances. These assets can easily be converted into cash.

Tools and machinery are necessary for products to be fashioned from raw material e.g. mineral
mining, oil drilling and lumbering. These assets also increase productivity for example sewing
with a machine as opposed to sewing by hand. Venture capital is needed for business start-up.
The business owner will need equipment, funds for promotion etc. to start the business.
Working capital is the cash available for the daily operation of the business. It is used to pay
workers, utilities and purchase raw materials.

Levels of Production

Subsistence

This is the lowest level of production. Subsistence productions refers to output from the
production process that is just enough for the survival. This amount of production is therefore not
adequate to meet all needs and wants of a family, community or a country. For example,
subsistence farming involves the production of crops to feed the family and for survival. Wealth
is not created as whatever is produced is consumed.

Domestic Production

Domestic production refers to production that is more than survival level. It provides output that
is enough to satisfy domestic needs and wants. Excess is not available for export. However,
production is adequate to supply local demand.

Examples include:

 Use of local forest resources to obtain lumber to produce furniture for domestic use.
 Use of daily catchments of fish to prepare local dishes to be consumed by the citizens

Surplus or Export

This level of production is adequate to supply local demand and for export. Large industries can
produce large quantities of output to satisfy local consumption and earn foreign exchange from
export, for example, the sugar and banana industries.

 Trinidad and Tobago produces crude oil for export

 Jamaica and Guyana Produces bauxite for export

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Types of Production

Primary Production

This includes all kinds of extractive industries such as agriculture, mining, forestry and fishing.

Secondary Production

This is the second stage of production after extraction from the natural resources. It involves
converting raw materials into finished goods. This includes manufacturing such as assembling,
baking, refining and construction (building) industries.

Tertiary Production

This is the final stage which can be classified into Direct Services such as hairdressing,
babysitting and secretarial work and Commercial or Indirect services such as banking,
insurance and advertising. Service industries include transportation, communication and tourism.

Cottage Industry

Cottage industry is a generic term for any type of home–based production business. The term is
specifically used to describe industries of a craft nature e.g. basket weaving, carving and pottery.
This type of home–based business is not difficult to start as it requires little capital to purchase
tools and employs family members. These small scale businesses are important to an economy.
They utilize local raw materials such as clay for pottery, wood for carving and straw for baskets.
They earn foreign exchange from selling to tourist at craft markets and fairs. Examples also
include:

 Food Items – pastries, jams and jellies

 Personalized services- sewing, hairdressing.

Importance of Cottage Industries:

1. Provide employment
2. Satisfy psychological need of the producer
3. Adds to family budget
4. Provides an opportunity to use one’s skills
5. Uses local materials
6. Improves skill base
7. Help to boost foreign exchange

Factors required for cottage industries to survive:

1. Materials must be readily available.

2. Training programmes must be readily available to pass on skills
3. Financial support through loans with low interest rates.

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 4. Supported by trade shows.

Linkage Industries

This refers to industries that are connected because they depend on each other to obtain or to sell
raw materials i.e. the output of one industry (finished product) is the input (raw material) of the
other industry.

Forward Linkage

If the final product or finished products of one industry is used in another industry as its raw
material then a forward linkage occurs. For example, sugar produced from a sugar factory is used
by a bakery to make pastries. Sugar is therefore the end product of one industry and used as raw
material in another. Other examples include agriculture and canning, lumber and construction
and cattle farming and meat processing.

A backward linkage occurs when the demands of an industry leads to the establishment of other
industries to produce for the needs of this industry. For example, the establishment of several
multinational fast food restaurants in the Caribbean has led to new businesses being established
to supply these restaurants with raw materials (vegetables, ground provisions, meats and paper
based products).

Benefits of Linkages:

1. Economic ties creates more job opportunities

2. Promotes innovation and use of new technology
3. Encourages large scale production for local and export demand.
4. Promotes cooperation
5. Leads to increased household incomes and foreign exchange.

Impediments of Linkages:

1. Lack of Venture Capital for primary sector development

2. Limited access to foreign markets
3. Investment in equipment and machinery can be expensive.

Factors that determine Business Location

The location identified for the operation of a business will impact on its success or failure. An
unsuitable location can result in high operational costs or low sales volume. Business owners
must therefore consider the following factors when choosing a location.

Geographical Factors

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Climate, geology and terrain can determine the location of an industry.

Cool Climate for Coffee in Jamaica, Sea for fishing and Tourism in Antigua and St. Lucia.

The proximity to customers

It is important that business owners give customers easy access to goods and services. Shopping
plazas in very central locations are very popular locations for businesses. Many companies now
opt for selling online and therefore do not need to be centrally located.

The proximity to raw materials

It is more cost effective for a business that uses raw materials that are heavy and or bulky to
locate close to the source of raw material. For example, bauxite processing plants are located
close to mining areas and sugar factories are located close to sugar fields.

Availability to suitable labour supply

A business will need adequate number of workers who possess the skills suitable for the creation
of its goods and services. The availability of health facilities will also ensure a healthy
workforce.

Adequate Infrastructure

Firms will locate where there are adequate supplies of water, lighting, airports, seaports, good
roads, transportation, and communication facilities. Failures in any of the utilities and
infrastructure can severely hamper operations.

Government Regulations

 Government may want to develop certain locations in line with their developmental plans as
opposed to protected natural areas.

Functions of a Small Business

 Supplying goods and services that satisfy demand

Identifying a particular need in a market and developing a product that will supply that market
need, improves standard of living and increases the overall revenue (GNP) earned in a country.
Small businesses have the advantage over large businesses to identify changing market trends as
they are closer to the customers. They are also able to produce unique products to suit the needs
of each customer.

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 Creating employment

Small businesses account for a large percentage of total employment in Caribbean economies.

 Making profits

The main purpose of starting and operating a business is to make profits. Profit makes it
worthwhile for the entrepreneur to continue business. Profit earned may be reinvested to expand
the business.

Small Business

Advantages Disadvantages
 Less layers of Management  Unlimited liability

 Personal interaction with clients  Difficult to access financing

 Less complicated to start  High risk due to economic pressures

 Able to source government assistance  Unable to compete with cost savings

 Can cater to niche markets better

Large Business

Advantages Disadvantages
 Easier to access financing  Greater bureaucracy

 Experience economies of scale  Increased barriers to communication

 Able to spread risk  Inflexible to market due to standardisation

 Able to invest in R&D  Impersonal dealing with clients

Effects of Growth on a Business

Small businesses that are efficient, creative and are cognizant of changing market trends are
poised for growth. Growth impacts on the business organizational structure and the business
operations.

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The creation of new posts and departments as a result of specialization and expansion will
change the organization’s structure. More workers will also be employed resulting in greater
specialization or division of labour (more workers will mean that tasks can be subdivided into
smaller tasks).

There will also be an increase in the internal communication systems (telephone, mail etc.) to
accommodate this expansion. More factory and office space, equipment and furniture will be
required to facilitate expansion.

As the business expands it can take advantage of economies of scale. Economies of scale refers
to the benefits that firms are able to enjoy because of expansion.

Internal Economies of Scale

This refers to the benefits enjoyed by a firm because of its own expansion. These include:

 Technical Economies of Scale - Expanding businesses will need to purchase machinery and
equipment to supply the level of output required. With the use of machines productivity will
rise and the firm will experience technical savings as unit cost of production will decline.
 Marketing Economies – Expanding businesses can take advantage of bulk buying and
receive discounts on raw materials.
 Financial Economies -Larger firms will access loans more easily and at a cheaper interest
rate than small firms since they already have established reputations and adequate collateral.
 Managerial Economies -The employment of experts who will specialize in various
management functions such as marketing, personnel, accounting and production will increase
efficiency and thus output.

External Economies of Scale

External economies refers to the benefits enjoyed by a business because it is part of a well-
organized industry and not because of its own expansion. Thus any businesses whether large or
small can reap these benefits as long as it is part of an industry enjoying these benefits. Benefits
include; government subsidies offered to particular industries, tax holidays and reduced duties on
items imported.

Internal Diseconomies of Scale

A diseconomy of scale refers to the disadvantages arising from the expansion, such as:

1. High Advertising Cost: This becomes a diseconomy when the percentage increase in a firm’s
advertising cost is much greater than the percentage increase in its revenue.
2. High maintenance cost for machinery and equipment.
3. Increased difficulty in controlling the organization.

External Diseconomies of Scale

1. Shortages of Raw materials

2. Decline in the Industry
3. Negative externalities such as pollution can affect businesses

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Internal Growth

 Expanding plant and equipment to full capacity

 Increasing plant size
 Creating or expanding product lines

External Growth

 Horizontal mergers or vertical mergers

 Formation of a conglomerate through the assembly of multiple businesses in the same
industry.
 Takeovers

Impact of growth on:

1. Organisational structure
2. Capital
3. Labour
4. Scale of production (economies of scale)
5. Use of technology
6. Potential for export

Economical and Social Implications of Technological Development

Technological development increases the quality and quantity of output. This results in the
lowering of unit cost of production which may be passed on to consumers in the form of lower
prices. When goods and services become more affordable the standard of living of citizens will
rise.

Developing countries employ both labour and capital intensive methods of production. Labour
intensive industries include banana and craft and capital intensive industries include petroleum
and bauxite.

There are three methods of production:

 Labour Intensive Production

This method of production utilizes mainly manual labour along with a limited amount of
machinery

 Capital Intensive Production

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This method of production utilizes mainly machinery along with a limited number of workers.

 Automation

Automation is the employment of machines in a continuous process of operation. This is the

further stage of mechanization. This production process is carried out automatically with little or
no human involvement. For example, the automated teller machine (ATM).

Mechanisation

This is the substituting of human and animal labour with machines such as robotics and
computers to produce more effectively.

Computer Aided Design (CAD)

Computer aided design is a computer software used in the product design process to produce
designs with greater accuracy, speed and flexibility. Its powerful computer graphics allow
product designers to produce 3-dimensional objects, which can be fully examined and tested
before they are implemented.

Advantages include:

 accuracy
 speed
 it is easier to make adjustments since changes are made on the computer
 reduces cost of the design process

Computer Aided Manufacturing (CAM)

This involves the use of computers in a variety of manufacturing tasks. Computers are used to
coordinate every aspect of production, from design through stock control to production
scheduling and control. Benefits are increased productivity, reduction in waiting time, greater
consistency, greater flexibility, and improved coordination of operations, direct and flexible
control of tools and materials, and continuous flow of operations.

Computer Aided Instruction (Instructional or Teaching software)

Software application designed to instruct users on procedures and methods. It involves self-
paced and interactive instructions with on line testing and feedback. It identifies areas of
weakness and provides remedial work until the learner understands. Teleconferencing is
possible.

Mechanization and Automation results in increased output but reduces the amount of labour
required in the production process. This creates unemployment in Caribbean countries. Workers

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must be retrained for new developing industries such as information technology. New industries
will absorb the fall out of workers from other industries.

Advantages and Disadvantages of Automation and Mechanisation

Advantages Disadvantages
 Increase productive capacity in a shorter  Increased unemployment
time
 Reduce labour cost  High initial investment
 Reduction in defects  High maintenance cost
 Minimal need for supervisors  Technical disruptions
 Increased support to tertiary services  Can only be used for large or standardised
output
 Machines become obsolete and depreciate

Implications of change from labour intensive to capital intensive:

1. Standardised products
2. Increased outputs
3. Greater efficiency
4. Fewer people employed

LECTURE 20
BUSINESS FINANCE

Financial Sector

The financial sector is made up of agencies such as:

 Government financing agencies

 Central bank,
 Commercial banks,
 Mortgage companies,
 Credit unions
 Insurance companies
 Building societies - A building society is a type of financial institution that provides
banking and other financial services to its members. Building societies resemble credit
unions in that they are owned entirely by their members.
 Micro-lending agencies – eg Island Finance
 Unit trust, stock market.
 Development banks (Caribbean Development Bank, Agricultural Development Bank)

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A commercial bank- is a financial institution that provides a range of financial services to
individuals and business clients. They accept deposits and give loans. The bank pays a
percentage to the depositor as interest or gain on the deposit. In essence they borrow a surplus of
funds to lend to those who are experiencing a shortage.

Role of Financial Institutions

 Commercial bank accepts money deposits and therefore provides a safe place for saving
money.

 Offering loans and overdraft to persons who need financial assistance.

 Assisting customers to easily make payments through standing orders, current accounts
and debit cards.

 They also offer investment opportunities such as mutual funds, annuities and stocks and
bonds

Services offered by Financial Institutions

 Commercial banks provide advisory services to clients who wish to borrow a loan to make

investments and persons who wish to purchase securities.

 Safety deposit boxes at the bank are used to store safely items that individuals deem as

highly valuable.

 Selling travellers cheques.

 Credit cards allows persons to purchase items by using funds that the bank makes available.

There is a limit to how much the bank makes available to credit card holders.

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 Offer a variety of deposits- Money can be deposited in a current account upon which

cheques can be drawn or a fixed deposit account where a higher interest rate is earned.

Foreign currency can also be deposited.

 Credit facilities (loans) can be provided through deposits where through using a cash ration

a portion of the deposits are kept in the bank while the rest are loaned.

 Money Transfers (remittance services) from depositors account to another account. This
called a standing order. They also facilitate bank drafts and letters of credit.

 Trustee work - Any individual or company who manages assets on behalf of another. For
example, a bank may hire a trustee to distribute funds from a loan to the borrower.

 Offering settlement services such as authorizing credit card payments

Cheques:

Essential data on a cheque:

 The date, payees name, the amount, the signature, personal cheque account number, other
data (counterfoil, branch number)

Types of cheques:

 Bearer cheques- Paid to the person who bears or presents the cheque.
 Order cheques – Paid to the person that the cheque instructs payment to.
 Open cheque – can be cashed over the counter and can be cashed by the wrong person
 Crossed cheque – can only be paid into a bank account.

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Jamaica Deposit Insurance Company (JDIC).

JDIC works in close collaboration with the Bank of Jamaica (BOJ), the regulatory and
supervisory agency for deposit-taking financial institutions. It receives copies of the Bank’s on-
site examination reports as well as all other information relating to the safety and financial
soundness of insured institutions (Policyholders)

Financial Services Commission (FSC)

 The mandate of the Financial Services Commission (FSC) is to supervise and regulate the
securities, insurance and private pensions industries.
 In doing so the FSC oversees the registration, solvency and conduct of firms and
individuals doing business in the securities and insurance (Life and General) industries.
 The FSC oversees these entities by administering a number of statutes and accompanying
regulations.
 The FSC also handles customer complaints and provides the public with important
financial information

Supervisor of Insurance

To protect the interest of the public, whether as a consumer or third party. This is done through
the monitoring of insurance entities and pension administrators to ensure financial stability and
use of fair business practices while carrying out their business operations.

Administration of the Insurance Act and Regulations

 Licensing of Insurance Companies and Insurance Intermediaries

 Ensure the payment of appropriate annual fees
 Monitor statutory departments and statutory funds
 Review annual financial statements submitted by insurers and intermediaries
 Ensure overall compliance by all licensed insurance entities with requirements of the
Insurance Act and Regulations

Role of regulatory bodies

To monitor, control and guide various industry sectors in order to protect consumers.

Functions of regulatory bodies:

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To enforce regulations and licenses of various financial activities, including depository, lending,
collection and money transmission activities.

Functions of the Central Bank

 The Central Bank has the sole authority to issue notes and coins.

 The Central Bank is a banker to the government as it keeps the government accounts.

 It manages the national debt.

 It is a banker to all banks as commercial banks must keep an account with the central bank.

 A lender of last resort-The commercial banks and all other financial institutions can count on
the central bank for financial assistance.

 It is a financial agent for government. The government uses the Central Bank to carry out its
economic policies. These policies are known as monetary policies.

Relationship between the Central Bank and Commercial Banks

The Central Bank is the head of the financial system. All financial institutions including
commercial banks are regulated and monitored by the Central Bank.

All commercial banks must keep an account with the Central Bank. These balances are used for
cheque clearing purposes between banks. Payments for cheques between banks are set off at
the Central Bank’s clearing house. The Central Bank can also demand commercial banks to
deposit a certain percentage of their total deposits with the central bank in order to control the
money supply. (Setting the cash reserve ratio)

The Central Bank is a lender of last resort and will aid commercial banks when needed. The
Central Bank dictates the interest rate that commercial banks can offer by setting the bank rate.
This is the interest rate set by the Central Bank and the rate at which commercial banks and the
Central Bank do business, e.g. loans offered by the Central Bank to commercial bank.

Direct controls and requests are also issued. These might include the reduction of loans to
particular industries. This could be the form of verbalised encouragement (moral suasion) or
measures such as increased interest rates on certain loans.

Central Bank may demand special deposits from the commercial banks, which are for fixed
time periods. Although these earn interest it means that there is less money for commercial banks
to lend out.

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Strategies to Manage Personal Income

Subsequent to the deduction of taxes and other statutory payments the income earner must
manage his money to maximize its use. He must exercise and develop habits of careful spending
and saving techniques. A good money manager will budget.

1. A budget outlines how much of an individual’s income is to be spent on his various

expenses; it disciples an individual to live within the constraints of his personal income.
The process of preparing a budget involves the record keeping of past expenditures, and
making decision based on these about future expenditures. Priorities must be set to meet
basic needs and a systematic plan for savings to achieve future goals.

2. Financial advising provides financial advice or guidance to customers for compensation.

Financial advisors, or advisers, can provide many different services, such as investment
management, income tax preparation and estate planning.

Sources of Short & Long Term Financing

Short-term capital may be accessed through the money market. Institutions in the money market
include commercial banks, merchant banks, credit unions and discount houses. Borrowers are
required to repay within a short-term e.g. 1 to 5 years.

Sources of Short term financing include:

 Personal sources eg. personal savings, credit cards and redundancy payments
 Trade credits and Promissory Notes
 Unsecured loans (no collateral required) and overdrafts
 Secured loans
 Loans from family
 Loans from government agencies such as NEDCO

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  Advances from customers
 Crowd funding eg Kickstarter, Patreon

Long –term capital may be accessed through building societies, the stock exchange, unit trust
companies and development banks. Borrowers are given a much longer repayment periods e.g.
up to 20 years.

Sources of Long term financing include:

 Shares
 Secured loans
 Debentures
 Loans from government agencies
 Mortgages

3. Savings and Investments

Savings is defined as money set aside or not spent from ones personal income. Money saved is
most effective in an interest bearing facility such as a commercial bank to keep up with inflation
which reduces the value of money over time. Other forms of savings include, the credit union,
insurance and partner (meeting turn, sou sou, box hand).

Investment is defined as methods of increasing wealth. It differs from savings as it involves

risks. Earning from capital invested is usually much higher than interest earned on savings.
Forms of investments include: unit trust companies, mutual funds, the stock exchange and
starting a business.

Types of bookkeeping systems

1. Single Entry - is a method of bookkeeping relying on a one sided accounting entry to
maintain financial information. Used for simplicity.
2. Double Entry - means that every business transaction will involve two accounts (or
more). Both a Debit and Credit entries will be used.

Financial Statements and their purpose

Income statement or Profit and Loss Statement

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Allows owners, shareholders and partners and investors to identify whether or not the business is
profitable. Investors would only invest in a profitable business while owners must justify the
continuation of the business.

Balance Sheet or Statement of financial position

The Balance Sheet illustrates the businesses net worth through its assets and liabilities. If the Net
Assets are significant then there is little chance that the business will fail. Investors and owners
use this statement to assess the performance of a business.

Cash Flow Statement

This statement gives information on the liquidity of the business or its ability to possess and
retain liquid cash for the operation of a business. Liquid assets such as cash are important as
goods and services have to be acquired in order for a business to be successful. If a business cash
outflows are greater than its inflows then this indicates low level of performance for the business.

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 LECTURE 21

ROLE OF GOVERNMENT IN AN ECONOMY

Responsibilities of a Government in an Economy

Governments are appointed by citizens to manage the affairs of their country. Their
responsibilities include:

 Ensuring the security of a state- Government must maintain law and order internally. This
is realized through legislation, the court of justice and the police force. Externally the armed
forces protect citizens against external threats.
 Protection and general welfare of citizens - Government is responsible for the general
health and education of citizens. Welfare programmes must be provided for those who are
very poor and vulnerable.
 As a major employer, the government is responsible for job security of workers and
ensuring that severance benefits are paid to workers should they become redundant. The
government is also responsible for employment legislation to meet the needs of the
workforce eg. Health and safety, equal opportunities, maternity benefits, severance benefits
and general labour laws.
 Management of the economy – Governments are appointed by citizens to efficiently
manage the economy to bring about growth and development. This includes: encouraging
local and foreign investment, controlling inflation, maintaining the foreign reserve (NIR),
curbing balance of payments deficits and achieving high levels of employment.
 Protecting the environment – Sustaining the environment is important to the well-being of
citizens. Ways of protecting the environment include: legislation to prevent further
degradation, zoning to protect wildlife areas from disruption by development of factories,
shopping and residential areas and taxation to reduce the level of pollution by firms.
 Infrastructural Development eg. Creation and maintenance of road networks, bridges,
ports, airports, water and electricity.
 Provision of regulations for business activity – Providing guidelines for the setting up and
operations of a business.

Why protect the environment?

 Preservation of the living conditions of people (Health)

 To protect against global warming and climate change
 To ensure that resources are not depleted (fisheries and forestry)
 To protect against disasters (landslides, hurricanes, flooding)

Ways in which Businesses Protect the Environment

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  Establish business in the zones legally allocated to reduce the impact of noise and air
pollution in residential areas.
 Being part or initiating environmental projects such as beach clean-up and planting trees.
 Use of renewable sources of energy (solar, wind, thermal)
 Use of non-hazardous materials in the production process.

Ways by which Government Regulates Business Activities

Businesses operate within a legislative framework. Some of the laws that govern businesses are:

 Statutory Deductions eg. National Insurance, health surcharge, income tax (PAYE)
corporation taxes.
 Labour laws eg. Occupational Safety and Health, Equal Opportunities, Minimum wage,
Maternity Benefits.
 Environmental Laws eg. Certificate of Environmental clearance and zoning laws.

Consumers must be protected from business owners who are eager to sell without taking into
consideration the well-being of customers. Consumers must be protected from overcharging,
poor quality goods and services and short measurements and weights.

Consumers are protected by legislation delegated to various government agencies. These

agencies include:

1. The Consumer Affairs Commission- aids consumers with redress

2. The Fair Trading Commission- investigates cases of tied selling and misleading advertising.

3. The Bureau of standards – set standards for goods and services to be sold on the market.

4. The Ombudsman- investigates injustices suffered by citizens from dealing with a

government agency or official.

Consumer Protection Laws

 The Food and drugs Act

 The Standards Act
 The Public Health Act
 The Weights and Measures Act
 The Processed Food Act
 The Hire Purchase Act

Hire Purchase Law

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Buyers and sellers must sign the hire purchase contract. The seller must state the cash price,
down payment and monthly instalments and total to be paid. Goods cannot be repossessed by the
seller once the buyer pays up to three quarters of the hire purchase price.

Price controls

Price controls are levied on certain good and services to prevent suppliers from increasing prices.
For example basic food items such as corn meal, flour, rice and sugar.

Zoning Laws

These laws protect the environment by identifying certain wildlife areas that should not be
disrupted by development. Therefore, areas are designated for factories, shopping centres and
residential, away from protected wildlife.

Taxation

Firms that pollute the atmosphere, rivers and seas are charged a tax for the harm caused to the
environment. This forces firms to find methods to reduce pollution to avoid this penalty.

Waste Disposal

This refers to the disposal of hazardous substances, packaging and recycling.

Taxation

A tax is on the individual or business entity. It is a compulsory payment made by individuals and
businesses to the government.

Taxes must be:

 Fair and equitable

 Economical in terms of administrative costs
 At convenient times so as not to interrupt the individual or business functioning
 Implemented with the full knowledge of persons being affected.

Purpose of Taxation

Taxes are mainly used to finance the expenses incurred by government to manage an economy.
These expenses include: health care, education, garbage collection and operating government
business entities. Taxation is also used by government for several other purposes.

 To reduce pollution by taxing offending firms

 To discourage unhealthy lifestyle e.g. a tax on cigarettes

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  To protect local and infant industries by taxing imports
 To achieve greater equality of wealth and income. Revenue from taxation is used to help
the very poor e.g. providing food stamps.
 To improve the balance of payments (BOP) by increasing the duties charged on imported
goods.
 To control spending in an economy thus reduce inflation
 To redistribute income through expenditure on social welfare programmes.

Direct and Indirect Taxes

Direct taxes are paid by individuals directly from income earned or on the value assets owned to
the income tax department.

Types of Direct Taxes

Income Tax

This is a tax on earned income- individuals pay a percentage of their income.

Corporate Tax

This is a tax on the profits of companies

Capital Gains Tax

This is a tax on the proceeds resulting from the sale of assets, e.g. houses, land etc.

Capital Transfer and Estate Duties

This is a tax on the transfer of property (gifts) and on legacies (death duties)

Other Direct Taxes

These include: stamp duties, motor vehicle duties land taxes, etc.

Indirect taxes are paid to the income tax department through the suppliers of goods and
services. These taxes are levied on consumption and therefore are paid by individuals when
purchasing commodities.

Value Added Tax (Ad Valorem Tax)

This is the tax levied on goods as each stage of production. This tax generally is known as a
General Consumption Tax (G.C.T.).

Purchase Tax

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This tax is placed on specific goods at retail outlets. These include gasoline, tobacco, rum etc.

Excise Duties

A tax placed on goods manufactured within a country. This tax is paid by the manufacturer of the
product.

Customs Duties

This is a tax on imports i.e. goods entering the country.

Regressive, Progressive and Proportional taxation

Progressive Taxation
A progressive tax system levies a higher percentage of tax on high income earners compared to
lower income earners. This ensures that higher income earners pay a larger proportion of their
income than lower income earners.

Regressive Taxes
A regressive tax system levies a smaller percentage of tax on higher income earners compared to
lower income earners. This results in higher income earners paying a smaller proportion of their
income in taxes than lower income earners. For example, a purchase tax of 10% charged on a
commodity which values $100 is bought by a high income earner who receives $10,000 weekly
and also by low income earner who receives $1000 weekly. Both income earners will pay
$10.00 in taxes. This $10 represents a much higher percentage of the lower income earner’s pay
which is .01% than the higher income earner which is only .001% of his income

Proportional Taxation

Under this system all taxpayers pays the same proportion of their income in taxes. The same
percentage tax is levied on both high and low income earners. Therefore if the percentage tax
charged is 10% of income then each person will pay that proportion of their income.

Government Assistance Offered to Businesses

The survival and growth of the business sector will reduce unemployment, increase GDP and
foreign exchange earnings. This sector must therefore be supported and encouraged by
government.

 Financing - Government assists local businesses by providing loans at low interest rates.
 Protecting local industries - Custom duties charged on imported goods to protect local
producers
 Tax concessions - Reduced tax rates or tax holidays offered to industries will encourage
production.

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  Subsidies - The cost of production is subsidised to reduce this cost to producers. For
example, a subsidy offered on fertilizer to farmers.
 Promotion - Local and international trade shows as well as general advertisements
promoting business locally and overseas, for example, advertisements encouraging tourist
to visit the region.
 Training - Government agencies set up to provide technical and managerial training.

Research and information centres

Government departments usually conduct market research and are able to provide information to
businesses in terms of potential markets, new technologies, trade agreements business
registration process and the legal framework.

Impact of Social Services Provided by Governments

These services are provided by government to ensure the well-being of all citizens.

Education

An effective national education plan will ensure that the innate skills, talents and abilities of
individuals are harnessed and developed to their fullest potential. High levels of literacy and
numeracy will increase productivity.

Health

The economic development of any nation is dependent upon its population being physically and
mentally healthy. For someone to be productive he or she must be in good health.

Roads and Transportation

Proper Infrastructure such as roads, railways, sea and airports coupled with an efficient
transportation system are important to a country’s economic activities. Roads and transportation
facilitate trade of goods and services.

National Insurance Scheme

National Insurance Schemes protect the elderly and other categories of vulnerable persons within
a society. The elderly have contributed to the development of a nation and must be adequately
provided for when they no longer a part of the labour force.

LECTURE 22

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 TECHNOLOGY AND THE GLOBAL BUSINESS ENVIRONMENT

Business technology - refers to applications of science, data, engineering, and information for
business purposes, such as the achievement of economic and organisational goals. The main
element of technology is the idea of change, and how it can affect business and society.

Role of technology in business:

ICT is considered to be all uses of digital technology that exist to help individuals, businesses
and organisations use information. So ICT is concerned with the storage, retrieval, manipulation,
transmission or receipt of digital data. Importantly, it is also concerned with the way these
different uses can work with each other.

Ways in which technology has influenced banking and commerce:

 Through the introduction of Automatic Teller Machines (ATMs) and Automated

Banking Machines (ABMs) which facilitate the deposit and withdrawal of funds, as well
as other services without having to go into a bank to access teller services. The location
of ATM machines in hotels, petrol stations, malls and supermarkets adds to the
convenience of customers who can transact business without having to wait in line at a
bank.
 The practice of on-line banking which enables customers to access their accounts from
home and other locations using personal computers. This facility enables customers to
check their balances from the comfort of their homes and permits easy and convenient
payment of utility and other bills. Customers with more than one account can also use
this facility to transfer funds from one account to another.
 Through electronic commerce (ecommerce). Using the internet, individuals and
businesses are now able to make business transactions via the World-wide web, without
having to visit a physical brick and mortar store. E-commerce has given rise to many on-
line stores which permit customers to browse for products and pay for them
electronically.

Types of technology:

Traditional

 Productivity tools, for example: -

 Word
 Excel
 Database software: Access
 Presentation software: PowerPoint, Prezi;
 Graphics software: Adobe Photoshop

Specialist applications:

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  Accounting: QuickBooks.
 Computer Aided Design (CAD).
 Management Information Systems.

Digital communication technologies:

Internet and mobile.

E-Commerce and E-Business:

In both cases, the e stands for "electronic networks" and describes the application of electronic
network technology - including Internet and electronic data.

E-commerce covers outward-facing processes that touch customers, suppliers and external
partners, including sales, marketing, order taking, delivery, customer service, purchasing of raw
materials and supplies for production and procurement of indirect operating-expense items, such
as office supplies. It involves new business models and the potential to gain new revenue or lose
some existing revenue to new competitors. interchange (EDI) – to improve and change business
processes.

E-business includes e-commerce but also covers internal processes such as production,
inventory management, product development, risk management, finance, knowledge
management and human resources. E-business strategy is more complex, more focused on
internal processes, and aimed at cost savings and improvements in efficiency, productivity and
cost savings.

Ways in which technology can improve business:

(i) Speed and time;

(ii) Easier storage;

(iii) Improved sharing of information; and,

(iv) Automation.

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Benefits of technology to business:

 Reach more potential customers, develop a business relationship with potential

customers;
 Streamline operations, reduce costs, improve efficiency, maximise profit, minimise
waste, devote talent to core business instead of overhead;
 Provide better service to customers;
 Support better relationships with key partners; and,
 Allow customers to better guide the business.

Consequences of unethical use of ICT:

 Security;
 Privacy;
 Intellectual property infringement;
 Impact on humans; and,
 Distraction.

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 NATIONAL INCOME ACCOUNTING &

INTERNATIONAL TRADE AND THE BALANCE OF PAYMENTS

(Social Accounting and Global Trade)

Factors that determine a Country’s Standard of Living

The standard of living is defined as the level of wealth experienced by a county which is
indicated by the average disposable income of the population, ownership of capital equipment,
the level of research and access to modern technology and the quality and quantity goods and
services enjoyed by citizens.

 Level of goods and services available: goods and services are needed to satisfy the needs and
wants of a society.
 Average disposable income: per capita GNP reveals the average amount of earnings of each
person in an economy.
 Ownership of capital equipment: Capital goods/investment goods are used to create
consumer goods and services locally and for export.
 Access to modern technology: countries with a high standard of living must have access to
modern technology to remain competitive maintain a high productivity level.
 Research and technology leads to innovation and increases production.

Difference between the standard of living and quality of life

Whereas the standard of living is measured by physical quantity (tangible), a country’s quality of
life is determined by the quality of goods and services enjoyed by citizens (intangible). These
include: safety (low crime rates), good diet and nutrition, environmental quality, quality of health
and educational facilities, life expectancy, rate of infant mortality and the access to public
utilities such as water.

Also the standard of living is mainly determined by the per capita income while the quality of
life is determined by intangible subjective factors.

Alternative measures of the Standard of Living

 The Human Development Index (HDI) (Per capita income, literacy rates, inflation)
 Physical quality of Life (infant mortality rate, literacy rates, life expectancy)
 Measure of Economic Welfare (NI + merit goods – demerit goods)

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National Income

The national income of a country is the total income earned by that country from the production
of goods and the provision of services in a given year after deducting depreciation. It therefore
measures the level of economic activity of a country within a year. Note depreciation of assets is
taken into account when measuring national income.

It can also be defined as the total money value of goods and services produced by a country over
a year.

Circular Flow of Income

Businesses produce and households consume. Households owns the factors of production (land,
labour capital and enterprise). Firms must purchase these factors of production to produce.
Wealth flows from one form to another as follows:

Income = Expenditure = Output

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Gross Domestic Product (GDP)

GDP is the total money value of all output produced within a country over a year. The word
‘domestic’ refers to income earned from local production only.

Gross National Product (GNP)

GNP is the total money value of all output produced over one year, both within a country and
from its overseas investments.

Therefore GNP = GDP + overseas earnings by nationals (Net Income from Foreign Assets)

Net Income from Foreign Assets- also called Net Property Income from Abroad. This is
calculated by subtracting payments to foreigners owning local assets from income received
from assets held abroad by citizens. This figure can be positive or negative.

Net National Product (NNP) or National Income (NI)

NB: The definition for national income includes adjustments for depreciation (reduction in
capital stock).

National Income (NI) = GNP- depreciation

Since GNP figures do not accurately measure the standard of living, the following indices may
be used.

Per capita GNP

This is calculated by dividing a country’s GNP by its total population. That is,

GNP

Total population

Thus if a country’s GNP is $40,000,000 and its total population is 5,000, its per capita GNP
would be $8,000.

40,000,000 = 8,000

5000

Thus each citizen enjoys on an average $8,000 worth of goods and services.

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Impact of National Income on Standard of Living and Quality of Life

An increase in National Income is usually due to increased output of goods produced, increased
incomes or increased expenditure. These are all indicators of positive growth in the economy
hence giving an increase in the standard of living. If the incomes are not evenly distributed then
the standard of living of the population will be uneven. Additionally an increase in the incomes
of the population does not mean that their quality lives have improved as access to clean water,
health care and education may have received little or no investment.

THERE ARE THREE METHODS OF CALCULATING NATIONAL INCOME

1. Expenditure Method

• The total expenditure incurred by the society in a particular year is added together to get
that year’s national income.
• Components of Expenditure:
– personal consumption expenditure
– net domestic investment
– government expenditure on goods and services, and
– net foreign investment

The equation for NI using this approach is:

C: Household spending

+ I: Capital Investment spending

+ G: Government spending

= GNP (at market prices)

+ Exports of Goods and Services

- Imports of Goods and Services

= GNP (at factor cost)

- Depreciation

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 = National Income

2. The Income Method: adding factor incomes

• The net income received by all citizens of a country in a particular year, i.e. total of net
rents, net wages, net interest and net profits. (GDP at factor cost).
• It is the income earned by the factors of production of a country.
• Add the money sent by the citizens of the nation from abroad and deduct the payments
made to foreign nationals (individuals and firms) (GNP at factor cost) or Gross National
Income (GNI).

Here GDP is the sum of the incomes earned through the production of goods and services. This
is:

Income from people in jobs and in self-employment

+ Profits of private sector businesses +

+ Rent income from the ownership of land

= Gross Domestic product (by factor incomes)

+ Net Property Income from Abroad

= GNP

- Depreciation

= National Income

We can also add income from Government Activities.

Only those incomes that come from the production of goods and services are included in the
calculation of GDP by the income approach. We exclude:

 Transfer payments e.g. the state pension; income support for families on low incomes;
the Jobseekers’ Allowance for the unemployed and welfare assistance, such housing
benefit.

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  Private transfers of money from one individual to another.
 Income not registered with the Inland Revenue or Customs and Excise. Every year,
billions of pounds worth of activity is not declared to the tax authorities.

3. Product (or Output) Method

The market value of all the goods and services produced in the country by all the firms across all
industries are added up together.

GDP

+ Exports

- Imports

= GNP

- Depreciation

= National Income

• Process
– The economy is divided on basis of industries, such as agriculture, fishing, mining
and quarrying, large scale manufacturing, small scale manufacturing, electricity,
gas, etc.
– The physical units of output are interpreted in money terms
– The total values added up. (GDP at market price)
– The indirect taxes are subtracted and the subsidies are added. (GDP at factor cost)
– Net value is calculated by subtracting depreciation from the total value (NDP at
factor cost).

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 Economic Growth and Development

Economic growth is the expansion of national income. The rate of expansion is usually
measured from one year to the next. Economic growth can be achieved if countries increase their
capacity to produce. It is a quantitative increase in production.

Economic growth can be generated by:

 The discovery of new resources

 The more efficient use of existing resources
 Improvements in technology
 Improved labour efficiency

Negative Growth – This situation exists when there is a fall in productive capacity from one
period to another. It may also describe a failure of the economy to expand production.

Growth without Development- Economic growth can occur without development. While the
economy expands and the National Income increases the poverty and unemployment rates has
increased as well due to unequal distribution of income, corruption and fraud.

Economic Development- This describes qualitative changes in the economy. It refers to

improvements in the standard of living, human capital development and the enjoyment of
freedoms. It is sustained economic growth accompanied by policies that bring about structural
changes such as increase in exportation, decrease in importation, lesser dependence on foreign
aid and important infrastructural development. These changes will allow for higher levels of
national income. Measures of economic development include: Human Development Index,
Infant mortality rate, literacy rates.

Role of Education or Human Resource Development (HRD)

In Economic Growth and Development

Investment in education is important for a country’s economic growth and development.

Education increases productivity as individuals who are trained and knowledgeable will be more
efficient which leads to increased output and increased economic growth. Education is the
process of imparting knowledge, skills, beliefs and cultures to empower and influence behaviour.

The long-term returns to investments in human capital such as; on the job training, coaching,
mentoring and e learning will reduce poverty.

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 International Trade

International trade consists of exports and imports between countries, which should cause an
improvement in people’s living standards through the principle of comparative advantage.

Comparative advantage is the idea that countries benefit from specializing in the production of
goods at which they are said to be more efficient.

It is an advantage for countries to be self-sufficient, but there are reasons why trade must take
place between nations.

Absolute Advantage

The capability to produce more of a given product using less of a given resource than a
competing entity.

For example, consider again Country A and Country B. The opportunity cost of producing 1 unit
of clothing is 2 units of food in Country A, but only 0.5 units of food in Country B. Since the
opportunity cost of producing clothing is lower in Country B than in Country A, Country B has a
comparative advantage in clothing.

Thus, even though Country A has an absolute advantage in both food and clothes, it will
specialize in food while Country B specializes clothing. The countries will then trade, and each
will gain.

Absolute advantage is important, but comparative advantage is what determines what a country
will specialize in.

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Reasons for International Trade

 Lack of certain natural resources to produce essential goods. Oil which is important to
economic life must be imported into countries that do not possess that natural resource.
 Lack of capital, technology and specialist labour to manufacture certain goods on a large
scale. For example, Caribbean countries import machinery equipment and vehicle.
 Differences in climatic conditions, e.g. many tropical countries import grapes and
strawberries as these produce need cool climates to survive.
 Differences in the cost of production between countries. This reason is based on the
principle of comparative advantage which states that benefits will be gained from trade if
countries produce goods in which they have a relative advantage. Therefore, if two countries
both produce cars and coffee but each is more efficient at producing or produces either at a
lower opportunity cost either car or coffee, then trade can take place. The country that is
more efficient at producing coffee should put all its resources into coffee and import cars
from the other country that is efficient in producing cars.
 To earn foreign exchange to pay for imports.
 Promotes necessary political connections between countries

Advantages of Int. Trade Disadvantages of Int. Trade

 Increase utilization of productive  Protection required by local firms

capacity for export

 Increased employment for increased  Dumping of goods by developed

output countries

 Improved standard of living due to  Underdeveloped local industries

increased variety of goods

 Increased quality of goods due to

competition

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 REGIONAL AND GLOBAL BUSINESS ENVIRONMENT

Stages of Economic Integration

1. Preferential trading area – a free trade area or trading bloc giving preferential access to
goods from different countries eg. Tariffs
2. Free trade area – a group of countries eliminate barriers between each other eg. Tariffs
and quotas and may have different policies with members outside the area eg. increased
tariffs.
3. Customs Union- free trade area with a common external tariff for non-members.
4. Common Market- a Customs Union with agreeing to adhere to the same product
regulations and freedom of movement of the factors of production. This is also called the
single market when licences, entry permits and taxes have been removed from trading.
5. Economic Monetary Union – a Single Market with a common currency.
6. Complete Economic Integration- final stage of economic integration; complete merging
of policy making with group decisions made on matters concerning all member countries.

Economic Institutions and Systems

Caribbean Community Common Market (CARICOM)

A common market is an association of countries that have joined together to bring about the
harmonious development, continuous economic expansion and increased stability of the
countries involved. CARICOM was formed in July 1973 when Barbados, Trinidad and Tobago,
Jamaica and Guyana signed the treaty of Chaguaramas. Since then the following Caribbean
countries have joined: Antigua and Barbuda, Belize, Dominica, Barbados, Suriname, Grenada,
Montserrat, St. Kitts & Nevis, St. Lucia, St. Vincent and the Grenadines and Bahamas and Haiti.

Associate members of CARICOM are Anguilla, Bermuda, British Virgin Island and Turk and
Caicos.

Objectives of CARICOM

 Improved standard of living.

 Expansion of trade.
 Joint negotiations internationally.
 Co-ordination on foreign and economic policies.
 Full employment of labour and other factors of production.

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 Economic integration.

Impact on the Caribbean:

 Allow for increased trade between Caribbean countries because of the removal of trade
restrictions such as quotas and tariffs.
 Improved standard of living.

Caribbean Single Market and Economy (CSME)

The CSME was established in 2006. It seeks to transform the common market into a single
market and economy. It was established to deepen the integration among Caribbean states and to
respond effectively to the challenges and opportunities globally.

Objectives of CSME:

 Deepening economic integration.

 Free trade of services.
 Free movement of capital, labour and the freedom to establish business enterprises anywhere
within CARICOM states.
 Widening of membership.
 A common currency/single currency.

Impact on the Caribbean:

 Increased economic growth amongst Caribbean states.

 Reduced cost of goods between member states.

Caribbean Development Bank

The CDB is a regional financial institution. It finances regional projects that contribute to the
economic growth and development of the region. Sectors financed by the CDB includes:
infrastructure, tourism, mining and refining, agriculture, agriculture, manufacturing, health and
education.

The objectives of the Caribbean Development Bank are:

 Supporting regional and local financial institutions

 Assisting borrowing member countries to optimize the use of their resources
 To mobilize financial resources regionally and internationally

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 To support capital markets
 Stimulating growth
 Supporting business activities

Impact on the Caribbean:

 Stimulation of business activity and improve economic growth.

 Maintain economic and social stability.
 Improved infrastructure and social services

The World Bank

The aim of the World Bank is to reduce poverty worldwide. It therefore assists developing
countries by providing loans for projects such as housing, infrastructure and industry. The World
Bank provides long term loans for developmental purposes. It is used interchangeably with the
International Bank for Reconstruction and Development (IBRD). However, the IBRD is only
one of the five agencies of the World Bank.

The five agencies of the World Bank are:

 International Bank for Reconstruction and Development (IBRD) (loans)

 International Development Association (IDA) (interest free loans and grants)
 International Finance Corporation (Private sector investment)
 Multilateral Investment Guarantee Agency (MIGA) (provides insurance on investment)
 International Centre for Settlement of Investment Disputes (ICSID) (Arbitration and
conciliation)

Impact on the Caribbean:

 Stimulation of business activity and improve economic growth.

 Maintain economic and social stability.
 Improved infrastructure and social services

International Bank for Reconstruction and Development (IBRD)

The International Bank for Reconstruction and Development (IBRD) is a global development
cooperative owned by 189 member countries. As the largest development bank in the world, it
supports the World Bank Group’s mission by providing loans, guarantees, risk management
products, and advisory services to middle-income and creditworthy low-income countries, as
well as by coordinating responses to regional and global challenges.

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The IBRD provides commercial-grade or concessional financing to sovereign states to fund
projects that seek to improve transportation and infrastructure, education, domestic
policy, environmental consciousness, energy investments, healthcare, access to food and
potable water, and access to improved sanitation.

Impact on the Caribbean:

 Improved infrastructure and social services

Organization of American States (OAS)

The OAS was established for the main purpose of increasing interdependence and solidarity, and
promoting regional co-operation and the peaceful settlement of disputes among the member
countries. These countries include: North and South America, Canada and the Caribbean.

Impact on the Caribbean:

 Improved international relationships between member states.

World Trade Organization (WTO)

The WTO is an international organization that monitors and regulates trade among the nations of
the world based on trade agreements by member states. The WTO replaces the General
Agreement of Tariffs and Trade (GATT).

Their main aim is to encourage the free flow of trade among nations.

Their objectives include:

 discouraging unfair trading practices e.g. export subsidies and selling products below cost
to gain market share
 settling disputes among members
 environmental protection
 monitoring and reviewing the trade policies
 increasing trade

Impact on the Caribbean:

 Allows for Caribbean states to have greater access to international markets.

 Allows for economic growth
 Improves standard of living.

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International Monetary Fund (IMF)

The International Monetary Fund is an international organization that aims to promote global
economic growth and financial stability, to encourage international trade, and to reduce poverty.

Activities involve:

 Surveillance

The IMF collects massive amounts of data on national economies, international trade, and the
global economy in aggregate, as well as providing regularly updated economic forecasts at the
national and international level.

 Capacity Building

The IMF provides technical assistance, training and policy advice to member countries through
its capacity building programs. These programs include training in data collection and analysis,
which feed into the IMF's project of monitoring national and global economies.

 Lending

The IMF makes loans to countries that are experiencing economic distress in order to prevent or
mitigate financial crises. Members contribute the funds for this lending to a pool based on a
quota system.

Impact on the Caribbean:

 Allows for Caribbean states to access financing for further economic growth.
 Improves economic growth
 Increased institutional strengthening through capacity building and technical advice.

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Economic and Social Problems in the Caribbean

 INDUSTRIALISATION

This refers to business activities such as production and manufacturing on a large scale.
Major heavy industrial activities in the Caribbean are in areas such as oil drilling, natural
gas extraction and bauxite. Problems involve: the disposal of industrial waste, reliance on
primary production, capital intensive nature of activities, high energy costs, and
opportunity cost of investment in these areas.

 UNEMPLOYMENT

Globalization has contributed significantly to unemployment in the Caribbean. With the removal
trade barriers, some industries have not been able to compete globally. The lack adequate skills
that are required for the new industrial paradigm for example, information technology skills have
also contributed to the problem of unemployment.

A high level of unemployment among the young people of the Caribbean may result in various
social problems, as survival may depend on illegal activities.

Types of Unemployment

Disguised unemployment- a worker is working less than the amount of ours in a normal work
week and not seeking additional employment in the remaining hours

Seasonal Unemployment – Persons are employed only when the season for certain types of
economic activities comes around eg. During the Carnival Season.

Casual Unemployment – Refers to persons who work on an on-and-off basis.

Cyclical Unemployment- Unemployment that occurs as a result of the cyclical nature of the
economy. People are laid off during a depression or recessionary period. Unemployment is
reduced during periods of boom.

Technological Unemployment- Unemployment that occurs as a result of the adoption or

implementation of technology or more capital intensive means of production. Increase
automation and mechanisation results in less need for human capital.

Structural Unemployment- Unemployment that occurs as a result of the long term changes in
the economy and results in decrease demand for a good or service eg. Movement away from
agriculture based production to tertiary production.

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Frictional Unemployment- Unemployment that occurs as a result of the period of time between
one losing or leaving a job and subsequently finding one.

Residual Unemployment- Unemployment that occurs as a result of persons not having the
capacity to undertake or engage in employment.

Reasons for unemployment

 firms e.g. multinationals closing down

 lack of investment to create new businesses
 lack of skills training

 POPULATION DENSITY / OVERPOPULATION

A situation where there is an excess of persons living in a defined area.

Population density Refers to the average number of people living on every square kilometre in a
country. The formula used for calculating population density is:

Density of population = Total population

Area (sq. km.)

Increases in population may be caused by:

 Increase in birth rate

 Lower mortality rate
 Migration

Net Natural Increase = If birth rate exceeds the death rate.

Very high population densities can indicate overpopulation. This occurs when the facilities in a
location, are not able to serve the number of persons in that location. This will cause heavy
competition for jobs, schools, health facilities etc. as well as reduction in the standard of living
and increased poverty and crime.

 MIGRATION

Caribbean people migrate to first world countries in search of opportunities such as employment
and education. When skilled and professional workers migrate, Caribbean countries may
experience shortages in critical areas such as health care. Loss of skilled workers from industry
will also retard growth and development. Social problems may arise when children are left in the
care of grandparents and other relatives who have challenges to discipline them.

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  URBANISATION

A situation where persons move from rural areas to settle in cities and towns. Problems
occur in that: The rural- urban drift results in fewer persons being left in rural
communities. This reduces the labour supply in those communities. Urban communities
will tend to become overcrowded.

Government can reduce urbanisation by:

 Develop policies and give incentives to owners to spread industries and businesses
throughout the country and not only concentrated in the towns and cities.
 Develop infrastructure such as roads and water in rural areas.
 Improve rural life to encourage persons to want to continue to live there.
 Require persons who because of living in the rural areas have obtained training, to
stay and develop these areas.
 Loan schemes for rural business owners.

 DEBT BURDEN

This arises from a country’s borrowing to finance deficits. Eventually the country has to repay
the loan with interest and a substantial amount of revenue generated has to go towards financing
this loan from institutions such as the IMF and World Bank. Many Caribbean countries have
high debt- to-GDP ratios. This ratio is the amount of national debt of a country as a percentage
of its Gross Domestic Product. High debt-to-GDP can stifle an economy as a large portion of its
GDP is consumed in debt payment and very little is left for investment in the economy. A very
low debt- to- GDP ratio is desirable for economic growth and development.

 SOURCING CAPITAL AND RAW MATERIALS

While the Caribbean might be rich in certain natural resources such as bauxite, oil and gold the
region lacks other very important resources such as capital and entrepreneurial skills. Capital is
important as it increases production through the use of machinery, equipment and money
invested. The spirit of entrepreneurship is necessary for the creation of new business ideas and
entrepreneurship skills are important for the successful running of the businesses. FDI and
domestic savings can be utilized to raise the necessary capital.

 ECONOMIC DUALISM IN THE REGION

Economic dualism occurs in countries where there exist two opposite economic sectors. One
sector is characterized by development, capital intensive industries, large scale farming and

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technological advancement, and the other sector is characterized by subsistence farming, labour
intensive industries, handicraft industries and simple trading means of survival.

Division in the economy is as follows:

1. Technologically advanced eg. Large scale manufacturing and tourism, Finance,

Insurance, Petroleum, Mining.
2. Technologically retarded eg. Cottage Industries, Small Scale manufacturing, Peasant
agriculture.

Possible solutions to Economic and Social Problems

Access to Foreign Direct Investment (FDI)

Foreign Direct Investments refers to capital investments into factories, machinery and equipment
by a foreign company or an individual. FDI is important for the development of Caribbean
economies as they are challenged by their high debt- to-GDP ratios and increased global
competition for export earnings. Attracting foreign direct investment is a way for Caribbean
countries to obtain capital for growth and development.

FDI can be done in two ways:

1. Selling securities to foreigners or through portfolio foreign investment – Shares are

offered on the international stock market and foreign firms are allowed to buy shares but
does not control the firm.
2. Direct foreign investment – Investors set up their business in the country.

Benefits of FDI include:

 Employment for nationals

 Increased access to global markets
 Introduction of advanced technologies and processes
 Improvement in human resource skills

Disadvantages

 Most of the profits are sent to the foreign country

 In the long run balance of payments will deteriorate
 Foreign investment has the potential to create dualism.

Development of human resource

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Investment in human resources is imperative for Caribbean economies to compete globally.
Improving the value of human resources through education and training will increase the
productive capacity of Caribbean countries.

Development of manufacturing sector

The manufacturing sector creates value added products which increases export earnings for
Caribbean economies. Developing the manufacturing sector therefore will impact on the
potential economic growth of a country.

Methods of developing the manufacturing sector:

 Encouraging Foreign Direct Investment

 Retooling
 Research and development
 Technological advancement

MARKETING
LECTURES 15, 16, 17 and 18

Difference between Market and Marketing

A market is any space within which trade takes place between buyers and sellers for a well
defined product. This space can be a produce market, a shop, internationally between countries
or over the internet.

Marketing is all those activities that facilitate trade. These include activities that identify
consumers’ needs such as market research and those activities that satisfy consumers needs e.g.,
packaging and distribution. Marketing activities therefore support the marketing of goods and
services.

Institute of Marketing definition of Marketing: the management process responsible for

identifying, anticipating and satisfying consumer’s requirements profitably.

Marketing Activities

Market research – the process of gathering information about potential customers.

Packaging – creating a suitable package for product usage and for advertising

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Branding - differentiating the product of a company from other brands and establishing loyal
customers.

Pricing - identifying the right price that will encourage sales

Advertising – methods used such as the media to inform and encourage the purchase of goods
and services

Sales promotion – short-term methods used to encourage consumers to buy during a specified
period

Distribution - methods used to make the product available to consumers. For example wholesale,
retail or internet.

The Marketing Mix

The marketing mix also referred to as the 4 Ps of marketing, categorizes all the various strategies
used in the marketing of goods and services. These categories are product, promotion, pricing
and place. The purpose of the marketing mix is create perceived value for the customer or target
market.

(1) Product this includes product designing, packaging, labelling and branding.
(2) Promotion advertising, public relations and sales promotions.
(3) Pricing includes various pricing strategies and methods.
(4) Place distribution of products.

Market Research

Market research is the gathering, recording and analysing of data to address the marketing
problems of a business. Market research must be specific to the problem of a business. The
marketing problem must therefore be clearly identified so that the appropriate market research
may be conducted.

Types of Market Research

Consumer Research – garners information on consumers’ feelings, thoughts and reactions

towards a company’s good or service.

Product Research – determines customer acceptance of the product whether it may be changes
in an existing product or a new product.

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Distribution Research – used to identify the most suitable channel of distribution for particular
products based on effectiveness of those channels.

Advertising Research- Identifies the most suitable media to present the advertising message.

Sales Research- Research on the target market eg size of market, potential, age, sex, income and
geographic variables.

The Marketing Research Process

This consists of five steps:

1. Identifying or defining the problem.

2. Developing information sources.

3. Collecting the information.

4. Analysing the data by using charts and graphs

5. Presenting the findings.

Reasons for Conducting a Market Research

Market research provides managers with current, relevant, accurate and reliable information
concerning competitors, advertising, distribution and potential and loyal customers. This
information assists managers in making decisions about packaging, product design, pricing,
distribution and advertising.

Consumer taste – Identification of consumer taste will enable the firm to produce goods and
services that will cater to the preferences of the consumer. Eg. Cadbury assortment of chocolates

Competition – Identification of the competing firms will allow the firm to adjust its marketing
strategy to gain a market advantage. Eg. Sell at lower prices than competitors.

Consumer Behaviour – Research on consumer behaviour will allow the firm to adjust their
products and services to changes in the factors that influence behaviour. Eg. Increased
consumption of fish during the Lenten season.

Factors that Influence Consumer Behaviour

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The following factors will cause consumers to either increase or decrease their demand for a
product.

-The price of a commodity

Consumers can afford to buy more of a good when its price falls and less when its price rises.

-The prices of other goods and services (substitutes and complements)

Substitute products are those that can be used alternatively as they satisfy the same need for a
consumer. For example, a weekly shopper may decide to purchase fish instead of chicken
because the price fish has fallen significantly less than the price of chicken. Therefore either fish
or chicken will be adequate for dinner. If by the next week the price of fish rises and becomes
more expensive than chicken then the consumer will opt for chicken.

Complements are goods that are used together e.g. bread and butter. If the price of butter rises
then its demand will fall and so will the demand for bread. Conversely if the price of butter falls,
its demand will rise and so too will the demand for bread.

Income of consumers

As income level rises consumers will demand more goods and services

-Taste and Preferences

A change in consumers taste for goods and services will impact their demand. For example,
changes in fashion will result in a drastic decline in demand for an outgoing fashion and a rise in
demand for what is trendy.

-Quality

A Consumer’s main motivation for the purchase of product may be the quality of the
product rather than the price. Eg perceived higher quality of Apple products

-Expectations of a future Rise in Price

If consumers expect the price of a commodity to rise in the near future, they will try to purchase
more now, before the price increases.

-Brand Loyalty

Brand loyalty will ensure a continuous demand for a product regardless of changes in its price or
the prices of other goods and services.

-Spending Patterns

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Consumer spending surveys compile information on consumer spending patterns based on
income levels. This informs businesses of what goods and services are in demand.

-Changes in the size of the population

A population decline will cause demand to fall in a particular region. One reason for a population
decline in a region is migration.

Types of Market Structures

The term market structure refers to the level of competition experienced by businesses in an
industry. This factor determines the nature of the product sold, how easy it for new businesses to
enter that industry and the amount of information available concerning that industry.

Monopoly

A monopoly exists when only one supplier has control over an entire market for a particular
good or service. Examples of monopoly in Caribbean countries are a single electricity and water
supplier which may be owned by the government or a private company. The monopolist sells a
product for which there are no close substitutes. The monopolist controls the market because it is
difficult for other firms to enter such industries. The challenges include high start-up costs and
difficulty in obtaining strategic raw materials or information regarding business operation. The
monopolist has great market power and can therefore set the price of products sold in the market.

Oligopoly

Oligopoly describes a market structure in which there are few large firms. They offer the same
product for sale and compete aggressively for market dominance. Examples of firms in this
market structure are telecommunications and petroleum companies. Entry into this industry is
also difficult as start-up costs are very high, there is control of strategic raw material and
information is not easily available.

Perfect Competition

This market structure is characterized by many buyers and many sellers of a product. The
product is not unique as it is available from many sellers. Firms in this market structure are price
takers as they cannot sell above the price of their competitors. Firms must accept the market’s
price as there are several competitors. There is perfect knowledge about the business and there
are no barriers of high start-up cost and control of strategic raw materials.

Monopolistic Competition

Similar to perfect competition this market structure involves many sellers. However, this market
structure differs from perfect competition in that each firm sells a branded product. Firms in this
market structure are a monopolist for their brand. There is freedom of entry and exist into the

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industry as there are no barriers such as strategic raw material, very high start –up cost and lack
of information.

How Price is Determined

The price of a good tells us the value of that product in terms of money. A rational consumer will
try to get the greatest value for money spent on goods and services. He will therefore weigh and
compare the prices of commodities before making a decision to purchase.

Prices in a market economy are determined by the level of demand and the level of supply for
each particular product.

The demand for a particular product is the amount that consumers are willing and able to buy at
a given price. The law of demand states that when prices are high demand will fall and when
prices are low demand rises ceteris paribus (meaning all other things remaining unchanged.).

The supply of a particular commodity is the amount that firms are willing and able to supply at a
given price. When prices are high supply will rise and when prices are low supply fall. Suppliers
are willing to sell more at higher prices as profits will be high, and unwilling to sell large
quantities when prices fall because of low profit margins.

The equilibrium price in a particular market is the price at which consumers and suppliers are
willing to trade a certain quantity of a commodity. For example, consumers are willing to buy 55
litres of milk at $3 and suppliers are willing to supply 55 litres at that price. If the price increases
to $4 there will be a fall in demand to 30 litres as some consumers are not willing to buy milk at
this price.

Illustrating Price Equilibrium

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The demand and supply curves are drawn from the demand and supply schedules. Price is
measured on the vertical axis and quantity on the horizontal axis. The demand curve slopes
downwards from left to right and the supply curve slopes upwards from left to right. The
intersection of the two curves indicates the equilibrium price and quantity.

Factors affecting changes in demand

i. Taste and Fashion

ii. Climate and Weather
iii. Changes in real income
iv. Changes in the price of substitutes and complements
v. Expectations
vi. Advertising

Factors affecting changes in supply

i. Weather conditions
ii. Price in factor input
iii. Taxation or subsidy
iv. Technology
v. Prices of related commodities

The Price

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Pricing objectives

 Survival – low pricing

 Current profit maximisation – price to maximise profit
 Market share leadership – Low prices to gain market share
 Product quality leadership – High prices for high quality to cover R&D.

Pricing strategies

 Average cost pricing – total cost/total quantity

 Break even Analysis – Point of no loss or profit
 Penetration pricing – low pricing
 Psychological pricing- High price to gain perceive high value or pricing goods at $10.99
 Predatory pricing – eg. price wars to remove competition
 Limit Pricing – low prices to limit competition

Packaging and Presentation of Goods

Packaging refers to designing and producing the container that holds the product. A good
package must identify, protect and advertise the product. It must also make the product
convenient to use. Therefore products such as toothpaste are best packaged in a tube as it has to
be squeezed out. Milk must be poured from its container. Egg containers are so shaped to hold
them securely.

A package must also sell the product. It must first attract customer to buy. It must provide
information about the product i.e. ingredients, amount of contents, price, the name and address of
the manufacturer and instructions for usage. The brand name is also displayed on the package.

Branding

A brand is any identifiable feature of a product which makes it different from its competitor. A
brand may be a name, term, symbol, design or combination of these. Examples of brand names
include: Avon and Colgate. A brand symbol e.g.

represents the Nike brand. A branded product will increase the value of the product in the eye of
the consumer and enable consumers to recognise a product instantly.

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Labelling – Labels are important features of a product that provides customers with vital
information on grade, product description, ingredients, uses, caution, expiry date, date of
manufacture and storage.

Copyright, Patent & Trademark

Intellectual Property- is any creation of the mind. Songs, books, ideas, machine designs and
other inventions are the intellectual property of the person who has designed or created it.
Copyrights, patents and trademarks are used to protect the intellectual property of owners.

Copyright is a form of intellectual property right that legally protects the creators and innovators
of original works. Copyright protects creators’ expressions such as music, painting, movie,
photograph, writings etc. Individuals who wish to use works that are copyrighted must request
permission from its creator. Copyright law allows creators of original work to be paid for them.
Other forms of intellectual property rights are patents and trademark.

A Patent is the right granted to the inventor of a process, machine, technique, formula or
other composition of matter. It protects innovation. It also excludes others from making and
selling that invention for a number of years. For eg. a franchisee receives a special licence to
reproduce the product and must pay the fee to the franchisor

Trademark legally protects brand names. It gives the seller exclusive rights to use a particular
brand name.

Product Life Cycle

A new product progresses through a sequence of stages from introduction to growth, maturity,
and decline. This sequence is known as the product life cycle and is associated with changes in
the marketing situation, thus impacting the marketing strategy and the marketing mix.

The product revenue and profits can be plotted as a function of the life-cycle stages as shown in
the graph below:

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 Product Life Cycle Diagram

Pre Introduction- Market research and product development

Introduction Stage

In the introduction stage, the firm seeks to build product awareness and develop a market for the
product

Growth Stage

In the growth stage, the firm seeks to build brand preference and increase market share.

 Product quality is maintained and additional features and support services may be added.
 Pricing is maintained as the firm enjoys increasing demand with little competition.
 Distribution channels are added as demand increases and customers accept the product.
 Promotion is aimed at a broader audience.

Maturity Stage

At maturity, the strong growth in sales diminishes. Competition may appear with similar
products. The primary objective at this point is to defend market share while maximizing profit.

Decline Stage

As sales decline, the firm has several options:

 Maintain the product, possibly rejuvenating it by adding new features and finding new
uses.
 Harvest the product - reduce costs and continue to offer it, possibly to a loyal niche
segment.

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  Discontinue the product, liquidating remaining inventory or selling it to another firm that
is willing to continue the product.

Methods of Promoting Sales

Promotion includes all forms of advertising, public relations and sales promotion.

Advertising is the paid presentation of goods or services through the media for the purpose of
encouraging consumer patronage. The media refers to television, radio, magazines, newspapers,
billboards, websites etc.

The Purpose of Advertising

-to attract attention and create awareness

-to inform and educate customers

-to increase sales

-to introduce new products onto the market

-build loyalty with customers

-to differentiate from competitors

Types of advertising

Informative Advertising

Informative advertising is often used when launching a new product, or for an updated or
relaunched product. The objective is to develop initial demand for a good, service, organization,
or cause. It is used when a new product is put on the market on when an old product has been re-
launched or updated.

Informative advertising will tell the consumer and marketplace about the product, explain how it
works, provide pricing and product information, and should build awareness for the product as
well as the company. The image of the product and the company should be compatible and
complementary. There should be enough information to motivate the consumer to take some sort
of action.

Persuasive Advertising

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Marketers use persuasive advertising to increase the demand for an existing good, service, or
organization. The idea is persuade a target audience to change brands, buy their product, and
develop customer loyalty. After the purchase, the quality of the product will dictate whether or
not the customer will remain loyal or return to the previous brand.

Persuasive advertising is highly competitive when there are similar products in the marketplace,
and products are competing for their share of the market. In this situation, the winning product
will differentiate itself form the competition and possess benefits that are superior to, or compete
strongly with, the competition.

Reminder Advertising

Reminder advertising reinforces previous promotional information. The name of the product,
testimonials of past customers, public response, and sales techniques are repeated in the hopes of
reminding past customers and garnering new ones. It is used to keep the public interested in, and
aware of, a well-established product that is most likely at the end of the product life cycle.

Competitive Advertising

Promotes one product over a competitor

Defensive Advertising

Reacts to competitive advertising to maintain market share.

Forms of Advertising

Direct Forms Indirect Forms

Circulars Press: Newspapers, Magazines, Journals
Catalogues Television, Radio, Website, Social Media
Free Samples Cinema Screens
Souvenirs Posters, signs and wallscapes
Word of Mouth Point of Sale: Speciality shop display
Cell Phones Exhibitions, fairs, carnivals
Chat room Mobile Caravans

Sales Promotion

Sales promotion is a marketing strategy that is used to induce customers to buy immediately.

Examples of sales promotion methods are:

a. A sale on items.

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b. Bargain packs, e.g. ‘two for price of one’.

c. Coupons. These are printed in the daily newspaper or magazines. The holders of coupons are
allowed a discount on the items bought.

d. Games, e.g. guessing riddles

e. Contest. Purchasers may receive a prize if they are the winners of a contest.

f. Trading Stamps. These are given to purchases with each item bought. Booklets filled with
these stamps may be returned by customers for goods, services or money in exchange. This
predates the loyalty card.

g. Loss–Leader. A loss-leader is a product that is in high demand and is therefore used to attract
consumers to a business location by cutting its price very low. The business uses a loss leader to
attract large number of persons to its location so that other items will be sold. The profits lost on
this product will be made up on the high sales turnover of the other products that will be bought
along with the loss-leader.

Public Relations

Public relations activities are aimed at creating a favourable impression of a business in the eyes
of the public. Public includes its customers, its suppliers, the government and the surrounding
community. Public Relations activities include sponsorship of local sporting events, press
conferences, and donations to charity.

Techniques of Selling

These are methods used to sell products more effectively by focusing on each customer’s
personal needs. Selling techniques include:

1. Personal Selling

2. After-sale services such as warranty and installation

3. Merchandising

4. Good Customer Relations

Personal Selling

This is the use of sales persons to present and sell goods and services of a firm. Sales persons
promote a firm’s goods directly to a specific consumer. They locate new customers, provide
display services, demonstrate the use of products, deliver goods, collect payments and provide
the firm with feedback

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After Sales Services

Customers are entitled to these services once they have made a purchase. They include delivery,
installation and warranty. These services are free and therefore usually encourage consumers to
buy.

Merchandizing

Merchandizing refers to self-service methods of sale. This is used in supermarkets and

department stores. It allows for a better display of goods and creates a more comfortable
shopping environment.

Good Customer Relations

Building good relationships with customers ensures customer satisfaction, repeat customers and
recommendation to new customers. The sales staff must be trained in the principles of good
customer relations. This entails, listening to customers being helpful and polite.

Terms of Sale

A business establishment may offer its customers various terms to settle accounts i.e the way that
payment are made for purchases.

Cash

This is preferable by most businesses and therefore customers are encouraged to make cash
payments. They are usually offered a lower payment amount for goods bought for cash.

Credit

Customers are allowed to pay at intervals over a short- term, usually one to three months to settle
outstanding balances.

Hire Purchase

Hire-purchase is a long term payment plan e.g. 24 – 36 months. Interest is charged to the
customer increasing the amount owed.

Cash Discount

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A cash discount is a reduction in the price of a good that is paid for immediately or over a short
period of time by a customer. For example, if a an appliance store offers 5% discount on items
bought for cash then 5% of the sale price would be deducted from the actual bill

Trade Discount

A trade discount is the reduction in the price of a good given by a manufacturer or a wholesaler
to a retailer to allow the retailer to make a profit or to encourage bulk buying. Thus if an
appliance manufacturer offers 10% trade discount to retailers then 10% of the catalogue price or
the quoted price would be deducted from the retailers’ actual bill.

Consumer Organizations

Consumerism is defined as the education and the protection of consumers to prevent their
exploitation.

Consumer exploitation includes:

 overcharging
 offering poor quality goods and services
 short measurements and weights

Consumerism is practised by various groups in the economy: the government, private

institutions, and private firms.

Consumerism practiced by the government

This is done through various government agencies. These include:

1. The Consumer Affairs Commission – This institution was set up to disseminate information
about consumer rights and responsibilities as well as provide consumers with an avenue for
redress if they are exploited.

Consumer Rights

-The right to safety

-The right to be informed

-The right to choose

-The right to be heard

-The right to redress

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-The right to consumer education

-The right to a healthy environment

Consumer Responsibility

-The responsibility to beware

-The responsibility to be aware

-The responsibility to think independently

-The responsibility to speak out

-The responsibility to complain

-The responsibility to be an ethical consumer

-The responsibility to respect the environment and avoid waste, littering and contributing to
pollution.

2. The Fair Trading Commission – This agency was set up to administer the fair trading act. It
is concerned with matters such as; Tied selling (marrying of goods), misleading advertising
(untruths about goods and services presented for sale), untrue sale (an announced sale for which
the price of items remain the same).and the use of market dominance to squeeze firms out of the
industry (For example, large firms may drop the price of their goods so low that small firms are
unable to compete with them.)

3. The Bureau of standards -The bureau carries out regular checks on business enterprises to
ensure that goods and services offered for sale meet the standards stipulated by this institution.

Functions are as follows:

 Protect the consumer or user against danger

 Protect public health or industrial health, welfare and safety
 Protect the environment
 To ensure acceptable quality of goods
 Research in relation to international quality standards
 Examination and testing of goods
 Establishment of quality standards
 Collection and publication of data on specification and standards
 Advising on quality control systems
 Certification of goods that meet quality standards

4. The Ombudsman

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The Ombudsman is a government official who protects the rights of citizens who may suffer any
kind of injustice from dealing with a government agency or a government official. For example,
the Ombudsman will investigate the death of a loved one due to the negligence of a public
hospital. He/she has the power to:

 to summon witnesses to appear and give evidence under oath

 to enter and inspect any government department or authority
 to examine any necessary documents

Consumerism practiced by private Institution

-Local consumer groups

-Radio talk show hosts listens to consumers’ complaints

Consumerisms practiced by private firms

-Offering warranty/guarantees on items sold

-Labels carry information on ingredients, nutritional content and health risks that may be
associated with the product.

Links in the Distribution Chain

Manufacturers must find the most efficient ways of getting the goods manufactured into the
hands of consumers.

The channels/chains of Distribution

Channels of distribution refer to the means by which commodities reach the hands of consumers
from the plant of manufacturers. This may be done directly from the manufacturer to the
consumer or indirectly through middlemen such as wholesalers and retailers.

Types of Channels

1. Direct Channel – Manufacturer – Consumer

Goods are bought directly from the producer e.g. purchasing furniture from a manufacturer.

2. Indirect channels (a) Manufacturer – Retailer – Consumer

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Goods are bought from a middle man e.g. a retailer. Retailers display goods, sell in small
convenient quantities and offer credit. They therefore aid manufacturers in moving goods
quickly.

3. Indirect channel (b) Manufacturer –Wholesaler – Retailer – Consumer

The wholesaler is a second muddle man/link on the chain. The wholesaler purchases in bulk
from the manufacturer and stores them in large warehouses. They therefore assists manufacturers
by moving large amounts of items from plants. Retailers purchase goods from wholesalers and
sell them in smaller quantities to consumers.

Wholesaler

The wholesaler purchases goods in large quantities from producers and thus assumes some of the
risk of the manufacturer such as, warehousing goods.

Roles include:

 Breaking bulk for sale to retailers

 Warehousing facilities
 Assumes risk: By buying larger quantities
 Helps manufacturers advertise goods
 Key source of market research
 Maintain price stability by incremental releases of stock onto market

Retailer

They provide goods directly to the consumer. They possess ownership of the goods and bare all
risk of losses should demand fall or taste change.

Role:

 Breaking bulk
 Provides outlets to targeted markets
 Provides credit facilities
 Provides delivery service to customers
 Gives technical advice on product
 Provides aftersales service
 Source of market intelligence

Methods of Retailing

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There are several methods by which retailers can offer items for sale.

Community Shops and Convenient Stores

These locations tend to serve a particular community. Opening hours include all weekend days,
holidays and very late in the evenings. Costs for some commodities that are not government
controlled tend to be higher than other types of retail outlets. Community shops in particular cut
and shape products to suit customers and offer credit.

Department Stores

These stores carry a several lines of goods under one roof. A department store may feature a
clothing department, household items, stationery, hardware etc. It provides convenience to
customers who can pick up several items in one place, and allows the businessman the cost
effectiveness of operating several business entities in one location.

Mail Order

Companies that retail through mail order benefit from reduced operational cost of location and
staff. Since display areas are not required only an office and storage facility are necessary for the
operation of this business. Orders are made from catalogues and goods are delivered by courier
or mailed to customers. This saves time and effort of consumers to visit shopping locations.

E-commerce

Orders are made by customers over the internet from the websites of businesses. Payments are
also made over the internet. Packages are delivered by mail or courier.

Tele- marketing

Tele –marketers introduce the company’s goods and try to obtain orders via the telephone.

Vending Machines

These self-service machines are placed at various locations by their owners. Customers are
required to place the required funds inside these machines and are then instructed on how to
make their choice. The machine then dispenses the product. This type of business is very cost
effective as owners may only pay a fee for locating the vending machine.

Forms of Transportation

Transportation is an integral part of the daily commercial and industrial activities of a country.
Transportation moves raw materials from source to manufacturers and finished goods to
consumers. It also makes possible overseas trade and thus foreign exchange earnings for an
economy.

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There are various modes/forms of transportation that can be used to transport goods.
Commodities may be transported by land, air, sea and pipeline. The mode of transportation will
depend on weight and size of the commodities being transported, as well as the urgency for
delivery and the transportation costs.

Modes/Forms of Transportation

 Land
 Road
 Rail
 Air
 Sea
 Pipeline

Land-Road

Types of transportation include trucks, vans, cars etc. It is the most popular mode of transport as
all types of goods can be transported by road. Road transport is affected by bad roads, traffic
congestion and challenging terrain. Lengthy delays can affect perishable goods such as farm
produce being transported from rural areas to cities.

Land-Rail

This is a cheap form of transportation over long distances. Trains are suitable for heavy and
bulky things such as bauxite. Trains are a very slow mode of transportation.

Air

Types of transportation include cargo planes and helicopters. Because of the high cost involved
with air transportation it is suitable for important documents and expensive items e.g. jewellery.

Sea

Cargo ships and barges are some of the types of transportation used for transporting goods by
sea. Goods such as oil, bauxite and cars are transported by sea.

Pipeline
Pipelines are used to transport commodities such as water and gas. High costs are involved in
laying pipes initially. However overtime it becomes very economical.

Factors that influence Choice of Channel of Distribution

1. Type of product – size, shape, weight, fragility, how expensive

2. Consumers – target market influences the channel

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 3. Quantity to be delivered – fewer goods would require a wholesaler or retailer.
4. Frequency of delivery- more frequent deliveries would mean longer channel.
5. Location – Remote areas require an agent.
6. Budget- Middleman can absorb cost of transportation
7. Speed – eg perishable items may require quick transport by air.

Importance of Transport:

 It brings goods form producers to final consumers

 Carries raw materials and crops to factories
 Helps to minimise inventory holdings and keeps costs down
 It minimises risk of shutdown of factory if raw materials are not available
 Reduces expenses and makes goods more competitive internationally
 It widens the market and demand for the product hence promoting economies of scale
and specialisation.
 It increases employment
 It brings a variety of products to the consumer

Transportation Network Facilities:

 Refrigeration facilities
 Adequate dock spaces
 Adequate parking spaces for aircrafts, lorries and containers
 Handling and moving facilities eg. forklift
 Warehousing space

The unavailability of the above facilities can seriously hamper transportation and distribution
channels.

Problems of Distribution

Distribution locally is challenged by poor road conditions and difficult terrain especially in the
rural areas. Spoilage of perishable goods is very costly and therefore types of transportation used
must be equipped to carry perishable goods.

Problems encountered in Overseas Transportation

The challenges faced in transporting goods internationally will impact foreign exchange
earnings. These challenges include:

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  Inadequate facilities for temporary storage eg. warehousing space
 Inadequate equipment and tools
 Transport system and networks that do not connect to ports or receiving points and
distribution road routes.
 misdirection of goods – goods mistakenly sent to the wrong destination
 Poor communication within the distribution network
 Lack of understanding of customs regulations.
 flight delays
 Strikes by airport and ship port workers.
 narcotics found in containers
 Pilferage- goods stolen in transit.

Measures to mitigate problems of distribution

 careful checks before loading packages for shipment

 contingency plan when strikes occur
 public awareness on the consequences of narcotics found in containers
 making persons responsible for any goods lost in their care
 Properly labelled goods
 Properly educated about laws governing distribution
 Proper planning and implementation
 Implementation of good industrial relations practices
 Ensure adequate funding for equipment and tools
 Government intervention to improve connectivity of distribution networks.

Logistics and Supply Chain

Logistics
Logistics is the flow of funds, goods and information between origin and
consumption. Logistics involves information, material handling, production, packaging, inventory,
transportation, warehousing and often security.

Supply chain operations

Supply chain operations include the systems, structures and processes to plan and execute the flow of
goods and services from supplier to customer.

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Components of Logistics:

Forward Flow
Logistics has been defined as that part of the supply chain process that plans, implements, and controls
the efficient, effective flow and storage of goods, services, and related information from the point-of
origin to the point-of-consumption in order to meet customers’ requirements

Reverse Flow
Logistics has been defined as the movement of product or materials in the opposite direction for the
purpose of creating or recapturing value, or for proper disposal

Inventory control

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Inventory management is to keep enough inventories to meet customer requirements, and simultaneously
its carrying cost should be lowest.

It is basically an exercise of striking a balance between the customer service for not losing the market
opportunity and the cost to meet the same.

Warehousing
Warehousing is the storing of finished goods until they are sold. It plays a vital role in logistics operations
of a firm. The effectiveness of an organization’s marketing depends on the appropriate decision on
warehousing.

Transportation
For movement of goods from the supplier to the buyer, transportation is the most fundamental and
important component of logistics.

When an order is placed, the transaction is not completed till the goods are physically moved to the
customer’s place. The physical movement of goods is through various transportation modes.

Material handling and storage system

The speed of the inventory movement across the supply chain depends on the material handling methods.
An improper method of material handling will add to the product damages and delays in deliveries and
incidental overheads.

Insurance
This provides coverage against physical damage or loss of goods during shipping, whether by land, sea or
air or even during storage.

Activities involved in supply chain operations

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  transformation of natural resources – This involves the extraction of raw materials from the
earth and preparing of these raw materials to be converted to inputs for the manufacturing
process.

 movement and storage of raw materials – This involves the movement of raw materials from
the point of extraction to warehousing facilities where it can be stored and used at later time in
the manufacturing process

 processing of raw materials and components into finished goods – The final product is
eventually made from the conversion of the raw materials to final product eg. Bakery products
such as cakes and desserts.

 storage of work-in-progress and finished goods – After the goods are made they must be stored
before they can be distributed to wholesalers or retailers.

 delivering the finished product from point of origin to the point of destination – this involves
getting the final product from the manufacturer through the distribution chain to the consumer.

THE DISTRIBUTION CHAIN

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Intermodal – is the movement of cargo from origin to destination by several modes of transport where
each of these modes have a different transport provider or entity responsible, each with its own
independent contract.. Multiple carriers contracted to fulfill a single journey.

Multimodal – is the movement of cargo from origin to destination by several modes of transport where
each of these modes have a different transport provider or entity responsible, but under a single contract.
A Single carrier contracted to fulfill a single journey.

Simply put, the key functions of both terminologies are the same, but the differentiation lies in the
contract and responsibility of the movement.

MODES OF TRANSPORT AND THEIR SUITABILITY FOR DIFFERENT GOODS

Air

Advantages
 deliver items quickly over long distances

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 give high levels of security for sensitive items
 be used for a wide range of goods

Disadvantages
• air transport can involve higher costs than other options, and is not suitable for all goods
• flights are subject to delay or cancellation
• there are taxes to be paid in each airport
• fuel and currency surcharges will usually be added to freight costs
• further transportation may be needed from the airport to the final destination

RAIL
Advantages
 Rail transport is a cost-effective and efficient way to move goods.

Disadvantages
 routes and timetables available can be inflexible, especially in remote regions
 can be more expensive than road transport
 mechanical failure or industrial action can disrupt services

ROAD
Advantages
 Low cost
 Extensive road networks
 Possibility to schedule transport and tracking the location of goods
 Safe and private delivery

Disadvantages
 long distances overland can take more time
 there can be traffic delays and breakdowns
 there is the risk of goods being damaged, especially over long distances
 toll charges are high in some countries

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  different road and traffic regulations on some countries

MARINE (CRUISE AND CARGO)

Advantages
• possibility to ship large volumes at low costs
• shipping containers can also be used for further transportation by road or rail

Disadvantages
• shipping by sea can be slower than other transport systems and bad weather can add further delays
• routes and timetables are usually inflexible
• tracking the goods’ progress is difficult
• port duties and taxes
• further transportation overland might be needed to reach the final destination
• basic freight rates are subject to fuel and currency surcharges

PIPELINE
Advantages of Pipeline:

1. They are ideally suited to transport the liquids and gases.

2. Pipelines can be laid through difficult terrains as well as under water.
3. It involves very low energy consumption.
4. It needs very little maintenance.
5. Pipelines arc safe, accident-free and environmental friendly.

Disadvantages of Pipelines:
1. It is not flexible, i.e., it can be used only for a few fixed points.
2. Its capacity cannot be increased once it is laid.
3. It is difficult to make security arrangements for pipelines.
4. Underground pipelines cannot be easily repaired and detection of leakage is also difficult.

DIGITAL DELIVERY

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This is the delivery or distribution of digital media content such as audio, video, software and video
games.[1] The term is generally used to describe distribution over an online delivery medium, such as
the Internet, thus bypassing physical distribution methods, such as paper, optical discs,
and VHS videocassettes.

TRANSPORT DOCUMENTS

IMPORT LICENSES

BILL OF LADING

STRAIGHT BILL OF LADING

ORIGINAL - NOT NEGOTIABLE

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 Bill of Lading Number:

FROM:
1. Shipper / Generator Location 2. Shipper / Generator Mailing
Address (if different)
A Top Generator
567 Oak Drive
Carterville, MI 48222 Phone No.:
Emergency Response Phone: Generator ID (if applicable):

TO:
3. Consignee / Facility Name and Address 4. Consignee / Facility ID#
Best Disposal
123 Main Street MIK23321456
Smithtown, MI 48333 Phone No.:
9. Notes:

DELIVERED BY:
5. Carrier/Transporter Name and Address 6. Carrier Transporter ID#:
A Great Transporter
123 Elm MIK987789987
Jonesville, MI 48222 Phone No.:
7a. 7b. 8. Containers 9. 10. 11.

BASIC DESCRIPTION Total Unit other

UN or NA number, Proper Shipping Name, Hazard Class, Packing Group (if
HM any) No. Type Quantity Wt./Vol.

1. Antifreeze 40 DM 2200 g Gallon

2.

3.

4.

18. Special Handling Instructions and Additional Information:

By signing below, Shipper hereby declares that the contents of this consignment are fully and accurately described above by the proper shipping name and
are classified, packaged, marked and labelled/placarded, and are in all respects in proper condition for transport according to applicable governmental
regulations. As shipper, I hereby certify that the liquid industrial by-product(s) are fully and accurately described on this shipping document, in proper
condition for transport, and that the information contained on the shipping document is factual.
SHIPPER (Print Employee Name) Signature Month Day Year

Carrier / Transporter (Print Driver Name) Signature Month Day Year

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Consignee / Facility Acknowledgement of Receipt (Print Name) Signature Month Day Year

White Copy: Consignee/Facility Original ● Yellow Copy: Consignee to Shipper ● Pink Copy: Carrier/Transporter ● Green Copy: Shipper Initial Copy

AIRWAY BILLS
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ROLE OF TRANSPORT IN MARKETING;

1. Physical Supply of Products

Transportation carries necessary raw materials to factory for production of goods and supplies finished
goods to consumers. It creates place and time utility of goods by transporting from one place to another. It
easily carries finished to the hands of those who need and use them. This significantly increases aggregate
sales of goods. In fact, transport is such a key of marketing, which helps in carrying goods to the scattered
consumers in different places, narrows the gap between producers and consumers and facilitates to
distribute goods to the consumers at minimum cost and time.

2. Specialization

Transportation facility encourages division of labor and specialization on geographical or regional basis.
Transportation cost highly affects localization of industries. Production of goods may center at such place
where the environment is the best and production cost is minimum. This makes maximum utilization of
local resources possible, which is both economically and socially necessary.

3. Mobility of Labor And Capital

Transportation facility provides mobility to labor and capital. If more labor force is available at any place,
transport helps to carry it economically to necessary place. The means of transport carry labors from one
place to another. This encourages labor and capital to use and invest in more productive sectors.

4. Stabilization in Price

Transportation helps to bring stability in price of different products. It transports goods from more
supplied places to scarcely supplied areas. This establishes coordination between demand and supply, and
brings stability in prices. It helps to supply necessary goods regularly to the consumers. Besides
this, consumers get necessary goods at lower prices, because it encourages competition among producers
and makes mass production at lower cost possible.

Importance of transport in domestic, regional and foreign trade.

Beside economic importance, transportation has also social, political and cultural importance. It
establishes social and utility by narrowing geographical distance. It consolidates social and cultural utility
and strengthens national integration. It helps to establish relationship with foreign countries.
Transportation also helps widen knowledge and skill in different sectors. In this way, it helps establish
social utility, uniformity and integrity and strengthens national security.

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IDENTIFY ADVANTAGES AND CHALLENGES OF SUPPLY CHAIN OPERATIONS;

Advantages: better quality of life; wealth creation; new and innovative job opportunities including
entrepreneurship, for example, telemarketing.
1. Expanded sourcing opportunities. A world market offers businesses opportunities to secure a
diverse selection of workers, materials, and products. This larger selection of goods and services
often means the opportunity to select higher-quality or lower-cost options.
2. The opportunity to reach new customers in new markets. Just as globalization offers more
materials and laborers, it also offers new customers in new locations with new needs.
3. More room to grow. New technologies and a shrinking globe mean that it is easier for
companies to grow generally: to produce more, offer more, and sell more. Expanding borders also
means expanding businesses and corporations.
4. More opportunities to save money. Globalization’s biggest benefit is that increases options:
options for source materials, options for workers, and options for transportation. More options
mean more chances to save on spending and increase profits.

Disadvantages: globalization, counterfeiting, product complexity, rapid product obsolescence, regulatory

complexity, management blunders, changing market conditions, natural disasters, and political instability.
1. Large-scale management issues. The opportunity to grow business goes hand-in-hand with the
issue of greatly increased supply chain complexity when it comes to management. Companies
must scale up all aspects of their business as it grows across borders, which can cause problems
that stretch the globe. Inventory issues and distribution issues are high on the list of problems
encountered by going global.
2. Greater risk. Having materials, factories, and customers all over the world means being at the
mercy of global events, from natural disasters, to port closures, to political uprisings.
Globalization requires that supply chain managers have detailed risk management plans in place
and that they are prepared when disaster strikes.
3. Global competition. You are not the only entity with access to supplies, products, and labor
around the world – you now have a lot of competition scattered across the globe. Globalization
necessitates that supply chains are highly efficient and and well-run in order to stay competitive
in a global market.
4. Information collection challenges. With different aspects of your supply chain scattered around
the world, and with an increasingly complex process for getting products to customers, data
collection and oversight can be huge new challenges. While big data analytics is helping some
supply chain managers tackle the issue of information collection, it is still a large problem that
has emerged alongside globalization.
5. Legal issues. Operating across borders means operating in countries that very likely have
different laws and regulations. For example, secret product details may not be safe in China,
where they have less stringent intellectual property laws. In another example, a country where

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 you have a factory may have very different employment laws than another where you have an
identical factory.

IMPACT OF LOGISTICS AND SUPPLY CHAIN OPERATIONS

ON THE COMPETITIVENESS OF BUSINESS

Here are a number of solutions that if used will help a company gain the competitive advantage:
 Shipper Associations / Consortiums: By being a part of a shippers association, a business can
benefit from lower transportation rates due to the competitive negotiations and economies of
scale.
 Transportation Management Systems (TMS): Such platforms allow a business to manage their
data flow more efficiently and allows for visibility of performance and cost. Keeping an eye on
costs, transit times, delivery performance, freight claims, and compliance will allow for strategic
thinking and put a company a step in front of its competitors.
 Auto-Tender Functionality: This feature allows freight to be tendered directly to carriers,
greatly reducing the time spent scheduling a shipment. When set up using a least cost carrier, the
savings combined with the efficiency gain provide a great advantage.
 Advanced Tracking: Visibility and transparency are becoming more and more important in
business. Advanced tracking features have been adopted to give customers real-time information
on where their goods are.

2PL - A second-party logistics provider is an asset-based carrier, which actually owns the means of
transportation. Typical 2PLs would be shipping lines which own, lease or charter their ships; airlines
which own, lease or charter their planes and truck companies which own or
lease their trucks.

3PL - A third-party logistics provider provides outsourced or 'third party' logistics services to
companies for part or sometimes all of their supply chain management functions.

4PL - A fourth-party logistics provider is an independent, singularly accountable, non-asset based

integrator who will assemble the resources, capabilities and technology of its own organization and other
organizations, including 3PLs, to design, build and run comprehensive supply chain solutions for clients.

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IDENTIFY THE PROBLEMS LIKELY TO BE ENCOUNTERED IN DISTRIBUTION;

 availability of airport, harbor and docking facilities

 Delayed shipment,
 spoilage,
 misdirection of goods,
 inadequate warehousing facilities,
 lack of proper security measures,
 industrial unrest
 Ineffective communication.

OUTLINE MEASURES TO MITIGATE PROBLEMS IN DISTRIBUTION

 Government intervention.
 Communication network including use of the internet.
 Insurance.
 Selecting the most appropriate channel of distribution based on product.
 Use handling services with good reputation.
 Careful labelling and documentation.
 Avoid holding large stocks.
 Employing Security Company, use of security cameras.

IMPACT OF INFORMATION TECHNOLOGY ON

LOGISTICS AND SUPPLY CHAIN OPERATIONS.

Global Positioning Systems (GPS)

Logistics management, when distracted driving is an issue, helps fleets locate vehicles to update vendors
and customers regarding shipments. Updated GPS systems are able to accurately direct a driver on a safe
route, without showing roadways that don’t really exist or roadways that are not complete.

Geographic Information System (GIS)

GIS as a tool can be used to map manufacturing, warehouse locations, clients, supplier locations and
distribution centers, showing product supply or manufacturing facilities. Geographic Information Systems
helps in analyzing and representing the information visually, allowing for greater understanding of the
operating environment around the corporate. GIS can be used to analyze the routes. Route analysis helps
us to generate the most efficient route (best route / shortest route) that the vehicle should take between the
company and it supply chain link. Alternative routes can also be generated and analyzed. Alternative

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routes help in rerouting of the supplies in case of problems (either man –made or natural) on one route.
GIS helps in identifying the locations of new depots and warehouses based on the factors like source of
incoming materials and the target market to which the stocks will move that is the different links in the
supply chain.

Portnet
The National Single Window for Foreign Trade Procedures, this is a computer tool which enables the e-
processing of authorizations, permits, certificates, customs documents and other deliveries by the
competent organizations of the State, to undertake specific import and export operations. The developed
system guarantees the technological and legal security of different documents upon the integration of a
digital signature and e-payment.
Benefits of Portnet
 Increasing the efficiency of the logistics chains of economic operators and public and private
service providers.
 Speeding up cross-border movement of exported and imported goods
 Providing an environment favorable to the competitiveness of economic operators with the
possibility to deliver just in time.
 Reducing uncertainty regarding timeframes and logistic costs.
 Improving business climate, good governance and increasing transparency in company-
administration relationships.
 Simplifying and speeding up procedures and formalities of the entry and withdrawal of goods.
 Improving the traceability of operations at any time, anticipation and planning capacities due to
the quality and good flow of information.
 Saving paper costs. ·
 Saving costs of transports and archiving documents. ·

Telemarketing, e-commerce
 Increasing transparency into all operations through the internet and mobile devices.
 Omni channel retailing, keeping customers involved in management decisions and reducing
downtime by using all the resources of the company to fill more orders.
 Enhanced reverse logistics, increasing customer service and giving warehouse managers a means
of handling returns regardless of their origin.
 Automated inventory systems, ensuring stock levels are appropriate, and self-optimizing slotting
systems that can tell warehouse managers what needs to be moved, as well as when and where.

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Global logistics providers such as Fedex, DHL, and Amazon Logistics
Global logistic providers now allow for logistical services to be provided at a much lower cost than in
previous decades and encourages businesses to outsource their logistic needs to these global providers.
These firms have enhanced their technically capabilities and economies of scale to offer global logistical
services at competitive rates. They have also utilized efficient systems that would for large scale, complex
logistical task to be undertaken with relative ease.
Logistics Hub
A Logistics Centre is the hub of a specific area where all the activities relating to transport, logistics and
goods distribution – both for national and international transit – are carried out, on a commercial basis, by
various operators.
Logistics hubs, for example, Jamaica is a premier logistics node within the Americas set up to capitalize
on the trade and business opportunities that will emanate from the expansion of the Panama Canal.
With strategic investment and global partnerships, the Jamaica logistics hub will include:

 maritime and air cargo logistics hubs;

 strategic storage, handling and processing points for bulk commodities;
expansive special economic zones facilitating assembly, warehousing, sorting, distribution and other
value-added services, particularly for industries catering to time-sensitive and high-value cargo;
 aviation-related maintenance repair and overhaul, ship repair and dry-docking;
 a robust digital network to support efficient global value chain tracking and tracing as well as e-
commerce operations.

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