CHAPTER I

CONCEPT OF ENTREPRENEURSHIP

Entrepreneurship and Patriotism

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

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

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

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

Entrepreneurship

Production of goods and services

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

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

Entrepreneurship distinguished from Intrapreneurship

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

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

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

RELATIONSHIP BETWEEN ENTREPRENEURSHIP AND PATRIOTISM

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

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

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

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

Perception of opportunity or opportunity seeking

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

Moderate risk taking

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

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

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

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

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

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

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

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

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

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

ROLES OF SMALL AND MEDIUM ENTERPRISES

What is a small business?

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

REASONS FOR CONTINUED SURVIVAL OF SMALL FIRMS

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

SURVIVAL STRATEGIES

[Link] Spirit – This is the spirit of people who value independence and who
probably make a greater contribution to the economy by running their own businesses than they
would be if submerged in larger organizations.
[Link] and Geographically Dispersed Markets – These are best served by small firms.
Moreover larger firms are often not interested in the production of customer made goods.
[Link] of important service – Small firms provide unique services than those given by
large firms by concentrating on their main tasks and customer needs.
[Link] for important innovations – Managers of small firms being closer to the market
than top managers in large firms are quicker to spot and appreciate the significance of new
development. Small firms are more flexible and often more amiable to their clients than large
firms.
[Link] Intervention – It gives assistance to small firms especially those which are just
establishing themselves through Ministries of Youth, Small to Medium Enterprise and Higher and
Tertiary Education.

OTHER STRATEGIES

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MICHAEL PORTER’S THREE (3) GENERIC STRATEGIES

Michael Porter proposed the following three generic strategies as follows:

[Link] cost leadership – The business works hard to achieve the lowest production and
distribution costs so that it can price lower than its competitors and win a large market share.
Firms pursuing this strategy must be good at engineering, manufacturing, purchasing and physical
distribution.
[Link] – This concentrates on achieving superior performance in an important
customer benefit area valued by a large part of the market.
The firm cultivates its strengths that will contribute to the intended differentiation. That’s quality
seeking leadership must make products with best components, put them together expertly, inspect
them carefully and effectively communicate their quality. For example Econet Wireless has
established itself as a technology leader in cellular networks by introducing various services than
its competitors.
[Link] – The business focuses on one or more narrow market segments. The firm gets to know
these segments intimately and pursues either cost leadership or differentiation within the target
segment.

ROLES PLAYED BY SMALL FIRMS TO THE ECONOMY

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

WHY SMALL BUSINESSES FAIL?

[Link] Incompetence – In most new businesses management inexperience leads to poor

decision making and problem solving. Money, time, personnel and inventory need to be
effectively managed if a small business is to succeed. Insufficient inventory level result in
shortages and stock outs causing customers to be disillusioned and not to return.
[Link] Financial Control – Small businesses experience a lot of money related problems such as
insufficient capital for start up and continuous cash flow obstacles.
[Link] Location – Too often most businesses are located without proper study and
investigation.

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[Link] to Plan – The entrepreneur must plan carefully and adjust completely to potentially
new and disruptive situations. Failure to plan weakens the entire company and usually manifests
in two ways ie lack of strategic plan and unplanned expansion.
[Link] Attitude – A number of obstacles to success may arise from the attitude of a small
business manager. He must be prepared to work hard and make sacrifices. Success requires hard
work and a lot of it.
[Link] – Hostile environment ie political, economic, social, technological and legal

Government Entrepreneurship initiatives

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

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

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

SOURCES / METHODS OF FINANCING

1. Personal savings – Sole traders and partnerships rely on their own resources to finance
their businesses. These sources are usually their personal savings. The savings may be in
form of insurance policies, or money kept in a deposit or savings account or pension.
2. Borrowings From Friends and family members – Sole proprietors and partners may
borrow money from their relatives and friends. If you're lucky, friends and family
members might be the most lenient investors of the bunch. They don't tend to make you
pledge your house, and they might even agree to sell their interest in your company back
to you for a nominal return.
3. Hire- purchase – Not all business owners go into business when they have enough
money. For this reason, business use hire purchase to acquire capital assets such as land,
furniture, fixtures, fittings and motor vehicles. Hire purchase is way by which a hired
property becomes the property of the hirer after a certain number of payments.
4. Leasing – Also known as Smart Leases. Leasing is another way of hiring. In a lease, the
hirer uses an asset for a certain period of time in return for a payment. Unlike hire
purchase, the hirer never becomes the owner of the asset. Thus a lease to firms. Leasing
enables small businesses to acquire the latest equipment without buying it outright.
5. Bank loans – Banks are like the supermarket of debt financing. They provide short-,
mid- or long-term financing, and they finance all asset needs, including working capital,
equipment and real estate. This assumes, of course, that you can generate enough cash
flow to cover the interest payments (which are tax deductible) and return the principal.
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 6. Customers – Advance payments from customers--assuming the terms aren't too onerous-
-can give you the cash you need, at a relatively low cost, to keep your business growing.
Advances also demonstrate a level of commitment by that customer to your operation.
About half of the world-beating entrepreneurs were funded by their customers. This
strategy allowed them to grow faster and with limited resources, and to operate with
relative impunity with respect to their investors.
7. Suppliers/Vending – His suppliers may give credit facilities by supplying him with
goods in advance and then allow him to pay later after making sales. Thus, your
financiers do not control your growth; you do. Just be sure not to enslave yourself to a
handful of powerful suppliers in the process.
8. Government – Through various ministries such as Small To Medium Enterprises,
Ministry of Youth, Indigenisation and Economic Empowerment and Higher and Tertiary
Education under the GEPP program to most college leavers.
9. Finance Houses – Finance Houses are involved in the business of hire purchase, credit
sales and leasing. Examples of finance Houses are Standard Chartered Finance House,
Scotfin, Fincor and UDC. Finance companies raise their fund by borrowing from
commercial banks and merchant Banks, discounting Bills and by advertising to the
Public.

FACTORS AFFECTING THE LOCATION OR SETTING UP OF A BUSINESS

Capital requirement
The new entrepreneur should raise enough capital for the new business, hence the following
sources of finance may be considered: Commercial Banks through acquiring loans, personal
savings, and credit finance Houses, etc.

Customers/ market
Entrepreneurs should consider the market for the product. Therefore, the new entrepreneur should
undertake market research so as to establish the possible customer s or market.

Government Policy/ Political

This involve the political influence and the power struggle environment consisting of laws,
Government agencies and pressure groups that influence and limit various organisations and
individuals in a given society also affects entrepreneurship. The
Government often sets up parameters/regulations for entrepreneurial development.

Suppliers/ Raw Materials

These are players in the Entrepreneurial Environment, whose main function is to provide the
resources needed by the company to produce goods and services. The entrepreneur should watch
supply availability, shortages and delays, etc.

Labour Supply
The new entrepreneur should be able to provide both the skilled and unskilled workers so as to
boost the production of the company depending on area of need.

Communication
Communication lines are very important in sense that these facilitate the movement of raw
materials from the areas of production to the company and to the markets. The communication
lines to be considered could include proper roads, railway lines, air transport, sea transport, etc.

Relevant Technology
Technology and new markets also influence the Entrepreneurial Environment. Company that does
not keep up with the technological changes are often overtaken and find their products outdated
and soon become s mall players in the big game.

Distributors And Intermediaries

These help the entrepreneurs to promote, sell and distribute the goods to the final buyers. Direct
market out reach is often difficult to new entrepreneurs and the business environment has these
two players as stakeholder s in developing small ventures.

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Competitors
Greater customer satisfaction is a major aspect in entrepreneurship development. The marketing
concept in entrepreneurial development stresses that to be successful, a company should provide
Greater customer satisfaction and the entrepreneurial environment therefore calls for strategies in
marketing, strategies to shrug off competition and gain competitive advantage through
positioning oneself strategically in the minds of the customer the marketing mix often breaks this
barrier in the entrepreneurship environment.

FORMS OF BUSINESS OWNERSHIP (BUSINESS ORGANISATIONS)

Objectives

By the end of this unit students should be able to;

➢ Discuss the various types of business organizations in Zimbabwe with regards to their
formation, operations and legal aspects.
➢ apply the principles of management in running businesses
➢ describe the procedure for business registration
➢ Outline the advantages and disadvantages of each form of business.

Starting a business

So many people aspire to be business owners, but several questions have to be considered
before deciding to start a new business. This chapter is going to focus on the various forms
of businesses with regards to their formation, operation and legal aspects in Zimbabwe.

Forms of business
A form of business relates to the legal status of the business. The common forms of businesses in
the private sector are;
➢ sole proprietorships
➢ partnerships
➢ co-operatives
➢ limited companies

1. Sole proprietorship/sole trader

It is a form of business where one person or family provides the permanent capital and in return
retains full control of the business and enjoys all profits. It is possible that the sole trader employs
other people but normally family labour is provided.

Capital contribution
A sole trader must accept that ultimately source of capital for his business is himself (personal
savings- e.g. from salaries, pensions etc) and or borrow from friends and relatives. Any loan
capital he raises will be repayable by him and the only security he can offer must of necessity be
from his own assets. Thus little capital may be raised.

Formation
It is simple to form and there are few legal requirements. One needs to develop the purpose of the
business and then apply for a Trading license to the local authority stating the purpose of the
business. Once the trading license is issued, one needs to get registered with the relevant ministry
e.g. if one wishes to start a tuck-shop, he is required to register with the ministry of Small to
Medium Enterprises and Industry and Commerce.

Liability
The business has no separate existence from its owner. Business property and personal property
are inseparable i.e. if the business fails and the proprietor is unable to pay its debts (which are his
debts) he faces the threat of insolvency and the loss of his property whether or not it is concerned
with the business. Thus, the liability is unlimited; creditors can go on to sell personal assets of the
owner to cover up for the business debts.

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Management and control
The business is managed by the sole trader himself although he may hire someone. Nevertheless,
the owner is responsible for the day to day running of the business.

Continuity of business
The business lacks perpetual succession i.e. it lacks continuity. The death of the owner or active
person may lead to collapse.

Advantages of setting a sole proprietorship

1. Decision making is done quickly as the sole trader does not have to consult anyone.
2. Profits are not shared, thus, the sole trader enjoys all the profits by himself.
3. There is privacy of business affairs- no need to disclose business affairs.
4. It is simple to set up because there are few legal formalities involved.
5. There is freedom in decision making to the owner.
6. There is personal control of staff and customers.
7. Little capital is required to set up as compared to limited companies.

Disadvantages
1. It may be difficult for the sole trader to expand because of lack of capital.
2. Most of them cannot raise adequate capital since cannot access loans because of lack of
collateral security (limited sources of finance).
3. Decision making and management may be inefficient and ineffective due to lack of
consultations as it is a one man band business.
4. Success depends on the owner’s energy and fitness.
5. The owner is fully responsible for decisions and debts of the business.
6. Lacks continuity in the death of the owner.
7. It can be difficult for the sole proprietor to leave the business as there is no one left to run
the business in their absence.
8. Little capital is raised.

2. Partnerships
It is a commercial undertaking set up and run by at least two people and not more than twenty,
with the objective of making profits and share profits and losses.

Capital contribution
The partners who are the owners of the business contribute capital. A partnership makes it
possible to share the risks of the business. (In exchange for sharing the profit) with one or more
people who are prepared to contribute capital or services. Raising of capital present greater
opportunities than for a sole trader as new partners (bringing new capital with them) may be
admitted when additional capital is required, but it must be appreciated that a partnership does not
offer potential investors the attractions of transferable shares and perpetual succession.

Formation
Any two people and not more than twenty can form a partnership as long as they contribute
capital towards the project. Persons wishing to form a partnership may agree verbally or orally.
However, it is a good idea to develop a partnership deed in case of future.

Partnership deed
It is an agreement between partners concerning their business. It contains the following;
a) nature of businesses
b) date of commencement
c) amount of capital each partner brought into the venture
d) method by which profit and losses are to be shared
e) voting rights
f) the role of each partner in the business
g) duration of the partnerships and methods of dissolving the partnership
h) arbitration procedure if partners cannot reach agreement
i) authority to sign contracts etc
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After the partners have agreed, they may proceed to apply to the local authority for a trading
license. Once the business license is issued, the partners need to register with the relevant
ministry e.g. if partners wish to set up a phone shop, they need to register with the Ministry of
Transport and Communication. This completes the registration process.

Management and control

Partnerships are controlled by an Act of Parliament called The Partnership Act. Each partner is a
manager of the business although the partners may choose a partner with managerial expertise or
hire outsiders to do the job. Partners are expected to consult each other when it comes to
management and decision making. There are three kinds of partnerships;

i. Active partners
They take active role in the day to day management and decision making in the business
other than just contributing capital.

ii. Sleeping/ Dormant partners

They just contribute capital and do not take an active role in the management and decision
making in the business.

iii. Norminal partners

Lends his name to the partnership but gives no other support.

Nevertheless, each partner is the agent of the partnership. For this reason, the law imposes on
partners a duty of the utmost good faith towards each other.

Liability
The sharing of the losses of the business is effective only between the partners since each partner
is jointly and severally liable to third parties for the full debts of the business and the only way of
limiting this liability is by setting up a limited partnership in which the dormant partner takes no
part in the running of the business. If the business becomes insolvent, the personal property of the
partner is at risk because the sequestration of the partnership estate necessarily involves the
sequestration of the personal estates of all the parties other than the dormant partners. However, if
the dormant partners take active part in the running of the business, all protection is forfeited or
lost and the dormant partner is then liable to the same extent with the active partners.

The active partners are liable in full to the creditors for the business debts.

Continuity of business
There is lack of continuity if one partner dies or is incapacitated, i.e. a partner, whether active or
dormant who wishes to withdraw cannot simply sell his or her stake and technically his
withdrawal involves a dissolution of the partnership, although by agreement of all concerned the
dissolution can be arranged on the basis of retiring partner selling his stake to a new partner.

Advantages of partnerships
1. Better decisions may be made than the sole trader since partners consult each other and
share experiences and ideas.
2. liability, losses and risks are shared unlike in a sole proprietorship
3. More capital may be contributed.
4. It is easy to form since formalities are few.
5. There may be division of labour due to diversity of expertise.

Disadvantages
1. Partners have unlimited liability except for the limited partners or sleeping partners.
2. Decisions may take long before they are implemented as partners need to consult each
other.
3. A partnership lacks continuity.
4. Profits have to be shared.

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 5. One partner can make contracts on behalf of others which may lead to all partners losing
their capital.
6. There may be conflict of interest between partners.
7. Can’t appeal to the public for capital, therefore, can’t raise huge capital necessary for a
big business concern.

3. Co-operatives
Formation under co-operatives act chapter 24:05
This is a form of business where at least ten members have a voluntary agreement to contribute
capital and work together as equals towards the achievement of a stated common goal.

Capital contribution
Every member contributes capital; therefore, it is possible to raise large amounts of capital.
Membership is open to anyone and every member must each have at least one share.

Organization and management of registered societies

Members of the co-operative elect a management committee. Subject to the co-operatives Act,
every member has the right to attend and vote at all general meetings. Notice of general meetings
should be given in writing or any other way decided at the first general meeting or specified in the
by-laws.

Objects of societies
Every society shall in its operations have regard to the need to attain the following objects;
➢ promoting the economic and social interests of its members in accordance with
government policy
➢ performing any economic or social activity in the interests of its members
➢ Participating in the overall economic and social development of the nation by increased
production, improvement of supply and marketing channels.

Co-operative principles
Every registered co-operative shall operate in accordance with the following principles;
➢ its membership shall be voluntary and open to every person who meets the requirements
for membership in terms of society’s by-laws
➢ one member one vote in general meetings irrespective of the number of shares held by a
member
➢ services to be rendered by the society mainly to its members
➢ surplus shall be allocated to the reserves or subject to the Act, distributed or credit to
members only in proportion to the business done with the society
➢ Education and training facilities should be provided to members and prospective
members so as to improve their economic well being.

Formation and registration

A register of Co-operative societies is maintained by the Registrar of Co-ops, which shall enter all
such particulars in relation to the registration and provisional registration of societies and their
by-laws.
Any society which has as its object the promotion of the economic interests of its members or
other societies in accordance with co-op principles may be registered with the registrar of co-ops.

Provisional registration process of a co-op

a) enter in the register
i. the name of the society
ii. the economic sector in which it is to operate
iii. the terms and conditions, if any, imposed on registration

b) forward to the society

i. a certificate of provisional registration
ii. a copy of the by-laws of the society provisionally registered by him
iii. A copy of the Co-ops Act and regulations.

11
 c) Direct the society to take all necessary steps to comply with the requirements for
registration within two years.

If the registrar is satisfied that the society which applied for registration complies with the
requirements for registration and that its proposed by-laws are in accordance with the Act, he
shall
a. enter in the register
i. the name of the society
ii. the economic sector in which it is to operate

b. forward to the society

i. a certificate of registration
ii. a copy of the by-laws of the society as registered by the registrar
iv. a copy of the Act and any regulations made in terms of the Act and

c. Cause notice of the registration to be published in the gazette.

Every society shall on registration be a body corporate with perpetual succession and in the name
under which it is registered, be capable of holding property, entering into contracts, of suing and
being sued and subject to the Act, of performing all other acts that corporate bodies may by law
perform

Examples of Co-operative Societies in Zimbabwe

- Mashco
- Farmers co-op

Advantages of co-operatives

1. losses are shared amongst the members unlike in a sole trader

2. enjoys limited liability if formally registered
3. source of living for most people
4. better decisions can be made since members consult each other
5. more capital can be raised because more members are involved
6. benefits of economies of scale, e.g. . bulk buying
7. members can afford assets as a group beyond the reach of individuals.

Disadvantages
1. conflict of interest between members may arise
2. profits have to be shared between members
3. Individual members lose their independence as they are bound by the rules and decisions
of the co-op.
4. Slow decision making because of consultations.
5. management is often underpaid and unskilled
6. after the initial enthusiasm has worn off, members may not work hard as for the co-op as
they would for themselves
7. Profits are shared in proportion to one’s spending in the venture i.e. the more you buy the
more dividends you may get.

4. LIMITED COMPANIES

Before looking at the different types of companies and their suitability for different types of
business, it will be as well to consider the characteristics that are common to all companies
created under the Companies Act Chapter 24. Section 18(2) of the Act sums up the characteristics
by saying that from the date of incorporation a company becomes a body corporate with perpetual
succession.
➢ As a corporate body accompany is a separate legal person in the eyes of the law, separate
from its shareholders and its directors
➢ Its assets and liabilities are equally separate from those of its members and directors;
➢ So the members may limit their own liability (s8)and

12
➢ The company may incur debts which, in the absence of fraud, neither the shareholders
nor the directors are liable to pay.

This fact alone makes a company particularly suitable for business involving an element of
risk and gives it opportunities for raising capital that are not open to a sole trader or a
partnership, The company can borrow on the security of its own assets, can borrow from
shareholders and directors. It can attract equity by offering shares on which dividends are
payable out of the business. There is also the element of perpetual succession; a change of
members have no effect on the legal personality of the company. Transfer of shares is simple,
which is an attraction to investors

There are two types of companies

1. Private Limited Company ((Pvt) Ltd)

A (pvt) ltd company id defined by the company’s act as one which by it’s articles restricts
the right to transfer its share, limits the number of its shareholders to fifty (50) excluding
employees and prohibits any invitation to the public to subscribe for its shares and
debentures.

Capital contribution
Capital is raised by selling shares privately e.g. to family and friends. Shares are not
advertised or traded on the Zimbabwe Stock Exchange (ZSE) market.

Liability
Shareholders enjoy limited liability- they do not pay business debts from their private
personal property if the business fails.

Management
Shareholders appoint directors who run the company on their behalf. Thus, the directors
are responsible for the day to day running of the company but are accountable to the
shareholders.

Formation
Any two people and not more than fifty can form a (pvt) ltd company. In order to become
a legally registered (pvt) ltd company, the promoters must prepare the following legal
documents and send them to the registrar of companies. The following should be
observed;
1. Lodge an application to the Registrar of Companies by way of filling in the following
documents and submit them to the registrar of companies.

a. Memorandum of Association
It sets out the company’s constitution i.e. how the firm will relate with the outside
world (external stakeholders). It thus contains the following;
➢ Company name
➢ Its registered office and address
➢ Objectives of the company- the purpose for which the company has been
formed
➢ Statement of limited liability
➢ Maximum number and value of shares

b. Articles of Association
Contain the internal rules of the company. These include
➢ Appointment of directors
➢ The rights and obligations of directors
➢ Procedures for calling for a meeting
➢ Borrowing powers of the company
➢ Names and addresses of shareholders
➢ Procedures for selling shares
➢ Procedure for calling for board meetings
➢ Distribution of profits
13
Provided its articles of association comply with s29(1) and it complies with those articles s(30),
the company is entitled to a number of privileges which include;
• Its name must end in (‘private’) limited s9(1) which may be shortened to (pvt) ltd for
business purposes
• It may commence business and exercise its borrowing powers immediately upon
registration without using a prospectus
• Need not file its annual accounts, auditor’s report or directors report with its annual
returns
• Need not hold a statutory meeting or issue a statutory report
• Need not appoint an auditor
• Etc

After the two documents have been complied and send to the registrar of companies, the registrar
will carry out a name search to find out if
a. The name is not being used by another company
b. The name is not derogatory
c. The name does not provoke others

If satisfied the registrar will issue out a Certificate of Incorporation- which establishes the
company as a separate legal entity and the company can commence business soon after
registering with the relevant ministry

Advantages of Pvt Ltd

i. Enjoys limited liability
ii. Enjoys perpetual succession
iii. More capital can be raised from the shares sold to at least two persons
iv. Limited liability attracts capital since property is safeguarded
v. The company can own assets and properties
vi. Since management and control are separated, experts can be hired to run the company
vii. The affairs of the company are private and accounts need not be made public.

Disadvantages
i. Complex legal formalities are involved in the formation
ii. Shareholders have less direct control over the business
iii. Conflict of interest may arise between shareholders and management
iv. The shareholders can only transfer share with the consent of other shareholders, thus,
restricting free share movement.
v. Not allowed by law to advertise shares and so cannot raise a lot more capital like a plc

2. PUBLIC LIMITED COMPANIES (PLC)

It is formed by at least two people but with no upper limit on the number of
shareholders. Being entitled to none of the privileges of a pvt ltd company, a PLC is not
only more expensive to run than a pvt ltd company, but offers greater protection to
shareholders and is therefore appropriate for a business which needs to raise capital from
the public. By obtaining a stock exchange listing, a PLC can make its shares more readily
transferable and therefore more attractive to the investing public. It is thus a large
corporate body which enjoys limited liability. The following must be observed in forming
a PLC;

1) They must apply to the registrar of companies by filling in the

memorandum of association and the articles of association ( of course
does not enjoy the privileges enjoyed by pvt ltd company for filling in the
articles)
• The name of the company must end with the words public limited
company (PLC)
• There must be at least two shareholders with no upper limit
• The authorized capital amount should be stated

14
 2) The registrar will carry out a name search and if satisfied with the documents
and application lodged would issue out a certificate of incorporation
(which gives the PLC a legal persona)

3) However, unlike a Pvt ltd which can commence business soon after getting a
certificate of incorporation, a PLC should wait to get a Trading Certificate.

After getting the trading certificate, the following document should be filled in;

4) The prospectus- this document invites members of the public to subscribe in

shares and become part owners i.e. it’s the advertisement of shares, the
company lists on the ZSE market and shares can thus be transferred publicly.
The public can monitor company performance through its share movement
on the ZSE.

After raising capital, the company can start operations. It is compelled to publish
its financial accounts and shares are sold at will.

Advantages of PLC
i. Like a Pvt ltd company, the PLC enjoys independent legal existence,
limited liability, continuity of business etc
ii. More capital can be raised through operation through the ZSE and the
limited number of shareholders
iii. No restriction on the transfer of shares
iv. Enjoys large scale production and benefits from economies of scale
v. Can own assets and properties separate from shareholders, can enter into
and out of contracts

Disadvantages
i. A lot of documentation is involved
ii. May suffer because of diseconomies of scale
iii. There is no privacy or secrecy of business affairs because they have to
publish ed in the public media
iv. Must appoint an auditor

Potential entrepreneurs in Zimbabwe have various business options at their disposal in as

far as types of businesses are concerned. However, in making the choice, the best and
suitable choice should be made taking into cognizance the fact that businesses have
different needs. There is no ‘right’ or ‘wrong’ business, it all depends on what the
entrepreneur wants to do, one’s financial situation and how large the operations are likely
to be. I t is also necessary to consider industry and market requirements and risks
involved.

ACTIVITY
i. Compare and contrast between a Pvt Ltd company and a Ltd company
ii. “A limited company is a separate legal persona with limited liability”, what is the
meaning and significance of the underlined phrases?
iii. Which form of business would you recommend to a new Polytechnic graduate to
venture into? Justify your recommendation.

15
 CHAPTER 2

BUSINESS ENVIRONMENT IN ZIMBABWE

CAUSES OF EMPLOYMENT SYNDROME IN ZIMBABWE

Employment syndrome refers to the mentality that one will always have to work for
another person to earn a living. One cannot deny that entrepreneurship is not a new
concept in the Zimbabwean traditional set up. It is a question of nomenclature. It may not
have been known with the above name, but it was obviously the practice in African
society before colonisation. During the pre-colonial era, Zimbabweans were self-reliant
and innovative. Agriculture, mining, trade, manufacturing industries were there before
the 19th century. It was actually key colonial legislation that fostered a job-seeking
culture among the indigenous Zimbabweans. When the colonial masters took all the
natives’ fertile land and forced them to work for them for next to nothing and putting
instruments in place to ensure that Zimbabweans remained a permanent source of cheap
labour. The colonial economic legacy has had a strong negative effect on the growth and
future of entrepreneurship.

Before the advent of colonialism in Zimbabwe, employment syndrome was a rare

phenomenon, this is because Zimbabweans and Africans at large were said to be highly
entrepreneurial and were productively engaged. For instance, there were great farmers
during the pre-colonial era. These great entrepreneurs produced crops not only for their
consumption, but for trade and other fellow citizens. Crops like millet, rapoko, sorghum,
ground nuts, round nuts were grown. There were great miners, way before the arrival of
the British in the 1880s. Entrepreneur – miners extracted iron ore from the ground. The
minerals mined included gold, copper, iron. In addition, there was a very successful value
adding industry way before the colonial era. The output from agriculture and mining was
processed. Great and useful items were made to serve the needs of the people then.
However, the arrival of the whites on the 11th of September 1890, marked the beginning
of the era of racial conflict between the white settlers and the indigenous black
communities. Even though different black communities tried to resist (through two wars,
1893 and 1896), however the blacks lost these wars, and as result they lost their lands to
the white settlers. This led to a rise of a large, landless class of labourers who travelled
from place to place in search of work, hence those displaced could not continue with their
entrepreneurial activities so they became fulltime labourers for them to earn a living.
It is regrettable to note that the British introduced a biased system of education which
they used to cow down and contain the Zimbabweans with the main aim of ensuring that
they would be no competition between the two racial groups. As early as the 1920s with
the inception of the Responsible Government, education designed specifically for blacks
was to make them providers of cheap labour for the colonial economy. The colonial
education system disempowered the majority blacks so that they could not excel,
materially or otherwise, in the near future, it was tailored towards producing men for
ready absorption into the colonial labour force and gave little scope for Zimbabweans to
aspire for roles beyond that of labourers and as a result of such educational system.
During the colonisation era, very few Zimbabweans graduated to become successful
entrepreneurs because such opportunities were only open to whites who received
unlimited government financial support to start businesses. The land bank act provided
new white settler farmers with free tillage for five years and the same period as grace
16
before commencing to repay loans from the state. Racial considerations militated against
Zimbabweans in accessing the needed funds to fund their entrepreneurial activities, the
consequence of such act was an increase of wage employment, as the blacks were failing
to fund their entrepreneurial activities.

The Land Apportionment Act of 1930 confirmed and legalized the displacement of
Africans that had been on-going earlier. The increase in land appropriation resulted in the
rise of landless blacks and the subsequent increase of the number of black people looking
for jobs in white farms, factories and mines, hence native Zimbabweans entrepreneurial
activities were sorely based on use of land and with such acts imposed by the whites,
ultimately the black community became disempowered, disenfranchised and landless,
and they were left with no choice but to go and work for the whites in the farms for
sustenance. The Maize Control Act of 1934 indirectly confined native Zimbabweans to
the rural areas where they were engaged in agricultural activities, producing crops that
did not have any competitive advantage over Europeans’ produce, with such stringent
market regulations many native Zimbabweans stopped farming and started working for
the whites, hence it became easier to provide wage labour than to produce for the export
market. It was certainly an easier and more secure way of obtaining money for taxes and
for purchasing consumer goods. Furthermore, the British highly commercialized
agricultural production. This commercializing of agriculture demanded cheap labour to
be sustainable.

However, working and living conditions in those work places were very bad. It was also
more profitable for the native blacks to engage in farming than go for wage labour. As a
result, very few volunteered to go and work. To solve their labour problems, the British
enslaved the native Zimbabweans. The chiefs were instructed to recruit able bodied men
and hand them over to the BSAC to work in farms and mines. Those that tried to resist
had their homes burnt and cattle seized by force. Therefore, a majority number of natives
found themselves working for the white settlers unwillingly. In addition, the British
imposed taxation, to indirectly force the native Zimbabweans to work for them, hence
taxes meant to stop African entrepreneurship and to force them to labour in European
farms and mines. The white settler groups desired to use taxation for a host of other
reasons, including compelling native blacks to becoming cheap wage labourers in the
companies of whites, as taxation exerted pressure on black men to work in the mines,
hence the tax was deliberately set at a high level to force young men to leave their
entrepreneurial activities and seek work from the settlers in order for them to earn enough
money to pay their taxes. In 1894 for example, the hut tax was introduced. Every male
adult was to pay tax amounting to 10 Shillings. Failure to pay this and other taxes was a
crime, which saw one being arrested to go and work for the State. Here the black
community had no option but to seek work from the white settlers for subsistence and to
source money to pay tax.

In mining, pieces of repressive legislation were put in place by the British upon their
arrival. Gave settlers’ concessions, but BSAC retained exclusive rights to buy and sell
minerals. For example, Minerals and Mining Rights laws restricted the blacks from
carrying on with their mining entrepreneurial activities. In fact, one had to secure a
prospectus license for mining of which it was a difficulty process for the blacks and as a
result many native Zimbabweans who lived off mining could no longer continue with
17
such entrepreneurial activities, so they were left with no choice but to seek work from the
whites, for them to earn a living Laws were also put in place against hunting. Wildlife
Parks and Game Parks were created. It became illegal to hunt in the parks. One would be
treated as a poacher if found in the parks. Thus, the blacks hunting entrepreneurial
activities were affected by such restrictions. Which also resulted in many native hunters,
failing to acquire hunting licences which was required by the laws imposed by the
British, therefore the native blacks had to work for the whites, since they could no longer
live off hunting.

HISTORY OF ENTREPRENEURSHIP IN ZIMBABWE

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

Introduction

The history of entrepreneurship in Zimbabwe dates back to the civilization era. In the Mutapa and
Rozvi state there were successful business initiators/ owners who became very wealth. It however
follows that like today, as recognized by Alfred Marshal in 1890 in the book Principles of
Economics was affected by the ability to combine factors of production: Land, labour, capital,
and organization
For over two (2) centuries great products like farming equipment, military equipment was made.
It is from these that successful and powerful states were created.
During the colonial era black entrepreneurs were so limited. The reason, being inability by blacks
to access means of production and suppressed talent. Technical Education was also biased. From
1980 we saw the cropping of great entrepreneurs from the black populace. There were business
Start ups in the transport sector, retailing, manufacturing, farming, and many industries.

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

Zimbabwe has for centuries had strong entrepreneurial abilities. There has been evidence of all
industries stretching from primary, secondary and tertiary industry. Agriculture, mining, trade,
manufacturing industries were there before the 19th century. The only argument could then be the
scale and the technology level. In fact, the history of entrepreneurship in Zimbabwe dates back to
the civilization era. In the Mutapa and Rozvi States, there were successful business initiators/
owners who became very wealthy.

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

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

18
Entrepreurship in the Primary industry

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

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

Entrepreurship in the Manufacturing (secondary) Industry

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

Metallurgist and Iron smith (Mhizha)

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

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

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

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

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

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

COLONIZATION AND ITS EFFECT ON AFRICAN ENTREPRENEURSHIP

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

their governance.

1. Wars

19
When the British arrived, major wars were fought. These are the War of Dispossession or Anglo-
Ndebele War: 1893-4; First Chimurenga: 1896-7; and the 2nd Chimurenga: 1966-79. These wars
disturbed the smooth running of entrepreneurial activities by blacks in Zimbabwe in so far as
farming, mining, hunting, among others, were concerned.

2. The land Issue (Land seizure)

• When the British arrived they introduced the reserve system and translocated the native
Zimbabweans to infertile dry inhospitable areas.

• In 1894 the first reserves were set up in Shangani and Gwaai and this affected the
entrepreneurs in farming.

• After the defeat of the Ndebele, the settlers seized their 6 000 acres displacing many natives
and those displaced became fulltime labourers or squatters.

• The settlers started ill treating the Ndebele like they were doing the Shona.

• The seizure of land also affected all the farming activities.

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

3. Forced Labour

To solve their labour problems, the company introduced forced labour (chibharo). The chiefs
were instructed to recruit able bodied men and hand them over to the BSAC as labourers. The
Shona and Ndebele so enslaved ran away into the hills to escape. The presence of white
settlements contrary to the agreements entered into.

Again this did not please the Ndebele who wanted to claim their ancestral land back as in the
reserves there was food shortage and starvation at times.

4. Cattle Confiscation

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

• Soon after the defeat of the Ndebele in the Anglo Ndebele war, the whites confiscated the
Ndebele cattle numbering about 250 000.

• This drastically reduced the Ndebele herd and the Ndebele wanted their cattle back as it was a
sign of prestige.

• This also gave birth to The Land Husbandry Act of 1951. The Act barred any African family
from owning more than five herd of cattle.

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

6. Mining Repressive Legislation

20
 In mining, pieces of repressive legislation were put in place by the British upon their arrival.
For example, Minerals and Mining Rights laws restricted the blacks from carrying on with
their entrepreneurial activities in mining. In fact, one had to secure a prospectus license for
mining of which it was difficulty for the blacks.

7. Hunting Ban

Laws were also put in place in hunting. Wildlife Parks and Game Parks were created. It
became illegal to hunt in the parks. One would be treated as a poacher if found in the parks.
Thus, the blacks’ entrepreneurial activities were affected by such parks.

8. Repressive Laws

The Native Reserve Order in Council: 1898.

The Act created reserves in dry inhospitable areas. This affected the entrepreneurial activities
of blacks in agriculture. The Act also effectively removed all native chiefs who were anti-
settlers and replaced them with puppet settler administrators.
Land Bank acts: 1912.
The land bank act provided new white settler farmers with free tillage for five years and the
same period as grace before commencing to repay loans from the state owned Land bank.
The Morris Carter Commission: 1925.
Divided the whole country into agro-zones based on rainfall patterns from the highest rainfall
region 1 to the lowest rainfall region 5. Natives were trans- located to regions 4 and 5.
The Land Apportionment Act: 1930.
In 1930 whites who numbered 50 000 were allocated 49 000 000 acres of prime land while
blacks who numbered 1 000 000 were allocated 28 000 000 acres of the worst land in regions
4 and 5. The translocation of blacks greatly affected their farming entrepreneurial activities
and was accompanied with untold violence and starvation and malnutrition became
endemic... The Land Apportionment Act of 1930 confirmed and legalized the displacement
of Africans that had been ongoing earlier.

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

The Land Husbandry Act: 1951.

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

The Tribal Trust Land Act: 1965.

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

The Land Tenure Act: 1969.

The act divided the land on racial lines and designated the best 45 000 000 acres as European land
and shared among the 250 000 whites and the worst 45 000 000 acres was designated as native
21
land to be shared by the 5 000 000 blacks. The act also barred the races from encroaching in the
other race’s land.

POST COLONIAL ERA

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

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

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

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

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

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

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

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

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

Political sanctions form yet another crucial factor that may hinder the entrepreneur’s progress in
business for instance in Zimbabwe there is fuel and foreign currency crisis due to political
sanctions based on the allegations by Britain and America that there is lack of rule of law,
22
democracy and violation of human rights. South Africa also faced political sanctions based on
allegations that there were apartheid, foreign currency crisis and fuel shortage can grossly affect
the entrepreneur’s business activities negatively.

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

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

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

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

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

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

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

Technological environment
Today, we are living in a global village which requires entrepreneurs to move with technological
breakthroughs and changes. Entrepreneurs are expected to be well versed with Internet systems
for effective communication with suppliers, customers and the publics in general.
Technology relates to the processes, techniques, tools and machinery used in business to produce
or offer products to customers. Poor technology results in inefficiency and ineffectiveness. Thus,

23
the advice to the entrepreneurs is that they should keep tack of the technological trends in the
business if they are afraid of being out-competed by their rivals.

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

Natural phenomena
These are the situations or conditions which can adversely or positively affect the entrepreneur’s
activities. These may include natural disasters such as road accidents, fire outbreaks, floods,
drought, earthquakes, good rains and natural resources such as minerals. Entrepreneurs are
advised to study the natural phenomenal trends as these provide threats or opportunities to the
business.

Microenvironment
This relates to those conditions which directly affect the entrepreneurial investment activities
either positively or negatively. The microenvironment is made up of employees, providers of
finance, suppliers, customers and government among others.

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

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

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

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If customers feel that they are ill treated, the entrepreneur loses them to the customer-driven
enterprises.

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

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

DEVELOPING A BUSINESS PLAN

OBJECTIVES

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

• Define a business idea.

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

GENERATION/CREATION OF A BUSINESS IDEA

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

The term business idea defined:

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

❖ A business idea must show the following :

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

Profitability and Feasibility of the business idea:

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

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

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

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

• A business plan is a written statement setting forth the

business mission and objectives, its operational and financial details, its
ownership and management structure, and how it hopes to achieve its objectives.

• It is a written document describing all relevant internal and

external elements and strategies for achieving objectives of
a business.

• A business plan is a document designed to provide sufficient

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

The purpose/importance of a business plan:

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

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

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

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

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

• It can be an effective communication tool for attracting and

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

• It provides an effective basis for controlling operations so one

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

HOW TO PREPARE A BUSINESS PLAN

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

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

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

COMPONENTS/ELEMENTS/CONTENTS OF A BUSINESS PLAN

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

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

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

1. Cover Sheet

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

2. Table of Contents

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

3. Executive Summary

It is the most important part of the business plan. It should be designed to

motivate the reader to go on to the other section of the plan. It should convey a
sense of commitment, challenge, plausibility, credibility and integrity.

It can include:

• Major aims and objectives

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

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

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

4. Description of the Business

Include the following :

a) Introduction

❖ Relevant brief history and background of the proposed business

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

5. Ownership and Management Structure

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

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 6. Marketing Plan

Include information about:

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

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

8. Financial/Plan/Analysis

• Indicate the expected financial results of your

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

9. Milestone Schedule

• This involves the determination of objectives and the

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

10. Appendix

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

• Names of References and Advisors and their addresses

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

CHAPTER 3

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HUMAN RESOURCES MANAGEMENT(HRM)

Definition of HRM - it is the design of formal systems in an organization to ensure effective

and efficient use of human talent to accomplish organizational goals
In a company with an owner and 10 employees, the owner usually takes care of HR issues.
At about 80-100 employees, organizations typically need to designate a person to specialize
in HRM
HRM activities
 HR planning and Analysis: managers attempt to anticipate forces that will influence the
future supply of and demand for employees. As part of maintaining organizational
competitiveness, analysis and assessment of HR effectiveness must occur.
 Equal Employment Opportunity: - compliance with equal employment opportunity
(EEO) laws and regulations affects all other HR activities and is integral to HRM. Strategic
HR plans must ensure sufficient availability of a diversity of individuals to meet affirmative
action requirements.
 Staffing: - to provide an adequate supply of qualified individuals to fill the jobs in an
organisation.
 HR Development: it begins with new employees’ orientation and also includes job-skill
training and retraining to accommodate technological changes
 Compensation and benefits: compensation rewards people for performing organizational
work through pay, incentives, and benefits. Incentive programs such as productivity rewards
are growing in usage.
 Health, Safety, and Security: ensuring the physical and mental health and safety
employees is vital. Workplace security has grown in importance, in response to the
increasing number of acts of workplace violence.
 Employee and labor/management relations: the relationship between managers and their
employees must be handled effectively if both the employees and the organisation are to
prosper. Employee rights must be addressed.

HRM PROCESS
MANPOWER PLANNING
It is the process of analyzing and identifying the need for and availability of human resources
so that the organization can meet its objectives
Manpower Planning Responsibilities
 Identify supply-demand needs for each division/department
 Integrate HR plan with departmental plans
 Monitor HR plan to identify changes needed
 Review employee succession plans associated with HR plan

Manpower Planning Process

i) consider organizational objectives and strategies
ii) scan external environment for changes affecting labor supply
iii) analyze internal inventory of HR capabilities
iv) then forecasts must be developed to identify the relationship between supply and demand
for human resources
v) management then formulates HR strategies and plans to address the imbalance, both short
and long term.

RECRUITMENT

Recruiting is the process of generating a pool of qualified applicants for organisational jobs.
Source of employees
 Walk –ins
 Schools/college (source for entry –level professional and technical employees)

30
 Employment agencies (for a fee from either the employee or the employer, they do some
preliminary screening and put the orgainzation in touch with applicants.
 Employee referrals
 Advertisements

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 Internal recruiting (databases,promotions and transfers, job postings)
 Internet recruiting (Job boards e.g [Link], professional/career web sites and
employer web sites , use of e-mail applications)

Job description
- Basically job description is about the job. It clarifies duties and responsibilities, provide a
basis for judging performance ie (Job title, reporting structure, relationships, department, pay
grades, general responsibilities that make the job unique).
Job specification
- Job specification entails the incumbent/candidate’s qualifications and experience which
include: (qualifications needed to perform the job satisfactorily, knowledge, skills and
abilities, education and experience, physical requirements and working conditions).

Evaluating prospects and selecting employees

i) Selection guidelines
a) employer should evaluate the position to determine which characteristics are most
important
b) employer should look for abilities that complement skills of others within the business
ii) Recruiting managerial and professional personnel
a) technical competence is necessary
b) versatility is important, since the applicant may need to perform more than one function.
iii) Evaluating applicants

Steps
- use of application forms
- interviewing the applicant
- checking references and further investigation
- testing the applicant
- physical examination

Selection

Selection is the process of choosing individuals who have needed qualifications to fill jobs in
an organisation The ultimate purpose is placement or fitting a person to the right job, it is a
matching process.
The selection process
i) Applicant job interest- (individuals desiring employment can indicate interest in
employment in a number of ways: through mail/fax, applying in person or internet most job
seekers appear to know little about organizations prior to applying for a job hence a Realistic
Job Preview is necessary in which applicants are provided with an accurate picture of the job
so that applicants evaluate their job expectations)
ii) Pre- employment screening:- So as to determine if applicants meet the minimum
qualifications for open jobs.
iii) Application form: application forms serves four purposes: as a record of the applicants’
desire to obtain a position, provides interviewer with a profile to be used during interview, as
a basic employee record for applicants who are hired, can be used for research on the
effectiveness of the selection process.
iv) Testing –ability tests ( tests that assess an individual’s ability to perform in a specific
manner e.g cognitive tests, Physical abilty, Personality test, honesty/intergrity)
v) Interview – done to obtain additional information and to clarify information gathered
throughout the selection process: Structured interviews( uses a set of standardized questions
asked of all applicants so that comparisons among applicants can be made, useful in initial
screening, (Behavioral interview-applicants are asked to give specific examples of how they
have performed a certain task or handled a problem in the past, Situational interview – a type
of structured interview that is composed of questions about how applicants might handle
32
specific job situations) Non-structured interviews e.g Stress interviews designed to create
anxiety and put pressure on the applicant to see how the person responds)
vi) Background Investigation – can take place either before or after the in-depth interview.
It costs the organization time and money but is beneficial. May include employment

33
verification, Criminal records check, Education verification, Reference check Credit history.
Applicants may misrepresent their qualifications and backgrounds.
vii) Additional Interview(optional)
viii) Conditional job offer -
ix) Medical exam or Drug test- Medical information on applicants may be used to
determine the individual’s physical and mental capability for performing jobs. Physical
standards for the job should be realistic, justifiable and geared to the job requirements
x) Job placement- final step is making a job offer formalized in letters and sent to
applicants, terms and conditions of employment should be clearly identified. Care should be
taken to avoid vague, general statements and promises about bonuses, work schedules or
other matters that might change later and provision made for applicant to sign an acceptance
of offer.

Training & Development

Training is a process whereby people acquire capabilities to aid in the achievement of

organizational goals. Training provides employees with specific, identifiable knowledge and
skills for use in their present jobs
A distinction is drawn between training and development, with development being viewed as
broader in scope and focusing on individuals gaining new capabilities useful for both present
and future jobs.
Development represents efforts to improve employees’ ability to handle a variety of
assignments and to cultivate capabilities beyond those required by the current job
It is possible to train most people to run a copy machine, answer customer service questions,
drive a truck, operate a computer , however development in areas such as judgement,
responsibilty, decision making and communications presents a bigger challenge.
Training and development aids organizational competitiveness by aiding in the retention of
employees.

The training process

i) Assessment: includes training needs asessment and identification of training objectives and
criteria.
a) Training needs assessment- training is designed to help the organization accomplish its
objectives. Sources of training needs assessment include grievances, observations, accidents,
complaints, exit interviews, job-based sources (employee key result areas, job specifications).
b) Organizational analyses- identification of the knowledge, skills and abilities that will be
needed in the future as both jobs and the organization change e.g technological obsolescence
c) Job/task analyses- comparing requirements of jobs with the knowledge, skills and abilities
of employees.
d) Individual analyses- use of performance appraisals.
ii) Design (Includes pretesting trainees, selecting training methods and planning training
content)
 Learner readiness should be determined (i.e must have the basic skills necessary for
learning, the motivation to learn)
 Determine learning styles (auditory learners learn best by listening, tactile learners learn
best through hands on and using training resources, visual learners who think in pictures and
figures and need to see the purpose and process of the training
 Transfer of Training- design should cater for the transfer of training when trainees actually
use on the job what they learned in training.
 Types of training: - (Regular training, job/technical training(enables employees to perform
their jobs ,tasks and responsibilities), interpersonal &problem-solving training(addresses both
operational and interpersonal problems and seeks to improve relationships,), developmental
and innovative training(provides long term focus to enhance individual and organizational
capabilities in the future.
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iii) Training Delivery/ Training methods

35
After training delivery can occur. Training should be pilot tested. Frequently training is
conducted internally.
 Informal training: occurs through interaction and feedback among employees
 On- the-job training: planned and commonly used and is flexible and relevant to what
employees do.
 Off-the-job training: usually offered by schools, colleges and universities.

External training is also used and may include:

 Outsourcing of training: - employers outsource training to external training firms,
consultants and other entities.
 E-learning: the use of the internet or an organizational intranet to conduct training on-line

 Cooperative training: it combines classroom training and on-the-job experiences eg

nursing and apprenticeship, internships/attachment (combines job training with classroom
instruction, schools, colleges and universities).
 Apprentice training- provides an employee with on-job experience under the guidance of
a skilled and certified worker.
 Instructor-led training - employer conducted short courses, lectures and meetings.
 Distance training- a growing number of colleges and universities use some form of
internet-based course support.

iv) Evaluation of training

Evaluation compares the post – training results to the objectives expected by managers,
trainers and trainees
Levels of evaluation
 Reaction:- evaluate the reaction level of trainees by conducting interviews or by
administering questionnaires to trainees
 Learning: evaluate by measuring how well trainees have learned facts, ideas, concepts,
theories and attitudes
 Behaviour: measuring the effect of training on job performance through interviews of
trainees and their co-workers, observing job performance
 Results- employers evaluate results by measuring the effect of training on the achievement
of organisational objectives. Results such as productivity, turnover, quality, time, sales and
costs are relatively concrete evaluation can be done by comparing records before and after
training.

DEVELOPMENT

Represents efforts to improve employees’ ability to handle a variety of assignments and to

cultivate capabilities beyond those required by the current job and it benefits both
organizations and individuals
The Human Resources Development Process in an organisation
1. Formulate HR Plans – to analyze, forecast and identify current and future organisational
needs for human resources. HR planning anticipates the movement of people in the
organisation due to retirements, promotions and transfers and also identify the capabilities
needed by the organisation in the future.
2. Identify necessary capabilities- capabilities might include, quality decision making, ethical
values technical skills, team building, directing others, dealing with uncertainty.
3. Carry out Succession Planning: - Succession planning is a process of identifying a longer-
term plan for the orderly replacement of key employees as a result of promotions, transfers,
retirements, deaths, disability, departures or other reasons. SP often focuses on top
management.
4. Assess development needs: - Either the company or the individual can analyze what a
given person needs by way of development. The goal is to identify strengths and weaknesses.
36
5. Conduct development planning: Organizational, Individual
6. Determine Development Approaches: Job-site- (Coaching- training and feedback given to
employees by immediate supervisors, Committee assignments/meetings- assigning promising
employees to important committees, Job rotation- shifting an employee from job to job,
Assistant –to positions) Off-site methods (classroom courses and degrees, human relations
training-attempts to prepare supervisors to deal with “people problems” covering motivation,
leadership, communication, Simulations- a simulation requires participants to analyse a
situation and decide the best course of action based on the data given. Some simulations are
computer interactive games
7. Evaluate development success

PERFORMANCE APPRAISAL

Performance is essentially what an employee does or does not do. Employee performance
common to most jobs includes the following elements:
 Quantity of output
 Quality of output
 Timeliness of output
 Presence at work
 Cooperativeness

TYPES OF PERFORMANCE INFORMATION

Managers receive three different types of information about how employees are performing
their jobs.
 Trait-based information- identifies a subjective character trait of the employee e.g attitude,
initiative, or creativity
 Behaviour-based information- focuses on specific behaviours that lead to job success e.g
for a salesperson, the behavior of “verbal persuation” can be observed
 Results – based information – considers employee accomplishments. Works well for jobs
in which measurement is easy and obvious

USES OF PERFORMANCE APPRAISAL

Performance appraisal is the process of evaluating how well employees perform their jobs
when compared to a set of standards, and then communicating that information to those
employees. Uses include:
 Administrative uses- compensation, promotion, dismissal, downsizing, layoffs
 Development uses – identifying strengths, identifying areas for growth, development
planning, coaching and career planning.

METHODS FOR APPRAISING PERFORMANCE

Category rating methods

 Graphic rating scale – allows the rater to mark an employee „s performance on a
continuum against each duty listed.
 Checklist – a performance appraisal tool that uses a list of statements or words. Raters
check statements most representative of the characteristics and performance of employees

Comparative methods
Managers directly compare the performance of their employees against one another
 Ranking – method lists all employees from highest to lowest in performance. Drawback of
method is that the size of the differences among individuals is not well defined.

Narrative methods
Managers are required to provide written appraisal information
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 Critical incident – the managers keep a written record of both highly favorable and
unfavorable actions in an employee’s performance during the entire rating period
 Essay – requires a manager to write a short essay describing each employee’s performance
during the rating period. Some essays are “free-form” or without guidelines, while other
more structured formats use prepared questions that must be answered.

Bahavioral/objectives methods
Attempt to assess an employee’s behaviors instead of other characteristics.
 Constructing behavioral scales – identifying important job dimensions which are the most
important performance factors in an employee’s job description, begins the construction of a
behavioral scale. (outstanding, satisfactory, unsatisfactory)

38
 Management by objectives – specifies the performance goals that an individual and her or
his manager agree to try to attain within an appropriate length of time also called appraisal by
results, work planning and review,mutual goal setting

COMPENSATION
Compensation is an important factor affecting how and why people choose to work at one
organization over others. Employers must be reasonably competitive with several types of
compensation to attract and retain competent employees.

TYPES OF COMPENSATION
 Base pay – the basic compensation that an employee receives, as a wage or salary either
hourly or salaried.
 Variable pay – compensation linked directly to individual, team, or organizational
performance e.g bonuses
 Benefits – provision for extrinsic rewards in an individual manner. A benefit is an indirect
reward e.g health insurance, vacation pay, or retirement pensions.

LEGAL CONSTRAINTS ON PAY SYSTEMS

Compensation systems must comply with government constraints. Important areas addressed
by the law include:
 Minimum wage standards
 Hours of work
 Child –labour provisions
 Overtime provisions

PROMOTIONS /DISMISSAL
Many organizations choose to fill vacancies through promotions. Although most often
successful, promotions have some drawbacks
- the person’s performance on one job may not be a good predictor of performance on
another because different skills may be required on the new job.

Employees can be dismissed for various reasons

- fired from work
- layed off as part of company’s downsizing policy-often laid off workers are compensated.

Motivation

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

Theories of Motivation and their implications to the entrepreneur

There are many theories of motivation and any theory or study which aids an understanding of
how best to motivate people at work must be useful. All entrepreneurs have a duty to motivate
their employees for the success of their enterprise. Motivated workers take more pride in their
jobs and work better. But many entrepreneurs do not know how to motivate their staff.
Entrepreneurs must know how to apply the theories of motivation in particular work situations.

39
There are two contrasting approaches that is the content theories and process theories (cognitive
theories)
- Content theories attempt to explain those specific things which actually motivate the
individual at work. These theories are concerned with identifying people’s needs and their
relative strengths and the goals they pursue in order to satisfy these needs. Content theories
place emphasis on the nature of needs and what motivates.
- Process theories attempt to identify the relationship among the dynamic variables which
make up motivation. These theories are concerned more with how behaviour is initiated,
directed and sustained. Process theories place emphasis on the actual process of motivation.

Major content theories of motivation include

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

Maslow’s hierarchy of needs theory

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

Self-actualization
(i.e. realizing one’s potential
for continued self development)

Esteem (i.e.
Status, respect, recognition by others)
achievement, self- confidence,
Social (love) (i.e. to belong, associate with, be
accepted by others)
Safety (i.e. protection against danger)

Physiological (i.e. shelter, clothing, food)

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

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

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

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

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

IMPLICATIONS OF MASLOW’S HIERARCHY OF NEEDS TO THE

ENTREPRENEUR
Once a lower need has been satisfied, it no longer acts as a strong motivator and only unsatisfied
needs motivate a person.
40
This hierarchy of needs implies that entrepreneurs need to consider seriously the lower level
needs if workers or staff are to cooperate at work. That is the remuneration (salary, wage, fringe
benefits) should meet decent or exclusive physiological needs (shelter, food, clothing). Pleasant
working conditions must also be ensured.

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

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

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

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

Herzberg’s two factor theory

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

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

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

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

Motivation & job satisfaction

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

Motivators/growth factors

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

Importance of motivating employees

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

ACTIVITY

1. List the four management functions.

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

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

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

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

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

CHAPTER 4

BUSINESS MANAGEMENT

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

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

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

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

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

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

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

A. PLANNING

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

The following are involved in planning;

➢ Identify opportunities and threats
➢ defining objectives and standards to be achieved
➢ deciding who is going to do it
➢ determining the actions and activities to be done in order to achieve the objectives
and standards
➢ determining the resources to use
➢ determining the time-frame for the activities
➢ assigning responsibilities
➢ analyse and consider the alternative plans of action
➢ designing a control procedure
➢ implement the plan

Manager’s questions in planning

1. where are we? -in terms of goals, resources, standards etc
43
 2. where do we want to go? –objectives, markets, customers etc
3. how do we get there? –strategies to reach the intended destination ( time, resources,
marketing mix)
4. are we getting there?

B. LEADING

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

➢ Directing – it is that part of managerial function which actuates the organizational

methods to work efficiently for achievement of organizational goals, and sets in motion
the action of people because planning is the mere preparation for doing work.
➢ Staffing-the main purpose is to put the right man on the right job. There should be proper
and effective selection, appraisal and development of personnel to fill the roles designed
on the structure. It thus involves manpower planning, recruitment, selection, placement,
training and development, remuneration and promotion and transfer.

➢ Supervision- implies overseeing the work of subordinates by their superiors. It is the act
of watching and directing work and others.

➢ Motivation- means inspiring, stimulating or encouraging the subordinates to work with

zeal.

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

LEADERSHIP STYLES
1. Autocratic – This is sometimes referred to as dictatorship. Autocratic leaders feel that
they must make all the decisions themselves without consulting others. Task oriented
style.
2. Democratic (Participative) – Feel that employees must also share and participate in
decision making. It’s a team leadership style.
3. Laissez faire (free rein) – This approach looks at drawing up objectives and guidelines
for staff and they must then continue on their own without any further leadership. Poor
leadership style.
4. Good Samaritan – Little concern for production but concerned about employees. It is an
employee oriented style.
5. Compromise – Reasonable interest in both employees and production. Maintains
existing style of leadership.

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

44
 ➢ identification of activities
➢ classification or grouping of activities
➢ assignment of duties
➢ delegation of authority and creation of responsibility ie divide workload according to
resources.
➢ coordinating/allocate authority and responsibility relationships
➢ obtain the necessary resources and announce arrangements

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

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

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

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

ROLES OF MANAGEMENT

The ten management roles of a manager identified by Mintzberg

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

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

Mintzberg’s ten managerial roles

ROLES DESCRIPTION EXAMPLES OF

ACTIVITIES
1. INTERPERSONAL
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a. Figurehead Symbolic head, obliged to Greeting visitors, signing
perform a number of team documents
duties of a legal or social
nature

b. Leader Responsible for the Performing all activities that

motivation of subordinates, involves subordinates
staffing and training, selects
and disciplines.

c. Liaison Maintains a network of Acknowledging mail,

outside contacts and external board work
informers who provide
favours and information

2. INFORMATIONAL

a. Monitor -Seeks and receives wide -reading periodical and

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

Transmits information form

b. Disseminator outsiders or from the Holding meetings, making
subordinates to members of phone calls to relay
the organisation information, sending memos

Transmits information to
outsiders on organizational Holding board meetings and
c. Spokesman policies, actions, results etc giving information to the
through speeches and media
reports.

3. DECISIONAL

a. Entrepreneur Initiates new projects, spot Organising strategy review

opportunities, identify areas sessions to develop new
of business developments programmes

b. Disturbance handler Responsible for corrective Resolving conflicts among

action when organization staff, adapt to external
faces unexpected changes and organising
disturbances and crises strategies that involves
disturbances and conflict

c. Resource allocator Responsible for the Scheduling, requesting,

allocation of organizational authorization and budgeting
resources of all kinds, setting activities
of priorities, budgeting

Responsible for representing

d. Negotiator the organisation at major Participating in collective
negotiations with unions, bargaining
suppliers and generally
46
 defend interests

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

The explanations above justify managerial purposes in terms of;

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

MANAGEMENT SKILLS

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

Management skills and levels

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

2) Human skills

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

3) Conceptual skills

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

Principles of Management

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

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

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

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

5. Unity of direction-all operations with the same objectives should have one manager and
one plan only.
47
 6. Subordination of individual interest to the common good- the interests of an individual or
group should not take precedence over interests of the organization.

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

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

found.

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

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

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

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

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

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

COMPUTERS IN BUSINESS

Objectives
- Define a computer
- Discuss the uses of computers in business areas such as record keeping, stock control,
accounts and production control.

Definition of a computer
- It is a machine or electronic device that accepts/collect, store, process, retrieve and
communicate data in business.

Uses of Computers

Record Keeping
- Computers are used to keep such as daily sales, employee’s records, memos and minutes
of meetings.
- Computers can also be used to store customer records in the banking sector in other
organizations that deal with computers. Special programs are developed for the purpose
of capturing and storing the information into databases that can later be retrieved and
used as when required.
- Also used in libraries to store book records and facilitating payments for overdue books.
- Computers are also used in schools to keep student records such as name, address and age
(for those in education business eg private colleges).

Stock Control
- Computers are used to monitor the inventory levels ie level of stock for each item an
organization has in their warehouse. The computer will be fed with information each time
stock is purchased or sold, in return it will give up to date stock levels, items that are at
records level, most selling stock and items requiring special attention.
- Those stock control functions can be applied in any kind of business, be it in
manufacturing industry, retailers etc.

Accounts

48
 - Computers can also be used to perform the accounting function. This is applied through
the development of accounting systems ie computer systems that automate accounting
activities.
The following are some of the accounting systems:
i. Accounts receivable systems which monitor the organisation’s debtors.
ii. Accounts payable systems that monitor suppliers.
iii. Pastel accounting an integrated package that provides a variety of accounting
functions.

Production Control
- Computer systems can also be used to monitor production industry. In such cases
computers are fed with the production output, they compare the actual output with the
planned/desired output. If there is a variance, they thus give suggestions of what can be
done to rectify the problem.
- In some cases computers are used to monitor and control the industrial machinery just as
what the human being does. They will be connected to an alarm that rings if unexpected
situations arose which will thus alert the human being in office.

Marketing
- Ecommerce
- Advertising
- Placing orders etc

CHAPTER 5

MARKETING

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

• Define marketing
• Describe the marketing mix elements
• Apply the marketing mix to product and service situations

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

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

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

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

Needs are basic human requirements such as food, clothing, shelter, exercise, etc. Some people
might be able to satisfy their needs for exercise by going for a run in a public park.
Wants refer to needs directed to specific objectives that might satisfy the need, For example,
people might want to meet their needs for exercise by joining an exclusive country club to play
golf. The marketing manager of an exclusive country club may carry out various marketing
activities to transform the needs of people for exercise into wants to play golf at a country club.
FAST FORWARD

49
Kotler (1991) also uses the word demand which refers to the wants being backed up by an ability
to pay, ie can the potential customer afford the membership fees to join an exclusive country
club? It is necessary for us to strike a clear distinction between marketing as an activity, and
marketing as a concept of how an organisation should go about its business.

The Marketing Mix

The marketing mix refers to a set of marketing variables which a firm can use to satisfy the needs
of its target market. McCarthy calls them the 4Ps of marketing. They are, namely: product, price,
promotion and place.

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

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

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

DISTRIBUTION STRATEGIES
1. Intensive Distribution
- This is the stocking of a product in as many outlets as
possible
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 - The goods must be available in, when and where
consumers need them.
- This promotes maximum brand exposure.
2. Exclusive Distribution
- Some producers limit the role of middlemen handling
their products.
- This is whereby a limited number of dealers are given
the exclusive right to distribute the company’s products
in their territories.
- Examples include the distribution of automobiles
(vehicles/cars) and women’s clothing.
3. Selective Distribution
- This is the use of more than one but less all middlemen
who are willing to carry the company’s products.
- The company doesn’t spread its efforts over many
outlets, it can develop a good working relationship the
middlemen who have a better selling effort.

• Promotion
Promotion is, of course, the focus of a great deal of marketing attention and might, with
justification, be regarded as the marketing specialist's home turf. Nevertheless, it does not take
place in a vacuum. It must not promise what it cannot be delivered, it must work within budget
(particularly where sales promotion is concerned) and individual aspects of promotion must not
undermine the overall corporate image. It is important to remember the product or service's
Unique Selling Proposition (USP) or Basic Consumer
Benefit (BCB) and ensure that the message is in alignment with these. The medium of
communication must then match the message. Promotional tools include: advertisements
(educative, informative, reminders), sales promotions (short term incentives), public relations
(also known as publicity) which is the building of good relations with the company’s various
publics by obtaining favorable publicity, building a good corporate image, heading off
unfavorable rumors, stories or events. This also includes sponsoring certain events. Personal
selling, press releases, in-store demonstrations, exhibitions and trade fairs.

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

THE EXTENDED MARKETING MIX

• People
Marketing is about relationships and people. A customer in doing business will contact
several different specialists, that is, sales people, personnel people, technicians etc.
Every contact is very important in building a sound customer relationship. It involves
relationships with people inside the business as well as external relationships with customers,
suppliers, distributors, manufacturers, banks and others.
The close and more loyal these relationships become, the greater the effect on individual
performance.
Marketing is a people driven activity there is no way you can do marketing without people.

• Physical Evidence
Includes the furnishings and atmosphere of a store and buying office interior/showroom.
Also includes brochures and literature given to customers, the system of invoicing and other
paper work as well as organized showrooms and comfortable office surroundings. From the
reception area the customer needs to feel that the company cares about comfort. Vehicle are
given labels and staff uniforms reflect high standards.

• Processes
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 This refers to dealing with customer queries, complaints and orders. The simpler the
operation the more committed the staff will be. Therefore you don’t have to work harder but
smarter.

BUSINESS GROWTH

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

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

Intensive Growth
Intensive business growth can best be understood by use of the Ansoff matrix.

Ansoff Matrix

The Ansoff matrix is a tool that helps businesses decide their product and market growth
strategy. Ansoff’s matrix suggests that a business’ attempts to grow depend on whether it markets
new or existing products in new or existing markets.

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

[Link]’s Growth strategies

a) Market penetration
b) Market development
c) Product development
d) Diversification

a) Market Penetration

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

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Market penetration seeks to achieve four main objectives:

• Maintain or increase the market share of current products – this can be achieved by a
combination of competitive pricing strategies, advertising, sales promotion and perhaps
more resources dedicated to personal selling
• Secure dominance of growth markets
• Restructure a mature market by driving out competitors; this would require a much
more aggressive promotional campaign, supported by a pricing strategy designed to make
the market unattractive for competitors.
• Increase usage by existing customers – for example by introducing loyalty schemes
A market penetration marketing strategy is very much about “business as usual”. The
business is focusing on markets and products it knows well. It is likely to have good
information on competitors and on customer needs. It is unlikely, therefore, that this
strategy will require much investment in new market research.

b) Market development

Market development is the name given to a growth strategy where the business seeks to sell its
existing products into new markets.
There are many possible ways of approaching this strategy, including:

• New geographical markets; for example, exporting the product to a new country
• New product dimensions or packaging: for example
• New distribution channels
• Different pricing policies to attract different customers or create new market segments

c) Product development

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

d) Diversification

Diversification Growth Strategies

1. Concentric diversification
2. Horizontal diversification
3. Conglomerate diversification

Diversification is the name given to the growth strategy where a business markets new products
in new markets. This is an inherently more risk strategy because the business is moving into
markets in which it has little or no experience. For a business to adopt a diversification strategy,
therefore, it must have a clear idea about what it expects to gain from the strategy and an honest
assessment of the risks.

Types of diversification

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

2. Horizontal Diversification
Holds that a company can produce totally unrelated products using different manufacturing
methods or processes

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

Integrative growth Strategies

a) Backward integration
b) Forward integration
c) Horizontal integration

a) Backward Integration – is when a company acquires one or more of its suppliers to gain
more control and generate more profit.

a) Forward Integration – is when a company acquires some wholesalers and retailers

especially when they are highly profitable.

b) Horizontal Integration – is when a company acquires one or more competitors provided

the government policies allow e.g. monopoly, oligopoly.
Important terms
• Merger-This is when two business organizations combine their shareholding and fixed
assets to become one business entity. Also known as “joint venture”.
• Acquisition-This is when one business takes over the shareholding and assets of another.

CHAPTER 6

CUSTOMER CARE

Objectives
By the end of the unit you should be able to:
• Define customer care
• Discuss the tips of customer care

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

Ten tips for customer care

1. Reliability
- this refers to consistency of performance and dependability
- perform the service right the first time fulfill promises

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 - be impartial and avoid favouritism
- Be firm with friends and relatives as far as business transactions are concerned.

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

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

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

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

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

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

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

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

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

Benefits/importance of customer care

- If customers are put first, the entrepreneur will be rewarded with new business and
increased profit margins and sales.
- Customer care creates new customers
- Constructive consumer dialogue enables the entrepreneur to know and understand what
the customers needs and wants
- It builds good relationships and loyalty with customers
- Can make passive customers become in violated participants (i.e. loyalty)
- Create corporate excellence
- Build good reputation and good image i.e. it is a tool for good corporate image building
- Business can become a market driven entity as you get information on what your
customers need and want.
- Increased profits.
- Increased sales.
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 CHAPTER 7

RECORD KEEPING AND STOCK CONTROL

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

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

DIFFERENCE BETWEEN BOOKKEEPING AND ACCOUNTING

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

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

The accounting process

It involves:
Recording Classifying Summarising Interpreting of

business activities capable of being expressed in monetary terms.

Users of accounting information

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

Source Documents

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

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Source document

- Source documents are the documents from which original information to the books of
primary entry is obtained e.g. receipts, invoices, debit note, credit note and statement of
account.

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

[Link] letter/note - is a letter from the customer asking about availability of specific range of
goods, their prices, specifications, quality and sales conditions.

[Link] - is a reply to the enquiry giving details about the specific items or services that the
customer has enquired about.

[Link] list – is a list showing all of the items for sale together with their prices. Usually
accompanies the quotation.

[Link] Note - is a letter requesting goods from the supplier. This document is a contractual
document that binds the supplier to provide the mentioned goods as per the quote.

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

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

[Link] Note - is used with or instead of a delivery note where the goods are delivered by
someone other than the supplier e.g. for goods delivered by sea or rail.
Entrepreneurs should consider the following. When choosing a supplier: prices, quality, delivery,
customer service, location, terms of payment, discounts and business hours.

[Link] - are used by the entrepreneur or supplier when the transactions involve cash e.g.
where a customer tenders cash, a receipt may be written out.

[Link] - is a note given by the supplier or seller to the customer when goods are bought on
credit to show that the customer has not paid for the goods. That is, an invoice is used for credit
sales.

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

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

57
[Link] - is a summary of all of the invoices, payments, credit and debit notes during a
period of time. A running balance (total) is used to show the effect of each transaction i.e.
invoices and debit notes increase the total amount which is owed, and credit notes and payments
reduce the amount which is owed. This is essential as it helps the supplier and the buyer to keep
a record of invoices sent and paid during a period of time.

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

Balance remaining $2 100.00

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

Appreciation of Books of Accounts

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

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

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

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

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

E Gobvu cash book for the month of February 2011

Date Receipts (Details) Cash Bank Date Payments (Details) Cash Bank
1/02 Capital 5 000 50 000 5/02 Purchases 10 000
8/02 Sales 15 000 15/02 Telephone bill 5 000
18/02 Deposit 10 000 18/02 Deposit 10 000
20/02 Sales 20 000 22/02 Wages 10 000
23/02 Withdrawal 5 000 23/02 Withdrawal 5 000
28/02 Drawings 15 000

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 25 000_ 80 000 29/02 Balance c/f 5 000 45 000
25 000 80 000
1/03 Balance b/f 5 000 45 000

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

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

Example: Mutsvedu (Pvt) Ltd

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

Mutsvedu D Purchases journal for the month of February 2011

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

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

Example: Mutsvedu (Pvt) Ltd

Mutsvedu D Sales Returns Journal for the Feb 2004

20/02 B Sali returned goods $2 000.00

22/02 T Tom returned goods $5 000.00

Date Details Folio Dr Cr

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

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

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

Date Details Folio Dr Cr

01/02 Office furniture 100 000.00
Alice Mabinge 100 000.00
02/02 Stationery 10 000.00
Alice Mabinge

The Ledger Book

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

The ledger is ruled as follows:

Dr Cr
Date Details Folio Amount Date Details Folio Amount

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

STOCK CONTROL
Stock control is the management of stock levels so as to ensure that economic stock is left at hand
or maintained.

Why do we control stock?

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

Objectives of Inventory Management

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

Maximise customer service

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

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

Minimum inventory investment

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

ADVANTAGES OF STOCK CONTROL

➢ Involves the management of stock levels and to ensure that the best stock level is
sustained.
➢ Stock control is essential in ensuring that the correct amount of stock is kept at hand.
➢ Maintenance of best stock level is important to avoid too much stock, which may result in
tying up capital.

DISADVANTAGES OF STOCK CONTROL

➢ Tying up capital means that money that could be used in other parts of the business is
held in unused stock resulting in the business failing to pay its creditors.
➢ Another disadvantage of keeping too much stock is that stock may lose its value.
➢ Too much stock is associated with high costs of storage and security.
➢ Too much stock is also susceptible to deterioration, perishing, theft and damage.
➢ Moreover, too little stock may mean turning away customers.
➢ Too little stock also means loss of reputation and that the entrepreneur may suffer losses.

Importance of Stock Control

1. Overstocking is avoided hence chances of items becoming redundant or obsolete are
eliminated.
2. Reduces pilferage or shrinkage.
3. Stock outs are easily avoided.
4. Stock coding and recording is enhanced.
5. Stock, which can easily be handled by the stores department is kept, this reduces damages
and contributes to economic purchases.
6. Storage costs are reduced.

METHODS OF STOCK CONTROL

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

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

(i) Just in Time (JIT)

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

(ii) Batch control/2 Bin System

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

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

(iii) Economic Order Quantity (EOQ)

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

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

too little stock.

EOQ formula: Q = 2DS

C

Where Q=Quantity ordered at each order point

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

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

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

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

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

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

(iv) Stock Review

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

(v) First in First Out (FIFO)

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

Minimum and Maximum Stock Levels

1. The greatest amount of stock that the entrepreneur must keep to satisfy its customers is
called and the lowest level that stock can be allowed to fall to while the business is
waiting for a new order is known as the minimum stock level and the business is not
allowed to fall below that level before a new order is placed.
2. The point the stock is allowed to fall to before an order for more stock is placed is
Reorder level.
3. To determine Reorder level the entrepreneur needs to know the time it takes to receive
the stock after an order has been placed.
4. Secondly there is need to calculate the items that may be sold in that time.
5. Thirdly the entrepreneur needs to add an allowance in form of the minimum stock level
to the amount that gives the entrepreneur the reorder level.
For instance: If the time between order and delivery is 30 days and the quantity to be sold
is 30 items, and minimum stock level is 5 items. The reorder level is 30+5=35 items.

The Stock Book

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For effective management of stock, entrepreneurs are encouraged to keep stock books or cards
which are used to record day to day movements of stock ie in and out of the business.

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

How to carry out a stock take

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

Below is a specimen of a stocktaking list

Stock taking list

Item Stock take Stock card Difference

Eversharp pen 1 000 1 150 -150

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

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

CHAPTER 8

COSTING AND PRICING

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

Define the following costing terms

• Costing
• Costs
• Direct costs
• Direct labour
• Direct expenses
• Indirect costs

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 ➢ Calculate total costs per item
➢ Discuss the importance of costing to the entrepreneur
➢ Define pricing
➢ Calculate prices of products
➢ Discuss the pricing factors

Definition of costing terms

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

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

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

Direct Material costs

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

Direct labour costs

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

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

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

Calculate total cost per item

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

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

STEP II
Indirect Cost per year

Add up all the Indirect costs for the year

Indirect Cost per item:

Total Indirect costs per year
Total number of items per year

STEP III Total cost per item:

Direct cost per item + indirect cost per item

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

Costing calculations in detail (Manufacturer or service operator)

Stage I: Calculate Direct Material Costs

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

Stage II: Calculate Direct Labour Costs

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

Stage III: Calculate Indirect Costs

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

Costing calculations where not more than one product is produced.

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

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

100 items are produced each month

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

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

Indirect Cost/item: Rent $ 5 000.00

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

Indirect Cost/item: $19 500.00

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

NB: There are not direct expenses

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

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

ii) The entrepreneur produces desks and uses the following:

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

Direct expenses $5 000.00

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

1000 desks are produced each year. Calculate the total cost per item.
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iii) The entrepreneur has the following to make a product item:

Materials $50 000/item

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

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

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

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

Material Dress Trousers

Fabric $800.00 $1 000.00

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

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

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

Answer:
Direct costs:

1st calculate direct material cost:

Materials Dress Trousers

Fabric $800.00 $1 000.00

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

2nd calculate direct labour cost

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

Trousers 2 workers x 4 hours x $2 000.00

= $24 000.00 per pair of trousers

3rd Total Direct Cost:

Dress: Direct material cost + Direct Labour
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 = $1 300.00 + $16 000.00
= $17 300.00 per dress

Trousers: $1 600.00 + $24 000

= $25 600.00 per pair of trousers

4th calculate indirect costs: Rent $6 000 000.00

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

5th calculate production hours per year

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

6th indirect cost per hour:

Formula: indirect cost/year

Production hrs/yr

= 1 080 000/yr
4 000 hrs/yr

= $270/hr

7th calculate indirect cost per item:

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

= $ 1 660.00/dress

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

= $ 3 240.00/pair

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

= $18 960.00

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

= $28 840.00

Further Questions

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

Materials Skirt Dress

Fabric $2 000.00 $3 000.00

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

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

Indirect costs per year:

Rent $600 000.00

Electricity $360 000.00
Transport $240 000.00

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

Costing for a retailer or wholesaler

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

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

Total cost = Direct Material Cost + Indirect cost

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

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

Pricing

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

Calculations of prices of product

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

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

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

Note that Profit = Selling Price – Cost

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

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

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

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

Further Questions
a) The entrepreneur makes Dresses and skirts and uses the following:
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Material Dress Skirt
Fabric $2 000.00 $3 000.00
Thread $ 200.00 $ 700.00
Buttons $ 30.00 $ 30.00

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

Rent $600 000.00

Electricity $240 000.00
Other wages $ 30 000.00

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

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

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

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

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

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

a) Customers

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

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

c) Cost and Profit

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

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

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

• Market penetration pricing – This is when the entrepreneur sets a low price for a new
product in order to attract a large number of buyers and a large market share.
Discount and allowance pricing includes cash discount, quantity discount, functional
discount (trade discount) and seasonal discount.
• Skimming Pricing – comes into being when the entrepreneur sets a high price for a new
product to skim maximum revenues from the segments willing to pay the high price. The
firm makes fewer but more profitable sales.

• Cost based pricing – This is adding the standard mark up to the cost of a product. It
includes cost-plus pricing, breakeven pricing and value-based pricing. Break even
pricing and value-based pricing.

• Variable pricing – this involves fluctuations for the same product where its price
changes with seasons eg prices of flowers go higher during valentine season. Raincoats
and umbrellas prices goes up during the rainy season.

• Flexible Pricing – This is the charging of different prices for the same product due to
geographical location eg potatoes prices in Mbare are different from those in Borrowdale.

• Follow the Leader Pricing – This is whereby the other companies follow the prices set
by the market leader. (The market leader is determined by the company with a larger
market share).

• Break Even Pricing – This is setting the price to even out the costs of making and
marketing the product in order to make a profit.

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

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

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

BENEFITS/IMPORTANCE OF CORRECT COSTING

- Facilitates proper pricing ie guards against under-pricing or over pricing

- Helps in making buying decisions,
- Helps in acceptance of special orders ie below normal selling price.
- Helps in performing cost volume profit (C-V-P) analysis.
- Helps in setting target profits.
- Helps in budgeting.
- Helps in avoiding losses.

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 CHAPTER 9

RISK MANAGEMENT

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

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

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

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

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

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

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

Method

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

1. identify, characterize, and assess threats

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

Principles of risk management

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

Risk management should:

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

Process

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

A. Establishing the context

Establishing the context involves:

1. Identification of risk in a selected domain of interest

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

B. Identification

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

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

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

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

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

• Objectives-based risk identification Organizations and project teams have objectives.

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

C. Assessment

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

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

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

D. Create a risk management plan

Select appropriate controls or counter measures to measure risk. Risk mitigation needs to be
approved by the appropriate level of management. For instance, a risk concerning the image of
the organisation should have top management decision behind it whereas ICT management would
have the authority to decide on computer virus risks.
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 E. Implementation

Implementation follows all of the planned methods for mitigating the effect of the risk.

F. Review And Evaluation Of The Plan

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

i. To evaluate whether the previously selected security controls are still applicable and
effective and,
ii. To evaluate the possible risk level changes in the business environment.

Types of Risks

1. Customer Risk

- It arises or occurs everytime everyone in an organisation communicates with a customer or

client. It provokes a variety of reactions eg Dissatisfaction – by failing to meet needs or
expectations and Delight by exceeding expectations in some way.
- Managing customer risk cannot be divorced from exercising good customer care and public
relations.
- Employees of an organisation are equipped with the vision, values and priorities of the
organisation, the most being to create customer loyalty. After carefully recruiting (with
attitude more important than experience or product knowledge) they are told the
organisation’s number one goal is to provide outstanding customer service and handle
customer complaints positively, take them as challenges.

2. Property Risk

- Involves getting a property insurance against the risk or loss from theft, fire, other perils and
damage to your physical property. So in the event your property is damaged or destroyed
somehow the insurance will effect replacement of your property in full at current prices,
regardless of what you paid for it and protects also against inflation.

3. Personnel/Human Resourse Risk

- Refers to threats that may be directed towards a company’s employees. These risks may
originate from within the company or from external sources. On the other hand personnel too
cause risks to the company. The following are most common types of personnel risk:

i. Safety and health – physical factors (eg noise, lightning, temperature etc) accidents,
chemical and biological factors, work related stress, people’s actions and physical
strain.
ii. Violence at work – robbery or threat of it, physical violence (either internal or
external bullying at work, sexual harassment and verbal insult.
iii. Travel/Traffic – work related road risk, internal traffic and journeys abroad.
iv. Acts of damage – Malicious damage and destruction, informal leaks or thefts, unsafe
practices and risk taking and unintentional damage.
v. Employment risk – employment contracts, retention, working hours, holidays and
termination of employment.
vi. Work community – Employee morale, information flow, and salary issues.
vii. Special risks of entrepreneurship – Own livelihood, family ties, disputes between
owners, unemployment and pension cover.
viii. Expertise – Knowledge and skills that support work (eg computer literacy, guidance
and continuing education, professional skills.

4. Political risk

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- Refers to complications businesses and governments may face as a result of what are
commonly referred to as political decisions or any political chaange that alters the expected
outcome and value of a given economic action by changing the probability of achieving
business objectives.
- Is a type of risk faced by investors, corporations and government. It is risk that can be
understood and managed with reasoned foresight and investment.
- Events related to political instability like terrorism, riots, coups, civil war and insurrection
also pose political risk.
- Moreover, governments may face complications in their ability to execute diplomatic,
military or other initiatives as a result of political risk.
- As a result, political risk is similar to an expected value such that the likelihood of a political
event occurring may reduce the desirability of that investment by reducing its anticipated
return.

5. Interest rate risk

- Is the chance that an unexpected change in interest rates will negatively affect the value of an
investment.
- In general short – term “bonds” are less responsive to unexpected interest rate changes or
carry less interest rate than long –term bonds.
- Some financial theorists that the higher yield of long term bonds include a premium for
interest rate risk.

6. Competetive risk

The risk that your competition will gain advantages over you that will prevent you from reaching
your goals. For example, competitors that have a fundamentally cheaper cost base or a better
product.

7. Economic risk

The possibility that conditions in the economy will increase your costs or reduce your sales.

8. Legal risk

The chance that new regulations will disrupt your business and that you will incur expenses and
losses due to legal disputes.

9. Credit risk

The risk that those who owe you money will fail to pay. For the majority of businesses this is
mostly related to accounts receivable risk.

Risk Options

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

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

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

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

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

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

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

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

Potential risk treatments

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

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

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

Risk avoidance

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

Hazard Prevention

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

Risk reduction

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

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

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

Outsourcing could be an example of risk reduction if the outsourcer can demonstrate higher
capability at managing or reducing risks. For example, a company may outsource only its

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software development, the manufacturing of hard goods, or customer support needs to another
company, while handling the business management itself. This way, the company can concentrate
more on business development without having to worry as much about the manufacturing
process, managing the development team, or finding a physical location for a call center.

Risk sharing/Transfer

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

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

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

Methods of transferring

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

BOOT CONTRACT ( Build Own Operate and Transfer)

ROT (Refurbish Operate and Transfer)

PPP ( Public Private Partnership )

Insurance

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

-Indirect consequential loss

Legal liability

Personal liability.

Risk retention

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

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since most property and risks are not insured against war, so the loss attributed by war is retained
by the insured. Also any amounts of potential loss (risk) over the amount insured is retained risk.
This may also be acceptable if the chance of a very large loss is small or if the cost to insure for
greater coverage amounts is so great it would hinder the goals of the organization too much.

Individual Cover

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

Group Cover

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

CHAPTER 13

BUSINESS ETHICS AND SOCIAL RESPONSIBILITY

Objectives
By the end of the study unit you must be able to;
• Define and appreciate the nature of business ethics
• Relate ethics and social responsibility
• Identify various business ethical issues
• Describe various forms of social responsibility
• Outline strategies for dealing with social responsibility issues.
Nature of ethics
Ethics refers to the rules or principles that define right and wrong conduct in business or at work,
to the publics or the organization.
It can also be defined as the study of right and wrong actions and how conduct should be judged
as to be good or bad.
Ethics is about how we should live our lives and, in particular, how we should behave towards
other people. They are the moral principles which guide thinking, decision making and action. It
is therefore relevant to all forms of human activity. Business ethics is not really separate or
different from ideas that apply in the general context of human life. Professionals of all
specialisations, entrepreneurs included, should be aware of the general principles of ethics and be
capable of applying them in their everyday work. It is important, however, to note that ethics and
law are not the same.

Examples of Ethical Issues

• Using business telephone or personal long distance calls.
• Using company postage for personal mail.
• Showing favoritism in selection decisions/disciplinary practices.
• Playing politics in the organization
• Unfair business practices/transactions.

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 • Unfair dismissal.
Ethics and Social responsibility
An organisation exercises social responsibility when its acts respect the general public interest.

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

Ethics and the law

Ethics deal with personal moral principles and values, but laws are the rules that can actually be
enforced in court. Behaviour which is not subject to legal penalties may still be unethical.
Different cultures view business practices differently. While the idea of intellectual property is
widely accepted in Europe and the USA, in other parts of the world ethical standards are quite
different. Unauthorised use of copyrights, trademarks and patents is widespread in countries such
as Taiwan, Mexico and Korea. According to a US trade official, the Korean view is that ' ... the
thoughts of one man should benefit all', and this general value means that, in spite of legal
formalities, few infringements of copyright are punished.

ETHICAL ISSUES IN BUSINESS MARKETING

• M Product issues
Ethical issues relating to products usually revolve around safety, quality, and value and
frequently arise from failure to provide adequate information to the customer. This may range
from omission of uncomfortable facts in product literature to deliberate deception. A typical
problem arises when a product specification is changed to reduce cost. Clearly, it is essential to
ensure that product function is not compromised in any important way, but a decision must be
taken as to just what emphasis, if any, it is necessary to place on the changes. Another, more
serious, problem occurs when product safety is compromised. Product recall may become
necessary.
Marketing at Work
• Promotion issues
Ethical considerations are particularly relevant to promotional practices. Advertising and
personal selling are areas in which the temptation to select, exaggerate, slant, conceal, distort and
falsify information is potentially very great. Questionable practices here are likely to create
cynicism in the customer and ultimately preclude any trust or respect. Also relevant to this area
is the problem of corrupt selling practices. It is widely accepted that a small gift such as a diary
is a useful way of keeping a supplier's name in front of an industrial purchaser. Most business

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

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

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

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

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

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

• Place issues
Where long and complex distribution channels are used there is potential for disputes and
conflicts of interest. Even where relationships of trust have been built up over long periods of
time, business pressures can lead to hard decisions and a perception by distributors that they have
been treated unfairly. Here are some examples of conduct by manufacturers that distributors
could reasonably complain of.
• Requiring high levels of stock holding by intermediaries
• Manipulating discount structures to the detriment of distributors
• Ending distribution agreements at short notice

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• Dealing direct with end users at Work
Ethical codes
It is now common for businesses to specify their ethical standards. Some have even published a
formal declaration of their principles and rules of conduct. This would typically cover
payments to government officials or political parties, relations with customers or suppliers,
conflicts of interest, and accuracy of records. Ethical standards may cause individuals to act
against the organisation of which they are a part. More often, business people are likely to adhere
to moral principles which are 'utilitarian', weighing the costs and benefits of the consequences of
behaviour. When benefits exceed costs, the behaviour can be said to be ethical. This the
philosophical position upon which capitalism rests, and is often cited to justify behaviour which
appears to have socially unpleasant consequences. For example, food production regimes which
appear inhumane are often justified by the claim that they produce cheaper food for the
majority of the population.

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

ion Programme 3
Social responsibility
There is a growing feeling that the concerns of the community ought to be the concerns of
business, since businesses exist within society, and depend on it for continued existence. Business
therefore has a moral obligation to assist in the solution of those problems which it causes.
Businesses and businessmen are also socially prominent, and must be seen to be taking a lead in
addressing the problems of society. Enlightened self-interest is probably beneficial to business. In
the long term, concern over the damage which may result from business activity will safeguard
the interests of the business itself. In the short term, responsibility is a very valuable addition to
the public relations activities within a company. As pressure for legislation grows, self-regulation
can take the heat out of potentially disadvantageous campaigns. More and more, it is being
realized that it is necessary for organisations to develop a sense of responsibility for the
consequences of their actions within society at large, rather than simply setting out to provide
consumer satisfactions. Social responsibility involves accepting that the organization is part of
society and, as such, will be accountable to that society for the consequences of the actions which
it takes. Three concepts of social responsibility are profit responsibility, stakeholder responsibility
and societal responsibility.
Marketing at Work

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 • Profit responsibility
Profit responsibility argues that companies exist to maximize profits for their proprietors. Milton
Friedman asserts:
'There is one and only one social responsibility of business: to use its resources and engage in
activities designed to increase its profits so long as it stays within the rules of the game – which is
to say, engages in open and free competition without deception or fraud.'
Thus, drug companies which retain sole rights to the manufacture of treatments for dangerous
diseases are obeying this principle. The argument is that intervention, to provide products at
affordable prices, will undermine the motivation of poorer groups to be self-sufficient, or to
improve their lot. Proponents of this view argue that unless the market is allowed to exercise its
disciplines, groups who are artificially cushioned will become victims of a 'dependency culture',
with far worse consequences for society at large.
• Stakeholder responsibility
Stakeholder responsibility arises from criticisms of profit responsibility, concentrating on the
obligations of the organisation to those who can affect achievement of its objectives, for example,
customers, employees, suppliers and distributors.

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

Strategies for social responsibility

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

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

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

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 • Defensive strategy
A defensive strategy involves minimising or attempting to avoid additional obligations arising
from a particular problem. There are several defense tactics.
• Legal maneuvering
• Obtaining support from trade unions
• Lobbying government
Marketing at Work
During 2001, a group of large pharmaceutical companies initiated proceedings in the South
African courts against the South African government. They wished to prevent the government
from importing cheap, private copies of their anti-AIDS drugs. The pharmaceutical companies
suffered predictable abuse for 'putting profits before people' and worldwide negative publicity.
The companies were following a defense strategy in that they were attempting to prevent the
financial damage that would follow the South African government's taking the 'moral high
ground'. This is also an excellent example of the tough dilemmas that ethical considerations can
induce.

• Accommodation strategy
An accommodation strategy involves acknowledging responsibility for actions, probably when
one of the following circumstances pertains.
(a) There is encouragement from special interest groups
(b) There is a perception that a failure to act will result in government intervention
The essence of the strategy is action to forestall more harmful pressure.
This approach sits somewhere between a proactive and a reactive

Benefits/Importance Of Business Ethics And Social Responsibility

- Goodwill
- Good reputation
- Satisfies customers
- Satisfies employees
- Positive public relations
- Productivity and efficiency may be enhanced as workers will be motivated with fair
business practices.
- Corporate image building.
- Maintenance of sound mutuality and relations with the society.
- Increased sales,
- Increased market.
- Increased profits.

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