ENTREPRENEURSHIP SKILLS DEVELOPMENT

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 CHAPTER I

CONCEPT OF ENTREPRENEURSHIP

Objectives
By the end of this chapter the student should be able to:
 Define entrepreneurship
 Describe the characteristics of successful entrepreneurs
 Discuss the roles of SMEs in the economy
 Analyze the various forms of business ownership

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.

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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 imitativeness 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 entrepreneur. Managers or employees who carry out entrepreneurial roles are aware of
opportunities and they initiate changes to take full advantage of them.

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

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The word intrapreneurship is attributed to Gordon Pinchot 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

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

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people have ideas but they are a few who decide to do something about them now and not
tomorrow.

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

Perception of opportunity or opportunity seeking

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

Moderate risk taking

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

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

Long-term perspective
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-

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image are basically satisfied to be the type of people they are. This self-faith is even
important than self-confidence especially when serious setbacks and failure occur.

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

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

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

Some of the characteristics of an entrepreneur include; patience, friendliness, hardworking,

reliability, dedicated ness, responsibility, objectivity, rationality, honesty, determination,
courage, flexibility, imaginativeness and knowledge.

In a word, successful entrepreneurs must have appropriate personal characteristics, business

skills where necessary.

TYPES OF BUSINESS ORGANISATIONS

A business is an organization that uses economic resources or inputs to
provide goods or services to customers in exchange for money or other goods
and services. Business organizations come in different types and forms. There
are 4 Types of Business,

1. Service Business
A service type of business provides intangible products (products with no
physical form). Service type firms offer professional skills, expertise, advice,
and other similar products.
Examples of service businesses are: schools, repair shops, hair salons,

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banks, accounting firms, and law firms.

2. Merchandising Business
This type of business buys products at wholesale price and sells the same
at retail price. They are known as "buy and sell" businesses. They make profit
by selling the products at prices higher than their purchase costs. A
merchandising business sells a product without changing its form.
Examples are: grocery stores, convenience stores, distributors, and other
resellers.

3. Manufacturing Business
Unlike a merchandising business, a manufacturing business buys
products with the intention of using them as materials in making a new product.
Thus, there is a transformation of the products purchased. A manufacturing
business combines raw materials, labor, and factory overhead in its production
process. The manufactured goods will then be sold to customers.

4. Hybrid Business
Hybrid businesses are companies that may be classified in more than one
type of business. A restaurant, for example, combines ingredients in making a
fine meal (manufacturing), sells a cold bottle of wine (merchandising), and fills
customer orders (service). Nonetheless, these companies may be classified
according to their major business interest. In that case, restaurants are more of
the service type – they provide dining services.

Forms of Business Organization

These are the basic forms of business ownership:

1. Sole Proprietorship

 A type of business unit where one person is solely responsible for

providing the capital and bearing the risk of the enterprise, and for the

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 management of the business.
 A sole proprietorship is a business owned by only one person. It is easy to
set-up and is the least costly among all forms of ownership.
 The owner faces unlimited liability; meaning, the creditors of the
business may go after the personal assets of the owner if the business
cannot pay them.
 The sole proprietorship form is usually adopted by small business
entities.

Characteristics of sole proprietorship form of business organization

(a) Single Ownership: The sole proprietorship form of business organization has
a single owner who himself/herself starts the business by bringing together all
the resources.
(b) No Separation of Ownership and Management: The owner himself/herself
manages the business as per his/her own skill and intelligence. There is no
separation of ownership and management as is the case with company form of
business organization. A sole proprietor contributes and organizes the resources
in a systematic way and controls the activities with the objective of earning
profit.
(c) Less Legal Formalities: The formation and operation of a sole proprietorship
form of business organization does not involve any legal formalities. Thus, its
formation is quite easy and simple.
(d) No Separate Entity: The business unit does not have an entity separate from
the owner. The businessman and the business enterprise are one and the same,
and the businessman is responsible for everything that happens in his business
unit.
(e) No Sharing of Profit and Loss: The sole proprietor enjoys the profits alone.
At the same time, the entire loss is also borne by him. No other person is there
to share the profits and losses of the business. He alone bears the risks and reaps
the profits.
(f) Unlimited Liability: The liability of the sole proprietor is unlimited. In case
of loss, if his business assets are not enough to pay the business liabilities, his
personal property can also be utilized to pay off the liabilities of the business.

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(g) One-man Control: The controlling power of the sole proprietorship business
always remains with the owner. He/she runs the business as per his/her own
will.
Merits of Sole proprietorship
(a) Easy to form and wind up.
(b) Quick decision and prompt action.
(c) Direct motivation.
(d) Flexibility in operation.
(e) Maintenance of business secrets.
(f) Personal Touch.

Limitations of sole proprietorship

(a) Limited Resources.
(b) Lack of Continuity.
(c) Unlimited Liability.
(d) Not Suitable for Large Scale Operations.
(e) Limited Managerial Expertise.

2. Partnership
 A partnership is a business owned by 2 to 20 persons who contribute resources
into the entity. The partners divide the profits of the business among
themselves.
 Types of partnerships include, general / ordinary partnerships where all
partners have unlimited liability and limited / extra ordinary partnerships
where creditors cannot go after the personal assets of the limited partners.

Characteristics of partnership form of business organization

Based on the definition of partnership as given above, the various characteristics
of partnership form of business organization, can be summarized as follows:

(a) Two or more persons: To form a partnership firm at least two persons are
required. The maximum limit on the number of persons is ten for banking

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business and 20 for other businesses. If the number exceeds the above limit, the
partnership becomes illegal and the relationship among them cannot be called
partnership.
(b) Contractual Relationship: Partnership is created by an agreement among the
persons who have agreed to join hands. Such persons must be competent to
contract. Thus, minors, lunatics and insolvent persons are not eligible to become
the partners. However, a minor can be admitted to the benefits of partnership
firm i.e., he can have share in the profits without any obligation for losses.
(c) Sharing Profits and Business: There must be an agreement among the
partners to share the profits and losses of the business of the partnership firm. If
two or more persons share the income of jointly owned property, it is not
regarded as partnership.
(d) Existence of Lawful Business: The business of which the persons have
agreed to share the profit must be lawful. Any agreement to indulge in
smuggling, black marketing etc. cannot be called partnership business in the
eyes of law.
(e) Principal Agent Relationship: There must be an agency relationship between
the partners. Every partner is the principal as well as the agent of the firm.
When a partner deals with other parties he/she acts as an agent of other partners,
and at the same time the other partners become the principal.
(f) Unlimited Liability which applies to a general partnership: The partners of the firm
have unlimited liability. They are jointly as well as individually liable for the debts
and obligations of the
firms. If the assets of the firm are insufficient to meet the firm’s liabilities, the
personal properties of the partners can also be utilized for this purpose.
However, the liability of a minor partner is limited to the extent of his share in
the profits. And also, for a limited partnership, liability is limited.
(g) Voluntary Registration: The registration of partnership firm is not
compulsory. But an unregistered firm suffers from some limitations which
makes it virtually compulsory to be registered. Following are the limitations of
an unregistered firm.
(i) The firm cannot sue outsiders, although the outsiders can sue it.
(ii) In case of any dispute among the partners, it is not possible to settle the
dispute through court of law.

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(iii) The firm cannot claim adjustments for amount payable to, or receivable
from, any other parties.

Merits of partnership form

(a) Easy to form
(b) Availability of larger resources
(c) Better decisions due to consultations.
(d) Flexibility
(e) Sharing of risks
(f) Keen
(g) Benefits of specialization
(h) Protection of interest
(i) Secrecy

Limitations of partnership form

A partnership firm also suffers from certain limitations. These are as follows:
(a) Unlimited liability
(b) Instability
(c) Limited capital
(d) Non-transferability of share
(e) Possibility of conflicts

Types of partners
(a) Based on the extent of participation in the day-to-day management of the
firm partners can be classified as ‘Active Partners’ and ‘Sleeping Partners’. The
partners who actively participate in the day-to-day operations of the business
are known as active partners or working partners. Those partners who do not
participate in the day-to-day activities of the business are known as sleeping or
dormant partners. Such partners simply contribute capital and share the profits
and losses.
(b) Based on sharing of profits, the partners may be classified as ‘Nominal
Partners’ and ‘Partners in Profits’. Nominal partners allow the firm to use them
name as partner. They neither invest any capital nor participate in the day-today

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operations. They are not entitled to share the profits of the firm. However,
they are liable to third parties for all the acts of the firm. A person who shares
the profits of the business without being liable for the losses is known as partner
in profits. This is applicable only to the minors who are admitted to the benefits
of the firm and their liability is limited to their capital contribution.
(c) Based on Liability, the partners can be classified as ‘Limited Partners’ and
‘General Partners’. The liability of limited partners is limited to the extent of
their capital contribution. This type of partners is found in Limited Partnership
firms in some European countries and USA. So far, it is not allowed in India.
However, the Limited liability Partnership Act is very much under
consideration of the Parliament. The partners having unlimited liability are
called as general partners or Partners with unlimited liability. It may be noted
that every partner who is not a limited partner is treated as a general partner.
(d) based on the behavior and conduct exhibited; there are two more types of
partners besides the ones discussed above. These are:
(a) Partner by Estoppels; and
(b) Partner by Holding out.
A person, who behaves in the public in such a way as to give an impression that
he/she is a partner of the firm, is called ‘partner by estoppels. Such partners are
not entitled to share the profits of the firm, but are fully liable if somebody
suffers because of his/her false representation. Similarly, if a partner or
partnership firm declares that a particular person is a partner of their firm, and
such a person does not disclaim it, then he/she is known as ‘Partner by Holding
out’. Such partners are not entitled to profits but are fully liable as regards the
firm’s debts.

3. Limited Liability Companies

 A joint stock business owned by at least 2 shareholders.

 There are 2 types i.e. private limited and public limited companies.
 Limited liability companies (LLCs), are hybrid forms of
business that have characteristics of both a corporation and a partnership.
 Nonetheless, the owners enjoy limited liability like in a corporation.

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  Memorandum of Association
- Describes what company has been formed to do i.e. its purpose/mission
- Company name
- Statement of liability
- Maximum number and value of shares available
 Articles of Association - internal rules covering:
- What directors can do
- Appointment of directors
- Conduct of directors ‘board meetings
- Distribution of profits
- Procedure for selling shares
- Keeping of records e.g. minutes
- Increasing and decreasing of shares available
- Voting rights of shareholders
- Limited liability means that investors can only lose money they have
invested.
 Encourages people to finance company
 Obtains a certificate of incorporation after submitting an application with the
memorandum of association and articles of association
 Limited liability means that they can only recover money from existing
assets of business. They cannot claim personal assets of shareholders to
recover amounts owed by company.
 Managed by a Board of Directors elected by shareholders during the annual
general meeting. This board is assisted by a C.E.O/ G.M/ M/ COO and his/ her
team made up of functional managers like production/ finance/ marketing/
human resources manager etc.

Merits
 There is continuity of business even if one owner dies.
 More capital is raised.
 Enjoy limited liability.
 Better decisions made due to consultations.
 Enjoys its independent status.

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  Sharing of risks, liability and losses.

Disadvantages
Ownership and control are separate.
Sharing of profits.
Complex registration procedure.
High taxation.
Slow in decision making.

4. Cooperative
 Cooperative Society is defined as “a society, which has its objectives for
the promotion of economic interests of its members in accordance with
cooperative principles.”
 A cooperative is a business organization owned by a group of individuals
and is operated for their mutual benefit. The persons making up the group
are called members. Cooperatives may be incorporated or unincorporated.
 Some examples of cooperatives are: water and electricity (utility)
cooperatives, cooperative banking, credit unions, and housing
cooperatives.

Characteristics of cooperative society

Based on the above definition we can identify the following characteristics of
cooperative society form of business organization:

(a) Voluntary Association: Members join the cooperative society voluntarily

i.e., by their own choice. Persons having common economic objective can join
the society as and when they like, continue as long as they like and leave the
society and when they want.
(b) Open Membership: The membership is open to all those having a common
economic interest. Any person can become a member irrespective of his/her
caste, creed, religion, color, sex etc.
(c) Number of Members: A minimum of 10 members are required to form a
cooperative society. In case of multi-state cooperative societies, the minimum

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number of members should be 50 from each state in case the members are
individuals. The Cooperative Society Act does not specify the maximum
number of members for any cooperative society. However, after the formation
of the society, the member may specify the maximum member of members.
(d) Registration of the Society: In India, cooperative societies are registered
under the Cooperative Societies Act 1912 or under the State Cooperative
Societies Act. The Multi-state Cooperative Societies are registered under the
Multi-state Cooperative Societies Act 2002. Once registered, the society
becomes a separate legal entity and attains certain characteristics. These are as
follows.
(i) The society enjoys perpetual succession
(ii) It has its own common seal
(iii) It can enter into agreements with others
(iv) It can sue others in a court of law
(v) It can own properties in its name
(e) State Control: Since registration of cooperative societies is compulsory,
every cooperative society comes under the control and supervision of the
government. The cooperative department keeps a watch on the functioning of
the societies. Every society has to get its accounts audited from the cooperative
department of the government.
(f) Capital: The capital of the cooperative society is contributed by its members.
Since, the member’s contribution is very limited, it often depends on the loan
from government and apex cooperative institutions or by way of grants and
assistance from state and Central Government.
(g) Democratic Set Up: The cooperative societies are managed in a democratic
manner. Every member has a right to take part in the management of the
society. However, the society elects a managing committee for its effective
management. The members of the managing committee are elected on the basis
of one-man one-vote irrespective of the number of shares held by any member.
It is the general body of the society which lays down the broad framework
within which the managing committee functions.
(h) Service Motive: The primary objective of all cooperative societies is to
provide services to its members.
(i) Return on Capital Investment: The members get return on their capital

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investment in the form of dividend.
(j) Distribution of Surplus: After giving a limited dividend to the members of
the society, the surplus profit is distributed in the form of bonus, keeping aside a
certain percentage as reserve and for general welfare of the society.

Types of cooperative societies

Some of the important types are given below.
(a) Consumers’ Cooperative Societies: These societies are formed to protect the
interest of consumers by making available consumer goods of high quality at
reasonable price.
(b) Producer’s Cooperative Societies: These societies are formed to protect the
interest of small producers and artisans by making available items of their need
for production, like raw materials, tools and equipments etc.
(c) Marketing Cooperative Societies: To solve the problem of marketing the
products, small producers join hand to form marketing cooperative societies.
(d) Housing Cooperative Societies: To provide residential houses to the
members, housing cooperative societies are formed generally in urban areas.
(e) Farming Cooperative Societies: These societies are formed by the small
farmers to get the benefit of large-scale farming.
(f) Credit Cooperative Societies: These societies are started by persons who are
in need of credit. They accept deposits from the members and grant them loans
at reasonable rate of interest.

Merits
 Easy to form
 Limited liability if registered
 Open Membership
 State Assistance
 Stable life
 Tax concessions
 Democratic Management

Limitations

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  Limited Capital
 Lack of Managerial Expertise
 Less Motivation
 Lack of Interest
 Dependence on Govt.
 Unlimited liability if not registered

Roles of Small and Medium Enterprises

What is a small business?

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

Reasons for continued survival of small firms

 Small businesses are able to be more flexible, innovative and can react
changes much quicker
 Small businesses play a supportive role to the giant firms by being
subcontracted in construction, distribution, service and manufacturing sectors
 Small businesses serve small markets (market riches) where large firms do
not have interest
 Small firms receive government support through the Ministry of Small to
Medium Enterprises, ministry of Youth Development Gender and
Employment Creation and Ministry of Higher and Tertiary Education that is
they receive support in form of training and funds. Small firms also pay
lower taxes.

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  Small firms supply their goods and services in smallest lots than giant firms
which usually supply in bulk
 Small firms offer specialized and personalized services to customers e.g.
electrical businesses.
 Small firms remain small usually during the initial phases of new technology
or innovation or product introduction as the firms will be studying market
reactions and modifying the products.

Roles played by small firms to the economy

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

Government Entrepreneurship initiatives

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Government entrepreneurship initiatives are efforts by the government to promote self-
sustenance, entrepreneurship and 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 were 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.

i) Analyze the government initiatives to promote entrepreneurship in Zimbabwe since

1980.
ii) Discuss the roles of the following in promoting entrepreneurship in Zimbabwe
a) AAG
b) Ministry of Small and Medium Enterprises
c) Zimbabwe Cross Boarders Association

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 CHAPTER 2

BUSINESS ENVIRONMENT IN ZIMBABWE

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

History of entrepreneurship in Zimbabwe

Introduction
Zimbabwe has for centuries had strong entrepreneurial abilities. There has been
evidence of all industries stretching from primary, secondary and tertiary industry.
Agriculture, mining, trade, manufacturing industries were there 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.

21
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).
.
Entrepreneurship 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 jewelry
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.

Entrepreneurship 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

22
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, cooper, gold into useful products. The farmers needed
hoes (mapadza), axes (matemo ) etc. The hunters needed spears (mapfumo), bows and
arrows etc. Jewelry such as golden necklaces were also needed by the wealthy people
and the royal family. These products could be traded to other kingdom for other
products. The ironsmith was 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 labor

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

23
Colonization negatively affected the Zimbabwean entrepreneurs and/or industrialists
as well as their governance.

Wars
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.

Farming
The land Issue

 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 laborer’s or squatters.

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

 To solve their labor problems, the company introduced forced labor. The chiefs were
instructed to recruit able bodied men and hand them over to the BSAC as laborer’s-
“chibharo”. 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.

Cattle
 Livestock was seized to force men to go to work for the settler

24
 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.

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.

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 five. 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 Labor Bureau (RNLB) stopped blacks from competing with whites

25
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 motor 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 -2004.

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 000acres was designated as
native land to be shared by the 5 000 000 blacks. The act also barred the races from
encroaching in the other race’s land.

Mining
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.

Hunting

26
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.

Post-Colonial Era
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 was business Startups in the transport sector, retailing,
manufacturing, farming, and many industries.

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

Entrepreneurship 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. EST
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

27
closure of business either permanently or temporarily. Extreme political disturbances or
instability such as tribal or civil conflicts may cause permanent closure of enterprises.
However, this depends on the nature of the business of the entrepreneur. Some political
climates may promote the success of the entrepreneur. At first glance, it would seem that
domestic politics should pose no threat and that a company should have minimal problems at
home. This is often not the case. Although a company’s major political problems usually
derive from political conditions overseas, it must still pay close attention to political
developments at home. Knowledge of the philosophies of all major political parties within
the country is very important since any of them might come to power and alter prevailing
attitudes. It is important to know the direction each is likely to take for example in Britain the
Labour party has traditionally tended to be more restrictive on both foreign and home trade.

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

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

28
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

29
thorough understanding of the language of the customer’s language as well as the ability to
speak or write clearly.

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

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.

30
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 favor in times of need.

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

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

Government

31
Entrepreneurs should of course, respect and obey the law even where they regard it as not in
their best interest. If certain laws are not followed the entrepreneur’s business may be forced
to close down 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.

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.
 Develop a Business Proposal.
 Define a Business Plan
 Discuss the elements/components of a business plan.
 Develop a viable business plan.

GENERATION/CREATION OF A BUSINESS IDEA

 Every business emerges from an idea.
 Businesses get started when people (customers) manifest
their needs and wants.
 Entrepreneurs develop business ideas out of the needs and
wants of people.

32
  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 carry out a feasibility study and SWOT
analysis.
 Feasibility study relates to a detailed investigation of all
 aspects of a business idea in order to determine if it is likely
to be successful.
 Before starting a business, it is essential to research that
 business idea to find if it is feasible.
 A business idea should be practical and profitable.

In terms of feasibility, the entrepreneur needs to consider the

following:

33
  Availability of a viable market
 Competition
 Location
 Infrastructure and facilities
 Raw materials
 Machinery and equipment
 Labor 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

34
 creating a business plan means that the entrepreneur has to
ask a number of key questions about their idea. This should
ensure that before starting up, the business idea would have
been considered with care.

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

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

 It can be an effective communication tool for attracting and

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

 It provides an effective basis for controlling operations so one

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

HOW TO PREPARE A BUSINESS PLAN

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

A sound approach is to :

35
 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.

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

36
 2. Table of contents
3. Executive summary
4. Description of The Business
5. Ownership and Management structure
6. Marketing Plan
7. Production/Operational Plan
8. Financial Plan/Analysis
9. Milestone schedule
10. Appendix

1. Cover Sheet

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

2. Table of Contents

Because the table of contents provides the reader an overview of what

is contained in the plan itself, it should be written and presented
concisely in outline form, using numerical and alphabetical designators
for headings and subheadings.

3. Executive Summary

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

37
  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 falls under
 location - business addresses
 SWOT Analysis

5. Ownership and Management Structure

38
  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 organization 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.

6. Marketing Plan

Include information about:

a) Marketing objectives
b) The target markets
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 motive 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.

39
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

40
  Resumes of officers
 Supportive market research
 Brochures of other published information describing
the products you provide.
 Letters of recommendations or endorsements etc.

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

Activity
i) Analyze the history of entrepreneurship in Zimbabwe
ii) Examine the effects of colonization on entrepreneurship in Zimbabwe

41
 CHAPTER 3

HUMAN RESOURCE MANAGEMENT

OBJECTIVES
 Define human resources management
 Explain the human resource management process
 Outline the theories of staff motivation

DEFINITION
It is the process of analyzing and managing an organization’s human resource needs
to ensure satisfaction of its strategic objectives.

KEY CONCEPTS
i) Process – systematic on going – requires first setting staffing objectives.
ii) Analyzing
iii) Managing
iv) Needs
v) Satisfaction
vi) Strategic objectives

THE STAFFING PROCESS

42
Staffing is the process by which organizations satisfy their human resource needs by
forecasting future needs, recruiting and selecting candidates and orienting new
employees.

COMPONENTS OF STAFFING PROCESS

i) Planning
The organization needs to forecast its human resources requirements so as
to determine (a) the number of employees to hire and (b) the types of skills
needed (c) determine when the employees are needed.
ii) Recruitment
Organizations should develop a pool of job candidates from which to
select qualified employees e.g. running adverts, contacts employment
agencies etc.

iii) Selection and hiring

Organization selects and hires people who are to do well at work.

iv) Orientation
Programs must be set aside to familiarize new employees company
policies, safety codes and those expectations compensations and employee
benefits.

v) Movement
Refers to promotions, demotions, transfers, restricting and training within
the organizations.

vi) Separation
May occur as a result of the employee finding a new job, retiring,
becoming disabled, being fired.

PLANNING
Tools and Techniques

43
 i) Skills inventory
Refer to a detailed file maintained for each employee that lists his/her level
of education, training, experience, length of service, current job title and
salary, performance history and personal demographics (age, gender,
marital status etc.). These files can help management spot human resources
gaps when making plans for diversifications/expenses.

ii) Job analysis

Refer to the breakdown of tasks for a specific job and the personal
characteristics determined to be necessary for their successful
performance.

Categories
i) Job description
A detailed outline of a position’s essential tasks and responsibilities
.
ii) Job specification
A listing of the personal characteristic

iii) Replacement chart

Is a diagram showing each position in the organization’s management
hierarchy, with the name of each incumbent and names of candidates
eligible to replace him/her. These charts are confidential – provide a
simple means of forecasting management needs and internal availability.

iv) Expert forecasts

- Used to determine an organization’s demand for human resources.
- The expert’s predictions are based on underlying assumptions e.g. the
expected rate of growth and the area’s future unemployment rate.

RECRUITMENT

44
The process of searching, both inside and outside the organization for employees to
fill vacant posts.

FACTORS AFFECTING RECRUITMENT

First regulations
An organization recruiting policies and practices are significantly influenced by the
regulatory environment (get policies/regulations).

Labor unions
Events corruption and illegal/unfair labor practices.

Labor market
If local supply exceeds local demand

SELECTION AND HIRING

Involves filling the vacant posts.
Sources that aid selections include;
a) CVs (Resumes).
b) Reference checks – from former employers.
c) Job applications forms – to gather info on age, education etc.
d) Realistic job previews – clearly showing the conditions the tasks/requirements
of a job.
e) Interviews.
f) Tests.
g) Assessment centers – a human resource selection tool that simulates job
situations in order to assess potential employees’ performance.

ORIENTATION
Is a formal or informal programme that introduces new employees to their job
responsibilities, their core workers and company policies.
- Effective orientation programmes serve two purposes,
a) To inform new employees about benefits, company produces and their routine
matters.

45
 b) To socially orient new employees by the tuning of their job-related
expectations, identifying reporting relationships and setting a tone for their
work.

BENEFITS
Promises development of realistic job expectations.

COMPENSATION AND BENEFITS

i) Compensations
Refers to the wages/salaries, bonuses and other monetary items paid to
employees in exchange for their labor. The purpose of any compensation
system is to reward workers equitably and to serve as a means of attracting
potential employees and retaining good employees.

ii) Benefits (aka indirect compensation)

Are pensions, health and life insurance, vacations, sick leaves and similar
nonmonetary remuration for employees.
PERFOMANCE APPRAISALS
Is the process of systematically everlasting each employees’ job-related strengths and
weakness, as well as determining ways of improving his/her performance?

KEY CONCEPTS (class discussion)

1) Systematically
2) Everlasting
3) Job related
4) Improving
5) Performance

 P.A is essential if the organization is to reward fairly the efforts of good

performance, redirect the efforts of struggling performance and know when to
let go of inadequate performances.

CHARACTERISTICS OF EFFECTIVE P.A

46
 - Provision of clear feedback to employees on how they are doing.
- Allowing managers to make short- and long-range administrative
decisions about pay increases, promotions and transfers on
performance.

USES OF P.A
1) Reward decisions
Basing pay, business and other financial rewards on performances.

2) Personnel movement
To make decisions on promotion, transfer, demotion on termination.

3) Feedback on performance
Identify strengths and weaknesses as well as guidelines on how to build on the
strengths and contracts the weakness.

4) Training needs
Training programmes to improve certain skills.

PROBLEM WITH P.A

1) Subjectivity
Bias/flowed assessment.
- Rater characteristics (managers will receive low rating, rate others
more strictly).
- Leniently (placing employees in a group higher than they were for
several unprofessional reasons).
- Halo effect (manager allows his knowledge of the employees on one
characteristic to color rating on all other dimensions).
- Central tendency (award of average rating to all employees even if
their performance varies).
- Political issues
The politics often play a role in deciding who gets a raise

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

Theories of Motivation and their implications to the entrepreneur

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

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  McClelland’s achievement motivation theory

Maslow’s hierarchy of needs theory

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

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

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

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

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

Physiological i.e. shelter, clothing, food

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.

49
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.

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 health 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
organization and as such entrepreneurs should not that.

Herzberg’s two factor theory

Hygiene theory

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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

- Increased productivity
- Increased efficiency and effectiveness
- Good corporate image building

51
- Increased sales and profits
- Good customer relations
- Promotes team spirit (team work) or cooperation and support by employees
- Promotes entrepreneurship by employees that is innovativeness, creativity and initiative
ness resulting in the growth or expansion of the enterprise

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.

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

52
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 organization as well as hired by an organization
to give it direction. Managers are employed so that the operations of these
organizations 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;

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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 organization’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 organization 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;

 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
 designing a control procedure

Manager’s questions in planning

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

B. LEADING

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Leading is the ability to initiate action, guide, supervise and direct others
(subordinates) in pursuit of a common goal. Organizational 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 ii 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.

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

55
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. Organizing as a process involves;

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

Principles of organizing
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 Heiman, “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

56
enforceable standards and on monitoring of performance by people, machines and
processes. Therefore, controlling has the following steps;
 establishment of standard performance
 measurement of actual performance
 comparison of actual performance with the standards and finding out if there
are any deviations
 taking of corrective action if necessary.

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

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

ROLES OF MANAGEMENT

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 behaviors or roles within a
business environment. Each role is different, thus spanning the variety of all identified
management behaviors. 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

57
ROLES DESCRIPTION EXAMPLES OF
ACTIVITIES
1. INTERPERSONAL

a. Figurehead Symbolic head, obliged Greeting visitors,

to perform a number of signing documents
team duties of a legal or
social nature

b. Leader Responsible for the Performing all

motivation of activities that involves
subordinates, staffing subordinates
and training, selects and
disciplines.
c. Liaison
Maintains a network of Acknowledging mail,
outside contacts and external board work
informers who provide
favors and information

2. INFORMATIONAL

a. Monitor -Seeks and receives -reading periodical and

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

b. Disseminator Holding meetings,

58
 Transmits information making phone calls to
from outsiders or from relay information,
the subordinates to sending memos
members of the
organization
c. Spokesman
Holding board
Transmits information meetings and giving
to outsiders on information to the
organizational policies, media
actions, results etc.
through speeches and
reports.

3. DECISIONAL

a. Entrepreneur Initiates new projects, Organizing strategy

spot opportunities, review sessions to
identify areas of develop new
business developments programmes
b. Disturbance handler
Responsible for Resolving conflicts
corrective action when among staff, adapt to
organization faces external changes and
unexpected disturbances organizing strategies
and crises that involves
c. Resource allocator disturbances and
conflict
Responsible for the
allocation of Scheduling, requesting,
organizational resources authorization and
of all kinds, setting of budgeting activities
d. Negotiator priorities, budgeting

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 Responsible for
representing the Participating in
organization at major collective bargaining
negotiations with
unions, suppliers and
generally defend
interests

The roles point to managers needing to be organizational generalists and specialists

because of;
 system imperfections and environmental pressures
 their formal authority is needed even for certain basic routines
 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 environment
 ensuring that the organization satisfies those that own it
 boundary management- maintaining information links between the
organization 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

60
 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 organization as a whole and the relationships among its various sub-units and
to visualize how the organization 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 labor-work should be divided into smaller units that permit
specialization.

2. Authority and responsibility-organizational structure should clearly show

levels of authority and responsibility.

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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.

6. Subordination of individual interest to the common good- the interests of an

individual or group should not take precedence over interests of the
organization.

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

8. Centralization- the proper degree between centralization and decentralization

should be found.

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

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

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

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

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

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

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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, organizing and controlling- PLOC) with diligence so as to facilitate the
accomplishment of set organizational 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.

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 organization at a special award ceremony

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

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 CHAPTER 5

CUSTOMER CARE

OBJECTIVES
By the end of the unit you should be able to:
 Define customer care
 Discuss the tips of customer care
 Explain the benefits of customer care to the entrepreneur
 Design a customer programme and charter

Customer care
- is the manner in which customers are treated by the business?
- Customer care creates a new orientation in an organization 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 organization 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 organization

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 - In the modern business world, there is an increasing focus on enhancing service
delivery and on ascertaining that the delivered as promised
- An entrepreneur should be responsible, accessible and quick to help source problems
- Should be reliable and deliver what he/she promises on time
- Should be knowledgeable and courteous
- Should be empathetic and should understand the needs of customers
- Work area should always be clean and organized.
-

Ten tips for customer care

1. Reliability
- this refers to consistency of performance and dependability
- perform the service right the first time fulfill promises
- be impartial and avoid favoritism
- 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, telephones, etc., they must be
polite and courteous at all times – remember, a smile goes a long way.

65
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)

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 - Create corporate excellence
- Build good reputation and good image i.e. it is a tool for good corporate image
building
- Business can become a market driven entity as you get information on what your
customers need and want.

Perquisites of meeting Customers’ expectations

1) be courteous and tactful

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

Who gets to decide if a customer service is good?

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

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

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

Dealing with unprincipled customers

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

You can defeat unprincipled customers by taking the following steps:

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

Building Customer Trust

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

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 9. Recommend a competitor when there’s a need that you can’t satisfy.
10. Make yourself available after the sale.

Creating Customer Comfort

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

Develop and maintain a customer charter

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

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

2. Enquires
- short turnaround time
- follow up
- courtesy options offered to caller

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

4. Delivery deadlines met

Delays explained and apology given

5. Outgoing services

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

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 CHAPTER 6

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 labor
 Direct expenses
 Indirect costs

 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

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- 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 labor 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
labor must be big enough to add a considerable amount to the total direct labor costs.
Retailers and wholesalers do not have employees working directly in making products, so
they do not have any direct labor 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 labor 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

Total cost per item:

STEP III
Direct cost per item + indirect cost per item

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

Costing calculations in detail (Manufacturer or service operator)

Stage I: Calculate Direct Material Costs

The entrepreneur should calculate the costs of all material
 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 Labor 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

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

Costing calculations where not more than one product is produced.

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

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

100 items are produced each month

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

Direct Labor: 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 $ 2 000.00
$19 500.00

Indirect Cost/item: $19 500.00

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 100 items/month
= $195.00/item
Total cost of one item: Direct material cost + Direct Labor 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.

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

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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:

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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 labor 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 Labor
= $1 300.00 + $16 000.00
= $17 300.00 per dress

Trousers: $1 600.00 + $24 000

= $25 600.00 per pair of trousers

4th calculate indirect costs: Rent $6 000 000.00

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

5th calculate production hours per year

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

6th indirect cost per hour:

Formula: indirect cost/year

Production hrs./yr

= 1 080 000/yr
4 000 hrs/yr

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 = $270/hr

7th calculate indirect cost per item:

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

= $ 1 660.00/dress

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

= $ 3 240.00/pair

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

= $18 960.00

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

= $28 840.00

Further Questions

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

Materials Skirt Dress

Fabric $2 000.00 $3 000.00

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

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

Indirect costs per year:

Rent $600 000.00

Electricity $360 000.00
Transport $240 000.00

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

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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 labor 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

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

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

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

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

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

Material Dress Skirt

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

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:
c)

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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, whichever 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.

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

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

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

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

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

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

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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
 Outline effective buying and stock control procedures

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 processes

It involves:
Recording Classifying Summarising Interpreting of

business activities capable of being expressed in monetary terms.

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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.

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
- Receipts are used by the entrepreneur or supplier when the transactions involve cash e.g.
where a customer tenders’ cash, a receipt may be written out. Below is a sample of a receipt

Books of primary entry is obtained

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

CHEGUTU
Telefax: 703301

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

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

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

The following is a sample of an invoice

Invoice 00214
Date: 26/02/04

Gobvu Manufacturing (Pvt) Ltd

P O Box 39
KWEKWE
Telefax: 055 50221

To: Makayepuva (Pvt) Ltd

Chuma street

MASVINGO

Tel: 039 62043

Item purchased Quantity Unit cost Total______

500ml super stick glue 500 $100.00 $50 000.00

less 5% discount if paid
within 30 days 85

T l $50 000 00
Debit Note is used to correct an undercharge on a customer’s account e.g. when the price shown
on the invoice is too low or when some items have not been shown. Sometimes a second invoice
is issued in this instance rather than a debit note.

Below is an example of a debit note

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

Item description Quantity Unit price Total___________

Total to be debited:
Reasons for debit:

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

The following is a layout of a credit note

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

Item Description Quantity Unit Price Total______

Total to be credited

Reason for credit:

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

Below is the layout and a specimen of a statement

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

Date Details Amount Balance_________

Balance remaining

Specimen
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.

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

87
Price list is a list showing all of the items for sale together with their prices.

Order Note is a letter requesting goods from the supplier.

Below is a layout of an order note

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

TOTAL_________________

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

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

Below is the layout of Delivery Note

Delivery note
Customer’s Name & Address:
Customer Ref:
Date:
Supplier’s name & Address
Delivery Note No:

Item description Quantity___________

Customer’s signature………………_______________________________

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

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

Appreciation of Books of Accounts

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

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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
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:

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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.

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

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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.

ACCOUNTING EQUATION
When an entrepreneur starts a business, he supplies part of the resources (Capital). He
seeks assistance from other sources (Liabilities), so as to have adequate resources. These
resources are the assets of the business. At any point of time the assets of any entity must
be equal (in monetary terms) to the total of equities. This can therefore be expressed as
What are the resources? Who supplies the equities to acquire the assets?
ASSETS = CAPITAL + LIABILITIES
Account
It is a place where all information referring to a particular asset or liability or capital is
entered.

Business is not entirely carried out on cash basis, many of the things bought when a
company is established are not exhausted straight away e.g. buildings and machinery. It is

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necessary therefore to have some method of showing the financial position of the
business from time to time and of calculating the amount of profit which is available for
the entrepreneur. This is the purpose of a system of accounts.

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

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

Cashbook

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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
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.

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- 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

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

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

Example; Mutsvedu (Pvt) Ltd

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

Date Details Folio Dr Cr

01/02 Office furniture 100 000.00
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:

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- 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.

DOUBLE ENTRY SYSTEM

It is based on the Double entry concept which is one of the universally acknowledges
accounting concepts. It says that for every transaction there is a debit and credit entry.

 Debit the receiver

 Credit the giver

Example 1

2010 Debit (Dr) Credit (Cr)

August 1 Started business with $1000 cash Cash Account Capital Account
2 Paid $900 of the opening cash into the Bank a/c Cash a/c
bank
4 Bought goods on credit $78 from Purchases a/c S.Holmes a/c
S.Holmes
5 Bought a motor van by cheque $500 Motor Van a/c Bank a/c
7 Bought goods for cash $55 Purchases a/c Cash a/c
10 Sold goods on credit $98 to D.Moore D.Moore a/c Sales a/c
12 Returned goods to S.Holmes $18 S.Holmes a/c Purchases Returns
19 Sold goods for cash $28 Cash a/c Sales a/c
22 Bought fixtures on credit from Fixtures a/c Kingston a/c
Kingston Equipment Company $150
24 D.Watson lent us $100 paying us the Bank a/c Loan-D.Watson
money by cheque
29 We paid S.Holmes his account by S.Holmes a/c Bank a/c
cheque $60
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 31 We paid Kingston Equipment Co. by Kingston a/c Bank a/c
cheque $150

Opening up accounts and closing them in the ledger

When transactions transpire within a month/financial period they are posted into the
ledger of the company’s books from subsidiary books. Accounts for related transactions
are recorded in the same accounts and these are balanced off at the end of a period.

 We are going to used T-Accounts for our ledger to open up accounts using
Example 1 above. We are now practically entering the theoretically done debits
and credits in the example.

Capital a/c Purchases a/c

S.Holmes 78 Bal c/d 133
Bal c/d 1000 Cash 1000 Cash 55
1000 1000

Bal b/d 1000 133 133

Bal b/d 133

Cash a/c
Capital 1000 Bank 900
Sales 28 Purchases 55
Bal c/d 73
1028 1028 S.Holmes a/c
Bal b/d 73 P.Returns 18 Purchases 78
Bank 60
78 78
Bank a/c
Cash 900 M.Van 500
Loan 100 S.Holmes 60 Motor Van a/c
Kingston 150 Bank 500 Bal c/d 500
Bal c/d 290 500 500
1000 1000
Bal b/d 290 Bal b/d 500

98
 Sales a/c
Bal c/d 126 D.Moore 98
Cash 28
126 126

Bal b/d 126

D.Moore a/c
Sales 98 Bal c/d 98
98 98
Bal b/d 98
Purchases Returns a/c
Bal c/d 18 S.Holmes 18
18 18
Bal b/d 18

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

Loan- D.Watson a/c

Bal c/d 100 Bank 100
100 100
Bal b/d 100

Kingston Equipment a/c

Bank 150 Fixtures 150

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

Definition: A trial balance is simply a proof of the equality of debit and credit balances in the
accounts.

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

Trial Balance as at 31 August 2010

Dr Cr

Capital 1000
Cash 73
Bank 290
Purchases 133
Motor Van 500
Sales 126
D.Moore 98
Purchases Returns 18
Fixtures 150
Loan-D.Watson 100
1244 1244

The two sides are equal therefore the trial balance has balanced. This shows that our transactions
that we posted into the ledger are correct.

FINAL ACCOUNTS OF A SOLE TRADER

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  Income Statement/Trading Profit and Loss Account
 Balance Sheet

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

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

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

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

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

Stock at 30 September 2010 was $2946.

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

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

Sales 18 600
Less Returns inwards (205)
18 395

Less Cost of goods sold:

Opening Stock 2 368
Add Purchases 11 874

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

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

Balance Sheet as at 30 September 2010

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

Net Current Assets 5 593

Current Assets 7 324

Stock 2 946
Debtors 3 896
Bank 482
Current Liabilities 1 731
Creditors 1 731

Total Assets 12 743

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

12 743

STOCK CONTROL

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.

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.

104
Minimum inventory investment
Batching economies in procurement shipments e.g. truckloads can reduce/minimise the amount of
money you use in inventory transportation and carrying costs.

METHODS OF STOCK CONTROL

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

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

(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.

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 on 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.
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 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

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

How to carry out a stock take

STEPS:
1st Set a date for stock take and inform the publics if business hours are interrupted
2 nd
Organize the stock to facilitate easy counting
3rd Develop a stock list
4th Physically count every item as per stock list and enter the figure in the ‘stock take’ column
5th Enter the last balance figure from the stock cards in the stock card column for each item
6 th
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.

107
 CHAPTER 8

MARKETING

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

 Define marketing
 Describe the marketing mix elements
 Apply the marketing mix to product and service situations
 Prepare a marketing plan

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

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

This is a more detailed definition and identifies some specific 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

108
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
Kotler (1991) also uses the word demand which refers to the wants being backed up by an ability
to pay, i.e. 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 organization should go about its business.

The Marketing Mix Strategies

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 price promotion
product and place.

Marketing activities
The basic marketing mix offers us a useful framework within which to discuss the relationship of
marketing activities to other organizational 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 e.g. sturdy boxes for breakable products
(ii) Preservation of the product e.g. plastic bags to keep bread and cakes fresh and
hygienic
(iii) Security of product e.g. 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 e.g. different types of nozzles on drinks and sauce

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containers
(v) Branding e.g. the Coca-Cola bottle is a huge source of promotion for the company
(vi) Profitability e.g. 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 organization’s globalization 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 organization 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 organizations 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.

 Promotion
Promotion is, of course, the focus of a great deal of marketing attention and might, with
justification, be regarded as the marketing specialist's home turf. Nevertheless, it does not take
place in a vacuum. It must not promise what cannot be delivered, it must work within budget
(particularly where sales promotion is concerned) and individual aspects of promotion must not
undermine the overall corporate image. It is important to remember the product or service's Unique
Selling Proposition (USP) or Basic Consumer
Benefit (BCB) and ensure that the message is in alignment with these. The medium of
communication must then match the message. Promotional tools include advertisements, press
releases, sales promotions, in-store demonstrations, exhibitions, trade fairs and public relations.

 Price
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Cost is a major consideration in price-setting and here the marketer must utilize 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.

 Physical evidence
These are the tangibles of the organization used to identify and separate an organization from its
competitors. Include the logo, uniforms, colors, flag, buildings, branded cars etc.

 People
These are the workers of the organization which includes their qualifications, skills, abilities,
politeness, presentation etc.
Process
These includes the delivery systems, ordering systems like online, and payment systems like cash,
swipe, RTGs, Eco cash etc

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Product Life Cycle

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

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

For the various stages of the cycle ,different objectives and strategies can adopted.this are
digrammatically shown on the next page:

The purpose and content of the marketing plan

A marketing plan is a specification of all aspects of an organization’s marketing intentions and
activities. It is a summary document, providing a framework that permits managers and specialists
to undertake the detailed work of marketing in a coordinated and effective fashion.
The creation of a good marketing plan is likely to be a time-consuming exercise, since it should
deal with both current circumstances and plans for the future.
(a) It should be based on detailed knowledge of both the target market and the company
involved.
(b) It should give sufficient detail of intentions to support the design and operation of all
marketing-related activities
.

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The marketing plan and corporate strategy
It is important to remember how the marketing plan fits into overall corporate strategy.
Students are often confused by the appearance of environmental analysis in the marketing planning
process and assume that this means that the marketing plan is the same thing as the overall
corporate strategic plan. This may be true in some highly marketing-oriented organizations, but it is
not necessarily so. The marketing plan and the corporate strategic plan are not the same thing. The
difference is largely one of scope: the corporate plan has to consider all aspects of the
organization’s business, while a marketing plan is principally about marketing activities. The
marketing plan is aligned with the corporate plan and supports it.
T FORWARD
What goes into the marketing plan?
There is no standard template or list of contents for a marketing plan. Different organizations will
find it
appropriate to consider different things at different times in their development. We will look at one
possible detailed layout for a marketing plan in Section 3. In this section we will look in general
terms at
what is likely to appear in most marketing plans.

The marketing plan – an outline

1 Situation analysis
PESTEL – SWOT – Market analysis and
marketing objectives
2 Marketing strategy
Objectives – tactics – marketing mix
3 Numerical forecasts
Sales – expenses
3 Controls

Marketing organization – performance measures

These four basic elements constitute a logical sequence of development for the basic building
blocks of the marketing plans. Ensure that you remember this basic structure. If all else fails in the
examination, it should enable you to organize your thoughts and make a creditable attempt at
preparing a marketing plan.

(a) Situation analysis. Any planning process should start with the collection and analysis of

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

The marketing plan in detail

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

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• The proposed marketing mixes
• Sales forecasts

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

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

3 Marketing strategy
Marketing strategy includes objectives and methods and may deal with such matters as gap
analysis, target markets, the marketing mix and marketing research. The marketing strategy section
of the marketing plan should describe in detail the organization’s
marketing objectives and methods.

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

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

4.2 Breakeven analysis

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

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

Entrepreneurship Strategies

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

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

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growth occurs when a business combines its resources with those of another business. The result
will either be a merger or takeover (acquisition).

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

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

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

2. Market development strategy

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

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

B. Integrative Growth
- business sales and profits can be increased through

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

Ansoff’s Growth Strategies Grid:

Current products. New products.

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

Ansoff’s Growth strategies

1.Market penetration
a) market development
b) product development

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

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

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

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

Diversification Growth.

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

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

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

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

Other Entrepreneurship strategies

- a strategy is a method used to achieve a goal

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

Advantages to the franchiser - marketing/distribution costs

shared
- increased distribution - production accepted by locals
- some operating costs are when local franchise ownership is
transferred held

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 - Retains quality control of products
is a franchise agreement
-

Advantages to the franchisee

- less risk with market tested

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

Disadvantages to the franchiser

- control of franchisees are far away

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

Disadvantages to the franchisee

- gives up freedom in management

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

- Buying an established busines

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Advantages

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

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

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

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 CHAPTER 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

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

Risk management is the identification, assessment, and prioritization of risks(defined in

ISO 31000 as the effect of uncertainty on objectives, whether positive or negative)
followed by coordinated and economical application of resources to minimize, monitor,
and control the probability and/or impact of unfortunate events[or to maximize the
realization of opportunities.

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

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

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

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

Method

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

1. identify, characterize, and assess threats

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

Principles of risk management

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
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  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

Risk Management Process

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

Establishing the context

Establishing the context involves:

1. Identification of risk in a selected domain of interest

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

Identification

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

Examples of risk sources are: stakeholders of a project, employees of a company or the

weather over an airport.

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

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

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

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 would affect, or one can begin with the consequences and determine which
combination of threats and resources would be involved to bring them about.

Assessment

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

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

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

Risk Options

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

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

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

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

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

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

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

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

Potential risk treatments/ Risk Management Strategies

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
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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, optimizing 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 optimize risk to achieve levels of residual
risk that are tolerable

Modern software development methodologies reduce risk by developing and delivering

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

Outsourcing could be an example of risk reduction if the outsourcer can demonstrate

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

Risk sharing

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

The term of 'risk transfer' is often used in place of risk sharing in the mistaken belief that
you can transfer a risk to a third party through insurance or outsourcing. In practice if the
insurance company or contractor go bankrupt or end up in court, the original risk is likely
to still revert to the first party. As such in the terminology of practitioners and scholars
alike, the purchase of an insurance contract is often described as a "transfer of risk."
However, technically speaking, the buyer of the contract generally retains legal
responsibility for the losses "transferred", meaning that insurance may be described more
accurately as a post-event compensatory mechanism. For example, a personal injuries
insurance policy does not transfer the risk of a car accident to the insurance company.
The risk still lies with the policy holder namely the person who has been in the accident.
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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 bring 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 since most property and risks are
not insured against war, so the loss attributed by war is retained by the insured. Also, any
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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.

Create a risk management plan

Select appropriate controls or countermeasures to measure each risk. Risk mitigation

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

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

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

Implementation

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

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

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

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

Limitations

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

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

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

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 CHAPTER 10

BUSINESS ETHICS

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

Nature of ethics
Ethics is the study of right and wrong actions and how conduct should be judged as to be
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 specializations, entrepreneurs included, should
be aware of the general principles of ethics and be capable of applying them in their
everyday work. It is important, however, to note that ethics and law are not the same.

Ethics and Social responsibility

An organisation exercises social responsibility when its acts respect the general public
interest.
Social responsibility requires that organizations 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

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Ethics deal with personal moral principles and values, but laws are the rules that can
actually be enforced in court. Behavior 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. Unauthorized use of copyrights, trademarks and patents is
widespread in countries such as Taiwan, Mexico and Korea. According to a US trade
official, the Korean view is that ' ... the thoughts of one man should benefit all', and this
general value means that, in spite of legal formalities, few infringements of copyright are
punished.

ETHICAL ISSUES IN BUSINESS MARKETING

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

 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 people would condemn the payment of
substantial bribes to purchasing officers to induce them to favor 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
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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 civil
is renegotiation, 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
• Dealing directly with end users at
Work
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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 behavior. When benefits exceed
costs, the behavior can be said to be ethical. This the philosophical position upon which
capitalism rests, and is often cited to justify behavior 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, organizations and society.

AMA Code of ethics

Marketers' professional conduct must be guided by;
1 The basic rule of professional ethics: not knowingly to do harm.
2 The adherence to all applicable laws and regulations.
3 The accurate representation of their education, training and experience.
4 The active support, practice and promotion of this Code of Ethics.
Honesty and Fairness
Marketers shall uphold and advance the integrity, honor and dignity of the marketing
profession
1 Being honest in serving consumers, clients, employees, suppliers, distributors and the
public.
2 Not knowingly participating in conflict of interest without prior notice to all parties
involved.

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4 Establishing equitable fee schedules, including the payment or receipt of usual,
customary and/or legal compensation or marketing exchanges.

Participants in the marketing exchange process should be able to expect

1 Products and services offered are safe and fit for their intended uses.
2 Communications about offered products and services are not deceptive.
3 All parties intend to discharge their obligations, financial and otherwise, in good faith.
4 Appropriate internal methods exist for equitable adjustment and/or redress of
grievances concerning purchases.

It is understood that the above would include, but is not limited to, the following
responsibilities of the marketer; the area of product development and management
• Disclosure of all substantial risks associated with product or service usage.
• Identification of any product component substitution that might materially change the
product or impact on the buyer's purchase decision.
• Identification of extra-cost added features.
• Avoidance of false and misleading advertising.
• Rejection of high-pressure manipulation, or misleading sales tactics.
• Avoidance of sales promotions that use deception or manipulation.
• Not manipulating the availability of a product for purpose of exploitation.
• Not using coercion in the marketing channel.
• Not exerting undue influence over the reseller’s choice to handle the product the area of
• Not engaging in price fixing.
• Not practicing predatory pricing.
• Disclosing the full price associated with any purchase area of marketing research
• Prohibiting selling or fund raising under the guise of conducting research.
• Maintaining research integrity by avoiding misrepresentation and omission of pertinent
research data.
• Treating outside clients and suppliers fairly.
Any AMA members found to be in violation of any provision of this Code of Ethics may
have his or her Association membership suspended or revoked.
(Reprinted by permission of The American Marketing Association)

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
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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 organizations to develop a sense of responsibility for the
consequences of their actions within society at large, rather than simply setting out to
provide consumer satisfactions. Social responsibility involves accepting that the
organisation is part
of society and, as such, will be accountable to that society for the consequences of the
actions which it takes. Three concepts of social responsibility are profit responsibility,
stakeholder responsibility and societal responsibility’s
at Work
 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
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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 minimize any detrimental
impact.
 Defensive strategy
A defensive strategy involves minimizing 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
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

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

THE END

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