Professional Documents
Culture Documents
CONTENTS
Introduction
Sole proprietorship
Partnership
Co-operatives
Limited liability companies
Public corporations
INTRODUCTION
Forms of business units refers to types of business ownership which includes the following:
Sole proprietor
Partnerships
Co-operatives
Limited liability companies
Public corporations
Parastatals
Business units can further be classified on the basis of their legal status into two, namely:
This are those business units which the law has no or little control over their formation, ownership
and operations. There is no formal certificate of registration required to form these business units.
They may include partnerships and sole proprietorships.
These are business units where there is legal control over their formation, ownership and operation.
These business are allowed to start operations after complying with all legal requirements.
Examples are limited liability companies, co-operative societies and public corporations
SOLE PROPRIETORSHIP
Ownership
This is a form of business unit which is owned by one person. This person is known as a sole trader
or a sole proprietor.
Sole proprietorships are the most common forms of business units. They mostly operate in retail and
wholesale trade.
Formation
Formation of a sole proprietor is very simple since it requires very few legal formalities.
In Kenyan, one only is required to apply to the local authority and if the application is approved, he is
issued with a trade license after paying the trade license fee. The trade licence gives him the
permission start his business
Management
Management of a sole proprietorship is done by the owner. The owner may however get assistance
from his family members or employ other people to assist him in managing the business.
The sole proprietor remains responsible for the success and failure of the business
Capital
The amount of capital required to start a sole proprietorship is relatively small compared to other
forms of business units. The owner can raise capital through the following sources:
a) The business has limited liabilities. This means that in case business assets are not enough to
pay business debts, personal property of the owner may be sold to repay the debts
b) Expansion of the business may be limited due to scarcity of capital
c) The sole trader may overwork himself leaving him/her with little time for leisure
d) The owner suffers all losses and risks alone
e) Lack of specialisation leads to poor performance. This is because one person may not
manage all the aspects of the business effectively
f) Death of the owner may lead to the collapse or poor performance of the business
g) The owner may not enjoy benefits enjoyed by large scale business such as easy access to
loans
h) Lack of consultation may lead poor decision making
Dissolution
PARTNERSHIP
Ownership
A partnership is a business unit which is owned by more than one person. The people who own a
partnership are known as partners.
A partnership is owned by a minimum of 2 partners and a maximum of 20, except for partnerships
which provide professional services such as law, medicine, auditing, banking etc. which have a
maximum of 50 partners.
Classification of partnerships
When classified according to the type of partners, partnerships can either be general or limited.
General partnership: in a general partnership, all members have unlimited liabilities. This means if
partners are unable to repay all business debts from the available business assets, personal property
of the partners will be sold to repay the debts
Limited partnership: in a limited partnership, partners have limited liabilities. This means that if
partners are unable to repay business debts from the available business assets, partners only loose
the capital they contributed to the business but not their personal property.
NOTE: in a limited partnership, there must be one partner whose liabilities are unlimited
When classified according to the period of operation, partners can either be temporary or
permanent.
Temporary partnership: these are partnerships which are formed to accomplish a specific objective
after which they are dissolved. These partnerships are also known as joint ventures.
Permanent partnerships: these are partnerships which are formed to operate indefinitely
Types of partners
Partners may be classified according to the role they play, their liabilities, their age and their capital
contribution as discussed below
Partner can either be active or dormant. An active partner is the one who plays an active role in the
running of the business while a dormant partner does not play an active role in the running of the
business
A dormant partner is also known as a sleeping, passive or silent partner
When classified according to their liabilities, partners can either be general or limited. Limited
partners have limited liabilities while general partners have unlimited liabilities.
c) Age of partners
According to their ages, partners can either be min or major. A minor partner is the one who is
below 18 years. A minor partner only takes part in the sharing of profits but cannot participate in the
day to day running of the business until he/she attains the majority age ( 18 years and above). A
major partners is the one who is above 18 years.
d) Capital contributions
When classified according to their capital contributions, partners can be real or nominal. A real
partner is the one who has contributed capital to the business while a nominal partner is the one
who does not contribute capital to the business but allows the business to use his/her name for
prestige in order to attract customers.
A nominal partner may also be a person who retired from the partnership but left his/her in the
business in form of a loan which earns him interest from the partnership at an agreed rate.
Formation
When forming the partnership, partners have to agree on how the business will be operated in order
to avoid misunderstanding amongst themselves. The agreement among partners is known as a
partnership agreement.
The partnership agreement can either be oral or in writing. When it is in writing, the partnership
agreement is known as a partnership deed.
The name of the partnership should be different from the surnames of the individual partners.
NOTE: in case the partnership deed has not been drawn or is ambiguous, the contents of the
partnership act of 1963 will apply. These contents are:
Management
All partners share the responsibility of managing the business. This is done by assigning different
areas of management to partners based on their specialities
Partners may also employ specialized personnel to manage the business on their behalf especially
when the business is too large or when the partners are ignorant on how the business should be
managed
Partners who take play an active role in the management of the business are major, real and general
partners. Minor, quasi and limited partners do not play an active role in the management of the
business. They are however allowed to access the books of account and to offer advice to active
partners
Sources of capital
Contributions by partners
Loans from banks and other financial institutions
Buying on hire purchase
Buying goods on credit
Ploughing back profits
Leasing and renting property
Advantages of partnerships
Disadvantages of partnerships
a) A mistake made by one partner results in losses that are shared by all partners
b) The liability of some partners is unlimited
c) Continued disagreements among partners may lead to dissolution
d) Decision making process may be slow since all partners have to be consulted
e) Actions taken by any partner in good faith on behalf of the business are binding to all other
partners
f) Retirement or death of a partner may adversely affect the partnership in case the business
heavily relied on that partner
g) Compared to limited companies, partnerships have limited access to major sources of capital
h) Lack of a variety of managerial skills especially when partners manage the business alone
i) A hard working may not be rewarded for his/her hard due to the fact that profits realised
from efforts are shared
Dissolution
Features of a partnership
a) Formed and owned by 2-20 people in the case of ordinary partnerships and 2-50 people in te
case of partnerships offering professional services
b) Capital is mostly contributed by partners
c) The business is managed by partners
d) The business lacks legal entity status.
e) Partners have unlimited liabilities
f) Profits are shared
g) Losses are shared
h) Each partner can act as an agent of the business
i) Business decisions are made jointly
CO-OPERATIVES
A co-operative society is a group people who come together mainly to provide convenient and
efficient services to members.
Co-operatives are also formed in order to eliminate middlemen so that all profits goes to members.
Co-operatives are formed by people who have common interests and problems.
The idea behind the formation of co-operatives is the need to pool together individuals’ scarce
resources so as to achieve common goals more efficiently.
Ownership
Co-operative societies are owned by more than 10 adults who register as members upon payment of
a non-refundable membership fee
Members are further expected to buy shares in the co-operative. The value of each should not be
less than Ksh 20.
No single member should own more than 5% of the co-operative’s shares capital. This is to ensure
that the co-operative is not controlled by a single member.
Membership to a co-operative is open and voluntary. This means that any member of the public can
join the society provided he shares the common of objective as that of the society. The member can
also leave the society at will.
Formation
Co-operative societies are formed by people who are above 18 years irrespective of their social,
economic or political background.
The number of members required to form a co-operative should not be less than 10.
The atleast 10 members will draft rules and regulations to govern the operations of the co-operative.
These rules and regulations are known as by-laws. The by-laws are submitted to the commissioner of
co-operatives for approval. Upon approval, the commissioner registers the co-operative and issues it
with the certificate of registration to enable it commence its operations.
NOTE: in case of failure by members to draft their own by-laws, the co-operative societies’ act of
1996 can be adopted in part or whole
Management
The management committee then elects the executive committee members i.e. the chairman,
treasurer and the secretary amongst themselves.
The committee acts on behalf of members i.e. it can enter into contracts, borrow money etc. on
behalf of the society. The committee also educates the members on their responsibilities by
organising seminars.
The committee holds regular meetings to discuss matters affecting the co-operative society.
The co-operative society can also hire professionals to assist in managing the society.
The management committee members are not paid salaries for their services to the society. Instead
they are allowed sitting allowances and honoraria in accordance with the guidelines of the
commissioner of co-operatives.
Where the committee fails to perform as expected, it can be voted out by members in a general
meeting or be dismissed by the commissioner of co-operatives
Sources of capital
a) Membership contributions in the form of registration fee and share capital contribution
b) Retained profit (earnings)
c) Interest on loans to members
d) Investment income
e) Acquiring property on credit or hire purchase
Dissolution
PRINCIPLES OF CO-OPERATIVES
These are rules and regulations which govern the operations of co-operative societies. These
principles are discussed below:
Membership to a co-operative society is open to any member of the public provided he shares the
same objectives as the other members of the society.
A co-operative society is managed on the basis of one man one vote. This ensures that all members
have an equal say in the running of the co-operative
Members earn interest or dividends on their share capital and savings. These interest or dividends
calculated on a percentage which is determined by the income earned by the society for the year.
A co-operative society is required to co-operate with other co-operatives of the same level so as to
learn from one another
Co-operatives are required to pay members dividends on their share capital at a given rate.
In Kenya, co-operative societies are classified according to the nature of their activities or according
to the levels of operation
When classified according to the nature of their activities, co-operative societies can be categorised
into:
a) Producer co-operatives
b) Consumer co-operatives
c) Savings and credit co-operative societies
a) Producer co-operative societies
A producer co-operative society is an association of producers who have come together to improve
the production and marketing of their products.
These are formed by a group of consumers who come together and set up shops from where they
can buy goods of better quality more conveniently.
These co-operatives buy goods directly thereby eliminating middlemen i.e. retailers and whole
salers. As such they are able to sell goods to members at relatively lower prices.
These co-operatives mostly deal in goods of general consumption e.g. milk, grocery etc.
Members of the public are also allowed to buy from the society at normal prices hence enabling the
society make more profit.
Profit made by these co-operatives is shared by members in the ratio of their purchases from the
society
Examples of consumer co-operative societies in the Kenya are:
a) They face stiff competition from large scale retailers who buy goods directly from producers
and sell them directly to consumers at lower prices
b) They may not afford to employ qualified staff
c) They may not raise adequate capital due to the fact that majority of its members are low
income earners.
d) Subsistence production, makes them unpopular
e) Consumer shops may be mismanaged
c) Savings and credit co-operative societies (SACCOs)
These are co-operative societies which are formed with the objective of enabling their members
save money and access loans.
They are mostly attached to the employer i.e. the employer deducts part of the employee’s earns on
a monthly basis (check off system) and remits the money to the society.
SACCOs have become very popular in Kenya especially due to the check off system and due to the
fact that they offer loans at lower interest rates
Mwalimu SACCO
Stima SACCO
Mhasibu SACCO etc.
Advantages of SACCOs
Disadvantages of SACCOs
a) They may not have enough finances at their disposal to cater for the needs of all their
members
b) Continued default on loan repayment may cripple the society financially
c) They face stiff competition from well-established financial institutions
d) They may be mismanaged
e) They may be subjected to misappropriation of funds
a) They provide easy access to loans since very few formalities are required
b) They offer loans at relatively lower interest rates
c) They offer a variety of loans to their members
d) In case a member dies, the outstanding loan is written off
e) In case a member dies, his/her beneficially are entitled to double the amount of his capital
contribution
f) Channelling members’ share capital contributions through a check off system
When classified according to the level of operation, co-operatives may be categorised into two,
namely:
These are co-operative societies which are composed of individuals who are either actual producers,
consumers or people who come together to save and obtain loans more conveniently
Most primary co-operative societies operate at village and district levels though a few of them
operate at national level
Most consumer co-operatives societies and most SACCOs are primary co-operative societies since
their membership is composed of individuals.
These are co-operative societies which are composed of primary c0-operative societies as their
members.
NOTE: all co-operative societies in Kenya are under the Kenya federation of co-operatives
Disadvantages of co-operatives
a) Some co-operatives have lesser capital hence they cannot benefit from economies of scale
b) They may be poorly managed due to lack of trained personnel
c) Withdrawal of members from the society may create financial problems since their capital
contributions are refunded
d) They may suffer from political interference
e) They may subjected to corruption and embezzlement of funds
f) Some members may not be keen on the management of the society since their capital
contribution is small.
a) Poor management
b) Financial problems
c) Low interest on members’ deposits discourages their participation
d) Low share capital
e) Lack of co-operative education and awareness among potential members
f) Political interference
A company is an association of persons who contribute capital in order to carry out business with the
aim of making profit.
A company is viewed by law as a separate legal entity separate from the members who form it,
therefore death, insanity, bankruptcy or retirement of some of its members does not affect its
continuity.
A company is regarded by the law as an artificial person, hence just like natural persons, it can own
property, enter into contracts, sue and be sued in a court of law in its own name.
A company unlike natural persons can only engage in those activities which it is authorised to engage
in by terms of its registration (acting intra vires). E.g. a company registered to offer transport
services cannot offer banking services. A company which engages in activities which it is registered
to engage is said to acting against the law (ultra vires)
Formation
The people who come together to form a company are known as promoters.
When forming the company, promoters are expected to come up with the following documents
This is a document which defines the relationship between the company and the outsiders.
a) Name clauses
In contains the name of the company. This name must end with the word limited (Ltd) which
indicates that the liabilities of the company are limited.
Some companies have their names ending with the initials PLC which stands for public limited
company. This indicates that it is a public company and not a private company.
The objects clause stipulates the activities the company should engage in. the company is therefore
not authorised to engage in any other activity other than the one indicated in its objects clause.
The objects clause serves as a warning to the public that the company is only authorised to engage in
the stated activities only.
c) Situation clause
The situation clause indicates the location of the registered office of the company where official
communication can be sent to or received from.
d) Liability clause
This is clause which informs members of the public that the liabilities of the members of the
company are limited
e) Capital clause
This clause indicates the amount of capital the company is required to raise and the subdivision of
this capital into smaller units of equal value known as shares.
The amount of capital indicated in the capital clause is known as the authorised share capital,
registered capital or nominal share capital.
This clause also specifies the types of shares and the value of each share
f) Declaration clause
This is a declaration which is signed by the promoters stating that they wish to form the company
and buy shares in the company.
The declaration should be signed by a minimum of seven promoters in the case of a public limited
company and a minimum of two in the case of a private company.
NOTE: the memorandum also contains the names of the promoters, their addresses, occupations
and the number of shares they intend to buy. Each promoter must sign against his/her details.
b) Articles of association
This is a document which governs the internal operations of the company. It contains rules which
govern the conduct of shareholders in relation to each other and to the company.
Once the above documents are ready, they are submitted by the promoters to the registrar of
companies for approval. If the registrar is satisfied that the documents are correct, he will issue a
certificate of registration (certificate of incorporation) to the company upon payment of a
registration fee.
The certificate of incorporation makes the company a separate legal entity from its members.
Sources of capital
a) Issue of shares
This is the main source of capital for a company. A share is a unit of capital for a company.
Example
A company may state its share capital as Ksh 10,000,000. But because it cannot raise all this capital
from one person, they subdivide this capital into affordable units of equal value say Ksh 10 each.
Each of these units is known as a share. Therefore the company will be said to have 1,000,000
shares. A person becomes a member (shareholder) by buying shares in the company.
Shareholders are entitled to a share of profits of the company. This share of profits are known as
dividends.
Each share is given a number. However after all shares of a given class have been sold and fully paid
for, they do not require numbering hence they are grouped together into to bigger units known as
stocks. A company that deals in stocks in known as a joint stock company.
Types of shares
Ordinary shares
Preference shares
1) Ordinary shares (equity shares)
a) The company acquires permanent capital as ordinary shares are not redeemable
b) The company is not obliged to pay dividends to ordinary shareholders
c) Rate of dividends on ordinary shares is not fixed since it is determined by realised profits
d) Ordinary shareholders are paid last when the company is winding up
e) Ordinary shares require no security
2) Preference shares
Debenture being loans carries interest at fixed rates which must be paid whether the company
makes profit or not. Debentures are issued to the public the same way as shares
Types of debentures
a) Redeemable debentures
These are debentures that can be bought back by the company within a specified future date
b) Irredeemable
These are debentures that cannot be bought back by the company. They can however be redeemed
when the company is being dissolved (liquidated)
To mortgage means to attach property as security. Mortgage debentures are therefore the ones to
which company property is attached (pledged) as security.
d) Naked (unsecured)debentures
These are debentures to which no security is attached. They are treated the same way creditors are
treated in the event that the company is being liquidated.
Shares Debentures
A share is a unit of capital in a limited company A debenture is a loan advanced to a limited
company
Shareholders are owners of the company Debenture holders are creditors of the
company
Shares earn dividends Debentures earn interest
Dividends on shares are paid only when the Interest on debentures must be paid whether
company makes profit the company makes profit or not
Shares represent capital invested hence do not Debentures are loans and security must be
require security provided by the company
Shareholders have voting rights Debentures have no voting rights
Share capital cannot be withdrawn unless when Debentures can be withdrawn at any time
the company is dissolving
In case of dissolution, shareholders are paid last In case of dissolution, debenture holders are
paid first
Reasons why public limited companies prefer raising finance through issue of ordinary shares to
debentures
a) Debentures are units of loans which must be repaid while ordinary shares are units of capital
and are not paid back
b) Ordinary shareholders are not paid a fixed rate of dividends but debenture holders are paid
a fixed rate of interest irrespective of whether the company makes profits or not
c) Payment of interest on debentures is a legal obligation failure to which may lead to
liquidation while dividends on shares is not a legal obligation
d) Shareholders contribute important ideas during AGM on how to run the company while
debenture do not contribute any ideas since they do not attend the AGM
Debt financing (Raising capital through sale of Equity financing (Raising capital through sale
debentures) of ordinary shares)
Usually redeemable It is a permanent source of capital
Payment of interest on finance is a legal Payment of dividends is not a legal obligation
obligation
Rate of interest on finance is fixed Rate of dividends varies with the amount of
profit realised
Involves costs such as insurance and security Does not involve such costs
It is usually secured It is not secured
A company may borrow money from banks and other financial institutions in the form of loans.
These loans carry interest at an agreed rate.
A company may decide not to distribute all its profits to members in form of dividends but to set
aside part of the profits for a specific purpose. Profit set aside this way is known as a reserve
6) Bank overdraft
A backdraft is an over-withdrawal of the amount in the account holder’s account. A company can
arrange with its back to be allowed overdraft facilities.
TYPES OF COMPANIES
a) It is easy to form since it involves a shorter procedure with less cost compared to a public
limited company
b) It has a separate legal entity from its owners hence it can own property, sue, be sued and
enter into contracts
c) The liabilities of shareholders is limited
d) It enjoys wide sources of capital
e) It is in a position to hire professionals to manage it
f) It starts traded immediately it receives a certificate of incorporation
g) It is assured of continuity i.e. death of a shareholder (s) does not affect its continuity
NOTE: the advertisement inviting members of the public to subscribe to a company’s shares and
debentures is contained in a special booklet known as the prospectus. A prospectus contains the
details of the type, amount and value of the shares or debentures offered.
a) Cost of formation may be high. Examples of expenses incurred when forming a public limited
company include; legal costs, registration fees and taxes
b) It is required by law to comply with a number of requirements e.g. filing of tax returns,
maintaining a list of all its shareholders etc.
c) Shareholders do not have direct control over the running of the business since management
is done by a board of directors.
d) Lacks secrecy. This is because they are required by law to publish their end year financial
statements. Any member of the public can also access these financial statements from the
registrar after payment of a small fee.
e) Directors may have personal interests that may conflicts interests of the company
f) Slow decision making since all major decisions must be sanctioned by shareholders
g) It may experience high costs of operation
h) It is subjected to double taxation. This is because its profits are taxed and are the dividends
distributed to its shareholders.
Management
Management of a private company is determined by its size. A small private company may be
managed by one director known as the managing director. A bigger private company is managed by
a board of directors.
A small public company can be managed by two directors one of whom must a managing director. A
bigger public company is managed by a board of directors and other professional staff such as
auditors, accountants, lawyers etc. the directors are responsible for the formulation of the
company’s policies
Below the directors are the professional managers e.g. the general manager, the marketing
manager, the personnel manager and the finance manager. The managers are responsible for their
own departments. They however take collective responsibility for the implementation of the
company’s plans.
Definitions
A quoted company: this is a company that has been registered (listed) as a member of the stock
exchange market.
Securities: refers to shares. It may also refer to documents which support share ownership
Initial public offer (IPO): refers to situations where a company has floated new shares for
subscription by the public i.e. has invited the public to buy its new shares. New shares are issued in a
primary market.
Secondary market: this is a market for second hand shares. It facilities the transfer of shares from
one person to another.
Stock broker: refers to individuals or organisations which buy and sell shares on behalf of investors
Investor: refers to an individual or an organisation who intends to buy or sell shares in the stock
exchange.
Jobbers: these are dealers in shares who buy and sell shares and other securities on their own behalf
with the intention of making profit
The capital markets authority: this is an organization established by the government to supervise
and oversee the operations of the stock exchange
NOTE
It is only quoted companies that can have their shares traded in the stock exchange.
The only stock exchange market in Kenya is the Nairobi stock exchange.
Apart from shares, the stock exchange may also deal in government securities such as
bonds, treasury bills and stocks of local authorities.
The stock exchange facilities both primary and secondary share deals
An investor cannot buy or sell shares directly in the stock exchange market, he/she can only
buy or sell shares through stock brokers.
The stock exchange market provides the market for investors willing to buy shares in different
quoted companies
The stock exchange market provides a steady market for those wishing to sell their securities
The stock exchange market provides timely, accurate and reliable information to enable them make
investment decisions
The stock exchange market enables companies raise capital by providing a market where they can
issue shares to the public.
f) Creates employment
Stock exchange market has created employment opportunities for those people who facilitate the
buying and selling of shares. This may include stock brokers and their agents.
The government raises revenue through fees and other dues charged on activities carried out in the
stock exchange market. The government may revenue from the stock exchange market in the form
of taxes and license fees.
The stock exchange market fulfils the needs of different investors by availing to them a variety of
securities from different companies
i) Fixes prices
The stock exchange market provides an environment buyers and sellers of securities meet to
determine the prices of securities.
The performance of securities in the stock exchange market indicates a country’s economic progress.
E.g. a rise in demand and prices of securities indicates that the economy is doing well.
Stock exchange market provides an avenue where investors can channel their excess funds hence
they save funds by investing them in the stock exchange.
a) The company can sell its shares and other securities easily to raise capital
b) Interested investors can invest in different companies by buying their shares and securities
c) It improves the image of the company as a well-managed, profitable and a financially stable
company
d) Quotation on the stock exchange improves the management of the company as managers
try to uphold the integrity of the company
e) It improves the credit rating of the company making it easier for the company to obtain
loans from financial institutions
f) The stock exchange advertises the company to the public
Dissolution of limited liability companies
Dissolution of a limited company is also known as liquidation or winding up. A limited liability
company may be dissolved under the following circumstances:
a) Insolvency
This refers to a situation where the company is unable to pay its debts. A company may be dissolved
if fails to pay its debts. If this happens, the company may be placed in the hands of the official
receiver (placed under receivership)
b) Ultra vires
Refers to where the company is engaging in activities contrary to the provisions of its objects clause.
A company which is acting ultra vires will be wound up.
c) Amalgamation
Refers to joining together of two or more companies to form one company which is completely
different from the original companies. When this happens, the companies joining together must be
dissolved.
d) Court order
A company may be ordered by a court of law to dissolve especially when there are complaints from
creditors.
The shareholders may decide to dissolve a company. This decision can only be arrived at in a general
meeting.
PUBLIC CORPORATIONS
Public corporations (state corporations) are organisations which are formed and/or controlled by the
government.
Public corporations are formed to provide essential services to the public more cheaply.
Formation
Most public corporations are formed by an act of parliament while a few are formed under the
existing laws. E.g. all public schools are formed under the existing laws i.e. the education act.
When a corporation is formed by an act of parliament, the act outlines the following:
Management.
The chairman and the members of the board of directors are appointed by the president or by the
respective minister.
The chairman of the board of directors reports to the government through the minister.
The managing director is the secretary to the board of directors and is the chief executive officer of
the corporation.
The initial financing is provided by the government through the concerned ministry. Thereafter, the
corporation will be expected to generate finances on its own. Other sources of capital may include:
a) They may not provide the goods and services they produce to every part of the country as
they are expected
b) They may incur high operational costs
c) Slow decision making processing because of the large number of people to be involved
d) Their performance may be poor due to the fact that managers are political appointees who
may be lacking appropriate management skills.
e) Corporations may be insensitive to customers’ feelings especially when they are monopolies
Dissolution of public corporations
Public corporations are dissolved by the government. This may happen under the following
circumstances
a) Marketing boards
These are public corporations formed by the government to assist local farmers in marketing and
selling their prices at the best possible price
These are public corporations which are established with the aim of engaging in business to provide
goods and services at a profit. E.g. Kenya power and lighting company, postal corporation of Kenya
These are corporations which are established to provide research services in order to support the
development of industry, agriculture etc. e.g. Kenya agricultural research institute
a) Privatisation
b) Nationalisation
Privatisation is the process through which the government gives up ownership of public corporations
by selling its shares to the private sector
The government can sell part of its shares to the public so as to reduce its shareholding to below
50%
Some of the circumstances (reasons) under which a public corporation may be privatised include:
Advantages of privatization
Refers to the process where the government acquires total ownership of privately owned business
organisations thereby transforming into public corporations
a) Appointing directors
b) Providing legal advice
c) Giving financial support
d) Supervising the activities of state corporations
e) Auditing the accounting records of state corporations
f) Training staff in state corporations.
PARASTATALS
A Parastatals is a public corporation which is fully owned by the government. Its formation,
management, sources of capital is the same as that of a public corporation.
Ways of improving the efficiency of Parastatals
a) Promissory notes
b) Trade credit
c) Bank overdraft
d) Retained earnings
e) Personal savings
f) Contributions from relatives
g) Bills of exchange
Reasons why a firm would prefer trade credit as a source of capital to a bank loan
The following are some of the current trends in forms of business units
a) Holding companies
A holding company is one that acquire 51% or more shares in one or more other companies. The
companies owned are known as subsidiaries of the holding company. The subsidiaries retain their
names.
b) Cartels
A cartel is a group of related companies that agree to work together in order to control output,
prices and the markets of their goods and services. E.g. O.P.E.C.
Features of cartels
Disadvantages of a cartel
Privatisation is the changing of state owned corporations into public limited companies
d) Absorptions (takeovers)
Absorption refers to a business taking over another business by buying all its assets making it cease
to exist.
e) Mergers (amalgamations)
This where two or more businesses combine to form a new business. The merging businesses totally
cease to exist.
This where money is deducted by the employer and directly submitted to the SACCO on behalf of
the employee who is a member of the SACCO.
This is a system mostly in SACCOs which is aimed at assisting their members financially during burials
This is a service which used in SACCOs to enable their members conveniently deposit and withdraw
money.
i) Franchising
This is where one business grants another the rights to manufacture, distribute or provide its
branded products using the name of the business that granted the right. E.g. general motors have a
right to sell Toyota, Isuzu and Nissan vehicles
j) Trusts
A trust may also be formed when a company buys more than 50% of shares in another company so
as to reduce competition
k) Globalisation
Refers to the use of technology to enable business conduct their operations worldwide.
l) Performance contract
These are contracts signed by employees in state corporations where they commit perform to set
standards.
CONTENTS
Introduction
Reasons for government involvement in business activities
Methods of government involvement in business activities
Merits and demerits of government involvement in business activities
Consumer protection
INTRODUCTION
The government gets involved in business activities in several ways. These include:
a) To prevent the exploitation of consumers by business people. Such exploitation may include
selling of commodities at high prices or selling poor quality commodities.
b) To provide essential goods and services in areas where private business do not operate due
to low profitability
c) To provide essential goods and services which the private sector is unable because they
require high capital e.g. electricity
d) To attract foreign investors into the country by initiating major business projects which
attract foreign investors
e) To stimulate economic growth and development in the country
f) To provide very sensitive goods and services which cannot be left in the hands of the private
sector e.g. fire arms
g) To create employment opportunities through initiating projects which create jobs
h) To prevent dominance of foreign investors in the economy. It does this by investing in areas
where the local people are unable to invest in
These are the ways through which the government gets involved in business activities. These
methods are discussed below:
1) Regulation
The government may regulate the operations of businesses through methods such as
Licensing
Ensuring standards
Legislations
a) Licensing
A business must be given permission to operate by the government. This permission is indicated by
the issuance of a license.
A licence is therefore a document which shows that a business has been allowed by the government
to start operating
In Kenya, the Kenya bureau of standards (KEBS) is charged with the responsibility of setting
standards especially for manufactured goods and ensuring that such standard are adhered to.
Products which meet the set standard are stamped with the KEBS logo as a sign of quality.
Legislations are rules and regulations put in place by the government to regulate business activities.
The government can therefore come up with rules and regulations that regulate the operations of
businesses. For example the government may ban hawking in certain areas such as within the city
centre
Imposition of taxes
Issuing guidelines to business people
Total ban on new businesses where there is need
Registration of business
Fixing quotas
2) Training
The government organises trainings for business people. This is mainly done at the Kenya business
training institute (K.B.T.I)
Trade promotion refers to a government initiated and supported policy to encourage the local
people enter into business.
The aim or trade promotion is to increase the volume and variety of goods and services traded in.
This is a form of trade promotion which aims at encouraging the local business people to enter into
export trade. It is also intended to encourage foreign investors into the country.
In Kenya external trade promotion is done by the ministry of trade and industry. It can also be done
by commercial attaches and Kenya external trade authority (K.E.T.A)
Commercial attaches
These are offices sent by the country’s government to work with embassies in foreign countries as
support in the field of trade.
a) Explore and identify new markets for exports from their home countries
b) Research and analyse markets for exports from their home countries
c) Takes and keep important statistical data of products e.g. volumes, packaging sizes and
method of manufacturing.
d) Attends meetings, seminars and workshops where trade patterns of respective foreign
countries are discussed hence keeping data on new markets for exports
e) Advertise their country’s exports in foreign countries besides publishing such exports in
business journals of foreign countries
f) Identify buyers, agents and distributors of their home country’s exports
g) Informs traders in their home countries of the standard required for export
h) Assist sales missions from their home countries by organising educational tours for them
i) Organise visits to trade fairs and exhibitions for business people from their home countries
j) Make detailed reports on commercial activities that may improve exports from their home
countries.
Its functions
This is a form of trade promotion that aims at helping the local people to start and run businesses.
Internal trade promotion is the responsibility of the ministry of trade and industry.
Internal trade promotion can also be done through Kenya chamber of commerce and industry
a) Advising business people on matters relating to the type of goods to produce, available
sources of finance, suitable locations for their businesses and the legal formalities required
for various businesses.
b) Training businesses people on appropriate ways of carrying out businesses
c) Offering business people financial assistance to enable them start and operate their
businesses
d) Organising shows, trade fairs and exhibitions from where local traders can advertise their
products
e) Providing incentives such as tax exemptions to encourage local businesses
f) Creating a conducive business environment
Public utilities are essential services such as water, transport, electricity, sewerage, communication
etc.
These services are provided either by the central government or by the county governments through
businesses set up by them.
Businesses set up to provide public utilities enjoy some level of monopoly and are financed by the
government e.g. the Kenya power and lighting company. The major objective of these businesses is
to provide public utilities affordably, profit making is their secondary objective.
Public utilities provided by the central government are meant for the welfare of the general public
whereas those provided by the county government are meant to benefit the residents of the given
county
a) Good infrastructure
b) Reliable and less expensive power supply
c) Water supply and good sewerage systems
d) Good communication systems
e) Education
f) Healthcare
g) Security to help create confidence among investors
5) Enabling environment
The government plays an important role in ensuring that the business environment is conducive.
a) Offering subsidies
A subsidy is a financial assistance given by the government to the businesses people in order to
enable them lower their production costs so as to sell goods at lower prices.
Technical assistance
Cheap financing
Manpower assistance etc.
b) Giving incentives
Incentives are things that are given to encourage one to do something. The government may offer
various incentives to business people in order to encourage them invest.
This refers to putting in place legal measures and regulations which are aimed at shielding local
industries from foreign competition. This is because big foreign firms which are able to take
advantage of economies of scale and sell their goods at relatively lower prices compared to the local
small firms may take control of the local market if allowed to operate freely hence forcing local
businesses to close down.
The government therefore has to come up with measures that will protect local businesses. Such
measures may involve the use of import duties and import quotas.
Import duties increases taxes on imports making them expensive compared to the locally
manufactured goods whereas import quotas reduces the amount of goods to be imported.
The government may act as a guarantor to enable local businesses access loans from international
financial institutions.
A guarantor is a person who undertakes to pay the loan in case the loanee defaults in payment.
a) The government is able to carry out businesses that require large amount of start-up capital
which the private investors cannot raise. E.g. Kenya power and lighting company.
b) Government involvement in business activities facilities the provision of essential but non-
profitable services since most of these services are provided by the government. E.g.
medical care, education, provision of water, construction of roads
c) Businesses started and run by the government helps solve the problem of unemployment.
d) Profits realised by businesses run by the government may be distributed to all citizens in the
form of provision of services e.g. education and health care.
e) Businesses run by the government helps create competition which may make private
investor improve quality and charge fair prices of their goods and services
f) Government involvement in business activities helps reduce foreign dominance in an
economy.
a) Businesses run by the government may be mismanaged since in most cases managers are
political appointees who may not have the required qualifications.
b) Government involvement in business activities may scare away potential investors who
would have rendered the same services more efficiently
c) Government-run businesses may consistently make losses forcing the government to finance
them using tax payers money
d) Most government-run businesses and projects require high amount of start-up capital,
expensive equipment and highly trained staff which may be very costly.
e) Government-run businesses are subjected to increased cases of corruption and
embezzlement of funds
CONSUMER PROTECTION
Consumer protection involves safeguarding the consumer from exploitation by producers and
business people.
Unfair pricing
Selling poor quality goods and services
Misleading advertising
Misleading on quantities of goods etc.
These are methods the government uses to protect consumers from exploitation by business
people. These methods are discussed below.
a) Setting up standards
Setting of standards in Kenya is the responsibility of the Kenya bureau of standards (KEBS). KEBS sets
national quality standards and ensures commodities conform to the set standards.
KEBS also requires that commodities are examined and tested before being used.
The government ensures that equipment used for weighing and measuring are correct and accurate.
This is done by regular checking and testing of these equipment.
The government further requires consumers to be issued with receipts which indicate the quantity,
size and price of the commodities they buy. The receipt is to act as evidence in case the consumer
raises a complaint.
c) Licensing
Licenses are documents which shows that a given business has been allowed by the government to
operate. Through licensing, the government ensures that there is control on the type of business
carried out.
This ensures that producers and traders do not include any substance in the commodities they sell
that can be harmful to the consumers’ health.
According to this act, all packages of food products and medicine should show the ingredients used
in making the commodity. For medicine, side effects should be disclosed.
There is also a requirement in this act that who sell certain category of foods and drugs be licensed
e.g. all butcheries, hotels and chemists must be licensed.
This act ensures that producers and traders must not mislead consumers by providing false
descriptions of commodities.
The act further requires that goods offered for sale are of good quality and right standards
This act ensures that commodities offered for sale hygienic and of good quality.
The act further requires that business premises conform to laid down health and construction
regulations. This is done through regular inspection of public places by health inspectors.
g) Price control
This refers to setting of a price beyond which a product should not be sold. Price control is done by
the government and it mostly affects essential goods and services such as petroleum products.
There is also a requirement that traders display price lists or price tags for the goods and services
they sell.
Consumers can protect themselves by forming consumer associations. These associations act as a
watchdog to ensure that consumers are not cheated or exploited.
a) They deal with complaints concerning any defective items bought by members.
b) They make sure goods are not hoarded by traders. This is to ensure that regular supply of
goods is maintained.
c) They ensure that weights and measures of commodities are correct
d) They ensure that health and safety regulations are adhered to
e) They ensure that essential goods and services are available at fair prices
f) They educate their members on their rights as consumers
g) They seek legal redness against offenders
h) They take consumer complaints to the relevant government bodies
Some non-governmental organisations may also participate in activities aimed at protecting the
consumer. E.g. the public law institute.
a) Adhering to set standards may raise the cost of production leading to increase in prices
b) Consumer protection campaigns may be used unethically against competitors
c) Over reacting of consumer protection agencies may lead to political and social instability
a) Market liberalization
This refers to the removal of protective policies and regulations so that Kenyan market is open to all
b) Privatization
c) Dumping of goods
Refers to selling of out-dated or low quality goods at lower prices in overseas markets
TOPIC 3: TRANSPORT
CONTENTS
Introduction
Importance of transport to businesses
Essential elements of transport
Modes of transport
Factors influencing the choice of an appropriate means of transport
Trends in transport
INTRODUCTION
Transport refers to the movement of goods or people from one place to another.
Transport enables the availing of goods and services to consumers at places convenient to them.
Transport therefore helps in bridging the geographical gap between producers and consumers.
Transports links consumers to producers hence enabling consumers obtain the goods they need.
b) Creates employment
Transport helps in the creation of job opportunities. It creates jobs for drivers, pilots, touts,
mechanics, road constructors etc.
c) Promotes specialisation
Transport enables people to specialise in jobs they are best at. For example, transport enables
producers to concentrate only on production and distributors to concentrate only on distribution.
Through transport, goods and services are moved from places where they are least needed to places
where they are most needed thereby making them more useful.
Transport enables consumers to get a variety of goods and services thereby improving their
standards of living
Transports helps producers to reach consumers in far places. This enables them reach more
customers hence increasing their sales volumes.
Due to the wide market created through transport, producers are able to increase the amount of
commodities they produce
h) Avoids wastage
Transport makes the disposal of surplus goods possible by taking them to areas where they are
needed.
Through transport, raw materials can be taken manufacturing industries and also finished goods
taken to the market. As such more manufacturing industries are established. Transport may also
promote the development of service industries e.g. tourism.
Elements of transports are factors that must be in place for transportation to take place. These
elements include:
Unit(s) of carriage
Methods of propulsion
Ways
Terminals(terminuses)
a) Units of carriage
Refers to anything that is used to carry goods and people to be transported from one place to
another. Units of carriage include: ships, trains, aeroplanes, motor vehicles, bicycles, human beings,
carts, animals etc.
b) Methods of propulsion
This is the driving force (source of power) that makes a unit of carriage move. The most common
methods of propulsion include: petroleum products, electricity, human energy, animal energy etc.
c) Ways
This is the route or path where the unit of carriage passes. The route can be on land, on water or
through air. Examples of ways may include: roads, railways, paths, canals, air etc.
Ways can be classified into two
i. Natural ways: these are ways which are provided by nature. They are free to acquire. They
include: airways and sea ways
ii. Man-made ways: these are ways that are made available by human beings. They cost
money to construct and maintain. They include: roads, canals and railways.
d) Terminals
These are places where loading and off-loading to and from the unit of carriage is done. Examples of
terminals include: bus stations, airports, seaports, railway stations etc.
MODES OF TRANSPORT
Mode of transport refers to the manner in which transport is carried out i.e. transport can be carried
out through air, on water or on land.
Land transport
Water transport
Air transport
a) LAND TRANSPORT
This mode of transport involves the movement of goods and people using units of carriage that
move on dry land.
Human porterage
Carts
Vehicles
Trains
Pipeline
1) Human porterage
This involves human beings carrying goods on their shoulders, heads or backs as they transport them
from one place to another.
Its major advantage is that it can access places where other means of transport cannot access.
a) It is always available
b) It supplements other means of transport
c) It is flexible since it does not have a fixed timetable
d) It may be cheaper compared to the means of transport
e) It is convenient over short distances
Carts are open vessels which move on two or four wheels and are pulled or pushed by human beings
or by animals such as donkeys.
The carts that are pushed or pulled by human beings are referred to as hand carts or mikokoteni.
The ones pulled by animals are called animal driven carts.
Compared to human beings, carts can carry relatively large quantities of goods. They are however
slow hence not suitable for long distances.
Advantages of carts
Disadvantages of carts
a) They may not be suitable for transporting very heavy and very bulky goods
b) They contribute to congestion on roads
c) They are not suitable for transporting goods over long distances.
3) Vehicles
These are means of transport where the units of carriage ferry goods and people on roads. Vehicles
are the most commonly used means of transport.
Vehicles are either passenger or goods carriers. Passenger carriers includes buses, matatus, taxis,
private cars etc. while goods carriers include Lorries, tankers, trailers etc.
Matatus
This is a special category of vehicles on Kenyan roads. Matatus are privately owned passenger
vehicles that are mostly used to supplement big transport companies.
Advantages of matatus
a) They supplement big transport companies e.g. bus companies especially in the rural areas
b) They save time since they fill up faster
c) They are more flexible since they mostly don’t follow fixed routes
d) They can access the rural areas where buses do not access
e) Their fares are not fixed hence they can be negotiated
f) They are readily available
g) They are cheaper compared to buses
Disadvantages of matatus
Advantages of vehicles
Disadvantages of vehicles
a) Acquisition and maintenance cost may be relatively higher
b) They may not be suitable for transporting heavy and bulky goods
c) They are affected by traffic jams on roads resulting into delays
d) Vehicle transport is prone to accidents
e) Some roads may be impassable during bad weather e.g. during rainy seasons
Trains are vessels that transport goods and people on rails. The terminuses for railway transport are
the railway stations.
Railway transport is suitable for heavy and bulky goods. Trains can also be designed to transport
passengers.
Cargo trains: these are trains that are used to transport goods
Passenger trains: these are trains that are used to transport people
Advantages of trains
a) They are relatively secure as cases of theft and accidents are minimal
b) They follow a fixed timetable hence allowing the transporter to plan for the transport of
his/her goods
c) They are economical (relatively cheaper) for transporting heavy and bulky goods over long
distances
d) Trains may have facilities for carrying special categories of goods e.g. gas, petrol and vehicles
e) They may deliver goods up to or from the owner’s premises
Disadvantages of trains
Refers to the movement of liquids and gases from one place to another through a pipe. Examples of
products that are transported using pipeline transport are water, gases, petrol, dieses and solids that
cannot dissolve or damaged by water.
Products flow through the pipe by the force of gravity by pressure from the source.
The units of carriage which are also the means of transport include: ships, boats, ferries, steamers
and dhows.
This is transport that is carried out on lakes, rivers and inland canals e.g. transportation on Lake
Victoria.
a) It is slow
b) It does not allow the use of large vessels
c) Often affected by unpredictable strong winds
d) Affected by water weeds such as hyacinth
a) Most rivers in Kenya are not navigable due to changing seasons, rapids and falls
b) Inland water transport is slow hence not suitable where urgency is desired
c) Most rivers in Kenya usually affected by strong winds and storms
d) Most rivers are narrow and shallow hence they do not allow the use of large vessels
e) Inland water transport may be affected by water weeds e.g. water hyacinth
2) Sea transport:
This is transport that is carried out in seas and oceans. Sea transport connects continents hence
facilitating international trade.
NOTE: most rivers in Kenya are not navigable (cannot allow water transport) due to the following
reasons
Ships connect countries or places which borders the sea or the ocean.
They load and off-load in terminals known as harbours e.g. the Kilindini harbour in Mombasa.
Classification of ships
Cargo ships
Passenger ships
Liners
Tramps
a) Cargo ships
These are ships that are designed to transport goods. They are convenient for transport heavy and
bulky goods
b) Passenger ships
c) Liners
These are ships that are owned and operated by shipping companies known as conferences.
Each conference determines the routes each liner should operate, the rates they will charge and the
rules and regulations to be followed by their members
Characteristics of liners
Advantages of liners
These are ships that do not follow fixed routes or time table
Their routes and rates depend on demand in the sense that they charge higher rates when demand
is high and low rates when demand is low
Characteristics of tramps
Advantages of tramps
Disadvantages of tramps
Shipping conferences
These are associations of companies which own liners. The membership of these conferences is
international.
NOTE
i. When a trader hires an entire ship to transport goods to a given destination, he/she and the
ship owner sign a document known as the charter party which shows the terms and
conditions under which the goods are to be transported.
ii. When the ship is hired to carry goods for a given journey, the trader and the ship owner
sign a document known as the voyage charter.
iii. When the ship is hired to transport goods for a given period of time, the trader and the ship
owner sign a document known as the time charter.
These are water vessels that are used to transport people and goods over short distances.
They are found both in inland and sea transport. E.g. the Likoni ferry in Mombasa.
a) It is the gateway for most imports and exports thereby facilitating international trade
b) Earns Kenya foreign exchange
c) Promotes the development of agricultural and industrial sector
d) Creates employment
e) Promotes tourism by receiving passenger liners which transport tourists
NOTE: in Kenya water transport is managed and controlled by the Kenya ports authority
This is a mode of transport where aeroplanes are used. Therefore aeroplanes (aircrafts) are the
means of transport.
Air is the way while airports and airstrips are the terminuses
Air transport is the fastest means of transport hence it is suitable for transporting urgently needed
goods over long distances.
Passengers planes
Cargo planes
a) Air transported has the highly automated and mechanised cargo and passenger handling
facilities
b) Aircrafts are fitted with special safety facilities
c) Air transport services are controlled by international air transport associations
d) Fares and rates are comprehensive to include all services at the terminus
a) There is less handling of goods along the way since aeroplanes mostly fly directly to their
final destinations. This reduces cases of damage to the goods.
b) The way is natural and free
c) Planes can move through places other means cannot e.g. across mountains.
d) Airlines are interconnected all over the world hence making it more convenient
e) It is suitable for long distance travelling e.g. from one country to another
f) It is suitable for transporting perishable and urgently needed goods
a) It causes pollution
b) Airstrips and airports are not available everywhere
c) It is not convenient for heavy and bulky goods
d) Aircrafts are expensive to acquire and maintain
e) It requires highly trained personnel e.g. pilots.
f) Unfavourable weather conditions causes delays
g) It an expensive means of transport in terms of freight charges
h) It is not suitable for transporting inflammable goods such as petrol and cooking gas
i) Airstrips and airports (airfields) are expensive to construct and maintain
j) In case of an accident, the results are catastrophic
CONTAINERISATION
Involves the transportation of goods packed in standard box like containers. These containers can
either be made of wood or metal.
Full container load (F.C.L): this applies where the container is filled with goods belonging to one
person (consignor)
Less than container load (L.C.L): this applies where a container is filled with goods belonging to
several people (consignors). When such container reaches the destination, it is open for each
Consignor to take his/her goods.
In Kenya, the main container depot is in Mombasa. Kenya ports authority has also established inland
container depots known as dry ports e.g. in Embakasi-Nairobi.
Railtainer: this is a special train meant for transporting containers from one sea port to the
upcountry dry port inland container depot.
Advantages of containerisation
Disadvantages of containerisation
a) Cost
The cost of transport vary from one means of transport to another. An affordable means of
transport should therefore be chosen.
b) Nature of goods
Goods to be transported can be perishable, durable, light, heavy and bulky. The fastest means of
transport should be used for perishable goods. Heavy and bulky goods require the appropriate
means of transport such as use of trains and ships.
Reliability refers to the assurance that goods will reach the intended destination at the right time
and in the right form. The most reliable means should therefore be chosen.
d) Urgency
When goods to be transported are urgently required, the fastest means of transport should be
chosen.
e) Security
A more secure means of transport should be chosen in order to ensure that goods in transit secured
against damage, loss or theft.
f) Distance
Distance to be covered should also be considered when choosing a suitable means of transport. For
long distances, air, railway and water transport will be appropriate whereas for shorter distances,
road transport will be the most appropriate means of transport.
One should always choose the means of transport that is easily available
h) Flexibility
Flexibility is the ability of the means of transport to be manipulated in order to meet the needs of
the transporter. Where flexibility is required, a more flexible means of transport such as the use of
matatus should be selected.
i) Terminals
Some means of transport may have their terminals closer to the transporter than others. In this
case, the transporter should choose the means of transport whose terminals are accessible.
a) It should be affordable
b) It should be punctual
c) It should be quick
d) Its speed should be moderate
e) It should be reliable
f) It should be flexible and convenient
g) It should be comfortable
h) It should be safe
A lot of changes have been introduced in the transport sector both in Kenya and abroad. Some of
these changes include:
TOPIC 4: COMMUNICATION
CONTENTS
Introduction
Importance of communication
Lines of communication
Essentials of effective communication
Forms and means of communication
Factors to consider when choosing a means of communication
Barriers to effective communication
Services that facilitate communication
Trends in communication
INTRODUCTION
IMPORTANCE OF COMMUNICATION
Communication facilitates proper flow of information within the organization and also between the
organization and outsiders
Through communication, the organization is able to clarify issues which would otherwise be
confusing.
Communication enables management to get new ideas, make plans and ensure that they are
implemented in the desired way.
Good communication helps in handling customers’ complaints and enquiries more efficiently and
offering them appropriate feedback.
Through communication, management is able to get work done by issuing procedures and orders
Communication is used to reassure people that their performance is good so as to boost their
morale. E.g. the best performing employee will feel recognised if he/she is sent a letter to appreciate
him/her for the good work.
Through communication, arrangements for activities to take place such as meetings and conferences
can be confirmed.
Communication enables the coordination of activities of various departments. For example when
sales increase, the sales department has to inform the production department about this increase
for it to increase production proportionately
LINES OF COMMUNICATION
Lines of communication refers to the direction in which communication flows from the sender to the
receiver.
Lines of communication can be classified according to the level of the communicating parties or
according to the nature of the message.
When classified according to the level of the communicating parties, communication can be
classified into:
a) Vertical communication
b) Horizontal (lateral) communication
c) Diagonal communication
a) Vertical communication
This is where messages are passed between a senior and his/her juniors in the same organization.
Training juniors
Evaluating performance of juniors
Delegating duties
Solving problems facing junior officers
Inspiring and motivating juniors
Submitting reports
Giving suggestions
Submitting complaints
b) Horizontal (lateral) communication
This is communication between or among people of the same level e.g. between heads of
departments.
It used to:
When classified according to the nature of the message, communication can be classified into:
This is where messages are passed using the approved and recognised way in an organization. This
means that messages are passed to the right people following the right channels and in the right
form.
It is also known as official communication because it involves the transfer of messages meant for
office purposes.
b) Informal communication
This is where messages are passed not in the right form and without following the right channels.
NOTE: both formal and informal communication are necessary for the smooth running of the
organization
These are the essential elements that must be in place for communication to be effective. These
elements are discussed below:
The sender encodes the message i.e. puts the message in a form that can be understood.
The sender encodes the message through the proper use of words, symbols, gestures and signs to
represent his/her ideas
b) The message
This is the information to be sent. The message may be in the form of words, symbols, pictures or in
any other form that will make it understandable
This refers to the means through which the message is sent. The medium can be a telephone, a
letter, a radio, face to face etc.
d) The receiver
The receiver decodes the message i.e. interprets the message for easy understanding.
e) Feed-back
This refers to the reaction of the receiver to the message. It may be in the form of a response which
the receiver sends back to the sender.
Communication process
(Illustrate)
Oral communication
Written communication
Audio-visual communication
Electronic communication
Means of communication: these are devices used to pass on information. Examples include
messengers, letters, telephones, radio, televisions, face-to face etc.
a) Face-to-face conversation
b) Telephone
c) Radio calls
d) Paging
1) Face-to-face conversation
This is a means of communication which involves two or more people talking to each other.
It is suitable where the subject matter requires convincing, persuasion and immediate feedback
In Kenya, telephone services are provided by Telkom Kenya, safaricom, airtel, yu etc.
Advantages of telephones
a) Relatively fast
b) It has personal appeal
c) Provides for immediate feedback
d) Allows for persuasion and convincing
e) Suitable for long distance communication
Disadvantages of telephones
a) When there is the desire convince and persuade the other person
b) When the parties involved in communication are far away from one another
c) When immediate feedback is desired
d) When the message is urgent
This is a means of communication where messages or information is conveyed by use of radio waves
i.e. without connecting wires between the sender and the receiver.
Radio calls are mostly used by the police, game rangers, researchers, foresters etc.
a) It is relatively fast
b) It has immediate feedback
c) It has personal appeal
d) Allows persuasion and convincing
e) It can transmit messages over long distances
This is a means of communication that mostly used to locate or alert staff quickly within an
organization.
It can be done using loud speakers, bells, portable receivers and lighted signals
a) Letters
b) Telegram
c) Telex
d) Facsimile (fax)
e) Memorandum (memo)
f) Notice
g) Reports
h) Circulars
i) Agenda
j) Minutes
a) Letters
Formal letters
Informal letters
Formal letters include business and official letters while informal letters refer to personal letters.
NOTE:
a) Business letters are used to pass information between the business and its customers e.g.
the letter of inquiry. They may be used to pass information the employer and employees
within the organization
b) Official letters are used to pass information from government to employers and employees
and vice versa.
c) Personal letters are those letters that are written to friends and relatives
Advantages of letters
It provides evidence
The message is not distorted
Provides a record for future reference
The message can be detailed
It is relatively cheap
It can be used to send confidential messages
b) Telegram
This is a means of communication that is provided by the post office. The sender types or writes a
message on a telegram form in capital letters and hands it over to the post office. The post office
then transmits the message to the recipient’s post office.
The charges for sending a telegram are based on the number of words i.e. the more the words, the
higher the charges
c) Telex
This is a means of communication that is used to send short or detailed messages faster by using a
machine known as a teleprinter.
Both the sender and the receiver must have telex machines which should be connected to each
other. The message is typed on the sender’s machine and it is simultaneously received or typed on
the receiver’s machine.
d) Facsimile (fax)
This involves the transmission of information through a fax machine. Both the sender and the
receiver must fax machines connected by a telephone line.
To send the message, the sender dials the fax number of the receiving machine. He then feeds the
document to be sent into his/her machine. The receiving machine reproduces the document
immediately.
e) Memorandum (memo)
This is a means of communication that is used to pass information between departments or offices
in an organization.
They are used to inform workers within an organization on matters related to the organization
f) Notice
This is a means of communication that is used to inform a group or the public about past, current or
future events.
g) Reports
Reports are statements that are used to communicate finding, recommendations and conclusions of
an investigation.
A report is usually sent to people who asked for it for a specific purpose.
h) Circulars
These are copies of a single letter that are addressed and copied to many people when the message
to be sent to each person is the same. For example, the ministry of education can send circulars to
all school heads in Kenya informing them on the closing date.
I) Agenda
This is a form of communication where messages are sent through sounds and signs.
Audio-visual communication is suitable where the message is targeting a large number of people.
This is a means of communication where a device is used to proud a loud shrill sound. This sound
may be accompanied by a flashing light.
It is commonly used by the police, ambulances, security firms and fire brigades
b) Television (TV)
This is a device that produces information in the form of a series of images on a screen accompanied
by sound.
It is a very effective means of communication since it combines the advantages of image and sound.
It is suitable for sending urgent message that give live coverage of events.
c) Photographs
A photograph is an image of an object as it appeared at the time when the photograph was taken.
They are self-explanatory hence the receiver is able to get the message at a glance
d) Signs
Signs refer to symbols, drawings or gestures whose purpose is to inform the public about such things
as directions, distances and dangers
e) Charts
These are visual representations of information which are clearly displayed so that the observer can
get the message at a glance.
f) Whistle
This is where a small device is blown to produce sound whose purpose is to warn or alert the target
audience.
This is a form of communication where messages are passed via electronic devices such as
computers and mobile forms.
The means of communication under electronic communication include E-mails and text messages.
a) It is relatively cheap
b) It is relatively fast
c) it is suitable for sending confidential messages
d) it allows immediate feedback
e) it is easy to access the message
f) it is universal hence allowing world-wide communication
g) it allows detailed messages
h) it keeps a record for future reference
a) Speed
It is important to take in consideration the speed of the means of communication especially when
the message is urgent.
For urgent messages therefore, telex, fax and telephone will be the preferred means of
communication
b) Cost
Cost refers to the expenses incurred when sending a message. a less costly means of communication
should be selected
c) Confidentiality
The message is said to be confidential when it is intended for a specific person(s) only. In this case, a
telephone, a registered mail or an internal memo enclosed in an envelope may be used.
d) Distance
This refers to the geographical distance between the sender and the receiver of the message.
For short distances, face-face, posters and sirens may be used whereas for long distances, fax,
telephone and letters are most suitable.
e) Availability of evidence
Refers to the ability of the means of communication to provide a record for future reference. Where
evidence is required, all means of written communication will be preferred.
f) Reliability
Reliability is the assurance that the message will reach the intended recipient at the intended time,
place and in the right form. Where reliability is to be considered, face-to face communication should
be used.
g) Accuracy
h) Desired impression
At times, it may be necessary to create a certain impression on the receiver. E.g. use of a telegram
conveys a sense of urgency, use of coloured and attractive letterheads portrays a goods image of the
business etc. a means of communication that conveys the desired impression should therefore be
chosen
i) Availability
Some means of communication are easily available than others. A readily available means of
communication should therefore be chosen.
Barriers to effective communication are conditions existing between the sender and the receiver
which have the effect of distorting the message leading to ineffective communication.
a) Language barrier
This is where the receiver is unable to understand the language being used by the sender. It may be
due to use of a foreign language or use of a different accent.
b) Poor listening
Communication is effective when the recipient is a keen listener. Listening requires careful attention
and concentration. Poor communication therefore renders communication ineffective.
c) Negative attitude
Attitudes refers to feelings of the communicating parties towards one another. Where these feelings
are negative, there may be intentional misunderstanding of the message resulting in ineffective
communication.
d) Poor timing
For communication to be effective, the message should be sent and received at the appropriate
time. For example a message sent when somebody is in a hurry may not be properly received. Poor
timing therefore contributes to effective communication.
Medium refers to the means of communication used. The means of communication used should be
appropriate for the message being conveyed e.g. on cannot convey confidential messages effectively
using audio-visual communication.
f) Prejudgement
Prejudgement refers to past experiences and knowledge about the sender and the message. For
example a message conveyed by the sender who is a well-known drunk may not be taken seriously.
g) Emotional responses
These are reactions resulting from anger or excitement. These reactions may distort the message
If the channels of passing information within the organisation are not clear, messages will not get to
the right people as intended.
i) Noise
Noise refers to any disturbing sounds within the surrounding that may interfere with the
concentration or the listening ability of the recipient.
The presence of noise may make it impossible for the message to be received in the right form.
Non-verbal signals are the means of communication which help enhance verbal communication.
These signals may include facial expressions, gestures and nodding. Non-verbal signs become a
barrier to effective communication when they are misinterpreted by the receiver.
These are services offered by different organisations such as Telkom, postal courier etc. to facilitate
communication. These services may be classified into four:
a) Mailing services
b) Telephone services
c) Broadcasting services
d) Print media services
a) Mailing services
Mailing refers to the handling of letters and parcels. Mailing services are therefore are those services
which deal with the handling of letters and parcels.
These services are provided by organisations such as the postal corporation of Kenya, Securicor
courier etc.
a) Speed post
This is a service that is offered by the post office to send correspondence and parcels to a destination
within the shortest time possible. To deliver the mail, the post office uses the fastest means of
transport available to the destination.
The sender pays the normal postage plus a fee for the special service.
b) Poste restante
This is a service offered by the post office to travellers who may wish to receive correspondence
while away from their post office box.
The receiver (traveller) has to inform those who may wish to communicate with him his/her nearest
post office during his/her travel. The sender must write the words ‘post restante’ on the envelope
An additional fee on top the normal postage charges is paid for the service.
c) Express mail
This is a service offered by the post office where mails and correspondences are delivered to the
destination in the shortest time possible.
When mail is sent using express, it is delivered to the receiver’s nearest post office from where the
post office will make arrangements to deliver the mail to the receiver within the shortest time
possible.
The difference between express and speed post lies in the manner in which the mail is treated. For
speed post, special arrangements to deliver the mail start at the sender’s post office whereas for
express mail, arrangements start at the sender’s post office.
d) Registered mail
This is a service that is offered by the post office and other registered service provider such as
Akamba, Securicor etc. for sending valuable items for which secure handling is required.
A registration fee and a commission is paid for this service. The commission depends on the weight
and the nature of the item being sent.
When sending items via registered mail, a certificate of registration is issued to the sender. In case of
loss, the sender is compensated on producing the registration certificate.
This is a service that is used by businesses that intend to encourage their customers to reply their
letters promptly. These business usually send their customers unstamped reply cards, letter cards or
envelopes marked “postage paid” or “postage will be paid by licensee”
b) Telephone services
These are services that are offered by firms such as Telkom Kenya, airtel and safaricom.
For one to use the service, he/she must have a telephone equipment which is connected to the
service provider through networking.
The subscriber pays for the service either in advance (post-paid) or in arrears (pre-paid)
c) Broadcasting services
These are services that are provided by radio and television stations.
These services are regulated by the telecommunications commissions of Kenya which issues licenses
for radio and television broadcasting stations.
These are means of written communication that are intended to pass messages to the general
public. They include newspapers, magazines and journals.
TRENDS IN COMMUNICATION
a) Emergency of communication bureaus: these are privately owned kiosks where telephone
services are offered
b) Introduction of mobile phones
c) Introduction of E-mail services
d) Introduction of internet
e) The growing use of short message services provided by mobile phones.
TOPIC 5: WAREHOUSING
CONTENTS
Introduction
Importance of warehousing to business
Essentials of a warehouse
Types of warehouses
INTRODUCTION
Warehouse
A warehouse is a special place where goods are stored until demand for them arises.
Warehousing
Warehousing is the process of storing goods until the time they are required. It may also refer to the
systems by which goods are handled and controlled for efficient retrieval.
Warehousing ensure steady supply of goods by storing goods during times of surplus and releasing
them to the market when need for them arises.
By ensuring steady supply of goods, warehousing prevents shortages or surplus in the market which
may lead to changes in market prices
c) Protects goods
Warehousing protects the goods stored from risks such as theft, fraud and physical damage
Through warehousing, goods are stored during times of surplus and later released to the market
when demand for them arises. As such, warehousing helps in meeting unexpected demand.
Goods stored in the warehouse can be blended, branded, packed and graded in preparation for sale
Warehousing gives the owner of the goods time to look for a suitable buyer(s) while the goods are
still in the warehouse
i) Encourages specialization
Through warehousing, the producers are able to only deal with the production of goods whereas
distributors only deal in the storage and distribution of goods. As such, each party is able to only
specialize in one line of operation.
Warehousing gives buyers an opportunity to inspect the goods before they can buy them.
a) Allows the producer to produce goods in advance in order to meet unexpected demand
b) Allows the producer to produce goods steadily without rushing
c) Enables the producer to offer steady supply of seasonal goods
d) Raw materials can be stored in the warehouse hence enabling the producer to continue his
production throughout
e) Producer’s goods are protected from physical damage and spillage
f) Enables the producer to prepare goods for sale
ESSENTIALS OF A WAREHOUSE
Essentials of a warehouse are the features and the resources that a warehouse must have for it to
function effectively. These include the following:
a) Suitable location
A warehouse should be located in a place where receipt and issue of goods can be done efficiently.
The location therefore should be accessible or near the market.
A warehouse should be designed in such a way that it is appropriate for the type of goods being
stored. The design of the warehouse should also facilitate safety, security and ease of handling
goods that have been stored
c) Appropriate equipment
A warehouse should be equipped with proper and appropriate facilities for handling the type of
goods stored.
A warehouse should be fitted with safety equipment and facilities necessary for protecting goods
against damage that can be caused by water, sunshine or personnel who may mishandle the goods.
A warehouse should be located in a place which is accessible to the appropriate transport system for
the type of goods stored. This is to facilitate the movement of goods in and out of the warehouse.
A warehouse should have access to good communication network for easy contact with the clients
and suppliers
g) Adequate space
A warehouse should be spacious enough to allow easy movement of personnel and goods. The
space should also be enough to accommodate the required quantity of goods.
h) Efficient staff
Warehouse staff should be well trained with the necessary skills for handling the type of goods
stored
A warehouse should be equipped with appropriate special facilities for handling special goods e.g.
refrigerators for perishable goods.
Precautions against risks such as fire should be taken within the warehouse. This can be done by
providing suitable equipment and insurance against such risks.
TYPES OF WAREHOUSES
Private warehouses
Public warehouses
When classified according to the goods stored, warehouses can be categorised into:
Bonded warehouses
Free warehouses
1) PRIVATE WAREHOUSES
These are warehouses that are privately owned either by individuals or firms.
a) Wholesalers’ warehouses
Wholesalers need warehouses to store the goods they buy in bulk from producers before they are
bought by retailers.
These warehouses enables the retailer to prepare the goods for sale through packaging, branding,
blending and sorting.
b) Producers’ warehouses
c) Retailers’ warehouses
These are warehouses which are owned by large scale retailers to store their goods as they wait for
customers. Such large scale retailers include supermarkets, hypermarkets, chain stores and
departmental stores.
Circumstances under which traders (retailers and warehouses) require warehousing facilities
Circumstances under which traders (retailers and wholesalers) may not require (or require
minimal) warehousing facilities
These are warehouses that are owned by individuals or firms for the purpose of renting space to
members of the public who need temporal storage for their goods.
They are strategically located i.e. near major roads junctions, bus stations, airports, railway stations
etc.
a) The hirer competes for space with other hirers hence he/she can miss space during peak
seasons
b) The owner of the goods is denied the opportunity to physically handle the goods
c) The owner of the goods may lose contact with his/her customers if they buy goods directly
from the warehouse
d) The procedure of receiving and releasing goods may be long
e) Continued renting of space in the public warehouse may be expensive in the long run
compared to constructing one’s own warehouse
f) The location of the public warehouse may not be suitable to the hirer i.e. they may be far
away from the hirer
3) BONDED WAREHOUSES
These are public warehouses which are specifically meant for storing imported goods as they await
payment of customs duty.
Goods kept in a bonded warehouse are said to be goods under bond or goods in bond. This means
that the owner of the goods has given a bond to customs duty authorities. A bond is a guarantee
that the goods cannot be released before duty for them is paid.
A bonded warehouse can be owned by the government or by an individual who is different from the
owner of the goods.
If goods are sold while still in the warehouse, the buyer (new owner) takes the responsibility of
paying customs duty.
If goods are re-exported from the warehouse, the owner (importer) does not pay customs duty.
Goods are stored in the bonded warehouse for a specific period of time. If this period expires before
customs duty is paid by the owner of the goods, the goods can be auctioned by the customs
authorities.
Once the owner of the goods pays customs duty, he/she is issued with a release warrant to enable
him/her get the goods out of the warehouse.
a) The importer can prepare the goods for sale while still in the warehouse
b) The importer can look for market before paying customs duty
c) Some goods lose weight while still in the warehouse, therefore the importer pays less duty
in case duty is based on the weight of the goods
d) The burden of paying customs duty passes to the buyer in case goods are sold while still in
the warehouse
e) It gives the importer time to look for money to pay for customs duty
f) Security and safety of goods is provided
g) Some goods e.g. wine may improve in quality while still in the warehouse
h) Storage space in the bonded warehouse is always available
i) Goods can be withdrawn from the warehouse in bits as duty for them is paid
a) Goods are auctioned by customs authorities if the importer fails to pay customs duty.
b) Warehouse charges may be expensive to the importer
c) Owners of goods (importers) have no control over the operations and management of the
warehouse
d) The importer pays higher duty in the long run when he/she withdraws goods from the
warehouse in bits compared to when he/she pays duty at once
4) FREE WAREHOUSES
These are warehouses where tax free goods are kept as they await sale or collection by owners.
Goods kept in a these warehouses may be locally produced goods which require no taxation or
imported goods which are duty free or whose duty has already been paid.
NOTE: all other warehouses (private and public) are free warehouses since tax is not paid on goods
stored in them.
a) The government does not benefit from free warehouses since customs duty is not paid
b) Some traders may store dutable goods in free warehouses so as to avoid paying taxes
c) Illegal goods maybe be stored in free warehouses since they are not strict on inspection and
scrutiny of goods
a) Receipt of goods
It involves ordering for the goods, inspecting them on arrival and accepting them into the
warehouse. Receipt of goods involves the following activities
It involves placing goods in the appropriate storage facilities and regularly inspecting them to ensure
they are in good condition
Involves protection of goods from damages. Activities carried out at this stage include:
It involves issuing the goods to the owner upon payment of customs duty.
a) It minimizes breakages
b) It minimizes pilferage
c) It minimizes contamination
d) It ensures proper utilization of space
e) It is easier to access goods
f) It is easy to detect illegal goods
TRENDS IN WAREHOUSING
TOPIC 6: INSURANCE
CONTENTS
Introduction
Pooling of risks
An insurance contract
Importance of insurance
Terms used in insurance
Principles of insurance
Classes of insurance
Re-insurance
Co-insurance
Procedure of obtaining an insurance
Procedure of making an insurance claim
Insurance and gambling
INTRODUCTION
Insurance is a contract between an individual or an organisation and the insurance company where
the insurance company undertakes to protect the individual or the organisation against loss arising
from the occurrence of the risks insured against.
The individual or the organisation taking the insurance cover is known as the insured whereas the
company giving the insurance cover is known as the insurer.
The insured must make regular payments to the insurer to effect insurance. These regular payments
are known as premiums.
The insurance uses the number of people insured a particular risk and its past experience as the
basis for determine the amount of premiums to be charged.
POOLING OF RISKS
Refers to the practising of grouping together all the people insured against the same risk by the
insurance company.
The pooling or risks spreads the risk over a large number of people, hence reducing the burden
on each of them.
a) It enables the insurance company to create a common pool of funds out of the premiums
paid
b) It enables the insurance company to compensate those who suffer loss when the risks
insured against occur
c) It enables the insurance to spread the risks over a large numbers of insured thereby
reducing the burden on each of them
d) Surplus funds from the pool can be invested in the economy by the insurance company
e) The insurance company can use funds from the common pool to its operational costs
f) It enables the insurance company to calculate the insurance company to be paid by each
insured
g) It enables the insurance to determine whether to re-insure itself with another insurance
company or not
INSURANCE CONTRACT
An insurance contract is therefore a legally binding agreement between the insurer and the insured
where each of them agrees to undertake certain specified obligations.
An insurance contract must meet the following conditions in order to be legally binding
a) It must be for a legal purpose i.e. one cannot insure illegal activities or items such as bhang.
b) The parties must have the legal capacity to contract i.e. they must be mature (above 18
years), sane and not bankrupt.
c) The terms and conditions of the contract must be acceptable to both the insured and the
insurer.
d) There must be a payment and a consideration. The payment is the premiums paid by the
insured whereas the consideration is the insurance cover given by the insurer.
IMPORTANCE OF INSURANCE
a) Creates employment
Insurance creates confidence in investors thereby encouraging them to venture in risky but
profitable businesses.
The government earns from insurance companies by taxing the profits they make and the salaries
paid to their employees.
e) Spreads risks
Through pooling of risks, insurance spreads risks in that each of the insured contributes a small
amount of money into a common pool out of which those who suffer losses are compensated. As
such they spread the burden (loss) to all the insured.
f) Encourages savings
The amount of money contributed as premiums may act as savings especially in life assurance
polices
Insurance companies may invest their surplus funds in the economy e.g. by buying shares in order to
earn more incomes.
a) The insurer
This is the insurance company that undertakes to provide the insurance cover
b) The insured
c) Insurance
This is a written contract between the insured and the insurer where the insurer undertakes to
protect the insured against loss arising from the occurrence of the risk insured against.
d) Premium
This is the specified amount of money which is paid by the insured to the insurer at regular intervals
in return for the insurance cover.
e) Risk
These are perils or events against which an insurance cover is taken. They include fire, theft,
accident etc.
Pure risk
Speculative risk
Insurable risks
Uninsurable risks
i. Pure risk
This is a risk which results in a loss it occurs and results in no gains if it doesn’t occur e.g. accident.
This is a risk which results in a loss or a gain when it occurs e.g. risks involved in the stock exchange.
These are events or risks which an insurance firm will accept to insure. Examples include fire,
accidents, theft etc. Their features include the following:
These are risks or events which an insurance firm would not be willing to insure e.g. death. Their
features include the following:
g) Claim
This is a demand for compensation from the insurance company by the insured for loss arising from
the occurrence of the insured risk
h) Policy
This is a document that contains the terms and conditions of the insurance contract
i) Actual value
This is the financial value of the subject matter insured as stated by the insured at the time of taking
the insurance cover.
k) Surrender value
This is the amount of money that is refunded to the insured by the insurance company in case the
insured terminates payment of premiums before the insurance contracts matures. The amount
compensated is usually less than the total amount of premiums already paid.
l) Grace period
This is the time allowed between the date of signing the insurance contract and the date of payment
of the first premium. The grace period is usually a maximum of 30 days
m) Proposer
This is the person who is wishing to take out an insurance cover. He/she is the prospective insured.
n) Cover-note (binder)
This is a document that is given to the insured by the insurer on payment of the first premium while
awaiting processing of the policy.
The cover-note acts as an evidence that the insurer has accepted to cover the proposed risk.
p) Annuity
This is the amount of money that the insurance company agrees to pay the insured annually until
the insured’s death.
Annuity is paid when the insured saves a large amount of money with the insurance company and
agrees with the insurance company that on maturity of the insurance contract, he/she be paid a
specific amount of money annually until his/her death.
q) Consequential loss
This is loss that is suffered by the insured as a result of the disruption of business caused by the
occurrence of the risk insured against
r) Assignment
This is the transfer of an insurance policy by an insured to another person. The new policy holder is
known as the assignee. The assignee takes over all the claims arising from the transferred policy
s) Beneficiaries
These are people named in life assurance policy by the insured who are to be paid by the insurance
company in the event that the insured dies.
t) Nomination
This is the act of designating (identifying) beneficiaries. The designated people are known as
nominees
u) Average clause
This is a clause that is included in the policy to discourage under-insurance (insurance property at a
lower value than its actual value).
The clause provides that the insured can only recover the proportion of the loss as the value of the
policy bears on the property insured.
The formulae used to calculate the amount of compensation when the property is under-insured is:
Example: Musa insured a car valued at Ksh 500,000 against an accident for Ksh 400,000. An accident
occurred and the car was damaged. The loss suffered was estimated at Ksh 200,000. Calculate the
amount of compensation Musa will receive from the insurance company.
v) Double insurance
This refers to where the insured takes insurance policies with more than one insurance companies in
respect of the same risk and subject matter. E.g. insuring a house against the risk of fire with two
insurance companies.
In this case, the insurance companies will share the compensation proportionate to the value of the
subject matter insured with them.
w) Self-insurance
This is where an individual or an organisation insures oneself/itself by saving and accumulating funds
to meet losses that may occur from certain risks rather than insurance the risks with the insurance
company
x) Proposal form
This is a form that is filled by the prospective insured seeking to get an insurance cover from the
insurance company.
PRINCIPLES OF INSURANCE
These are the guidelines which govern the relationship between the insured and the insurer.
These principles are discussed below:
According to this principle, the person taking out insurance cover should disclose all the material
facts relating to the person or the property being insured.
This disclosure is done at the time of entering into the contract. Any changes during the contract
period must be communicated to the insurance company.
All relevant material fact must be disclosed by the insured whether he is asked to or not.
The aim of this principle therefore is to ensure that the insured discloses all the relevant material
facts when taking the insurance policy.
Disclosure of all relevant material facts enables the insurance company to:
If the insured fails to give all the material facts honestly and truthfully, the insurance company has
the right to refuse to compensate the insure when the risk insure against occurs
According to this principle, one should only insure property whose damage (loss) as a result of the
occurrence of the risk insured against will result in a financial loss to him/herself.
According to this principle therefore one can only insure his/her own property or any other property
in which he/she has interest.
Where the subject matter (property) to be insured is owned by more than one person, each person
can insure only to the extent of his/her interest in the subject matter.
The aim of the principle is to discourage people from insuring other people’s property.
According to this principle, for the insured to be compensated, there must be a very close
relationship between cause of the loss and the risk insured against i.e. the loss must arise directly
from or be closely connected to the risk insured. For example is a person insures his vehicle accident
and it is stolen, he/she cannot be compensated
The aim of this principle is to ensure that compensation is made for losses arising from risks insured
against only
d) Principle of indemnity
To indemnify means to put one in the financial position he/she was in just before the loss occurred.
According to this principle therefore, the insured should be compensated only to the extent of the
actual financial loss suffered.
The aim of this principle is to ensure that the insured does not benefit from the misfortune.
For example, if a vehicle is insured for Ksh 500,000 against theft, the insurance will only compensate
up to a maximum of Ksh 500,000 in the event that the vehicle is stolen
NOTE: the principle of indemnity does not apply to life assurance policies as it is not possible to
restore life
e) Principle of subrogation
According to this principle, whatever remains of the property insured after the insured has been
compensated according to the terms of the policy becomes the property of the insurance company.
For example, if a vehicle which is insured for Ksh 300,000 is totally damaged and the owner fully
compensated, any scrap metal left behind after compensation becomes the property of the insurer.
The aim of this principle is to ensure that the insured does not benefit from the misfortune in
accordance with the principle of indemnity.
f) Principle of contribution
This principle operates in a situation where the insured has taken policies with more than one
insurance companies covering the same risk (double insurance).
According to this principle, in the event of a loss, all the insurance companies would contribute
proportionately in order to indemnify the insured.
The total amount received from all the insurers should be equal to the loss suffered in compliance
with the principle of indemnity.
The aim of this principle is to ensure that the insured does not benefit from the misfortune in
accordance with the principle of indemnity.
CLASSES OF INSURANCE
a) Life assurance
b) Property insurance
a) LIFE ASSURANCE
This is a form of insurance cover that is taken to cover personal life. It covers the risk of death or
incapacitation.
The value of the insurance policy is determined by the ability of the insured tom pay premiums.
This is a form of life assurance that provides protection within a specified period of time whereby if
the policy holder dies within this period, compensation is offered to beneficiaries.
However if the assured does not die within the specified period, no compensation is offered
Term assurance covers short periods of time e.g. 1 year, 5 years 10 years etc.
This is a type of insurance policy in which the assured pays premiums until he/she dies.
Upon death of the assured, his/her beneficiaries are paid the sum assured as indicated in the policy.
Whole life assurance also covers disabilities due to illness or accidents in that if the assured is
disabled during the period when the policy is in form, the insurer will compensate him/her for the
income lost.
This is a type of life assurance policy where the assured pays premiums regularly for a specified
period of time. Sum assured is paid at maturity of the policy.
If however the assured dies before the policy matures, he/her beneficiaries are paid the sum
assured.
Endowment insurance can be terminated by the assured before maturity, in this case the assured is
paid the surrender value
a) It is a savings plan since the assured can be paid the sum assured
b) Provides financial security to the beneficiaries in case of early death of the assured
c) It provides financial security to the assured at retirement
d) It can be terminated before maturity by the assured
e) It is a form of investment since it earns interest in most cases
f) The assured enjoys a special tax relief
g) It can be used as a collateral security to acquire a loan
This is a type of life assurance policy where the assured (annuitant) pays a certain sum of money to
the insurance company in return for an annual payment of a specified amount of money from the
insurance company for a specific period of time or until his/her death.
e) Statutory schemes
These are insurance schemes which are offered by the government to provide welfare to the
members of the scheme. Such welfare may be in the form of medical services or retirement benefits.
A member and the employer both contribute certain amounts of money to the scheme at regular
intervals.
a) One can insure anybody whose life he/she has an interest e.g. a wife, a child or a husband
b) Group life policies can be taken to cover a group of people e.g. an employee can take a
group policy over his/her employees
This is a class of insurance that covers property against various risks which may result to loss or
damage.
Examples of risks insured under property insurance include; fire, accident and marine. Each of these
is discussed below:
1) FIRE INSURANCE
This is a type of insurance that covers loss or damage of property caused by fire. Property covered
under fire insurance include; stock, machines, equipment and building.
For the insured to be compensated under fire insurance, the following conditions must be met:
This is a type of fire insurance policy which is aimed at indemnifying the insured due to loss of profit
as a resulting of the interruption of business activities as a result of fire.
This is a type of fire insurance policy which provides cover against loss or damage caused to goods or
premises by accidental leakages from fire fighting sprinklers.
Fire fighting sprinklers are devices which are installed in buildings to provide automatic mechanisms
for fighting fire outbreaks
This is a type of fire insurance policy which covers buildings and their contents. Such buildings may
include; shops, warehouses, offices and factories
2) ACCIDENT INSURANCE
This is a type of insurance which covers all type of risks which occur by accident.
a) Motor policies
b) General accident policies
a) Motor policies
These are policies which are aimed at covering vehicles from losses arising from accidents.
This is a policy that covers losses caused by the vehicle to other people, other vehicles and to
property as a result of the accident.
The policy does not cover the vehicle and the owner.
NOTE:
This is a policy where compensation is offered to third parties as well as the vehicle itself in case of
loss or damage caused by fire or theft.
c) Comprehensive policy
This is a policy which covers damage or loss caused by the vehicle to first, second and third parties as
a result of an accident.
It also covers loss of the insured vehicle through fire and theft.
This is a form of insurance which provides cover for a wide range of risks. These risks are discussed
below:
This is a policy that covers partial or total physical disability caused to a person due to injury or loss
of income as a result of an accident.
This is a policy that covers employees who may suffer injuries while on official duty.
This is a policy that provides cover for loss of cash or goods while being transported.
This is a policy that provides cover for losses arising from the activities of robbers and thieves. For
example if robbers break into business premises and take away goods, the insurer will compensate
the insured for loss of goods and damage to business premises.
e) Bad debt cover
This is a policy that covers the business against losses arising from failure of debtors to pay their
debts.
This is a policy that covers losses, injuries or damages caused accidentally by a business or its
employees to the members of the public. For example if a building collapses injuring passers-by in
the process, the insurer will compensate the people who were injured.
This is a policy that covers the owner of the business against losses arising from activities of his/her
dishonest employees.
This is a policy that provide cover against loss of profits resulting from interruptions in business
causing the business to close down temporarily.
3) MARINE INSURANCE
This is a type of insurance that provide cover for the ship, other water vessels and cargo against sea
perils that may lead to financial loss. Examples of sea perils include storms, fire and sinking.
This is a policy that covers the ship against loss or damage as a result of risks at sea. These risks
include; storm, fire, collision and capsizing.
This a policy that covers cargo against loss or damage while being transported by ship
c) Part policy
This is a policy that covers a specific peril when the ship is being loaded, off-loaded or serviced
d) Voyage policy
This is a policy that covers the ship or cargo on a particular journey. The insurer may not compensate
if the destination is changed unless such change was necessary to save the ship, cargo or human life.
e) Floating policy
This is a policy where several shippers pay a lumpsum to cover their ships while in transit. As ships
make shipments, the amount of insurance for a particular shipment is deducted from the lumpsum.
The policy collapses when the sum insured equals the total value of all the shipments.
f) Time policy
This is a policy that covers losses arising within a specified period of time.
g) Mixed policy
This a policy that covers ships against losses while on a specified voyage and specified time.
h) Fleet policy
This is a policy which covers a fleet of ships against losses under one policy. This is possible where
there are many ships belonging to one organisation
i) Composite policy
This is a policy that provides cover to one specific ship which is insured by several insurance
companies. This is necessary where the sum insured is too large for one insurance company to
cover.
This is a policy which covers the risks that a ship is exposed to while it is either being constructed,
tested or delivered.
k) Freight policy
This is a policy that covers the ship owner against losses arising from failure by the hirer of the ship
to pay freight charges
This is a policy that covers claims that may arise from loss caused to other people and property by
the ship.
m) Port policy
This is a policy that covers the ship against sea perils when it is at the port
Marine losses
a) Total loss
b) Partial losses
a) Total loss
Constructive total loss: this occurs when the insured is extensively damaged and as a result
it is abandoned because the cost of salvaging it would be more than the wreckage.
Actual total loss: this occurs when there is total damage to the ship, on the cargo or both.
b) Partial loss
Refers to where the ship or the cargo is partly damaged. It is also known as average.
Particular average: this is an accidental loss or damage on either the ship or the cargo.
General average: this is loss that occurs when actions taken to save the ship and the cargo
result in a loss
The amount of premiums will he higher when health of the insured is poor compared to when
he/she is healthy
The amount of premiums will be higher when the probability of occurrence of the insured risk is
higher than when the probability is low
The amount of premiums will be higher if the extent of damage caused by the insured risk previously
was high compared to when the extent of damage was low
The higher the value of the property, the higher the amount of premiums and vice versa
Older people will pay higher premiums than higher people than younger people. On the other hand,
the insured will pay low premiums for older properties compared to newer properties.
Insured who reside in urban areas tend to pay higher premiums than the ones residing in rural areas.
This is because those residing in urban are assumed to be financially stable than those residing in the
rural areas
RE-INSURANCE
Re-insurance means to insure again. Re-insurance therefore refers to where insurance companies
insure themselves with other insurance companies known as re-insurers.
Insurance companies usually re-insure themselves when the value of the property insured with them
is high or when the chances of the risk occurring are very high.
In the event of the risk insured against occurring, the re-insurer helps the insurance company to
compensate.
In Kenya, all insurance companies are required by law to re-insure themselves with the Kenya re-
insurance company.
CO-INSURANCE
Refers to where the insurance company insures the same property for the same risk with other
insurance companies.
Co-insurance is necessary when the value of the property is high to be covered by one insurance
company.
Each insurance company will provide cover for only a portion of the value of the property insured.
The insurance company that accepts to insure the property or the one the highest proportion is
known as the leader while the others are called co-insurers.
In the event of the risk occurring, the leader will ascertain the loss and apportion it to each of the co-
insurers in accordance to the value of the property covered by each of them for compensation
purposes.
DOUBLE INSURANCE
Refers to where the owner of the property (insured) insures the same property for the same risk
with two or more insurance companies.
The property may be insured with each insurance company for the full value or each firm taking a
share of the value.
In the event the risk insured against occurs, each insurance company only a share of the loss
suffered based on the proportion of the value insured.
UNDER-INSURANCE
This is where the sum insured is less than the actual value of the subject matter insured. In the event
of the actual loss, the insured will be compensated the lesser of the sum insured or the actual loss
suffered
OVER-INSURANCE
This is where the sum insured is higher than the actual value of the subject matter insured. In the
event of the actual loss, the insured is compensated the less of the actual loss or the actual value of
the subject matter.
The process of obtaining an insurance policy involves five key stages which are outlined below:
A person intending to take an insurance policy will first fill a proposal form which will be obtained
from the insurance company he intends enter into contracts with.
The applicant is expected to fill the form with the highest level of honesty by disclosing all the
relevant facts in compliance with the principle of indemnity.
Information given in the proposal form is used by the insurance company to calculate the amount of
premiums to be paid by the insured.
On receiving the proposal form, the insurance company uses the facts stated in the form to decide
whether to accept to cover the risk. If the insurance company accepts to cover the risk, it will
calculate the amount of premiums to be paid based on the information provided in the proposal
form.
Where necessary, arrangements may be made to inspect the subject to be insured
After the insurance company has accepted to cover the risk and the premiums calculated, the
insured pays the first premium.
Upon paying the first premium, the insured is issued with a cover note by the insurer. The purpose
of the cover note is to serve as an evidence that a contract has been entered into between the
insured and the insurer.
The cover note is valid for a period of 30 days after which the policy is issued.
The policy is the actual document of contract between the insured and the insurer. It contains the
terms and conditions of the insurance contract.
This is the process followed by the insured when claiming compensation from the insurer. This
process involves five key stages which are discussed below:
The insured should inform the insurer immediately the risk insured occurs.
After being notified of the occurrence of the risk, the insurer issues a claim form to the insured. The
insured will then fill the form by giving all the details relating to the occurrence of the risk. The fully
filled claim form is retained by the insurer.
On receiving the claim form, the insurer undertakes to investigate the cause of the occurrence of the
risk so as to ascertain whether the cause of the loss has any direct connection with the risk covered.
Once the insurance company establishes that the claim is valid, it prepares a report concerning the
extent of the loss suffered. This report is prepared by experts known as assessors
Upon receiving the assessment report, the insurer makes arrangements to pay insured. This
payment concludes the contract between the insured and the insurer.
Insurance Gambling
The person taking the policy should have A gambler doesn’t need insurance interest
insurable interest
The aim of insurance is to indemnify the The aim of gambling is to improve the financial
insured position of the gambler
The insured is required to pay regular Gambling money is paid at once
premiums to the insurer for the insurance
cover to be in force.
Insurance involves pure risks Gambling involves speculative risks
The event of loss may not occur The event of bet must happen to determine the
winner and the loser
a) When the insured has not acted with utmost good faith and is discovered by the insurer
b) When the risk insured has occurred and compensation has been paid
c) When the insurance contract matures
d) When the insured decides to terminate the contract
e) When the court of law orders termination of the contract thus rendering it null and void
f) When the insurance company is wound up
g) When the insured ceases to have insurable interest on the property e.g. in case the property
is sold
TRENDS IN INSURANCE
CONTENTS
Introduction
Importance of product promotion
Methods of product promotion
Sales promotion
Ethical issues in product promotion
Trends in product promotion
INTRODUCTION
Product promotion refers to the use of various methods and techniques to inform, influence and
persuade consumers to buy and consume the products.
A product is a good or a service produced for the purpose of satisfying human wants. A product can
also be an idea.
Product promotion aims at providing information about new products and persuades consumers to
buy them.
Product promotion aims at providing information about the benefits of the product to the consumer
Product promotion aims at ensuring that consumers continue buying the product.
d) Stimulates demand
Product promotion encourages the consumption of the product thereby increasing sales
e) Creates awareness
Product promotion aims at educating the consumer on the features of the product, its quality and its
usage.
f) Counters competition
Product promotion may enable the firm outdo its competitors by gaining a greater market share for
the product
Product promotion is used as a strategy of marketing the business organisation hence improving its
image
Product promotion aims at convincing consumers that the product will fulfil their needs hence
influencing them to buy the product.
Product promotion aims at reminding consumers about the continued existence of the product so as
to encourage them to keep buying the product.
Methods of product promotion are the activities that are carried out by businesses in order to
increase the demand for their products.
a) Personal selling
b) Advertising
c) Publicity
d) Public relations
e) Point of purchase (window) display
f) Direct mail advertising
g) Catalogue
h) Guarantee
i) Discount
j) Loss leader
k) Psychological selling
l) Coupons
m) Credit facilities
n) After-sale-services
a) PERSONAL SELLING
This is a method of product promotion where a sales person (sales representative) presents a
commodity to the consumer with the aim of convincing the consumer to buy.
Potential customers are referred to as prospects. Potential customers can be identified through the
following methods:
Analysing the organisation’s past customers records
Reading newspapers
Interviews and meeting
The sales person should gather as much information about the product as possible and then present
this information to the prospective buyer.
The sales person should an appropriate time when the prospective customer is available and likely to
attend the sales person
The sales person should use the appropriate approach and language to arouse the prospective
customer’s interest in the product.
Objections are the reactions of the prospective customer. The sales person should be prepared to
deal with objections. The objections may relate to price, quality, quantity and design. The objections
must be dealt with properly otherwise the prospective customer will decide not to buy.
This involves the sales person asking the prospective customer to buy the product. This should be
done in a friendly way.
Once the sale has been made, the sales person should make a follow up to ensure that all the after
sale services promised to the customer have been offered. Such services may include;
transportations, installations and repairs.
These are the ways in which personal selling is carried out. These methods include the following:
This is where the sales persons physically approach the prospective customers to explain the details
of the product and even demonstrate the use of the product with the aim of convincing the
customer to buy the product.
During shows, trade fairs and exhibitions, sales persons demonstrate and explains the features of
the products to the prospective buyers. This enables the firm to sell their products and attract new
customers.
Advantages
a) Gives customers an opportunity to compare various products before they decide on the one
to buy
b) Gives sales persons an opportunity to demonstrate and explain various features of their
products
c) The firm is able to get feedback from customers immediately
d) Enables the organisation to assess whether their product is popular or not based on the
number of people who visit their stall
Disadvantages
These are large rooms in which products for sale are displayed for sale to prospective customers.
Showrooms usually deal with bulky and durable products e.g. cars.
Customers who visit the show rooms get the necessary details from the sales persons concerning the
displayed product.
Advantages
a) The seller is able to interact with customers and get immediate feedback from them
b) Customers are able to get clarifications from the sales persons before deciding to buy the
product
c) It is a cheap method of product promotion
d) Enables the demonstrations on the uses of the product
e) Customers can be advised on the type of goods to buy
Disadvantages
a) Showrooms are not accessible to many people since they are mostly located in urban
centres
b) Putting up or hiring a show room is expensive
c) Showrooms require security which may be expensive to provide
d) Customers may tamper with the products in the show room
4) Free gifts
A gift is an item which is given to a customer for free after buying a given product worth a certain
value. The aim of giving free gifts is to encourage customers to buy more products.
Advantages
a) It enables the customer to enjoy using a certain product without paying for it
b) It encourages customers more products so as to get more free gifts
c) It increases customer satisfaction
d) May create customer’s loyalty to the firm offering the free gifts
Disadvantages
a) It may encourage unplanned buying by the customer in his/her efforts to get the free gift
b) Getting the free gift may be costly since the customer has to buy more goods in order to get
the free gift
c) Some traders may keep away the free gift
d) There is assurance to the trader that the customer will buy the product after getting the free
gift
5) Free sample
A free sample is a product that is given to the customer freely for trial. Free samples are normally
given when the product is new or when the old product has been improved.
The aim of giving free samples is to induce customers to buy more of the product
Advantages
Disadvantages
This is where sales persons go out with samples of products to meet prospective buyers and try to
convince them to buy the products.
a) It is a costly method to operate since sales persons are paid and sometimes trained regularly
b) It is time consuming since it involves bargaining, demonstrating, asking and answering
questions etc.
c) It may be difficult to persuade the prospective customer especially when the sales person
lacks etiquette, skills and knowledge.
d) Sales people may misuse the resources allocated to them
e) Personal selling may inconvenience the programs of the prospective buyer
f) It covers a small geographical area
g) It may not be self-sufficient hence it has to be supported by advertising
h) Sales persons may convince customers to buy products that they don’t need.
b) ADVERTISING
This is refers to any form of impersonal presentation of a product which is made through the mass
communication media such as newspapers, radios, TVs etc.
Features of advertising
Types of advertising
a) Product advertising
This is a type of advertising which aims at increasing the sales of a particular product. The brand
name of the product features predominantly in the advertisement.
This is a type of advertising that mainly aims at popularising a new product to potential customers.
The aim of this advertisement is to create awareness to the potential customers about a new
product in the market.
c) Institutional advertising
This is a type of advertising that is aimed at popularising the business organisation and not the
individual products.
Institutional advertising is mostly used when various business organisations are selling similar
products.
The main objective of this form of advertising is to improve the image of the business organisation,
its sales and its relations with customers.
This is a type of advertising which is used by a business organisation that is face facing stiff market
competition to convince potential customers that the product provided by the organisation is the
best in the market.
It is used to differentiate the products of the business organisation from those of the competitors
e) Celebrity advertising
This is a type of advertising where famous people are used to advertise products. The aim of this
advertisement is to encourage people to identify with such celebrities so as to buy the product
f) Reminder advertising
This is a type of advertising which is used to remind that the product is still available so as to help in
retaining these customers and encouraging them to continue buying the product.
g) Educative advertising
This is a type of advertising which has features of both informative and persuasive advertising.
Educative advertising educates the consumer about the product and leaves the consumer to make
the decision on whether to buy the product or not.
h) National advertising
This is a type of advertising which is done by producers whose products are consumed nationwide
i) Regional advertising
This is a type of advertising which is aimed at a particular region or section of the country
j) Local advertising
This is a type of advertising which is done by retailers to attract customers to their business premises
e.g. use of posters, neon signs etc.
ADVERTISING MEDIA
Advertising media refers to the channel through which the advertising message is conveyed to the
target group. These channels include the following:
a) Newspapers
b) Magazines and journals
c) Posters
d) Billboards (hoardings)
e) Transit (transport) advertising
f) Electronic neon signs
g) Radio
h) Television
i) Cinema
a) NEWSPAPERS
These are regular publications which contain news and advertisements. They are commonly used in
advertising since they penetrate most segments of the society.
Examples of newspapers in Kenya include the standard, the daily nation, Taifa Leo, the star etc.
Advantages
a) They cover a wide geographical area hence reaching high number of potential customer
b) They are relatively cheaper
c) Advertised messages on the newspapers are easily acceptable by readers
d) They convey the message for a long time
Disadvantages
a) They have a short lifespan since they are mostly read during the day
b) They mostly advertise in Kiswahili or English hence the message cannot get to potential
customers who don’t understand the two languages
c) The message cannot be targeted to a specific group as newspapers are read by everyone
d) Some readers go through the newspaper in a hurry hence they may not read the
advertisement
e) It is costly to advertise on the newspaper
f) It does not allow demonstrations
b) MAGAZINES AND JOURNALS
These are publications which are produced periodically i.e. monthly or yearly. They mostly target a
specific class of readers.
Advantages
Disadvantages
a) There may be a big time gap between when the advertisement is placed and when the
publication is circulated making the advertisement fail to achieve the desired objective.
b) They are a bit expensive to buy hence not all potential customers can afford to buy them
c) It is costly to advertise in magazines
d) Circulation of magazines may be limited to a small geographical area e.g. in urban areas
e) They are written mostly in English and Kiswahili hence the advertisement cannot be
understood by people who cannot read and write.
c) POSTERS
These are forms of outdoor advertising media that can be used to advertise products.
Posters contain advertising information both in words only or in both words and pictures
To be effective, posters should be placed in strategic places where it is likely to draw attention.
Advantages
a) They may convey the advertised message to a large audience since they are placed in
strategic places
b) They are cheaper to prepare
c) Different colours may be used to make it appealing to the audience
d) They are appropriate both to the literate and the illiterate
e) They are easy to prepare
Disadvantages
d) BILLBOARDS (HOARDINGS)
This is a medium of advertising where the advertising message is written on the board. The
advertising message is designed in such a way that it is attractive and capable of read from a
distance.
Advantages
a) They are positions at strategic points where they can be easily read by many people
b) It is easy to understand the advertising message since it is heavily worded
c) They are relatively permanent hence they convey the advertising message for a long time
d) They are attractive to the audience
Disadvantages
This is where vehicles such as matatus, buses, trains and Lorries carry the advertising message. The
advertiser paints the message or fixes a poster on the body of the vehicle.
Advantages
a) The advertiser reaches people inside the vehicle as well as those in areas served by the
vehicle
b) The painting on the vehicle may be long lasting hence able to convey the message for a long
time.
c) The advertising message can be read quite often as many people are regular travellers
Disadvantages
a) Rush hour crowds may limit travellers’ opportunity to read the message
b) The advertising message gets only to those places accessed by the vehicle
f) ELECTRONIC NEON SIGNS
These are coloured lights which usually keep on flickering at regular intervals to attract passers –by.
They are mostly found on walls and roofs of tall buildings.
Advantages
Disadvantages
This is a medium of advertising that uses electromagnetic waves to receive and broadcast sound
messages.
Advantages
a) It has a wider coverage therefore the advertisement can reach many potential customers
b) It conveys the advertisement to many people at the same time
c) The advertisement reaches both the literate and the illiterate
d) Different radio stations are able to broadcast in different languages hence the advertising
message can reach those who don’t understand Kiswahili and English
e) Radio advertisement is appealing to many people since the message can be accompanied by
music
f) The advertisement can be repeated over and over again according to the needs of the
advertiser
g) The advertisement reaches the audience in the intended time
h) The advertisement may be targeted to a specific audience through proper timing
i) Radios captures the attention of the audience quickly
Disadvantages
This is a medium of advertisement that conveys both audio and visual messages. The TV is therefore
the most effective medium of advertisement since it can convey messages by combining words,
sounds and motion pictures.
Advantages
Disadvantages
A cinema is place where films (movies) are shown. Such films may be used to pass the
advertisement.
The film just like a TV may be combine written words, sounds and motion pictures so as to reach the
audience more effectively.
Cinemas are mostly attended by the youth and the middle aged people hence cinemas can be used
to advertise products to a target group.
Advantages
Disadvantages
a) The advertisement may not reach those who don’t attend cinemas
b) Cinemas are fairly expensive as an advertising medium
c) Cinema attendance has reduced over the years due to the popularity of television and
videos.
d) Movie halls are fewer hence limiting their use as the advertising media.
ADVERTISING AGENCIES
These are businesses that specialise in advertising work and are hired to carry out advertising
functions for businesses
a) They help organisations in designing their trademarks, logos and advertising materials
b) They book space and airtime for their customers in various media
c) They advise their clients on best-selling techniques
d) They advertise on behalf of their clients
e) They choose the appropriate media to use on behalf of their clients
The advertising medium chosen should be economical, affordable and within the available budget
b) Selectivity
This is the ability of the medium to distinguishing between groups so as to reach the intended group.
The medium that can convey the advertising message to the target group should be selected
c) Flexibility
This is the ease with which it is possible to change from one medium to another. The medium
selected should be flexible to accommodate future changes
The product being promoted may be such that it either requires demonstration or it doesn’t. For
products requiring demonstration, TVs and cinemas are most appropriate and for products which
don not require demonstration, the radio is appropriate. The firm should therefore choose the
medium that will suit the product being promoted.
g) Government policy
A firm should use the medium which is approved by the law to promote its products
An alternative medium from the one used by the competitors should be used in order to counter
competition
a) Creates awareness of the firm’s products to potential customers especially when the
product or the firm is new in the market
b) Increases the volume of sales
c) Popularises the firm’s products hence encouraging their frequent use
d) Reminds consumers of continued existence of the product
e) Enables businesses get feedback from consumers about their products through consumer
reactions to advertisements
a) The customer through advertising may be educated on how to use the product
b) Advertisement may inform the customer about the offers available in the market
c) Competitive advertising may result in price reductions
d) The customer may be guided by the advertisement on where to find the product
e) Competitive advertising may result in improved quality of goods and services
f) Advertising enables the availing of information relating to price and other features of the
product to the customer
g) Competitive advertising may result in production of different types of goods to customers
hence providing a variety of goods to customers
h) Advertising through the mass media entertains customers
Publicity refers to any mention of the product, firm or person in the mass media.
Publicity makes the product, firm or person mentioned known to many people.
Types of publicity
Free publicity
Special feature publicity
a) Free publicity
This is publicity which is not paid for. For example, when an organisation invites somebody
important to open a new branch, the mass media that will cover such event offer free publicity to
the organisation
This is publicity which is paid for by the organisation. For example where the organisation has
organised a sporting activity and invites mass media to cover the event.
Advantages of publicity
Disadvantages of publicity
a) The firm has no control over free publicity as related to the content of the message, timing
and space
b) Only a portion of the information released by the firm might appear in the media
c) The media may give negative information about the firm hence adversely affecting the firm
d) The media may not cover the firm at the firm’s convenience
e) It is not long lasting
f) Special feature advertising may be costly to the firm
d) PUBLIC RELATIONS
This is the process of passing information with a view of creating, promoting or maintaining good will
and a favourable image of the organisation to the public.
a) It is costly
b) It is difficulty to evaluate the impact of the message since customers are not obliged to
respond
c) It lead to premature buying by customers
d) It takes longer for the effects of the advertisement to be realised
e) It does not guarantee increase in sales
f) POINT OF PURCHASE (WINDOW) DISPLAY
This refers to the arrangement of items at strategic points in the shop where potential customers
can easily see them
Point of purchase display is used to attract, inform and induce customers to buy from the shop.
This refers to any form of advertising which is sent directly to the potential customer through the
mail.
A catalogue is a booklet that gives a brief description of products sold. It gives details relating to
price of different products and the terms of sale.
Advantages of a catalogue
a) It can be used to advertise all the products the organisation sales at once
b) The advertiser has total control over the catalogue
c) It gives details information about the product
d) It is printed in beautiful colours hence making an attractive promotional tool
Disadvantages of a catalogue
a) It is expensive to produce
b) It is affected by price changes
g) GUARANTEE
This is the assurance by the seller to the buyer that the product offered for sale will serve as
expected if it is used as specified.
During the guarantee period, the seller undertakes to either replace, or repair the item if it fails to
perform as specified.
The seller will however not repair or replace the item during the guarantee period if the buyer uses
the item against the specifications
The aim of the guarantee is to build confidence in customers so that they can buy the firm’s
products.
Advantages of a guarantee
Disadvantages of a guarantee
Discount refers to the reduction in the sales price of the commodity by the seller so that the buyer
ends up paying less. There are three types of discount; trade discount, quantity discount and cash
discount (already discussed)
Discounts are used to attract customers since customers are likely to buy from sellers who give
discounts than those who don’t.
i) LOSS LEADER
A loss leader is a product that is sold below its marked price in order to attract customers into the
shop with the view that once in the shop, the customer is likely to buy other products which are sold
at normal prices
j) PSYCHOLOGICAL SELLING
Psychological selling involves all the activities which are meant to increase sales by playing around
with the customer’s mind. For example the price may be quoted as Ksh 999 to make the customer
think the price is reduced and therefore end up buying the product
k) COUPONS
A coupon is a small piece of paper that gives someone a right to buy something at a lower price than
normal. For example sellers may give coupons of Ksh 50 for any purchase of goods worth Ksh 2000.
The customer can use this coupons to buy more goods worth the value of the coupon from the
seller.
l) CREDIT FACILITIES
This is a method of selling where the seller allows the buyer to take goods and pay for them later.
Credit facilities may induce may induce the customer to buy more. It also creates loyalty in the
customer
m) AFTER-SALE-SERVICES
These are services offered by a seller to a buyer after the buyer has bought goods. Such services may
include; transport, installation and repairs.
A seller who offers after-sale services is likely to retain existing customers as well as attract new ones
Advantages of after-sale-services
Disadvantages of after-sale-services
a) A fall in demand for the product will result in a decrease in profits leading to closure of the
business
b) The trader may attract many buyers since most people prefer buying from traders who stock
a variety of goods
c) A fall in supply from suppliers may result in the closure of the business
d) The trader will lack innovativeness
e) The trader will face stiff competition from firms which offer varieties
SALES PROMOTION
Sales promotion refers to the application of various techniques and activities to attract customers
and increase sales. Some of these techniques and activities include the following:
a) To increase sales
b) To inform customers about the new product
c) To persuade existing and potential customers to buy the firm’s products
d) To remind customers about product attributes
a) Cost
c) Target group
The promoter should a method of promotion that reaches his/her target group so as to reduce
wastage.
Sometimes, firms undertake product promotion in order to achieve certain objectives. For instance,
if the objective is to correct the bad image of the firm, public relations should be preferred. A firm
should therefore choose a method of sales promotion that will help meet the objectives of the firm.
Firms should choose methods of promotion that enables them compete favourably with their
competitors that is the firm should use a different method of promotion from the one the
competitor is using
f) Government policy
A firm should use only those methods that are allowed by the law of the land
g) Geographical region
Some products may require countrywide coverage while others will require regional coverage. The
firm should therefore choose a method that will cover the geographical area intended
Some methods of product promotion are easily available than others. A firm should therefore
choose a method that is easily available
The term ethics refers to the prescribed or accepted code of conduct. Ethics in product promotion
therefore refers to the rules and regulations which are to be followed when promoting products so
as to avoid the violation of other people’s rights.
Ethical issues in product promotion refers to product promotion practices which contravene the
principles of good ethics and fair business practices resulting to negative effects on the consumer.
These ethical issues are discussed below:
This is a situation whereby the promoter of the product does tell the truth about the performance of
the product.
This is where the promoter gives false information about the ingredients of the product so as to lure
the customers into buying the product. He/she may give the impression that the product contains
certain ingredients when it doesn’t
d) False pricing
Some promoters may overprice their products and later reduce their prices slightly so as to make the
customer think that the price has been reduced and therefore buy the product.
Some promotional activities may have adverse effects on the environment e.g. loudspeakers used by
sales persons may cause noise pollution. The promoter may however disregard all these negative
effect on the environment in his/her efforts to sell the product
Product promotion may encourage the use of foreign products and styles that conflict with the
cultures of the various communities in the country. For example putting on earrings by men is
considered a taboo in some communities.