Business Studies A Level Revison Guide

'A ' LEVEL BUSINESS REVISION GUIDE FOR
LEARNERS
STUDIES
ZVAKAVAPANO CAISY
BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

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'A ' LEVEL BUSINESS STUDIES REVISION GUIDE FOR
LEARNERS
ZVAKAVAPANO, C.

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Contents
'A ' LEVEL BUSINESS STUDIES REVISION GUIDE FOR LEARNERS ................................ 2
Business Environments ........................................................................................................... 12
Micro -environment ................................................................................................................ 14
Market environment (external) ............................................................................................... 15
Macro -environment ................................................................................................................ 16
NEED FOR AND NATURE OF BUSINESS ACTIVITY .................................................... 18
Problem of scarcity and opportunity cost ............................................................................... 19
ECONOMIC SYSTEMS ........................................................................................................ 19
Market economic system ........................................................................................................ 20
Mixed Economic System ........................................................................................................ 21
INDUSTRIALIZATION ........................................................................................................ 22
De-Industrialization ................................................................................................................ 23
BUSINESS ORGANIZATIONS ............................................................................................ 24
Sole proprietorship .................................................................................................................. 25
The Partnership ....................................................................................................................... 26
There are three ways of ending a partnership namely; ........................................................... 27
Incorporated companies .......................................................................................................... 27
Private limited companies ....................................................................................................... 29
Public limited companies ........................................................................................................ 30
Advantages .............................................................................................................................. 31
Disadvantages ......................................................................................................................... 31
Joint ventures .......................................................................................................................... 31
Registration of joint stock Companies .................................................................................... 32
Public corporations ................................................................................................................. 34
PRIVATIZATION .................................................................................................................. 35
BUSINESS STAKEHOLDERS ............................................................................................. 37
Size and growth of businesses .................................................................................................... 38
SMALL AND MEDIUM ENTERPRISES ............................................................................. 39
ECONOMIES OF SCALE...................................................................................................... 42
Internal economies .................................................................................................................. 42

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External Economies ................................................................................................................ 42
FORMS OF BUSINESS GROWTH....................................................................................... 43
Holding companies ................................................................................................................. 43
Conglomerates ........................................................................................................................ 43
Integration ............................................................................................................................... 43
Horizontal integration ............................................................................................................. 44
Vertical Integration ................................................................................................................. 44
Lateral Integration ................................................................................................................... 45
Definitions to learn.................................................................................................................. 45
BUSINESS OBJECTIVES ..................................................................................................... 46
Objectives must follow the SMART criteria .......................................................................... 46
Corporate aims ........................................................................................................................ 47
Mission statement ................................................................................................................... 47
Common Business Objectives ................................................................................................ 47
Growth .................................................................................................................................... 47
Increasing Market Share ......................................................................................................... 48
Survival ................................................................................................................................... 48
Profit satisficing ...................................................................................................................... 49
Maximizing short -term sales revenue .................................................................................... 49
Maximizing shareholder value ................................................................................................ 49
Corporate social responsibility (CSR) .................................................................................... 49
Conflicting Objectives of Shareholders .................................................................................. 50
The Community and the Government ..................................................................................... 51
EXAMINATION PRACTICE QUESTIONS ......................................................................... 51
TOPIC 2: BUSINESS CONSTRAINTS..................................................................................... 53
INTERNAL CONSTRAINTS ................................................................................................ 53
EXTERNAL CONSTRAINTS ............................................................................................... 54
Government policies ............................................................................................................... 54
National Income ...................................................................................................................... 55
Inflation ................................................................................................................................... 57
Causes of Inflation .................................................................................................................. 57

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Effects of inflation .................................................................................................................. 57
Solutions to Problems of Inflation .......................................................................................... 59
Effects of Exchange Rate Fluctuations ................................................................................... 60
Unemployment ........................................................................................................................ 61
Causes of Unemployment ....................................................................................................... 61
Policies for Reducing Unemployment .................................................................................... 61
BUSINESS ETHICS AND CORPORATE SOCIAL RESPONSIBILITY ............................ 63
Social Responsibility............................................................................................................... 65
Areas of Social Responsibility and Business Ethics ............................................................... 65
Consumers and Business Social Responsibility...................................................................... 66
Suppliers.................................................................................................................................. 66
Competitors ............................................................................................................................. 67
Employees ............................................................................................................................... 67
Owners and shareholders ........................................................................................................ 68
The Community ...................................................................................................................... 68
EXAMINATION PRACTICE QUESTIONS ......................................................................... 68
Essay questions ....................................................................................................................... 69
Technological Components..................................................................................................... 72
E-BUSINESS .......................................................................................................................... 74
BUSINESS PLANNING ........................................................................................................ 76
PROJECT MANAGEMENT .................................................................................................. 81
Basic Network Analysis .......................................................................................................... 83
Analysis of Time Using the Network Diagrams ..................................................................... 88
The critical Path ...................................................................................................................... 92
Float ........................................................................................................................................ 93
DECISION TREES ................................................................................................................. 95
COST BENEFIT ANALYSIS .............................................................................................. 101
EXAMINATION PRACTICE QUESTIONS ....................................................................... 104
MANAGEMENT FUNCTIONS .......................................................................................... 107
The Fundamental Tasks of Management .............................................................................. 109
Levels of management .......................................................................................................... 110

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The Role of managers ........................................................................................................... 110
MANAGEMENT THEORIES ............................................................................................. 111
Principles of Management Theory: Henri Fayol .................................................................. 114
Principles of Bureaucratic Management Approach .............................................................. 117
The Behavioral School: Elton Mayo .................................................................................... 118
LEADERSHIP ...................................................................................................................... 120
Leadership and management ................................................................................................. 121
Aspects of leadership ............................................................................................................ 122
Leadership models ................................................................................................................ 125
Rensis Likert's Four Styles of Leadership............................................................................. 128
McGregor's Theory X and Theory Y .................................................................................... 130
Factors Influencing Effective Leadership ............................................................................. 131
Informal leadership ............................................................................................................... 132
MOTIVATION ..................................................................................................................... 134
Maslow's Hierarchy of Needs Theory................................................................................... 135
Herzberg's Two Factor Theory ............................................................................................. 138
Equity Theory by Adam Stacey ............................................................................................ 142
BUSINESS COMMUNICATION ........................................................................................ 146
Classification of Communication.......................................................................................... 150
(b) According to media ......................................................................................................... 151
(c) According to degree of formality .................................................................................... 153
Barriers to Effective Communication ................................................................................... 155
Communication Networks .................................................................................................... 156
Structured questions .............................................................................................................. 159
Essay questions ..................................................................................................................... 160
TOPIC 5: MARKETING MANAGEMENT ............................................................................ 161
Marketing and other functions .............................................................................................. 166
Market Analysis .................................................................................................................... 168
Market size ............................................................................................................................ 168
Market Share ......................................................................................................................... 169
Market Segmentation ............................................................................................................ 170

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Niche vs. Mass Marketing .................................................................................................... 172
An attractive niche is characterized as follows; .................................................................... 173
Local Area ............................................................................................................................. 174
Individual Marketing............................................................................................................. 174
Target marketing ................................................................................................................... 175
Mass Marketing (undifferentiated marketing) ...................................................................... 176
Niche marketing (concentrated marketing) ........................................................................... 177
MARKETING RESEARCH ................................................................................................. 177
Types of Research (types of data collected) ......................................................................... 179
The Marketing Research Process .......................................................................................... 180
Research Approaches (Techniques for field research) ......................................................... 181
3. Test Marketing .................................................................................................................. 183
4. Focus groups ..................................................................................................................... 183
5. Surveys .............................................................................................................................. 184
Face - to - face (interview survey) ........................................................................................ 185
6. Panel Surveys .................................................................................................................... 186
Research Instruments ............................................................................................................ 186
Sampling Methods ................................................................................................................ 188
Probability sampling ............................................................................................................. 190
Non - Probability sampling techniques ................................................................................. 192
FORECASTING ................................................................................................................... 196
Qualitative forecasting methods............................................................................................ 197
Quantitative Forecasting Methods ........................................................................................ 201
TIME SERIES ANALYSIS .................................................................................................. 202
The Moving Averages Method ............................................................................................. 203
DEMAND MEASUREMENT .............................................................................................. 206
Determinants of demand ....................................................................................................... 207
Product .................................................................................................................................. 215
Reasons for failure of new products ..................................................................................... 215
Types of brands ..................................................................................................................... 223
Product Life Cycle (PLC) ..................................................................................................... 224

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PRODUCT PORTFOLIO ANALYSIS ................................................................................ 230
The Boston Consulting Group Matrix (BCG)....................................................................... 230
Pricing decisions ................................................................................................................... 233
Communication Mix ............................................................................................................. 245
Place (Distribution) ............................................................................................................... 250
Essay questions ..................................................................................................................... 255
TOPIC 6: NATURE OF PRODUCTION ................................................................................. 257
Production ............................................................................................................................. 257
The Production Function ....................................................................................................... 259
Business Location ................................................................................................................. 261
Costs of Production ............................................................................................................... 261
Efficiency and Effectiveness ................................................................................................. 262
Productivity ........................................................................................................................... 262
Value Analysis (Value Engineering) .................................................................................... 265
Organizing Production (Production methods) ...................................................................... 267
Capacity utilization ............................................................................................................... 273
Production costing................................................................................................................. 277
General application of marginal costing ............................................................................... 280
INVENTORY CONTROL ................................................................................................... 283
Economic Order Quantity (EOQ) ......................................................................................... 287
Stock control chart ................................................................................................................ 292
Two bin method (TBM) ........................................................................................................ 294
Pareto rule efficiency ............................................................................................................ 295
OPERATIONAL EFFICIENCY/LEAN PRODUCTION .................................................... 297
Just - in - time (JIT)............................................................................................................... 298
Quality control ...................................................................................................................... 301
Total quality management (TQM) ........................................................................................ 303
Benchmarking ....................................................................................................................... 305
Work study ............................................................................................................................ 306
Management by Objectives (MBO) ...................................................................................... 309

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Essay questions ..................................................................................................................... 312
CHAPTER 7: ORGANISATIONAL STRUCTURES ............................................................. 313
Functional structure............................................................................................................... 314
ORGANISATIONAL CHART .................................................................................................. 320
Centralization and decentralization ....................................................................................... 325
Formal and informal organizations ....................................................................................... 327
Essay Questions .................................................................................................................... 330
TOPIC 8: HUMAN RESOURCE MANAGEMENT ............................................................... 331
Human Resource Planning .................................................................................................... 332
Human Resources Demand ................................................................................................... 333
Recruitment and Selection of Staff ....................................................................................... 335
Labor Turnover ..................................................................................................................... 338
Training Benefits and Costs .................................................................................................. 340
Job evaluation ....................................................................................................................... 341
Remuneration ........................................................................................................................ 342
Labour Management Relations Labour legislation .............................................................. 343
Trade unions .......................................................................................................................... 344
Redundancies ........................................................................................................................ 345
Structured Questions ............................................................................................................. 346
Essay Questions .................................................................................................................... 347
TOPIC 9: BUSINESS FINANCE AND ACCOUNTS............................................................. 348
Need for Business Finance .................................................................................................... 349
Sources of finance ................................................................................................................. 350
Gearing .................................................................................................................................. 351
External sources of finance ................................................................................................... 354
Revenue Expenditure and Capital Expenditure .................................................................... 358
The Capital Market ............................................................................................................... 361
The International Monetary Fund (IMF) .............................................................................. 363

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Financial statements .............................................................................................................. 365
Depreciation .......................................................................................................................... 370
Stock valuation ...................................................................................................................... 375
Financial ratios ...................................................................................................................... 378
Profitability Ratios ................................................................................................................ 381
Efficiency Ratios ................................................................................................................... 383
Investor Ratios ...................................................................................................................... 385
INVESTMENT APPRAISAL .............................................................................................. 389
Payback Method .................................................................................................................... 390
Accounting Rate of Return (Average Rate of Return) .......................................................... 392
Process of discounting .......................................................................................................... 396
Net Present Value (NPV) ...................................................................................................... 396
Internal Rate of Return (IRR) ............................................................................................... 398
CASH FLOW FORECASTS ................................................................................................ 400
BUDGETING ....................................................................................................................... 406
Sources of Information for Budgets ...................................................................................... 409
Structure of a cash budget ..................................................................................................... 410
Essay Questions .................................................................................................................... 415
TOPIC 10: PRESENTATION OF STATISTICAL DATA ...................................................... 416
Pie Charts .............................................................................................................................. 417
Bar Graphs ............................................................................................................................ 419
Pictograms ............................................................................................................................. 421
Line Graphs ........................................................................................................................... 421
Histograms ............................................................................................................................ 423
Median for grouped data ....................................................................................................... 428
LINEAR PROGRAMMING................................................................................................. 432
EXAMINATION PRACTICE QUESTIONS ........................................................................... 434
PREPARING FOR EXAMINATIONS .................................................................................... 436
Examination tips ................................................................................................................... 436

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How to answer essays ........................................................................................................... 445
Books for further reading. ..................................................................................................... 451

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TOPIC 1: BUSINESS AND ITS ENVIROMENT
Objectives
By the end of the topic, learners should be able to:
 Explain what business is and what it involves.
 Explain the difference types of business environments.
 Explain the different economic systems and their goals.
 Describe forms of business ownership their merits and demerits.
 Evaluate the impact of different forms integration.
 Analyze the advantages and disadvantages of small and large businesses.
 Understand the importance of setting objectives.
Several definitions have been put forward to define what business studies is all
about? It refers to all the commercial activities undertaken by the various
organizations, which produce and supply goods and services. The main aim of
studying it is to equip ourselves with knowledge of how business undertakings are
managed so as to create goods and services beneficial to society.
Business Studies can be defined as the study of how individuals and groups of
people organize themselves, plan and act to create and develop goods and services
to satisfy customer needs and wants. An organization is a grouping of people who
work towards the attainment of a common objectives. The grocer in our village, to
supermarkets in growth point areas to, large manufacturing industries in
metropolitans constitute business organizations.
These organizations do not operate as islands but exist in environments.
Business Environments
The environment of a business is made up of the firm and the community. The firm
must be sensitive and responsive to its environment (surroundings) where it does its
selling of goods and services. For example, in low income communities, plastic

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surgery is not a major need because very few people if any would like the service
and the fees are beyond the reach of many people.
The salaries the firm pays to its employees often come back to the firm when the
people purchase the goods the firm manufactures or sells.
Therefore, a firm must be able to interact successfully and in harmony with the total
environment if it expects to survive.
Characteristics of a firm and a community

Firm Community
Provides products and services a Is a market where the products of a firm

community need and its services are sold
As an employer it influences the Provides a firm with the source of labor.

purchasing power of the community
Its products and services may affect

the community's way of life.
There are three main business environments:
 Micro environment
 Market environment
 Macro environment

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Micro -environment
Refers to the internal environment of the business and factors or variables in the
micro-environment that are responsible for the outputs of the firm and can be
controlled by the firm's management. A micro -environment includes the following
variables:
The mission and objectives of the firm

These direct the activities of a firm and explain its goals, the reasons it exists at all.
If a firm does not have clear objectives to aim for there would be no need for it to
exist.
The difference between business functions and internal organization of a firm.
The business functions include;

 General managing function
 Marketing function
 Financial function
 Public relations function
 Purchasing function
 Production function
 Human relations function
These functional structures refer to the hierarchy of authority in the business.
The resources of the firm

These include its means of production which are;
 Land – all the natural resources provided by nature, fields, forests, oil, gas and
minerals.

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 Labor - number of people available to make products.
 Capital - finance, machinery and equipment needed for the manufacture of
goods.
 Enterprise - skill and risk- taking ability of the person who brings the other
resources or factors of production together to produce a good or service e.g.
the owner of the business or entrepreneur.
Strengths and weaknesses
Every firm is supposed to assess its environment in order to see the advantages and
disadvantages of operating in it. It should make use of opportunities available and
how to counter the threats to its objectives.
Market environment (external)

Immediately surrounds the micro environment and contains those variables such as;
 Competition.
 Challenges the firm faces when management tries to obtain the necessary
resources.
 Challenges when management attempts to market the firm's products in a
manner that makes a profit.
The market environment sometimes called the task environment consists of the
following variables; markets, suppliers, competitor and intermediaries.
Management faces its most important task in the market environment and a SWOT
analysis by the firm must be done and this stands for:
S - Strengths
W - Weaknesses
O - Opportunities

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T - Threats
These tasks are;
 To identify, assess and take advantage of the opportunities present.

 To develop and adapt to the firm's strategies to meet competition.
Macro -environment
Contains variables that have an indirect effect on the firm's market environment.
These factors cannot be easily controlled by the firm's management because they
have far reaching effects on the business (long- term effects).
The economic environment

Consists of the following variables; level of inflation, level of employment, shortage
of raw materials, recession (periods when total output of a firm becomes less),
growth, money supply, interest rates, taxation and government expenditure. The
economy is greatly influenced by politics and the social environment. The
international environment also has an impact on business operations.
The Social Environment

A country and its culture also affect how businesses operate and also the types of
products it sells. Social trends include; demographic changes (growth of population
or community), geographic distribution (spatial distribution of the community), the
level of education in the community and the changes in the role of women, all
influence how business activities are done.
The technological environment

Contains the following factors; information technology, research and development,
inventions and innovations and know-how (methodology). The technological

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environment increases productivity in a firm, creates both new business
opportunities and threats for existing business activities.
Physical Environment
Involves limited resources from which a firm obtains its inputs or raw materials. It
also involves the environment in which a firm discharges its waste.
Political environment
This includes; the political situation, legislation, state expenditure and state markets.
NB: Government influences annual budget, taxation, import control, promotion

of exports and tariffs.
The international environment

Includes; international markets, reserves (surplus on balance of payment), economic
conditions and politics.
Ethical issues
Ethics can be defined as a system of morals or rules of behavior. They indicate what
is right and wrong, acceptable or unacceptable. Major areas of concern are;
 Advertising that relies on sex, violence or that is directed at children

 Misleading advertisements
 Methods of gathering information on competitors
 Bribes
 Investing in illegal deals such as weapons of mass destruction.
 Relations at work places e.g. equal opportunities.
* Social responsibility e.g. when an organization sponsors social activities
through donations.

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 Treatment of workers with different illnesses e.g. Discriminating an HIV
positive person.
NEED FOR AND NATURE OF BUSINESS ACTIVITY
This section answers why government needs to control businesses.
Underdeveloped economic systems

Early man had fewer needs when it comes to satisfying these needs, they were mainly
self - supporting. Reasons are that standards of living were generally low and
primitive methods of production were used.
Developed Economic Systems

Nowadays we have complex needs, for this reason we have to find others who are
able to satiate our needs and this has given rise to division of labor and specialization.
This means that a great variety of need satisfying activities are divided into smaller
and more specialized tasks and each worker specializes in one task.
People receive money for the goods and services they provide. The money is then
used to pay other people for goods and services required to satisfy remaining needs.
Needs create opportunities for entrepreneurs (people who have a passion for
business).
Technology also plays an important role in a developed economic system. These

economic structures give consumers the opportunity to buy the goods and services
they need.
The entrepreneurs who establish and run the firms make profits and use this income
to satisfy their needs.

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Problem of scarcity and opportunity cost
The motive of each and every individual is to strive for the satisfaction of one's needs.
At least two factors complicate the satisfaction of needs;
a) The problem of scarcity which means the factors of production are available
in limited quantities.
b) A particular means of production has to satisfy a range of needs e.g. nothing

can be used instead of water which is vital for the satisfaction of many needs
throughout the country. Therefore, man's multiple and unlimited needs have to be
satisfied with the help of means of production that are scarce and that may be used
to satisfy a variety of needs.
This relationship between unlimited needs of man and earth's limited resources
create a lasting and basic economic problem as such everybody and every country
must exercise choice, i.e. To choose according to one's place those goods and
services that best satisfy one's needs. This brings up the subject of opportunity cost,
which is defined as, the next best alternative given up by choosing another item or
action. For instance, if the government spends the $100 million on new equipment
for the army, then the opportunity cost of this is the hospitals that would have been
built.
ECONOMIC SYSTEMS
Every country has its economic system which it adheres to in the provision of goods
and services to its citizens. These systems are dominated by which firm is
responsible for producing and distributing goods and services. A country therefore
choses from;

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 The command economic system
 The market economic system
 The mixed economic system
Market economic system
Economic matters are settled by forces of supply and demand. State keeps its
interference in the system minimal. There is private ownership of property based on
the rights of individuals to possess property such as land, buildings, equipment and
vehicles.
Characteristics
The system is "a laissez faire system" where entrepreneurs and consumers have the
freedom of choice on resources to use and goods and services to buy. Employees
may choose careers within their potential. Employers are free to choose whom to
employ. Trade unions are however controlled by the state. Entrepreneurs share
profits with the government in form of corporate tax in the case of entrepreneurial
business and income tax in the latter case.
The greatest advantage the free market has is the sovereignty of the consumer. For
example, it creates competition in the market which will in turn cause prices of goods
to be reduced. It also brings in efficiency in the production and distribution of goods
and services.
However, politicians in the less economically developed countries call this system
capitalism. Main disadvantages of the system include;
 All resources are put in the hands of a few.

 Unhealthy competition - can cause wastage of resources.

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 Development of monopolies.
 Promotes unemployment because they see labor as a cost.
 Pollution of the environment increases due to competition to supply goods to
the market.
 Affects the growth of small businesses.
The Command /Centrally planned economic system
Sometimes known as communism. State owns and controls the community's
resources or factors of production such as land, capital, labor and enterprise.
Individuals don't own property because means of production are communally owned
because state assumes complete responsibility for the production and distribution of
products and services. This means decisions on what to produce and how and for
whom, rests with the central government. Choices of products and services are
limited to what the state offers. The advantage are that it prevents wasteful
competition and duplication of goods .In addition production is based on the needs
of the majority. However consumer choice is limited, profit motive is absent, no
consumer sovereignty, workers are directed to jobs, slow to adapt to changes of tastes
and need long - term planning. This economic system is now crumbling in most
countries for it robes individuals of the initiative to produce goods and services and
prevents the creation of wealth. System is found in China, Cuba and some African
countries.
Mixed Economic System

Nearly all countries follow a mixed economic system in which there is a public
sector under strict government control, often operating on a non - profit making basis
and private sector that is driven by a profit motive in which government allows
market forces to have an influence. Many products and services are produced only

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by private businesses. The state provides most essential services, such as
streetlights, schools, the defense, police, firefighting services, water supply and
electricity. Merit goods are provided by both such as, health services and
communications. In Zimbabwe Econet is private and Telone more of a parastatal in
the communication industry.
In mixed economic system, the citizens pay taxes to the government in order to
finance state operated services.
NB: The degree of mix in any one economy is the result of a complex interaction
of cultural and political factors so that any attempt to change it may cause
acrimonious date.
Stages of Economic Activity (Production)

Production is defined as a process of transforming inputs of human and physical
resources into outputs that consumers need. Production creates utility thus anything
that could satisfy a need or utility, is the power of the product or service to satiate
human needs or the amount of satisfaction derived from consuming the product.
The levels of business activity are; primary production, secondary production and
tertiary production. Each activity plays an important role in the economy of a
country.
INDUSTRIALIZATION
It is a period of social and economic change that transforms a human group from an
agarian society to an industrial one involving the extensive reorganization of an
economy for the purpose of manufacturing. It increases the total national output

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(GDP) which is the total value of all final goods and services produced in an
economy over a year's period. It is important because;
 employment is created through expanding manufacturing industries

 it increases foreign currency generation through exports
 it expands the value added to country's outputs rather than exporting raw and
unprocessed goods
 there is improvement of infrastructure
However, problems of industrialization include;
 encourages rural-urban migration due to the chance of obtaining jobs in
manufacturing industries in towns
 leads to social and housing problems in urban areas
 growth in manufacturing industries is due to multinational companies which
might exploit natural resources, labour or repatriate profits to home countries
 most developed countries import raw materials leading to increased demand
for foreign currency and this results in more import costs.
De-Industrialization
Refers to the decline in the secondary sector (manufacturing) and an increase in
tertiary activities, this is common in more economically developed countries such as
Britain, France and Sweden.
Reasons for de-Industrialization

 Increased incomes associated with high living standards, resulting in
consumers spending most of their incomes on services than goods leading to
growth of tourism, hotels and restaurant services.
 Sources of some primary products such as timber, oil and gas, become
depleted.

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 Most developed economies are losing competitiveness in manufacturing to the
newly industrialized countries such as Brazil, India and China.
BUSINESS ORGANIZATIONS
There are five main forms of business organizations in the private sector which are;
sole traders, partnerships, private limited companies, public limited companies and
cooperatives.
Private sector firms are owned by individuals who aim to make more profit. The
owners are entrepreneurs with a profit motive, profit being the reward for the risk of
being in business.
These are set up because;
 people have the desire to work

 some have personal goals or reasons
 The wish for a satisfactory level of income.
Public sector firms in contrast to private sector firms consist of organizations that are
owned by the state on behalf of the community and emphasis is less on the profit
motive and more on provision of goods and services to the community. In the public
sector, goods and services are provided through public corporations and central local
government authorities. Such organizations are financed out of taxation e.g. ZBH,
ZESA, ZUPCO, GMB etc. These firms are called parastatals.
Forms of Business Ownership
When prospective entrepreneurs choose a form of business enterprise, they need to

consider the following;

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 The legal personality of the business, that is, can the business, from a legal
point of view exist independently of its owners and have its own assets and
liabilities (possessions and obligations).
 The liability of the owners, that is, are the owners liable or answerable for
outstanding debts and claims against the business.
 The degree to which the owners have direct control or authority over the
activities of the business, the application or use of assets and the distribution
of the business profits.
 The capital acquisition potential of the business when it is first founded and
in the event of expansion later on e.g. number of owners permitted, their
liability and veto powers.
 The possibility of change of ownership, that is, the ease with which an owner
may transfer his or her interest in the business to somewhere else and related
to this is the lifespan or continuity of the business.
 The legal requirements regarding the establishment, management and
dissolution of the business and the tax liability of the business and its owners.
Sole proprietorship
Sole trader business is owned and managed by one person or individual.
It is simple, common and the least cost form of ownership for beginning own
business. Has no independent legal personality (cannot exist independently of the
owner). The assets of the business belong to the owner alone and owner is personally
liable for all the debts and claims against the business. The owner could lose personal
possessions if the business is unable to meet its obligations. Owner has direct control
and authority over business's activities and enjoys all profits.
A sole trader business offers the following advantages:
 simple to create
 the least cost form in beginning a business

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 owner has total decision- making authority
 no special legal restrictions stipulated by the Companies Act
 owner can make close relations with customers and staff
 easy to discontinue or terminate
It has the following disadvantages;
 unlimited personal liability of the owner
 limited skill and capacities
 limited access to capital
 lack of continuity
 Faces stiff competition from large firms.
The Partnership
This is a contractual relationship between two or more people or firm’s but usually
not more than twenty "persons” who operate a legitimate business to which each
contributes something with the purpose of making a profit that is distributed among
them. Partners have a contract or agreement among themselves.
Ordinary partnerships are more common than extra-ordinary partnerships. Ordinary

partnerships have no legal personality - it is the partners in their personal capacity
who enter in all transactions, contracts or agreements. The partners are jointly and
severally liable for all claims against the partnership, regardless of who was
responsible for bringing about the claim and also have joint control and authority
unless agreed earlier. Personal possessions are not protected against any claim.

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A partnership can sometimes be identified by the name of the business for example,
Doctor Du Buisson and Partners, Semi and Sons and Maeresera and Partners Legal
Practitioners.
Advantages are;
 easy to establish
 availability of complementary skills of partners
 larger pool of capital available than sole trader businesses
 little government regulations on formation and financial reporting
 flexibility
Disadvantages include;
 unlimited liability
 difficulty in disposing of interest in partnership
 potential for conflict of interest and personality and also about authority
There are three ways of ending a partnership namely;

 By agreement, that is, all partners agree to end their business.
 Death or retirement of one partner.
 Insolvency (bankruptcy).
Incorporated companies
Are called joint stock companies or limited companies.

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A company is a board corporate in which one or more persons who come together
for a lawful purpose of carrying on any business that has for its objective the
acquisition or gain by that association for which it has been incorporated under the
Companies Act or any other law and whose liability is limited. A company is subject
to many more legal prescriptions than the other forms of ownership discussed above
which are;
 A company must have a constitution to be registered with the Registrar of
Companies according to the Companies Act.
 A company acquires a legal personality only when the Registrar of Companies
has issued a certificate of incorporation according to the Companies Act.
 The principle organ of a company is the Annual General Meeting (AGM) of
members and the board of directors (B.O. Ds). An AGM determines the
general policy, while the B.O.Ds attends to the administration of the company.
 Shareholders' interests in the company are represented by the number of
shares held in the company.
 Company has to comply with requirements concerning accounting records,
financial reporting, auditing, minutes of meetings and registers of members or
shareholders.
 Companies Act contains provisions regarding the rights, powers and duties of
directors and other office bearers, that is, articles of association must be
adhered to.
 There are legal requirements concerning the dissolution or liquidation of a
company.
 A company pays a fixed percentage of its net income before tax (tax liability).
Companies differ from sole traders and partnerships in five ways which are;
 Share capital - companies issue or sell shares which means many people are
able to own a small part of the business as "shareholders".

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 Companies have limited liability - should the business fail shareholders do not
lose their personal possessions i.e. their liability is limited to the amount they
invested.
 Companies are corporate bodies - they have a separate legal identity from their
shareholders. That means, continue to exist even if one shareholder dies or
changes.
 Separation of ownership and control - enables people who do not want or
cannot take part in its management to still contribute capital and share any
profits.
 Legal control - companies must by law present annual accounts to an Annual
General Meeting (AGM) to which all shareholders must be invited. The
accounts must also be submitted to the Registrar of Companies according to
regulations set in the statutes.
There are two types of limited companies; private and public limited companies.
Private limited companies
Main features are;
 Usually but not always, small family concerns.

 Name of company must be registered with the Registrar of Companies and
must end with the word "Limited" (Ltd).
* Not allowed to sell shares to the general public.
 Shareholders may not be able to sell their shares without the agreement of the
other shareholders.
Advantages include:
 limited liability for shareholders
 continuity of existence
 separate legal personality

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 minimum number of shareholders is only two
 greater capital potential
 benefit from operating on a large scale or enjoys economies of scale
 original owner still able to retain control
 greater status than an unincorporated business
Disadvantages are:
 Growth may be limited by lack of capital since shares cannot be offered to the
general public.
 Transfer of shares may be limited to "approve" new members (difficulty for
shareholders to sell shares).
 A copy of the audited accounts to be send to the Registrar of Companies.
 Legal formalities are involved in establishing the business.
Examples of private companies include Delta Corporation, Unilever South East
Africa and Supreme Panel Beaters Private (Ltd).
Public limited companies

Must be registered with the Registrar of Companies. Examples are ZBC, ZINWA,
NRZ and others.
 They have limited liability.

 They raise capital by issuing shares to the general public.
 Public limited companies are run by a board of directors elected by the
shareholders in an
AGM.
NB* the differences from a private limited company lies in that;
a) They can advertise their shares to the general public to raise capital. They do
this through a prospectus. Which is a printed document which gives details

30
about the company i.e. Its history, profit record and future plans. In the
prospectus is also found the amount of capital it is raising and information
about the share offer.
b) Shares can be freely bought and sold on the Stock Exchange.
c) The company must indicate its public status in its name by using the words
“public limited" (plc.) or Inc.
Advantages
 Limited liability for shareholders.
 Continuity of existence or separate legal identity.
 Easier to raise large amounts of capital and expand (a floatation).
 Shares are freely transferable on the Stock Exchange.
 Easier to borrow funds i.e. from banks.
 Benefits from economies of scale.
Disadvantages
 Legal formalities to be done according to the Companies Act.
 Can become very large and impersonal, that is, workers may not feel that they
belong to the organization.
 Inefficiency may result if a firm becomes very large and difficulty to manage.
 Annual accounts must be published.
 Risk of takeover bids by other companies because shares can be easily bought
on the Stock Exchange.
 Directors are influenced by short- term objectives of major investors.
Joint ventures
Two or more businesses agree to work closely together on a particular project and
create a separate business division to do so. They are not the same as a merger but

31
they can lead to mergers in the event that one business fails to pay back to the
provider of finance and is left without any option except to accept the other as a
partner.
Reasons for joint ventures

 Costs and risks of a new business venture are shared. This is a major
consideration when the cost of developing new products is rising rapidly.
 Different companies might have different strengths and experiences and they
therefore fit together.
 They might have their major markets in different countries and they could
exploit these new opportunities more effectively than if they both decided to
go for it as separate companies.
Drawbacks of joint ventures
 Style of management and culture may be so different that the two teams fail
to blend well together.
 Errors and mistakes might lead to one blaming the other for mistakes.
 The business failure of one of the partners could put the whole project at risk.
Registration of joint stock Companies

When a joint stock company is established, certain documents must be submitted to
the Registrar of Companies.
1. Memorandum of association -this governs the firm's external relationship with

other people and organizations and provides the world at large with certain basic

32
information about the company. It contains several items; name of company and
address of the registered office.
Objectives clause -his states the type of business in which the company will be
involved in, for example, retailing or building services.
Limitation clause -this is a statement that shareholders have limited liability.
Capital clause which tells of the authorized share capital.
2. Articles of association - these are rules governing the internal affairs of a
company. It covers matters such as;
 Voting rights of shareholders

 Election of directors
 Buying and selling of shares
 Payments of dividends
 Detailed procedures to be followed at meetings.
3. Statutory Declaration - this is a statement that the company has been set up within
the regulations of the Companies Act. It is sent to the Registrar of Companies along
with the memorandum and articles of association.
Certificate of Incorporation
This is issued by the Registrar of Companies and is necessary before the company
starts trading. It is the company's "birth certificate". A private limited company can
start immediately upon receipt of the certificate of incorporation.
Certificate of trading
It is also issued by the registrar and must be obtained by a public limited company
before it can start. To obtain this document, the public limited company must have
raised a minimum amount of money. This is to ensure that the company will have
sufficient funds to trade.

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Questions.
1. What is a franchise?
2. Outline benefits of operating as a franchise.
3. What are the merits and demerits of franchise businesses?
Public corporations
Public corporations are business enterprises owned by the state. They are also known
as nationalized industries. Public sector organizations do not often have profit as a
major objective. Their products might be regarded as strategic in that they are vital
to the people in the economy.
Nationalization
This is the process of converting privately owned enterprises to state owned

enterprises.
Arguments for Nationalization

 They may provide socially important services such as roads, railway lines and
postal services which might not be supplied by a private firm because they are
unprofitable.
 Some industries are natural monopolies. It may not be financially worthwhile
for one firm to provide a service such as water. Therefore, nationalization
reduces monopoly.
 Many industries require investments in expensive equipment and technology.
A private firm might be unwilling to risk such a large sum of capital.
 The government should control the economy on behalf of the citizens.
 They are managed with a social objective rather than profit.
 Loss making services might still be kept if social benefits are greater enough.
 Finance is raised mainly from the government.

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Arguments against Nationalization
 Tendency towards inefficiency due to lack of strict profit targets.
 Subsidies from the government may encourage inefficiency.
 Government interferes in business decisions for political reasons, for example,
opening a new branch in a certain area to gain popularity.
 There is lack of competition and it is difficult to assess organizational
efficiency.
 Resources may be wasted due to poor quality services.
 It creates a dependency syndrome.
 It increases government spending.
 Some unprofitable organizations may continue to operate despite the shoddy
services they offer.
In a nutshell, reasons for public ownership of businesses include; political, control
of vital industries and commercial activities, control monopolies, protection of
national security, capital cost, provision of social services and survival of
unprofitable industries.
PRIVATIZATION
Selling of state owned or state- controlled businesses to investors in the private
sector. It means switching production of goods and services from the public sector
to the private sector. The common methods of privatization include:
 Denationalization - selling government owned enterprises to the private

sector.
 Deregulation - removing statutory monopolies, for example, abolishing
restrictions upon business services and operations.

35
 Contracting out - allowing private firms to bid for supply of public services
e.g. hospital cleaning and refuse collection.
 Marketization - the shifting of services into the market sector which were
previously provided by the public sector so that private participants or players
can also offer such services e.g. health services, education and security among
others.
Arguments for Privatization
 The profit motive of the private sector business will lead to much greater
efficiency than when a business is subsidized by the government.
 Decision-making in state owned businesses may be slow and bureaucratic.
 Privatization puts the responsibility of success firmly in the hands of managers

and staff who work in the organization. This can lead to strong motivation as
they have a direct involvement in the work that they do.
 There is a greater sense of empowerment.
 Market forces will be allowed to operate, failing businesses will be forced to
change or die and successful ones will expand, unconstrained by government
limits on growth.
 Profits of most of the privatized businesses increase after their sell-off.
 There is always a temptation for government to run state-owned industries for
political reasons or as a means of influencing the national economy, for
example, keeping electricity prices artificially low, decisions making may not
be done for commercial reasons.
 Sale of the nationalized industries can raise finance for government which can
be used for other state projects.
 Private businesses will have access to private capital markets and this will lead
to increased investments in these industries.
 Better quality is produced, due to greater competition, producers will have to
continually improve their products to fight competition.
 It reduces government spending.

36
 It also increases revenue through the payment of taxes such as PAYE and
corporate tax.
Arguments against Privatization
 Essential industries argument - these decisions are based on the society's needs
and not just the interest of shareholder. This involves keeping on businesses
that private companies might consider unprofitable.
 With competing privately run business, it will be more difficult to achieve a
coherent and coordinated policy for the benefit of the whole country, for
example, railway system, electricity grid and others.
 Through state ownership, an industry can be made accountable to the country
this is by means of a responsible minister and direct accountability to the
parliament.
 Many strategic industries could be operated as "private monopolies" if
privatized and they could exploit consumers with high prices. Imagine
electricity and water supply being provided by private firms.
 Breaking up nationalized industries, perhaps into several competing units, will
reduce the opportunity for cost saving through economies of scale.
 The government might lose control in the economy of most of the factors of
production when are in the private hands.
 There is danger of resource wastage for the benefit of few individuals.
 Certain services that have been provided by the state such as education and
security may not be provided by private firms.
 It may result in high level unemployment.
BUSINESS STAKEHOLDERS
Stakeholders are people or other organizations that are affected by and or are able to
influence the behavior of business organizations. The original stakeholders are the
owners of the business who have a financial stake in, and seek profit from the

37
organization. The owners, managers, employees and consumers are some of the
important stakeholders of the business.
Though some companies are run in the interest of the owners, nowadays, people
accept that there are other groups of people with a stake in the business and whose
interests should not be ignored. Hence employees who invest their time and efforts
in the business are also very important stakeholders. The term stakeholder also
extends to anyone who feels the impact of the organization, these include supplies,
government, local communities and environmental agencies such as E.M.A.
Size and growth of businesses

Businesses can vary greatly in terms of size, some are individually operated and
some are large companies with a lot of shareholders as well as capital and assets.
Some businesses specialize in production, manufacturing as well as selling of
products and services.
It is the stakeholders who are interested in the comparison of businesses due to the
variety of impacts that the businesses have to them.
In Zimbabwe businesses are classified as small scale, medium scale and large scale.
A small business is that with less than 75 employees. However, this is inadequate.
How can you then classify a business with less than 75 employees but with large
value products and a turnover in excess of USD$10 million per annum?
However, in other countries including Zimbabwe there are businesses that clearly
fall into one category or another e.g. nobody disputes that Unilever S. E. Africa, OK
and Tobacco Sales Floors (Mashonaland Tobacco) are big companies. Equally the
corner shop run by Mr. Jiri with casual, part-time labor is a small business.

38
In situations where the distinction between a small and a large business are not clear-
cut the classification will be based on the industry norms, the measurement selected
being dependent on the dominant characteristic of industry concerned. The following
are some of the measurements that might be used:
1. The size of market - the market share of the business is its total sales expressed
as a percentage of the total sales of the market in which it operates e.g. total
sales of all similar products are $150 million and business A has sales of $30
million, its market share will be : $30m/$150m x100 = 20% .
2. However, a business can employ less than 100 people but has 90% share of
the market, the business exerts greater influence than a company with
thousand workers whose market share is 20%.
3. Annual Sales (turnover) - a high -cost product can generate more sales per
employee than a low-cost product. This however is often used in the retail
industry selling similar products. However, could be misleading when
comparing the size of businesses that sell very different products.
4. The amount of capital employed - a business using advanced technology is
likely to have relatively few employees. Automation is likely to intensify this
trend. Capital intensive businesses employ more capital equipment than
people. It is not unusual to walk about the production areas of such businesses
for an hour and meet less than twelve people. Labor intensive simply means
that people are used more than capital. Willow vale Mazda Motor Industries
(WMMI) is an example where labor has been replaced by machinery.
5. The way in which it is organized - as businesses increase in size, the workload
becomes too great for a person or small group of people to manage. Managers
are employed and the control exercised by the owner diminish. However, to
say this company is small or large depends on legal definitions according to
the country's statutes.
SMALL AND MEDIUM ENTERPRISES

It is difficult to formulate a universal definition of a small business because the
economies of countries differ and people adopt particular standards for specific

39
purposes. Most enterprises are typically small businesses e.g. the local hairdressing
salon, greengrocer, video shop and hardware store. A supermarket that we regard as
big may actually be small in comparison with Pick n Pay. Medium and even large
businesses in Zimbabwe may be small in comparison with their overseas
counterparts.
Therefore, use of qualitative and quantitative criteria are done to attempt to define a
small business enterprise. Examples of quantitative criteria are; number of
employees, sales volume, value of assets and market share. From a qualitative point
of view a criterion used to say a business is small is that the owner must be part of
the management of the business.
A comprehensive definition of a small or medium enterprise (SME) in Zimbabwe

is therefore, any enterprise with one or more of the following characteristics;
 fewer than 75 employees

 annual turnover is less than $2.5million
 capital assets of less than $1million
 Direct involvement by owners.
However, the concepts "small" and "large" may differ from one industry to the other.
The role of SMEs in an economy
Entrepreneurs innovate, take risks and employ people, create markets and service
consumers by combining materials, processes and new products in new ways. They
initiate change, create wealth and develop new enterprises. More specifically the
strategic role of small businesses in any economy revolves around the following;
 Producing products and services - small businesses combine the resources of
society effectively to produce products and services for the society in which
they operate. They are less inhibited by large bureaucratic decision-making
structures and are more flexible and productive than many large firms. Apart

40
from employing about a third of the country's workforce it produces more
products in an economy.
 Innovation - they are very innovative such that they have produced the
following new products, photocopiers, color films, jet engines, penicillin,
insulin, ball point pens, helicopters, zips, vacuum tubes and personal
computers.
 Aiding big businesses - they generate much needed foreign currency alongside
big firms. They supply local businesses with large orders and are sub-
contracted by these large firms. The small firms do not only supply to big
businesses but also help to distribute the goods produced by large firms.
 Employment creation - small firms provide many of the new job opportunities
needed by the growing population. In fact, they create jobs whereas large
firms are shading jobs. The SMEs are the catalysts of economic development
especially in Zimbabwe, because they are entrepreneurially driven. SMEs
tend to stimulate competition and thereby improving productivity and create
variety to consumers.
 Supply of specialist goods and services to important industries e.g. very large
car manufacturers may depend on small specialist suppliers of wheels, audio
equipment, training and cleaning services.
Government assistance to small firms comes through;
 reduced rate of profit tax (corporation tax)

 loan guarantee schemes
 information, advice and support will be provided through SEDCO and IDL
 establishment of factory shells at lower rates of rent
Problems faced by small firms include;
 lack of specialist management

 problems in raising both short and long -term finance
 marketing risks from a limited range of products

41
 Difficulties in finding suitable and reasonably priced premises.
ECONOMIES OF SCALE
The term is used to describe a fall in costs of producing each item as a result of an
increase in the productive capacity of a business or the industry of which it is part.
Those economies which arise out of the expansion of the business itself are known
as internal economies, those arising from expansion of the industry are called
external economies.
Internal economies
 Managerial economies
 buying or purchasing economies-companies enjoy bulk buying discounts
 Financial economies
 Administrative economies
External Economies
 Provision of services as an effect of agglomeration
 Cost of components/services
NB: The size at which a particular business operates most effectively is known as
its optimum size. Once past that size, diseconomies of scale begin to operate. The
cost per unit of output under these circumstances begins to rise as output
increases. This may be due to;
a) overuse of machinery
b) breakdown in communication
c) marketing problems

42
FORMS OF BUSINESS GROWTH
There are many reasons why organizations wish to develop their markets and grow
in size. The most important ones are:
 to achieve economies of scale
 to reduce trading risks and obtain greater security by offering wide range of
products
 To increase market share and possibly gain a monopoly position by reducing
competition
 asset stripping to generate cash flows.
Growth takes place in many different ways;
 increasing sales revenue and market share

 expansion of geographical markets
 takeovers or mergers
 joint ventures
Holding companies
A holding company is a company specifically formed to take a controlling interest
in another firm. The firms controlled are called subsidiaries.
Conglomerates
Many large companies also hold such controlling interests which enable them to
diversify into a wide range of completely different product areas. Such are called
conglomerates e.g. Lonrho, Anglo-American, Delta etc. . . . This is also known as
diversification.
Integration
When two or more firms combine to form a large unit, it is called integration.
Integration can be horizontal, vertical or lateral.

43
Horizontal integration
Firms in the same stage of production join together under the same management.
Advantages are;
 to eliminates competition /competitors
 Possible economies of scale e.g. purchasing, marketing, technical and
managerial.
 Scope for rationalizing production e.g. all output at one site as opposed to two
sites of production.
 Increased power over suppliers.
 rationalization may bring bad publicity
 May lead to monopoly if combined business exceeds certain market share
limits.
 Consumers will now have less choice.
 Workers may lose job security as a result of technology.
Vertical Integration
It is the amalgamation of firms in the same industry but at different stages of

production. This can take place either "backward" towards the source of the raw
materials or "forward" towards the market e.g. Hop farms and public houses are all
concerns at different stages with the supply of beer. A brewery which acquires its
own hop farms is said to be integrating backwards. If it acquires its own public
houses, it is integrating forward.
Advantages are;
 Gives control over quality, price and delivery times of suppliers.

44
 Encourages joint research and development into improved quality of supplies
of components.
 Business may now supply their components to competitors.
 May lack the experience of management supplying a company.
 Supplying business may become complacent due to having a guaranteed
customer.
 Provides greater career opportunities for workers.
 Consumers may obtain improved quality goods and more innovation.
 Control over supplies to competitors may limit competition and choice to
consumers.
Lateral Integration
Occurs when firms with similar but not competing products, merge together. This
enables firms to diversify and offer a wider range of related products.
Businesses can expand in two ways;
1. By internal growth e.g. a restaurant owner can open another restaurant in

another town - this growth is often paid for by profits from the existing
business. This type of growth is often slow but easy to manage than external
growth. It is also called organic growth.
2. By external growth, involving a takeover or a merger with another business.
Therefore, integration methods such as horizontal merger, vertical merger, and

conglomerate are all external growth ways.
Definitions to learn
1. Internal growth occurs when a business expands its existing operations.

45
2. External growth is when a business takes over or merges with another
business. It is often called integration as one firm is integrated into another
one.
3. A merger is when the owners of two businesses agree to join their firms
together to make one business.
4. A takeover or acquisition is when one business buys out the owners of another
business which then becomes part of the "predator" business (the firm which
has taken it over).
5. Synergy - is the working together of two businesses to produce an effect
greater than the sum of their individual effects. In integration it is often
assumed that the new larger business will be more successful than the two
formally separate businesses.
BUSINESS OBJECTIVES
These are clear ideas of what the business is trying to achieve. They are set goals and
principles that a business seeks to achieve.
Objectives must follow the SMART criteria
 Specific - objectives should focus on what the business does and should apply
directly to the business, for example, a hotel may have an objective of 15%
bed occupancy over the winter period. This is specific to the business.
 Measurable - objectives that have a quantitative value are likely to prove to be
more effective targets for directors, for example, increasing sales by 20%.
 Achievable - setting objectives that are almost impossible in time frame given
will be pointless as they can demotivate the staff trying to reach the targets.
 Realistic and relevant - objectives must be realistic when compared to the
resources of the company and should be expressed in terms of relevance to the
people carrying them out, for example, informing a factory cleaner about
increasing market shares will be irrelevant but target of cleaning materials.
 Time specific - a time limit should be set when an objective is established.
Without a time limit it will be impossible to assess whether the objective has
been actually met.

46
Objectives can be strategic or tactical.
Strategic objectives - state in broad terms what the firm would like to do in the long-
run, for example, increase annual profits by 10% every year for the next 5 years.
Tactical objectives - are designed to ensure that the strategic objectives are reached.
They are more detailed and short - term.
Corporate aims
These are very long- term goals which a business hopes to achieve. The core of a
business activity is expressed in its corporate aims and plans.
Mission statement
A statement of a business' core aims phrased in a way to motivate employees and to
stimulate interest by outsider groups.
Common Business Objectives
Profit maximization
All stakeholders in a business are working for a reward. Profits are essential for
rewarding investors and for financing further growth. Profits are necessary to
persuade owners and investors to take risks. Firms seek to widen the gap between
total sales revenue and costs.
Limitations of profit maximizing as an aim of a business
 Focus on high short - term profits, may encourage competition to enter the
market and jeopardize the long -term survival of a business.
 Most analysts assess the performance of a business through return on capital
employed rather than profits.
Growth
Larger firms are likely to be taken over and should be able to benefit from economies
of scale. Managers will be motivated by the desire to see the business achieve its full

47
potential from which they can gain higher salaries and fringe benefits. Business that
grows encourages investors and provides job security to the workers.
Limitations of growth to businesses

 Expansion that is too rapid can lead to cash flow problems.
 Sales growth might be achieved at the expense of lower profit margins.
 Large businesses may experience diseconomies of scale.
 Using profits to finance growth, retained earnings, can lead to lower short -
term returns to shareholders.
 Growth into new business areas and activities away from the firm's core
activities (diversification) can result in a loss of focus and direction for the
whole organization.
Increasing Market Share
This is closely linked to overall business growth. Increasing market share indicates
that the marketing mix of the business is proving to be more efficient than that of its
competitors. This has the benefit that retailers will be keen to stock and promote the
bestselling brand. Profit margins offered to retailers may be lower than competing
brands as the shops are keen to stock it. This leaves more profits for the producer.
Limitations to Increasing Market Share

It depends on the size of the market at large. If the market is small it is relatively
difficult to increase shares held.
Survival
It is likely to be the key objective of new business start-ups. The high failure rate of
new businesses means that to survive for the first two years of trading is an important
aim for new businesses.

48
Profit satisficing
This aims to achieve enough profit to keep the owners happy but not aiming to work
harder to earn as much profit as possible. This is common with owners of small
businesses who wish to leave comfortably but don't want to work even longer hours
to earn even more profits. Once a satisfactory level of profits has been achieved, they
consider that other aims take priority, for example leisure.
Maximizing short -term sales revenue

This could benefit managers and staff when salaries and bonuses are dependent on
sales revenue.
Limitations to maximizing short -term sales revenue

If increased sales are achieved by reducing prices, the actual profits of the business
might fall.
Maximizing shareholder value

This could apply to public limited companies and directs management action towards
taking decisions that would increase the company share price and dividend paid to
shareholders. These targets might be achieved by pursuing the goal of profit
maximization.
Corporate social responsibility (CSR)

This was developed by Milton Friedman and Archie Carroll. This concept applies to
those businesses that consider the interest of the society by taking responsibility for
the impact of their decisions and activities on customers, employees, communities
and the environment. Examples of corporate social responsibilities are provision of
scholarships, cleaning campaigns and creation of employment.
Importance of business objectives

49
 Objectives give the business a sense of direction. All organizational efforts
will be tailored toward the achievement of objectives. This prevents conflicts
of interests.
 Objectives act as a yardstick against performance and can be measured.
Progress is assessed against set standards, thus allowing for corrective action
if actual performance is below the expected standard.
 Objectives act as motivators boosting the esteem and meeting the self -
actualization needs of workers.
 Objectives help in setting rules, policies and strategies for the whole company.
They assist in policy formulation.
 They help in formulating guidelines that give the business a sense of purpose.
 They provide a framework for decision-making.
 Allows the business to evaluate its performance after a certain period.
Limitations to Business Objectives
 They can demotivate workers if they are unattainable and unrealistic.
 Formulation of objectives can be time consuming.
 Objectives might change over time leading to constant review of the
objectives from time to time.
 They show what is to be achieved not how it will be achieved.
 Can lead to conflicts when management and workers fight for resources.
Conflicting Objectives of Shareholders
Owners
When owners play no part in the running of the business, their objective is to
maximize their returns. This occurs when the business is a medium to large sized
company owned by shareholders. This might conflict with managers' objectives
who might want to retain profit for growth rather than pay them out as dividends.

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Workers
Ordinary workers and middle management have little interest in objectives of the
owner and want pay and job security. They want the highest possible wages and this
might conflict with the owner's objectives of cutting costs and increasing profits.
Customers
They want the best prices with the best quality. They want good services. This may
conflict with other stakeholders' interests, for example, spending more on research
and development to create new products might lower the amount payable as
dividends to shareholders. Improving quality might lead to high costs.
The Community and the Government
The community in which the business operates tends to welcome jobs, taxes and
prosperity which the business can bring to the area. The government can insist on
costly developments, for example, to avoid pollution by insisting on pollution free
equipment and production methods. This might conflict with the firm as that
increases costs and reduce profits.
EXAMINATION PRACTICE QUESTIONS
Structured questions
1(a) Identify any two internal economies of scale. [2]
(b) State any two forms of assistance given to small businesses by the government of
your country. [2]
(c) Assess the importance of parastatals to the economy of your country. [4]
2(a) Distinguish between a merger and a takeover. [4]

(b) What possible reasons can be put forward to justify a merger? [5]
3(a) State three reasons why small firms are of great importance in an economy. [3]
(b) Discuss the difficulties which are common to most small business firms. [4]
4. What do you understand by the following terms?

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a) De-merger [2]
b) Divestment
[2]
5(a) List three stakeholders that might wish to compare the size of business to
another. [3]
(b) State and explain any two factors that are taken into consideration when
measuring the size of a business [4]
6 (a) What is meant by the term privatization? [2
(b) Does privatization necessarily benefit consumers in the economy of your
country? [5]
7 (a) What is meant by the public sector of the economy? [2]
(b) What are the advantages of a company that might choose to go multinational?
[4]
8 (a) Define the following terms:
(i) Management buy-out,
[2] (ii) Contracting out.
[2]
(b) Distinguish between a public limited company and a public corporation. [4]
Essay questions:
1. Critically examine the impact of privatization to stakeholders in your country. (25)
2. Discuss the importance of multinational companies to the economy of your

country. (25)
3(a) Explain the benefits of privatizing state- owned enterprises. (10)
(b) Evaluate the effectiveness of centrally planned economic systems. (15)

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4 . Discuss the contribution made by economies of scale to an organization of your
choice. (25)
TOPIC 2: BUSINESS CONSTRAINTS
Objectives
 Understand business constraints and how they impact on businesses and

business stakeholders.
 Outline the measures to reduce inflation, unemployment and exchange rate
fluctuations.
 Explain the significance of business ethics and corporate social
responsibility.
A constraint is any factor that prevents or makes it difficult for a business to achieve
its objectives. Constraints may be internal (within the business) or external (from the
environment in which the business operates) e.g. Internally it may be constrained
by limited resources, insufficient staffing levels or poor management whilst external
factors might be high inflation and unemployment levels in the economy.
INTERNAL CONSTRAINTS
 Production - can be limited by lack of skills or the level of technology
employed.
 Marketing - requires considerable resources for advertising and promotion

especially where competition is a major factor.
 Sales - which are one part of marketing, are the lifeblood of the business. If
the price is wrong and customer base is too small, then it may fail to meet its
sales targets.

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 Administration - involves record keeping, essential systems and procedures
which enable a business to operate efficiently.
By possible careful planning the above constraints may be eliminated or reduced by

the business' management.
EXTERNAL CONSTRAINTS
The external constraints that affect businesses can depend on a number of factors;
1. The market in which it operates e.g. local, national, international, highly
competitive, niche and oligopolistic just to mention a few.
2. The type of economy e.g. communist, capitalist and/ or mixed.
3. The state of the economy - both nationally and locally e.g. Rising inflation
might make it difficult for a firm to control its prices and compete
successfully, labor or skill shortages may affect production whilst high
unemployment can impact on sales through reduced purchasing power.
The firm does very little to control the external constraints hence they are not easy
to control.
Government policies
1. One of the external constraints that affect businesses greatly are government
policies and its macro-economic policies.
2. An increase in taxation might reduce consumer income and demand for an
organization’s products and services and also its ability to borrow for
investment and development.
3. Legal constraints particularly the increasing impact of E.U. legislation which
might affect a business as the following illustrates;

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-Employment laws cover recruitment, employee contracts, minimum wages,
termination, health and safety and working hours.
-Consumer protection legislation covers issues such as product descriptions,
safety, labelling, packaging, advertising and promotion.
-Competition laws exist to control restrictive practices and potential abuse of
monopoly power.
-Environmental protection legislation covering recycling and control of
pollution and hazardous substances is becoming increasingly significant e.g.
duties of E.M.A in Zimbabwe.
National Income
The value of all goods and services produced by businesses in the country each year
is called the
Gross Domestic Product (GDP). This can be expressed as either;
a) in terms of market prices, that is, what people actually pay for in terms of
goods and services, or
b) At factor cost, that is, the cost of producing the goods and services and
ignoring any taxes or subsidies.
GDP can also be expressed in;
 Current prices, that is, actual prices as they exist, or
 Constant prices i.e. after removing the effects of inflation in order to measure
the underlying growth in the economy.
GDP can be calculated in three different ways: as the sum total of income or
expenditure or output but both methods produce the same differences. The definitive
measure is therefore calculated as an average of these three methods.

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In a nutshell, the GDP represents the total value of all the final goods (referred to as
products) and services produced in a country within a specific period of time (usually
a year).
The GDP per capita (or person) is therefore a good indicator of a country's economic
wealth. Developed countries such as USA, Japan, Sweden and Germany will
therefore have a higher GDP per capita than developing countries such as Singapore,
Taiwan and also South Africa and Zimbabwe.
Economic growth is important to a country for several reasons;
 GDP increases quality of goods and services to consumers and increases living
standards.
 Increased employment when output increases.
 More resources can be devoted to public sector projects.
 Poverty eradication.
 Rising demand for products depending on elasticity of demand.
 Higher GDP makes resources available for the government through greater
income from taxes and a decreased burden of social expenditure.
Achieving economic growth depends on;
a) Quantity and quality of factors of production i.e. National resources, skills of
workforce, capital investment and level of enterprise.
b) Development and introduction of new technology leading to new products,
improved techniques and an increase in productivity.
c) Level of education and training. Knowledge and skills are essential for
economic growth.

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Inflation
Defined as a continuous rise or increase in general level of prices of commodities in
an economy. It is measured by the retail price index (RPI) which reflects a weighted
average of the price rises over the previous twelve months.
There are two extremes of inflation namely, hyper-inflation and creeping inflation.
Hyper-inflation is so severe that prices rise rapidly and drastically and is

accompanied by an issuing of a new currency, political instability and domestic
unrest e.g. 2007 to 2009 in Zimbabwe.
Creeping inflation is found in a normal economy and price level rises on an average
rate of 2 to 3 percent.
Causes of Inflation
Demand - pull inflation - too much money chasing few goods - thus the increase in
the price level is attributed by an excess of total spending beyond the economy’s
capacity to produce. Excessive demand pulls up prices. May also be caused by
government creating too much money in the money market making it easy for people
to borrow finance, thus it is also known as monetary inflation - an excess increase in
the money supply.
Cost - push inflation - is attributed to a rise in the company's factors of production,
which in turn is passed on to consumers by firms. The rising unit costs squeeze prices
and companies are willing to supply at the existing price level, the cost then pushes
up the price level.
Effects of inflation
"Inflation is the worst enemy of human kind”. It affects all facets of man's life.
On individuals

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Fixed income recipients suffer because their purchasing power is reduced. Lenders
lose because of the time value of money i.e. money repaid in future is less than paid
today. Purchasing power is reduced. Borrowers gain because what they pay back is
less. The tax net is further widened, further reducing disposable incomes. Inflated
money wages bring more people to a taxable level of income making them worse
off.
On Businesses
People buy less because their real incomes are eroded. Inflation usually occurs when
demand is buoyant which might cause rising sales and profits. High interest rates are
needed to make people save but add to the cost of borrowing leading to higher prices
and high interest rates that discourage investment. Resources are diverted into non-
productive items as savers seek to hedge against inflation. Exports relatively become
expensive affecting firms that rely on exportation. Planning or budgeting for the
future becomes difficult and thus increases business risks. Making provisions for the
replacement of assets as they depreciate becomes more difficult. Inflation also
increases the tax burden.
On Balance of Payment (BOP)

Imports become cheaper in relation to exports, with falling exports and rising
imports, balance of trade and BOP will be in an adverse state. With rising prices
any form of foreign investment will be discouraged thus capital out-flows will
outweigh capital in-flows resulting in a negative BOP.
NB* the effect on BOP depends on the elasticity of imports and exports.
Given the Zimbabwean situation exports are less than imports thus the value of
imports will rise as compared to exports causing an unfavorable BOP?
On Exchange Rate

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Domestic inflation may cause exchange rate to appreciate, thus foreigners will find
local goods extremely expensive therefore decreasing exports.
Solutions to Problems of Inflation

Fiscal Policy - cutting government expenditure and increasing taxation so as to curb
demand pull inflation. The policy is painful to businesses which experience decline
in sales and to workers some who are made redundant (the measure can cause
unemployment).
Monetary Policy - higher interest rates can be used to reduce the money supply and
therefore demand. However, this also raises the cost of borrowing to businesses
which will affect highly geared firms. Reduced demand will reduce sales and profits
leading to unemployment. Higher interest rates also push up exchange rates which
makes exports relatively more expensive.
Prices and Income Policies - fiscal and monetary policies are indirect macro-
economic policies. Government may choose direct intervention to reduce wages and
prices by freezing them or restricting any rises to an agreed level. However, such
policies are difficult to enforce except in the public sector. It can also cause industrial
unrest and confrontation. Can also distort the market mechanisms leading to product
shortages and proliferation of “black markets ".
Price control and rationing - Government as a last resort may introduce statutory
controls on prices but this is unlikely except in a short- term emergency because it
can lead to shortage of goods.

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Exchange Rates - the value of a currency in relation to a foreign currency or a group
of currencies. Exchange rate can either be floating or fixed. As with any other prices
on a free market, exchange rates are determined by the forces of supply and demand.
Fluctuations in exchange rate comes into being when demand for a currency exceeds
supply and its value will rise. This is called an exchange rate appreciation because
one unit of the currency will buy more units of other currencies.
Exchange rate depreciation is a fall in the external value of a currency as measured

by its exchange rate against other currencies e.g. If Z$1falls in value from USD $2
to USD $1.50, the value of the dollar has depreciated in value.
Exchange rate appreciation is a rise in the external value of a currency as measured

by its exchange rate against other currencies e.g. If Z$1 rises from USD$1.50 to
USD$2 the value of the dollar has appreciated.
Exchange rates can appreciate or be revalued. Appreciation is a result of market

forces whereas revaluation is a result of government deliberate policy decisions.
The exchange rate can depreciate or be devalued. Depreciation is caused by market
forces whereas devaluation is caused by government deliberate policy decisions.
Effects of Exchange Rate Fluctuations
Can affect the cost of raw materials and components making it difficult to forecast
the cost of production. Exchange rates can also influence the selling of imported
goods and services. Profit margins can increase or decrease, the value of the
currency changes between the contract and delivery dates.
NB* A fall in exchange rate will make exports cheaper and consequently raise the
export quantity and conversely makes imports expensive and thereby reducing
their quantity.

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Unemployment
This exists when members of the working population are willing and able to work,
but are unable to find jobs.
Causes of Unemployment
 Growth of the working population.
 Periodic downturns of the economic cycle e.g. Periodic recession referred to
as cyclical unemployment.
 Foreign competition which may cause a decline of local firms e.g. the decline
in the textile industry in Zimbabwe due to importation of clothes often known
as "mabhero”. Cone Textiles was greatly affected and once closed.
 Technology - introduction of new technology or techniques in production
hence many employees lose their jobs as machinery takes over.
 A mismatch between the skill of the job seeker and the skill required by the
labor market (referred to as structural unemployment)
 Seasonal activities - this type is called seasonal unemployment e.g. as
experienced in agriculture e.g. Tobacco Sales Floor and Mashonaland
Tobacco lay off workers during off season.
 Lower economic activities in certain areas (referred to as regional
unemployment).
Policies for Reducing Unemployment
Fiscal policy - government policy based on the manipulation of taxation and public
expenditure. Increased public expenditure to create economic activity i.e.
establishment of public corporations or investment projects. Reduced taxation to
increase disposable income in order to generate demand and encourage private sector
investment. Support for businesses through investment incentives and export
assistance reduces unemployment in an economy.

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Monetary Policy - government financial policy based on control of investment rates
and money supply. Interest rates are used to control bank lending rates and money
supply rates. Lower rates, less savings, less attractive and borrowing cheaper thereby
encouraging consumers to spend and businesses to invest. This increased economic
activity will help to reduce unemployment.
Other measures include;
1. Information and advice e.g. Career guidance in Zimbabwe is offered by the

Ministry of Labor and Manpower Planning.
2. Reducing trade union power to control wages and salaries.
3. Selective regional assistance - grants and tax reliefs are offered in areas of
high unemployment.
4. Reducing social security to force people to go to work.
5. Education and training to provide skills for future employment e.g.

agricultural colleges e.g. Gwebi College, Science institutions e.g. Harare
Institute of Technology, vocational training institutes e.g. Magamba
Vocational Training College.
NB* Unemployment is also beneficial to businesses because the reserves of labor
available to business will make labor costs low. Excess supply of labor will weaken
the power of trade unions to seek or to press for better working conditions.
Workers could be employed on contract basis hence businesses saving money.
Conversely, unemployment may be harmful to businesses in that the higher the

unemployment rate, the lower the demand for goods and services that they produce
and sell.

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BUSINESS ETHICS AND CORPORATE SOCIAL RESPONSIBILITY
Milton Friedman is quoted as saying, "There is one and only one social responsibility
of business, to use its resources and energy in activities designed to increase its
profits so long as it stays within the rules of the game ... (and) engages in open and
free competition, without deception and fraud ".
This statement helps learners of Businesses Studies to understand the importance of

business ethics and corporate social responsibility.
What are business ethics? Why are ethics important in business?
Ethics refers to views or convictions about what is right or wrong and good and bad.
Therefore, ethical conduct is conduct or action that observes generally accepted
social norms or values, while unethical conduct indicates action that is in conflict
with generally accepted social norms and values. Ethics can also be defined as the
study of how our decisions affect other people.
In the context of business, ethical practices are concerned about how business
decisions affect the society i.e. the community and the various stakeholders of the
business especially customers and consumers. The business should therefore have a
moral obligation to society on all its activities. It therefore follows that business
ethics indicate generally accepted views on right and wrong behavior in the business
context.
Ethical business behavior is individual behavior that corresponds with what is

generally regarded as right (correct) business conduct, while unethical business
practices refer to conduct that is in conflict with what is generally seen as right or
correct business conduct. Ethics in business is therefore concerned with relationships

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between people and people in business and businesses in business. What is regarded
as ethical or unethical conduct is dependent on;
a) The norms and values of a particular community or subculture.
b) The views of individuals in that community or sub-culture regarding what is

right and wrong in certain circumstances.
In an organization workers come from different communities with different sub-

cultures, it is therefore imperative for companies to draw up a code of conduct in the
company. This code should include;
 The general social norms and values of the community in which the business
operates which should provide the basis of the code of conduct.
 Vague generalizations about ethical conduct are meaningless. A code of
ethics should be as specific as possible and contain details about ethical
issues that employees might be confronted with as well as their desired
reactions to them.
 In the same way that management exercises control over the functional areas
of a business, it should also ensure that employees adhere to the code of
conduct all times.
 Employees should be held accountable for their behavior. Compliance with
the code of conduct should be one of the conditions of service, and
employees who transgress the code should be subjected to disciplinary
action.
 Remuneration should be based on upholding ethical standards.
 Employees may be unsure of what represents ethical behavior in a particular
situation, especially if they are suddenly confronted with it, for example, a
supplier inviting one of the business buyers to lunch at an upmarket
restaurant.

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Employees should be encouraged to discuss such situations with management and
core -workers so that consensus can be reached about suitable action.
Social Responsibility
While business ethics is concerned with the behavior of individuals (employees) at

work, social responsibility has to do with behavior of a business towards
stakeholders such as consumers, suppliers, competitors, employees, owners or
shareholders and the community at large.
Being socially responsible essentially means that a business tries to reconcile the
interests its different stakeholders with each other. For example, profit maximization
is the primary concern of the owners or shareholders while consumers are mainly
interested in quality products at affordable prices.
However, most businesses act irresponsibly towards customers in an effort to best

serve the interests of their owners.
Factors that affect (influence) a business's approach to social responsibility include;
a) Business ethics of employees especially to management.
b) Legislation (by government enforcement).
c) Consumer action.
d) The approach of competitors.
Areas of Social Responsibility and Business Ethics

Issues of social responsibility and business ethics are important when businesses
interact with the following groups of stakeholders;
a) customers or clients (consumers)
b) suppliers
c) competitors

65
d) employees
e) owners and shareholders
f) the community
Consumers and Business Social Responsibility

Dealing with consumers is not easy but businesses should at least show their
responsibility to consumers through:
a) marketing actions (product, price and marketing communications)
b) Introducing legislation to protect consumers from exploitation and deceit and

other professional bodies have a code of conduct e.g. Dentists and medical
practitioners.
The Consumer Council of Zimbabwe (CCZ) is an example of a board that voices for
consumer protection. There are many cases of questionable ethics in regard to
consumer’s e.g.
 the placing of tobacco, cigarette and alcohol advertisements

 advertisements aimed at children
 keeping quiet about defects in products when selling them
 basing price discrimination on gender and age
Suppliers
In the interaction between a business and suppliers, there are numerous cases of
questionable ethics e.g.
a) Where a supplier is in a strong position relative to that of a client, it is not
unusual for the former to enforce unreasonably high prices or order

66
quantities. This happens for example, when the supplier is the sole source of
a particular product or raw materials and the buyer has little option.
b) It is not unusual for a strong customer to compel suppliers to accept
unreasonably low prices for their products or raw materials e.g. market
gardeners often complain that retail groups such as OK, Pick N Pay and
Food World exploit them when they sign contracts to deliver vegetables.
Competitors
Examples of questionable actions in the interaction between a business and its
competitors;
 Circulating rumors about the financial stability, product quality, service

quality and business ethics of competitors.
 Luring away a competitor's core personnel, suppliers and business partners.
 Attempting in any conceivable way, to obtain confidential information about

a competitor.
 Waging price wars to eliminate competitors.
Employees
Issues that businesses have to cope with in their interaction with employees;
 A proper and fair general code of conduct for employees in their interaction
with a business' other stakeholders and the monitoring of such a code.
 A policy on sexual harassment, smoking, drinking, drug use and dress code in
the workplace.
 A language policy.

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 Equity without discrimination on the basis of creed, race, gender, skin color,
age and so on.
 The creation of a safe and healthy working environment.
Owners and shareholders
Issues of ethics and social responsibility that businesses have to deal with in their
interaction with owners and shareholders include the following;
 Choosing between short -term and long- term benefits.

 The tendency to make things seem rosier than they are to attract new
investments.
 The investment of business capital in other businesses or projects.
The Community
In its interaction with the community, the social responsibility of a business involves
its views and actions on matters such as;
 Conservation of the physical environment - pollution.
 Utilization of scarce resources - recycling of waste.
 Economic issues - community capacity development, health programmers
(HIV, AIDS, TB etc.)
 Crime prevention, education and training (business training facilities etc.)
1 (a) what is inflation? [2]
(b) Discuss the problems that are associated with a rise in inflation in an economy.
[4]
2. How are businesses affected by an increase in taxation? [4]

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3 (a) Outline any three drawbacks of import controls. [3]
b) Why are most governments keen to promote exports? [4]

4 (a) State any two examples of direct taxes. [2]
b) How might businesses be affected by

taxation? [4]
5 (a) State any two legal constraints that affect
businesses. [2]
b) Explain the effect of import duties on foreign
trade. [4]
6. Analyse the possible impact of a rise in interest rates on a firm
manufacturing technical equipment. [4]
7. Distinguish between economic and political constraints. [4]
8 (a) Distinguish between Fiscal Policy and Monetary Policy. [4]
b) State any two examples of external stakeholders of a business. [2]
Essay questions
1. Explain how and why the government of Zimbabwe might influence the growth
of businesses.
(25)
2. A) Explain how economic constraints might affect prospects of small firms. (10)
b) Discuss measures that small firms might undertake to minimize effects of

economic constraints. (15)
3. Evaluate the impact of exchange rate fluctuations on businesses in your country.
(25)
4. Evaluate the impact of both internal and external factors that are likely to influence
the success of a business organization of your choice. (25)

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5. Explain economic constraints faced by businesses. (10)
6 (a) Explain economic constraints faced by businesses. (10)
TOPIC 3: INFORMATION TECHNOLOGY AND PROJECT PLANNING
Objectives
 Understand the importance information and technology in businesses.

 Analyze the value of project planning and evaluation.
 Evaluate the concepts of critical path analysis, decision tree analysis and cost
benefit analysis as they are applied to planning and evaluation of projects
Information Technology

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Information and communication technology (ICT) is often used as an extended
synonym for information technology (IT) but is a more specific term that stresses
the role of unified communications and the telecommunications (telephone lines and
wireless signals) , computers as well as necessary enterprise software , storage and
audio -visual systems , which enable users to access , store , transmit and manipulate
information .
Information communication technology is a generic name used to describe a range
of technologies for gathering storing, retrieving, processing, analyzing and
transmitting information. ICT in business environment can be used for;
 recording data
 storing data
 manipulating data
 retrieving data
ICT is used in;
 Administration - invoices, communication and e-mails.

 Business - finance and accounting, auditing, business plans, financial
forecasting, market analysis, research and recording transactions.
 Communications - e-mails, instant messages and mobile phones.
 Engineering and creative art - 2D and 3D drawing, modelling and simulation.
 Wildlife and tourism and hospitality - animal tracking and hotel bookings.
ICT changes business landscapes because it has opened up businesses to;
 globalization

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 deregulation
 competition
The term globalization refers to the greater free movement of goods, capital and
people around the world. Free trade and use of the internet have reduced the
international distances.
Technology
 Power of the web

 Information versus data
 Global reach of internet technology, mobile phones can handle internet
communications.
 Pervasive Computing - idea of putting powerful computer chips and functions
into everyday things such as cars or household appliances e.g. refrigerators
can now scan themselves and inform you to procure goods on line using GPS
and location technology. G.P.S technology has been enhanced.
Consumers
 more sophisticated
 more demanding
Markets
 fragmented
 mass customization
Technological Components
Hardware - laptop, LCDs, printers, cameras, PC headsets, hard drives, keyboards
and mouse, wireless routers, DVD-C, memories and scanners
Software
 Application software - word processing, spreadsheet and graphics.

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 Systems software - operating systems, file management, tools, utilities,
compilers, debuggers and assemblers.
 Communication - graphics and databases.
 Internet, E-mails and E-commerce.
Internet
 Internet is used to reach global market place, do e- commerce, assess market
performance, and make price comparisons and visiting some important sites.
E-mail
 Messages can be sent to individuals and groups.
 Quick information transfer to various stakeholders e.g. booking at safari
lodges.
E-commerce
 shopping 24/7
 low overheads
 global market
 e-marketing
How software improves efficiency
 Speed - quicker processing times saves the business time and money.
Transactions are processed on quicker real-time.
 Accuracy - with the use of verification and validation, data can be inputted
more accurately. This can help with decision- making
 Data handling - can be inputted and manipulated anywhere on the market.
 User friendly - easy to use.
 Capacity - large quantity of data can be held with very little physical space.
Computer Network

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Computers connected to each other electronically, which can "talk" to each other
and that every computer in the network can send information to the others.
The components of a computer network include: the router, the gateway, the bridge
network device, the switch for networking and the hub. Most of these are data
terminal equipment and components of networking that are tasked with receiving or
generating data.
A virtual private network (VPN) extends a private network across a public network
such as the internet.
Definition of terms
 A computer is a general- purpose devise that can be programmed to carry out
a set of arithmetic or logical operations.
 A router is a devise that forwards data packets between computer networks,
creating an overlay internetwork.
 A network switch (sometimes known as switching hub) is a computer
networking device that is used to connect devices together on a computer
network.
E-BUSINESS
It is the transformation of an organization’s processes to deliver additional
customer value through the application of technologies, philosophies and
computing “paradigm" of the new economy.
Three primary processes are enhanced in e-business:
a) Production processes, which include procurement, ordering and
replenishment of stocks, processing of payments, electronic links with

suppliers and production control processes among others.

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b) Customer - focused processes which include promotional and marketing
efforts, selling over the internet, processing of customers' purchase orders

and payment and customer support, among others.
c) c) Internal management processes, which include employee services,

training, internal information sharing, video - conferencing and recruiting.
Types of E-business
The major types of E-business are:
 Business -to-Business (B2B)

 Business -to -Customer (B2C)
 Business -to -Government (B2G)
 Customer -to- Customer (C2C)
 Mobile Commerce (M-Commerce)
Advantages of ICT
 Speed
 Accuracy
 Reliability
 Flexibility
 Improved quality - presentation of finished copy of written communication is
greatly improved by word processing, desktop publishing and laser printing.
Disadvantages of ICT
 Security - can be hacked.
 Depends on accuracy of data input.
 Expensive to maintain and replace.

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 Needs skills - trained workforce.
 Damage individuals through affecting eyesight, causing fatigue and backache.
Information technology is very useful in management of projects where sharing
ideas and developing of new products have become a necessity. In order to carry out
project planning using critical path method, decision trees and cost benefit analysis,
information technology is indispensable.
BUSINESS PLANNING
A plan is a written document that accomplishes certain basic objectives or a written

document that describes a business, its objectives and its strategies, the market it is
in and its financial forecasts.
The main objectives of planning are;
 To identify and describe the nature of the business opportunity or the new
venture.
 To present a written plan of how the entrepreneur plans to exploit the
opportunity.
 To attract investors or to persuade a bank or other institution or person who
provides financial resources to lend the entrepreneur the money needed to
establish the new business.
Apart from the above main objectives of a business plan, it provides many other
benefits, such as the following:
 A systematic, realistic evaluation of the new venture's chances of success in

the market.
 A way of identifying the key variables that will determine the success of the
new venture as well as the primary risks that may lead to failure.
 A good game plan for managing the business successfully.
 A management instrument for comparing actual results against targeted
performance.

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 A primary tool for attracting money in the hunt for financial resources.
A business plan is not only a requisite for seeking finance from investors but also
an essential document for describing aims and objectives and enabling
measurement of progress towards achieving them.
Current operations of a business can be monitored when there is a business plan

which is a statement of:
 The current situation - a situational audit.

 Where the business is going - its objectives.
 How it will get there - its strategy.
 The financial implications of the proposed activities.
 The viability of the proposal - its feasibility.
COMPONENTS OF A BUSINESS PLAN.
The format
 Who should writes the plan?
Many small business managers employ the professional assistance of accountants,

attorneys and marketing consultants to draw up a business plan however experts
agree that the entrepreneur may consult with professionals but should in the end
write the plan himself or herself.
There are no rigid rules on the format but should at all times be;
 of a good appearance
 concise
 comprehensive

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 logical
 Easy to read and understand (i.e. by the proposed reader or evaluator)
 Based on facts.
The length of the business plan will depend on the venture, but can vary from five to
twenty pages, excluding annexures and substantiating documents.
The Contents of a Business Plan
A business plan for each venture is
unique.
An outline of a simple business plan.

Executive A one to three pages overview of the total business plan. Written
summary after the other sections are completed, it highlights the
significant points and, ideally, creates, enough excitement to
motivate the reader to read on.
General Name and location

Company
Nature and primary product or service of the business
Description
Current status (start up, buy- out, on expansion) and history ( if
applicable )
Legal form of organization.

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Products and Description of products or services
/ or services
Superior features of advantages relative to competing products
or services
Any available legal protection - patents, copyrights, trade

marks
Dangers of technical or style obsolescence.

Marketing Analysis of target market and profile of target customer.
Plan
How customers will be identified and attracted.
Selling approach, type of sales force, and distribution channels.
Types of sales promotion and advertising.
Credit and pricing policies.

Management Management team members and their qualifications.
Plan
Other investors and / or directors and their qualifications.
Outside resource people and their qualifications.
Plans for recruiting and training employees.

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Operating Operating or manufacturing methods used to produce the
Plan product or service.
Description of operating facilities, location, space and

equipment.
Quality control methods to be used.
Procedures used to control inventory and operations.
Sources of supply and purchasing procedures.

Financial Revenue projections for three years.
Plan
Expense projection for three years.
Necessary financial resources.
Source of financing.
Existing businesses also make use of business plans for various reasons. Some of
them are;
 Rewrite and adapt it to accommodate new or revised strategies, such as

expansion plans.
 The original financial forecasts can act as budgets and control benchmarks.
 Updated versions can be used to apply for additional funding or to attract
additional partners or to supply data for the experts if "going public" becomes
an option.

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PROJECT MANAGEMENT
A project is a sequence of unique, complex and connected activities having one goal
or purpose and that must be completed by specific time, within budget and according
to specification.
Project management is the process of scoping, planning, staffing, organizing,

directing and controlling the development of an acceptable system at a minimum
cost within a specified time frame.
Most projects are undertaken by governments and include motorway construction,

building of schools, hospitals, airports and dams for major irrigations.
Measures of project success
To say a product is successful it is only when:

 The resulting information system is acceptable to the customer.
 The system was delivered on time.
 The system was delivered within budget. The system development process
had a minimal impact on ongoing business operations.
Causes of Project Failure

 Failure to establish upper management commitment to the project.
 Lack of organization’s commitment to the system development methodology.

 Taking short-cuts through or around the system development methodology.
 Poor expectations of management.
 Premature commitment to a fixed budget and schedule.
 Poor estimating techniques.

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 Over-optimism.
 Inadequate people management skills.
 Failure to adapt to business change.
 Insufficient resources.
 failure to" manage the plan”.
 A high- profile business executive pushing ahead a wrong idea.
A common technique used for the planning, management and control of complex
projects is called Network analysis or Critical Path Analysis (CPA) or Programmed
Evaluation Review
Technique (PERT)
Projects are usually broken into;
a) separate tasks or activities
b) precedence relationships
Network analysis therefore involves the following processes;
 Identifying the objective of a project e.g. develop and launch a new product.
 Identifying the various tasks or activities required to complete a project.
 Putting the activities in the right sequence e.g. Prepare initial designs, make
prototypes, design packaging, produce first batch and test market. The critical
question is, "what activities must be finished before this activity can start?”
 Network diagram showing the activities.
 Calculating the duration of the project by adding together the time taken to
complete each activity.

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 Highlighting the critical path i.e. the path through the network which takes
longest to complete. Activities on the critical path are those which cannot be
extended without delaying the time taken to complete the whole project.
Basic Network Analysis
Networks are drawn for projects to show the sequencing of various activities that can
be used in order to complete a project.
Suppose that a project is comprised of nine activities identified by the letters A, B
to I. Some of the activities cannot start until certain other activities have been
completed. These relationships, together with the time needed to complete such
activities are summarized in the following precedence table;
Project XYZ
Activity Immediately preceding activity Duration in days
A ---- 2
B A 6
C A 10
D B 1
E B 6
F C, D 3
G E, F 1
H E, F 1
I G 2

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The first step in a critical path analysis is to draw up a network diagram of the
activities taking account of the dependencies between the activities. From the
above precedence table, the following network diagram can be constructed;
NB. Durations have been added.
*Points to note
a) Each activity is represented by an arrow, thus
b) Duration of each activity is written below the arrow. Activity A takes two days.
c) The duration of each activity begins and ends at a node, designated by a circle.
These nodes are also known as events. An event such as that shown at node B (in
diagram above) is not achieved until all the activities which finish at that event are
complete. In the network diagram above we could not say event 6 had been
achieved until both activities C and D were complete.

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d.) Activities may be referred by the events where they start and finish, e.g. Activity
C could be referred to as activity 2 - 6. It follows that a diagram such as
Is not allowed because both activities A and B would be referred to by the events 1
- 2.

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Such a situation would be solved by the
use of a dummy as above the dummy
activity 2 - 3 maintains the logic of the
network and allows the two activities A
and B to be separately referenced as: 1 -
2 and 1 - 3.
Dummy is an imaginary activity which consumes neither time nor resources and is
meant for logical dependency or sequence of activities. Dummy activities are used
for three purposes;
a) To maintain necessary logical relationships.
b) To allow unambiguous referencing of activities.
c) For cosmetic purposes.
In the diagram for project XYZ (above) the dummy activity 12 - 14 is merely
cosmetic because the diagram could equally well have been drawn without
A dummy.
A network diagram must not include;
( i ) a loop e.g.

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The loop 3 - 4, 4 - 5, 5 - 3 would prevent the project ever being
completed.
(ii) Dangling event e.g.

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Event 2 is" dangling". There can be only one finishing event in a project. In the
diagram above both events 2 and 6 appear to be finishing events.
Analysis of Time Using the Network Diagrams
Inserting time in nodes

In order to analyses the network, we compute earliest event times (EETs) and latest
event times (LETs) and enter these in the nodes.
The earliest event time, Ej (or EET) is the earliest possible time at which j can occur.
The latest event time, Lj (or LET) is the latest allowable time at which event j can
occur.
To calculate earliest event times and latest event times for a network, mark the nodes
this;

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The forward pass (forwardation)
The EETs are entered in what we call the forwardation. Starting at event O, the start
node in the network enter zero on the upper right-hand side of the node. Work from
node O logically through the network. At each subsequent node consider all the
activities entering that node. For each activity (i, j) take its EET and add its duration
i.e. From Ei + Dij for each activity entering node j. THEN, enter the largest value
of Ei +Dij as Ej for node j.
This gives the network shown below:

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For example, EETs for nodes 6, 8 and 14 are calculated as follows;
a) Node 6
There are two activities entering node 6
Activity D = 8 + 1 = 9
Activity C = 2 + 10 = 12
We take the greater (i.e. 12) because that is the earliest that activity F
may start.
b) Node 8
Again, two activities are entering node 8
Activity E = 8 + 6 = 14
Activity F = 12 + 3 = 15
Therefore, the EET for node 8 is 15.

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c) Node 14
Activity I = 16 + 2 = 18
Dummy = 16 + 0 = 16
Therefore, the EET for node 14 is 18 and this is the earliest that the project can be
completed in.
Backwardation
The latest event times (LET) for each node are entered starting at the end node and
working towards the start node. This gives us the title "the backward pass". Starting
at the final node, set the LET of the final node which is equal to its EET. Working
backwards to preceding nodes at each node consider all the activities leaving the
node. For each activity i, j leaving node i take the duration Dij from the LET i.e.
from Lj - Dij enter the smallest value of Lj - Dij as the LET for node i. For our
network this is shown below;
Examples of Calculations.
a) Node 12
L14 - D12, 14 = 18 - 0 = 18
b) Node 8
L10 - D8, 10 = 16 - 1 = 15 (smallest) and L12 - D8, 12 = 18 - 1 = 17. We enter 15

in node 8 as the LET.

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The critical Path
Once a network has been drawn and earliest and latest event times calculated, the
critical path can be identified. For an activity to lie on the critical path, it must satisfy
two conditions;
a) Its starting and finishing events must have the same earliest and latest event
times.
b) The duration of the activity must require all the time available between its
start and finish events.
Critical path is the shortest possible duration of a project (depicted by the longest
route in a network diagram).
The critical path is shown as follows;
A double line on the arrow indicates the critical path in a network diagram.
Events 5, 10 and 15 must be in the critical path because their earliest and latest
achievement times are all equal to each other. Activity K lies on the critical path

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because its duration (4) needs all the time available between events 5 and 10.
Similarly, activity L lies on the critical path, its duration (7) needs all the time
available between event 10 and event 15. Activity J does not lie on the critical path.
Eleven (11) units of time are available between events 5 and 15 and as the duration
of activity J is 8 units, it could be delayed by up to 3 units without affecting the
overall project duration. The critical path consists only of those activities which must
be completed as soon as possible if the project is to be completed in the minimum
time.
Float
It is the amount of time an activity can be delayed without delaying the overall
project. Calculation of float for each activity allows us to see how far it can be
allowed to "slip" without affecting final project duration. Float can also be defined
as the amount of slack that exists for non-critical activities. There are three types of
float.
a) Total float - is the amount of time a path of activities can be delayed without
affecting overall project completion.
Total float = LFT for the activity minus EST for the activity minus duration of
activity
=LFT - EST - Duration
On the critical path T (total float) is zero for all activities, any delays will therefore
extend the project duration. Spare time may be used to delay the start or extend the
duration of an activity by up to the total float.

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b) Free float - is the amount of time by which an activity can be delayed without
affecting the commencement of subsequent activities at their earliest start time. It
is calculated as follows; Free float = EST (of next activity) minus EST (of current
activity) minus duration. Spare time for an activity if all activities start as early as
possible. If F = 0 for an activity we say that the activity is sub -critical as delaying
its start time will extend the project duration.
c)Independent float - the amount of time an activity can be delayed when all
preceding activities have been completed as late as possible and all succeeding
activities are started as early as possible (it does not affect the float on preceding
or subsequent activities). Independent float = EFT - LST - duration
Slack time for an event

Si = Li - Ei. The slack time for events on the critical path is zero. If any delay to
critical activities is likely, resources should be transferred to them from non-critical
activities.
Usefulness of Network Analysis (CPM)

 Calculation of critical path allows a business to give accurate delivery dates.
 Calculation of EST helps determine when resources are needed.
 Facilitates resource allocation.
 Helps identify activities likely to cause bottlenecks.
 Helps eliminate and reduce idleness of human, capital and material resources.
 Reduce costs by reducing wastes, hence part of lean production methods.
Limitations of using network analysis (CPM)
o Cannot guarantee a successful project by itself - requires skilled and
motivated staff.
o For completely new projects, duration time depends on estimates.

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o Time is not the only important factor in the success of a project.
o Costly and time consuming to implement.
o Might be affected by external factors e.g. weather conditions.
o Project must be specific e.g. it must be timed accurately.
DECISION TREES
Another tool for decision making apart from critical path analysis, ratio analysis,
break -even analysis/cost-volume profit analysis, cost benefit analysis, linear
programming (blending technique), investment appraisal and time series analysis. A
decision tree is a graphical method of displaying the alternatives resulting from
combinations of decisions and chance occurrences (probability). It is also known as
probability tree diagram. A decision tree is an aid to decision making in conditions
of uncertainty. It considers all options available and make use of probabilities.
Examples of types of decisions that are made using decision trees include;
a) Whether or not to introduce a new product or continue with the existing

product.
b) Whether to launch a new advertising campaign or not.
c) Whether to sell off assets for a known price or continue to use them in
conditions of uncertainty.
d) Whether or not to expand in one nation or another.
When dealing with business problems the term decision tree is preferred and most
of the probabilities are subjective.
How to construct a decision tree diagram.

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Features
 Square - starting point of a decision tree diagram. It represents points at which

management decisions have to be made. Is known as decision node.
 Branches - each branch of a tree represents an option e.g. whether to award a
contract or not. It also shows a range of consequences or outcomes and the
chances of them occurring.
 Circle - shows that a range of outcomes may result from a decision. It
represents points at which one of a number of outcomes may occur.
 Black dot - shows the finishing point of the sequence of events. A decision
tree on whether to open or close shop can look like;

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A decision is made whether to open or not to open shop. Then if we open, we have
different outcomes depending on the state of the economy that is, boom and
recession. To decide on which decision to take in this case whether to open the
factory or not it is necessary to calculate the expected value at each node.
Expected value
This is equal to the outcome multiplied by its probability. The rule is, you multiply
horizontally along each line and then add up the resulting values.
Pay off means the expected net cash inflows from the project.
To set up a decision tree it is necessary to go through the following stages;
 make a list of all the possible activities

 decide on the possible outcomes
 Determine the possibilities of each action occurring (probabilities).

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Step 1: The point at which a decision is made is represented by a square which is an
immediate decision whereas the second square will be a decision made after a long
time.
Step 2: Branches leading from a decision point represent a possible decision that will
be taken.
Step 3: The circle highlights random or chance events and is sometimes known as
state of nature point.
Step 4: Branches leading from an event show what would occur and also the
probability of this.
Step 5: At the end of these branches the value of each occurring, either in monetary
terms are the utility of the product.
Managers using this technique for decision making will use the following processes;
 identify the courses of action available

 identify the possible outcomes of the action
 determine the probabilities for each outcome
 calculate the expected value of each outcome
 select course of action with the highest value
Example (Source, Stephen Danks p721)
A firm wishes to undertake a new marketing campaign with the aim of increasing
sales and market share. It is considering two possible approaches.
Campaign A at a cost of $100 000

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Campaign B at a cost of $150 000
Expected value at node 2 = 0.7 (70 000) + 0.3 (30 000)
Expected value at node 3 = 0.6(90 000) + 0.4(60 000)
Therefore, the expected values of are
0.7x$100 000 =$70 000}
0.3x -$30 000 = -$10 000}. = $60 000
Therefore, the expected values of B are
0.6x$90 000 =$54 000 +0.4 x -$60 000= -$24 000
= $30 000
In this situation Campaign A would be chosen. This is shown on the decision tree
diagram as follows.
P(s) - probability of success

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P (f) - probability of failure.
The figures at the right-hand side of each branch are the expected pay-offs as a result
of certain action.
NB* Pay off = Expected cash inflows minus Initial Capital Outlay.
Also remember that not doing anything e.g. not to open shop is a decision or an
action.
Advantages / Usefulness of decision tree(s)

 Reduces the risk of project failure by assessment of risks associated with
undertaking a project in a certain environment. Only projects with the highest
expected values are considered/chosen.
 Acts as a quick screening device important in choosing viable projects which
provide better return on investment.
 They present a more logical way and reasonable way of selecting projects. It
simplifies and makes it easier to select the best project from a number of
alternatives available.
 Most suitable when dealing with large investments e.g. when dealing with
projects which require a lot of capital investments like purchasing a factory or
building.
 The decision trees are quite motivational because it is a collective process
done with worker participation as well as consultation.
 In efficient allocation of resources whereby more resources are channeled to
a project with a low risk of failure, thus reducing costs in an organization.
 Helps in the timing of the introduction of the project by assessing the state of
the economy, they provide a clue as to when to introduce a project.
 New ideas are thrown up.
 They encourage managers to quantify alternative courses of action.

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Limitations of decision trees
 Construction is time consuming.
 Information is not always available e.g. the cash flows estimates.
 Increases the costs to the business associated with data collection and labor.
 Focuses more on quantitative factors, neglecting qualitative factors.
 Probabilities may lead to biased information because of uncertainties.
 The calculations are based on estimates and they might not be accurate.
COST BENEFIT ANALYSIS

A technique that is used to give a financial value to all of the social, private and
external costs and benefits of a project. It can also be referred to as a collection of
techniques which attempt to find an objective measure of the utility of a project
proposal, based on the range of people's values in a community and to measure these
values on a common monetary scale. It is a process that takes all costs and benefits
of an economic activity into account.
Cost benefit analysis (CBA) is usually applied to public sector investment projects
such as roads and airport construction. It is used to evaluate social costs and benefits.
NB* Social Costs = Private costs + External costs
External costs are costs imposed upon a third party when goods and services are
produced and consumed. Goods and services with external costs are effectively
being subsidized by society at large which ends up paying them.
NB*Social Benefits = Private benefit + External benefit

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An external benefit "or positive externality" is a benefit that a transaction or activity
provides to a party that is not part of the transaction or activity. In other words, it is
a benefit provided to a party that cannot control whether or not the transaction or
activity occurs.
If the analysis arrives at the conclusion that the social costs of a new airport exceeds
the social benefits then the government could refuse planning permission. The
reverse will be the case of the social benefits exceeding the social costs. Example is
the building of a new motorway which could involve some or all the following costs
and benefits.
Costs
Pollution from exhaust fumes, noise from increased traffic, loss of countryside, loss
of business on the existing route, economic costs of construction, maintenance and
repairs.
Benefits
By-passing towns and cities, faster travel, greater convenience, extra jobs for road
maintenance and in-garages for parts and servicing, a more mobile workforce,
increase in government revenue from tax on petrol sales.
Principles of CBA
The main principles are;
 Identifying which costs and benefits to include.
 Deciding how to value them in relation to the estimated life of the project.

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 Determining the rate at which costs and benefits are to be discounted in order
to calculate the net present value (NPV).
 Considering the relevant constraints such as the budget available or influence

of pressure groups such as from environmentalists like E.M.A in Zimbabwe.
 Evaluation so that only if benefits exceed costs is it worth proceeding with the
project.
It is important to realize that there is always uncertainty surrounding estimates of
future costs and benefits associated with the project and this must be allowed for
and considered against potential changes in such factors as project life and interest
rates.
NB* In CBA a programmer or project would be deemed acceptable if its benefits

outweigh the costs.
Advantages of CBA
 Takes in account qualitative factors such as, pollution, unemployment, land
damage and living standards giving them a monetary value.
 Helps in planning given the costs and benefits of a project, management can
plan on how to minimize costs or increase benefits before launching a project.
 It acts as a screening device of projects. Profitable projects have more total
benefits than costs. When dealing with more than one project, one with the
highest difference between total benefits and costs is selected.
 It determines the worthy of carrying out certain projects, that is, firms will
know the likely net benefits of their projects.
 It considers ethical issues since it considers external benefits and costs of
projects.
Disadvantages of CBA

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 Some factors are difficult to put in monetary terms/value.
 Is based on estimates of monetary values hence results may be biased.
 The process is time consuming as it involves a deeper analysis on costs and

benefits.
 It is an assumption which may not be relevant.
1. Define the following terms:

(a) project [2]
(b) project management [2]
(c) Business plan. [2]
2. Outline the contents of a business plan. [6]
3. What do you understand by the following terms used in network analysis?
(a) Dummy [2]
(b) Free – float [2]
(c) Critical path [2]
4. A firm is faced with a choice of buying a small machine or a large one. The
return or pay off will vary depending on the choice of machine and state of
demand. Relevant data is shown below:
State of demand Probability Pay off from small Pay off from large
machine machine
High 0,2 80 000 160 000
Medium 0,6 72 000 48 000

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Low 0,2 32 000 - 20 000
(a) Present the above information on a decision tree diagram. [4]
(b) Which machine should be chosen and why? [2]
5.
In the decision tree diagram above, what is the significance of the square [1] and the
circle? [1]
6. Show how a firm can use the concept of cost benefit analysis when considering to
buy more machines for its operations. [5]
7. To what extent are computers useful to mobile network providers? [5]
8. A firm has to decide between two alternative projects. The costs and the expected
probability of each of these is given below:
Profit/ (Loss) $
Project Cost If If
successful unsuccessful
X 20 000 60 000 3 000
Y 35 000 85 000 (20 000)
If there is a 60% chance of Project X being successful and a 50% chance of Project
X being successful,
(a) Draw a decision tree of the options above. [3]
(b) Which project should the firm choose? Justify your answer. [3]

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9. What is the importance of Information Technology to a marketing department?
[4]
10. Define the term ' globalization'. [2]
11. Outline the merits and demerits of using computers in business. [4]
12 Define the following words as used in network analysis:

(i) Node, [1]
(ii) Activity. [1]
(b) A project manager came up with the following network diagram.
a. Calculate the earliest starting time of activity F. [2]
b. Calculate the duration of the project. [1]
c. Redraw the diagram and show the critical path. [3]
Essay questions
1. With the aid of an appropriate illustration, evaluate the usefulness of critical path
analysis in a house building industry. (25)
2. Evaluate the usefulness of installing and using computers to the management of a
large
Manufacturing firm. (25)
3. Discuss the usefulness of business planning to a manufacturing firm. (25)

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4. Evaluate the relevance of project management to a firm in the construction
industry. (25)
5. Explain, with the aid of an appropriate diagram, how a decision tree can be used
in decision -making. How useful is such a model to managers? (25)
TOPIC 4: PEOPLE IN ORGANISATIONS
Objectives

 Explain management and its roles.
 Evaluate management theories.
 Understand the significance of formal and informal leadership.
 Analyze theories of motivation.
 Understand different methods used to motivate workers.
 Explain the importance of communication in managing, leading and
motivating workers.
The resources that are deployed in business such as people, money, equipment and
knowledge must be managed in such a way that the business reaches its profit and
other goals as a result management in business examines fundamental management
tasks of the management process, namely, planning, organizing, leading and
controlling.
MANAGEMENT FUNCTIONS
Management is an indispensable component in a business because:
 Management directs a business towards its goals.

 Management sets and keeps the operations of the business on a balanced
course.

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 Management keeps the organization in equilibrium with its environment.
 Management is necessary to reach the goals of the organization at the highest
possible level of productivity.
NB: Details on the actual roles of managers will follow after defining this important
concept.
Management is the process followed by managers to accomplish a business' goals

and objectives. More precisely, it may be said that management is a process of
activities that are carried out to enable a business to accomplish its goals by
employing human, financial and physical resources for that purpose.
It is also defined as making work done by people.

Others say it is the process whereby human, financial, physical and information
resources are employed in order to reach the goals of an organization.
Management does four things;
 decides what has to be done

 it decides how this should be done
 it orders that it be done
 It checks that its orders have been carried out.
The management terms used to define these fundamental tasks are planning,
organizing, leading and controlling. In shot these tasks are:
Activities Terminology
Management decides what should be done Planning
Management decides how it should be done Organizing

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Management says how and when it should be done Leading
Management ascertains whether the tasks have been Controlling

carried out
The Fundamental Tasks of Management

Can be represented as a process whereby the four tasks are executed in a systematic
sequence as follows;
Planning: determines the mission and goals of a business, including resources that
are needed.
Organizing: the human financial and physical resources of the business have to be
allocated by management to the relevant departments or persons, duties must be
defined and procedures fixed to enable the business to reach its goals. Can also
include designing of an organization structure indicating how equipment and
materials should be employed.
Leading: directing and motivating human resources. Leaders align the actions of
subordinates with business goals and plans. Leaders also work together with their
subordinates and superiors.
Control: should establish whether the business is in the right course towards
accomplishment of its goals. Management makes sure activities and performance
conform to the plans for reaching predetermined goals. Control also enables
management to detect any deviations from the plans and to correct them. It also
obliges management to constantly reconsider its goals and plans.

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Levels of management
There are three main levels;
a) Top management: comprises the relatively small group of executives who

control the business and in whom the final authority and responsibility for the
execution of the management process rests e.g. the board of directors, the partners,
the managing director, CEO. They are responsible for the business as a whole, its
mission and goals. They are concerned with long-term planning. They control the
business using reports and audits.
b) Middle management: responsible for certain functional areas. Accountable for

the execution of policies, plans and strategies determined by top management e.g.
The marketing manager, purchasing manager, personnel manager and so on. They
are responsible for medium and long- term planning and organizing within
functional areas.
c) Lower management: supervisory management responsible for smaller

segments of the business e.g. A marketing department may have a product manager,
a promotion manager or a sales manager. Supervisors and firemen are found in the
lower management. These levels are however determined by the size of the business
organization.
The Role of managers

Mintzberg published ten management roles in 1990. The ten roles are;
 figurehead
 leader
 liaison
 monitor

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 disseminator
 spokesperson
 entrepreneur
 disturbance handler
 resources allocator
 negotiator
The ten roles are then divided up into three categories;
Category Roles
Interpersonal  Figurehead
 Leader
 Liaison
Informational  Monitor
 Disseminator
 Spokesperson
Decisional  Entrepreneur
 Disturbance handler
 Resources allocator
 Negotiator
These roles are not applied separately but have got a tendency of overlapping.
MANAGEMENT THEORIES
1. Frederick Taylor - Theory of Scientific Management
2. Henri Fayol - Administrative Management Theory
3. Max Weber - Bureaucratic Theory of Management

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4. Elton Mayo - Behavioral Theory of Management (Hawthorne Effect)
These are sometimes called classical theorists. The aim of management theories was
to ensure the best important resource in the company - the human being /workforce
is taken care of and is made best use of so as to increase productivity as well as
increasing profit generation.
1. Scientific Theory by Frederick Taylor

This is a theory of management that analyses and synthesizes work flows. Its main
objective is improving economic efficiency, especially labor productivity. It is one
of the earliest attempts to apply science to the engineering of processes to
management. Taylor proposed that by optimizing and simplifying jobs productivity
would increase. He also assumes that it is the cooperation between managers and
workers that brings about improved productivity as well as worker motivation,
Taylor believed that all workers were motivated by money so he promoted the idea
of "a fair day's pay for a fair day's work.”
Taylor applied the scientific method to study the optimal way to do any type of
workplace task, he found out that by calculating the time needed for the various
elements of a tasks he could develop the "best" way to complete the task.
These "time and motion” studies also led Taylor to conclude that certain people could
work more efficiently than others. Selecting the right people for the job was another
important part of workforce efficiency.
Through these experiments Taylor latter on developed four principles of Scientific

Management.

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1. Replace working by "rule of the thumb" or simple habit and common sense
and instead use the scientific method to study work and determine the most efficient
way to perform specific tasks.
2. Rather than simply assign workers to just any job, match workers to their jobs
based on capability and motivation and train them to work at maximum efficiency.
3. Monitor worker performance and provide instructions and supervision to

ensure that they are using the most efficient ways of working.
4. Allocate the work between managers and workers so that the managers spend
their time planning and training, allowing the workers to perform their tasks
efficiently.
Criticisms of Taylorism
The scientific management theory promotes the idea that there is "one right way" to
do something, as such it is at odds with current approaches, such as MBO,
Continuous Improvement Initiatives, Business Process Re-engineering and other
tools like them.
The theory removes autonomy and flexibility among the workforce and reduce them
to machines fueled by money and promotes rigidity which causes workers to fail to
adapt to new situations.
Teamwork is not promoted by Taylorism, because it breaks tasks down into tiny
steps and focuses on how each person can do his /her specific series of steps best.
The extreme specialization that Taylorism promotes is contrary to modern ideas of

how to provide a motivating and satisfying workplace.

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Where Taylorism separates manual from mental work, modern productivity
enhancement practices seek to incorporate worker's ideas, experience and
knowledge into best practice.
Scientific Management in its pure form focuses too much on the machines and fail
to value the people -side of work, whereby motivation and workplace satisfaction
are key elements in an efficient productive organization.
Evaluation
The principles of Taylor's Scientific Management Theory became widely practiced
and the resulting cooperation between workers and managers eventually developed
into the teamwork we enjoy today. While Taylorism in a pure sense isn't practiced
today, Scientific Management Theory did provide many significant contributions to
the advancement of management practice. It introduced systematic selections and
training of procedures. It provided a way to study workplace efficiency and it
encouraged the idea of systematic organizational design.
Principles of Management Theory: Henri Fayol

Prior to Henri Fayol's development of the administrative theory of management,
managers took a scientific approach to work, attempting to maximize productivity
by treating their workers as machines. Fayol's fourteen principles of management
focus on the entire organization rather than just the work.
According to Henri Fayol," to manage is to forecast and plan, to organize, to

command, to coordinate and to control.”
Fayol has been regarded as the father of modern operational management theory and
his ideas have become a fundamental part of modern management concepts.

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Henri Fayol was able to synthesize 14 principles of management;
 Division of work
 Authority and responsibility
 Discipline
 Unity of command
 Unity of direction
 Remuneration
 The degree of centralization
 Scalar chain
 Order
 Equity
 Stability of tenure of personnel
 Initiative
 Esprit de corps
 Subordination of individual to the general interest.
The 14 principles of management can be used to manage organizations and are useful
tools for forecasting, planning, process management, organization management,
decision making, coordination and control.
Although they are obvious, many of these matters are still used based on common
sense in current management practices in organizations.
It remains a practical list with focus areas that are based on Henri Fayol's research
which still applies today to a number of logical principles.

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The Bureaucratic Management Theory: Max Weber.
Max Weber created the idea of bureaucratic management where organizations are
more authoritative, rigid and structured.
The three component theories of stratification, more widely known as Webern

stratification or three class system, was developed by German sociologist Max
Weber with class and status and power as distinct ideal types. According to Max
Weber bureaucracy constitutes the most efficient and rational way in which one can
organize the human activity and that systematic processes and organized hierarchies
are necessary to maintain order, maximize efficiency and eliminate favoritism.
Weber's theory of a bureaucratic management also has two essential elements.

Firstly, it entails structuring an organization into hierarchy. Secondly, the
organization and its members are governed by clearly defined rational-legal
decision-making rules.
To be precise bureaucracy refers to a specialized system and process of maintaining

uniformity or authority within an organization. Bureaucratic processes are most
common in large organizations or governments and administer formal rules of
internal behavior.
Weber advocated a system based on standardization procedures and a clear chain of

command. Weber stressed efficiency as did Taylor but also warned of the danger of
emphasizing technology at the expense of emotion.
Key elements of the Max Weber management theory include;
 clearly defined job role

 a hierarchy of authority

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 standardization procedures
 meticulous record-keeping
 Hiring employees only if they meet the specific qualifications for the job.
Principles of Bureaucratic Management Approach
1. Proper division of labor - division of labor specialization should be fixed and
there should be a balance between power and responsibilities.
2. Chain of command - organizational hierarchy should be constructed in a way

that information related to decisions and works can flow effectively from top
to bottom.
3. Separation of personal and official property - owners and organization’s assets

are separate and can be treated as same by the owner or the organization.
4. Application of consistent and complete rules - there should be proper rules
and regulations in the organization for running the organization. These rules
should be followed in every step of the organization and they are equally
applicable to every member of the organization.
5. Selection and promotion based on qualifications - this should be based on
equalization like, skills, experience and age. It should not be influenced by

personal relations and benefits.
6. Training in job requirements and skills - there is a difference in management

on other parts of organization and training and improving skills of
management is important.
Criticisms of the Bureaucratic organization

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 Emphasizes only on rules and regulations.
 Unnecessary delay in decision making due to formalities and rules of a
bureaucratic organization.
 Coordination and communication hampered because of too much formality
and rules.
 Involves a lot of paperwork, too much levels of authority, which wastes time,
effort and money are not ideal for efficiency.
 It is only suitable for government organizations.
 Places emphasis on technical qualifications of employees for promotion and
transfers, dedication and commitment of employees are not considered.
 Limited scope for human resources. No importance is given to informal
groups and neither any scope is given to former ones.
Evaluation
Max Weber's bureaucratic approach worked as a solution to problems of traditional
administrative systems. But it was not the perfect or "close to perfect" solution. The
bureaucratic structure gives all the importance and power to the top- level
management. The rules and levels of authority are just too much. It gives a greater
sense of security to the employees but bureaucratic management gives a window for
"redtapism" (the bureaucratic red tape)
The Behavioral School: Elton Mayo

Sometimes known as the Hawthorne Effect upon of the place where the experiments
were carried out. Elton Mayo began his experiments (the Hawthorne studies) to
prove the importance of people for productivity - not machines. The human relations
management theory is a researched belief that people desire to be part of a supportive
team that facilitates development and growth.

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Over the course of five years, Mayo's team altered the female worker's working
conditions and monitored how the change in working conditions affected the
worker's morale and productivity. The changes in working conditions included;
changing in working hours, rest breaks, lighting, humidity and temperature. The
changes were explained to the workers prior to implementation.
Hawthorne Experiments Results

At the end of five years period the female worker's working conditions reverted back
to the conditions before the experiment began. Unexpectedly the worker's morale
and productivity rose to levels higher than before and during the experiment. The
combinations of results during and after the experiment (i.e. the increase in worker's
productivity when they were returned to their original working conditions) led Mayo
to conclude that workers were motivated by psychological conditions more than
physical working conditions hence motivation of workers come from working as a
group and socialization.
Hawthorne Experiments Conclusions

After analyzing the results from the experiments Mayo concluded that workers were
motivated by more than self-interest and the following had an impact too;
Psychological contract - unwritten understanding between the workers and employer

regarding what is expected from them. Mayo called this the psychological contract.
Interest in workers - workers' motivation can be increased by showing an interest in

them. Mayo classified studying the workers (through the experiments) as showing
an interest in the workers.
Work is a group related activity - teamwork can increase a worker's motivation as it

allows people to form strong working relationships and increases trust between the
workers. Work groups are created formally by the employer but also occur

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informally. Both informal and formal groups should be used to increase productivity
as informal groups influence the workers' habits and attitudes.
Social aspects of work - workers are motivated by the social aspect of work
demonstrated by the female workers socializing during and outside work and the
subsequent increase in motivation.
Recognize workers - workers are motivated by recognition, security and a sense of
belonging.
Communication - the communication between workers and management influences
workers' morale and productivity. Workers are motivated through a good working
relationship with management.
Conclusion
The traditional view on how to motivate employees is that you offer monetary
rewards (pay increases, bonus etc.) for work completion. However, the Hawthorne
Experiments may suggest that motivation is more complicated than that. Advocates
of the Hawthorne Effect will state that the Hawthorne Experiments results show that
motivation can be improved through improving working relationships and social
interaction hence improved productivity of workforce and firm as a whole.
LEADERSHIP
Organizations are made up machines and people. People are the most complex
resource of the organization this follows that an equally complex management task,
namely leading is required to direct people towards reaching the organization’s
goals.
Guiding or leading employees of an organization towards accomplishing its goals is
called leadership.
Leadership is that element of management that sets activities in motion and keeps
the activities moving until the goals have been accomplished. It deals with the
relationship between leaders and followers and the behavior of followers.

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In leading management also gives direction to the organization's activities so that all
its resources are deployed as efficiently as possible.
Leadership is the process of directing the behavior of others towards the

accomplishment of predetermined goals. Leadership involves elements such as
influencing people, giving orders, motivating people, either as individuals or in
groups, managing conflict and communicating with subordinates.
Leadership and management

Managers are the bearers of authority allowed to them by the organization, that is,
they have the authority to enforce order and direct the activities of others. This
includes issuing orders and being responsible for their execution.
Leaders have the authority but get results without having to use force. They are
leaders by virtue of certain personal qualities that they possess including the ability
to consult followers and motivate them and enlist their cooperation of their own
freewill.
Some differences between leaders and managers

Leader Manager
Has followers Has subordinates / employees
Appeals to people's hearts Appeals to people's minds
Has power through Has power through formal authority and position
charisma and influence
Motivates and enables Directs and controls a group of people

others to contribute
People oriented Goal oriented / task oriented

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Builds relationships Builds systems
Creates vision Creates goals
They coach Focus on setting, measuring and achieving
They inspire and engage Control risks, think in the short- term
people
Good managers are not necessarily good leaders and vice versa. However, for the
success of a businesses it is endeavors that all managers also be leaders and for this
reason people who are both managers and leaders are sought and trained.
As an element of the management process, leadership may now be defined as the

ability to influence and direct the behavior of individuals and groups and to induce
them to work willingly for the accomplishment of the organization’s predetermined
goals.
Aspects of leadership
Authority - the right of a leader to give commands to and demand action of

subordinates (followers).
Power - the ability of a leader to influence the behavior of others without necessarily
using authority.
Influence - refers to the ability to use authority and power to move followers to action
e.g. in business subordinates are often influenced or moved to make personal
sacrifices for the good of the business.

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Delegation - occurs when a leader transfers authority to a subordinate. It involves
splitting up the task and entrusting part of it, together with the necessary authority to
a subordinate for execution on the leader's half.
Responsibility - rests on the leader carrying out a given task in accordance with
instructions and being held accountable for the execution of all tasks by himself or
herself and subordinates.
NB* of all these authority and power are probably the most important ones.
Authority
Types of authority are legal authority, personal authority, authority by reputation and
economic authority.
Without authority leaders are unable to manage, initiate or sustain the management
process. Authority therefore revolves around obtaining the right to perform certain
actions (within specified guidelines), to decide who does what, to complete the
execution of tasks and to punish those who fail to do what is expected of them. In
short, this means the right to demand action from subordinates which may also be
seen as the right to act.
Authority flows out of delegation from shareholders to board of directors then to

managers and workers. Authority is conferred on a specific position or rank in a
business. It is granted by the business to a particular manager. In contrast power is
not granted to a manager, it is acquired in various ways.
Power

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Leaders influence their subordinates because they possess power of one kind or
another and thus exercise their authority effectively. Without power a leader would
not be able to influence subordinates sufficiently to induce them to direct their
activities voluntarily towards the productive accomplishment of business goals.
Power or the ability to influence the behavior of others, has nothing to do with the
position occupied by a manager in the hierarchy and it is not acquired through a title
or an entry in an organizational diagram. It has to be earned. A person who holds
both power and authority, that is, a manager with power, is far more effective than a
manager who possesses only authority.
The following are the kinds of power;
1. Legitimate power- authority granted in a business to a particular position.

Accordingly, a manager has the right to insist on the execution of certain duties by
subordinates and the right to dismiss them if they fail to comply. Legitimate power
is the same as authority.
2. Reward power - the power to give or withhold rewards such as salary raises,
bonuses, recognition and allocation of interesting assignments.
3. Coercive power - power to enforce compliance through fear whether

psychological, emotional or physical.
4. Referent power - refers to personal power. Subordinates obey leaders because

they respect them and identify with them. Leader's personal characteristics make
them attractive to others. Such leaders are said to have charisma.
5. Expert power - derived from knowledge, expertise or professional ability.

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Leadership models
Research into leadership and the development of leadership models was driven by
the assumption that certain personality traits and behavior patterns are crucial to a
leader's success (hence the Trait Theory).
However as far as leadership characteristics (traits) are concerned, the research
conducted were unsuccessful in pinpointing a definite set of characteristics or traits.
Studies found out that most effective leadership does not depend on a particular set
of characteristics but rather on how well the leaders own personal characteristics fit
the needs of a given situation.
One study found out that characteristics such as intelligence, initiative and self-
confidence are closely related to managerial proficiency while another rated highly
the ability to supervise.
The most recent studies have found that women are less likely than men to emerge
as leaders but that when they do, they are as effective as men.
Subordinates regard women in managerial positions as no less competent leaders

than men. However, in modern day we now have situational leadership styles and
interactive leadership styles. Despite that fact, the common leadership styles are;
a) Autocratic or task- oriented leadership style.
b) Democratic or relationship- oriented style.
c) Laissez- faire or middle of the road leadership style.
d) Paternalistic or father-figure leadership style.
Autocratic /authoritarian leadership style

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Leader makes most decisions without consulting subordinates. Leaders are
authoritative and expect unquestionable obedience to orders with no opportunity for
employees to be involved in decision making process or problem -solving process.
Communication is one - way with little or no space for feedback.
The style is more effective in cases where the task is simple and is to be repeated
over and over again. It works best if the relationship between the manager and
subordinates is brief or does not last longer. It is also suitable with subordinates who
are inexperienced, uneducated or where prompt decisions are needed in times of
crises or in the armed forces.
On the negative autocratic style creates frustration and resentments or high levels of
conflicts. The workers become very dependent on the leaders and are often unable
to work independently. It also stifles individual initiative and rely upon the quality
of the leader to work successfully.
NB* Nowadays employees demand better autonomy/ freedom, group participation

in decision making and problem - solving.
 Autocratic leaders emphasize much on monetary incentives or rewards.

 There is quick decision- making since it is centralized.
Though it instils discipline among subordinates, productivity is low.
Conclusively circumstances under which this style is most appropriate are where
individuals work best under direction and control, there is no real time for
consultation, where disciplinary measures must be observed e.g. army, danger or
difficulty and other problems are common e.g. firefighting, where task is structured
and when task is too risky.

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Democratic leadership style
Leaders consult workers and allow them to share in decision-making. Leaders tend
to follow what the majority say. Communication is two- way and there is room for
feedback. The style increases the employee's job satisfaction, morale and
commitment to the organizational goals or objectives It is more appropriate when
dealing with a more competent and experienced workforce.
On the negative it is time consuming, can lead to undermining of management

control, less aggressive members can be easily influenced by the more talkative and
aggressive members also relies on good communication, management may lose
control of the workforce.
On the positive, it is motivational, there is two- way communication, trust, good

industrial relations, and lower labor turnover.
NB * this type of leadership is becoming more and more important as the team
work approach management gains wide acceptance.
Paternalistic leadership style

It is a father to son or mother to daughter relationship. Managers do what they think
is best for the workers. Consultations might be made but strictly speaking there is no
true participation in decision making. Managers want workers to be happy in their
jobs.
NB* It is used by managers who care for employees but at the same time think they
know best.
The leaders have concern for workers' welfare in return for loyalty and hard work.

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May be useful where workers are young and or inexperienced e.g. apprentices.
However, there is no true participation in decision-making which may make some
workers dissatisfied.
Laissez - faire leadership style

This has both features of autocratic and democratic leadership styles. Allows
employees to carry out activities freely within the broad limits or are left to do what
they want. Style may result in a relaxed atmosphere but where there are few
guidelines and directions, leaders believe in allowing matters to take their natural
course i.e. do not become involved in the work being done by the workers. The
workers manage themselves. Subordinates are usually experts in the particular field
and are generally well motivated. Managers delegate virtually all authority and
decision- making powers which motivates enthusiastic workers.
However, success depends on the competence and integrity of workers.
It is most applicable for research and design teams.
The greatest disadvantage is that there is lack of feedback to workers due to "distant"
management which may be demotivating and make manager lazy.
Resins Likert's Four Styles of Leadership
1. Exploitative -authoritative
The manager makes all decisions, that is, what is to be done by whom, how and when
the work is to be completed. Subordinates are expected to listen carefully, obey
explicitly and execute tasks faithfully. The performance standards and the work
methods are closely monitored. Managers believe that workers have nothing to
contribute to quality. Workers fear their managers will punish them when standards

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are not maintained. Managers use threats, punishments and force to their
subordinates.
There is poor teamwork. There is one -way communication that is top- down
approach. The level of motivation is very low. Characterized by higher levels of
labor turnover. Managers put little trust in subordinates.
2. Benevolent
Managers give orders but they allow their subordinates to express their opinions and
sometimes discussions are permitted and explanations are given. When subordinates
exceed their targets, rewards are given. Managers believe that they know their work
and do not have to listen to their subordinates unless it is an idea that applies to them,
this means subordinates are given the flexibility to carry out their duties.
3. Consultative
Managers set goals and issue general orders after discussing with their subordinates.
Subordinates make their own decisions on how to carry out the duties. Managers
offer rewards for good work and behavior and do not use threats. Subordinates are
given the platform to discuss work related issues with management.
4. Participative approach
Groups are responsible for setting goals and work- related decisions because leaders
have complete confidence in their subordinates and often trust them. Total
commitment is brought about and total participation is encouraged. This way
conflicts are reduced to minimum. It is motivational and brings about low levels of
labor turnover but high levels of productivity.

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McGregor's Theory X and Theory Y
Though some schools of thought regard these theories as motivation theories, a
closer analysis places them under management and leadership theories. This
depends on what aspects of them are emphasized on.
McGregor studied the two sets of assumptions by managers about workers' attitudes
to work and responsibility. He identified two distinct management approaches to the
workforce and he called these theories X and Y.
Theory X managers view their workers as lazy, disliking work, unprepared to accept
responsibility and have to be given extrinsic rewards.
Clearly these managers most likely adopt an autocratic style of leadership because
workers are viewed as unambitious, irresponsible and not to be trusted. They have
to be controlled because have security as their greatest need. Managers believe
workers will avoid responsibility at all costs and are not creative.
Theory Y mangers believe workers do enjoy work and find it as natural as leisure or
play. They view workers as prepared to accept responsibility, creative and would
take part in contributing ideas and solutions to work related issues and problems.
Workers get sense of achievement from work, they don't wish to be controlled and
desire to satisfy social and self- actualization needs.
Acceptance of the more negative Theory Y view of workers result in;
 autocratic leadership
 traditional organization structures
 centralization of decision making

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 scientific management
 a stress on extrinsic factors (carrot and stick)
Acceptance of the more positive Theory Y results in;
 a democratic / free reign style of leadership

 more flexible structures
 decentralization of decision- making
 a search for appropriate ways of motivating the workforce
 A stress on factors intrinsic to work itself.
Factors Influencing Effective Leadership
These are the same factors that determine choice of leadership style. Scholars agree
that leadership is complex and there is no best way or style of leadership. This means
good leaders are to be eclectic (draw styles from a variety of schools of thought).
Effective leadership depends on a variety of factors such as;
 expectations and behavior of superiors

 requirements of the job / nature of the job
 organizational climate/ culture and policy
 personality, past experience and expectations
 subordinates' characteristics, expectations and behavior
 Time available to complete task at hand.
NB* though most subordinates prefer their leader to have a definite style research
suggests that style of leadership should change according to situation at hand.
Qualities of a good leader

Though contestable a good leader is expected to have the following qualities;

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 Charismatic - with a flair for good public relations.
 Possessing principles, for example taking ethical decisions.
 Excellent communicator - and a good listener.
 Welcoming advice and support from specialists as well as subordinates.
 Flexible and able to flourish in a dynamic business environment.
 Honesty and has integrity.
 Has ability to inspire others.
 Has commitment and passion in his or her work.
Informal leadership
Informal leaders are the leaders of an informal organization. They are the people who
have the ability to lead without formal power perhaps because of their experience,
personality and special knowledge. They may have more influence over the activities
of the group than formal leaders especially when the formal leaders are inefficient.
Informal leadership is the ability of a person to influence the behavior of others by

means other than formal authority conferred to by the organization through its rules
and procedures.
Formal leaders are able to exert both informal and formal power but no informal
leader has formal organizational authority to lead. Informal leaders do influence
members of an organization and can even be more effective than formal leaders in
certain circumstances. Informal leaders have several bases of power they are able to
use e.g. referent power, in other words they lead by example. An informal leader can
also use expert power, others seek them out for knowledge and skills no-one else in
the organization possesses. They can also use reward power where they may praise
and recognize members of the organization for a job well done. They can't use

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legitimate or formal power because their authority has not been formally sanctioned
by the organization. They cannot use coercive power much because effective use of
coercive power tends to require that it be wielded by someone with legitimate
authority to carry out the rewards or punishments sanctioned by the organization.
Benefits to the firm

 Informal leaders can be used to influence the other members of the
organization to accept change when there is resistance to change among them.
 They can help to solve personal problems experienced by fellow workers e.g.
cash problems, family problems, which formal leaders fail to solve.
 They help in organization of parties and other social events which help to
boost morale for fellow workers.
 Informal leaders are very close to workers and can enhance communication
and reduce alienation of some workers.
 Informal leaders can motivate the workers more than formal leaders.
 Some informal leaders have influence on productivity and pace at which work
is done.
Problems to organizations
 Informal leaders can be used by workers to press on wage and salary
increments when firm is also struggling which can paralyze production.
 Can work against the firm and lead to resistance to change and cause
unhealthy industrial relations.
 Informal platforms created by the leader may be a source of rumors which
destabilizes the firm and create conditions of uncertainty and insecurity.
 The informal leaders lack specialization.
 In a nutshell such leaders should not be ignored nor the whole informal groups
be ignored. Management or formal leadership should use these informal

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groups and leaders for their advantage e.g. tapping the organizational
atmosphere in the advent of change.
MOTIVATION
A motive is an incentive to act, a reason for doing something, anything that prompts
a choice of action. To motivate is to cause motion, having power to move or tending
to move. Motivation is a set of processes that arouse direct and maintain human
behavior towards attaining some goals. It is the commitment to do something. It
deals with how behavior is energized, how it is directed and how it is sustained.
Motivational theories include;
1. The early views which fall under management theories such as the Scientific
Management, Human Relations School, etc. These were discussed in an earlier

chapter. Students are therefore required to understand some aspects on motivation
in these early theories before they study this section.
2. Content theories dominated by Abraham Maslow's Hierarchy of Needs Theory,

Frederick Herzberg's Two Factor theory and David McClelland’s Three Needs
theory.
3. Process theories propounded by Vroom and Porter and Lawler which include, the
Expectancy theory and the Equity theory respectively.
4. Contingency theories, based on practical motivational measures.
Importance of motivation
The key to Leadership success is motivating others to do their best.
The importance of satisfaction in the workplace cannot be overstated. Motivating the

right people to join and remain with the organization is a key function of managers.

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People are motivated by a variety of things;
a) An intrinsic reward - is a good feeling one has when he/she has done a good
job (intrinsic motivation)
b) An extrinsic reward - something given to a worker by someone else as

recognition of good work and include pay increases, praise and promotion (extrinsic
motivation)
Motivation which is the drive to satisfy a need, ultimately comes from within an
individual. If it is the case the purpose of motivation is to stimulate people and bring
out that natural drive to do a good job. The job of the manager is to find out each
worker's commitment, encourage it and focus it on some common goal.
Motivating employees is vital to any business. A motivated workforce means a

highly productive staff all of which will help you to achieve your business goals.
Employee incentive programs are one of the easiest ways to incentivize workforce
and motivation is the psychological catalyst employees and owners require to reach
goals. Organizations whose workforce is motivated show low levels of absenteeism,
low labor turnover, high labor productivity and good industrial relations.
Maslow's Hierarchy of Needs Theory

Maslow's theory is based on the fact that every individual has wants and needs and
will always want more and what they want depends upon what they already have.
Maslow then came up with a Hierarchy of needs theory as illustrated below

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Physiological needs are basic needs such as food, clothing and sleep which are
necessary for survival. These are the needs that people work for and want from
earning a salary.
Safety and security needs involve protection from danger e.g. job security, an orderly
working place, pleasant environment, pension and sick pay schemes.
Social needs are concerned with each individual's need for love and affection at
work. This involves a feeling of belonging and good relationships with colleagues
which comes from good communication, group and teamwork, social clubs and other
activities.

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Esteem and ego needs are based on individual's need for self-respect and to be
respected by others. These come from job titles, status, efforts, being noticed by
supervisors, tasks being delegated and prospects for promotion.
Self - actualization is concerned about the feeling of fulfilment, realizing one's

potential, achievement/ accomplishment and personal growth. This has been placed
at the top because such needs are never completely satisfied.
Maslow believed that individual needs start at a lower level (physiological). When
one need is satisfied then only individuals move onto the next level of needs. If one
level of the needs has been satisfied then that category of needs will become inferior
or less important.
Reversion is also possible e.g. if a businessman is working at self- esteem needs but
suddenly suffers a great financial loss he can come back to safety and security needs.
Maslow believed satisfied needs are non-motivators.
Limitations
 The theory is too rigid and not verified by research.
 Needs differ in individuals thus everyone has different need priorities.
 It is very difficult to determine whether a particular set of needs has been
satisfied or not.
 Money may be important not for basic needs only but also for higher levels
like status and self -esteem.
 Many people seek self - actualization by changing jobs.
Evaluation
Whichever Theory is preferred between Maslow's and Eldefer’s (ERG)

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E - Existence - physiological and safety needs.
R - Relatedness - the need for social relationships.
G - Growth - the need to develop and fulfil personal potential, it is important that
managers recognize that employees' basic needs must be met if they are to function
effectively and concentrate on the job itself rather than worrying about where the
next meal is coming from.
Herzberg's Two Factor Theory

This theory states that there are certain factors that cause job satisfaction while a
separate set of factors cause dissatisfaction. Herzberg's findings revealed that certain
characteristics of a job are consistently related to job satisfaction therefore he came
up with motivators and hygiene factors.
Motivators
 Achievement
 Recognition
 Work itself
 Responsibility
 Advancement
 Growth
Hygiene factors
 Company policies
 Supervision
 Relationship with supervisors and peers
 Work conditions

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 Salary
 Status
 Security
The conclusion he drew is that job satisfaction and job dissatisfaction are not
opposites. The opposite of satisfaction is no satisfaction. The opposite of
dissatisfaction is no dissatisfaction.
Remedying the causes of dissatisfaction will not create satisfaction nor will adding
the factors of job satisfaction eliminate job dissatisfaction. If you have a hostile work
environment giving someone a promotion will not make him or her satisfied. If you
create a healthy work environment but do not provide members of your team with
any of the satisfaction factors, the work they are doing will still not be satisfying.
What does this mean?
According to Herzberg, this means, the factors leading to job satisfaction are
"separate and distinct from those that lead to job dissatisfaction ". Therefore, if you
set about eliminating dissatisfying job factors you may create peace but not
necessarily enhance performance. This placates your workforce instead of actually
motivating them to improve performance.
The characteristics associated with job dissatisfaction are called hygiene factors.
When these are adequately addressed people will not be dissatisfied nor will they be
satisfied. If you want to motivate your team you then have to focus on satisfaction
factors like achievement, recognition and responsibility.
Herzberg says that if management fails to provide motivators it should at least

maintain provision of hygiene factors at work places.

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McClelland’s Three Needs Theory
McClelland's acquired needs theory states that an individual's specific needs are
acquired over time according to one's life experiences. He described three types of
motivational needs
1. Achievement motivation (Nach)
2. Authoriy/power motivation (Npow)
3. Affiliation motivation (Naffil)
Nach - the workers seek achievement, attainment of realistic but challenging goals
and advancement in the job. There is a strong need for feedback about achievement
and progress and a need for a sense of accomplishment. For such workers to excel
they tend to avoid both low-risk and high -risk situations. Achievers avoid low-risk
situations because the easily attained success is not a genuine achievement. In high
risk projects, achievers see the outcome as one of chance rather than one's own effort.
High Nach, individuals prefer work that has a moderate probability of success,
ideally a 50% chance. They prefer either to work alone or with other high achievers.
Npow is authority motivated who has the need for being influential effective and
make an impact. Strong need to lead and ideas to prevail. There is need to increase
personal status and prestige.
Naffil - has a need for friendly relationships and is motivated towards interaction
with others. Needs harmonious relationships with other people and need to feel
accepted by other people. This drive produces motivation and need to be liked and
held in popular regard (they are team players).

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High Naffil- tend to conform to the norms of their work group. They prefer work that
provides significant personal interaction. They perform well in customer service and
client interactions.
Interpretation of McClelland
 Most people possess and exhibit a combination of these characteristics.
 The mix of these affect the behavior and working and managing style of
people. According to McClelland training can help to shape one's needs.
 Workers with a greater Naffil affect the manager's decision- making
capabilities. The Npow workers attach themselves to leaders but are not good
leaders themselves but produce a determined work ethic and commitment to
the organization. These sometimes make good leaders though they have a
tendency to demand too much of their stuff in the belief that they are all similar
and highly achievement focused and results driven which of course most
people are not.
In summary, Nach type of workers should be given challenging projects with
reachable goals. Should be provided with frequent feedback. While money is not an
important motivator in itself.
Naffil type of workers need to perform best in a cooperative environment.
Npow type should be provided with the opportunity to manage others.
An Overview of Needs Theories
Maslow AL defer McClelland
Self-actualization needs Growth Achievement motive, Power

motive
Esteem needs
Social needs Relatedness Affiliate motive

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Safety needs Existence Avoidance Motives
Physiological needs
This comparison reveals that the theorists are basically arguing from the same ideas
of needs. It is the needs of people that needs fulfilment that drives them to work.
Equity Theory by Adam Stacey

It is about fairness between effort (inputs) and rewards. In other words, there should
be a sort of balance between the effort applied by employees and their rewards, the
greater the effort, the more the reward and this enhances motivation.
NB* the fairness of inputs and rewards of the company's employees is compared to
inputs and rewards of other people performing comparable tasks.
Equity exists when the ratio of one's outcome to his / her inputs equals to another
one's ratio Workers feel a sense of injustice if their efforts are not rewarded in
conformity with other people's rewards (relative to their efforts).
NB* Equity deals with comparisons of your own situation to the situation of others,
for example all teachers expect equal remuneration if there happens to be pay
differences some will feel demotivated.
A motivator is anything which arouses behavior.
If workers perceive that their rewards are higher than performance, they increase
their performance and vice versa.
If workers perceive that there is equity between their inputs and rewards they
maintain performance.

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Vroom's Expectancy Valence Theory
He argues that the drive to do something is determined by the attractiveness of the
outcome to the individual, that is, the importance the individual attaches to the
outcome.
Performance - Reward linked to it, that is, the degree to which the individual believes
that performing at a certain level will lead to attainment of the desired outcome.
Effort - performance linkage, that is, the probability assumed by the individuals that
exerting a given effort will lead to performance.
These three variables are summed up and give the following equation:
Motivational force (F) = V x E
Where:
 V is valence - the value of outcome.

 E is expectancy - the perceived likelihood of outcome.
 Effort is not sufficient, it has to be accompanied by ability and skill.
 Job satisfaction will result in effective job performance.
 Job design is of great importance.
Practical Motivation Methods
To be able to motivate workers today make sure you offer;
 fair pay and conditions

 a comfortable, safe, working environment
 opportunities for employees to socialize and make friends
 clearly defined work responsibilities and goals
 education and training opportunities

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 career opportunities
Practical Motivation techniques
 treat employees as individuals
 treat employees with respect
 provide opportunities for employee learning and development
 Make the workplace a funny place.
Motivation in practice
1. Job design - employees place high value on jobs that provide satisfaction are
challenging, provide growth and will allow adequate achievement opportunities.

Jobs can be redesigned to make them more challenging by using job rotation, job
enlargement or job enrichment.
2. Job rotation - allows employees to move through a variety of jobs, functions or

departments.
3. Job enlargement - allows jobs to become more desirable and challenging by

including new and more difficult tasks and granting an employee more
accountability.
Other aspects to consider are variable work schedules, flexible work schedules, job
sharing and telecommuting.
4. Entrepreneurial incentives - new ideas from employees can be developed within
the organization with the financial support of the organization. Such programs are
known as entrepreneurship which encourages employees to come up with new
suggestions and ideas.

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5. Training and Education - learning opportunities can be a strong motivational force
since they are critical to individual growth and opportunity. Organizations that
invest in the training and development of employees are generally more
successful. Training can be on-the-job or off-the-job.
6. Incentives and rewards for above average work performance are widely used to
drive results in organizations and they vary from cash, shares, profit sharing,
overseas visits and bonuses to trophies and certificates.
7. Empowerment and participation are two important methods of enhancing

employee motivation. Empowerment is the process of enabling employees to set
their own goals, make decisions and solve problems within their spheres of
responsibility and authority. Participation is the process of giving employees a
voice in making decisions about their own work.
8. Team building - the importance of good team working is widely recognized in
most organizations. Staff training and development frequently have team building
as one of their prime objectives. A good team will develop independence, self -
confidence, trust and tackle problems as a group.
9. Devising reward systems that are directly related to the expectancy theory of
motivation and the effect of the reward system on attitudes and employee behavior
should be fully investigated.
10. Create a culture of change - it has been discovered that motivation nowadays
is focused on quality of customer service and the capacity of workforce change
unlike leaning on motivating theories of the past. True change will only come
about when organizations motivate people to work by using the formula:

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Effective change = F (friendship, work, respect).
Financial and Non - financial Motivation Methods
The following are the financial motivation methods commonly used.

 Time rate / hourly wage rate
 Piece rate
 Salary
 Commissions
 Performance related pay
 Profit sharing
 Fringe benefits / perks.
Non- financial rewards
 Job enlargement
 Job rotation
 Job enrichment
 Team working
 Quality circles
 Target setting
 Delegation
 Recognition.
BUSINESS COMMUNICATION
Communication is the sharing of messages, facts, opinions, ideas and emotions
between a receiver and a sender. It can be oral, visual, printed, electronic,
diagrammatical or bodily.

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Communication in businesses takes place between workers themselves, workers and
management and management and various stakeholders.
Effective communication is when message is accurately sent, properly received and

understood as well as feedback provided.
Why do we need effective communication in businesses?

Good leaders motivate their subordinates through good communication as a result
productivity increase. Communication with various stakeholders such as suppliers
or creditors will increase profits in the organization. It also helps to solve problems
e.g. departmental conflicts that could be handled through meetings.
Two - way communication makes it easy to communicate change in an organization

and brings about co-ordination between people in various departments of the
organization.
Communication also helps to improve decision making and relationships at

workplaces (good industrial relations as well).
Communication Model Explained
Encoding is when the sender of the message tries to establish mutuality of meaning
with the receiver by the appropriate channel and medium or symbol of
communication.
Channel is means by which the information is transmitted.
Decoding refers to the situation whereby the receiver tries to deduce the meaning by
converting symbols into meaning.

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Feedback refers to situation where the receiver reports back to the sender or encoder
about the message communicated.
The Model
Sender/ Communicator
Tries to convey a message or idea to someone who understands it. Senders convey
messages through speech, the manner in which they speak, how they sound, their
appearance, actions and gestures to accompany their words. A message includes
conscious and unconscious elements. Senders as originators (sources) of messages
and when aiming to communicate effectively they should take care with choice of
words they wish to transmit, “Words have multiple meanings". In the interest of
effective communication this means message should be simple and clear.
Communication channel
The manner in which the message reaches the receiver. It may assume any form
perceptible, gestures must be seen and felt and the written word can be read. In the
channel there is noise, which is anything that interferes with the reception of the

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message. It can be something that distracts attention or competitive actions (such as
advertising) by other businesses.
Receiver
Communication only happens when there is a receiver of the message transmitted.
Messages can be received through sense of hearing, sight, smell and touch, not only
through spoken word. Receivers get both intentional and unintentional signals during
communication. Receivers facilitate effective communication by showing that the
signals have been received and understood.
Effective communication entails the sender's message being received unimpeded by

the recipient, in other words, the recipient grasps the message in accordance with the
sender's intention.
Because effective communication is so important in leadership, management should

be careful to remove all barriers to clarity such as insecure messages, language
difference, erroneous perception or doubts about the source of senders and all
possible ambiguities.
Management should promote effective communication by encouraging feedback by

using face to- face communication where practicable and by using simple language.
Message
This is the idea or information being transmitted. Two kinds of messages are verbal
(spoken or written) and non - verbal (that is all other forms by which information
can be conveyed such as symbols). Messages should make sense to both the sender
and the receiver, refer to a situation and system of values, simple to compose, carry

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the same meaning to the sender and the receiver. It should be sent via suitable
channels (e.g. radio, television, internet or newspapers)
However, the more effective channel for transmitting a message is face-to -face
communication because both words and gestures are combined in the message.
Feedback
The response of the receiver of the information that he or she has received and may
be verbal or non-verbal. In face- to- face communication feedback is received
instantly, the message can be reformulated if necessary, and questions may be asked
for elaboration and clarity.
Classification of Communication
(a) According to direction
1. Vertical communication - is when people from different levels of hierarchy

communicate with each other. It can be downward or upward communication.
2. Downward communication (from top to down, i.e. from management to

employees)
 it allows decisions by management to be carried out by employees

 ensures that action is consistent and coordinated
 reduces costs because fewer mistakes would be made
 Leads to greater effectiveness and profitability as a result of the above.
Upward Communication (from bottom to top i.e. from employees to management)
 helps management to understand employees' views and concerns

 helps to keep in touch with employees' attitudes and values better

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 can alert managers of impending problems
 Decision making by managers is made easier because feedback is provided
and in so doing worker participation is enhanced hence motivational.
 Provides feedback on the effectiveness of downward communication and how
it can be improved.
2. Horizontal Communication
It occurs along the organizational chart between people who have approximately the
same status but different areas of responsibility either through team meetings or
committees. It coordinates activities, helps solve problems and offer advice.
Common problems are;

 Different departments may not understand the culture, ways of working,
objectives, problems or technical language of other departments.
 The outlook and objectives of different departments may conflict.
(b) According to media
1. Oral Communication
Face -to- face communication which involves an oral message being between people
talking to each other.
Advantages are;
 allows new ideas to be generated
 it is direct
 easy to understand
 can be questioned quickly
 can be varied to suit needs of the receiver

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 sender can use body language / gestures
 It can bring motivation.
Disadvantages
 No written records
 Time consuming
 Body language may affect the message if improperly used
 People responding must be willing to participate and communicate
 Body language creates barriers.
2. Written Communication
This can be through notice boards, letters, memos, reports, diagrams and minutes of
a meeting which provide a permanent record and the transmission of complicated
data via diagrams.
Advantages
 The same message is sent to many people and is faster.
 It can deal with a large audience and is faster.
 Information exists in recorded form.
 It can act as a backup to complicated verbal communication.
Disadvantages
 No guarantee of receipt and of understanding
 It reduces participation
 It can result in ambiguity of written language without feedback.
3. Electronic Media

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It has the benefit of speed and can often be combined with written records. Internet,
e-mail use, intranets, (internal computer links), fax messenger, video conferencing
and mobile telephones.
Drawbacks
 It may require staff to be retrained.
 They reduce human contact and may lead to alienation.
 Can also lead to information overload as a result of speed and low
transmission costs.
 The equipment needed to facilitate communication is also very costly.
4. Visual Communication
 This can be used to accompany, oral, written or electronic messages.
 Diagrams, charts, pictures and pages of computer images can be used.
 Visual communication is usually used in training and in marketing programs.
Advantages
 More interaction
 needs active listening or attention
 Can be easily remembered.

Disadvantages
 Sometimes not clearly presented
 There may be varied interpretations unless someone guides listeners.
(c) According to degree of formality
1. Formal Communication

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This is the communication that takes place in the organizational set up which is
viewed to be official, planned and organized, for example, written communication,
meetings and memos are officially recognized by the organization and follow the
organization’s structure.
2. Informal Communication (grapevine)

It takes place in informal and interpersonal contacts among employees. The
communication is not part of the organization structure but exists as people socialize
at work. It can lead to rumors and exaggerations. It is unofficial, unplanned and
outside the organization’s formal channels.
a) One-way communication
It is communication that does not allow feedback from the receiver. The subordinates
just obey without feedback. It involves communication via notice boards and usually
no meetings. Is commonly used by autocratic leaders and does not motivate workers
because of the absence of consultations. It is characterized by conflicts, high labor
turnover, lack of motivation and reduction in productivity.
b) Two-way communication
There is room for feedback from the receiver and is associated with the democratic
leadership style. It also enables subordinates to contribute in decision making, for
example, by use of meetings, reports etc.
However, it is slow as compared to one -way communication and hence time

consuming.

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Barriers to Effective Communication
A barrier to communication is any factor that prevents a message from being
received or correctly understood. Barriers to effective communication can best be
grouped into:
(a) Physical barriers - often due to nature of the environment. These can be
distance, poor outdated equipment, background noise, poor lighting, environment
which is too hot or cold which affects people's morale or concentration which in turn
interferes with effective communication.
(b) System design faults - problems with the structure or systems in place in an
organization examples are an unclear organizational structure, unclear in the sense
that you don't know who communicates with whim, inefficient and inappropriate
information systems, lack of supervision or training, a lack of clarity in roles and
responsibilities which can lead to staff being uncertain about what is expected of
them.
(c) Attitudinal barriers - come about as a result of problems with staff in an

organization. Can be brought about by such factors as poor management, lack of
consultation with employees, personality conflicts which can result in people
delaying or refusing to communicate, the personal attitudes of individual employees
which may be due to lack of motivation or dissatisfaction at work brought about by
insufficient training to enable them to carry out particular tasks or just resistance to
change due to entrenched attitudes.
Overcoming Communication Barriers

 Use feedback or two - way communication.

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 Simplify language i.e. slang should be avoided in business communications -
look carefully at the audience.
 Active listening - listening with full meaning without making premature
judgments or interpretations.
 Constrain emotions - refrain from communication until one has gained
composure.
 Keep the communication channel as short as possible.
 Ensure the environment is free from noise and other hindrances.
 Ensure message is clear and precise.
 Be sensitive to the receiver's world.
Results of Communication Failure
 Poor decision making
 High levels of conflicts
 Poorly delegated tasks
 Failure to implement change and plans
 High levels of mistakes and errors
 Withdrawal of cooperation which may result in industrial actions and disputes
 Low morale
 Poor quality and shoddy work
 Lack of control.
Communication Networks
A network is a pattern of interconnected lines of communication. It is the system

where the message can flow in one direction or in several directions.

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 It represents a free flow of communication
 Every member is allowed to communicate freely with other members
 It provides highest satisfaction
 It is unstructured and informal
 Can provide best solutions to complex problems because workers are open to
one another
Disadvantages
It is slow and tends to disintegrate under the pressure to get the results when operated
in a group setting.

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This allows that each department can only communicate with two departments e.g.
A communicates with B or E and it is not possible with C. This type of
communication can occur between the middle managers from different departments
but at the same level of the organization.
Disadvantages
Decision-making can be slow or poor because of lack of coordination.

.
One person passes information to others who then pass it on. This approach tends
to be the formal approach adopted by hierarchical organizations such as civil service.
The main advantage is that there is a leader /coordinator at the top of the hierarchy
who can oversee communication downwards and upwards to different areas of the
business. One problem may be the isolation felt by those at the bottom of the
network. Their motivation may be less than others if they feel are alienated.

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A is the head office B, C, D, E are managers from different departments. There is a
person, group or department that occupies a central position. This network is
particularly good at solving problems.
It is a centralized form of communication. It combines the wheel and the chain
Communication. C passes information to A, B, D and E. Without C information will

not flow.
1. Explain any three qualities of a good leader. [3]
2 (a) Name any two methods of communication. [2]

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(b) Discuss the impact of informal communication to a clothing manufacturing
firm. [4]
3. Explain what Maslow meant by self - actualization and why he placed it at the top
of his pyramid of needs. [3]
4. Comment on Herzberg's ideas on motivation. [5]
5. Distinguish between democratic and autocratic forms of leadership in an

organization. [4]
6. Explain what you understand by the ' exploitative - authoritative system' in
leadership study. [4]
7. Explain the circumstances in which an autocratic management style may be
appropriate. [4]
8 (a) Show the importance of downward communication in an organization. [4]
(b) How useful is oral communication within a business? [4]
9. How do the following non- financial factors motivate staff?
(a) Team- working [2]
(b) Training [2]
10. Explain the importance of effective communication in an organization. [4]

11 (a) what is meant by the following terms?
(i) Grapevine, [2]
(ii) Leadership [2]
(b) Outline the advantages of an ' all - channel network '. [4]
12. Does job rotation really motivate workers? [2]
Essay questions
1. Evaluate the contribution made by early management theorists to modern day
management approaches. (25)

160
2. The directors of Sustain Restaurant are proposing to undertake a major expansion
of the restaurant. Evaluate the methods that management might use to motivate its
staff to accept the heavier workload. (25)
3. Discuss the barriers to effective communication and suggest solutions to those
barriers. (25)
4 (a) Discuss the effectiveness of an autocratic leadership style to a large business
organization
(10)
b) Evaluate the appropriateness of schemes management might implement to
involve workers in decision making. (15)
5. With reference to Taylor and Herzberg's motivation theories, evaluate the
importance of financial incentives as a way of improving the productivity of shop
floor workers. (25)
6 (a) Explain the criteria that a business might use to assess the effectiveness of its
communication systems. (12)
b) Critically examine the importance of informal communication to businesses.
(13)
7 (a) Why is it important for a business to have a well-motivated workforce? (10)
b) Evaluate strategies businesses may use to encourage effective communication.

(15)
TOPIC 5: MARKETING MANAGEMENT

Objectives
 Define marketing and the marketing concept.
 Explain the marketing mix variables.

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 Explain the relationship between marketing and other functions of the
business.
 Evaluate the relative advantages of mass and niche marketing.
 Assess the significance of market segmentation.
 Explain the concept of market research and its implications on businesses.
 Analyze business forecasting.
 Evaluate time series analysis.
Marketing is defined as the management process responsible for identifying,

anticipating and satisfying the requirements of customers profitably. It consists of
management tasks and decisions directed at successfully meeting opportunities and
threats in a dynamic environment by effectively developing and transferring a need
satisfying market offering to consumers in such a way that the objectives of the
business, the consumer and society will be achieved.
Evolution of Marketing
Before the industrial revolution households were mainly self- sufficient, goods were
produced mainly for barter trade. Trade or barter was made easy by the introduction
of money as a medium of exchange. When distance increased between producers
and their markets intermediaries became important and some could use carts to go
around selling goods.
However, the industrial revolution produced machinery that could mass produce
products and management approaches to the marketing function gradually changed,
hence approaches to marketing have to be understood such as;

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(a) Production oriented
Emphasis was on production and solving operations problems i.e. firms concentrated
on efficient, low cost production in the hope that the goods will find a market. There
was little response to consumer needs.
(b) Product oriented

Assumption was that supplier knows best. High quality goods were produced
expecting that customers will like them and buy them.
(c) Sales oriented

Concentration was on advertising (persuasive) in trying to coerce customers to buy
more quantities of the products (excessive promotion) and this led to high sales costs
as a result management was compelled, in the face of increased competition, to look
for more productive marketing methods. This led to the idea that products should be
marketed instead of merely sold. Hence to quote Levit,"Selling tries to get the
customer to want what the company has; marketing on the other hand, tries to get
the company to produce what the customer wants".
Drucker also said the aim of marketing is to know and understand the customer so
well that the product offering or service fits the customer and sells itself.
(d) Marketing oriented

Means that not only the sales message and the price of the product have to be
considered but also the quality of the product, the packaging, and the choice of
distribution channels and the methods of informing potential consumers about the
market offering. It starts with the customer needs hence the firm produces what
customer wants not what the firm wants to produce. Customer is placed at the
center this means, “Customer is king.” It also realized that all functional

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departments must join forces to ensure the successful marketing of the business
products.
(e) Consumer oriented

What resulted from increased competition was the realization that to beat
competition consumer demand now become clear, so decisions about a product's
attributes and quality, its packaging, the choice of the brand, the type of distribution
outlet (store), the price and marketing communication methods should all be based
on consumer needs, demands and preferences.
(f) Strategic approach

Because of continued changes in the marketing environment and the need for the
survival and growth of the business, attention is focused on strategic long -term
issues and environmental scanning. Scanning identifies environmental changes such
as technological innovation, economic influences, cyclical movements (growth
periods followed by recessions), political factors, increasing competition,
demographic aspects and changing consumer tastes or preferences.
Components of this strategy can be identified as:

 Market research
 Product planning and development
 Pricing
 Distribution
 Promotion
g) Relationship marketing

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These are long-term relationships with persons and institutions in the environment
in which the marketing task has to be performed, which leads to loyalty, repeat
purchases, availability of raw materials and inventory.
E - Marketing
Also known as internet marketing, web marketing, digital marketing or online
marketing and also include marketing done via e-mail and wireless media. It
therefore refers to advertising and marketing efforts that use the web and e-mail to
drive direct sales via electronic commerce, in addition to sales leads from websites
or emails.
E-marketing means using digital technologies such as websites mobile devices and
social networking to help reach your customers, create awareness of your brand
and sell your goods or services. The basis of marketing remains the same - creating
a strategy to deliver the right messages to the right people.
E- Markets are open to several buyers and several sellers, it is a trading platform.
The e- market itself does not sell nor buy goods or services traded on the platform
but has at least one trading function. Online marketing strategies include;
 Personal branding. Successful businesses can generate a ton of momentum

from successful entrepreneurs who lead them.
 contact marketing
 search engine optimization (SEO)
 Conversation optimization
 Social media marketing
 email marketing

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Marketing and other functions
Marketing does not dictate policy or operations of the business, it provides the
organization with forecasts and estimates of sales volume, profitability and market
potentials as well as the limitations imposed by the company resources and policies.
It has an overriding responsibility which cuts the entire organization, providing an

information base from which goals and schedules of all functions are determined.
An effective working relationship between marketing and other functional areas of

the business is vital for success. It represents the interests of the customer.
Marketing and production

Before production, marketing should provide accurate and timely information to the
design and production department about the nature of needs, tastes and preferences
of the customer. That information will form the basis of production planning.
Sales forecasts and estimates of the market demand are essential for production
planning, thus marketing should produce correct estimates, assess target market's
attitude towards a product.
After purchase marketing must monitor customer attitudes to the company's

products, any adverse comments or complaints from consumers must be noticed and
passed back to the production department for action.
It is usual for the manufacturing department to produce a quantity to be introduced

to the customer (prototype) on a sample basis to determine the taste or demand or
flaws so that raw materials are not wasted in producing products which customers
do not want.

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Marketing helps the level of production and standard of a product. The level of
production once determined should be maintained in accordance with the future
demand.
Marketing helps improving production methods. Through the research unit, constant
experimenting with new processes and even with new materials may lead to the
improvement of production methods.
It is important that the marketing department should fully be aware of the progress
being made by the experimental unit, for the successful results of experiments which
will become the selling products of the future.
Marketing and Finance

This relationship is important for provision of cost information for pricing decisions,
forecast level of sales, market share objectives and competitor prices.
Clear objectives of sales force activities and forecasts assists in measuring the
efficiency of the members of the sales team.
The finance function is required to provide information which will enable marketing
and sales to assess the cost effectiveness of the team e.g. Information on the
following factors;
 total selling costs

 breaking down of total costs by salaries, commissions and expenses
 details of costs incurred by each sales person
This information makes it possible to calculate;
 average costs

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 sales costs by territory (target market)
 trends in direct and indirect costs.
This means marketing and finance must work together as a team to achieve effective
sales control. Decisions on credit and discounts should also be done together by
finance and marketing departments.
Market Analysis
The activity of gathering information about conditions that affect a market place is
called market analysis. A market analysis studies the attractiveness and the dynamics
of a special market within a special industry. It is part of the industry analysis and
thus in terms of the global environmental analysis it is usually achieved by carrying
out a SWOT analysis. It also helps to determine how suitable a particular market is
for an industry. It can be used to evaluate a current market or look at new markets.
Market size
This is the measurement of the total volume of a given market. In order to determine
a market size;
 understand market potential

 estimate the market size
 define the target customer
 estimate the number of target customers
 determine the penetration rate
 Calculate the potential market size, volume and value.
 Apply the market size data.

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Market size can be viewed in terms of Total Available Market (TAM), Served
Available Market (SAM) and Share of Market (SOM). If we take example of food
packaging, the total available market can be calculated by adding sales of food
packaging producers in a particular geographic region or market segment.
Market Share
A percentage of total sales volume in a market captured by a brand, product or

company. Market share represents the percentage of an industry or market's total
sales that is earned by a particular company over a specified time period. Market
share is calculated by taking the company's sales over the period and dividing it by
the total sales of the industry over the same period. Its importance is to get a general
idea of the size of a company relative to the industry e.g. If a company has 25% of
sales in a market with overall sales of the industry being 75%. Its market share is
thus:
25% ÷ 75% = 0.333
Then multiply the result by 100 to find the company's relative market share expressed
as percentage.
A company can increase market share through innovation, strengthening customer

relationships, hiring practices and acquiring competitors (takeover or mergers).
Market share is often associated with profitability and thus many firms seek to
increase their sales relative to competitors’. Economies of scale - higher volumes of
sales and product offering can be instrumental in developing a cost advantage in the
market.

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Competitors
Any person or entity which is a rival against another. In business, a company in the
same industry or a similar industry which offers a similar product or service is a
competitor. The presence of one or more competitors can reduce prices of goods and
services as the companies attempt to gain a larger market share.
Competitor analysis involves looking closely at competitor's market position, market

shares, strengths and weaknesses.
Market Location
Any application or service or campaign that incorporates the use of geographic

location to deliver or enhance marketing message or service. It is associated with
geographical pricing i.e. Adjusting an item's sales price based on the buyer's
location. Sometimes the difference in sales prices is based on the cost to ship the
item to that location or what the people there are willing to pay.
Market Segmentation
The process of dividing the total heterogeneous market for a product or service into
several segments, each of which turns to be homogeneous in all significant aspects.
A marketer cannot usually afford to tailor- make a different product or service for
every single customer thus marketers adopt some form of market segmentation as a
strategy in order to compromise between extremes of one product or service for all
and a different one for each customer.

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A major key to a company's success is its ability to select the most effective location
between the two extremes on this segmentation spectrum. The concept of market
segmentation is based upon three propositions that;
 The consumers are different.

 Differences in customers' needs are related to differences in market demand.
 Segments of customers can be identified with the overall market.
The company can segment its markets in many different ways and the basis for
segmentation vary from one product to another. The commonly used basis for
segmenting the consumer markets may be grouped into the following four
categories;
 Geographic (region, size of city, density, climate)

 Demographic (age, gender, family size, income, occupation)
 Psychographic (lifestyle, personality, social class)
 Behavioral (behavior towards the product e.g. benefits sought, loyalty).
Management selects one or more of these segments as the organization’s target
market and finally a separate market mix is developed for each segment or group of
segments in the target market.
Advantages of research in market segments

 Attitudes and preferences of specific goods and brands can be ascertained
 Innovation can be planned well in advance
 Company strengths and weaknesses in each segment can be measured
 Promotional activity can be directed to a specific target market
 Marketing objectives are set more specifically and realistically

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 Market segmentation analysis helps in decision- making on the needs for new
product development and line extensions.
Demerits
 Can be expensive in terms of production and marketing of products.
 Production costs will rise because a variety of models, colors and sizes must
be produced.
 Inventory costs will similarly increase.
 Promotion costs will rise because different advertisements may be needed for
different segments.
 Administration costs increase when several different marketing programs are
in place.
Requirements for Effective Segmentation
1. Identifiability and differentiable - segments are distinguished to create groups.
2. Accessibility - segment should be effectively reached and served.
3. Viability or actionable - effective programs can be designed for attracting and

serving the segment.
4. Substantialness - big enough to make profitable exploitation possible.
5. Measurability - the size, purchasing power and profiles of segments should be

measurable.
6. Responsiveness
7. Profitability
Niche vs. Mass Marketing
 A niche market is the subset of the market on which a specific product is

focused. The market niche defines the product features aimed at satisfying
specific market needs as well as the price range, production quality and the
demographics that is intended to impact. It is also a small market segment.

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 In niche marketing therefore, marketers identify a specific segment of an
overall market and then tailor - make a marketing plan to the habits and
preferences of that market segment.
 Niche marketing is the best approach to marketing which may be used by
small firms. The small business does not want to compete against a large
competitor but rather to concentrate on a small geographic area in which a
large competitor is not well represented.
An attractive niche is characterized as follows;
 The customers in the niche have a distinct set of needs - they will pay a
premium to the firm that best satisfies their needs. The niche is not likely to
attract other competitors.
 The nicker gains certain economies of scale through specialization and the
niche has size, profit and growth potential.
 Whereas segments are fairly large and normally attract several competitors,
niches are fairly small and normally attract one or two competitors.
 Large companies such as Johnson & Johnson have turned to niche marketing.
Niche marketers presumably understand their customer's needs so well that
the customers willingly pay a premium.
In mass marketing the seller engages in the mass production, mass distribution and
mass promotion of one product for all buyers. Arguments for mass marketing are
that, it creates the largest potential market which leads to the lowest costs being
incurred, which in turn leads to lower prices and or higher profit margins.
However increased splintering (segmentation) of the market makes mass marketing

more difficult and proliferation of advertising media and distribution channels is
making it difficult and increasingly expensive to reach mass media, thus mass
marketing is dying and many companies are turning to micro - marketing at one of
the four levels which are;

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 Segments
 Niches
 Local area
 Individual
Local Area
Target marketing is leading to marketing programs tailored to the needs and wants
of local customer groups (trading areas, neighborhoods or even individual stores).
Those favoring local area marketing see national advertising as wasteful because it
fails to address local needs. Those against local area marketing argue that it drives
up manufacturing and marketing costs by reducing economies of scale. Logistical
problems become magnified when companies try to meet local requirements. A
brand's overall image might be diluted if the product and message differ in different
localities.
Individual Marketing
The ultimate level segmentation leads to segments of "one" customized marketing

or one - to - one marketing based on the idea that every individual has a unique set
of wants and preferences.
Related to these concepts are:

a) Mass customization which is the ability of the company to prepare on a mass
basis individually designed products, services, programs and communications to
meet each customer requirements. Customers now use the internet to order goods
and services (e-commerce).

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b) Customerisation which combines operationally driven mass customization in
a way that empowers consumers to design the products and service offerings of their
choice.
Target marketing
The firm decides to serve a set of buyers sharing common needs and characteristics
providing goods or services for a specific group of customers for example, women
in a city, children in an area or working -class men because customers have unique
needs and wants. A seller could patiently view each customer as a separate target
market hence a target market is a group of consumers most likely to use a company's
product. These consumers have similar interests or hobbies, beliefs and usage
patterns.
Advantages of target marketing

 Marketers can better match marketing strategies with core customers.
 It leads to identification of niche markets.
 It allows the organization to be highly competitive.
 The firm will be able to develop the products which meet the customer's
requirements.
Disadvantages
 It takes a considerable amount of time to identify and target customers.
 It is expensive and high costs are incurred by primary research.
 May result in omission of other customers.

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 Ethical considerations, exploitation of less educated, poor people by selling
bigger and more expensive items e.g. selling of quarts at a beer hall that those
with little money cannot buy.
Mass Marketing (undifferentiated marketing)
It is a market coverage strategy in which a firm decides to ignore market segment

differences and go after the whole market with one offering. It can mean advertising
or promotion of products to a larger number of customers. It offers a single mix to
the heterogeneous market.
Advantages of mass
marketing
 Maximizes income.
 Allows brands to be
used to their full
value
 Focuses on high sales and low costs.
 Easier to organize and control rather than operating in many segments with a
variety of products.
 Facilitates choice maximization.
 There is less shortage of goods hence high customer loyalty.
 Production costs per unit are lower.
Disadvantages
 There is limited market orientation of goods to the market.
 High development costs of the product as it will be sold to different customers.

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 High levels of competition.
 Failure might lead to wastages of resources and loss of sales.
Niche marketing (concentrated marketing)
A marketing coverage strategy in which a firm goes after a large share of one or few
segments or niches. A particular segment is targeted.
Advantages of niche marketing

 Less competition as they are small and attracted to fewer competitors.
 Brand loyalty increases.
 Increases business income.
 Helps a firm achieve strong market position because of its greater knowledge
of customer needs.
 It can market efficiently, targeting its products, prices, channels and
communication (marketing mix) programs towards consumers it can serve
best and profitably.
 Cost reduction strategies.
Disadvantages of niche marketing
 If the segment turns sour e.g. consumer tastes and preferences suddenly
change the firm suffers greatly.
 Large competitors may decide to enter the same segment with greater
resources causing stiff competition.
 The firm may fail to properly segment the market.
MARKETING RESEARCH
The systematic gathering, analysis and interpretation of information on all types of
marketing problems by utilizing recognized scientific methods for the accumulation
of information to facilitate market management's decision-making. The term is used

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interchangeably with market research. Marketing research is used to obtain relevant
information on the market, competitors and other environmental changes. By means
of marketing research, management receives feedback from the market and the
environment.
Marketing managers purposely gather information on external environmental

variables and on internal resources in the form of reports on among others, current
prices, sales figures, market trends, technological changes, changes in market share,
consumer preferences, new legislation, production schedules and internal financial
problems. This information is then systematized and classified in a way that is easily
accessible to marketing managers.
The Scope of Marketing Research

Marketing research is a formalized intelligence system of collecting, analyzing and
interpreting market data to provide correct guidance or the effective control of the
marketing function. Raw data must be translated and processed to be meaningful and
useful. It does not only deal with the objectivity of facts and statistics but also with
the subjectivity of attitudes, assumptions and opinions.
Marketing research allows a truly analytical approach to decision- making on

potential markets and evaluation of decisions already implemented. The main
divisions of marketing research are:
 product research
 sales research
 customer research
 promotional research

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 market research
The Purpose of Market Research
 Risk reducing activity.

 Aids the development of successful new products and the most effective way
to market them.
 Understanding what motivates the customers to purchase products and find
out or advice on promotional campaigns.
Types of Research (types of data collected)
1. Qualitative Research
This is in-depth research into motivations behind consumer behavior and attitudes.
It gives information on consumer tastes and preferences and purchasing habits.
Although this is inevitably subjective, it provides insight into consumer behavior to
complement quantitative data. Qualitative data is non - quantifiable. It is data which
cannot be expressed in numerical terms. It is usually done by a focus group.
2. Quantitative Research
Concentrates on factual information such as market share, probable level of sales at
a given price and ways in which a market can be segmented. In essence, this relates
to who buys the product and how much they can buy of that product. It is also
concerned about the reasons for customers buying certain commodities.
Techniques of quantitative research include surveys (face-to-face), by post or

telephone. Quantitative data is data that can be mathematically quantified or that can
easily be expressed in numerical terms. Data is objective (free from bias) because it
depends on empirical evidence or measurements. It normally includes data about the
level of demand, the time the customers buy the goods in a day.

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Differences between qualitative and quantitative research
Qualitative Research Quantitative Research
Data is non – Data can be expressed numerically

quantifiable
Subjective Objective
Requires interviewers Few interviews and special skills required

with special skills
Sample sizes usually Sample sizes usually large

small
The Marketing Research Process
Step 1: Define the problem

 Outline the objectives which should be specific, measurable, and attainable,
realistic and should be time specific (SMART).
 Make decision alternatives (hypothesizing) assumptions.
 The problem should not be defined narrowly or broadly.
 A hypothesis that is to be tested is the beginning of the research problem

Step 2: Investigation of the secondary source/Developing a research
plan
There should be an efficient plan for gathering information.
 Costs of a research plan before approving it should be known.
 Designing a research plan calls for decisions on the data sources or research
approaches, research instruments, sampling plan and contact methods.
Data sources

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Secondary data is data that we collect from existing print information (media) such
as newspapers, previously done research projects and journals. Primary data is data
freshly gathered for a specific purpose and problem. When secondary data is
outdated, inaccurate, incomplete or unreliable, the researchers resort to primary data.
During primary data collection, the normal procedure is to interview some
respondents individually or in groups in order to get a sense on how people feel about
the topic in question and develop a formal research instrument, debug it and carry it
in the field.
Desk research is another way of collecting secondary data and it is cheaper than
primary research. However secondary data collection should be handled with care
otherwise what its focus was differs from that of the research problem at hand.
Research Approaches (Techniques for field research)
1. Observations
Rather than asking consumers about their behavior, market researchers can observe
how consumers behave. Observations take the form of audits (such as stock take),
recording things and watching. Observers can be employed to watch the behavior in
shops and how consumers use the product after purchasing it.
Advantages of observations
 Allow researchers to record behavior as it occurs and does not rely on people's
memories and previous reports of their behaviors.
Very large amounts of data are collected.
 Groups unable to give verbal responses are considered e.g. infants and
animals.
Disadvantages

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 Results may not be representative of reality if those being observed know it.
 Not easy to predict when an event happens hence researchers cannot record
behavior as it actually happens.
 It is limited to certain situations e.g. one cannot obtain the life history of an
individual through observations.
 It creates many unanswerable questions e.g. the reasons for a customer to
behave that way.
2. Experiments
Are used to test and assess the response of consumers to changes in marketing mix.
This might involve changes in the product or packaging, advertising, price and
distribution arrangements.
Advantages of experiments
1. reduce the risk of product failure, for example, if the product is introduced to
test consumer reactions and the consumers accept the product, then the
company can go on to launch the product on a national scale
(commercialization).
2. More reliable data is gathered which is more objective since the consumer
reaction provides a guideline to the sources of the product.
3. It is the only technique that explains why consumers behave in a certain way
or why the product of the company fails or succeeds, for example, a product
may fail as a result of price increases, lack of effective advertising and so on.
4. More abundant information may be gathered and the technique is less costly
compared to observations.
Disadvantages of experiments
 Require employment, hiring of highly experienced researchers good at
carrying out field experiments, which is costly.
 Most information collected is quantitative and such information is ignored if
experiments are not properly implemented.

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 Collect forecasts on data and not historical data.
 May not sometimes reflect the truth of an experimental result about
what caused changes in the marketing of a product e.g. a decline in sales might
have been caused by other factors like inflation.
 Time consuming.
3. Test Marketing
It is an experiment with the actual product. It involves a limited launch of a product

to test reaction, both to the product and the way in which it is marketed. A prototype
is normally produced for the purpose.
Advantages of test marketing

 Reduces marketing costs since it is tested on a small sample of the population.
 Allows the firm to know the likely reaction of customers before launching
their product.
Disadvantages of test marketing
 Its accuracy depends on the choice of participants.

 There is a difficulty of controlling random variables such as weather
conditions or the mood of participants.
4. Focus groups
Involve a group discussion in which people are free to express views and opinions
on a selected subject.
 The technique is used as a means of determining both overt and subconscious

attitudes and motivations.
 This means the researcher becomes the leader of the group while consumers
contribute their views and participate in provision of market data.

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 The researcher selects a specific marketing topic, for example, issues about
the product quality or utility rate.
 The researcher also participates and contributes his opinions.
Advantages of focus groups
 A lot of data is collected since a focus group becomes a source of different
views from consumers.
Less bias since researcher is involved.
 Very cheap to administer and easy to use.
 Researcher gets actual and more reliable information from the consumers.
Disadvantages
 Time consuming.
 May result in conflicts between different consumers which may affect the
results.
 Reliability of information is limited due to no guarantee that each and every
individual will participate.
 Ineffective because some consumers may be shy to give out information.
 Biased since researcher actually puts his contribution including opinions and
conclusions.
 Talkative consumers may dominate the discussion and influence results.
 Demotivating to consumers whose ideas have been left out.
5. Surveys
 Involve gathering of data by use of survey questions.

 The researcher asks questions about a certain marketing problem and the
consumers respond to the questions.
 The researcher has to record all the answers to the questions asked.

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 Surveys are delivered in form of; personal interviews, telephone surveys,
postal surveys, panel surveys and group interviews.
Face - to - face (interview survey)
This is a face- to- face research in which the researcher collects the data directly from
the target source of information by asking questions directly to the consumers who
then provide immediate answers. It is more like a discussion which involves an
interview between two people at one time, that is, interviewer and interviewee.
Advantages of face- to- face

 First-hand information is gathered since it is collected from the field.
 Immediate responses are obtained and means it may be quick to implement.
Cheaper as compared to telephone and postal surveys.
 Interviewee can ask questions for clarification in case of ambiguities.
 Quantitative information can be gathered which is vital when making
marketing decisions.
 Observation of reactions is possible.
 Is flexible.
 Visual materials can be used.
Disadvantages of face -to -face
 Biased information can be collected since researcher asks questions in the way
he expects them to be answered.
 Information from interviewees can be exaggerated in order to give a positive
impression.
 It is time consuming if researcher lacks skills to control the respondents.
 Surveys limit collection of quantifiable data.
 Is more demanding in terms of resources, techniques and time?

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 It is difficult to sample a scattered population.
6. Panel Surveys
This is whereby the opinions and behaviors of a representative group of people is

obtained.
Advantages of panel surveys

 Members are cooperative
 Panel members know procedures and time is saved
 Trends over time can be reviewed
 Appointments avoid the expense of retrials.
 Control groups can be formed
Disadvantages
 Panel members tend not to be representative of the sample
 Panel sophistication develops
 Panel surveys may lead to the collection of false information since the
interviewees have high chances to lie given that the interviewer is
absent.
Research Instruments
(a) Questionnaires
Consist of a set of questions presented to respondents. It is very flexible. Careful
designing of questions is needed. There are closed - end and open-end questions.
Closed-end questions specify all the possible answers and provides answers that are
easier to interpret and tabulate. Open - end questions allow respondents to answer in
their own wording and often reveal more about how people think. They are useful in
exploratory research, where the researcher looks for insight on how consumers think
rather than measuring how many consumers think in a certain way.

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Advantages of questionnaires
 Elimination of interview bias.
 Allows collection of more information since many questions are asked and
responses given.
 Suitable for large samples hence easy to administer
 Reliable and relevant since respondents willingly give information at their
own pace.
Disadvantages
 Time consuming to collect data.
 Tendency of providing false information since respondents are not monitored.
 Not all people have time to complete questionnaires.
 Poor research questions may compromise the results of research.
 No room for respondents to ask further questions or get elaborations.
 Problems of non- returns on questionnaires.
Characteristics of a good questionnaire
 Must be as short as possible to avoid confusion and promote completion.
Must be straight to the point.
 Should include open - ended and close - ended questions.
 Misleading questions should be avoided.
(b) Psychological tools
In-depth interviews, laddering techniques, Rorschach test etc.
 Laddering involves asking a male consumer why he wants to purchase a

certain product.

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 In-depth interviews involve going deeply into the thoughts that an individual
has about a product.
 Rorschach test involves asking people to make models of what they feel under
different circumstances, subjects state what they see in the inkblot.
(c) Mechanical Devices
Galvanometers are meters for detecting or comparing or measuring small electric

currents. They are used to measure interest or emotions aroused by exposure to a
specific advertisement or picture or video. Respondents are asked to tell (recall) what
they feel about the video or picture.
(d) Qualitative Measures
Involves interviewing respondents face- to -face. They include;
 Consumer prototyping - attempts to paint a realistic portrait of an individual

by describing a specific customer type in qualitative terms. When the process
is repeated until prototypes begin to overlap this describes the target
consumers.
 Particulate interviewing - is designed to determine what social values
interviewees hold strongly by having them talk about broad topics such as
their various roles in life and their daily activities. This enables the marketer
to draw out relevant information and interviewee is likely to reveal valuable
information regarding core beliefs and other social factors that may influence
product buying decisions.
Sampling Methods
A sample is part of the population chosen to represent the whole population. It is a
systematic process of collecting and selecting a representative from the total
population with the belief that the representative will bear true characteristics of the
whole population. It is a process of selecting variables from the population with the

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idea that the selected variables will give true information about all the variables of
the population. It is a technique of selecting a portion of the population that the
researcher wishes to study.
Population refers to the total number of variables from which representatives are
chosen.
Sampling is a process of selecting part of the population whereas a sample is a part

of the population.
Advantages of sampling
 reduces costs of having to survey the whole population
 saves time
 requires fewer resources as compared to a census
 is more reliable as there is a concentration on fewer units
is less complicated than a census.
Disadvantages of sampling
 Sampling error - a sample is always likely to differ from the population to
some extent.
 Substitution problem - what can the investigator do when a certain element in

a sample is not available for investigation?
 Convenience versus representativeness - a good sample is one which is

representative of the total population. The larger the sample, the more
representative it is more likely to be.
As convenience increases representativeness is likely to decrease.
Sampling methods are divided into two groups;

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 Probability sampling
 Non - Probability sampling
Probability sampling
These are the techniques that are used to identify the representative sample from
which the research data is collected. They are constructed such that every member
of the population has a known probability (chance) in the selection. It requires the
use of a sampling frame, that is, a complete list or identification of the population.
Random sampling technique

This is a probability sampling technique in which every variable in the population
has a chance of being chosen or not. Each variable in the population has an equal
chance of being selected or not being selected. Variables are selected on a haphazard
process which can be done by pulling names out of a hat or using a computer to
generate random numbers.
Advantages of random sampling

 An easy method when gathering research data compared to other techniques
such as stratified sampling.
 Reduces costs meaning that the research costs can be minimized instead of
dealing with the whole population.
 It saves time.
 Reduces interviewer bias and research data is most likely to be reliable.
Disadvantages of Random Sampling
 May not disclose true information about the true characteristics of the whole
population since only a few individuals are chosen.
 Individuals left may be the ones with relevant data.

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 With random sampling there is a slight degree of bias if not properly
implemented.
 Is very difficult to use while the population is very large to the extent that
selecting a random sample is almost impossible.
Systematic Sampling
This is a sampling technique in which the researchers determine the sample by first
predetermining the starting point and then use a systematic process to collect
variables constituting a sample. Systematic sampling enables the researchers to have
a starting point and then select every nth term in the order.
Advantages of systematic sampling

 May reduce the level of interviewer bias since variables from which data is to
be collected is chosen systematically or using a known method.
 It is a fast way of gathering data especially when dealing with large
populations.
 It reduces costs incurred when researching from marketing data.
 Saves time needed to gather data.
Disadvantages of systematic sampling
 element of subjectivity will not be eliminated given that the researcher already
knows the variables which can be selected and the method can be twisted so
that it will suit the researcher's expectation.
 Important information can be missed from variables skipped while selected
variables might have less relevant information.
 Requires the use of sampling frames which may not be readily available.
 It is difficult to exactly know where to start at and what interval to select the
variable from.
Stratified Random Sampling

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It is the sampling technique in which the population under study is divided into
several strata or classes. It involves dividing the population under study into
subgroups according to different characteristics such as age, sex, status, income,
location and lifestyle. From these strata established, variables are then randomly
chosen or selected. Random samples from various categories provide research data.
Advantages of Stratified Random Sampling technique

 More accurate information is collected as compared to other techniques such
as random sampling.
 Considers individual differences compared to random sampling and it gives
more relevant information.
 Data collected is more reliable since uniformity in variables is taken into
consideration.
 Reduces level of human subjectivity since the population is first stratified and
then random samples are selected from different strata.
Disadvantages of stratified sampling
 It increases the workload as compared to random sampling.
 Time consuming because a lot of processes are involved so as to identify the
samples.
 Like other probability sampling techniques, it needs to use a sampling frame
and it may not be easily available.
 May be costly when compared to other techniques.
Non - Probability sampling techniques
These are sampling techniques in which variables under study have no probability
of being selected. It involves the use of methods to select variables which will make
a research sample.

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Cluster sampling technique
It is whereby the research samples are organized into clusters. It involves the use of
sampling frames from which individuals making up clusters are selected. Individual
variables are organized into clusters as they are identified from sample frame list.
Advantages of cluster Sampling

 Normally used when the researcher does not have the entire set of variables
making up a sampling frame.
 Normally used with random sampling technique to increase accuracy of data
collected.
 Can also be used when the population is dispersed or scattered.
 Minimizes research costs.
 It also reduces time wastages in research.
Disadvantages of cluster Sampling
 Difficulty to use in the absence of a sampling frame.
 Increases a lot of work to researcher’s e.g. There is need to randomly select
variables from the sampling frame.
 It cannot be effective on its own but it needs to be incorporated with other
random sampling techniques.
Quota Sampling
It is when the population under study is divided into subgroups. The variables are
grouped according to different characteristics such as age, sex, etc. The population
is divided just as in stratified sampling. Individuals in the same group are then
selected on a random basis but are selected using a known method.
Advantages of quota sampling

 It is more reliable, as more accurate information is collected.

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 It covers the weaknesses faced in random sampling whereby individuals are
selected on a random basis.
 It considers differences between variables in a population and therefore more
relevant data is collected.
Disadvantages of quota sampling
 It is time consuming since a number of processes are involved in determining
the sample.
 It involves some elements of human judgment and this may introduce some
bias in the research.
 It is very expensive compared to other techniques.
 It requires high level of mental reasoning and skills and therefore it requires
high experienced researchers.
Multi-stage sampling technique
It is a sampling technique whereby variables are selected as many times as possible

from different stages, for example, samples can be selected at rural level, provincial
level, district level etc. Samples collected at various stages are then interviewed. It
works in conjunction with cluster sampling technique.
Advantages of multi-stage sampling

 It provides more accurate data since samples are collected at many levels.
 Data collected will be more reliable and relevant.
 It can be used to counter the weaknesses of other methods of sampling.
Disadvantages of multi-stage sampling
 It is a more time-consuming method of sampling.
 It increases the amount of work involved when researching.

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 It also includes elements of human judgment since variables are selected using
a known method.
 It includes allocation of a lot of resources since samples are collected at many
stages and this increases costs.
Step 3: Collection of the information
Most expensive and prone to errors. Some respondents would not be available and
must be reconnected or replaced. Others will refuse to cooperate (give excuses).
Others give biased information or dishonest responses. Some interviewers will be
biased and dishonest. However, data collection is improving due to the use of
computers and telecommunications so that interviews are performed at a centralized
location. Rapidity of information gathering saves time and is less biased, reduces
errors and produces all the required information or statistics.
Step 4: Extract findings from the collected data, tabulate data and develop
frequency distributions
Averages and measures of dispersion (mean, mode, median) are computed for the
major variables. Advanced statistical techniques and decision models may be made
use of in the hope of discovering additional findings e.g. frequency curves,
distribution curves, skewness and range.
Step 5: Present the findings

Findings that are relevant to the major marketing decisions facing management
should be clearly presented. The analysis, interpretation and evaluation of results
require an understanding of statistical theory. Reference should be made to
techniques that test the significance of the findings. Data can be presented in form
of bar charts, line graphs, histograms, pictograms and pie charts.

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Step 6: Make the decision/Recommendation for action
Recommend the strategy to be pursued or followed in relation to the topic under
study or the marketing effort.
Overcoming Barriers to the use of Marketing Research

In spite of the rapid growth of marketing research many companies still fail to use it
sufficiently or correctly for several reasons which are;
 a narrow conception of the research problem

 uneven caliber of researchers
 poor framing of the research problem
 late and erroneous findings
 Personality and presentation differences.
FORECASTING
Forecasting is an attempt to predict the behavior of a future variable so as to provide

a basis for planning.
One major reason for undertaking marketing research is to identify market

opportunities. After research a company must measure and forecast the size, growth
and profit potential of each marketing opportunity.
Sales forecasts are used by finance departments to raise the needed cash for
investments and operations, by manufacturing departments to estimate capacity and
output levels, by the purchasing department to acquire the type and amount of
supplies and by human resources (HR) to hire the needed number of workers.

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Marketing is responsible for preparing the sales forecasts, failure of which the
company will face inventory problems.
Sales forecasts are based on estimates of demand. A company may forecast short-
run demand for a particular product for the purposes of ordering raw-materials,
planning production and borrowing cash. It may forecast regional demand for its
production line to decide whether to set up regional distribution.
There are two groups of forecasting techniques, qualitative or judgmental and

quantitative:
(a) Qualitative is based on human judgments and experience and is used when;
 Data is scarce e.g. during the introduction of a new product.

 The timeframe is long that data frame is of limited use.
Information from this technique cannot be turned into a statistic hence not
quantifiable. Qualitative techniques that are commonly used are personal insights,
panel consensus, market surveys, historical analogue and Delphi method.
(b) Quantitative is based on numerical statistics and can include causal method,
which involves the use of mathematical models to link cause and effect such as
the relationship between price or income and demand. By establishing these
relationships forecasting on trends and on variables becomes easy.
Qualitative forecasting methods

These cannot be easily converted into numerical terms because they depend on
human judgment and experience and are used when data is scarce. When a new
product is introduced the timeframe is so long that data is of limited use.
Personal insight

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It is a qualitative method that depends on mental reasoning of the researcher. This
involves estimating or assuming how a given variable will behave in the future using
personal judgment. Forecasting is done by one person and it depends on that one
person.
The major advantage of using personal insight is that it results in quick forecasting
which means marketing decisions are quickly implemented. It is also less expensive.
However, this can be less accurate given that only one person's judgment is
considered as enough to predict the behavior of a particular variable. The results
produced are less reliable as judgment varies from one person to another.
Panel Consensus
It is forecasting method whereby a panel of experts discuss issues to arrive at an
agreed forecast. This has higher accuracy over personal insight as it involves pooling
of knowledge and ideas together. All members in a panel give their personal
judgments or they freely participate in the discussions. All judgments are considered
and discussed until an agreement is reached. More accurate information or decisions
are made given that more people are involved. High quality marketing decisions are
likely to be made.
However, it may result in poor marketing decisions given that predictions are made
on the basis of mental judgment and there is an element of subjectivity. It is also a
slow forecasting method which delays decision making process as well as
implementation. Poor quality decisions are likely to be made because of some
individuals who dominate panel discussions or are opinion leaders.
Market Survey

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It is a qualitative forecasting method in which forecasting decisions are made on the
basis of data collected through surveys. The researcher can first carry out interviews
or surveys in which questions are asked to the targeted market or any source of
information needed e.g. consumers. From the data that has been collected through
surveys or interviews, the research problem is identified. They are mostly used when
the research is more complicated. This is considered qualitative as the absence of
adequate data thus human judgment is needed. The accuracy of the resulting forecast
depends on;
 representation of the samples

 quality of the questions asked
 reliability of replies
 Quality of analysis and the resulting conclusions.
Delphi method
It is a qualitative method of forecasting in which the future behavior of the given
variable is predicted by using personal judgment from a group of experts. It is similar
to panel consensus because a group of members are involved in making estimates
about how a variable will behave. Expert researchers are asked questions one by one
and the views are collected so that predictions about the future behavior or variables
are done.
However, respondent experts are independently asked questions and their views are
collected at different times and forecasting is then done.
Advantages of Delphi method

 High quality information is collected since more experts are involved hence
improved quality of decisions.

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 It reduces effects of individual dominance associated with panel consensus.
 More accurate and more reliable forecasting decisions.
Disadvantages of Delphi Method
 It means forecasting decisions take a long time to be implemented because
there is need to get various views from different respondents.
 It is very costly as compared to other methods of qualitative forecasting.
 It requires more important and knowledgeable expert researchers who are
costly and difficult to find.
 The fact that there is need to make a final conclusion about forecasting on the
basis of views produced may introduce subjectivity or bias.
Historical Analogue
It is a qualitative method of forecasting in which history is very important in
determining the future trends of a variable. Forecasting decisions are made by
looking at history. History may provide guidelines on how a certain variable is likely
to behave or occur, for example, when predicting how sales of a product will behave
in the near future we may first look at how the product and a similar product have
been performing. The historical analogue can be based on analyzing the historical
performance of a product on the product life cycle e.g. if a product from the past year
was on the growth stage then we are likely to predict that its sales are likely to
maintain that level of sales position meaning that sales are likely to be constant at a
certain position.
Advantages of historical analogue

 Is the cheapest and easiest method of forecasting available to the marketing
manager because it does not require cultivation of financial resources?
 It saves time compared to other methods such as Delphi method.

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 At times, historical behavior of a variable may provide a guideline to the
future behavior of a variable.
Disadvantages of historical analogue
 History does not shape the future, conditions change over time.
 Miscalculated forecasting decisions are likely to be made since historical
information used may not be applicable for present situation.
Quantitative Forecasting Methods
Causal method (Experiment)
This is a forecasting method in which a cause and effect relationship is used as a
basis for forecasting the behavior of a given variable in the near future. It involves
examining the effects one variable has over another e.g. determining the effect of
price on the level of sales. When the cause is manipulated or adjusted, the effects of
the variable are used as the basis of predicting behavior of the variable in particular.
It also involves test marketing in which products are introduced on a smaller scale
with the idea of testing reactions to new products. Consumer reactions are used as
basis to predict how a variable is going to behave over time.
Advantages of causal method
 reduces chances of new product failure

 it provides an explanation as to why a variable will behave in a certain way
e.g. an increase in sales can be attributed to a decrease in price
 quantitative forecasting leads to objectivity because of elimination of human
judgment
 More accurate forecasting decisions are made because forecasting decisions
are based on quantitative facts and reaction of consumers.
Disadvantages of causal methods

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 A costly method to undertake when forecasting behavior of a variable and
this means more financial resources are needed to fund the process.
 A time- consuming quantitative technique as much time is needed for the
forecasting process to be successful.
 Can result in biased forecasting decisions as accuracy of data depends on the
researcher, sources of information, change in customer tastes and preferences.
 Involves a lot of work meaning that it is a laborious process.
TIME SERIES ANALYSIS
A time series is a set of observations of a random variable arranged in chronological

or time order. It is a systematic quantitative process that involves the use of past data
to make a prediction about the behavior of a given variable. It considers data
recorded for a certain period say twelve months. The data recorded is replaced by
new data which means it involves decomposition of data according to certain
requirements or factors. It is mostly used for prediction of sales, profits and costs. It
involves calculation of moving averages from data received. As new data is added
on, an average is also calculated and extrapolation and interpolation is done by
management. Extrapolation is a process whereby trend resulting in moving averages
is used as a basis to predict the behavior of a variable (product). It uses the concept
of a line graph.
Example
Plot a line graph of the quarter sales data for Chido Pvt Ltd in thousand dollars.
Quarter 1997 1998 1999 2000
1 54 55 49 60
2 58 61 55 64
3 94 87 95 99
4 70 66 74 80

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a) Describe the trend and extrapolate.
b) Are the sales rising or declining?
Advantages of time series analysis

 It is an objective technique which depends on the use of quantitative data
which is measurable.
 Ii is mostly used when the variable to be predicted is very vital to the extent
that mathematical calculations have to be made.
 There is elimination of human judgment or bias since quantitative facts
determine the forecasts.
Disadvantages of time series
 Many mathematical computations make it more difficult to execute.
 Errors in data collection are common hence erroneous forecasting decisions
may be made.
 Can be affected by factors such as inflation which causes data to be irrelevant
in the future.
 Ignores use of qualitative facts such as consumer preferences and tastes on the
prediction of future variables.
 Not suitable for prediction of seasonal products.
The Moving Averages Method
Removes the short- term fluctuations in a time series by taking successive averages
of groups of observations, idea being to smooth the trend so that extrapolation
becomes easier.
The 3 period moving averages calculation,

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1990 Sales 3 period moving 3 period moving
totals average
Jan 7
Feb 3 15 5
Mar 5 17 5.67
April 9 21 7
May 7 25 8.33
Jun 9
Jul 12
Aug 5
The sales figures for the following months are given as; September (10), October
(13), November (9) and December (10). One can complete the table, say, figures for
February are; 7 + 3 +5 = 15 (3 period moving total). To get 3 period moving averages
divide 3 period moving total by 3 that is, 15÷3= 5. The 5 should be centered i.e.
written at the mid -point of the 3 months used in the calculation.
Activity: Plot curves on a graph paper and compare the trends and you can notice
that the second graph shows a smoother curve or trend as compared to the first one.
Hence averaging helps to make extrapolation easier.
The basic principle is that the period chosen must coincide with the cycle and within
each average we have the twelve months being represented. One can divide the
period into quarters and produce desirable results.

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Rule is that moving averages should be centered. The results of a moving average
can be predicted or forecasted by extrapolation, using the additive method or the
multiplicative methods found in regression analysis.
Features of moving averages

Though useful for sales forecasting, certain features are;
 Period of moving averages must coincide with the cycle to capture upturns
and downturns.
 The greater the number of periods in the moving average, the greater the
smoothing effect.
 Greater number of periods should be chosen if the underlying trend is fairly
constant but there is substantial randomness.
 Fewer periods should be included in the moving averages if there is thought
to be some changes in the underlying state of the data.
Limitations
 Unreliability of information when we forecast the future from past data.
 Limited to short -term forecasting only.
 Does not give greater weighting to current data.
 Takes account of data outside the period of the average through extrapolation.
 More data is prone to errors when dealing with thousands of items of stocks
or it becomes cumbersome.
Importance of Forecasting to an organization
Forecasting provides a sense of direction and a basis of planning to a business which
means it becomes easier to run and control the organization as some confusions can
be eliminated and all workers would work according to the forecasts. It can be used
as a performance assessment tool when forecasted behavior can be measured against

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recorded performance, that is, expected performance on the ground. It can also be
used in cost projections. It is important in improving information flow which means
it is a collective process, which involves every component or function of the
organization and this increases the rate of interaction and exchange of information
between various components of an organization. Forecasting is useful in manpower
planning. It improves morale and motivation in an organization when workers work
hard to achieve expected targets in forecasting. Forecasting aids resource allocation
and reduces wastage by targeting resources to certain forecasts and decisions. In
addition, efficient resource utilization is enhanced. Forecasting helps in the reduction
of new product failures and company failure since all internal and external factors
are anticipated.
Limitations of forecasting to an organization

° Basis of forecasted information may be wrong, leading to poor forecasts.
 History can be different from the future, conditions can be totally different,
and the future may change very much, making forecasts unreliable.
 Affected by external factors such as weather, changes in consumer preferences
and tastes and the economic environment.
 Much application of quantitative techniques makes method prone to errors.
 Experts need to be hired and are expensive especially to small firms.
 It is time consuming because it involves data collection, analysis and
interpretation which require a lot of time.
DEMAND MEASUREMENT
Market demand is the total volume that would be bought (of a product) by a defined
customer group in a defined geographical location in a defined time period, in a
defined marketing environment, under a defined marketing programs. [P Kotler,

206
2003] It is not a fixed number but a function of the stated conditions. It is therefore
called "the market demand function”.
Company demand is the company's estimated share of market at alternative levels of

company marketing effort in a given marketing period. The company's share of the
market demand depends on how its products, services, prices, communications and
so on are seen relative to the competitors'. To estimate demand, company's market
share would depend on the size and effectiveness of its market expenditures relative
to competitors’. To estimate market- demand companies attempt to;
 Determine total market potential, which is the limit approached by market

demand as industry marketing expenditure approach infinity for a given
market environment. Market potential for most luxury goods are higher during
periods of prosperity than recession.
 Estimate area market potential, that is best territory to allocate market budgets
optimally e.g. Different cities, states and nations.
 Estimate industry sales. In so doing company will assess and compare its
performance to the total industry or any particular competitor to see whether
it is gaining or loosing shares.
 Estimate future demand, companies’ survey buyers’ intentions, solicit
their sales force, gather expert opinions or engage in market testing.
Mathematical models, advanced statistical techniques and computerized data
collection procedures are essential to all types of demand and sales forecasting.
Determinants of demand
Demand is the outcome of decisions about which wants to satisfy given the available
resources or means. Demand can also refer to the quantity of goods or services that
the potential buyers are willing to and able to buy. Wants on the other hand are the
unlimited desires or wishes that people have for goods or services concerned.

207
Demand is a flow of goods or services measured over a period of time rather than a
particular time. Quantities demanded can differ from the quantities actually bought.
Quantities bought or exchanged will depend on the availability of the goods or
services in question.
Demand for goods is determined by the;
 price of the product or service

 price of related products - complements and substitutes
 income of the consumers
 tastes and preferences of the customer
 size of the household or population
Quantity of a good demanded by an individual (or household) in a particular period
depends on (or is a function of) the price of the good, the price of related goods, the
income of the individual (or household), tastes, the number of people in the
household and any other possible influences. Symbols are sometimes used in
economic theory as follows;
Qd = f (Px, Py, Y, T, N ...)
Where;
Qd - quantity demanded
Px- price of commodity/ product
Y - Income of household during the period
T - Taste of the consumer(s) concerned

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N - Number of people in a household
concerned
... - allowance for other possible influences.

Most important determinant of the quantity demanded of a particular product or good
is its price. Focus in the above equation is on the relationship between Qd and Px.
Thus, the law of demand states that, “ceteris paribus "(if other things are held
constant), the higher the price of a good the lower the quantity demanded of that
good. If other things are held constant demand therefore is a function of price. The
relationship is inverse so when price falls the quantity demanded increases.
Elasticity of Demand
It is the degree or amount of responsiveness or sensitiveness of demand to price
changes. There are four common forms;
a) Price elasticity - effect on demand of a change in price.
b) Income elasticity - effect on demand of a change in income levels.
c) Cross elasticity - effect on demand of a change on the price of other goods

and services.
d) Promotional elasticity - effect on demand due to an increase in promotional

spending.
The demand for a commodity is said to be elastic when a rise in or a fall in its price
is followed by a marked rise or fall in the quantity demanded. The demand for a
commodity is inelastic when a relatively large variation in price produces a relatively
small change in the demand. Where a change in price results in the same total amount
being spent on a commodity, elasticity is said to be unitary or unity. Three broad
cases of elasticity may be distinguished:

209
a) Result is greater than 1 (0 > 1) i.e. if demand has changed to a greater extent
than the price, then demand is elastic.
b) Result is less than 1 (0 < 1) i.e. if demand has changed to a lesser extent than
price, then demand is inelastic.
c) If the proportionate change in demand is equal to the proportionate change in
price, the elasticity is unity, i.e. the result is equal to 1.
In general, demand tends to be inelastic (unresponsive) where;
 The product is a necessity e.g. bread, milk.

 There are no close substitutes e.g. electricity.
 The product is habit - forming e.g. tobacco.
 It is inexpensive in relation to income
 It has been advertised
 There is brand loyalty.
In general demand tends to be elastic (sensitive) when the product is
a) A luxury item e.g. foreign holiday.
b) Has a close substitute e.g. going to a cinema or watching video.
c) Expensive in relation to income.
(a) Price Elasticity of Demand
Price Elasticity of Demand = percentage change in quantity demanded divided by

percentage change in price
%∆d ÷ %∆p

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Since we want the elasticity between two points on a demand curve to be a single
value independent of the direction of movement between the two points we shall
take all percentage changes to be the change in quantity or price divided by the
average of the original and the new quantities or prices. Thus, the formula is as
follows;
E = (-Q1 - Q2)/Average Q divided by (P1 - P2)/Average P
Average Q= (Q1+Q2)/2 and Average P = (P1 - P2)/2
Note: The negative sign is included in the formula simply to make elasticity of
demand a positive number, this is just a matter of convenience. This formula can be
simplified to;
-∆Q/∆P X P/Q. Where P is average price and Q average quantity.
Example 1:
Price of tomatoes at $1 attracted a demand of 5000. An increase in the price to $2
the same quantity attracted a demand of 3000. Calculate the price elasticity of
demand for the tomatoes.
Solution:
Price has increased by $1 and demand decreased by 2000.
Therefore; ∆d/∆p X average P / average Q
- (-2000)/1 X 1. 50/4000
= 3.00/4 = 0.75
NB: Triangle in the formula means change

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This demand had an elasticity of less than unity, thus the demand is in-elastic. Thus,
the price change has relatively little effect on demand.
Example 2:
The price of chocolate at $5 attracted a demand of 1000. An increase in price to $8,
the same quantity, attracted a demand of 500. Calculate the price elasticity of
demand.
Solution:
(-) - 500/3 X 6.50 /750
= 13/9
= 1.4
This demand has an elasticity of greater than unity, so the demand is elastic. Price
changes have a considerable effect on demand.
Since elasticity links price and quantity demanded, it also shows the effect of changes
in price and income on total revenue. Thus, it is important to businesses and
government.
If demand is relatively elastic, a reduction in price causes total revenue to increase,

whilst a price rise causes total revenue to fall. Thus, price and revenue move in
opposite directions.
If on the other hand, demand is relatively inelastic, a reduction in price causes total
revenue to fall and price rise causes total revenue to increase. Thus. Price and
revenue move in the same direction.
With unitary elasticity, total revenue stays the same at all prices.

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Price sensitivity is important to firms because;
 A price reduction may produce little benefit for the firm if demand is
insensitive to the price.
 A firm considering a price rise may suffer a great loss of trade if demand is
sensitive to price.
This means the relationship between elasticity and the firm's revenue after a price
change will indicate the degree of elasticity and provide a basis for decision-making
to a firm.
(b) Income Elasticity of Demand
It is the responsiveness of demand to changes in the levels of income. It is calculated
as follows;
YED = %∆ in Quantity demanded ÷ %∆ in income.
Increase in income will generally lead to an increase in demand but the demand for
some goods is more responsive to changes in income than others. If income elasticity
is very low (less than one), quantity demanded is not very responsive to change in
income. Consumption remains about the same irrespective of income level. This is
usually the case with necessities such as bread and milk. An income elasticity greater
than one means that the quantity demanded is very responsive to changes in income.
This is the case with luxury goods such as television sets, microwave ovens, DVDs
and so on.
(c) Cross Elasticity of Demand

Measures the responsiveness of demand to changes in the price of other products. It
is calculated as follows;
XED = %∆ in demand for product A ÷ %∆ in price of product B

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A and B being different products.
If XED is positive, the products are said to be substitutes for each other e.g. coffee
and tea, butter and margarine. If XED is negative, the products are said to be
complementary (dependent) e.g. golf clubs and golf balls, cars and petrol, video
recorders and video tapes. If XED is zero, the products are said to be independent
and therefore, have no effect on each other. Demand for food and holidays for
example are independent.
Example 1.
A 20% rise in the price of coffee results in a 10% rise in the demand for tea.
XED = 10% ÷ 20% = 1/2 [both rise hence positive]
Example 2:
A 50% rise in the price of video recorders results in a 20% fall (decline) in the
demand for video tapes.
XED = -20 % ÷ +50% = -2/5 [one negative, one positive results into negative].
(d) Promotional Elasticity of Demand

This measures the responsiveness of demand for a product following a change in the
amount spent on promoting it.
ProED = %∆ in demand for the product ÷ %∆ in promotional spending.
If the result is > 1 demand is said to be elastic or responsive following a change in

spending on promotion. If the result is < 1 then demand is inelastic and there might
be little point in increasing promotional expenditure.

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Businesses must therefore increase spending on those products with a higher
promotional elasticity of demand and reduce promotional spending on those with a
low elasticity.
MARKETING MIX AND STRATEGIES
Product
The first important concept to grasp is that a product is more than the physical article
itself. It is anything that can be offered to a market for attention, acquisition, use or
consumption. It includes physical objects, services, personalities, places,
organizations and ideas.
A new product is;

 A new innovative product distinct from anything else in existence.
 A significant adaptation of an existing product.
 An initiative or "me too" product.
 A simulated adaptation in which the customer perceives a difference from an
existing product.
Companies that fail to develop new products are putting themselves at greater risk.
This is because their products are vulnerable to changing customer needs, tastes, new
technology, shortened life cycles and increased domestic and foreign competition,
calling for increased innovation.
Reasons for failure of new products
 A high- level executive pushes a favorable idea through in spite of negative

market research findings.
 The idea is good but the market size is overstated.
 The product is not well designed / defects in the product.

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 Incorrect positioning of the product in the market, not advertised effectively
or is overpriced.
 Failure to gain sufficient distribution coverage or support.
 Development costs are higher than expected.
 Competitors fight back harder than expected.
 Inadequate sales force.
Factors that hinder new product development are;
 Shortage of important ideas in certain areas.
 Fragmented markets - smaller market segments should be used.
 Social and governmental constraints.
 Cost of development - high R&D, manufacturing and marketing costs.
 Capital shortages.
 Faster required development time, company should use new techniques,

strategic partners, early concept tests and advanced marketing planning.
 Shorter product life cycles.
The number one success factor for a company to produce a successful new product
is a unique, superior product.
Product Development Process
a) Idea generation
Ideas for the new product can come from customers, scientists, competitors,
employees, channel members and top management. Customer needs and wants are

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logical places to start the search for ideas. R&D is the other greatest source of ideas
for new products.
b) Idea Screening
The purpose of screening is to drop ideas as early as possible. However, errors such
as (i) Go error where company may continue with a product in the market but has
since been outdated and no longer on demand and, (ii) Drop error where company
may erroneously remove an otherwise profitable product from its portfolio, should
be minimized or avoided.
c) Concept Development
Attractive ideas must be refined into testable product concepts. A product idea is a
possible product the company might offer to the market. A product concept is an
elaborated version of the idea expressed in meaningful consumer terms. [Value
analysis. Why is it important in product development?]
Consumer research is used to find out the benefits of the product and its position in
relation to rivals. Large amounts of money are needed to develop the product for the
market after screening the product concept has to be turned into a brand concept
(prototype).
d) Concept Testing
Involves presenting the product concept to appropriate target consumers and getting
their reactions. Prototyping is done nowadays by computers (rapid prototyping).
Customer driven engineering is today used to design new products and incorporate
consumer preferences in the final design of a new product. Respondents' answers
indicate whether the concept has a broad and strong consumer appeal, what products

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this new product competes against and which consumers are the best target market.
Co-joint analysis - a method for measuring derived utility value that consumers
attach to varying levels of a product's attributes should be done. This helps
management to forecast the profitability and market share the company can realize.
e) Marketing Strategy
If concept testing is successful, the new product manager will develop a preliminary
marketing - strategy plan for introducing the new product into the market. Such a
plan consists of three parts;
i) Describes the target market's size, structure and behavior, the plan product
positioning and sales, market share and profit goals sought in the first few years.
ii) Outlines the planned price, distribution strategy and marketing budget for the first
year.
iii) Describes the long - run sales and profit goals and marketing mix strategy
over time.
f) Business Analysis
Evaluation of business costs, sales and profit projections to see whether they satisfy
company objectives. If so the concept can move to the development stage.
Estimating total sales - total estimated sales are the sum of estimated first time sales,
replacement sales and repeat sales but this depends on whether the product is;
a) one - time purchased product
b) infrequently purchased product

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c) frequently purchased product
Estimation of costs and profits is done by R&D, manufacturing, marketing and

finance departments.
Break - even analysis (BEA) is used to evaluate and estimate how many units of a
product the company would have to sell to break-even with the given price and cost
structure.
Risk analysis can also be done at this stage to fully develop the product (prototype).
Seeing the satisfaction of customers in the product the next stage comes in.
g) Market Testing
At this stage, the product is dressed up with a brand name and packaging and put
into a market test. The new product is introduced into an authentic setting to learn
how large the market is and how consumers and dealers react to handling, using and
repurchasing the product. Consumer goods market testing is done as well as business
goods market testing. Former uses sales wave research, simulated test marketing,
controlled marketing and test marketing and the later uses trade shows to introduce
the product, vendors, distributors and dealer display rooms and test marketing.
A simulated product is one that has been made or produced to resemble or being an
imitation of the genuine article.
h) Commercialization
Plant size will be a critical decision as well as marketing costs of advertising and
promotion. Market entry timing is also critical for new product commercialization.
If a competitor is present in the market there is a choice to do first entry, parallel

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entry and late entry. That is "when " (timing) , it should also consider " where " (
geographical strategy) ," to whom " ( target market prospects ).
i) Stages in the adoption process [diffusion]

Rogers defines the innovation diffusion process as, "the spread of a new product idea
from its source of invention or creation to its ultimate users or adopters”. Adopters
of a new product pass through the following stages:
Awareness--------Interest-------Evaluation-------Adoption
The consumer adoption process is the process by which customers learn about new
products, try them and adopt them or reject them. Today many marketers are
targeting heavy users and early adopters of new products because both groups can
be reached by specific media and they tend to be opinion leaders. The consumer -
adoption process is influenced by many factors beyond the marketer's control
including consumer's and or organizations' willingness to try new products, personal
influences and the characteristics of the new product or innovation.
Packaging
Involves designing and producing the container or wrapper for a product as well as
the protection and promotion of a product. There are many reasons for packaging
products.
a) Packaging forms an integral part of a company's marketing programme. It help

in;
 identification of products
 stopping substitution of competitive products

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 can sell itself
 advertising on packs last longer
 Product differentiation.
b) Packaging sends a message e.g. expensive bottling for perfumes.
c) Packaging serves a number of safety and utilitarian purposes as it protects the

product in transit from manufacturers to consumers. Child proof containers help
child safety, prevents damage, spillage and evaporation. Goods become more
convenient to handle.
d) May lower distribution and promotion costs.
e) May increase profit and sales volume.
f) May extend the life cycle of a product.
Criticisms of packaging include;
 contributes wastes towards pollution of the environment

 not easy to dispose of e.g. perfume containers, insecticide containers
 uses up natural resources despite recycling and biodegradable materials
 expensive containers often account for half of the production costs
 creates health hazards e.g. aerosols
 can be deceptive to customers
Branding
A brand is, a name, term, symbol or design or a combination of them which is
intended to identify and differentiate the goods or services of one seller or group of
sellers from those of competitors.

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A brand name is made up of words letters and /or numbers that can be said aloud.
Branding gives an idea of the attributes of a product through its use a company
cultivates consumer goodwill and gains an assured market.
A brand mark is that part of a brand that is in the form of a symbol, design of
particular color or lettering. It includes logos, slogans, package, design, color and
typography. It also helps to stimulate and maintain demand successfully put together
e.g. star on Mercedes Benz cars.
A trade mark is a brand that is given legal protection because under the law it has
been appropriated exclusively by one seller.
Importance of branding
It is important to consumers, retailers, manufacturers, suppliers and distributors for

the following reasons;
 Ensures a product a position of market leadership which may be held for a

long time.
 Many become a company asset.
 Satisfies customer needs - development of brand loyalty.
 Gives personality to a product, marketing advertising easier.
 Market segmentation is better facilitated through marketing consistence.
 Wholesalers and retailers are ready to accept a branded product.
 Helps consumers to make a choice under self - service conditions.
 Display space is more easily obtained at outlets.
 Special promotions become practicable.
 New products can be introduced easily.

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 Personal selling effort is reduced.
Types of brands
a) Family brands and licensed brands
A family brand means that the same brand name is used for several products e.g. in
Royco foods and Bata shoes. It is beneficial in that the goodwill that goes in with
one or two of the products may help to promote others and reduce promotional costs
hence less expensive to introduce new products in the market.
Licensed brand is a known family brand that sellers pay a fee to use e.g. using items
on caps and T - shirts e.g. Chicago Bulls, 50 Cent, J- Lo and Gucci. This gives good
selling and advertising to a brand.
b) Industrial brands
Are products of different types and quality that each has a separate brand name?
Confusion amongst individual brands will be avoided. Industrial brands are used by
firms to stimulate competition e.g. Unilever South East Africa's different brands e.g.
Surf, Omo, Sunlight compete against each other for a share in the detergents market.
c) Generic brands
Are products sold without a brand name and are normally identified by their contents
and the manufacturer or the middleman. They are sold at lower prices in plain
packaging e.g. in 2008 in Zimbabwe, during inflation, sugar had plain packaging as
well as green bar soap. Generic names are used when some brands become well
accepted over the years in the product life cycle.
There are various ways in which brand names become generic;

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a) when the patent expires
b) If there is another generic name the public may continue to use the brand name
as a generic name.
c) An excellent well-advertised brand name may become generic e.g. Elastoplast
or Scotch tape.
The following strategies will be used to avoid or prevent use of a generic name;
 Use of the brand name together with the company name e.g. Johnson's Baby
Powder.
 Change the company name to that of a brand e.g. Olivine Cooking Oil.
 Make sure that the public knows that the brand has a copyright.
Product Life Cycle (PLC)

This is the cycle through which every product goes through from introduction to
withdrawal or eventual demise. A new product progresses through a sequence of
stages from introduction to growth, maturity and decline. The PLC is associated
with changes in the marketing situation, thus impacting on the marketing strategy
and the marketing mix. The product life cycle is a very important concept in
marketing. It describes the stages a product goes through from when it was first
thought of until is finally removed from the market. Not all products however, reach
this final stage. Some continue to grow and others rise and fall. To say a product has
a life cycle is to assert that:
 A product has a limited life span in the market.

 Product sales pass through distinct stages each facing different challenges,
opportunities and problems to a seller.
 Profits rise and fall at different stages in the life cycle of a product.

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 Products require different marketing, financial, purchasing, manufacturing
and human resource strategies in each life cycle stage.
Explanation of stages
(a) The Market Introduction

 Informative promotion is needed marked by high costs, low sales volume, net
losses and limited distribution.
 Much money is spent on product promotion and place development
 High unit production costs
(b) The Market Growth Stage
 Fast growing industry sales with rising profits.
 Competitors start to come into the market.
 Sellers move from primary demand promotional strategies to secondary
demand promotional strategies.
 Growth in the number of distribution outlets, price cuts may be introduced and
industry profits start to decline.

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(c) The Market Maturity Stage
 The competitors get tougher
 Profits of both the manufacturer and the retailer start to decline
 Marginal producers start to withdraw from the market
 Persuasive promotional becomes important at this stage.
 Some competitors form alliances in order to survive in the market.
(d) Sales Decline Stage

 Product becomes obsolete as new products are introduced to replace the old
ones.
 As the demand for the product drops, cost control becomes important.
 Some competitors will withdraw from the market.
Marketing Strategies during the PLC

Effective management to a large extent controls the shape of the product's sales and
profit curves. a) Introductory Stage
When new product is launched the timing of its entry in the market is important.
Management can get a high or low level for each of the four variables of the 4Ps.
Considering only pricing and promotion one of the following strategies may be
chosen;
1. Rapid Skimming Strategy: A high price is set in order to obtain as much profit as
possible and high promotional level in order to accelerate the level of market
penetration.

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2. Slow Skimming Strategy: A high price is set in order to recover as much profit as
possible and low promotion in order to keep marketing expenses down thus
expecting to skim a great deal of profit from the market.
3. Rapid Penetration Strategy: Low price and heavy promotion resulting in the fastest
rate of market penetration and the largest market share for the company.
4. Slow Penetration Strategy: Low price to encourage rapid acceptance of the product
at low promotion costs in order to realize more profits.
b) Growth Stage
The firm tries to sustain rapid market growth as long as possible through the
following:
 Product quality is improved, new features are added.
 New market segments are sought.
 Being aware of new distribution channels so as to gain additional product
exposure.
 Enter new market segments.
 Deciding to lower prices when time is right.
c) Maturity Stage
 Use initiatives to extend the life cycle. Three basic strategies are used:
1. Market Modification - i.e. finding new market segments which have not yet been
tried with the product also by stimulating increased usage amongst present
customers and finally by repositioning the product e.g. Johnson's new baby
shampoo.
2. Product Modification - may be achieved by a number of ways
 Take something out of a product e.g. caffeine from coffee.

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 Add something to the product e.g. lemon scent to vim.
 Use of one product category for another e.g. this occurs in the automobile
industry often.
 Take note of customer complaints.
 Invent new uses of the product e.g. Cotton ear buds to remove make up.
 Make the task easier e.g. combining shampoo and conditioner.
 Find new distribution channels for the product.
 Add guarantees.
 Look for new inventions possibly in other countries.
3. Marketing Mix Modification - elements of the market mix are altered.
4. d) Decline Stage
Challenging for most managers as a product declines the decision on dropping or

continuing with it becomes crucial. Alternatives as below will follow:
1. To improve the product perhaps in a functional way.
2. To ensure production and marketing are functioning effectively.
3. To streamline choice of product by taking out profitable sizes and types.
4. To cut costs in order to maximize profitability over the remaining lines of the
product.
NB* If the product has to be eliminated, timing is important, otherwise losses will
be great e.g. advertising being arranged for the future gradual phasing out is
better.
Product Life Cycle Extension

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Product life cycles are becoming shorter due to changing technology but need to be
prolonged. The longer a product stays in the cycle the more profitable it is to the
firm. Firms therefore, aim to keep their products in the cycle as much as they can but
market decline occurs because;
1. The need for the product disappears.
2. A less costly better product is developed to do the same function.

3. People get tired of the product.
4. People’s needs and tastes had changed because of changes in technological and
economic environments.
Skillful managers can influence customers in such a way as to lengthen the life cycle
of a product by extending and expanding the market. Extension involves maintaining
production levels by seeking a wider market as demand begins to fall in the existing
market. No new investments in manufacturing operations are required.
Expansion involves trying to increase production levels. It is thus a strategy which

does not require additional investment either in support of local manufacturers or
foreign market facilities.
Common strategies for extension involve change in the;
 product
 packaging
 Channel of distribution used.
 way it is promoted
Extension Strategies
 Modification of the marketing mix - 4Ps

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 Modification of the product - change in style, improved quality, new features
etc.
 Encouragement of increased usage - new or more varied uses.
 Expansion of the number of brand users - increased market share, converting

non - users and enter new segments.
PRODUCT PORTFOLIO ANALYSIS

It suggests a specific marketing strategy to achieve a balanced mix of products that
will produce the maximum long-run effect from scarce cash and managerial
resources.
The Boston Consulting Group Matrix (BCG)

The BCG developed a business portfolio matrix also known as the growth share
matrix, which classified products according to market growth rate and relative
market share.
Market growth is measured as the growth per year of the overall market for a product.

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Market share is the market share for each product relative to the industry's largest
competitor.
Stars - are high growth, high share products. They generate moderate amounts of
cash but have high cash requirements to maintain or enhance position. May need
heavy promotion to maintain position in the market, create customer awareness and
increase distribution.
Cash cows - are established products which require little advertising. They have a
high market share but low growth. The products generate a lot of cash and are usually
“milked" to help finance other products .Market leaders in a mature market.
Question marks/problem children - are products which are under-achieving and

therefore have an uncertain future. They have a high growth rate but only small
market share. Therefore, with a cash injection they may become STARS but equally
without it could end up as DOGS.
Dogs - have low market share and low growth rate. They have little potential for
development and should therefore be withdrawn from sale in the market.
Management can use the BCG matrix to determine what strategy to be used in order
to manage their product portfolio. There are four basic strategies available;
1. Build - aims at an improved market position with the willingness to forgo short
-term earnings to achieve this goal. It is appropriate for question marks whose share
has to grow and they are to become stars.
2. Hold - preserve the market position of products. These are needed by cash
cows if they are to continue yielding a strong cash flow.

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3. Harvest - getting short -term effect. Is used for a weak cash cow and also for
question marks and dogs.
4. Divest - aim at selling or liquidating the products because resources can be

used better elsewhere. This is appropriate for dogs and question marks which the
company cannot further finance their growth.
The Ansoff Matrix.
Market penetration strategy - involves getting more from present markets possibly
by improving or adding to distribution e.g. flowers in petrol stations or extending the
services or products to parts of the country not yet reached. It is about selling an
existing product in a new market.
Product development strategy - is a matter of finding new products using the same
production and distribution facilities to earn more profit for the company. Many
ideas may come from the customers, some of which can be used to add to the product
range. It selling a new product in an existing market.

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Market extension strategy/ market development - involves increasing the sales of
existing products but in new markets. Thus, identifying a new age group or
geographical area to which products can be sold. It is selling an existing product in
a new market.
Diversification strategy - involves launching a new product in a new market, usually

achieved only by strong companies which can afford to take a high risk involved. It
is selling a new product in a new market.
However, the Ansoff Matrix must not be seen as a decision- making tool by itself. It
is useful as a way of clarifying the next stage in the process of ensuring profit growth
which is the investigation of the possibilities.
Pricing decisions
Price is the critical element of the market mix. It is the only one of the 4Ps that
produce revenue and others produce costs. This therefore follows that every firm
must have a pricing policy.
Setting a Price Policy
1. Selecting the pricing objective

 Profit maximization
 A target level of profit
 An increase in the market share / high market share
 Sales revenue maximization
 Profit margin / market skimming
 Risk maximization - company believes that a higher sales volume lead to
lower unit costs and higher long - run profits.

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 Companies set the lowest price assuming the market is price sensitive (market
penetration strategy).
Penetration pricing can be used when:
 The market is highly price sensitive and a low price stimulates market growth 
 Production and distribution costs fall with accumulated production expenses.
 A low price discourages actual and potential competition.
Market skimming makes sense under the following conditions:
 Companies inventing a new technology favor setting high prices to skim the
market.
° A sufficient number of buyers have a high current demand.
 The unit costs of producing a small volume are not so high that they cancel
the disadvantages of charging what the traffic will wear.
 The high initial price does not attract competitors to the market.
 A high price communicates image of a superior product.
Whatever the specific objective, businesses that use price as a strategic tool will
profit more than those who simply set costs or the market to determine their pricing.
2. Determining demand
 Each price leads to a different level of demand and has a different impact on
the company's marketing objectives.
 The demand curve; - the higher the price the lower the demand
3. Estimating costs
 Demand sets a ceiling on the price a company can charge for its products while
costs sets the floor.
 The company wants to charge the price that covers its costs of production,
distribution, sales of the product, including a fair return for its effort and risk.

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Company costs are of two types:
Fixed costs - are costs that do not change with production or sales volume e.g. rents,
salaries paid each month regardless of output.
Variable costs - vary directly with the level of production e.g. product packaging,
tend to be constant per unit produced or total varies with the number of units
produced.
Total costs - consist of fixed and variable costs for any given level of production.
Average costs - is the cost per unit at the level of production that is equal to the total
cost divided by production costs.
Management need to know that costs vary with the different levels of production.
Marketers use costs per unit for prediction through cost behavior techniques against
production and also use experience curves (learning curves) in the prediction of
prices to be set.
Different marketing offers can also be made use of through negotiating with different
customers, thus accounting employees identify the real costs associated with serving
each customer.
Both variable and overhead costs must be tagged back to each customer.
Since costs change with production scale and experience, target costing is employed.
Market research is used to find out a new products' desired functions then product
price is determined given its appeal and competitor prices.

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The desired product margin is deducted from this price and leaves the target costs to
be achieved (Japanese system).
4. Analyze competitor's price cuts and offers

Apart from prices determined by market demand and company costs, a firm takes
the competitor's costs, prices and possible price reactions into account. A firm can
decide whether it can charge more, the same as or less than the competitors'
depending on competitor's reaction to price.
5. Selecting a pricing method

Given the 3Cs - customer demand schedule, the cost function and competitor's
prices, a company is ready to select a price.
Cost Plus Pricing / Mark Up Pricing
Is a price added on top of another price already charged, especially for profit-
making? Lawyers and accountants typically price by adding a standard mark up on
their time and costs.
Example:
Suppose a toaster manufacturer has the following costs and sales expectations;
Variable costs $10
Fixed costs $300000
Expected unit sales $50000
The manufacturer's unit costs are given by;
Unit cost = VC + FC ÷ unit sales

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= $10+$300 000/$50 000
= $16
When the same wants to earn a 20% mark up on sales, the mark-up price would be,
Mark up price = unit costs ÷ (1-derived return on sales)
= 16/ (1- 0, 2)
= $20
The manufacturer will charge dealers $20 per toaster and make a profit of $4 per
unit. The dealers would mark up the toaster in turn, say at 50% on their selling price
to $40, which is equivalent to a cost mark up of 100%. Mark - ups are usually higher
on seasonal items (to overcome risk of selling off). It works only when it produces
the expected level of sales.
Target Return Pricing.

The firm determines the price that will yield its target rate of return on investment.
This method is used by public utilities which need to make a fair return on their
investment.
Example:
The toaster manufacturer has invested $1m in the business and wants to set a price
to earn 20%, number specifically 20000. The target return price is given by the
following formula;
Target Return Price = Unit Cost + Desired Return ÷ Unit sales
= $16 + 20% X1 000 000/50 000

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= $20
The toaster manufacturer will realize this 20% ROI provided its cost and estimated
sales turn out to be accurate.
If sales do not reach 50 000units the firm will prepare a Break-even chart, to find out
what happens to other sales levels.
Fixed costs are $300 000 regardless of sales volume. Variable costs (not shown) rise
in rise with volume. Total costs are the sum of fixed costs and variable costs.
Total revenue curve starts at zero and rises with each unit sold.
TR and TC curves cross at 30 000 units in the chart below. This is the break-even
volume and can be verified by the formula;
Break-even volume = fixed costs ÷ selling price - variable costs
= 30 0000÷$20 - $10
=$ 30 000

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The firm is therefore hoping that according to the sketch above the market will buy
55 000 units at $20 in which case it earns 200 000 output from its 1 000 000
investment but much depends on price elasticity and price of competitors which
target return ignores. The firm should consider different prices and estimate their
probable impacts on sales volume and profits. The firm should also search for ways
to lower its fixed costs or variable costs because lower costs will decrease its break-
even volume.
Perceived Value Pricing

Based on customer perception of value of the product, advertising and sales force. It
is made up of several elements e.g. buyer's image of the product performance,
channel of distribution and customer support.
A company should be sure on how to treat price buyers, loyal buyers and volume
buyers when setting prices e.g.

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 Going Rate Pricing - based on competitor prices and smaller firms follow
the leader
 Auction type pricing or group pricing
6. Selecting the best price
In the final selection the company must consider additional factors such as
psychological pricing, gain and risk pricing, influence of other market mix
elements for a price, company pricing policy and the impact of price on other
parties.
Price setting in different circumstances
The pricing methods used in practice fall under the headings;
1. Demand Oriented
2. Cost Oriented
3. Competition Oriented
1. Demand Oriented Pricing
Starts with the estimates of the demand curve. Survey on customer attitude when
price changes by x%, y% or z%. A statistical relationship between price and quality
demanded be made looking at either historical data (time series) or company sales at
different prices in different markets (cross-sectional analysis). Demand oriented
pricing often leads to price discrimination.
Discriminatory Pricing
Companies often adjust their basic price to accommodate differences in customers,

products, locations and so on. Price discrimination occurs when a company sells a

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product or service at two or more prices that do not reflect a proportional difference
in cost.
In first degree price discrimination the seller charges a separate price to each
customer depending on the intensity of his or her demand.
In second degree price discrimination the seller charges less to buyers who buy a
large quantity or volume of goods.
In third degree price discrimination the seller charges different amounts to different
classes of buyers.
Skim Pricing
Uses high prices to obtain high profits and quick recovery of R&D costs in the early
stages of the product life cycle before competition intensifies. As the competition
intensifies prices are reduced as the product becomes acceptable and volume of sales
increase with an increase in sales, the firm enjoys economies of scale and can afford
to reduce prices.
Penetration Pricing
Companies set low prices to stimulate growth of the market and to achieve a large
market share.
As volume increases prices are reduced.
When is skimming useful and when is penetration useful?
Penetration pricing is useful:
1. If the market is price sensitive, and reductions in price bring about substantial
increase in demand.

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2. If the increase in its market share and therefore its outputs a company is able
to substantially reduce average costs i.e. Is able to make economies of scale.
3. If a low price would discourage actual or potential competition.
4. Where the company has sufficient financial assets to support a low- price
policy and possibly initial losses.
Skimming Pricing
When there is a sufficient number of buyers whose demand is not price sensitive or
are ready to pay a higher skimming price and where demand for a product is inelastic.
When unit production and distribution costs are producing a small volume and do
not cancel out the advantage of the price premium.
When high prices do not stimulate potential new entrance to the market and there are
patents and high costs of entry into the market.
Cost Orientated Pricing
Mark- up pricing (already discussed above).
Zone pricing - the firm has a base price for its products at point of manufacture and
price increases further the customer or point of delivery from the point of
manufacture. It is used by bulky materials e.g. bricks and cement. The best price
might have been estimated on a cost -plus basis of which two methods are popular.
Full cost pricing - price based on direct costs plus an allocation of overheads and a
percentage mark-up is added to arrive at a selling price (absorption costing). It has
the advantages that it is simple, fair to customers and ensures coverage of all costs.
However, it ignores the relationship between price and volume and leads to missed
opportunities.

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Target Pricing - profit mark up being targeted to a desired rate of return (ROI) on
total costs at an estimated standard volume. Its advantages are that, it is more flexible
than full cost pricing, and subject to adjustments to reflect demand and competitive
conditions between products in the market to give an overall ROI. Its disadvantages
include; uses an estimate of sales volume to derive price where all price influences
sales volume, the selling price does not guarantee acceptability in the market.
Marginal costing - states that one should ignore fixed costs and concentrate on the
variable costs. The basic formula is;
Sales - variable costs = contribution
Contribution - Fixed costs = Profit / Loss
Thus, if the sales are $100 000, variable costs 20% of sales and fixed costs are $10
000, the calculation would be:
Sales 100 000
Variable costs 20 000
Contribution 80 000
Fixed costs 10 000
Profit 70 000
If sales are halved, profits decline from 70 000 to 30 000 i.e. More than half. If the
revenue exceeds the variable costs and bearing in mind that fixed costs will have to
be paid in any case, then a profit or contribution will be made.
3. Competition Oriented Approach

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A company fixes its price by reference to what its competitors are charging. Price is
set without regard to current costs or demand. It tends to follow price leaders. The
forms include;
1. Going rate / imitated pricing
2. Product analysis pricing - value is put on the basic product and similar values
on all the optional features or extras.
3. Sealed buyer pricing - to win a contract a company has to charge low prices.
Competition oriented approaches are common in oligopolistic market structures.
1. Full line pricing - where prices have to be fixed for the whole product line,
and use of a standard price for products.
2. Discount pricing
3. Penetration pricing
4. Destroyer pricing - a firm embarks on aggressive price cuttings so as to

eradicate rivals.
4. Psychological Pricing - used by an organization to capture the minds of
customers, for example $4.99 instead of $5.00. In this way customers are tempted
that the prices are reduced yet they are not. This is a very common pricing method
in Zimbabwean supermarkets such as OK and Pick n Pay.
5. Loss Leading Pricing - this is a strategy whereby other products are sold at a
loss so as to tempt customers into the shop knowing that profits would be recovered
on the other items in the shop.
6. Economic Pricing - is whereby very low prices are charged for the products
in order to cover advertising and manufacturing costs. Some of these products may

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be sold as loss leaders. It is used with dogs in product portfolio analysis in the BCG
matrix.
Communication Mix
It consists of a blend of techniques used to communicate the product's availability

to consumers. It is a combination of ways in which a business communicates with
its customers about available products.
Aspects of communication mix or promotion strategies are:
 Advertising
 Personal selling
 Sales promotion
 Public relations
 Publicity
 Direct mailing
 Merchandising
Factors to be considered when selecting a promotional mix are;
 Nature of the product

 Market expenditure budget
 The availability of options
 Nature of the market and its customers
 The product life cycle - the level of sales promotion employed will depend on
which stage the product is at in its life cycle.
Advertising

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Refers to any form of promotion of goods and services by an identified sponsor to a
target audience with the objective of persuading and informing the customers about
the product available. It refers to all forms of goods and services. It is non- personal,
one- way communication to promote the sale of goods and services via paid -for
advertisements in the media.
Types of advertising
1. Informative advertising - communicating customer value, telling the market
about a new product, explaining how the product works and suggesting new uses of
a product. It is also used to inform the market of price changes and availability of
new products just launched.
2. Persuasive advertising - this is used to create brand preference, encouraging

customers to shift to your brand, persuading customers to purchase now and
convincing customers to tell others about the brand.
3. Reminder advertising - this is used to maintain customer relationships,

reminding customers that the product may be needed in the near future, reminding
customers where to buy the product and keeping the brand in customer's minds
during the off-seasons.
4. Generic advertising / Collective advertising - it is used by a number of

producers in the same industry who jointly advertise a product in general without
using brand names. There is no competition among producers.
Advertising budget
This is money and other resources allocated to a product or a company's advertising

programmer.
Factors to consider when preparing an advertising budget

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 Stage of the product in the PLC e.g. products at introduction stage typically
need huge advertising budgets.
 Market share - firms with low market share usually require huge advertising
budgets to cover up.
 Competitors - firms with many competitors need a huge advertising budget to
match or outdo competitors.
 Advertising clutter - in high advertising clusters, the firm must advertise its
products heavily to be noticed high above the noise (clutter) in the market.
 Undifferentiated products - those selling products that resemble other brands
require heavy advertising budgets to set them apart.
Advertising Media
Media Advantages Disadvantages
Television  Good mass marketing  High absolute costs.

coverage.
 High clutter.
 Low cost per exposure.
 Less audience selectively.
 Combines sight, sound and
 Short life.
motion.
 Poor reproduction quality.
 Appealing to the senses.
 Fleeting exposure (brief).
Newspaper  Flexibility.  Short life.
 Timeliness.  Poor reproduction quality.

 Good local market coverage.  Some people do not like
reading.
 Broad acceptability.
 Small circulation along
audience.

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Direct mail  High audience selectivity.  Relatively high costs per
exposure.
 Allows personalization.
 Junk mail image.
 Flexibility.
 No competition with the
same media.
Magazines  High geographic and  Long purchase lead time.
demographic selectivity.
 High costs.
 Credibility and prestige.
 No guarantee of position.
 High quality reproduction.
 Good circulation along
readership.
Radio  Good local acceptance.  Audio only.
 Cheaper than television.  Fleeting exposure.
 High geographic and  Low attention.
demographic selectivity.
 Low costs.
Factors to be considered when selecting an advertising media

1. The reach of the media.
2. The selectivity of the media.
3. The relative costs of advertising.
4. The impact of the media.
5. The performance of the advertisement.
6. Type of the product.
7. The size of the market.

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8. Cost of advertising.
9. Effectiveness of the media.
10. Urgency.
11. Targeted group.
12. Nature of the goods.
Advantages of advertising
It informs customers about the products available, prices of the product, where to get
the product and how to get it. Allows consumers to make more informed choices. It
can be used to fight competition. During advertising assurance about the quality of
the products to the market is done. It acts as an aid to the identification of the product.
Advertising also increases profits and sales of a company. It persuades customers to
buy the product and create brand loyalty. By helping reduce fluctuations, it assists
in planning of production schedules.
Disadvantages
Advertising raises business costs and eventually prices of goods. It sometimes wastes
resources and raising prices without adding any value to the product. Persuasive
advertising coerces people to spend unnecessarily on the products and services they
do not want. Advertising can be used to prevent entry of other competitors in the
market. Some adverts are deceptive.
Sales Promotion
These are the short-term incentives used by the organization so that customers would
be able to buy their products. Like advertising, it is a form of one-way
communication but unlike advertising, it does not involve a paid medium. Sales

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promotion is employed in a supportive role to the other techniques of communicating
with customers. It is done to;
 Develop the product or brand image.

 Enhance the promotional activities done by the distributors such as
wholesalers and retailers.
 Reinforce advertising and selling messages.
 Aid product recognition.
 Attract attention.
 Encourage consumers to buy and try the products.
Sales promotion tools include; samples, coupons, cash refunds, demonstrations and
point of purchase displays at tills as we find in supermarkets.
Sales promotions are used in order to; encourage purchases and repeat purchases,
introduce new products, challenge competition, boost sales of a product and to
communicate with customers as an alternative to media advertising.
Disadvantages of sales promotion include that it encourages customers to be cherry

pickers, meaning they only buy products through offers leading to the erosion of the
brand image. It also does not bring preference and loyalty. This means consistently
using sales promotion can demean the product's image.
Place (Distribution)
The channels of distribution refer to all the stages in an organization through which
a product must pass between the producer and the consumer. Intermediaries who
affect channel length are agents, wholesalers and retailers. Intermediaries help to
break bulk, store and make it convenient for consumers to access goods by delivering
them where they are wanted.

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Of importance these days is direct marketing. Direct marketing is a generic term for
selling methods in which business organizations approach customers directly not
using intermediaries. The forms of direct marketing include; direct mail, tele-
marketing, direct response marketing and e-marketing of potential customers. It has
advantages of being selective and well-targeted as well as fitting with other
promotional activities. It is easy to monitor and cheaper than conventional
advertising. However, databases become outdated, old and finally obsolete due to
flux of people’s needs tastes and preferences, privacy is at stack and a lot of junk
mail distracts customers.
Channel Routes
1. Direct market (from producer to consumer) - usually used in selling of
industrial goods e.g. factory and farm shops.
2. Manufacturer to retailer to Consumer (3 Channel) - is a result of the rise in
large supermarkets chains which reduce the importance of the wholesalers but retail
chains are able to deal directly with the manufacturers and carry out their own
wholesale functions. The reasons why the wholesalers have been eliminated in this
channel are;
 Bulk buying by large scale retailers such as hypermarkets and departmental

stores with enough capital, own capital and warehouses.
 It is cheaper to buy from the manufacturer.
 Some fragile goods need careful handling.
 Perishable goods need quick delivery to the consumers.
 Manufacturers have opened retail stores e.g. Bata Shoe Company.
3. Manufacturer to wholesaler to retailer to consumer (4 Channel) - is the
known traditional channel in consumer goods markets. Retailers depend on
wholesalers for supplies of goods and commodities e.g. Chanaiwa Store depending
on Bhadela and Mohammed Musa wholesalers.

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4. Manufacturer to agent to wholesaler to retailer to consumer (5 Channel) -
here agents are found in the import or export market.
5. Manufacturer to agent to consumer (3 Channel) - the manufacturer uses the

services of an agent to sell the goods direct to the public. The agent works on behalf
of the manufacturer who in turn exercises greater control over the agent's activities.
Distribution can be intensive or selective depending on the control on stockiest of

goods done by the manufacturers.
Factors to consider when selecting a distribution channel are:
 Product factors e.g. unit value, nature of product and the technical nature of
product e.g. companies such as Komatsu and Gulliver offer product support
for their earth moving equipment.
 Market factors e.g. number of potential users of a product, geographical
concentration of the market and order size.
 Company factors e.g. financial strength, market ability of the management,
desire to control quality of the product, prices and distribution.

1(a) why might a firm find it beneficial to carry out market research? [4]
(b) Discuss the importance of market segmentation to a sportswear supplier. [4]
2(a) what is meant by the term demand? [2]
(b) To what extend is the Product Life Cycle (PLC) concept useful to a marketing
manager? [4]
3 (a) Why is it necessary for businesses to advertise their goods? [4]

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(b) Show the importance of packaging in the successful marketing of a product. [4]
4(a) what is forecasting? [2]
(b) State any three situations in which forecasting can be useful. [3]
5(a) Distinguish between marketing and selling. [4]
b) Explain any two factors that influence demand for a product. [4]
6(a) Explain what you understand by a cash cow in product portfolio analysis. [4]
(b) What strategy might be used to boost a problem child product? [2]
7(a) how might a marketing manager segment a market for shoes? [4]
(b) Show how the government might influence demand for a product. [4]
8 (a) Why may a company temporarily sell one of its products at a loss? [4]
(b) A business has decided to increase the price of its product from $1 to $1, 20 as
a result, sales fell from 1 200 to 900 per week.
Calculate the price elasticity of demand for the product. [3]
9 (a) Identify the strategies that a firm can adopt given the following situations
according to the Ansoff Matrix:
(i) Selling the present product in the present
market, [2]
(ii) Selling the existing product in a new market,
[2]
(iii) Selling a new product to the existing market.
[2]
(iv) Selling a new product to a new market. [2]
(b) Distinguish between marginal pricing and perceived value pricing. [4]
10 (a) What is niche marketing? [2]

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(b) Evaluate the usefulness of market skimming. [4]
11 (a) Explain how a manufacturer of soft drinks might find price elasticity of
demand useful. [4]
(b) The following information shows the effect of a price change, from $10 to
$15, to a product produced by Nyakunika Ltd.
Price $ Expenditure Advertising$ Sales (units)
10 5 000 20 000
15 6 000 22 00
(c) Calculate the promotional elasticity of demand for this product.
23 (a) Explain the two classes under which products are grouped.
a. Why might a clothes’ manufacturing firm be prepared to sell its product
at a price below the total cost of producing it? [4]
24 (a) List any two factors that influence pricing decisions. [2]
(b) Distinguish between niche marketing and mass marketing. [4]
14(a) Give any two advantages of desk research. [2]
(b) How important is research and development to an airline firm. [4]
15 (a) Explain the importance of promotional budget. [4]
(b) Evaluate the usefulness of Boston Matrix to a firm which offers a wide
range of products. [4]
16 (a) Identify any two methods of information gathering that a firm can use when
conducting a market research. [2]
(b) How can a firm extend the maturity stage of its product? [4]
(c) With reference to the Boston Matrix, which product has,

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(i) High market growth and low market share? [1]
(ii) Low market growth and high market share? [1]
Essay questions
1. Evaluate the contribution made by branding and packaging to an
organization’s marketing effort. (25)
2. Discuss how knowledge of product life cycle might assist a manufacturer of
cell phones when developing an appropriate marketing mix for his products. (25)
3 (a) Evaluate the contribution of advertising towards the marketing of goods and
services. (12)
(b) Evaluate the usefulness of market segmentation to a manufacturer of clothes.
(13)
4 (a) Discuss the contribution of market research to a newly established tobacco
processing firm.
(12)
(b) Evaluate the techniques that the firm might use to collect the market research
data. (13)
5. "Probability of success for many new products is very low.”
(a) Why, then, do many businesses decide to develop new products? (10)
(b) Discuss the importance of factors that might influence the success of a new
product. (15)
6. A clothing manufacturer is considering entering the fashion market.
(a) Discuss the factors that might influence the manufacturer's marketing strategy.
(10)
(b) Evaluate the methods the manufacturer might use to collect the information from
the fashion market. (15)
7 (a) Explain the criteria a marketing manager might use to decide on the advertising
budget. (10)

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(b) To what extent is advertising an important element of a firm's marketing effort
(15)
8. Discuss how and why a marketing manager might change a firm's promotional
activities at different stages of a product's life cycle. (25)

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TOPIC 6: NATURE OF PRODUCTION
Objectives
 Appreciate the nature of the production process and value addition.

 Understand the difference between production and productivity, efficiency
and effectiveness.
 Explain the importance of the concept of value engineering.
 Evaluate the methods of production.
 Understand significance of capacity utilization.
 Describe costs of production and how they affect businesses.
 Analyse various inventory management methods.
 Explain lean production methods.
Production
Production is a transformational process whereby inputs are converted or
transformed into useful goods. Raw materials are the things that go through
processing in order for useful goods and products to be obtained. When a product is
processed it ceases to be the same as the raw materials used to produce it. Its value
is added at each stage of the transformation process it takes the following forms;
 Extraction e.g. mining, forestry, farming.

 Analytical techniques e.g. breaking down substances.
 Fabrication e.g. welding.

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 Synthesis e.g. creating new substances or assembling components into a
whole product.
Production should not be confused with productivity, which is the ratio of
quantity and quality of units produced to the labor per unit of time.
CAPITAL VERSUS LABOUR INTENSITY
Capital intensive process is one that involves a relatively high proportion of
machinery and equipment. Such as at Coca Cola bottling company in Mutare.
There is the production of large quantities of highly standardized products at
low unit costs. The costs reduce because when many products are produced
costs are spread over many units.
A capital intensive process, is expensive to set up, and is inflexible in terms
of producing diferent versions of the product but cost are high when small
units reproduced.
A labor intensive process uses a relatively high proportion of people; for an
example, a design business.
Using a high proportion of labor can enable the business to be very flexible
and produce a wide range of personalized services. However, it may limit the
volume of products that can be produced.
Capital intensive Labor intensive
- expensive to set up - lower set up costs
- can achieve lower average costs - may be relatively expensive
if volume is high for high volumes as high
amounts of labor are needed
- can produce high volume - may involve lower output
levels
- may be relatively inflexible - relatively flexible

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The Production Function
Production function does a great job of embracing the process of innovation.

Flexibility makes innovation easier.
Involves the planning and co-ordination of work to ensure that goods and services
are of the right quality, are produced in time, in the required quantities and at a
minimum cost.
Innovation can lead to new products and also new ways of doing things. Firms that
do not have enough capacity to produce may subcontract.
Process innovation can occur when businesses change the way they deliver a service
egg ordering online, or change the way they produce or adopt to new ways of
producing eg turning to robots or automation .
Business operations and processes should aim to produce products and providing
services more efficiently hence need to embrace the concept of Enterprise Resource
Planning (ERP).ERP uses software to integrate the collection and use of information
for managers throughout a business.
The aim of ERP is to promote information determination as and when needed. It
therefore links to outside stakeholders such as suppliers. The information supplied
should be reliable, relevant and cost effective. Managers will be let plan for they will
be aware of available resources.
The impact of ERP should not be underrated in operations management.
In the transformational process inputs such as people, machines, materials and
money (capital) are converted (processed) to get outputs such as goods and services.
Operational management (conversion process) is concerned with the cost- effective

production of goods and services and it is the central activity in the organization.
Operations management is managing the conversion process.
Reasons for producing goods are;

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 To meet anticipated demand in response to marketing effort.
 To replenish stock (adding stock).
 To complete an individual customer's order.
Marketing and production should therefore be closely related.
A business must decide on the quality and type of product it wishes to make and sell
and then invest in the services needed including equipment of correct capacity and
labor with the necessary skills to produce the quality products. Failure of which
marketing effort is wasted (if information is not passed by the marketing department,
marketing effort will be meaningless).
A business cannot therefore create demand for a product it cannot produce or make.
However, areas of conflict between production and marketing may come from
aspects such as;
 New products - need to extent product life cycles to release a new product into
the market by either using penetration or skimming price methods.
 Quality of product.
 Prices - which pricing method to adopt i.e. cost - plus, competitive,
penetration?
 After sales service - who maintains the products afterwards, few resources to
offer product support?
 Product variation - different brands.
However, these are minimized by involving everyone in the company.
There may also be conflicts on simplification, standardization and specialization.

260
Business Location
Factors influencing location of industries vary from country to country but the
common ones are;
 Nearness to source of raw materials - natural resources and raw materials
affect primary and manufacturing industries.
 Nearness to markets and labor affect service industries, bulk or heavy goods
industries.
 Transport services - communication.
 Government influence or policy.
 climate
Reasons for Relocation of Industries
 Exhaustion of raw materials

 Shifts in labor force
 Changes in technology
 Industrial agglomeration
 Industrial inertia
 Environmental reasons e.g. pollution restrictions
 Shift in demand for goods and services (products produced)
 The need for new market segments.
Costs of Production
They involve initial production, waste from scrap or faulty goods.

Maintenance of equipment especially preventative maintenance.
Inspection for quality control purposes.

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Prevention costs e.g. staff training, extra maintenance and procurement of new
equipment. Investigation and servicing of complains.
NB* more on costs to be discussed under Approaches to Costing.
Efficiency and Effectiveness

Efficiency is getting the right thing the right way or getting the job done without
wasting resources e.g. time and raw materials to obtain maximum output.
Efficiency can be expressed as; Resources actually used divided by Resources

planned to be used multiplied by 100.
Production efficiency can be expressed in terms of percentage or scrap produced by

the process.
Effectiveness is doing the right thing at the right value or getting the job done at the
right time or on time. It is concerned about the achievement of objectives and can be
measured by the following formula:
Actual Output ÷ Expected Output x 100.
It is therefore possible to be efficient yet not effective.
Productivity
It is the measurement of a firm's efficiency. It measures output in relation to inputs.
It can be expressed as output per unit of input. In rising productivity, it takes the
form of;
 producing more with the quantity of inputs
 producing the same quantity with fewer inputs
 Outputs rising faster than inputs or vice versa

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The most common measure of efficiency is labor productivity. This measures the
amount a worker produces over a given time e.g. a worker can make a pair of jeans
in one hour. Labor productivity can be obtained by using the following formulae;
a) Output per employee = Total output ÷ Total number of employees
b) Output per person per hour = Total output ÷ Total hours worked
These can be expressed in monetary terms when the standard of products is produced
as value of output per person as follows;
Value of output per person = value of output ÷ total number employed
Value added per employee = Value added by the firm ÷ total number employed
These reflect the revenue contribution of the average employee but that can be
distorted by price changes.
The productivity of workforce reflects;

a) human capital
b) stock of capital at the disposal of workers
c) health and wage structure of the workforce
d) efficiency of the organization
e) Working conditions, industrial relations and employee motivation.
Productivity of capital = Value of output ÷ value of capital stock.
The productivity of capital reflects;
a) the technology incorporated in the company
b) age of the capital stock - machinery

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c) skills of the workforce
d) production planning
e) inventory management
f) product diversity
Productivity data is for detection of trends in the level of productivity over time,
comparing actual production with expected productivity and make comparisons
between productiveness of different plants or departments.
Low productivity means unsatisfactory planning, management, employee

motivation, training, unnecessary waste, processes and systems of work.
How to increase Efficiency and Productivity
 Work simplification - elimination of unnecessary operations, movements and

paperwork.
 Rationalization - reviewing and reducing size and scope of the organization.
 Capital investment - injection of capital to purchase new equipment to
modernize old equipment.
 Material utilization - improved control of material usage and stability.
 Improved planning - to increase the utilization of plant, equipment, schedules
and sequencing.
 Changes in the human resource mix - employing fewer but more skilled
workforce.
 Facilitate improvements, improving the working environment and factory
layout.
 Organizational change - flattening or downsizing the organizational structure.
 Simplification and standardization of variety - reducing variety or simplifying
the design to reduce waste.

264
 Outsourcing - buying from outside rather than making them internally in the
firm.
Value Analysis (Value Engineering)
It is an approach to improving the value of a product or process by understanding its
constituent components and their associated costs. There are three main features
involved in the design of a product that are targeted during value analysis which are;
performance, appearance and economy of manufacture also referred to as attributes
of a product. Value engineering seeks to find improvements to the components by
either reducing their cost or increasing the value of the functions.
How does it work?

In order to understand value analysis it is necessary to understand some key concepts
such as;
 Value: the ratio between a function for customer satisfaction and the cost of
that function.
 Function: the effect produced by a product or by one of its elements in order
to satisfy customer needs.
 Value analysis - methodology to increase the value of an object. The object
to be analyzed could be an existing or a new product or process and it is
usually accomplished by a team following a work plan.
 Need: something that is necessary or desired by a customer.
Basic Rationale Used in Value Analysis

Function may be broken into a hierarchy, starting with a basic function, for which
the customer believes they are paying and then followed by secondary functions,
which support that basic function. The purposes of functions may be aesthetic or
utility and basic functions may be either or both of these e.g. A coat may have a use
function of making you warm and an aesthetic function of looking attractive.

265
The product or process may be broken down into components, which can be
associated with the functions they support. Value of the product or process may be
increased by improving or replacing individual components. It also applies to the
whole item being analyzed, which may be completely replaced with a more
functional or lower cost solution.
Although this is a simple - sounding tool, it can be quite difficult in practice as it

requires both deep analysis of the product or process to be improved and also an
innovative approach to finding alternatives.
Strengths and Weaknesses of value analysis
Some of the major advantages in using value analysis can be summarized in the
following ideas;
 a high customer orientation - focusing on those aspects of the product or service
that better satisfy customer needs.
 Cost reduction - by eliminating functions that do not supply specific
advantages to satisfy customer requirements or needs.
 New ideas - that arise from the creativity or innovation phase and may add
radical changes and therefore competitive advantages that will be regarded by
the market.
 A new systematic mentality to take in account for next designs of products or
to systematically improve the existing ones.
The problems that may arise during the application of value analysis can be of
different nature. In order to arrive at a successful completion of the process, one has
to bear in mind the following
‘Rules’;
 Avoid making generalizations and superficial statement - it is important to be

precise at every moment.

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 collect, determine and examine all costs involved - only if one is cost
conscious will it be possible to determine the value of the thing being assessed.
 Make use of information from the best possible sources.
Organizing Production (Production methods)
The scheduling of production involves the organizing of activities in a manufacturing
plant or service industry to ensure that the product or service is completed at the
expected time. Production can be organized in job, batch, flow- line and continuous
production. Which method to be used depends on?
 Type of product e.g. whether durable or perishable.

 Size of the business e.g. many small firms may never have sufficient demand
or the capital investment required to operate on a large scale.
 Size and location of the market and therefore the volume of production
required.
 Frequency of demand, that is, whether the product is a regular purchase such
as toothpaste or infrequent such as central heating equipment.
Job Production
This method is used when a single product or small ''one off '' orders are made and
products are made according to customer specifications or requirements. A unique,
non-standardized product can be suitable for this method. There is no repetition of
product or tasks each product order must be planned and controlled separately. In
job production no stock of raw materials and finished stock is found. Job production
produces non - standardized products and because of this it is the most expensive
form of production. It is also labor intensive and requires considerable flexibility and
technical skills (trained workforce). Job production can be used in the production of
luxury goods like jeweler, houses, ships, racing cars, birthday cakes and wedding
invitation cards.

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Flow Production
Uses a series of repetitive processes and is common where mass produced

standardized products pass along a conveyer belt or assembly line. There is use of
dedicated machinery which produces large quantities of outputs. It is cost effective
for large scale production because the longer the production run, the lower will be
the unit cost due to wider spread of fixed costs.
Nowadays assembly lines are highly automated as businesses make increasing use
of robots and other forms of computerized technology like CAM and CAD.
It calls for careful organization and planning so that continuous flow from one
process to another happens and also to avoid “bottlenecks". Products such as cars,
television sets, chocolates, tinned foods and packed goods can be produced by the
method.
Batch Production
Batch production produces goods in separate groups or lots this method falls between
job and flow production. In it some repetition is done to complete batches or units
of production. Units of production can be made at any one time according to demand.
All items in a batch will move simultaneously from one process to another or from
one machine to another. It is suitable for production in the confectionary industry
where cakes, bread, biscuits and ban are produced in separate lots but using the same
dough and system.
It suffers from drawbacks of costs of changeover including retooling and prevention
of staff and machinery lying idle for long periods of time. Unit costs are very high
as compared to continuous flow production, reason being that production runs are
shorter. Wallpaper firms produce batches of different designs, paint manufacturers
make color batches and so on.

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Line Production
This is a repetitive manufacturing process in which each product passes through the
same sequence of operations and the machines and other equipment are laid out in
the order they are used. In line production, production is dedicated to the needs of a
single or small group of products and (unlike batch production) the process does not
have to be stopped and restarted for new products.
Advantages of line production include that assembly line allow workers and
machines to specialize at performing specific tasks which can increase productivity.
Large scale assembly lines can allow for mass production of goods that would not
be possible if products were made from start to finish by a single worker. The items
produced are almost identical, easy to monitor and maintain and replace worn out or
broken parts.
 There is standardization of products

 Training requirements are not too demanding
 Expenses are kept low.
Disadvantages of line production
 Items loose that individualistic flare of unique craftsmanship as a result of

standardization
 Due to little training workers’ wages are low.
 Not motivating to workers because of repetition and monotony due to lack of
creative critical thinking and mental stimulation.
Continuous Production

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Also called continuous process or continuous flow process because the materials,
either dry, bulk or fluids that are being processed are continuously in motion
undergoing chemical reactions or subject to mechanical or heat treatment.
Continuous process is contrasted with batch production as it refers to the large- scale
production of items which "flow" from one operation in the process to the next (often
on a conveyer belt). Little flexibility in the use of equipment and operations is
required, each operation being carried out by specialized machines and operators.
Advantages of continuous production
 Reduced processing time of work pieces

 Saving costs for temporary stoppage
 Control of the entire course of production
Disadvantages of continuous production
 Much capital is required to install production lines

 Low flexibility in changing products
 High receptiveness to malfunctions since a single fault can stop the entire
course of production
However, the technique of continuous production line is of enormous use if there is
a high demand for mass produced goods.
Problems of changing production Methods
Sometimes economy and circumstances dictate what firms should do to an extent

that some firms may decide to change production methods.
Finance Human Resources Marketing

270
From Job to  cost of  Less  Can no longer promote
equipment emphasis product as being
Batch
needed to placed on "customized" to each
handle individual's consumer.
large craft skills.  May have to promote
numbers
 in each the benefits of lower
batch prices and consistent
quality.
additional
working
capital needed
to finance
high levels of
stocks and
work in
progress
From Job or  Cost of  risk of low  mass production
Batch to Flow equipment motivation requires mass marketing
needed for and boredom so market research will
flow if traditional be essential to identify
 production. line largest market segments
production 
any Accurate estimates of
production techniques future demand to ensure
delays during are used that output matches
the  demand.
changeover Promotion and pricing
period may decisions will have to be
impact on geared towards a mass
cash flow marketing approach not
niche marketing, so the
orientation of the
business may have to
change.

271
From Batch or  Expensive  recruitment  Production and quality
Flow to cell CAM methods of flexible, improvements should
production. may be adaptable allow competitive
needed to staff keen to pricing and promotion
allow cells to work in of the improved quality
switch from  teams products.
one product to staff training
another. and
retraining
will be
needed to
achieve
multi-
skilling
Organizing the production function
(a) Kaizen (Continuous improvement)
A philosophy of on-going improvement based around small changes involving

everyone, managers and workers alike. Kaizen is based around people and their ideas
rather than investment in new technology. Each change on its own may be of little
importance. However, if hundreds of changes are made, the cumulative effects can
be substantial.
To work effectively Kaizen requires a commitment from management to establish a

special positive culture within the organization. The culture has to be communicated
to all in the organization.
Characteristics of Kaizen Philosophy

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 One employee two jobs
 Team working (cell working)
 Empowerment
 All employees should be involved
Problems of Implementing Kaizen
 Some changes cannot be introduced gradually and may need a radical (Kayak)
and expensive solutions.
 Changing organizational culture is not easy for most employees, a right
organizational culture has to be set.
 Often resistance from autocratic managers and poorly motivated workforces
hinder implementation of Kaizen.
 Costs may be incurred, when training staff to be better skilled and change their
attitudes.
Limitations of Kaizen
 Diminishing returns
 Radical solutions
Capacity utilization
The proportion of maximum output capacity currently being achieved. (The
maximum that can be produced is capacity) Capacity utilization is a measure of the
extent to which the productive capacity of a business is being used. It can also refer
to the percentage of total capacity that is actually being achieved in a given period.
Maximum capacity is achieved when a firm is making use of all the buildings,
machinery and labor available. Capacity utilization is measured using the formula:
Current output divided by maximum possible output expressed as a percentage.

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Or CO ÷ MPO X 100
A firm is said to be working at full capacity at 100% capacity utilization. Some firms
work at excess capacity while others work at below capacity. The degree of total
capacity being used is a major factor in determining the operational efficiency of a
business.
Maximum output is the total level a business may achieve in a certain period e.g. a
hotel, the number of rooms nights available during this period.
If the firm is working at full capacity, it is achieving 100% capacity utilization and
there is no spare capacity. Data on capacity utilization is widely used by analysts and
industry experts to compare performance of firms on average or how capacity
utilization differs from period to period. The capacity utilization rate measures the
proportion of potential economic output that is actually realized. Displayed as a
percentage, capacity utilization levels give insight into the overall slack that is in the
economy or a firm at a given point in time.
Under- utilization is the state of not being used enough or not used to full potential.
An example of underutilization is when a very smart person with a master’s degree
is just working at an entry level job in fast food outlets.
Capacity utilization is an important concept in that;
 It is often used as a measure of production efficiency.

 Average production costs tend to fall as output rises - high utilization can
reduce unit costs making a business more competitive.
Firms usually aim to produce as close to full capacity (100% utilization) as possible.

274
There are several reasons why businesses operate at less than 100% capacity
utilization.
a) Lower Demand;
 general reduction in overall market demand

 loss of market share Seasonal variations in demand.
b) Increase in capacity not yet matched by increased demand;
 possibly new technology introduced

 Provides some 'slack'.
c) Inefficiency (a problem = less competitive unit costs).
 Poor maintainable, quality, employee disruptions.

 When a business is operating at less than 100% capacity, it is said to have
‘spare capacity’. Sometimes spare capacity is not the problem - a business
finds itself with excess demand (i.e. it cannot produce enough to meet
demand). In such circumstances, what can it do to operate at higher than 100%
normal capacity? It can often;
 Increase workforce hours (e.g. extra shifts, encourage overtime, employ
temporary staff).
 Sub - contract some production activities e.g. assembly of components.
 Reduce time spent maintaining production equipment.
However, there are some potential pitfalls with operating at very high capacity (i.e.
around 100%) such as;
 negative effect on quality (possibly)
 Production is rushed
 Less time for quality control
 Added workload and stress
 Demotivating if sustained for too long.

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 Loss of sales
 Less able to meet sudden or unexpected increases in demand
 Production equipment may require repair
Advantages of working at full capacity
 Lower average costs (the fixed costs are spread over more output)
 Improved image amongst customers (business looks successful and busy in
the eye of customers)
 Increases staff motivation and job security.
Disadvantages of working at full capacity
 Company cannot produce any more which means you could miss out on
lucrative orders from customers.
 Training and maintenance increases (increased pressure on staff and machines
and a lack of time generally).
 Strain on resources.
Improving Capacity Utilization
Reducing capacity - reducing capacity will make it easier to have 100% capacity
utilization e.g. 50000 ÷ 10000 is only 50% capacity utilization where if they
reduce the maximum capacity to 75000, the capacity utilization will rise to 66%.
Increasing Sales - will increase revenue and therefore it would be easier to get a
profit. If selling more you are using more of capacity.
Increased usage - peaks and troughs demand stock up on stocks e.g. fireworks,
Easter eggs for certain seasons.
The capacity utilization is stock that can now be used for next season.

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Sub- contracting or Outsourcing - subcontracting is when you take orders and
produce ‘things’ for other businesses. It will increase capacity utilization as you are
making more not for your business but for other businesses as well.
Key Terms of Capacity Utilization
Subcontracting and outsourcing - employing another firm to carry out work and
deliveries or obtain goods from an outside supplier (contract work out).
Redeployment - transferring workers from one department to another.
Reducing capacity - to increase capacity utilization by reducing staff, selling of fixed

assets and leasing out capital assets.
Increasing sales - to increase capacity utilization by running a promotional

campaign.
Production costing
Costs can be classified by;
 nature of resources
 Function - production, selling, distribution and administration.
 product or job center
 type of costs e.g. direct and indirect costs
By type can be subdivided into nature of resources e.g. material and labor costs.
Marginal Costing
It is the ascertainment of variable costs and the effects on profit of changes in volume
or type of output by differentiating between variables costs and fixed costs. It is not

277
a system of costing such as process costing or operation costing but a means by
which management can obtain information.
Marginal costing is the cost of producing an extra unit - direct cost or the total of
variable costs.
It is important to the profitability of a business but which is not originally found in
cost accounts. Marginal costing requires us to classify costs in fixed and variable
costs.
Uses of Marginal Costing in Business
 Accepting business especially orders or contracts.
 Make decisions to make or buy raw materials or goods.
 Analysis of the performance of a department.
Fixed costs are costs that tend not to change regardless of the change in the volume
of production or capacity utilization. If there is variation in the level of activity, fixed
costs remain fixed at least in the short- run.
However, to say they are fixed is relative because they also may change in the long-
run.
Variable costs are costs that tend to change in direct proportion to the level of
activity e.g. overheads, power and so on. In a system of direct costing variable costs
are occasionally referred to as direct costs.
Marginal cost of a unit is the cost by which profits or total costs are changed if the
volume of output changes by one unit e.g.
Production units 1000
Cost of production $ $ per unit
Direct Labor 1000 1

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Direct Materials 3000 3
Direct Expenses 2000 2
Prime Costs 6000 6
Variable Overheads 1000 1
7000 7
Fixed Costs 2000
9000
If production had been 1 500 units the total costs would have been 12 500.
Marginal cost per unit remains constant regardless of the "contribution” which is
simply the difference between sales volume and marginal costs of sales e.g.
Sales Volume 10000 15000 25000
Prime Costs 7000 10000 17000
Add: Variable 1000 1500 2500

overheads
Marginal costs 8000 11500 19500
Contribution 2000 3500 55500
Fixed costs 5000

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NB * Contribution consists of fixed cost and profits. A contribution per unit remain
constant regardless of output.
General application of marginal costing
Fixed costs + variable costs = Total costs.
If the result is graphed we will get a break - even chart. Which is the graphical
method of showing the relationship between;
 fixed costs
 variable costs
 sales volume
 Profit or loss
Its function is to show what level of output the total costs equate with the sales
volume i.e.
The beak - even point.
For the purpose of preparing Break-even charts, it is assumed that there are no stock
changes i.e. sales units are equal to the production units.
Construction:
Vertical axis y corresponds to sales and costs. Horizontal axis x corresponds to

output or capacity. On most charts, the x-axis is measured as a percentage of total
capacity and is termed "activity".
The fixed cost (FC) curve is plotted as a horizontal line to the beginning of the total
cost line (TC) .AD is a straight upward sloping line beginning at the start of the fixed
cost line (FC).

280
It will be easier to add a fixed cost and variable cost curve together and plot the total
cost line rather than plotting a variable cost line.
Sales curve (OC) is a straight upward sloping line beginning at the origin of the
graph.
Information obtained from the chart
1. BEP is found on the point where sales curve crosses 40%. Formula for BEP is as
follows;
BEP in units of production = Fixed costs ÷ Contribution per unit
FC / C per unit (the answer will be in units of sales).
BE in sales = Fixed Costs ÷ Contribution X sales
= FC X 1/ PV ratio
PV = Profit Volume = FC/ 1 - VC/ SV.

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SV = sales volume.
2. Profit or losses - triangle ABO represents losses which would have been incurred
if activity was between O and BEP. Triangle CBD represents the profits that would
have arisen if activity was between BEP and maximum activity. Since these
triangles represent the difference between sales, income and total costs, then the
gaps between curves AD and OC at any level of activity will show the profit or
loss at that level.
3. Angle of Incidence - angle at which the sales revenue line crosses the total cost
line. If the angle is large, it means profits are being made at a higher rate even after
overheads have been recovered. Such a situation usually occurs when marginal
costs constitute a major portion of the costs of sales.
4. Margin of safety - the amount by which a selected level of activity differs from a
BEP. If the margin of safety is small a little reduction in activity could have
disastrous effects on profits whilst if the margin is large then profits will be made
even if activity drops seriously.
MOS = Profit ÷ Contribution X Sales or
Actual or expected sales - sales at BEP ÷ Actual or Expected sales x 100
= Expected sales less sales at BEP ÷ Exp sales X 100

Advantages of Break - Even Chart
 It enables a firm to obtain the level of output it is breaking so as to obtain the

desired level of output.
 Creates costs consciousness among managers so that they can find strategies
of minimizing costs so as to determine the level of output.

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 The MOS helps managers to measure the degrees of richness of the firm's
output at full capacity.
 illustrates the importance of a start-up keeping fixed costs down to minimum
(higher fixed costs = higher break-even output)
 Help entrepreneur understand the viability of a business proposal and also
those who will lend money to invest in the business.
 Focuses entrepreneur on how long it will take before a start-up reaches
profitability i.e. What output or total sales is required to break-even.
 Margin of safety (MOS) calculation shows how much a sales forecast can
prove overoptimistic before losses are incurred.
Disadvantages of break - even chart
 The concept assumes that costs can be easily divided into fixed and variable
costs but it is difficult because costs can take some characteristics of fixed and
variable costs at the same.
 Assumes a constant price function which is not too realistic
 Assumes total costs and total revenue functions are linear which enables a
firm to get only one breakeven point but total costs and revenue fluctuate and
take a curved linear function and brings about more break-even points.
 Unrealistic assumptions e.g. products are not sold at the same price at different
levels of output, fixed costs do vary when output changes.
 Most businesses sell more than one product so break-even for the business
becomes harder to calculate
 Break-even analysis should therefore be seen as a planning aid rather than a
decision - making or problem- solving tool.
INVENTORY CONTROL
Inventory is stock that is idle but needed by the organization.
Types of inventory

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1. Movement inventory - referred to as pipeline inventories. These are stock
quantities found between points of delivery and their nature is typified by the fact
that it takes some length of time depending on the distance between ordering stock
and receiving the ordered stock.
2. Buffer or safety stock - held to protect against shortages and not to cause loss of
customer goodwill. It is a minimum level of stock considered desirable.
3. Anticipation inventory - kept for future known demand to alleviate lack of supplies
when demand is due. It is normally done when it is known that there will be a plant
or firm shutdown. It is common for a state to stockpile its supplies in anticipation
of war, economic sanctions or unpredictable price fluctuations.
4. Seasonal inventory - sometimes commodities are only produced or supplied in
certain seasons. Such types of inventory need to be kept in adequate quantities to

enable continuous supplies in other seasons.
5. Display or promotional inventory - these are stocks that are kept, produced,
supplied for the purpose of display.
6. Cycle inventory - for some types of stock it is advisable and economical to order
them in lots and batches rather than in small amounts. The nature of ordering in
this regard creates ordering cycles.
7. Raw materials or component inventories.
8. Work- in- progress - in progress inventories.
9. Finished goods inventory.
Reasons for holding stocks include to;

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 Hedge against price increases.
 Absorb fluctuations in demand and production.
 Cater for unexpected increases in demand.
 Provide a buffer between different stages of production.
 Cater for stock outs (shortages).
 Take advantages of low ordering costs.
 Ensure that sufficient goods are always available to meet anticipated demand.
Inventory decisions
There are four main decisions to be made by the organization in regard to stock
holding decisions.
1. How much to order? That is storage or carrying costs versus ordering costs.
2. When to order? That is too early versus too late.
3. How much buffer stock should be kept?
4. How much to invest in each stock?
Ordering Costs and Obtaining Costs
These are costs incurred by an organization when stock is being replenished. They
consist of clerical, administration, transportation, inspection and payment of the
workers (salaries and wages).
Carrying Costs and Holding Costs
These are associated with the carrying and handling of a given label of inventory
over a specified period of time. They consist of explicit costs. Explicit costs are

285
monetary payments of factors hired or borrowed by the firm, on the other hand
implicit costs are those costs not reflected in monetary terms.
Shortage or Stock - out Costs

These are costs which are incurred when items cannot be supplied on demand. Some
of these costs include;
 Loss of customer goodwill.

 Lost contribution due to non - availability of goods to be sold.
 Loss of future sales.
 Increase in production costs due to stoppages.
Terminology in Inventory
 Lead time or delivery delay - time between ordering and delivery of an order
for planning purposes as this will help companies to reduce shortage costs.
 Demand - the amount of sales or units produced.
 Maximum stock - the highest number of items that can be kept at any given
time.
 Reorder level - the level of stock at which another order has to be made, i.e.
point of replenishing the stock.
 Re-order quantity - the number of items to be ordered.
These are illustrated below:

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Economic Order Quantity (EOQ)
A model that assumes the minimum costs of ordering and carrying of an inventory.
Economic order quantity is the number of units of an item which should be ordered
in order to minimize total inventory costs.
Assumptions of EOQ
 Demand is known and is constant over time.
 The lead time is known and is constant.
 Quantity discounts are not possible.
 The re-order quantity is constant.
 Receipt of an inventory is instantaneous.
 The entire order is received in a single batch.
 Costs are assumed to be constant and known over infinite time periods.
The chart below illustrates the concept.

287
Steps to find Optimum inventory
1. Develop a function of Co. (Ordering costs)
2. Develop a function of Ch. (Holding costs)
3. Equate one and two above.
Annual ordering costs (AOC) = Number of orders per day X Co per order.
Number of orders per day per year = Annual demand divided by number of units on
each order.
Therefore, AOC = D/ Qty X Co

= DCo /Qty
Where Q = is the optimum number per order.
D = annual demand
Co = ordering costs per order
Average inventory level = OQty÷2

Annual carrying costs (Ach) = Average inventory X Ch per unit per year.
= Qty/2 X Ch

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Total costs = TCo + TCh =D/Qty X Co + QCh/2
For economic order quantity we say: 2DCo ÷ Qty = Q2Ch/2
Q2=2DCo/Ch
Thus Q = √2DCo/Ch.
Example 1
The company's cost per each order is $20 and the carrying cost per unit is
$100.The annual demand per year is 365 units. Find the economic order
quantity.
Solution:
EOQ=√2DCo/Ch
= √ 2 x 365 x 20 ÷ 100
= √ 146
=12.8 units
Example 2
A local distributor for a National Tyre Company expects to sell 9 600 steel radial
tyres of a certain size and trade design next year. Annual carrying costs are $16 per
tyre and the order cost is $75, the distributor works 288 days per year.
a. Determine the EOQ.
b. How many times per year does the store re-order?

289
c. Determine the length of the order cycle.
Solution:
a) EOQ = √ 2DCo/Ch = √2*9600*75/16 = √1440000/16 = √90000 = 300 tyres.
b) Annual demand = Expected Units ÷ EOQ
= 9600/300
= 32 times
(c) Number of days ÷ Re-order times = 288/32 = 9
In short economic order quantity = √2DCo/Ch
Where: Co = purchase price per unit production cost.
Q = order quantity
Q2 = optimum order quantity
D = annual demand quantity
Co = fixed cost per order
Ch = annual holding costs per unit.
Advantages of Economic Order Quantity
 Is less expensive compared to other stock control techniques?

 Is the only stock control technique which is used to minimize total inventory.
 Reduces costs to the organization.
 The organization will be able to meet unexpected demand increases because
of the fact that they keep stock.

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 Organization may not be affected by problems associated with stock
shortages.
Disadvantages of EOQ
 Model assumes that ordering cost is constant which may not be true.
 Model assumes that rate of demand is known to be constant throughout the
year and demand may change.
 Works well when the lead time is fixed and lead time varies due to logistical
problems.
 It is difficult to maintain the price of a product for a long time.
 Works well when one single product is involved thus difficult with many
products at hand.
 Too much mathematical computations hence complex calculations.
Material requirement planning: (computer based Stock Management)

This is a computer- based production planning and involves control systems. It is
concerned with the production, scheduling and inventory control. It is also a
materials control system that attempts to keep adequate levels of stock to ensure that
the materials are available when they are needed. MRP is applicable in situations of
variety of items with complex bills of materials. MRP is not useful to organizations
which use job production and continuous production.
Aims of MRP
Materials requirements planning has the following objectives to;
 Ensure the availability of materials, components and products for planned

production and for customer delivery.
 Maintain the lowest possible inventory.

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 Plan manufacturing, delivery schedules and purchasing activities.
Advantages of MRP
 Can be used in the reduction of stock-out costs because it ensures the

availability of raw materials for planned production.
 It maintains the lowest possible level of inventory thereby reducing stock
holding costs.
 It is the only stock controlling technique which is used in situations of variety
of items with complex bills of materials.
Disadvantages
 Results in a dependency syndrome hence workers lack innovation.

 Many pressures to increase lead time in an MRP results in high levels of
unemployment.
 May suffer from system failure since it depends on computerization of
procedures.
 May increase costs to an organization.
 The lead time is expected to be constant regardless of how much work has
been released into the production system and this may create problems when
production levels are at or near full capacity.
Stock control chart
It is a stock controlling technique that involves the use of charts which show the
amount of stock in terms of order of goods and utilization of goods by the customer.
Stock control charts allow the organization to make decision on when, how and what
to produce. It specifies the amount of goods that a company should order and the
time of delivery.

292
It also shows re-order level meaning that it specifies the point at which the business
can place a new order. The stock control chart also specifies the amount of recent
stocks that should be kept to prevent stock-outs.
The business does not wait for stock to deplete so they reserve the stock level known
as buffer stock. On the chart, the straight horizontal line illustrates the level of stock
while slanting line shows the utilization of stock. The chart specifies the minimum
and maximum stock levels a business can hold at any particular time.
Advantages of Stock Control Chart
 It makes it easier to run and control stock simply because stock control charts
specify the amount and the time when the quality of raw materials should be
ordered.
 It makes it easy for the business to make necessary arrangements because it
specifies the amount of the lead time. This refers to the time interval between
placing an order and receiving that order.

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 It helps the business to avoid stock-outs given that raw materials are ordered
when stock has declined and a reserve stock is kept to carter for any
unexpected demand increases.
 It helps a company to efficiently and effectively utilize resources through
minimization of resource wastages.
 It is a technique which is most suitable for large businesses that operate on a
larger scale.
Disadvantages
 It requires some research meaning that it is a costly technique.

 A stock control chart requires continuous motivation and evaluation meaning
that it is a more time- consuming technique.
 It can result in an increase in warehousing costs such as insurance costs,
damages and obsolescence.
 It requires experienced production managers and stock controllers which are
very expensive to hire or employ.
 Stock control chart is difficult to implement in an unstable economic
environment where it might be difficult to determine the quantity to order,
time and delivery of stock.
 It is difficult to estimate the lead times.
Two bin method (TBM)
The two -bin system is a very simple stock controlling technique. It is very easy to
understand and practically applied provided warehouses are available. It facilitates
stock rotation and is a safeguard to the business for the risk of obsolescence of stocks.
The two- bin system requires that the organization fills the two bins when ordering
raw materials.
After the first bin has been filled then the second bin will be utilized.

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In other words, the two bin system controls stock by rotating warehouses.
Advantages of the TBM
 A simple stock controlling technique.

 Very easy to understand and practically applied provided warehouses are
available.
 Facilitates stock rotation and this safeguards the business from the risk of
possible obsolescence as stocks are rotated.
 Prevents stock-out costs since raw materials are ordered in bulk and two
warehouses are filled with stock which rotates.
 Results in enjoyment of economies of producing because two bin method
requires that raw materials must be ordered in bulk.
Disadvantages of two bin method
 Increases warehouse costs. Storage costs are relatively high given that all the
two warehouses must be filled with stock.
 Insurance costs are relatively high and the value of loss will be very high in
the event of a fire outbreak on warehouses.
 It might force the business to suffer possible obsolescence even if stock is
rotated because some stock can be affected by technological changes.
 Damages can also be high because of bulk orders and stock ages. This
increases unnecessary costs as compared to other techniques.
Pareto rule efficiency
It is a stock management technique which is based on reasoning. It states that all
companies categorize their stocks into two groups which explain that;
 80% of the stock is less important while 20% of total stock is more important.

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 80% of the total stock contributes 20% of the revenue and profits while 20%
of the total stock contributes to 80% of revenue and profits.
Thus, the organization must carefully monitor the 20% of its total stock.
Advantages of Pareto Rule Efficiency
 Acts as a complimentary strategy to other stock controlling techniques such

as stock control chart meaning that it helps in the implementation of other
techniques.
 It also helps to reduce damage, obsolescence and warehousing costs.
 It helps in minimizing unnecessary costs because it requires that the
organization gives attention to more important stock.
Disadvantages of Pareto Rule Efficiency
 It does not specifically state what should actually be done to control the
movement of stock into and out of the organization.
 It also results in negligence meaning that the organization can end up
neglecting the unimportant stock which may be very important.
 The organization can run the risk of producing poor quality products given
that some less important stock may not be given attention.
 The Pareto Rule cannot be practically used on its own but it must be combined
with other techniques such as Just in Time and Stock Control charts.

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OPERATIONAL EFFICIENCY/LEAN PRODUCTION
Lean production is the capacity of an enterprise to deliver products or services to its
customers in the most cost- effective manner possible while still ensuring the high
quality of its products, services and support.
In operational efficiency we are also concerned about efficiency and effectiveness

which have been discussed earlier on.
When producing goods or products or services companies should do that in such a

way that they enjoy economies of scale and avoid diseconomies of scale. In order to
do this companies should use lean production methods as well as work study
programs.
Lean production is an integrated approach to design, technology, components and

materials and requires a new culture for the firm.
Elements of lean production include;
 just-in-time
 time based management
 cell production
 total quality management
In lean production elimination of waste takes center stage. The seven types of waste
in most organizations that should be eliminated for organizations to operate
efficiently are;
 overproduction - excess production

 waiting time - idle materials in non-value adding activities
Written by: Caisy Zvakavapano (D.B.A. - Zim, B .A.-UZ, PGDE - ZOU.)
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 transportation - handling does not add value
 processing waste - should be kept to the minimum
 inventory waste - excess stock holding costs
 Motion - movement that does not add value should be avoided.
 Product defects - lead to reworking, scrapping waste time and resources.
Emphasis in lean production is placed on;
a. identification of problems
b. problem-solving
c. Improved utilization of people, space, capital and inventory.
This can be achieved by adopting lean production techniques of just - in - time

production, time -based competition, cell working, flexibility in working methods,
team working, continuous improvement (Kaizen), quality circles and total quality
management.
Just - in - time (JIT)

JIT involves both production and stock control system in which works are scheduled
so precisely that only the smallest amount of work in progress is held. It has been
associated with the elimination of stock in all its forms.
True JIT is concerned with elimination of all forms of waste, that is, wasted time and
effort, unnecessary activities and simplifying procedures.
Possibly the biggest form of waste in most organizations is the easiest to see and is
of course stock. Stock held because of such factors as poor quality, uncertain
delivery, minimum batch sizes exceeded, etc. JIT would argue that if you can
eliminate such problems you reduce stock and make considerable savings.
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However total elimination of stock is unlikely. The journey to eliminate stock
improves efficiency.
The following are the prerequisites for JIT;
 Single sourcing
 Long term contracts (18 - 36 months)
 Contracts renegotiated 6-12 months
 Extremely short lead times (2 weeks)
 Monthly rolling forecast to vendors (one year out)
 Very frequent delivery (daily or weekly)
 Good quality (on time, right quantity, no inspection)
 Engineering aid to vendor (if required)
 Frequent visits
 Local sourcing
 Freight consolidation programme
 Minimum paperwork
 Vendor training (statistical quality control measures)
 Standard packaging
 End to adversarial relationships.
The JIT Philosophy
Continuous drive to improve production processes and methods. Strives to reduce

and finally eliminate inventories because high inventory levels are thought to cover
up production problems. High machine and worker utilization will be achieved
through speedy repairs of machinery.
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It is really a system of enforced problem- solving where every material is expected
to meet quality standards, every part is expected to arrive exactly at the time
promised and precisely at the place it is supposed to be. Every worker is expected to
work productively and every machine is expected to function as intended without
breakdowns.
The requirements for successful JIT production.
 Employee flexibility
 Employee commitment
 Total quality or zero defects
 Preventative maintenance
 Cell production
 Continuous improvement to eliminate bottlenecks.
The advantages claimed for JIT stock holding are;
 the right quantities are purchased or produced at the right time

 higher quality
 improved customer service
 Minimization of inventory, work-in- progress and waste.
 reduced space requirements
 reduction in manufacturing lead time
 increased equipment utilization
 simpler planning systems
 increased workforce participation
 continuous emphasis on improvement and problem solving
 Reduced costs.
Problems that have to be overcome for successful JIT implementation
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 It requires a high degree of delegation
 It requires a change in the philosophy and culture of the business
 Economies of scale in purchasing items is lost
 vulnerable to break in supply indulging a breakdown in machinery
 It does not work in the case of irregularly used parts or specially ordered
materials
 JIT purchasing requires reliable and flexible suppliers
 It requires an atmosphere of close cooperation and mutual trust between the
workforce and management.
Quality control
Quality control involves the operational techniques and activities that are used to
fulfil requirements for quality. Quality is the totality of features and characteristics
of an entity (product) that bear on its ability to satisfy stated and implied needs.
Quality control traditionally emphasized control systems, product testing and

documentation control to ensure greater process control and reduced non-
conformance. Emphasis is placed on data collection, self -inspection, feedback
systems and intermediate inspection stages.
However, final inspection is still considered fundamental to protect the purchaser's

interests.
According to Mushipe Z.J. (2004) quality control ensures that products meet
minimum standards such as size, shape, weight and performance.
Quality assurance is closely related to quality control. It can be defined as, “all the
planned and systemic actions implemented within the quality system and
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demonstrated as needed, to provide adequate confidence that an entity will fulfil
requirements for quality." It is prevention based rather than inspection based.
Purposes of Quality Control
 reducing scrap rates or waste rates

 reducing the number of returns from customers
 maintaining a degree of conformance that is required for a product
 improving product quality
 no-defective products result into less costs
Ways of controlling quality include;
 setting standards
 inspection
 random sampling
 testing
 involving workers
 total quality management
 Kaizen groups
 benchmarking
Quality control methods that can be used are;
 feedback
 feed forward
 concurrent
Role of quality assurance department in an organization.
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 A quality assurance department's primary responsibility is to evaluate and
report (audit) the quality system.
 May perform other functions but it’s possible for these responsibilities to be
placed elsewhere
 Quality assurance means that all the activities concerned with achieving
quality are done with certainty
 Has direct route to management with executive responsibility
 Sets out the quality practices which relates to a specific product, service,
contract or project.
NB* in quality management everyone from the boardroom to the workshop and
even the grounds should know the objectives of quality control and assurance.
Communication is thus vital in achieving quality in an organization. Thus team-
work is called for.
Total quality management (TQM)

Similar but not identical to Kaizen but has continuous improvement type of
philosophy. The basic idea is the recognition that quality is not solely the concern of
quality control experts or related just to the finished product but is the concern of
everyone in the organization.
Scope of Total Quality Management
If an organization is totally committed to quality it will concentrate on;

 continuous process improvement
 treating everything as a process to be improved
 The use of scientific methods with decisions supported by facts or data and
statistical process control (SPC), failure modes and effect analysis (FMEA).
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 Perfection as a goal hence quality circles are used.
The organization will require;
 Universal participation of everyone, everywhere, individuals and

teams.
 Concept of empowerment - the aim is for all this to lead to, customer
satisfaction and exceeding the expectations of the customers both
internal and external.
Characteristics of a TQM Organization
 Profits come from customer satisfaction

 Value problem prevention rather than detection
 Complaints are seen as a challenge to learn and improve and not as a nuisance
 People and teams are important elements in the development process
 Training and personal development are important.
TQM or excellence is concerned with "getting it right first time." It is not interested
in zero defects only in products or services entering or leaving an organization but
all activities carried on within the organization and outside it. Many see the process
as a journey not a one -off exercise, we should all be striving to improve.
Requirements for TQM
 A corporate statement or mission statement clearly establishing TQM as a

goal for the whole organization.
 To achieve this strategic objective, management should organize a

programmer that gets everyone involved within the organization from top to
bottom.
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Costs of poor quality
The costs of rejects or defective products is made up of;
 poor delivery
 inadequate systems
 poor communications
 mediocre management
Failure to improve could result in closure of an organization.
Benchmarking
It is measuring products, processes or services against those of recognized leaders in
the same industry. It provides the basis of metrication - measurement of performance
of recognized successful companies. It includes the following in best practice
benchmarking;
a) Determine what makes the difference to the customer between an ordinary

supplier and an excellent supplier.
b) Setting standards in each of those areas identified, by reference to the best
practice that can be found.
c) Discovering how the best companies achieve these standards.
d) Applying in- house and other companies' experiences to meeting and

exceeding standards.
Stages of Best Practice Benchmarking
1. Decide what is to be benchmarked.
2. What is the performance standard? Who do we benchmark against?
3. How is the information obtained?
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4. How is the information analyzed and utilized?
Work study
The name given to the techniques used to determine the most efficient use of labor
in relation to other factor inputs in an organization. It is an important aid to
improving productivity. It began from the Scientific Management School of Taylor
and Gilbert.
Work Study has two sides which are method study and work measurement (or time
study).
Benefits of Work Study
 improved flow of work to reduce bottlenecks in the production process

 improved employee performance
 improved utilization of spare equipment and materials
 increased efficiency, productivity and ultimately profitability
 provides the basis for costing of jobs in the future
 Plans a more even spread of work among employees.
 improves planning by the provision of standard times and procedures
 Provides the basis for incentive schemes such as piece rate, which reward
workers for the amounts of produce done rather than time spent on the
process.
Method Study
Method study is defined as the systematic recording and evaluation of ways of doing
work as a means to develop easier, more effective ways thereby reducing costs. It
falls under lean production methods. The idea being that there is a best method of
performing a task and this can be discovered by means of scientific methods or
logical operations.
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As an analysis of doing work SREDIM (a common - sense heuristic or general
problem - solving strategy represents the method study stages.
1. Select the tasks to study
2. Record the facts about it
3. Develop a new method
4. Install / implement it
5. Maintain it by revising it on regular basis to ensure that it is operating as

planned and modifying it if necessary.
The main purpose of method study is to eliminate the unnecessary operations and to
achieve the best method of performing the operation. It is also called methods
engineering or work design because its main objectives are to improve efficiency
through;
 improved layout and design of workplace

 improved and efficient work procedures
 effective utilization of men, machines and materials
 Improved design or specification of the final product.
Work Measurement
The application of techniques designed to establish the time for an average worker
to carry out a specified manufacturing task at defined level of performance. It is
concerned with the duration of time it takes to complete a work task assigned to a
specific job. Work measurement helps to uncover non - standardization that exists
in the workplace and non-value adding activities and waste.
A work has to be measured for the following reasons;
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1. To discover and eliminate costs or ineffective time
2. To establish standard times for performance measurement
3. to measure performance against realistic expectations
4. To set operating goals and objectives
Techniques of Work Measurement
The following are the principal techniques by which work measurement is carried
out.
1. Time Study
Consists of recording times and rates of work for elements of a specific job carried
out under specified conditions to obtain the time necessary to carry out a job at a
defined level of performance.
2. Standard Time
The total time in which a job should be completed at standard performance i.e. work
content, contingency allowance for delay, unoccupied time and inference allowance.
Contribution of Work Study to Management Efficiency
 Better planning of projects and functions as a result of having complete

information about the extent to which activities of human resources and
material aids are used, accuracy or procedures and methods and prescribed
performance standards are employed.
 Management is in a better position to draw up meaningful control systems.
 Work study results in optimum utilization of labor saving tools.
 It is aimed at increasing output within the company and using financial
resources to an extent that output costs are decreased.
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 Help in drawing up career development programs by focusing on efficiency.
 Work study offers the basis for revising procedures and methods and it
provides the basis for setting performance standards.
 It motivates workers.
Management by Objectives (MBO)
It is the process whereby the superior and the subordinate managers of an enterprise
jointly identify its common goals, define each individual's major areas of influence
and responsibility in terms of the results expected of him and use the measures as a
guide for operating the unit and assessing the contribution of each of its members.
Objectives of MBO
 To measure and judge performance.

 To relate individual performance to organizational goals.
 To clarify both the job to be done and the expectations of accomplishment.
 To foster increasing competence and growth of the subordinate.
 To enhance communication between superiors and subordinates.
 To serve as a basis for judgments about salary and promotions.
 To stimulate the subordinates' motivation.
 To serve as a device for organizational control and integration.
Advantages of MBO
 Improves managerial performance.
 Concentrates on profit making activities.
 Better delegation.
 Improved communication.
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 Improved morale and sense of purpose.
 More effective development of executives.
 Early recognition of management potential.
Disadvantages of MBO
 Difficulty in goal setting
 Time consuming
 More paperwork
 Pressure on people
 Leadership problems
IMPACT OF ICTs ON OPERATIONS MANAGEMENT
Information communication technology is an important source of competitive
advantage. Modern companies that are doing well in the market have invested in
new technology. In manufacturing computers assist in;
- designing products
- The manufacturing process
- Production planning
- Monitoring and control
The competitive advantages resulting from ICT are as follows;
° Closer links with customers and suppliers
° improved information flow to increase the quality of decision making
° improved quality control
° increased responsiveness
° improved integration of marketing (what to produce) with operations (how to
produce it)
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° increased management control
° Greater control over budgets
° improved monitoring of environment and performance indicators.
Overall the coming of ICTs have changed the production and manufacturing
landscape.
1 (a) How do fixed costs differ from variable costs. [2]

(b) Comment on the limitations of contribution costing. [4]
2 (a) what do you understand by worker productivity? [2]
(b) How can management raise the productivity of workforce? [4]
3 (a) Explain the following terms: (i) Buffer stock [2] (ii) Lead time [2] (iii)
Economic Order quantity [2]
(b) Why would a manufacturer move from job to batch production? [4]
4. Explain any two factors leading to relocation of an industry. [4]
5. Graphically illustrate the following (i) Break - even point [2] (ii) Margin of safety.
[2]
6 (a) State the three common forms of stock. [3]
(b) Explain the role of stock control. [4]
7. Explain two ways in which a football club might reduce it break- even level. [4]
8.Mr Zivengwa is an old and experienced tailor who uses job production in making
suits for his customers.
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Outline the possible advantages and disadvantages he is likely to encounter in his
business. [5]
9. Evaluate the significance to a car manufacturer of adopting the Just - In - Time
system of stick control. [5]
10. Why do businesses want to control the quality of their products? [4]
11. Under what circumstances is it appropriate to use an absorption costing
technique? [4]
12 (a) State any three factors a firm has to consider when choosing a supplier. [3]
(b) Outline any two qualitative and two quantitative benefits derived from
quality circles. [4]
13 (a) Define batch production. [2]
(b) Explain one advantage and one disadvantage of batch production. [4]
14. Explain costs associated with

a) Holding stocks [2]
b) Holding inadequate stocks [2]
15 a) Analyse the possible problems to a firm of introducing 'just-in-time'

manufacturing. [4] B) how does work study affect the motivation of workers?
Essay questions
1. Assess the contribution made by a work study programme to a manufacturer of
shoes. (25)
2. Assess the methods that a business might use to improve productivity. (25)
3."The Just-In-Time method of stock management is not compatible with flow

production”
a) To what extent do you agree with this statement? (10)
b) Evaluate the appropriateness of flow production to a soft drink manufacturer. (15)
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4 (a) Discuss the reasons that might influence a firm's decision to relocate to another
country. (12)
(b) Evaluate the methods that might be used by a floor polish manufacturing firm
to improve its capacity utilization. (13)
5. Evaluate the contribution the Production Department can make towards the
achievement of business objectives. (25)
6 (a) Discuss the factors a firm might take in account when determining its stock
levels. (10)
(b) Evaluate the benefits of holding stocks to a business. (15)
7(a) why might a manufacturer not be keen to use flow production techniques? (10)
(b) Evaluate how value analysis might affect the success of a business. (15)
8 (a) Discuss the importance to a business of holding large quantities of stock. (10)
(b) Evaluate two methods a business might use to manage and control its stock.
(15)
9. Discuss factors a firm should take in account when determining level of stocks to
be held.
(10)
CHAPTER 7: ORGANISATIONAL STRUCTURES

Objectives
 Outline the importance of different organizational structures.

 Analyse the concepts of centralization and decentralization.
 Describe the importance of an informal organization.
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ORGANIZATIONAL STRUCTURES
An organizational structure defines how activities such as task allocation,
coordination and supervision are directed towards the achievement of organizational
aims.
Organizational charts are diagrams that show the internal structure of the business.
They make it easier to identify the specific roles and responsibilities of staff and how
their different roles relate to one another and the structure of departments within the
whole company.
The four types of organizational structure are functional, divisional, matrix and
project based.
Functional structure
People who do similar tasks, have similar skills and / or jobs in an organization are
grouped into a functional structure based on specialty. Accountants are placed in the
finance department and so on for the marketing, operations, senior management and
human resource departments.
The advantages of functional structures include quick decision making because the
group members easily communicate and learn from each other, since they already
possess similar skill sets and interests.
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Divisional Structure/Product Departmentation Structure
In this structure company groups workers into teams based on the products or
projects to meet the needs of a certain type of customer e.g. a bakery with a certain
operation might structure the workforce based on key clientele, such as a wedding
department and a wholesale or retail department. Division of labor in this kind of
structure ensures workers making similar products can achieve greater efficiency
and higher output.
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Matrix Structure
It is one in which a team of specialists from different departments of the organization
get together to work on a special project under the supervision of the project
manager. It can be defined as an organization that employs a multiple command
system that includes not only the multiple command structure but also related
mechanism and associated organizational culture and behavior pattern.
Advantages of Matrix Structure.
 It allows total communication between departments and cuts across the

traditional boundaries. Team members are given more autonomy and are
expected to take on more responsibility for their work. This fosters greater
innovation and creativity and allows managers to cooperatively solve
decision-making problems through group interaction.
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 Efforts are channeled towards what is good for the project or business instead
of individuals or departments. As project teams can be created easily, the
system responds quickly to changing marketing conditions.
 The members in the project teams will have their skills perfected and May go
back to their departments with more vitality and confidence hence the workers
will be more motivated.
Disadvantages of matrix structure
 This type of organizational structure takes lots of planning and effort, making
it appropriate for large companies that have the resources to devote to
managing a complex business framework.
 It encourages power struggles as to who is going to be the project manager.
 May be time consuming when members spend more time on discussion rather
than on action.
 May affect the morale when people are re - arranged at the beginning and end
of the project.
 Conflicts may arise due to split allegiances.
 There is also going to be problems of overlapping authority.
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Flat Structure
Known as horizontal organization or delayering. It has an organizational structure

with few or no levels of middle management between staff and executives. A flat
organizational structure attempts to disrupt the traditional top - down management
of most companies. Management is decentralized so there is no everyday "boss”.
Each employee is boss of themselves, eliminating bureaucracy and red tape and
improving direct communication. It involves a broad span of control and relatively
few levels of hierarchy. There is centralized authority with few levels of authority.
There are low levels of delegation and easier coordination.
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A company adopting this type of structure for everyday purposes typically
establishes a special top - down management system for temporary projects or
events.
Advantages of Flat Structures
 Good for staff requiring greater independence, challenge and responsibility.

 Speedy and improved communication
 Reduced overhead costs and uses supervisors.
 Faster decision making
 Lesser administrative distance.
Disadvantages of flat structures
 lose control
Difficult in coordination.
 More mistakes due to relaxed supervision.
 Pressure on managers and heavy penalty for failure.
Hierarchical Structure / Bureaucratic Structure
It is where there are different layers of organization with fewer and fewer on each
higher level. It is often represented as a pyramid. Most government corporates are
hierarchical with different levels of management power.
Advantages of hierarchical Structures
 Clear communications, employees receive their policy, directions and day to

day assignments from their direct managers.
 The role of each individual is clear and well defined.
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 Specialization of tasks is also possible.
 Responsibility and accountability are clearly defined.
Disadvantages of hierarchical structures
 Inflexibility - works for standardization process but not useful in dynamic

environments thus they are slow to react to new opportunities.
 Slow decision making - this is because responsibility and authority are
centralized in few people at the top.
 Resistance to creativity.
 It can stifle creativity and innovation.
 Lack of coordination - there are few horizontal links between the departments.
Departments make decisions which benefit themselves rather than the
business as a whole.
 In management by walking around, managers spend a significant amount of
their time making informed visits to work area and listening to the employees.
 The purpose of the exercise is to collect qualitative information, listen to
suggestions and complaints and keep a finger on the pulse of the organization.
 Also called management by walking around (MBWA).
ORGANISATIONAL CHART
 Shows that everybody is linked together in the

organization. All employees are aware of which
communication channel is used to reach them with
messages and instructions.
 Every individual can see their own position in the organization. They can
identify who they are accountable to and who they have authority over.
Employees can see who they should take orders from.
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 It shows the links and relationships between different departments within the
organization.
 Everyone is in a department and this gives them a sense of belonging.
FEATURES OF AN ORGANISATIOAL CHART
a) Chain of Command
The continuous line of authority that extends from the upper organizational levels to
the lowest levels and clarifies who reports to whom. In other words, it shows the
various levels and positions held in an organization and how they relate. Chain of
command also indicates the channel of communication - how instructions and
feedback flow in an organization.
b) Hierarchy of Authority
Shows the different levels within an organization for exercising authority. It clearly
shows the boss and the subordinate and their relationship.
Hierarchy of authority can create the following problems;
 Communication - slow and messages can be distorted or filtered (bureaucratic

red tape).
Narrow spans of control which might not be cost effective in an organization.
 Those in the lower ranks may feel detached or irrelevant to the organization.
(c) Span of Control
It shows the number of subordinates directly controlled by a one superior, the area
of activity, number of functions, number of people and things for which an
individual has responsibility on. The shorter the span of control means fewer layers
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of management within the organization and a relatively flatter organizational
structure. This can lead to:
 Faster decision making due to fewer levels of approvals required for a specific
decision, which allows the company to respond more quickly to business
issues.
 Better and more frequent communication between higher level managers and
staffers, so the staff is knowledgeable about company goals and the high -
level managers are more knowledgeable about daily operational issues faced
by staff.
 Reduced costs relative to a taller organization, since there are fewer
management layers needing compensation.
Factors affecting span of control
 Geographical dispersion/ size of organization.

 Capability of worker's / workforce skill level.
 Capability of boss / manager's responsibilities.
 Value - addition of the boss/ organizational culture.
 Similarities of tasks.
 Volume of other tasks.
 Required administrative tasks.
Narrow span of control means a single manager or supervisor oversees few
subordinates. This gives rise to a tall organizational structure.
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Wide span of control - this means a single manager or supervisor oversees a large
number of subordinates.
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d) Delegation
Assigning responsibility and authority to someone in order to complete a clearly

defined and agreed upon task while you retain ultimate responsibility for success.
Delegation incorporates empowering your teammates through effective leadership
and may be directed in any direction and used in any direction and used in any
organization. Effective delegation is the delegation of authority to the right people
on the correct time.
Reasons for delegation include;
 To enable managers to concentrate on major issues and thus get more work
done.
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 In other organizations subordinates have a more specialized knowledge about
a particular task to be performed - given such tasks employees feel trusted and
this motivates them to do well.
 To enlarge and enrich the experiences of subordinates and provide training
opportunities to enable subordinates to achieve or advance their careers.
Reasons why managers are reluctant to delegate
 Negative attitude towards workers where managers lack confidence and trust
in their subordinates and therefore find it difficult to delegate work to them.
 Unwillingness to let others make mistakes as they carry the blame.
Perceived threat - some superiors fear being replaced by brighter and better
subordinates.
 Lack of time of supervision and control, managers are advised not to delegate
if they do not have enough time for supervision since they will be blamed for
any negative outcome.
 Lack of ability by managers to delegate.
Centralization and decentralization
Centralization refers to the hierarchical level within an organization that has
authority to make decisions. When decision making is made at the top level, the
organization is centralized and when it is delegated to lower organization levels, it
is decentralized.
Businesses need to address where decision-marking power resides in the

organization.
Decision making is about “authority “so should it be kept centrally or not?
Most large businesses necessarily involve a degree of decentralization when it starts

to operate from several locations or it adds new business units and markets. The
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issue is really how much independence do business units or groups within a business
have when it comes to the key decisions?
A centralized structure keeps decision- making firmly at the top of the hierarchy
(amongst the most senior management).
Advantages of centralization
Easier to implement common policies and practices for the whole business.
 Prevents other parts of the business from becoming too independent.
 Easier to coordinate and control from the center e.g. with budgets.
 Quicker decision - making - usually easier to show strong leadership.
Disadvantages of centralization
 More bureaucratic - often extra layers in the hierarchy.

 Local or junior managers are likely to be much closer to customer needs.
 Lack of authority down the hierarchy may reduce manager motivation.
 Customer service does misses flexibility and speed of local decision - making.
Decision - making in decentralization is spread out to include more managers in the
hierarchy, as well as individual business units or trading locations.
Advantages of decentralization
 Decisions made closer to the customer - better customer service.

 Better able to respond to local circumstances.
 Should improve staff motivation.
 Consistent with aiming for a flatter hierarchy.
 Good way of training and developing junior management.
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Disadvantages of decentralization
 Decision making is not necessarily "strategic".

 Harder to ensure consistent practices and policies at each location.
 Maybe some diseconomies of scale e.g. duplication of roles.
 Who provides leadership when needed (e.g. in a crisis)?
 Harder to achieve tight financial control - risk of cost - over-runs.
Consequences of Poor Organization Structures
 Low motivation and morale
 Ineffective decision making

 Lack of coordination and control
 Poor communication
 Divisions and lack of co-operation
 Poor adherence to organizational objectives
 An inability to respond to changing conditions
 Duplication of activities
 Failure to provide opportunities for the development of future managers.
Formal and informal organizations
An informal organization is the social structure of the organization as opposed to the

formal structure of an organization. It establishes how an organization functions from
a practical standpoint. Formal organization is an organization in which the job of
each member is clearly defined, whose authority, responsibility and accountability
are fixed.
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Informal organization is formed within the formal organization as a network of
interpersonal relationships when people interact with each other.
Focus of the informal organization is the employee as the individual person.
Informal groups may cross- over departmental lines or levels. The behavior of group
members is determined by "norms" or normal standards of behavior such that if one
individual deviate he/ she will be sanctioned by the rest.
However, the informal group has a leader who has personal power (not related to
position) but arises spontaneously as people associate with each other.
Informal structures can either be beneficial or harmful to the business e.g. some
workers can be influenced at workplaces by people with whom they work.
If informal groups are not controlled they can cause the workforce to;
 resist change
 disrupt work at the organization
 create confusion at workplace by spreading hatred, rumors and animosity
 reduce productivity
 Cause unnecessary high rates of worker turnover.
However, good managers should not ignore the informal groupings but;
 Encourage them and use them as a source of information and constructive

criticism.
 If the group leader is identifiable, should try to delegate tasks through him so
that, the colleagues will not resist change.
 Build teamwork through the groupings.
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A good manager should also choose leaders or supervisors carefully to avoid
problems caused by informal groupings.
However, to the workforce informal groups are also beneficial because some of the
needs of individuals are satisfied by the informal organization and this is especially
the case when the formal organization fails to give satisfaction and motivation.
1. Why are some managers reluctant to delegate? [4]
2. Explain any two consequences of a poor organizational structure. [4]
3 (a) Define the term delayering. [2]

(b) How might a firm benefit from the process of delayering? [4]
4. Explain the merits and demerits of a geographically based organization structure.
[4]
5(a) Define a line relationship. [2]
(b) Evaluate the relationship between line managers and staff managers. [4]
6 (a) Define span of control. [2]
(b) Discuss the benefits of a wide span of control to a furniture manufacturing
company. [4]
7. Explain the limitations of vertical communication in a tall organizational structure.
[4]
8. Give factors which influence the extent of decentralization. [4]
9. Analyse the importance of a functional structure to a business. [4]
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10 (a) Draw a functional organizational structure, using the diagram explain the
‘span of control.' [5]
(b) Explain any two disadvantages of reducing managerial levels. [4]
11 (a) Draw a typical example of a matrix organizational structure. [3]
(b) Explain one advantage and one disadvantage of a matrix organizational
structure. [4]
12. To what extent is an organizational chart of significance to a business? [4]
Essay Questions
1 (a) Why might the span of control differ from one organization to another? (12)
(b) Discuss the effectiveness of hierarchical organizational structures. (13)
2 (a) Discuss the view that informal groups may be favorable to an organization.
(12)
(b) Critically examine the advantages of decentralization. (13)
3 (a) Explain the effect on the role of individual managers of reducing the levels of
authority in a tall organization. (12)
(b) Evaluate the effectiveness of matrix organizational structures. (13)
4 (a) How might a manager ensure effective delegation at the work place? (10)
(b) Evaluate the importance of decentralization to an organization. (15)
5 (a) with the aid of an appropriate diagram, explain the features of an organizational
chart. (12)
(b) Evaluate the benefits of decentralization to an organization (13)
6. Why might managers be keen on decentralization? (10)
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TOPIC 8: HUMAN RESOURCE MANAGEMENT
Objectives

 Explain the importance of human resource planning and management.
 Distinguish between selection and recruitment.
 Appreciate the importance of worker orientation, worker training and
development.
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 Evaluate the various methods that are employed to maintain good industrial
relations.
 Understand collective bargaining.
Human resource management (HRM) is the strategic approach to effective
management of an organization’s workers so that they help the business gain a
competitive advantage. It is a common term for the personnel function within a
business. The main aim of human resources management is to recruit capable,
flexible and committed people, managing and rewarding their performance and
developing their key skills to the benefit of the organization.
Good human resource management impacts on the efficiency, flexibility and

motivation of workers.
Functions of human resources management include human resource planning,

recruitment, selection, training and development, job evaluation, remuneration,
performance appraisal, work study, advisory role and guidance role.
Human Resource Planning
This involves strategies for (or rational approaches to) the acquisition, retention,
utilization, improvement and disposal of human resources of an organization. The
main reasons for undertaking human resource planning are to ensure that the
organization;
a) Is able to attract and retain staff in sufficient numbers and with the
appropriate skills to be able to operate effectively and achieve its
objectives.
b) Fully utilizes the staff employed.
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c) Is able to ensure that employees receive all the training and development
necessary for effective performance in their current roles and have the
flexibility to change roles as may be required.
d) anticipates and meet changes in the demand for its services or in the labor
supply
e) Meets future human resource requirements from its own internal resources.
f) Ensures that equal opportunities for promotion and development are

available to staff.
g) Keeps control of human resources costs and effectively anticipates the
staffing costs of new initiatives.
Human Resources Demand
Firstly, human resource planners should assess current and future requirements in
relation to organization’s marketing, production and capital investment plans. This
should be done in quantity and quality of labor.
The supply of labor needs to be analyzed as well in terms of;
 age structure
 skills
 grade
 turnover
 absenteeism
 overtime
 Work practices.
All these will help planners to project the future workforce.
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This also constitutes workforce audit which also involves an investigation of
manpower utilization to identify situations in which the organization is not making
full or best use of its employees. A situational audit can be done to find out more
about a firm's labor force. It means a stock take of the present scenario, especially
the statistics of labor say average number of workers at the firm and their rate of
turnover.
External supply of labor is analyzed in planning and data will be collected on;
 local and national demographic trends

 local housing and transport
 migration
 the employment activities of other firms
 changes in the local economy
 National agreements on conditions of employment.
Thus, after conducting an audit of existing supply, the planners will forecast future
supply to compare it with future demand. Data collected will be used for
establishment of human resource programs and policies for;
 recruitment
 training and development

 promotion
 remuneration
 productivity
 transfer
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 retirement
Redundancy
Recruitment and Selection of Staff
The best workforce is needed in most organizations and this calls for proper
recruitment which would reduce conflicts of interest between the organization and
workforce.
Recruitment and selection are necessary when;

 The business is expanding and hence a bigger workforce.
 Employees leave and they need to be replaced - this is called labor turnover.
Recruitment is the process of identifying the need for a new employee, defining the
job to be filled and the type of person needed to fill it and attracting suitable
candidates for the job.
Selection involves the series of steps by which the candidates are interviewed, tested
and screened for choosing the most suitable person for vacant post. The recruitment
and selection process should start with a job description. This is a detailed list of the
key points about the job to be filled - stating all its key tasks and responsibilities
.This job description attracts the right people for the post .A person specification is
drawn up, which is a detailed list of the quantities, skills and qualifications that a
successful applicant will need to have.
After the two steps above the third step is preparing a job advertisement. This shows
the job needs, requirements, and personal qualities and can be found in circulars,
newspapers, pamphlets and even broadcasted on televisions.
A short - list of applicants is done based on personal details on CVs
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Lastly job interviews are done.
However, some organizations rely on internal recruitment as opposed to external

recruitment.
Benefits of Internal Recruitment
 Quicker and cheaper than external recruitment.

 Greater variety and promotion opportunities may motivate employees.
 No need for induction costs.
 The firm has knowledge of the performance and skills and attitudes of the
candidates.
Drawbacks of Internal Recruitment
 Existing workers may lack needed skills.

 May lead to stagnation of ideas.
 Bad habits may be nurtured.
 Can create a vacancy elsewhere, postponing external recruitment rather than
avoiding it.
 Can lead to complacency if promotion is based on seniority.
Advantages of External Recruitment
 External applicants will bring in new ideas and practices to the business which
helps existing staff focused on future rather than “the ways things have always
been done".
 Should be a wide choice of potential applicants - not just limited to internal
staff.
 Avoids resentment sometimes felt by existing staff if one of their colleagues
is promoted above them.
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 Standards of applicants could be higher than if just limited to internal staff
applicants.
Disadvantages of External Recruitment
 It can be an expensive and time - consuming process, using up valuable

company resources.
 It can have a demotivating effect on members of the existing workforce, who
may have missed out on promotion.
The main sources of candidates for recruitment are;
 Media advertising
 Internal
 External advertisements
 Private employment agencies
 Job centers
 Education and training establishments
 Unsolicited letters and calls
The choice of method will vary with the type of job and the level of employment,
cost of recruitment method, size of the recruitment budget and the location and
characteristics of the likely candidates.
When the successful candidate is selected he/ she is offered a Contract of

Employment which is a legal document that sets out the terms and conditions
governing a worker's job. The Contract of Employment should be such that it does
not contradict with current labor - law practices.
Briefly, a contract of employment should include the following in its articles;
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 Date of commencement of work
 pay (remuneration)
 Working hours
 Holiday entitlement
 Sick leaves and sickness pay
 Pension
 Period of notice
 Title of job
 Whether contract is permanent or temporary
 Disciplinary procedures
 Grievance procedures
Included in the contract should be a clear statement of the identity of both sides to
the agreement.
Labor Turnover
This is the rate at which employees are leaving an organization. It is measured by
the ratio;
Number of workers leaving the firm per year ÷ average number of workers x 100
In other words;
Number of employees leaving in one year ÷ average number of people employed

x100
 Costs of High Labor Turnover

 Costs of recruiting, selecting and training new staff increase.
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 Poor output levels and customer service due to staff vacancies before new
recruits are appointed.
 Difficult to establish loyalty and regular, familiar contact with customers.
 Difficult to establish team spirit.
Potential Benefits of High Labor Turnover
 Low - skilled and less productive staff might be leaving - they could be
replaced with more carefully selected workers.
 New ideas and practices are brought into an organization by new workers.
 a business that plans to reduce staff numbers anyway - due to rationalization
- will find that high labor turnover will do this, as leaving staff will not be
replaced.
High labor turnover is normally a reflection of employee discontent, low morale,
wrong people employed. One other reason for high labor turnover is the availability
of high paying jobs in the market.
However high labor turnover is high in some industries than others, the availability
of college students looking for temporary, part time and attachment lead to high
labor turnover rates.
Labor turnover is low in law practice firms and in scientific research due to the nature
of the expertise required.
Training
This can be defined as work related education to increase workforce skills and
efficiency. Training can be further defined as investment in human resources to
improve effectiveness and / or efficiency.
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The purpose of training is to help employees to develop existing skills or gain new
ones.
There are three main types of training:
a) Induction training -is familiarizing newly appointed workers with key aspects
of their jobs and their employer such as health and safety policies, holiday
entitlement and payment arrangements. Aim is to make employees fully productive
as soon as possible.
b) On- the- job training - where employees acquire or develop skills without
leaving their usual workplace, perhaps by being guided through an activity by a more
experienced member of staff. It is less costly and quick. Business has control on
what the learner (inductee) learns.
c) Off- the -job training - where employees leave their normal place of work in
order to receive instruction, either within the firm or by using an external
organization such as a college or university. Is however expensive despite the fact
that the learner concentrates on studies undisturbed. It can also disrupt production.
d) Market failure - in the context of training, this refers to the reluctance of

employers to invest in training for fear that staff once trained will be poached by
other firms attempting to avoid training costs. If sufficient firms are discouraged
from training employees, overall skill levels within the workforce will fall leading
to loss of competitiveness for the economy as a whole.
Training Benefits and Costs

Benefits
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 Increases the level of and range of skills available to the business, leading to
improvement in productivity and quality.
 Increases the degree of flexibility within a business, allowing it to respond
quickly to changes in technology or demand.
 Can lead to a more motivated workforce by creating opportunities for
development and promotion.
Costs
 Can be expensive, both in terms of providing the training itself and also the
costs of evaluating its effectiveness.
 Production may be disrupted while training is taking place, leading to lost
output.
 Newly trained workers may be persuaded to leave and take up new jobs
elsewhere (poaching) meaning that the benefits of training are enjoyed by
other businesses.
Job evaluation
Is the placing of jobs in order of rank so that employees can be rated fairly? It is also
defined as a method of analyzing a job to assess, in non- financial terms its standing
relative to other jobs.
The purpose of job evaluation is to determine pay rates, especially in terms of

differentials between grades. The techniques of job evaluation are:
 Job ranking
 Job classification
 Point rating system
 Factor comparisons
Advantages
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 provides a rational basis for pay differentials
 is based on job content, not personal merit
 should result in equity between grades
 Plays a major part in ensuring that there is no discrimination on pay between
the sexes.
Drawbacks
 Elements of subjective judgment are found.

 Results in pay unrelated to performance.
 It establishes pay differentials but not absolute levels of pay.
 It supports rigid hierarchical organizations and concept of status, which
operates against flexibility and assumes that people are commodities that can
be fitted into defined roles.
 It has to be updated as job requirements change.
Remuneration
Types of remuneration include;
 Time rates
 piece rates
 measured day work
 performance related pay
 profit related pay
NB* Learners are expected to know the advantages and disadvantages of these
methods of remuneration.
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Labor Management Relations
Labor legislation
There is need for labor laws and principles. These are passed by governments to
control working conditions and the relationship between employer and employees.
Of importance is the impact of laws and regulations to health and safety and
employment rights such as protection from discrimination.
State intervenes in industrial relations through;
1. industrial relations laws
2. Agencies set up to improve industrial relations such as arbitration councils.
3. Its own policies as a major employer.

Improved industrial relations lead to higher productivity and improved
international competitiveness of industry and higher living standards for the whole
country. Some labor laws try to govern the activities of trade unions. Labor laws
and regulations are there to try to reduce conflicts between employer and
employees. Major cause of conflict has been outlined in the following quotation,
"At a simple level, the manager or owner aims to achieve satisfactory profit levels
by keeping costs, including labor costs, as low as possible. However, workers ---
and do not forget that wage costs are often a major part of total business costs ---
will seek to obtain high pay and shorter working hours.”
Some conflicts arise when businesses introduce change e.g. Relocation or new
technology and businesses rationalize.
The only way to solve the conflicts is to stick to labor laws and control of trade
unions.
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Collective bargaining between trade unions and major employers and their
associations can be another solution to conflicts between management and
employees. It is when representatives of unions and national employers negotiate
wage levels and working conditions but this makes unions very powerful.
Cooperation between labor and management may avert conflict. This seeks to
involve workers in decision-making and operational issues. Participation and
employee involvement may become an important factor determining the long - term
success of businesses in rapidly changing market conditions.
Trade unions
Trade unions can be defined as all organizations of employees which include, among
their functions that of negotiating with employers with the objective of regulating
conditions of employment. Functions of trade union include;
 Collective bargaining.
 Acting as channel of communication between employers and employees.
 Provides assistance to individual members with grievances or in disciplinary
matters and legal support on unfair dismissal.
 Helping employees participate in the process of decision making.
Despite these roles management (employers) can view unions as hostile and always
stir trouble.
If the power of trade unions is not checked they often force compliance upon
management by threatening; strikes, go slows, work to rule, overtime bans, strike
action, negotiations agreeing to arbitration (settlement of dispute by the intervention
of a neutral third party).
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Discipline and Dismissal of Employees.
It is the duty of the HR manager to sometimes discipline employees when they fail
to meet the laid down obligations pertaining to contract of employment. Several
ways are used to discipline a worker. It may start from withdrawing pay incentives,
forced transfer to remote branches of the company and so on.
Dismissal
When a worker is dismissed he or she is sacked from the job due to incompetence or
breach of discipline. Dismissal of workers should be done as a last resort because
unfair dismissal may lead to court action and company may suffer huge costs if
improperly done. Workers may be dismissed when they show incompetence, breach
conditions of employment and gross misconduct e.g. stealing, sexual harassment at
work and gross negligence on duty.
However before dismissing a worker, warnings should be given e.g. verbal warnings
and written warnings otherwise the company will be found wanting on unfair
dismissal.
Since dismissal may affect a worker's status, salary, social life and self-esteem, labor
courts are there to make sure there is no unfair dismissal.
Redundancies
This occurs when workers' jobs are no longer required, may be because of a fall in
demand or a change in technology. This may be part of company policy of
retrenchment to serve on costs to remain competitive or redundancies to reduce costs
which may affect worker morale to the remaining workers even leading to loss of
job security.
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Structured Questions
1 (a) what do you understand by the term performance appraisal? [2]

(b) Explain the importance of performance appraisal. [4]
2. What is a training programme? [2]
3 (a) What are the benefits of internal recruitment? [4]
(b) Outline any three factors which determine the number of employees required in
the future of a firm. [4]
4. Outline ways in which the Government might provide employee protection in
your country. [4]
5 (a) What are the main causes of high labor turnover? [4]
(b) How might management reduce high labor turnover? [4]
6. What are the effects of poor communication on industrial relations? [4]
7. How might a saw- milling firm benefit from training? [4]
8. Outline any two advantages of internal recruitment. [2]
9. Assess the effectiveness of induction training to a car manufacturing firm. [4]
10 (a) Why may a firm employ part - time workers? [4]

(b) What practices may be used in job enrichment? [4]
11. Distinguish between piece rate and time rate as methods of
payment. [4]
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12. What do you understand by the following terms? I)
Recruitment [2] ii) selection. [2]
Essay Questions
1(a) Examine the circumstances in which training and re-training might be
needed. (13)
(b) Assess the importance of performance appraisal to a firm in the service
industry. (12)
2. Assess the importance of the following activities in an organization:
(a) job evaluation (8)
(b) on - the- job training (8)
(c) Collective bargaining (9).
3 (a) Discuss the factors that might determine the choice between on - the- job and
off - the - job training. (10)
(b) Assess the role of a Personnel Department in ensuring health and safety in the
work place.
(15)
4. Assess the importance of an organization of
(a) human resource planning (8)
(b) job evaluation (8)
(c) training (9)
5 (a) what consideration might be taken in account when deciding whether or not to
centralize decision - making? (10)
(b) Evaluate the benefits of worker participation to large businesses. (15)
6 (a) Explain factors a Human Resource Manager might consider when recruiting
workers. (10)
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(b) Assess the importance of performance appraisal to a firm in a service industry.
(15)
7 (a) clearly distinguish between training and
development. (8) (b) Critically examine the importance of
training to a business. (17)
8. Assess the importance, to a firm, of the following:
a) Performance appraisal, (9)
b) Health and safety programs, (8)
c) Internal recruitment. (8)
9. Critically examine the symptoms of poor industrial relations in an organization.

(15)
10. Assess the contribution of training to a business organization that sells
computer accessories (25)
TOPIC 9: BUSINESS FINANCE AND ACCOUNTS

Objectives
 Outline the need for business finance and accounts

 Outline the different sources of finance for businesses
 Explain how the stock exchange functions
 Describe the significance of working capital in a business
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 Appropriate the role of international sources of finance
 Understand ratio analysis
 Understand investment appraisal
 Explain cash flow forecasting and cash flow budgets
Need for Business Finance
Business activity cannot take place without finance or the means of purchasing the
materials and assets before the production of a good or a service can take place.
Finance in the business is needed for,
 Buying equipment and materials and acquire suitable premises.

 The start-up of the business.
 Expansion when the business grows and also for replacement of worn out
assets or increasing their number.
 As working capital needed for the day to day running of the business e.g.
payment of overheads such as rent and salaries
The need for external finance will vary over the life of the firm, being greatest when
the business progresses to a further stage in the life cycle of a business. The business
cycle consists of the following stages; start up, expansion stage, consolidation stage,
development stage, maturity stage and decline stage.
Sources of finance can either be internal or external.
Apart from using finance to acquire assets finance is also needed for;
 developing new products

 developing new markets
 Deal with extraordinary situations e.g. cautionary.
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 finance export trade
 Provide working capital (stock of material).
Sources of finance
Whether to finance a business by borrowing or revolving funds, depends largely on
the aims and objectives of a business, through the views of their owners e.g.
proprietorial or entrepreneurial.
Proprietorial business people want to remain in control of the business as part of

their employment and are reluctant to source finance from external sources.
Entrepreneurial business people want to expand and tend to get funds from various
sources both internal and external Thus in choosing between debt and equity finance
promoters of businesses should consider whether they wish to;
 Share profits or not.

 Share decision - making or not.
 Reduce or add implications or dividends on shares and interest on loan.
This means there should be a balance between;
1. Profit maximization and wealth maximization
2. Management's and shareholder's interests
3. investment and dividend payment
These three decisions help to understand why keeping financing through debt or
equity.
The dividend decision is mainly concerned with establishing and carrying out a
dividend policy which includes;
1. A percentage of earnings paid to shareholders in cash dividends
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2. The stability of the absolute dividends about a trend
3. Share dividends and split
4. The purchase of shares.
The dividend pay-out ratio determines how much of the earnings are retained in the
firm but the most important consideration is the maximization of the shareholders'
wealth since they are after all the ones who have to be satisfied.
The value of the dividend to the shareholders (investors) must be balanced against
the opportunity cost of the retained earnings lost as a means of equity financing
Interest on debt has to be paid legally however debt financing increases the risk of
insolvency (high gearing).
Gearing
Gearing is sometimes known as leverage. It is the extent to which a company is

finance more by debt as compared to equity.
Debt financing and equity financing differ in that:
 As debt it takes preference in liquidation.

 Interest is an expense and should be paid before dividends.
 The rate of interest is either fixed or tied to the current base rate.
 Interest payments are tax deductible.
 Can be secured against fixed assets.
Advantages of high gearing
 Increased opportunities for equity shareholders.

 The company has increased capital without diluting equity.
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 Interest on loan is an expense for tax purposes whereas dividends are declared
after tax has been calculated.
Disadvantages of high gearing
 Increased risk of company failure.

 Increased risk for shareholders.
 Assets are pledged hence reducing control over them.
 Dividends fluctuate dramatically.
 Reduce prospective creditor's willingness to grand further loans.
 The gearing ratio is of particular importance to banks in considering whether
to grand loans to a firm because if highly geared a bank becomes reluctant to
grand further loans because of increased default.
Internal Sources of Finance
These exist within the business

and comprise of many sources.
a) Retained Profits
Most useful for small businesses

By using profits for reinvestment, a business avoids paying interest on a loan and
this can avoid heavy interest charges if the loan required is a large one.
There will be no need to sell shares and control is not diluted.
However, opportunity costs are met and forming this source may not be popular
with shareholders, also method is useful for firms posting profits only, not
suitable for big assets.
b) Sale of unwanted assets
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Assets no longer needed can be sold to raise finance such assets like land, buildings
are to be sold to raise large sums of money.
This has the advantage that business not committed to a high interest payment nor
do its shareholders suffer dilution of control as retained profits
However, the business may require the assets in the future hence loss of assets hence
a good decision should be to lease the assets rather than outright sale.
c). Sale and lease back
Under this arrangement firms sell valuable assets and lease them back again.
They may have the capital from the sale of the assets as well as the continuing use
of these assets.
However, business is now paying for assets that were once freely available which
affects profits in the long - run.
c) Reductions in working capital
Working capital is the cash required by the business to pay for its day - to - day
operations (e. g paying for fuel, raw materials and wages)
When companies reduce inventory levels, chasing up debtors more urgently and
delaying payment to suppliers they can raise cash generated from a firm's working
capital.
Reducing assets may reduce working capital and capital is released, which works
for sources of capital.
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However, there are risks in cutting down on working capital, that is firm's liquidity
will be reduced.
External sources of finance

Injection of funds into the business from individuals, other businesses and financial
institutions.
Businesses are likely to use external sources of finance when;
 a large sum of finance is required,

 The level of risk associated with the source of finance is low thus encouraging
outsiders to invest or lend money.
 The company's profit levels are relatively low thus reducing the possibility of
the use of retained profits.
a) Bank overdraft.
A short - source of finance
Bank allows a business to make an overdraft (more money than it has in the bank)
up to an agreed limit. These are flexible and simple to arrange.
Overdrafts are expensive because they often carry high interest charge. When the
business faces failure in the payment of overdraft interests it is better to convert it
into a long- term loan. Another disadvantage is when the firm is “called in" to make
the payment.
b) Bank loans
Say to apply for a loan and grant provided the company is solvent and has a
satisfactory history (credit worthiness).
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Collateral is needed.
There are high interest rates such that small companies struggle.
However, on the positive quick finance is obtained and paid back over a long
period of time.
c) Mortgages
These are long-term loans given by financial institutions solely for the purchase of
land and buildings, the property in question is used as collateral.
Mortgages are often for a long period of time and have fixed or variable rates of
interest and needed when large sums of money are also needed.
d) Debentures
These are a special type of long-term loan to be repaid at some future date, normally
within 15 years of the loan being agreed.
Have a fixed interest rate.

They can sometimes be a permanent loan for a business (irredeemable).
Can be secured by using the non - current assets of a business as collateral.
Debentures are another form of loan capital and holders of debentures do not have
voting rights in the business.
e) Venture capital
A source for small - to medium - sized businesses which are considered to be risky
and facing danger of failure.
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It is a mixture of loan and share capital.
Venture capital is obtained from wealthy individuals (venture capitalists) and

merchant banks.
Venture capitalists often want to control businesses they have provided funds to,
reason why they want to share experience with companies they assist with funding.
However, venture capitalist my takeover the firms.
f) Share or Equity Capital
Can be used at start up or for additional capital requirements by businesses.
By selling a large number of shares businesses raise finance.
Though issuing of shares can be very expensive, method is used only to raise large
sums of capital.
Private Ltd companies and Public Limited companies alike may raise capital through
issuing of shares.
g) Micro -finance
The provision of financial services for poor and low -income clients who do not have
access to banking services, such as loans and overdraft offered by traditional
commercial banks.
However, interest rates may be quite high as the administration costs of small loans
is considerable.
h) Crowd Funding
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A source of finance that entails collecting relatively small amounts of money from
a large number of supporters - the crowd e.g. the GEMS fund in Zimbabwe where
civil servants are contributing.
Important for new business start-ups.
NB: Other important sources of capital are:
 Trade credit
 Debt factoring.
 Hire purchase and leasing.
Factors influencing the choice of finance
 Business' legal structure

 Cost of the source of finance
 The rate of interest
 The cost of selling shares
 Opportunity cost
 Flexibility of the source to allow payment
 Control of the business or ownership
 The purpose for which the finance is needed
 The level of existing debt.
Working capital
Capital is the amount of money a business has for its day to day spending. It is used
to pay for expenses such as bills for fuel and raw materials and wages and rates.
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When considering working capital special importance should be given to what
remains of the business ' liquid assets once it has settled all its immediate debts.
Working Capital = Current assets - Current liabilities.
Current assets include; cash in the bank, trade and other receivables due to settle
their accounts soon and inventories - raw materials and components. Current
liabilities include; debts repayable to the banks e.g. overdraft, trade creditors and
other payables who expect to be paid in the near future and tax due to authorities.
Working capital can be calculated from a business' statement of final position.
Management of working capital is vital for businesses at every stage, be it start-up,

expansion consolidation stage, development stage, maturity stage and decline stage.
Revenue Expenditure and Capital Expenditure
Revenue expenditure is any expenditure on costs other than non- current asset
expenditure this means expenditure on purchase of items such as fuel and raw
materials that will be used up within a short space of time. Revenue expenditure is
recorded on the income statement under headings such as "cost of sales" and
administration expenses.
Capital expenditure means any item bought by a business and retained for more than
one year, that is the purchase of fixed assets or non- current assets, expenditure on
assets such as premises, production equipment and vehicles.
The value of non-current assets purchased through capital expenditure is shown on

the statement of financial position and reduction in value of these assets over time is
listed on the income statement.
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Capital expenditure is essential if a firm is to generate long- term profits.
Working Capital Management

Positive working capital is required to ensure that a firm is able to continue its
operations and that it has sufficient funds to satisfy both maturing short - term debt
and upcoming operational expenses.
The management of working capital involves managing inventories, accounts

receivable and payable and cash.
Of greatest importance in working capital monitoring or management are company

assets which are current assets and current liabilities.
The primary purpose of working capital management is to make sure the company
always maintains sufficient cash flow to meet its short - term operating costs and
short - term debt obligations.
Elements of Working Capital Management
The working capital ratio, calculated as current assets divided by current liabilities
is a key indicator of a company's fundamental financial health since it indicates the
company's ability to successfully meet all its short-term financial obligations.
Although numbers vary by industry, a working capital ratio below 1.0 is generally
indicative of a company having trouble meeting its short - term obligations. Working
capital ratios of 1.2 to 2.0 are considered desirable, but a ratio higher than 2.0 may
indicate a company is not effectively using its assets to increase revenues.
The collection ratio (average collection period ratio) is a principle measure of how
efficiently a company manages its accounts receivables. The collection ratio is
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calculated as the product of the number of days in an accounting period multiplied
by the average amount of outstanding accounts receivables divided by the total
amount of net credit sales during the accounting period.
The collection ratio calculation provides the average number of days it takes a
company to receive payment. The lower the company's collection ratio, the more
efficient its cash flow.
The final element of working capital management, for a company to operate

efficiently and comfortably, a company must carefully balance sufficient inventory
on hand to meet customer needs, while avoiding unnecessary inventory, that ties up
working capital for a long period before it is converted into cash.
Companies use the inventory turnover ratio to monitor this. Inventory turnover ratio
calculated as, revenues divided by inventory costs, reveals how rapidly a company's
inventory is being sold and replenished. A relatively low ratio compared to industry
peers indicates inventory levels are excessively high, while a relatively high ratio
indicates that efficiency of inventory ordering can be improved.
MONEY AND CAPITAL MARKET INSTITUTIONS.

The money market consists of organizations like banks, discount houses and finance
houses which borrow and lend money for short term periods often up to 30 days.
Functions of the money market are;
 To provide short term capital to the government, corporations and financial

institutions.
 To provide a market for short- term investors.
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 To invest funds in securities that have short -term maturities and are highly
liquid and have no risk.
 Acts as a barometer of liquidity within the economy.
 The money market is the main determinant of interest rates in the economy.
 The supply and demand of funds in the money market will determine the
interest rates in the economy.
Participants in the money market and their roles are as follows:
 Commercial banks - specialize in demand deposits and short- term

commercial loans and provide services to individuals and corporate investors
and borrowers.
 Merchant banks - mainly bankers to corporations providing investment, short
to medium- term loans facilities and corporate financial advice.
 Finance houses - financial institutions that specialize in providing finance to
corporates in the form of loans, factoring and leasing. Deposits are raised
mainly from money market and through fixed deposits.
 Discount house - involved in the buying and discounting in money market
securities such as acceptances, commercial paper, trade bills and government
securities.
 Building societies - largely mobilize savings deposits for providing mortgage
finance to individuals and companies
The Capital Market
 Provides long term finance for the government, businesses and individuals.
 Includes institutional investors, the stock exchange and issuing house.
 The foreign exchange market - deals with different currencies and is essential
for the import and export trade.
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The Zimbabwe Stock Exchange
Is a market on which stocks and shares may be bought or sold?
It is important for financial development of a company's capital structure.

Functions of the Zimbabwe Stock Exchange include;
 Dealing in existing securities such as stocks, debentures etc.

 provides a market for share buyers and sellers and enables companies to raise
finance
 Encourages people to invest in shares and stocks.
 Reduces risks of failing to sell shares by quoting shares on the stock exchange.
 Helps stabilization of prices and shares.
 Advertises share prices allowing the public to follow their investments and
change them as necessary.
 Protects the public against fraud by having fair market prices.
 Is the barometer of the health of and well-being of the economy?
 Lists and de-lists companies.
In short, the functions of the ZSE include investment, raising of capital, providing
the opportunity for liquidity and evaluate the performance of limited companies.
Other sources of finance for the government include from international financial
institutions such as the World Bank, International Monetary Fund (IMF) and African
Development Bank (Fad).
International Sources of finance

Are major sources of finance for non- profit organizations and include several
regional development banks such as the Asian Development Bank, the African
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Development Bank and the Caribbean Development Bank. The primary purpose of
these agencies is to finance productive development projects to promote economic
development in a particular region.
Of all the international financial organizations the most familiar is the World Bank,
formally known as the International Bank for Reconstruction and Development
(IBRD). The World Bank has two affiliates that are legally and financially distinct
entities, the International Development Association (IDA) and the International
Finance Corporation (IFC). The two have the same goals mainly to promote
economic and social progress in poor and developing countries by helping raise
standards of living and productivity to the point at which development becomes self-
sustaining.
Towards this common objective the World Bank, the IDA and IFC have three inter-
related functions and these are to lend funds, to provide advice and to serve as a
catalyst in order to stimulate investments by others. In the process financial
resources are channeled from developed countries to the developing world with the
hope that developing countries through this assistance will progress to a level that
will permit them in turn to contribute to the development process of other less
fortunate countries e.g. Japan moved from being a borrower to a lender and South
Korea is moving in the same direction.
The International Monetary Fund (IMF)
Upon its founding it has three primary functions.

 To oversee the fixed exchange rate arrangements between countries thus
helping national governments to priorities economic growth and to provide
short - term capital to aid the balance of payments. This assistance is meant
to prevent the spread of international economic crises.
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 It is also meant to provide capital investments for projects such as
infrastructure development.
 It negotiates conditions on lending and loans under their policy of
conditionality which was established in the 1950s, where low income
countries can borrow on concessional terms, which means there is a period of
time with no interest rates.
Need for Business Accounts
Main users of business accounts are; the public, investors, banks and lenders,
creditors and debtors, competitors, labor / workforce, government, financial analysts
and advisors.
It is therefore important for business to keep accounts of detailed records of

purchases, sales and other financial transactions.
The stakeholders mentioned above need accounting information for;
 Collection of data on transactions.

 Preparation of reports to both internal and external users.
This brings the ideas of management accounting versus financial accounting.
Management accounting is a process that involves partnering in management
decision-making, planning and performance management systems and providing
expertise in financial reporting and control to assist management in the formulation
and implementation of an organization’s strategy.
In short, “management accounting is the presentation of accounting information in

such a way as to assist management to the creation of policy and the day to day
operation of an undertaking." The aim of management accounting is to enable
management to maximize profits or minimize losses.
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Objectives of management accounting are;
 planning and policy formulation

 assists in decision-making process
 controlling
 reporting
 facilitates organizing
 Facilitates coordination of operations.
Financial Accounting is a specialized branch of accounting that keeps track of a
company's financial transactions. Using standardization guidelines, the transactions
are recorded, summarized and presented in a financial report or financial statement
such as an income statement or a statement of financial position.
Financial accounting information is used for decision-making by external users such

as investors and creditors while management accounting information is used for
decision-making by internal users, such as the management or operational managers.
Financial statements
The International Financial Reporting Standards approaches and terminology are

used for presentation of financial informal.
Income Statements
 Is an accounting statement showing a firm's sales revenue over a trading

period and all the relevant costs generated to earn that revenue?
 It records the revenue, costs and profit (or loss) of a business over a given
period of time.
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 An income statement is usually produced for internal use though a brief
summary may be in published accounts for external use.
Sections of the income statement are as follows;
 trading account
 profit and loss section
 Appropriation account.
a) Firstly the “gross profit" is calculated e.g.
Opening stock (at beginning of the year) Xxx
+ Purchases during the year Xxx
= Total Stock (available for sale) XXX
- Closing stock (at the end of the year) (XX)
= Costs of goods sold XXX.
This element is known as the trading account.
b) Operating profit is calculated as below;
Gross Profit XXXXX
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Less: Overheads/ expenses
-administration
- selling costs Xx
X XXX
=Operating profit (Net Profit)
XXXXXX
c) Profit before tax is calculated e.g.
Operating profit Xxxx
Add: Interest received - interest paid Xx
Add: Profit from one off activities Xxx
= Profit before tax Xxx
Less: Tax 20% Xx
= Net Profit after tax Xxxx
The net profit after tax shows the net amount that has been earned for shareholders.
The amount can be used by the firm as; distributed profits (dividends payment) and
retained profits (kept for investment).
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Management of business should be careful when declaring a dividend or retain large
amount for investment, hence there should be a balance between profit maximization
and wealth maximization.
Uses of the income statement
 Measures and compares performance of a business over time.

 Comparison of data with the expected profits levels of the business.
 Bankers and creditors need information to decide whether to lend money to
the business or not.
 Prospective investors may assess the worthy of investing under a certain level
of profit.
Statement of Financial Position
 Is a financial statement recording the assets (possessions) and liabilities

(debts) of a business on a particular day at the end of an accounting period?
 It only shows a picture of the business' assets and liabilities at a moment in
time (snapshot).
 SFP always carry a date on which the valuation of assets and assessment of
liabilities took place.
 SFP shows how the business has raised its capital and uses to which capital
has been put. Stakeholders find this statement useful.
Contents of SFP
a) Assets - items of monetary value that are owned by a business and are
purchased by the business' capital. Assets are of two categories;
1. Non- current assets - are fixed assets such as land, buildings, vehicles and
machinery. These are used regularly by the business and are held for more
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than one year and are not intended to be resold. They are divided into tangible
and intangible assets (patents, goodwill, trademarks etc.).
2. Current assets - these are likely to be converted into cash before the end of the
financial year. Cash and inventories are examples including trade receivables
(debts).
b) Liabilities - are financial obligations of a business that it is required to pay in

the future or debts owed to business organizations or individuals.
1. Current liabilities - debts owed by the business that are due for payment within
one year or less e.g. overdrafts, tax due for payment, unpaid dividends and
tax.
2. Non- current liabilities - not expected to be paid within short period of time.
Mortgages and bank loans are examples.
3. Total equity – shareholders’ fund, share capital and retained earnings are
liabilities because they have to be eventually paid out to shareholders in the
event of liquidation.
Reserves - profit accumulated during previous year's trading and not paid out to
owners of the business. The accumulated profit is invested into a range of assets that
are useful to the business and hopefully, generate further profits.
The Format of a Statement of Financial Position
Statement of financial position for ENG Pvt Ltd as at 31 December 20xx

Intangible non- current assets $4987
Tangible non- current assets $ 5258
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Inventories $3319
Receivables and $9082
cash $417
$23063
Other current assets
Total Assets
Current liabilities $(9780)
Net current assets $ 3038
Non - current liabilities ($6980)
Total liabilities ($16760)
Net assets $6393
Share capital $456
Reserves and retained earnings $5847
Total equity $6393
NB * in evaluating the Statement of Financial Position, attention should be paid to;
1. Working capital,
2. The proportion of its capital that is borrowed long - term.
Depreciation
The reduction in the value of a non- current asset over a period of time? It can also
be defined as the measure of wearing out, consumption or other reductions in the
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useful economic life of a non- current asset, whether arising from use, efflux ion of
time or obsolescence through technology or market changes.
Depreciation should be charged so as to charge a fair proportion of cost or valuation

to the benefit from use (SSAP12).
This definition makes two important points;
a) Depreciation is the measure of the wearing out or depletion of a non - current

asset through use, time and obsolescence.
b) Depreciation charges should be spread fairly over assets' life and so allocated
to accounting periods which are expected to benefit (i.e. make profit) from the
asset's use.
In the statement of financial position, the purpose of recording depreciation is to
account for loss in value. The net value of non- current assets (the net book value)
is historical costs less accumulated depreciation.
In the income statement, depreciation reflects the matching principle of allocating

the costs to an asset over time. It is a negative item in the income statement, though
not an expense as money does not leave the business.
The amount of depreciation deducted from the cost of the non- current asset to arrive
at its Net Book Value will build up (accumulate) over time as more depreciation is
charged in each successive accounting period. Accumulated depreciation is a
provision because it provides for the value of the non- current asset, the term "
provision for depreciation '' refers to the accumulated depreciation of a non- current
asset.
The effects of depreciation on company accounts can be summarized below:
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Statement of Financial Position Income Statement
The value of many non- current assets is The amount by which the value of non-
reduced over time and their current current assets is reduced annually is shown
values are recorded each year on the as an expense on the income statement.
statement of financial position.
There are many methods used for the calculation of depreciation but for the purposes
of this course the straight - line method and the reducing balance method shall be
explained. a) The Straight - Line Method
Commonly used method where total depreciable amount is charged in equal

instalments to each accounting period over the expected useful life of an asset .In this
way the net book value (NBV) of the non- current asset declines at a steady rate or
in a straight - line over time .In other words a constant amount of depreciation is
subtracted from the value of the asset each year. Calculation is as follows;
Original cost of asset less expected residual value Divided by Expected useful life
of asset (in years).
Example.
Original cost of an asset $800000
Expected residual value $200000
Expected useful life 6 years
Annual Depreciation = $800000-$200000 ÷ 6yrs
= $600000/6
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=$100000
After the first year, the NBV of the asset will be $700000 after the second year
$600000 and so on.
Evaluation of straight - line method
Compared to reducing balance method it is simple to calculate and understand. Is

widely used by limited companies. It spreads the cost of an asset over its working
life. However, simplicity is its principal weakness. Few assets lose their value
steadily over a period of time.
Most assets such as vehicles and computers depreciate faster in their early years of
use hence the straight - line method may overvalue the asset in the early years of its
life.
b) Reducing Balance Method
Depreciates assets by a greater amount in the first few years of life than in later years
it calculates the amount of depreciated charged as a fixed percentage of the NBV
(net book value) of the asset at the end of the previous accounting period. With this
method the annual charge for depreciation is higher in the earlier years of the asset’s
life and lower in the later years.
Example:
$
Original cost of asset 800000
Depreciation year 1(50%) 400000
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Balance as at start of year 2 400000
Evaluation of Reducing Balance Method
More realistic because assets depreciate faster in their early years of use. However,
the NBV is not equal to the current market value of the asset.
Importance of Depreciation to Firms

(a) it provides an accurate value of a business' assets throughout their lives and
allows for a" true and fair” assessment of the overall worthy of a business at any
time. It is required by investors and creditors.
(b) Affects the overall value and profits of a business.
The Effects of Depreciation
Higher Rate /Figure Lower Rate / Figure for

Depreciation Depreciation
Effects on Non-current assets valued less Non- current assets on the
statement of than their true worthy; thus, the statement of financial position will
financial true value of the business is be overvalued giving a false
position understated. impression of the company's
worthy.
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Effects on Depreciation expenses Low rates of depreciation will
income overestimated on income reduce the expenses incurred by a
statement statement, reducing level of business. This will result in
profit. business ‘profits being higher than
they would otherwise be.
Wider effects Business may look unattractive This may make the company more
to prospective investors, tax attractive to investors but will also
liability on profits may be increase its tax liability.
reduced, but tax authorities
might investigate. Business
may record surplus when asset
finally sold.
Stock valuation
Used for the pricing of materials issued from stores and for final accounts of a
business. Value of stock appears in statement of financial position at year- end. The
value of opening and closing stock affects costs of sales in income statements
especially the figure and tax to be paid.
The prudence concept states that stock value should be the lower of purchase price
and net realizable value (NRV). The NRV (net realizable value) method is the means
of valuing inventories (stock/assets) at the amount that would be raised by selling
them less any costs involved in the sale of the stocks.
Methods of Valuing Stock
The value of stock at year- end depends on a company's policies regarding the
issue of stock to production department and sales department. There are basically
three key methods of issuing stock to user departments, these are;
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 First-In-First out (FIFO)
 Last-In - First Out (LIFO)
 Weighted Average Cost (AVCO)
First - in - first out (FIFO)
 Assumes that materials are issued in the order in which they are acquired.
 The oldest price is used for all materials of a batch.
 Closing stock is valued at current price or recent batch price.
Advantages
 There is no risk in goods expiring or becoming stale. Some drugs for example
have a limited life span after manufacture, agricultural products also go stale
quickly, thus call for use of FIFO.
 due to changes in technology, new products are on the market quite often so
unless those goods that come in first are sold, the older goods may never be
sold - risk of obsolescence if any other method than FIFO is used.
 Closing stocks are representative of the ruling market places.
 FIFO is internationally recognized and it is the method used by tax authorities.
Disadvantages
 Closing stocks are high, leading to lower cost of sales. Profits are therefore
high and hence FIFO attracts high taxes.
 During periods of rising prices there is a risk of underpricing, where the
selling prices are cost plus mark- up. The selling price may end up being less
than or equal to the replacement costs of goods.
Last - in - first out (LIFO)
The goods that come in last should be sold or issued first.
The value of closing stocks is thus made up of the goods bought first.
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Advantages
 Profit margins are based on the latest purchase price and therefore there is no
risk of underpricing.
 Lower closing stocks implying lower profits hence LIFO attracts lower taxes.
Disadvantages
 It is not suitable for perishables as they may go bed before they get sold.
 There is a risk of obsolescence as some goods may end up being unsold at all.
 Closing stocks are grossly undervalued, not representative of market prices.
 LIFO is not recognized internationally by the tax authorities.
Weighted average cost (AVCO)
Stocks are valued at an average price calculated by dividing the total value of
stocks purchased by the number of items. Prices are recalculated after each receipt
taking to account both quantities and money value.
Advantages
 Prices averaged out thus, recognizing that all items should be included in the
calculation.
 Changes in prices are minimized.

 Have the effect of smoothing out the costs of production and costs of sales.
 Profits of different periods can statistically be compared.
 Recognized internationally by tax authorities.
Disadvantages
 The average does not represent prices actually paid.

 The new average must be calculated with every purchase of stock hence
tedious.
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The Net Realizable Value Method of Valuing Inventories
Values inventory at their likely selling price after allowing a reasonable amount for
costs associated with either the eventual sale or the disposal of the asset.
Used to avoid over and undervaluing stock on the statement of financial position.
Calculation of NRV
 Calculate the total value of all inventories held by the business i.e. the amount
the company could sell its assets for on the open market.
 Costs incurred in selling each asset the company possesses must be deducted
i.e. costs of advertising, distribution expenses etc.
 Final stage includes deducting the costs associated with selling the products
from the revenue raised from their sale.
 It is widely used internationally (IFRS).
 IFRS rules state that inventories should be valued at cost or NRV whichever
gives the lower figure.
Problems of valuing inventories
 Some inventories may lose value because are perishable.

 Inventory may be a fashion product.
Financial ratios
A ratio is a fraction or a percentage representing the comparison of one amount with

some other amount
A financial ratio is one figure in a set of accounts expressed in terms of another

figure in the same set of accounts. Ratios are expressed as percentages. Ratios can
be useful tools of financial analysis if carefully calculated and interpreted. Often
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used to indicate trends and as a basis for policy decisions. Ratios are useful to users
of accounting information such as, management, investors, creditors, suppliers,
banks, shareholders etc.
Liquidity Ratios
The liquidity ratio is the relationship which exists between;
 Liquid assets such as cash and good debtors, and

 Liquid liabilities such as creditors and bank overdraft.
Any stocks, work-in-progress or other current assets which are not cash or next to
cash do not enter into the comparison because stocks are converted into debtors and
it is the latter which are converted into cash. Thus, a direct measure of solvency.
a) Current Ratio
Measures the ability of a business to meet its liabilities or debts over the next year
or so.
Calculated as follows:
Current Ratio = Current assets ÷ Current liabilities
It is expressed in form of a ratio e.g. 2:1.
This means the firm possessed $2 of current assets (cash, receivables and
inventories) for each $1 of current liability (payables, taxation and proposed
dividends).
A ratio of 1.6:1 is nowadays recommended.
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a higher ratio of say above 3:1 indicates that too much cash is held that could be
invested in non- current assets to generate income or high amounts of inventories
are held which may go obsolete.
Current ratio may be improved by selling non-current assets or borrowing funds

(loans).
b) Acid test (Or quick) ratio
Measures short-term liquidity of a business.
Compares current liabilities with liquid assets excluding inventories.
The ratio measures the ability of a firm to pay its obligations in a short space of time
say 3 months.
Inventories are excluded because they may not have been sold by then.
The formula is:
Acid test ratio = liquid assets ÷ current liabilities
Answer is expressed as a ratio e. g. 2:1
A result of 1:1 used to be the normal figure but firms are able to operate with a figure
of 0.7:1 successfully. However, it varies according to type of business.
firms are not recommended to operate for a long time with high acid test ratios as
this suggests that a lot of cash is held up which should be profitably invested to
generate more income.
As with the current ratio it can be improved by selling non- current assets or agreeing
on long-term borrowing.
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It can be affected by window dressing.
Profitability Ratios
These show profitability in relation to sales revenue.
a) Gross Profit Margin
Gross profit is earned before expenses such as administration and marketing costs
are deducted.
Calculates the percentage of the selling price of a product that constitutes gross
profit.
Calculated by the formula:
Gross profit = Gross profit ÷ Revenue * 100
Result is in percentage
Results also depend on type of industry, firms that turnover their stock rapidly and
then trade with relatively few assets may operate with low gross profit margins.
Sales mix can have a major influence on this ratio.
Ratio can be improved by increasing prices although this may result in lower
turnover. Reducing direct costs such as raw material costs and wages will also
improve the figure of the gross profit margin.
b) Profit margin
Calculates the percentage of a product’s selling price, that is, its net profit after all
costs have been deducted but before tax is paid.
This ratio may be a better indication of performance than gross profit margin.
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Answer is in a percentage.
Profit margin = profit before taxation x 100 ÷ Revenue
A higher profit margin is preferable though it varies according to type of business.

Comparison of gross profits and profit margins can be informative. Business
enjoying a stable gross profit margin and a declining profit margin may be failing to
control expenses effectively maybe through buying expensive non-current assets.
Improvements in the profit margin may be achieved through higher selling prices or
tighter control of costs particularly expenses or indirect costs.
c) Return on Capital Employed (ROCE)
Commonly used to assess the profitability of the business - often referred to as “the
primary efficiency ratio”. It compares profit with the capital that have been invested
in the business.
Is calculated as follows;
Return on Capital Employed %= Operating profit X100 ÷ Capital Employed
Capital employed is the total value of all long-term finance invested in the business.
It is equal to:
Non-current assets + current assets - current liabilities
Or Non - current liabilities + shareholder's equity.
The higher the value of this ratio, the greater the return on the capital invested in the
business.
ROCE should be compared with previous year's results, to establish a trend.
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Result can be compared with bank rate to establish whether to invest the money in
the bank to earn interest or buy more assets for the firm.
ROCE results can be compared with the interest cost of borrowing finance - if it is
less than this interest rate than any increase in borrowings will reduce returns to
shareholders.
ROCE between 20 % and 30% is most desirable.
A business may improve its ROCE by increasing its operating profit without raising
further capital or by reducing the amount of capital employed, perhaps by repaying
some non-current liabilities.
Efficiency Ratios
Measures the effectiveness with which management controls the internal operation
of the business. They consider the following aspects of the management of an
enterprise;
 How well inventories are managed

 The time that the business takes to settle its own bills.
 The efficiency of creditor control, i.e. how long before customers settle their
accounts.
a) Inventory turnover ratio
This ratio records the number of times the inventory of a business is bought in and
resold in a period of time.
The faster the company makes a profit on each sale, then the faster it sells its
inventories, the greater the profit it earns.
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This ratio is mostly relevant to manufacturing firms and not services firms.
It is calculated as follows:
Inventory turnover ratio= Cost of goods sold ÷ Average inventories held
The result should be in number of times a year the inventory has been turned over.
In general terms the higher this ratio is, the lower the investment in inventories will
be.
This formula can be reorganized to express the number of days taken on average to
sell the business' inventories, hence;
Inventory turnover ratio = inventory x 365 ÷ cost of sales.
The ratio varies according to type of business e.g. Fruit seller and car dealer cannot
have comparable ratios.
Low figure means obsolete inventories and high figure indicates efficiency.
Holding lower stock levels and achieving higher sales without increasing levels of
inventory will improve this ratio.
b) Debtors' Days
Also referred to as receivables collection period.
This measures the time taken by the business to collect the money that it is owed.
If a company fails to collect what it is owed in a reasonable short space of time, it
may face liquidity problems.
It can be calculated as follows;
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Receivable days = receivable X 365 ÷ Revenue
The shorter this time period is, the better the management is at controlling its
working capital.
The ratio can be improved by selling goods on cash or giving short days to pay
credits e.g. 30 to 60 days.
c) Creditor Days
Known as payables collection period.
It calculates time taken by the business to pay the money it owes its suppliers and
other creditors.
Essential because, as delaying payment for as long as possible can help a business
to avoid liquidity problems. Thus;
Creditor days = Payables x 365 ÷ cost of sales
Delaying payment may improve company liquidity but creates bad relations with
suppliers.
Some delays will accrue interest charges hence lowering the company's liquidity
position.
When figure is lower it shows the company is experiencing liquidity problems, that
is, it is quickly paying its creditors hence affecting its liquidity position.
Investor Ratios
Shareholder’s ratios or investment ratios.
Important to potential investors and shareholders.
Shareholders can receive a return on investment in two ways;

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1. Through dividends paid from company profits over a financial year.
2. As a result of a rise in the price of shares - called a capital gain.
a) Dividend per Share
The total dividend declared by a company dividend by the number of shares the
business has issued.
Dividend Per share = total annual dividends ÷ number of issued shares
It is expressed as number of cents per share.
It is important to note that dividends may be paid in two parts: an interim dividend
halfway through the financial year and a final dividend at the end of the year.
A higher figure is preferable to a lower one as this provides the shareholder with a
larger return on investment.
It is made use of in comparison with other firms.
This can be improved by announcing higher dividends and therefore reducing the
amount of profit retained within the business. This may be attractive to some
shareholders but conflicts with long - term interests of the business, particularly if
profits are not rising.
b) Dividend Yield
Measures the rate of return a shareholder gets at the current share price.
It compares the dividend received on a single share with the current market price of
that share.
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The result of calculation is given as a percentage.
Dividend yield = dividend per share x 100 ÷ market price of share.
Results showing a higher return are preferable by shareholders seeking a quick

return. Longer- term investors might want a lower figure, allowing reinvestment of
profits hence generating a higher dividend in the future.
Results are affected by fluctuations in share prices.
Can be improved by increasing the proportion of profits distributed to shareholders

in the form of dividends.
c) Dividend Cover Ratio
Show how easily a business can pay its dividend from its profits.
A high dividend cover means that the business can easily afford to pay the dividend
and a low value means that the business might have difficulty paying a dividend:
Dividend Cover ratio= Profit after tax and interest ÷ total annual dividends
= Profit for the year ÷ annual dividend
A low level of dividend cover might be acceptable in a company with steady profits,
but the same level of dividend cover in a company with volatile profits would
indicate that future dividend payments may be at risk.
Generally, a ratio of 2 or higher is safer and less than 1.5 risky.
Less than 1 result means company is using retained earnings to pay a dividend and
this is not healthy for the company.
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Can be improved by reducing dividend payments or increasing profitability in the
long-term. d) Price - Earnings Ratio (P/E Ratio)
It reflects the confidence that investors have in the future prospects of the business.
A higher P/E ratio suggests that investors are expecting higher earnings growth in
the future compared with companies with a low P/E ratio. A ratio result of 1 for
example, would mean that investors had very little confidence in the future earnings
power of the company.
To calculate P/E ratio it is necessary to calculate the earnings per share (EPS) first
.EPS is the amount of profit (after tax and interest) earned per share
EPS = Profit after tax and interest ÷ total number of issued shares
The result is used in the calculation of P/E ratio as follows;
P/E ratio = Current share price ÷ Earnings per share
A higher P/E indicates that investors are anticipating higher growth in earnings in
the future than in companies with a lower P/E ratio.
Ratio should only be compared with other companies in the same industry and
company’s previous P/E ratios.
If a company has a P/E ratio of 20, investors are willing to pay $20 for $1 of current
earnings.
Limitations of using Financial Ratios.
 Many large firms operate different divisions in different industries, for these
companies it is difficult to find a meaningful set of industry average ratios.
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 Inflation may have badly distorted a company's statement of financial
position, in this case profits will also be affected.
 Seasonal factors can also distort ratio analysis - this understanding reduces
the chance of misinterpretation.
 Different accounting practices can distort comparisons even within the same
company (leasing versus buying equipment, LIFO versus FIFO etc.).
 Unless ratios are extracted at frequent intervals, the trends indicated could be
most misleading.
 Ratios only show results and do not show causes of poor performance.
 Accuracy depends on quality of information calculated from.
INVESTMENT APPRAISAL
Is a series of techniques designed to assist businesses in judging the desirability of

investing in particular projects?
Investment projects are undertaken because the business expects there to be a return
from them, in the form of cash inflows, received over the useful life of the assets
purchased.
Quantitative methods to be discussed are important because they make comparisons

easier.
For comparisons to be successful certain information should be necessary .The

following information is required:
 The initial capital cost of the investment.
 The estimated life expectancy.
 The residual value of the investment.
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 The forecasted net returns or net cash flows from the project - these are the
expected returns from the investment less the annual running cost of it.
However, all these rely on estimates hence lack certainty.
All the techniques used to appraise investment projects require forecasts to be made
of future cash flows - net cash flows.
Uncertainties about the future as a result of forecasting can affect the results of
quantitative techniques.
Payback Method
Payback period is the length of time it takes for the net cash inflows to pay back the
original capital cost of the investment.
May be used to compare the payback period of a particular project with other
alternative projects so as to put them in rank order.
It asks the question: From which project do I get my money back quickest?
Example 1
Project A ($) Project B ($)
Capital Outlay 14 000 18 000
Net Income Earned: Year 2 000 12 000

1
Year 2 000 4 000
2
Year 2 000 2 000
3
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Year 4 2 000 2 000
Year 5 6 000 2 000
Year 7 4 000 2 000
Total Net Income 24 000 24 000
Payback period 5 years 3 years
Thus, project B is preferred because it has returned the money quickly.
Example 2
Assume a company was considering whether or not to invest in $ 500 000 for new
equipment .The equipment is expected to last seven years and increase the firm's
cash flow ( net of operating costs ) by $ 150 000 per year. Can be calculated as
below;
Payback = Initial Outlay ÷ Cash inflows
= Cash investment required for the period ÷ Average annual net cash inflows from
period
= $ 500 000÷ $ 150 000
= 3.3 yrs.
Advantages
 Quick and easy to calculate

 Result easily understood by managers
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 Emphasis is on speed of return of cash flows given the benefit that
concentrating on the more accurate short - term forecasts of the project's
profitability.
 Results used to eliminate or screen out projects that give returns too far in the
future
 Used in the business where liquidity is of great importance over overall
profitability.
Weaknesses
 Ignores the cash flow after the payback period hence does not measure the
overall profitability of the firm.
 Very profitable investments may be rejected because they take some time to
repay the money because it concentrates on the short-term.
 Does not consider timing of cash flow during the payback period.
However, used as a quick check on the viability of projects or a means of comparing

projects. It is rarely used in isolation from the other appraisal methods.
Accounting Rate of Return (Average Rate of Return)
Calculates the average annual profits on an investment as a percentage of the original

amount invested.
Results can be compared with;
 ARR of other projects

 Minimum expected return set by the business (criterion rate).
 The annual interest rate on loans - if the ARR is less than the interest rate, it
will not be worthwhile taking a loan to invest in the project.
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Steps in calculating ARR
Add up all positive cash flows
Subtract cost of investment
Divide by life span
Calculate the percentage return to find the ARR by dividing by the capital cost and
multiply by
100
Example
Year Net cash flow
0 $5 million
1 $ 2 million
2 $2 million
3 $2 million
4 $3 million (including residual value)
Calculation:
Add all positive cash flows $2m + $2m+ $2m+ $3m = $9m
Less: cost of investment = $ 9m - $5m = $4 ÷ Life span = $4m ÷ 4yrs = $1m
Calculate percentage return = $1m ÷ $5m * 100
ARR = 20%
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Advantages of ARR
 Uses all the cash flows unlike the payback method.

 Focus on profitability.
 Result easily understood and easy to compare with other projects competing
for limited funds.
 Result can be quickly assessed against the predetermined criterion rate of the
business.
Disadvantages
 ignores the timing of cash flows

 All cash inflows are included which are less accurate.
 Time value of money is ignored.
Discounted Cash Flow Method (DCF)
 Takes the consideration of the "time value of money”.

 The reason is to avoid risk and opportunity costs.
 The time value principle means that the longer the delay before money is
received, the lower its value is in present day terms (present value)
Example
Year Investment project A $ Investment Project B $ 000s

000s
0 (500) (500)
1 400 100
2 100 100
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3 100 100
4 100 400
Both projects receive the same amount of cash inflows over a four year period and
would generate the same average rate of return (10%).However, the majority of the
cash inflow for project A occurs in year 1 while in project B this is delayed until
year 3 .The time value principle would suggest that project A is preferable to project
B .To show the effect of the time principle we need to calculate the present value of
cash inflows and outflows through the use of discounting. Discounting is the process
of adjusting the value of money received at some future date to its present value, i.e.
it’s worth today.
Discounting tables are used to convert future streams of income to their present day.
The rate of interest plays an important role in discounting.
The higher the interest rate, the less value future cash has in today's money. The
longer into the future cash is received, the less value it has today. Interest and time
are used to calculate discount factors.
Example (Extract from DFC tables
Years 8% 10% 20%
1 0.93 0.91 0.83
2 0.86 0.83 0.69
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3 0.79 0.75 0.58
4 0.74 0.68 0.48
5 0.68 0.62 0.40
Process of discounting
Year Net cash flow Discount Discounted cash flow Cumulative

$m Factor $m DCFs
0 (5) 1 (5) (5)
1 2 0.91 1.82 (3.18)
2 2 0.83 1.66 (1.52)
3 2 0.75 1.50 (0.02)
4 3 0.68 2.04 2.02
Multiply the discount factor by the cash flow e.g. $3 000 is expected in 3 years’ time.
Current rate of interest is 10%. Discount factor to be used is 0.75 - this means that
$1 received in 3 years’ time is worth the same as 75 cents today. This discount factor
is multiplied by $3 000 and the present value of $ 2 250 is obtained.
Net Present Value (NPV)
Uses discounted cash flows.
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Is calculated by subtracting the capital cost of the investment from the total
discounted cash flows.
The three stages in calculating NPV are;
 Multiply discount factors by net cash flows but cash flows in year 0 are never
discounted, as they are today's values already.
 Add the discounted cash flows.
 Subtract the capital cost to give the NPV.
Example
PROPOSAL A PROPOSAL B
Year Annual cash Discounting Present Annual cash Discounting Present value
flow $ Factor value$ flow $ Factor @10% $
@10%
0 (212 000) 1 (212 000) (451 000) 1 (451 000)
1 46 000 0.91 41 860 89 400 0.91 81 354
2 57 500 0.83 47 725 115 000 0.83 95 450
3 63 250 0.75 47 437.50 122 500 0.75 91 875
4 69 000 0.68 46 920 144 275 0.68 98 107
5 71 000 0.62 44 020 140 000 0.62 86 800
PV 15 962.50 NPV 2 586
As the net present value for proposal A (the cheaper option) is higher than that for
proposal B, proposal A can be chosen.
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The net cash flow for proposal A is also positive as cash inflows exceed outflows.
Therefore, the investment is viable. On the other hand, non-financial information
may affect this investment decision.
If NPV is positive project should go ahead (accepted) or greater NPV in comparison
project should go ahead.
Advantages
 Considers both the timing of cash flows and the size of them in arriving at an
appraisal.
 The rate of discount can be varied to allow for different economic
circumstances, for instance, it could be increased if there was a general
expectation that interest rates were about to rise.
 Considers the time value of money and takes the opportunity cost of money
into account.
Disadvantages
 Reasonably complex to calculate and explain to non- numerate managers.

 Final result depends on the rate of discount used, and expectations about
interest rates may be wrong.
 Net present values can be compared with other projects, but only if the initial
capital cost is the same, because the method does not provide a percentage
rate of return on the investment.
Internal Rate of Return (IRR)
The rate of discount that yields a net present value of zero - the higher the IRR, the
more profitable the investment project is.
The rate of discount is then compared with;
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 The IRR of other projects - the highest reflects the most profitable investment.
 The expected cost of capital or rate of interest and, if IRR is greater, the project
should be profitable, taking the cost of borrowed capital into account.
 A cut off rate or criterion of return pre- set by the business.
Advantages
 By giving a percentage rate of return, different projects costing different

amounts can be compared.
 The IRR is easily compared with the rate of interest or the criterion rate of the
business.
 It avoids the need to choose an actual rate of discount.
Disadvantages
 Calculation is tedious without a computer.
By giving an exact result, it can mislead business users into believing that
investment appraisal is a precise process without risk and uncertainties. Factors
Influencing Investment Decision
 The rate of interest
 The level of profit
 Alternative investment
 Political factors
 Legal factors
 Economic situation
 Investor confidence
The difficulties in forecasting sales arise from;
 Time scales
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 New markets
 Competitors' reactions
Managers can manage risks in an investment decision by;
 Purchasing raw materials on forward markets.

 Building in allowances for fluctuations in sales revenue and costs.
 Ensuring the business has sufficient financial assets available.
Investment appraisal techniques can be used without qualitative aspect, since they
are purely quantitative more weight can be brought about by the use of qualitative
aspects (informative) such as;
 Corporate image
 Corporate objectives
 Environmental and ethical issues
 Industrial relations.
CASH FLOW FORECASTS
Cash flow relates to the timing of payments to workers and suppliers and receipts
from customers. Cash flow can be defined as, the sum of cash payments to a business
(inflows) less the sum of cash payments (outflows).
If a business does not plan the timing of these payments and receipts carefully it may
run out of cash even though it is operating profitably. If suppliers and creditors are
not paid in time they can force business owners into liquidation of the business'
assets if it appears to be insolvent.
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Businesses are especially vulnerable to cash flow difficulties in their first months
and years of trading and during periods of major expansion. Before granting loans,
creditors require evidence of good management of cash flows.
The Distinction between Cash flow and Profits.

Profit is the surplus of sales over total costs, if any exists.
A profitable business does not necessarily have large sums of cash because;
 The business might sell large amounts of goods or services on credit offering
trade credit and payment will be made later.
 Some goods are tied up in inventories and may not be available to businesses
for other uses.
 Some businesses may have paid for non- current assets and used large sums
of cash to do so, and these assets will generate more cash inflows in the future,
the outflow of cash will be only at the start and may affect the firm's finances.
the three points above leads to businesses that are profitable but have less cash, hence
may be seen to become insolvent and having to cease trading.
A business can survive in the short- term without profits but cannot go on without
cash because cash is used to pay bills and other obligations on time.
Therefore, businesses must forecast their cash flows to;
 support applications for loans

 Help avoid unexpected cash flow crises.
Sufficient cash flow is therefore important to businesses in many ways;
 Businesses need working capital to pay suppliers of raw materials,

components and energy as well as labor costs. Most inflows come from sales
of goods and services and are used to pay for obligations on time.
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 Some businesses need to hold larger sums of cash than others e.g.
supermarkets can trade security and confidently despite holding relatively
small cash balances.
 However other companies, selling different products, need to hold larger cash
reserves to trade safely and securely e.g. house builders and ship builders
because they face a longer cash cycle.
 Businesses not holding enough cash reserves may experience difficulties
when trying to raise capital to fund the purchase of new assets or the
development of new products.
 Potential investors judge the business to be too great a risk when it fails to
have sufficient cash reserves and may decide not to grant loans or to purchase
shares.
How to forecast cash flows
A cash flow forecast is a document that records a business' anticipated inflows and
outflows of cash over some future period, frequently one year.
Example of cash flow forecast

Cash inflows: JAN FEB MAR APRIL
Owners' capital injection 6000 0 0 0
Cash sales 3000 4000 6000 6000
Payment by trade receivables 0 2000 2000 3000
Total Cash In 9000 6000 8000 9000
Cash Outflows:
Lease 8000 0 0 0
Rent 1000 1000 1000 1000
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Materials 500 1000 3000 2000
Labor 1000 2000 3000 3000
Other cost 500 1000 500 1500
Total Cash 11000 5000 7500 7500

Out
Net Cash flow Net monthly cash (2000) 1000 500 1500
flow
0 (2000) (1000) (500)
Opening balance
(2000) (1000) (500) 1000
Closing balance
Though cash flows forecasts differ from one another, they normally have three
sections and are calculated monthly.
An essential part of cash flow forecasting is that inflows and outflows should be
included in the plan at the time they take place.
Section 1 - Cash inflows
Forecasts of cash inflows into the business, usually on monthly basis, includes
receipts from cash sales and credit sales which occur when the customer is given
time to pay, normally 30, 60 or 90 days.
Section 2: Cash Outflows or expenditure section
It states the expected expenditure on the goods and services. Includes forecasts on
expenditure like on rent, rates, insurance, wages, salaries and fuel. At the end of this
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section the total expected outflow of cash over the time period in question will be
stated.
Section 3: Net Monthly cash flow and Opening and Closing Balance.
The net monthly cash flow is calculated by subtracting the total outflow of cash was
from the total inflow. If the closing balance is negative (shown by a figure in
brackets), then a bank overdraft will almost certainly be necessary to finance this.
The opening balance is the business' cash position at the start of each month. This
will be the same figure as at the end of the previous month. The net monthly cash
flow added to the opening balance figure is the closing cash balance for the month.
It is also the opening balance for following month.
Advantages of Cash flow Forecasts
 To new businesses they show periods of negative cash flow, so that plans can
be put in place to find additional finance e.g. Arranging a bank overdraft or
preparing to inject more owners ' capital.
 If negative cash flows appear to be too great, then plans can be made for
reducing these e.g. by cutting down on purchases of materials or machinery
or by not making sales on credit, only for cash.
 Investors and bankers want to assess the cash flow statements (forecasts) for
granting of loans.
 Cash flow forecasts can be easily amended if there happens to be changes in
the inflow and outflow of cash. The differences in expected forecast of inflows
and outflows necessitates the amendments.
Causes of cash flow problems
 Lack of planning
 Over - trading (expanding too rapidly)
404
 Allowing too much credit control resulting into bad debts.
 Unexpected events e.g. economic recession and new competition.
 Lack of qualified personal e.g. credit controllers.
Why cash flow forecasts can be inaccurate
 Inaccurate assumptions regarding the future levels of sales for the business or
the prices it will receive for its products - cash forecasts may be too low or
too high.
 Unexpected costs occurring - increase in prices of raw materials, costs of
labor, machinery breakdowns.
 Inexperience.
 Researching the market carefully can reduce risks of inaccurate cash flow
forecasting. It can establish the prices of customers and level of demand of
other firm’s products. Cost of raw materials and labor can be obtained from
local job centers. Can also monitor the operation of the forecast or use new
technology to analyses cash flows.
Methods of improving cash flow
 Reducing costs of production, seek lower cost resources to reduce cash

outflows, cutting hourly rates or reducing the number of employees however
quality may be compromised in reducing cash inflows, adverse publicity from
cutting hourly rates or number of employees, recycling is also a better option.
 Improving the management of trade receivables and trade payables -
negotiating credit terms, delaying payment to creditors.
 Debt factoring
° Short term borrowing
 Sale and leaseback
 leasing
 Reduction in costs
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 Hire purchase
However, there is no one best method of improving cash flow, this depends on;
1. How established the business

is
2. The business' level of
profitability
3. The type of business.
BUDGETING
A budget is a detailed financial plan for the future.
Budgets are usually drawn each month over a period of a financial year.
Types of budgets include;
 Sales revenue or income budgets

 Production or expensive budgets
 Budgeted income statements and statements of financial position.
Why businesses set budgets?
 Businesses will plan future costs and revenues using budgets.

 To assist businesses in controlling their finances by planning their expenditure
over a future period.
 Budgets are an effective way of ensuring that a business does not spend more
than it should.
 Businesses use budgets to assess the viability of new projects such as
launching a new product or relocating to a new region or country.
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A budgeting process can be a way in which employees are motivated -
delegating junior managers in their production.
 Monitoring budgets is a vital part of managing a business successfully - early
detection of underspending and overspending.
Delegated Budgets
Control of budgets given to individuals and teams in all levels in the organization.
The intentions behind these include;
 To reduce the number of managers, cutting wage costs.

 To motivate employees by giving them more diverse and responsible jobs.
 To help encourage employees at all levels to play a part in decision making
and problem solving.
This have overlay resulted into improved company performance.
Advantages of budgets.
 Production or expenditure budgets allow managers to ensure that firm does

not overspend.
 Allow senior managers to direct extra funds into important areas of the
business.
 •they can be used to motivate employees - satisfaction from being given

responsibility for a budget.
Sales revenue budgets can also be used as targets for employees, possibly as part of
the appraisal process.
Disadvantages of Budgets
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 In order to use delegated budgeting retraining will be required with a cost, and
if not properly used can demotivate staff.
 Conflicts in resource allocation may arise e.g. more influential managers
benefiting on less worthy areas leading to unnecessary spending.
 Budgets are short- term in nature and frequently require revision.
Lack of flexibility.
Preparation of Budgets
The master budget is presented to the board for the director's approval and once
approved the budget becomes the basis of the operational plans of each department
and “cost Centre “within the organization.
Before firms start to produce budgets, they should carry out some research which
may involve;
 Analyzing the market to predict likely trends in sales and prices to help plan
sales revenues.
 Analyzing likely actions and reactions of competitors in the market.
 Researching costs for labor, fuel and raw materials by contacting suppliers,
negotiating price reductions for prompt payment or bulk buying.
 Considering government estimates for wage rises, inflation and incorporating
these into future sales revenue and expenditure budgets.
Challenges faced in setting budgets
 It may be difficult to forecast sales accurately.

 The danger of unexpected changes.
 Decisions by government and other public bodies.
 Using manager's time effectively - time consuming for inexperienced
managers.
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 Ever-changing business, economic and political environments.
Sources of Information for Budgets
Apart from market research other sources are;
 Similar businesses
 Professional organizations
 Bank and government organizations
Zero based budgeting

Zero budgets exist when budgets are automatically set at zero and budget holder
have to argue their case to receive any funds.
Time consuming as review of the work and importance of each budget - holding
section is needed each year.
Only effective for setting production budgets.
Depends on negotiating skills of managers.
Flexible Budgeting
A flexible budget is one that is designed to change along with the sales volume or
production level.
Flexible budgets are more motivating for middle and lower - level managers as they
will not be criticized for adverse variances that might occur just because output was
lower than budgeted.
It’s more realistic and makes it easy to produce valid and accurate variance analysis
as they will now highlight changes in efficiency, not changes in output.
409
Incremental Budgeting
This uses last year's budget as a basis and an adjustment is made for the coming year.
The process for monitoring budgets is known as variance analysis. Variances occur
when an actual figure for sales revenue, expenditure or profits differs from the
budgeted figure .Actual sales revenue and cost figures can be higher or lower than
planned, similarly, actual sales revenue or expenditure figures may be higher or
lower than budgets.
Variances may be categorized as adverse or favorable.
Worked Example
Financial Budget $ Actual Result $ Variance Favorable or Adverse
variance $
Revenue 15 000 12 000 3 000 Favorable - this increases
profit
Direct costs 5 000 4 000 1 000 Favorable - this increases
profit
Overhead costs 3 000 3 500 500 Adverse - this reduces profit
Operating profit 7 000 4 500 2 500 Favorable - this increases

profit
Structure of a cash budget
Dzapasi Co Ltd
Cash Budget for January to March 20xx

JAN FEB MAR
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Opening balance /Overdraft Xxx Ccc Fff
Add: Income receivable
Income from cash sales XXX XXX XXX
Income from debtors XXX XXX XXX
Sales of non- current
assets
XXX XXX XXX
Sundry creditors
Xxx Xxx Xxx
AAA DDD GGG
Less: Outgoings
Xxx Xxx XXX
Payment for purchases
XXX XXX XXX
Payment for wages
XXX XXX XXX
Sundry expenses
XXX XXX XXX
Income tax and dividends
Loan repayment XXX XXX XXX
Capital expenditure XXX XXX XXX
Research expenditure Xxx XXX XXX
BBB EEE HHH
Closing Balance or overdraft CCC FFF III
Note that the closing balance for January becomes the opening balance for
February etc.
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1(a) Explain any two factors which influence the choice of source of finance to be
used by a business. [4]
(b) Analyse the possible drawbacks to a firm of increasing cash inflows by selling
idle assets. [4]
2 (a) a textile firm is considering to undertake a project whose initial outlay and
future cash flows are given below:
YEAR NET CASHFLOWS ($)

0 (100 000)
1 20 000
2 20 000
3 30 000
4 50 000
5 25 000
i) Calculate the Average Rate of Return (ARR). [2]
ii) If their criterion rate is 10%, advice the textile firm on whether or not it should
accept the project. [4]
3. A business is investigating three alternative investment projects each involving an
initial outlay of $5 million, the following calculations have been made:
NPV Payback period ARR
Project A ($2m) 4 years 30%
Project B $1m 3 years 40%
Project C ($3m) 2 years 60%
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Which project should the business choose, and why, when using the following
appraisal techniques:
a) Net Present Value, [3]
b) Payback Period, [3]
c) Accounting Rate of Return? [3]
4 (a) State any three different groups of people who might be interested in the
accounts of a firm. [3]
(B) Explain why it is good for a business to make provisions for (i) Bad debts, [2]
(ii) Depreciation [2]
5. How useful is ratio analysis to a firm’s management? [4]
6 (a) Explain any two factors which influence choice of finance. [4]
(b) What might be the advantages and disadvantages of high gearing? [4]
7 (a) State two sources of internal and two sources of external finance for a firm. [4]
(b) Outline the factors considered by a firm when sourcing finance. [4]
8. To what extent are published accounts of a firm useful to potential investors? [4]
9 (a) State any three methods of improving cash flows in a business. [3]
(b) Explain any two advantages of using debt finance. [4]
10 (a) Why might the government be interested in a firm's accounting information?
[4]
(b) Distinguish between a shareholder and a debenture holder. [4]
11. Explain any two advantages of debt financing. [4]
12. Comment on any three limitations of ratio analysis. [6]
13. Evaluate at least two methods of improving cash flows in an organization. [4]
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14. Mbanda Ltd accepts all investments which pay back the initial capital outlay
within three years.
Project X $(000)
Initial investment 4 000
Net return: Year 1 800
Year 2 1 000
Year 3 1 500
Year 4 1 400
Year 5 1 650
Year 6 1 700
Year 7 1 750
a) Using the payback method, should Mbanda Ltd accept this project? [4]
b) Explain why the payback method may not be a good way of deciding whether to
invest in this project. [4]
c) Recommend any other method Mbanda Ltd could use. [3]
15. A firm buys a machine worth $20 000. Its expected useful life is 5 years and has
a residual value of $1 000.
Calculate the depreciation charge for this machine in year
four, using; (i) the straight line method, [3]
(ii) The reducing balance method, at 20% per annum. [3]
15. A local bakery firm is planning to purchase the latest model of machinery
which costs $48 000. It’s gearing stands at 60%.
a) To what extent is the payback period useful as an investment appraisal
technique?[4]
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b) Discuss the significance of the firm's gearing ratio. [4]
17. A) Define the following terms: (i) zero budgeting [2] (ii) cost center. [2]
b) Distinguish between money and capital market. [4]
18. Distinguish between Last in First out (LIFO) and First in First out (FIFO)
methods of stock valuation. [4]
Essay Questions
1 (a) 'A balance sheet reflects a true and fair worth of a business at a given date.' To
what extent is this statement true? (10)
(b) With the aid of examples, explain how each of the following would affect the
reported profits of a business;
i) The first - in - first - out (FIFO) method of stock valuation.
(7)
ii) The straight line and diminishing balance methods of
depreciation. (8)
2. A construction company is considering an expansion programme involving large
capital investments.
Evaluate the significance of investment appraisal techniques the company could use
to choose between available capital investment projects. (25)
3 (a) Explain the distinction between financial and management accounting.
(5)
(b) Discuss the importance of ratio analysis to the following stakeholders
i) Managers ii) Creditors iii) Shareholders iv) Workers (20)
4 (a) Discuss the usefulness of a cash flow forecast to a new farmer. (10)
(b) Evaluate the possible ways a firm might use to improve its cash flow. (15)
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5. Evaluate the importance of keeping accurate business
accounts. (25) 6 (a) Describe the following types of budgets:
i) Flexible budgets; (4) ii) Zero budgets. (3)
b) Evaluate the usefulness of budgets to a large manufacturing firm. (18)
7 (a) Explain the importance of the Statement of Financial Position and the Income
Statement to the management of a firm. (12)
b) Evaluate the significance of short - term sources of finance. (13)
8. Evaluate the usefulness of ratio analysis to stakeholders when making decisions.
(25)
9 (a) Distinguish between debt and equity financing. (10)
(b) Evaluate the appropriateness of loan capital to a business. (15)
10. How might a business improve its liquidity? (10)
11 (a) why do some businesses window dress their company accounts? (8)
(b) Evaluate the usefulness of budgets to managers. (17)
TOPIC 10: PRESENTATION OF STATISTICAL DATA

Objectives
 Explain the nature and presentation of information.

 Identify sources of information for decision making.
 Collect, collate, analyze and use information for decision-making.
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 Explain different methods for presenting information.
There are a number of ways through which statistical data can be presented.
Pie Charts
A pie chart is a segmented circle with each segment being proportionate to the
variable represented.
Example: Present the data below using a pie chart.

Type of crop Output per year in tones
Maize 120
Wheat 100
Rapoko 90
Tobacco 150
Steps:
1. Find the total of the production of all the crops.
2. Express each value in relation to the total and multiply by 360°
3. Apportion the circle accordingly
4. Shade each segment differently and have a key.
Solution
1. 120 + 100 +90+150 = 460
2. Maize = 120/460 X 360° = 93.4°
3. Wheat = 100/460 * 360° = 78.3°
4. Rapoko = 90/ 460 * 360° = 70.4°
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5. Tobacco = 150/ 460 * 360° = 117.4°.
Advantages of a pie chart

 Easy to understand when comparing different values i.e. the bigger the
segment the greater the frequency.
 There is a sense of totality i.e. each value is related to the total of all values.
 It gives a visual picture of the values under study.
 Relatively easy to construct.
Disadvantages of pie charts
 There is some approximation due to rounding off of degrees.
 they can be clumsy where many values are involved i.e. it will not look nice
where say 15 segments are to be drawn on a pie chart.
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Bar Graphs
These are rectangular horizontal or vertical bars used to display data.
Types of bar graphs include; simple bar graphs, multiple bar graphs, compound bar
graphs and percentage compound bar graphs. For the purposes of our study we shall
give an example of a simple bar graph. Simple bar graphs are disjointed bars and the
height of each bar or rectangle represents the frequency of each variable.
Example:
The following are sales figures of a certain chain store over four years. Present the
data using a simple bar chart.
Year Sales in thousands
1990 20
1991 80
1992 100
1993 120
Solution
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For a simple bar graph a key is not necessary since the same shading can be done for
different years.
Advantages
 Relatively easy to construct and understand.

 They are good for comparison purposes (the highest rectangle shows the
highest frequency).
 There is no approximation - the values are exact.
Disadvantages
 They do not reflect a sense of totality i.e. each value is not related to the total
of all values.
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Pictograms
These are symbols or pictures which are used to display or summaries data.
Example: The barrels of fuel in thousands imported from January to May by

Zimbabwe are as follows.
Month Barrels of fuel
January 4
February 5
March 3
April 6
May 2
The advantage of this display is that it gives a quick visual picture of the variable
under study, i.e. the type of symbol used should reflect to the data set under study.
The disadvantage is that of accounting for values like 2351, how the drum will be
drawn to represent that amount of fuel.
Line Graphs
A line graph is a line drawn connecting values of a variable at different time periods
.This graph is ideal for portraying temperature , rainfall , sales figures etc. , how
they change over a given period of time .
Example: The average rainfall figures recorded by the Met Office from January to
May were as follows:
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Table: Rainfall figures
Month Rainfall in mm
January 24
February 35
March 30
April 38
May 25
Display the data using a line graph.
Solution
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The advantage of this display is that more than one variable can be compared when
superimposed on the same graph.
Histograms
These are joint rectangular bars used to display frequencies of grouped data. Bars
are usually of the same width. Height of each bar depicts the frequency of each class.
Types of histograms are the frequency histogram and relative frequency histogram.
From a frequency histogram a frequency polygon can be derived. Mid points of each
class are determined and from the top of each bar, these points are joined to get a
frequency polygon.
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Mid-point is the summation of an upper-class boundary and a lower- class boundary
of any class divided by two.
Frequency curves are derived from the frequency polygons, smoothening to the
polygons into curves rather than straight lines.
Example of frequency histogram.
Example of frequency polygon.
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Measures of central tendency or location.
Measures of central tendency describe or define the Centre of any given set of data.
There are three principal measures of centrality namely; mean, median and mode.
Mean or arithmetic mean or average

Is the summation of all the values in a given set of data divided by the number of
values?
Advantages of the mean

 Its relatively easy to calculate and understand
 There is only one mean for any given set of data.
 It takes in account all values in the set of data in its computations.
 It is very useful when comparing different sets of data.
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Disadvantages
 It is affected by extreme values e.g. the mean of 3, 6 and 99 is 37 (only one
value 99, has contributed to the high value of the mean).
 It cannot be calculated from a set of data with open ended classes.
The following data shows the retail price (in $s) of a 20 kg bag of roller meal at
fifteen randomly selected retail shops.
83, 88, 59, 92, 77, 91, 48, 76, 76, 82, 62, 69, 74, 80, 85.
Find the mean retail price.
Solution
Mean = summation of X /n = (83+ 88 + .....+ 80+ 85)/15
= 1142/15
= $76.13
Mean for grouped data

Example: Find the mean of the following grouped data in the table below.
Classes f(i) MI f(i).MI
4-8 5 6 30
8-12 8 10 80
12-16 6 14 84
16-20 1 18 18
20 212
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Solution
X = f (i).MI
Where X = sample mean
F (i) = frequency of a given class
MI =mid-point of a given class
n = sample size (i.e. sum of all
frequencies)
NOTE: The numerator of the
formula -first multiply the
frequencies of the classes with their
respective median points and then
add the products.
Therefore X = 212/20 = 10.6 (see table above)
Median is a value which splits a set of data into two equal halves after the values
have been put into data array (i.e. ascending order), there should be an equal number
of values above and below the median.
Advantages of the median
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 Relatively easy to calculate and understand (it can also be obtained by mere
inspection).
 There is only one median for a given set of data.
 It can be calculated from any set of data.
 It is not affected by extreme values.
Disadvantages of the median.
 Time consuming because of the need of a data array for ungrouped data.
 It does not take in account all values for its calculation or determination.
Median for ungrouped data

Example: Find the median of the following set of data; 5, 3, 8, 15, 10
Solution arrange the data in ascending order: 3, 5, 8, 10, 15
Therefore: Median = 8 (by inspection)
Example: Find the median of the following set of data: 10, 9, 7, 18, 20, 16
Solution: 7, 9, 10, 16, 18, 20. The median value should be between 10 and 16
Therefore: Median = 10 + 16 ÷ 2 = 13
Median for grouped data
Example: Compute the median for the data below.
Employees of Mira Company and their weekly wages.
Classes f( i ) Lcm f( i)
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313- 369 12 12
369- 425 9 21
425- 481 18 39
481- 537 12 51
537- 593 7 58
58
Solution:
Median = L + i [n/2 - Cf] ÷ FM
Where L = the lower- class boundary of the median class.
i = class interval or width
n = sample size (i.e. sum of all
frequencies)
cf =cumulative frequency prior to
median class. Fm = frequency of the
median class.
Steps: Find the less than cumulative frequencies
Find n÷2 (58 ÷2 = 29) - this gives you an idea of where the median value should be.
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Find the first value which is equal to or bigger than 22 going downwards in the class
less than cumulative frequency column (in this case it is 39).
So (425 - 487) is the median class
Class interval 369 - 313 = 56
Therefore Median = 425 + 56 (29 - 39) /18 (see table above)
= 425+ 56(10)/18
= 425 + -560/18
= 425 + 24.889
= 393.9
Mode
The most frequent value in a set of data. Results from the mode is most useful to
someone dealing with buying and selling goods as well as stores management. It can
be used for stock ordering purposes e.g. number of shoe sizes that should be ordered
mostly.
Advantages of mode
 It is not affected by extreme values.

 Relatively easy to understand, calculate and find.
 It can be observed even if not all values in a data set are known.
Disadvantages
 A set of data may have more than one mode.

 It is possible for a set of data not to have a mode.
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 It is time consuming where there are many values for ungrouped data (a data
array is needed.)
Mode for ungrouped data
Example:
Find the mode given; 1, 12, 5, 12, 6, 7, 12, 9, 1, 12, 12, 11.
Solution:
Mode is 12 (that occurs 5 times)
Range
The difference between the highest and lowest in a set of data.
Example:
Find the range if the daily output varies from 210 000 to 220 000 bottles of coca-
cola.
Solution:
Range = 220 000 - 210 000 = 10 000 bottles.
Advantages of Range
 It is easy to calculate.
 It is not affected by data outside the set of data.
 Easy to understand.
Disadvantages of Range
 It only takes in account two extremes. Both may be very untypical thus
distorting the picture of the extreme variation.
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 Leaves out other relevant information.
LINEAR PROGRAMMING
Is a technique which shows how practical mathematical problems can be used to
solve or best find the optimum or best solution? It is used to determine how to
produce the highest output from a given set of machines and equipment, taking into
accounts the resource constraints such as production time. It can be commonly
applied by bakeries when they want to maximize the production of bread and cakes
when faced with limited dough and ovens.
It can be defined as a mathematical technique which can be employed by

management to determine the optimal utilization of limited resources.
Apart from the bakery situation above other situations that require linear
programming are:
 The manufacturer wants to adopt a production schedule and an inventory
policy that will satisfy demand in the future periods. Ideally the schedule
policy will enable the company to satisfy demand and at the same time
minimize the total production costs of inventory.
 A marketing manager wants to determine how best to allocate a fixed

advertising budget among alternative advert media e.g. radio, TV and
newspaper. Manager would want to determine the media mix that maximizes
the advertising efficiencies.
Linear programming has two techniques: the blending technique and the
extrapolation technique.
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The blending technique makes use of the concept of a line graph or Cartesian plane.
It is common than the extrapolation method, example will look like the diagram
below:
This graph is a result of a bakery if faced with production of cakes or biscuits. It

shows resource allocation between the two products.
The bakery has to produce 4 of biscuits and 8 of cakes in order to maximize

production, with available resources.
Evaluation of linear programming technique.

 Blending can be useful when firms are deciding on the best use of available
resources.
 It improves the quality of decisions by eliminating guesswork.
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 Managers can use this method to allocate resources between different
products so that costs are minimized or profits are maximized.
 Helps in highlighting bottlenecks in which machines may not meet demand
while others may remain idle for some time.
 Computer models can be used to speed up the technique.
However, this simple version only allows two products to be considered, thus,
 It ignores the market demand for the products - the assumption being that the
optimum output levels can all be sold profitably.
 The technique assumes that resources can be switched between the two
products at a constant rate of productivity.

1. Using numerical values explain the meaning of the following
terms:
a) Mean [2]
b) Median [2]
c) Mode. [2]
2. How meaningful is the mode in making stock holding decisions? [4]
3. The following data shows incomes of nine employees in a food outlet.
Monthly Income in '000 dollars

120, 128, 122, 120, 135, 126, 128, 120,
130.
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a) Calculate the arithmetic mean. [2]
b) Determine the value of the mode and the value of the median. [2]
4. The following are the monthly quantities of chairs manufactured by Chipango Pvt
Ltd in 2019.
Month Jan Feb Mar Apr May Jun July Aug Sep 0ct Nov Dec
Number 200 150 100 200 160 110 100 300 200 134 240 350
of chairs
Giving examples derived from the above information, identify and explain any two
measures of central tendency. [3]
5(a) the following are marks obtained by Business Studies students in a given test:
60, 50, 70, 60, 80, 40, 30, 10, 60, 90, 20, 40, 60, 80, 90.
From the given set of marks, distinguish between the mode
and the mean. [2]
b) What are the benefits of linear programming? [4]
6. With the aid of diagrams explain any two methods that can be used to visually
present data. [4]
7. On ten consecutive days the sales of ice cream from a street stall were as follows:
70, 99, 35, 95, 60. 32, 35, 68, 71, 46.
a) State the range and mode of this data and calculate the arithmetic mean. [4]
b) Calculate the proportion of occasions on which sales exceed 80 ice creams. [4]
c) Explain how the stallholder might use these results when deciding on re- order
levels for future periods. [4]
8. A shop analyses its sales of a particular shoe for a six- day week by the number
of each size which has been sold results for the first week of sales:
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SHOE SIZE 3 4 5 6 7 8 9
PAIRS SOLD 4 6 11 11 12 8 2
(a) Calculate total sales and the arithmetic mean of daily sales. [4]
(B) Explain why the manager may be more likely to use the mode than the mean in
making stock holding decisions. [4]
PREPARING FOR EXAMINATIONS

Objectives

 Understand how to tackle question during examinations.
 Interpret questions correctly.
Examination tips
Every learner will take an examination at the end of the course. Testing will be done
on, short structured questions and case studies, that is, in Component One and data
response questions and essays in Component Two.
Case Study and Data Response.

A case study is a description of an organization’s situation or specific event affecting
the business environment. It is a presentation of a business' scenario.
In a case study theory and practical are blended. In the case study candidates are
tested for five skills which are:
 Knowledge
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 Application
 Analysis
 Evaluation
 Judgment.
Case studies may be extracted from; newspapers, magazines, textbooks, financial
statements and past examination papers.
This means candidates should be exposed to all these sources so that analytical skills
are developed at preliminary stages.
Case study and data response

Read the case study carefully before attempting to answer any questions. Read the
case several times for a thorough understanding. It is helpful to make brief notes on
the key elements in the case study.
Apply learnt information to solve problems i.e. answers should be very specific and
apply business ideas to the scenario given.
During reading take note of mark allocation which should guide on how much effort
should be put on the question. Answers with eight (8) or more marks are in levels.
Example of a level marking scheme where answer is out of 10 is as follows;
Level 1: Simple business studies information displayed (1- 2 marks)
Level 2: Show understanding of evidence but no analysis and conclusion (3-4

marks).
Level 3: Evidence extracted and analyzed but no conclusion drawn (5-7 marks).
Level 4: Evidence extracted, analyzed and a conclusion drawn (8-10 marks)
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Hence to obtain full marks, answer the question fully, avoid listing of points, extra
marks are picked where an answer is developed.
Answers should be in context meaning the answer should show reference to the
product or firm. To be contextual means making references to different types of
products that might be provided by the business in question, examples of raw
materials that might be involved rather than simply saying " its products " or its "raw
materials ". One should state real examples like benches as products or wood as raw
materials used in the furniture industry.
Therefore, always be contextual and give recommendations or judgment for

maximum marks.
Answers that are out of context will earn less marks since they do not display mastery
of case study.
Some questions will require calculations. In such situations do the following:

 write the formula
 Process up to the final answer.
Do not leave the question or calculations unfinished because the next question may
require you to comment on your answer whether wrong or correct.
When the question requires a comment on the future of the business, both
quantitative and qualitative data analysis or manipulation will be required.
Answers must be in context. In context, means ability to include;
 Names of the product in the passage

 Names of related products in the passage
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 Names of the business related to the one in the passage.
In reference to Component One (Paper 1), for questions 12, 13, 14 and 15 candidates
are expected to give at least two- sided arguments, written in context plus giving a
judgment.
Three (3) paragraphs may be enough. First paragraph should be for side A and the
second is for side B whilst the third paragraph will be the judgment.
When the candidate is starting the second paragraph he/ she must begin with the
word, HOWEVER in capital letters, highlighted and then underlined.
The third paragraph which is the judgment is an evaluative comment, a concluding

paragraph or a candidate's overall assessment.
The following can be used to show judgment;
 In a nutshell...
 To sum up...
 In a word etc.
Remember questions 14 and 15 must be side a, side B, in context plus judgment
.However even when question 14 and 15 simply say explain ..., Outline ..., What
are.... (10)
The data response questions and case study questions have the same expected
structure of answers. They all required analysis, evaluation and reasoned judgments.
How to tackle structured questions.
These are found in Component One (Paper 1) and require short answers.
Key words and their demands
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1. DEFINE: means to give precise meaning of. It has to be accurate and to the point.
A good definition should have all the key aspects e.g.
Define mode. (1mark)
Mode is the value that has the highest frequency in a given data set.
Define the term lean production. (2)
Refers to a range of practices meant to reduce waste (1), costs and maximize quality.
(1)
Define intangible assets. (3)
Intangible assets are assets which do not have physical attributes and can't be touched
but have a monetary value, e.g. goodwill, patents, trademarks.
2. EXPLAIN: means state a point and describe that point. Make a subheading e.g.
Explain any one disadvantage of a decentralized organizational structure (2)
Time consuming - this is due to the fact that the subordinates are involved in decision
making and a lot of time is taken when consulting.
The answer must be in two parts, stated point and expansion in whatever direction.
Remember points that are well developed earn full marks.
Explanation may be two sided.
E.g. explain the effect of import duties in foreign trade. (4)
Positive
 Makes imported goods expensive
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 Encourages consumption of local products
 Increased government revenue
Negative
 Collapsing of local firms relying on imported raw materials.

 Limited raw materials may encourage use of low -quality substitutes.
 Leads to poor living standards and restricted chances.
NB: If a candidate gives a one- sided answer in this question he / she gets a
maximum of 2 marks.
3. What are / State / List / Name / Outline - this requires a mere provision of a short
and precise answer, at times a word or a very short phrase, e.g.
State any three examples of direct taxes (3)
 Income tax
 Corporate tax
 Capital gains tax
NB: One point is awarded one mark 2 x 1
List any four factors of production (4)
Land, Labor, Capital, entrepreneurship
4. DISTINGUISH - definition of two terms involved e.g. Give examples if question

has more than two marks.
Distinguish between direct and commercial services (4)
Direct services - are services provided personally e.g. teaching, nursing.
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Commercial services - are trade and aids to trade or are services provided through
trade and commerce e.g. banking, transport.
Students may answer this question through matched differences.
Distinguish between the public sector and private sector of an economy (4)
Feature Public sector Private sector
Control state individuals
Aim to provide a service to the Maximum utilization or

community resources in generating profits to
the shareholders.
5. COMMENT - it is a two -sided question.
Comment on the role played by the primary sector of your economy. (6)
 provides employment
 provides raw materials to secondary industry
 provides foreign currency However:
 Creates environmental degradation.

 Produces low value goods.
Comment on Herzberg's ideas on motivation (6)
You get 4 marks for explaining the hygiene and motivators. 2 marks are going to be
awarded on what the managers must do about information given e.g. managers
should always provide motivators as they provide intrinsic love for work.
6. Calculate and comment with [4marks]
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This is usually on quantitative data and question demands that candidates have to
write the formulae, show process and then comment on their answers whether
wrong or right. Units should be given where applicable.
7. Two- sided answer questions include questions structured in the following

manner:
Comment...; Evaluate...; Assess…; Advise...; How useful is ...; to what extent...; or
is ... e.g.
Is collective bargaining important to firms?
The following structures may require a two- sided answer depending on the
manner in which they are asked e.g. Analyse... or discuss the significance of...,
discuss the importance of ..., discuss the effectiveness of..., etc.
How useful is oral communication within a business? (4)
Assess the importance of market segmentation. (4)
Evaluate the usefulness of desk research. (4)
8. Discuss - it is two- sided question e.g. discuss the contribution of ..., discuss the
effects of ... etc. . . . E.g. discuss the significance of recruitment to a firm. (5)
Advantages
 Cheap
 Foster’s employee loyalty
 motivates
 No need for thorough induction
However:
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 Bad habits are natured
 Organization remains internally focused and new ideas are shut.
 May lead to complacency if promotion is based on seniority.
There are times when ' discuss' question demands a one- sided answer e.g.
Discuss the difficulties which are common to most small firms. (5)
Candidates are required to discuss difficulties only and no more need for the other
side e.g.
Discuss the problems that are associated with the rise in inflation. (5)
NB: The best way to know whether the question needs a two- sided answer or not is
to read through the question carefully to see whether it creates a conditional
statement, e.g. Does work study assist operations managers?
The reading of the question alone tells that there are circumstances it is helpful and
when not helpful.
Common mistakes in answering structured questions.
 Too short answers which will remain vague leading to loss of marks.
 Failure to answer the question by writing unconnected statements. This is a
sign of poor question answering.
 Changing the order of the question in answering.
 Copying the question is a waste of time.
 Defining terms not asked for.
 Too long paragraphs or answers when there is no equality between effort and
marks.
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How to answer essays
In order to answer essays successfully the following ideas should be understood:
 Take time to choose a question don't rush.
 Make sure you have at least four points for and four against (for two sided
answers), before you attempt the question planning is therefore necessary, on
a separate sheet of paper of course.
 The whole essay must have shape of how best you are going to present it in
your mind before you write anything, this leads to logical presentations which
may get a candidate 18 marks and above in an examination.
 Remember each essay must be completed in not more than 35 minutes so that
you have more time devoted to data response where mostly higher order
answers are expected.
A paragraph is a group of sentences meant to develop a point. Therefore, start your
answer by:
 Stating the point (knowledge level)
 Explaining what you mean by the point, either by exemplification to illustrate
that point where possible (application level).
 If the point can only work under certain circumstances then show that
(analysis level).
 If there is a weakness against that point it has to be outlined right away
(evaluation level).
 Conclusions should come in form of evaluative summary, judgments or
recommendations in line with the needs of the question and what you have
been saying in your essay.
Always remember the need for clear presentations and good English, do not strain
the examiner for you are communicating to the examiner.
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Examples of questions calling for one sided answer in essays include those that
begin with the following: Explain...; Outline ...; Why might ...; Discuss the factors
that might ...; Describe ...; etc.
Examples of essay questions that call for two sided answers are: Evaluate; Assess;
examine; critically discuss; analyze; to what extent; discuss the contribution of etc.
Samples of case study and data response questions.
a) Blue collar clothing company

Blue-collar, a company formed five years ago, is in the business of manufacturing
clothes and clothing materials. A company's customers are mainly clothing retail
outlets and other clothing manufacturers. Of late the company has been doing well
but because of intense pressure from competition, management has decided to
expand the company's operations.
Management has two options from which to select the course of action to follow in
their pursuance of growth. In addition to monitoring the ever-changing business
environment, they will have to decide on the most effective and profitable option.
The first option is to diversify into the production of quality footwear.
The company may have to buy or lease buildings and machinery for the new venture.
The Operations Manager has provided the Managing Director with the following
figures for consideration.
Fixed costs $753 750 per month
Raw materials per pair $2 300
446
Direct labor per pair $1 800
Production at full capacity $603 pairs per month
Selling price $6 350 per pair
The second option is to merge with a clothing retail chain that has a 40% market
share and is regarded as one of the biggest clothing companies in the country.
1 (a) Explain the meaning of the following terms as they are used in the passage:
(i) Diversify (3),
(ii) Market share (3)
(b) In June 2003, the company decided to produce footwear at full capacity.
Calculate:
(i) The contribution per pair, (2)
(ii) The break- even point, for the month, in units, (2)
(iii) The margin of safety, (2)
(iv) The net profit for June 2003 (3)
(c) Evaluate the costs and benefits of each option. (10)
[Zimsec N2003 /2]
b) Vukani Ltd
Vukani Ltd is a new business that arise as a result of the indigenous policy. The firm
produces peanut butter for local supermarkets.
447
Since its inception, Vukani Ltd has successfully maintained a steady increase of its
market share despite the harsh economic environment it has operated in. This
increase in market share has prompted the directors to propose the construction of a
bigger and modern factory to facilitate business expansion. The directors have tasked
the Finance Director, Rudo Dube, to recommend suitable sources of finance and
work out cash flow projections for the proposed factory.
Basing on the assumption that the factory will be viable for four years, Rudo has
produced the following cash flow projection figures:
Initial investment $ 800 000
Forecasts of net annual returns: Year 1 $100 000
Year2 $200 000
Year3 $350 000
Year4 $ 300 000
To minimize risk of production failure, the Operations Director has proposed the
implementation of a work study programme in the proposed new factory. He has
argued that this programme will also improve efficiency once the firm has
expanded.
(a) Define the following terms:
(i) indigenization policy (2),
(ii) work study (2)
(b) Using the information provided by the Finance Director, calculate the average
rate of return and then comment on how it can be used to make investment
decisions. (5)
(c) Giving reasons, advice Rudo on which possible sources of finance to use. (6)
(d) Discuss how Vukani Ltd would implement the work study programme and
relevance of such a programme to the firm. (10).
448
[Zimsec N2008/2]
c) Jersey land
Jersey Land is a medium - sized business producing jerseys for the mass market. It
has always been one of the most successful businesses in its own country but has not
attempted to export. The home country has been buying all the company would have
produced. In the last four years, imported jerseys and wool have been competing
successfully on the home market. The marketing manager estimates that Jersey
Land's market share has fallen to 30% from its figure of 45% in the year 2000. He
estimates a further fall for the coming year unless action is taken over price.
Currently the business is producing 6 000 jerseys per year and in the year 2006 sold
all of them. Each jersey is sold at a standard price of $50 and foreign competitors
are selling similar jerseys at $45. Although these imported jerseys are of poorer
design and quality, they are attracting customers. The marketing manager is
confident that if they match their competitor's price, demand would increase and
quantity produced would increase to 7 500 jerseys in year 2007. Employing a more
aggressive marketing approach would see all jerseys produced being sold out by
December 2007.
Although the level of production is expected to rise, the human resources manager
has hinted that the current size of the workforce will remain the same. The operations
manager has also noted a possible increase in both direct and overhead costs.
1 (a) Assuming the production level is increased; calculate (i) the price elasticity of
demand for the jerseys (2) (ii) the total revenue for the year 2007. (2)
(b) Explain the possible reasons why:
(i) Labor costs are expected to rise, (2)
449
(ii) Material costs per unity are expected to fall, (2)
(iii) Allocated overheads per unit are expected to increase. (2)
2. Examine the human resources issues which the human resources manager should
be concerned about if the envisaged change is carried out. (10)
3. Discuss the difficulties the business might experience in selling jerseys in your
country.
(10)
[Zimsec N2011/ 1]
c) Snackie - Dairy Products Ltd
The marketing environment has become dynamic and challenging, a wave that has
made many companies to tighten their grip and make fundamental changes in their
marketing approach. The marketing manager of Snackie - Dairy Products upon being
quizzed about how they were surviving the harsh economic environment, gave the
following response:
“Our customers are Kings! They make everything tickle for our company, so much
that we have become obsessively customer - focused, delivering to them value for
money through quality goods and services. We don't just rely on the marketing mix
variable but we have adopted an integrated approach by looking at the quality of
supplies, the labor market and also adhering to the ISO requirements.
We have developed a variety of powerful brands, all of which are second to none.
These are identified as Snackie - a- Snack , Snackie - Tomato , Lick- a - Juke , Icy-
Kool and Cool - Chip to which we are experiencing tremendous increase in monthly
sales since June last year. This assures us of customer satisfaction and brand loyalty
and we thus thrive to continue to deliver quality goods and to educate the consumers
on how to get the best from Snackie products.
We have since realized that the cost of acquiring a new customer far outweighs that
of retraining existing customers. To this effect, the ISO certification has helped us
to meet the needs of the customers and also to have our brands compete both at
regional and international levels as they are quality guaranteed.”
1 (a) (i) State the marketing mix variables referred to by the marketing manager. (2)
450
(ii) What costs might a firm incur in acquiring a new customer? (2)
(b) Identify and explain efforts put in place by Snackie - Dairy Products Ltd to
sustain the statement "... Customers are Kings." (6)
2. Evaluate the importance of Snackie - Dairy Products Ltd.’s customers in the
overall success of this business. (10)
3. Assess the quality control methods that could have been in place by Snackie -
Dairy Products Ltd. (10)
Books for further reading.

Applaby R, C, (1994) Modern Business Administration 6th Edition, Pearson
Educational Limited Essex, England.
Cronje G, J, DE, J and Toit Du G, S. (2013) Management, Butterworths, RSA.
Danks S, Lutchman, A. (2007) Business Studies 4th editions, ELP, Mauritius.
Hammond,S (2003), A Level Business Studies, Longman, Uk.
Jewell, B, R. (2002) An Integrated Approach to Business Studies 4th edition, Pearson
educational, Essex, England.
Kotler, P. (2003), Marketing Management, Prentice – Hall, New Delhi, India.
Mushipe Z, J, (2004) A Level Business Studies, ZPH, Harare, Zimbabwe.
Stimpson, P, (2002) Business Studies 1st Edition, Cambridge University Press, UK.
Surridge, M and Gillespie, A, (2004) Business Studies, Hodder Education, London.
451

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'A ' LEVEL BUSINESS REVISION GUIDE FOR

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

 Explain what business is and what it involves.

 Explain the difference types of business environments.

 Explain the different economic systems and their goals.

 Describe forms of business ownership their merits and demerits.

 Evaluate the impact of different forms integration.

 Analyze the advantages and disadvantages of small and large businesses.

 Understand the importance of setting objectives.

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

Characteristics of a firm and a community

Provides products and services a Is a market where the products of a firm

As an employer it influences the Provides a firm with the source of labor.

Its products and services may affect

There are three main business environments:

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

The mission and objectives of the firm

The difference between business functions and internal organization of a firm.

The business functions include;

The resources of the firm

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

Market environment (external)

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

These tasks are;

 To identify, assess and take advantage of the opportunities present.

The economic environment

The Social Environment

The technological environment

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

NB: Government influences annual budget, taxation, import control, promotion

The international environment

 Advertising that relies on sex, violence or that is directed at children

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

Underdeveloped economic systems

Developed Economic Systems

Technology also plays an important role in a developed economic system. These

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

b) A particular means of production has to satisfy a range of needs e.g. nothing

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

 All resources are put in the hands of a few.

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

Mixed Economic System

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

Stages of Economic Activity (Production)

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

 employment is created through expanding manufacturing industries

Reasons for de-Industrialization

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

 people have the desire to work

Forms of Business Ownership

When prospective entrepreneurs choose a form of business enterprise, they need to

BY ZVAKAVAPANO C (D.B.A-ZIM ,BA-UZ,PGDE-ZOU)

A sole trader business offers the following advantages: