Professional Documents
Culture Documents
ESD Module2011
ESD Module2011
CHAPTER I
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CONCEPT OF ENTREPRENEURSHIP
Objectives
By the end of this chapter the student should be able to:
● Analyse the history of entrepreneurship in Zimbabwe
● Define entrepreneurship
● Describe the characteristics of successful entrepreneurs
● Discuss the roles of SMEs in the economy
Introduction
Zimbabwe has for centuries had strong entrepreneurial abilities. There has been evidence
of all industries stretching from primary, secondary and tertiary industry. Agriculture,
mining, trade, manufacturing industries were there before the 19th century. The only
argument could then be the scale and the technology level. In fact, the history of
entrepreneurship in Zimbabwe dates back to the civilization era. In the Mutapa and Rozvi
States, there were successful business initiators/ owners who became very wealthy.
By about 1200 to 1890 AD African Entrepreneurs on the plateau between Limpopo and
Zambezi Rivers became more advanced due to iron technology. The pre-colonial
entrepreneurs included the iron Smiths (boiler makers) or fitting and turning craftsmen
(mhizha), potters, farmers (hurudza), hunters (hombarume), among others.
As an evidence to disagree with the explanation of African history that the pre colonial
African societies were primitive and unchanging, and therefore any important changes
were brought by outsiders, archaeologists have found pottery and iron tools at Great
Zimbabwe and in other different parts of the plateau between Limpopo and Zambezi
Rivers (Zimbabwe).
.
Entrepreurship in the Primary industry
Farming
There were great farmers during the pre-colonial era. These were known, in shona, as
hurudza. These great entrepreneurs produced not only for their consumption, but for
trade and other fellow citizens. Crops like millet, rapoko, ground nuts, round nuts were
grown. That was crop farming. Animal farming was also popular. Great entrepreneurs
could own as many as 500 or more cattle. Goats and sheep were also kept. The cattle
were a form of wealth and could be traded or exchanged for jewellery and other
commodities.
Mining
Zimbabweans have been great miners way before the arrival of the British in the 1880s.
Entrepreneur – miners extracted iron ore from the ground. Mining rights were given by
the King and his advisors. The minerals mined included gold, copper, iron, for instance.
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There was a very successful value adding industry before colonization. The output from
agriculture and mining was processed. Great and useful items were made to serve the
needs of the people then.
These were the most skillful technicians, engineers, and business people who had the role
of processing, the iron, cooper, gold into useful products. The farmers needed hoes
(mapadza), axes (matemo) etc. The hunters needed spears (mapfumo), bows and arrows
etc. Jewellery such as golden necklaces was also needed by the wealthy people and the
royal family. These products could be traded to other kingdom for other products. The
ironsmith were usually very wealth. These skilled artisans were entrepreneurs of the
time in metallurgy... The iron smith entrepreneurs were weapon and tool makers. The
weapons and tools included arrows, axes, knives, and hoes, among others. At first, iron
was used only to make light arrow heads and jewellery. Bigger items such as hoes and
axes took much more time and labour
Entrepreneur – village smiths often paid tributes to their Chief or King with hoes, axe
heads and other items from iron. Hoes were used for special payments such as lobola.
The use of iron made it easier to hunt wild animals, till land and undertake domestic
tasks. People who lived near deposits became entrepreneurs in mining, smelting, and
fabrication (boiler making) and traded their products for other goods.
Entrepreneur-Potter
Some African Entrepreneurs were involved in pottery designing and making clay pots.
Brewing Industry
Millet, rapoko, and sorghum were processed and brewed into different beer flavors. As
it is today, after work villagers would gather and drink. This industry had strong
competition and successful entrepreneurs were known for exceptional brews and good
customer care
Wars
When the British arrived, major wars were fought. These are the War of Dispossession or
Anglo-Ndebele War: 1893-4; First Chimurenga: 1896-7; and the 2nd Chimurenga:
1966-79. These wars disturbed the smooth running of entrepreneurial activities by blacks
in Zimbabwe in so far as farming, mining, hunting, among others, were concerned.
Farming
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● When the British arrived they introduced the reserve system and translocated the native
Zimbabweans to infertile dry inhospitable areas.
● In 1894 the first reserves were set up in Shangani and Gwaai and this affected the
entrepreneurs in farming.
● After the defeat of the Ndebele, the settlers seized their 6 000 acres displacing many natives
and those displaced became fulltime labourers or squatters.
● The settlers started ill treating the Ndebele like they were doing the Shona.
● To solve their labour problems, the company introduced forced labour. The chiefs were
instructed to recruit able bodied men and hand them over to the BSAC as labourers-
“chibharo”. The Shona and Ndebele so enslaved ran away into the hills to escape. The
presence of white settlements contrary to the agreements entered into.
● Again this did not please the Ndebele who wanted to claim their ancestral land back as in the
reserves there was food shortage and starvation at times.
CATTLE
TAXATION
For example the Hut Tax of 1903 was enacted to raise revenue for settlers and to force
black men to go and work for the white men leaving their entrepreneurial activities.
This was also imposed to indirectly force the blacks to work in order to pay tax and it
was meant to increase the company income.
Up until 1906, ninety percent of Southern Rhodesia’s agricultural produce came from
black farmers and many whites did not like this state of affairs. As a result, the Rhodesia
Native Labour Bureau (RNLB) stopped blacks from competing with whites and between
1908 and 1915, 1.5 million acres of the best land was taken from blacks and given to
whites. New boundaries were created to exclude fertile high rainfall areas from newly
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created reserves. The latter were located in semi arid areas. Blacks in regions 1, 2 and 3
were made to pay higher grazing fees and taxes. Since many could not pay they were
removed and settled in reserves which were situated far away from markets and rail and
tarred motor roads. By the 1920s, 65% of the black population had been forced into
reserves. This led to cycle of poverty among Africans which persists up to today -2004.
The Act barred any African family from owning more than five herd of cattle or eight acres of
land in the communal lands.
The Act segregated the ownership of land between white areas and black areas. Natives could
only occupy land in communal lands without holding title to it. In Towns natives could only lease
property and no black man could own a house in town until after 1980.
The act divided the land on racial lines and designated the best 45 000 000 acres as European land
and shared among the 250 000 whites and the worst 45 000 000acres was designated as native
land to be shared by the 5 000 000 blacks. The act also barred the races from encroaching in the
other race’s land.
Mining
In mining, pieces of repressive legislation were put in place by the British upon their
arrival. For example Minerals and Mining Rights laws restricted the blacks from carrying
on with their entrepreneurial activities in mining. In fact, one had to secure a prospectus
license for mining of which it was difficulty for the blacks.
Hunting
Laws were also put in place in hunting. Wildlife Parks and Game Parks were created. It
became illegal to hunt in the parks. One would be treated as a poacher if found in the
parks. Thus, the blacks’ entrepreneurial activities were affected by such parks.
The government supporting schemes has been the major driver facilitating
entrepreneurial activities. Sources of funds be obtained from AGRIBANK, SEDCO, etc
From 2010 the Indigenization and Empowerment Act created a further empowering tool
leading to the starting up of business in areas like mining.
Zimbabwe remains one of the African countries with potential for vibrant entrepreneurial
activities.
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state-owned enterprises and the private enterprises in the formal sector. Apart from being the
largest employer, the informal sector is the largest foreign currency earner, among other crucial
roles it plays to the economy.
What is an entrepreneur?
An entrepreneur is the originator (initiator) of an enterprise (economic/business undertaking) in
order to satisfy an identified need or want profitably. That is a person who organizes and
manages a commercial undertaking especially one involving calculated commercial risks. In
other words, an entrepreneur is someone who identifies opportunities in terms of needs and wants
of people and mobilizes resources such as land, capital and labor to develop profit-making
projects to meet the identified needs and wants.
Successful entrepreneurs are not gamblers but take calculated and moderate risks in business. It
should, however, be noted that entrepreneurs believe so strongly in their business ideas that they
are willing to take full responsibility for developing them and to assume most of the risks should
they fail.
What is entrepreneurship?
Various authors define entrepreneurship differently, but their definitions somewhat amount to the
same meaning.
The following are some of the definitions of entrepreneurship:
Appleby (1989) defines entrepreneurship as the process of bringing together creative and
innovative ideas and coupling these with management and organizational skills in order to
combine people, money and other resources to meet an identified need and thereby create wealth.
Whereas Appleby defines entrepreneurship as such, Stoner & Freeman (1992) view
entrepreneurship as seemingly a discontinuous process of combining resources to produce new
goods and services.
Analysis of definitions
Both definitions do not fall short of the fact that entrepreneurship is a systematic and logical event
as shown by the term ‘Process’. That is entrepreneurship is not a haphazard activity. However,
Stoner & Freeman have moved a step further in an attempt to distinguish entrepreneurship from
management as they look at entrepreneurship as a discontinuous process. That is, it is a
discontinuous phenomenon appearing then disappearing until it reappears to initiate another
change, unlike management which is a continuous event.
The idea of ‘creative and innovative ideas,’ shows that the two definitions are complete. In
business, entrepreneurs should be able to come up with changes or new approaches, means,
processes, machinery, tools or techniques and new products in order to meet the needs of
turbulent and dynamic market environments. When a new venture is being contemplated on,
risks arise involving uncertainties which require initiativeness and process innovation.
Whereas Appleby clearly states, the idea of “management and organizational skills” in his
definition, Stoner & Freeman have remained silent about it. Organizational skills and
management are crucial for successful entrepreneurs. These relate to the ability of the
entrepreneur to plan, organize, lead and control the organizational members’ activities and
resources in order to achieve the stated goals of the enterprise. In other words, the emphasis here
is the ability to organize the other factors of production or resources into creative combination for
the purpose of producing goods and services in order to satisfy human needs and wants
profitably. The combination of resources is as follows:
Land
Labour
Capital
Entrepreneurship
Production of goods and services
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For the business to be successful the ‘needs and wants’ should be identified first through a
feasibility study. Identification of needs and wants will indicate whether there is a potential
market or not. Thus, the viability of a business largely depends on an effective feasibility study to
determine the potentiality of the market. In this case, Appleby’s definition of entrepreneurship is
clear about identifying first the needs of customers, unlike Stoner & Freeman’s. Thus, for
Appleby, new goods and services should not just be produced for unknown customers as this is
tantamount to wastage of resources.
Moreover, Appleby’s definition appears to be more comprehensive than that of Stoner &
Freeman as he mentions the idea of ‘wealth creation’. The major aim of any business entity is to
create wealth or increase the owner’s equity by maximizing profit. Without profit maximization
or creation of wealth, the business will not survive.
The fundamental issue about the entrepreneur is that he/she has to have innovative ideas and
transforms them to profitable activities within an existing organization. In other words, he/she is
an initiator or originator of the commercial undertaking.
The word intrapreneurship is attributed to Gordon Pinchott an American who founded a school
for entrepreneurs to help managers from large corporations to take responsibility for creating
innovations and turning ideas into profitable reality.
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Entrepreneurial characteristics
In a new business, the entrepreneur is the most important person. The entrepreneur has the
responsibility to initiate, manage and see the success of the business. The success of a business
largely depends on the entrepreneurial or personal characteristics. The following are some of the
characteristics of successful entrepreneurs.
Action oriented
Successful entrepreneurs are action oriented, that is, they want to start producing results
immediately. The critical ingredient is getting off business and doing something. A lot of people
have ideas but they are a few who decide to do something about them now and not tomorrow.
Success oriented/optimism
Successful entrepreneurs are optimistic, that is successful entrepreneurs do not have ‘ifs’ or ‘buts’
about succeeding. All they think about is how they are going to succeed and not what they are
going to do if they fail.
Goal setting
In setting a new business, entrepreneurs are expected to have the ability to set goals which are
specific, measurable, achievable, and realistic and time bound (SMART) basing on their
(ENTREPRENEURS) strengths, weaknesses, opportunities and threats (SWOT).
Moreover, their goals must be consistent with their interests, values and talents in order to achieve
them. Their belief in the reality of their goals is the primary factor in the fulfillment of those
goals. Their plans may seem illogical to others but they are perfectly logical in the context of
their own personal values and desires.
Long-term perspective
Successful entrepreneurs can tolerate considerable amount of frustration and delay in need
gratification and they devote a lot of time and effort in goals that often yield profits at a distant
point in the future. Entrepreneurs should be able to accommodate hurdles, difficulties and
temporary failures in business.
Innovativeness/initiative ness/creativeness
Effective entrepreneurs have the ability to come up with new products, methods or techniques of
production and the accompanying machinery and tools.
Adventuresome ness
Successful entrepreneurs are adventuresome i.e. they are interested in testing out and
experimenting phenomena in an endeavor to come up with solutions to the needs and wants of
people.
Commitment
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To succeed in business, you must be committed. Commitment means that you are willing to put
your business before almost everything else.
In a word, successful entrepreneurs must have appropriate personal characteristics, business skills
where necessary.
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● Small firms contribute in the improvement of the standard of living of the
community
● Small firms contribute in stabilizing the economy through increased employment,
reduced prices and improved standard of living
● Small businesses help in indigenizing the economy. If the economy is in the
hand so indigenous people, resources are not expatriated.
● Small firms help in the generation of foreign currency
● Small firms contribute in the production of quality and affordable products by
being in competition with giant businesses
● Small firms contribute to government revenue through payment of business and
employment taxes
● Small businesses contribute to the national income of the country (GDP – Gross
Domestic Products) and to the improvement of the balance of payment
The government has also introduced the Ministry of Small and Medium Enterprises to ensure that
small businesses succeed. Black empowerment and indigenization policy was also put in place
to promote entrepreneurship. Land redistribution exercise is a good example to government
entrepreneurship initiatives to promote self-sustenance and the development of the country.
Activity
i. Analyze the history of entrepreneurship in Zimbabwe
ii. Examine the effects of colonization on entrepreneurship in Zimbabwe
iii) Analyze the government initiatives to promote entrepreneurship in Zimbabwe since
1980.
iv) Discuss the roles of the following in promoting entrepreneurship in Zimbabwe
a. AAG
b. Ministry of Small and Medium Enterprises
c. Zimbabwe Cross Boarders Association
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CHAPTER 2
Objectives
By the end of this unit you should be able to:
● Describe the entrepreneurship environment in Zimbabwe
● Evaluate how the macro and micro environmental factors affect entrepreneurs
● Discuss entrepreneurial survival and growth strategies
Entrepreneurship environment
Entrepreneurship environment relates to the factors or variables which directly or indirectly affect
the activities of the entrepreneur either positively or negatively.
Macro – environment
This is also known as external environment. This environment consists of all those factors, which
indirectly affect the business activities of the entrepreneur either positively or negatively. The
external environment involves PEST analysis and natural phenomena.
PEST stands for Political, Economic, Social and Technological environmental variables.
Political Environment
Political factors may provide initiative situations towards the success of the entrepreneur
especially where the political climate is not stable. Political disturbances may result in the
closure of business either permanently or temporarily. Extreme political disturbances or
instability such as tribal or civil conflicts may cause permanent closure of enterprises. However,
this depends on the nature of the business of the entrepreneur. Some political climates may
promote the success of the entrepreneur. At first glance, it would seem that domestic politics
should pose no threat and that a company should have minimal problems at home. This is often
not the case. Although a company’s major political problems usually derive from political
conditions overseas, it must still pay close attention to political developments at home.
Knowledge of the philosophies of all major political parties within the country is very important
since any of them might come to power and alter prevailing attitudes. It is important to know the
direction each is likely to take for example in Britain the Labour party has traditionally tended to
be more restrictive on both foreign and home trade.
Economic nationalism is another factor which leads to an unfavorable business climate e.g. some
other organisations are said to be sponsoring foreign media which are said to be anti-government.
If the entrepreneur is not nationalistic in his or her business activities he/she may lose his/her
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business license.
Political sanctions form yet another crucial factor that may hinder the entrepreneur’s progress in
business for instance in Zimbabwe there is fuel and foreign currency crisis due to political
sanctions based on the allegations by Britain and America that there is lack of rule of law,
democracy and violation of human rights. South Africa also faced political sanctions based on
allegations that there were apartheid, foreign currency crisis and fuel shortage can grossly affect
the entrepreneur’s business activities negatively.
Economic environment
The macroeconomics focuses on aggregate economic conditions that may affect the business
either positively or negatively e.g. inflation, exchange rates, lending or interest rates, and
unemployment.
Macro-economic issues set the environment within which a business operates. Because of this,
entrepreneurs should keep abreast with developments in the macro-economic environment to
enable them make informed decisions. Thus, a full understanding of those issues enhances the
ability of an entrepreneur to make sound business decisions and to avoid surprises.
*For instance, inflation is the general uprise of the prices of commodities. If the prices of
commodities rise it means that the entrepreneur can now afford to buy less supplies or raw
materials or producer goods than he/she used to. That is, his/her business is being affected
negatively. If the inflationary rate drops, it means that the entrepreneur can now buy more
producer goods.
Exchange rates are yet another factor of macroeconomics which may affect the activities of the
entrepreneur. Exchange rate defines the price for getting foreign currency. If the exchange rate
rises, the entrepreneur will afford to buy less of the foreign currency and vice versa. Foreign
currency is essential for the purchase of foreign products such as spare parts, ingredients, raw
materials and fuel.
Lending rates are an important aspect of macroeconomics. Lending rate is the price of borrowed
funds or a loan. This is also known as interest rate. If the loan interest rises, it means that it is
expensive to get a loan for investment and vice-versa.
Thus, given these macro-economic issues, the entrepreneur is expected to have a predictive mind
for efficient management of the enterprise.
Microeconomics is another fact of the economic environment which focuses on the economic
forces that influence the decisions made by individual consumers, firms and industries. These
decisions are often made in an instinctive way, yet consistent economic forces underlie them.
Entrepreneurs are encouraged to keep track of the trends of the behaviors of individual
consumers, firms and industries in business as their (entrepreneurs) investment activities are
based on them.
Social environment
This relates to the cultural values, beliefs and artifacts of a group of people or society. These
determine the consumption patterns of consumers. Social environment also involves the religious
values. Thus, the products that people buy, the attributes they value, and the opinions they have
are based on culture. Food consumption, acquisition and preparation are interrelated with other
aspects of culture such as religious values and beliefs. For example, Christians consider pork
unclean. Thus, to the entrepreneur it is evident that customer’s actions in the society are shaped
by their lifestyles and behaviors which stem from their society’s culture. That is people of
different social classes have different lifestyles and behavioral patterns.
Language is another aspect of culture which has influence on the entrepreneur’s activities. Thus,
a successful entrepreneur must achieve expert communication. This requires a thorough
understanding of the language of the customer’s language as well as the ability to speak or write
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clearly.
Technological environment
Today, we are living in a global village which requires entrepreneurs to move with technological
breakthroughs and changes. Entrepreneurs are expected to be well versed with Internet systems
for effective communication with suppliers, customers and the publics in general.
Technology relates to the processes, techniques, tools and machinery used in business to produce
or offer products to customers. Poor technology results in inefficiency and ineffectiveness. Thus,
the advice to the entrepreneurs is that they should keep tack of the technological trends in the
business if they are afraid of being out-competed by their rivals.
Natural phenomena
These are the situations or conditions which can adversely or positively affect the entrepreneur’s
activities. These may include natural disasters such as road accidents, fire outbreaks, floods,
drought, earthquakes, good rains and natural resources such as minerals. Entrepreneurs are
advised to study the natural phenomenal trends as these provide threats or opportunities to the
business.
Microenvironment
This relates to those conditions which directly affect the entrepreneurial investment activities
either positively or negatively. The microenvironment is made up of employees, providers of
finance, suppliers, customers and government among others.
Employees
These are the people who work for the entrepreneurs and those who are likely to work for him/her
(potential employees). People today have wider expectations of the quality of working life
including: justice in treatment, democratic functioning of the organization and opportunities for
consultation and participation, training in new skills and technologies effective personnel and
industrial relations policies and practices and provision of social and leisure facilities.
Entrepreneurs should give due consideration to the design of work methods and job satisfaction,
make every reasonable effort to give security of employment. If employees are not treated well,
the entrepreneur will lose them to his/her rivals.
Providers of finance
These are the financial institutions which supply financial services to the entrepreneurs.
Entrepreneurs need to consider the interest or lending rates together with the accompanying
finance changes fixed on them by the financial institutions as these costs of financial services
have adverse effect on their investment activities. Apart from that, the entrepreneurs also need to
consider return on investment in terms of the funds which they may need to invest with the
financial institutions. On the other hand, the entrepreneurs are expected to prove their credit
worthiness and credibility by paying back the borrowed funds (loans) within the contractual time
frame as this will enable the entrepreneurs to even receive preferential treatment and favor in
times of need.
Customers
To many entrepreneurs, responsibilities to customers may be seen as no more than a natural
outcome of good business. Customers are people who make the business successful. The
entrepreneurs need to understand the needs and wants of customers first before production
activities take place in order to avoid wastage of resources by producing goods and services for
unknown customers. Customers must be put first by providing:
● Good value for money
● The safety and durability of products
● Prompt and courteous attention to queries and complaints
● Long-term satisfaction e.g. serviceability, adequate supply of products and
replacement of parts
● Full and unambiguous information to potential customers
If customers feel that they are ill treated, the entrepreneur loses them to the customer-driven
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enterprises.
Suppliers
These are firms that supply the entrepreneur with raw materials. These can affect the
entrepreneur’s activities adversely or positively in terms of prices, reliability, quality, delivery
services and convenience among others. Thus, a supplier of competitive prices, quality, delivery
services and convenience must be chosen. On the other hand, the entrepreneur should also prove
creditworthiness by settling accounts within the contractual time frame if future deferred payment
business transactions are to be upheld.
Government
Entrepreneurs should of course, respect and obey the law even where they regard as not in their
best interest. If certain laws are not followed the entrepreneur’s business may be forced to
closedown but what is debatable is the extent to which organizations should co-operate with
actions requested by the government. Some examples are restraint from trading with certain
overseas countries and the acceptance of controls over imports or exports, price controls designed
to combat inflation e.g. limits on the level of wage settlement and assisting in the control of
potential social problems such as advertising and display of health warnings.
Competitors
These are the rivals of the entrepreneurs who produce substitute products or the same products.
The entrepreneur must keep track of the price levels, technology, quality, and delivery services,
among others of the competitors as these may pose negative impact on the acceptability of the
entrepreneur’s products by customers.
Entrepreneurship Strategies
Growth strategies
A. Intensive Growth Strategies
According to Ansoff’s product market expansion grid, a company is exposed to growing
dimensions under intensive growth
3. Product development
● in addition to penetrating and developing markets management should consider new
product possibilities
● Company develops a product’s new features; different quality levels and also tries to
come up with a technological breakthrough a potential product.
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B. Integrative Growth
● business sales and profits can be increased through
a. Backward integration
b. Forward integration
c. Horizontal integration
Current markets.
New markets.
Diversification Growth.
● Is the most favorable growth strategy if good opportunities can be found outside the present
business?
● An opportunity is one in which the industry is highly attractive and company has the mix of
business strength to be successful.
Types of diversification
a. Concentric diversification
● Holds that the company could seek new products that have technological and or
marketing synergies with the existing product lines even though the new products
themselves may appeal to different groups of customers.
b. Horizontal Diversification
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● holds that a company can produce totally unrelated products using different
manufacturing methods or processes
c. Conglomerate Diversification
● Holds that a company seeks new business that have no relationship to the company’s
current technology products or market suppose a company is producing fax machines and
now seeks to produce furniture
1. Franchising
● A system of distributing products/services through associated resellers.
● The franchiser gives rights to the franchisee to perform or use something that is the
property of the franchiser
● The objective is to achieve efficiency or profitable distribution of products/services
within a specific area
● Both parties contribute a trademark reputation, known products, managerial know-how
produces or equipment.
● increased distribution
● some operating costs are transferred
● marketing/distribution costs shared
● production accepted by locals when local franchise ownership is held
● Retains quality control of products is a franchise agreement
●
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Advantages
Disadvantages
● the buyer inherits any ill will of the existing firm
● certain employees may be inherited which are not assets to the firm
● inherited clientele may not be the most desirable and changing the firms image is usually
difficult
● procedures of the former may be difficult to follow
● renovation expenses
● purchase price may not be satisfying
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CHAPTER 3
OBJECTIVES
a. Product to be offered.
b. Target market/potential customers.
c. Target customers’ needs.
d. Selling approach.
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● Raw materials
● Machinery and equipment
● Labour and other costs such as electricity insurance, water,
security etc.
BUSINESS PLANNING
Definitions of A Business Plan
Several definitions of a business plan can be observed.
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following your plans.
The following is one feasible approach you can use in preparing a business
plan
1. Survey consumer demands for your products and decide how
to satisfy those demands.
2. Ask questions that cover everything from you firm’s target
market to its long-run competitive prospects.
3. Establish a long–range strategic plan for the entire business
and it’s various parts.
4. Develop short-term detailed plans for every aspect of the
business, involving the owners, managers, and key
employees, if possible.
5. Plan for every facet of the business’ structure, including
finances, operation, sales, distribution, personnel, and
general administrative activities.
6. Prepare a business plan that will use your time and that of
your personnel most effectively.
COMPONENTS/ELEMENTS/CONTENTS OF A BUSINESS
PLAN
● The contents of a business plan vary tremendously, depending upon the
type of business, the expertise of the entrepreneur, who the plan is aimed
at and how much time is spent researching the plan.
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10. Appendix
1. Cover Sheet
On the cover sheet you should include identifying information so that readers will
immediately know the business name, address, phone numbers, names and titles
of the principals (owners), and the date the Plan was prepared.
2. Table of Contents
3. Executive Summary
It can include:
a. Introduction
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● Legal identity/legal form
● Industry that it fall under
● location - business addresses
● SWOT Analysis
6. Marketing Plan
a. Marketing objectives
b. The target market
c. Sales and marketing mix strategy
d. Competitors analysis
e. Research – that leading to product design – confirmation of
demand and future research planned.
7. Product/Operational Plan
● This motives the details of converting inputs to outputs valued
by customers
● Specify products/services to be produced
● Raw materials and suppliers
● Optional location for production activities
● Costing of the products offered.
8. Financial/Plan/Analysis
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● Show the Financing of the business.
9. Milestone Schedule
10. Appendix
Generate your own business idea and develop its viable business plan.
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CHAPTER 4
BUSINESS MANAGEMENT
Objectives
By the end of this unit you should be able to:
● Define management
● Discuss the management functions
● Describe the roles of management
● Outline the principles of management
Business
A business is a social and or a commercial entity that thrives to satisfy the needs and
wants of consumers at the same time making more profits. As such, entrepreneurs have to
manage the factors of production, i.e. land, labour and capital so as to achieve the
business objectives. Businesses can be in any of the following sectors of the economy;
farming, mining, retailing, art and craft, wholesaling etc. Thus, this chapter will focus on
the functions of management as well as the roles of management in an enterprise.
Management
Management has been described as a social process involving responsibility for
economic and effective planning and regulation of operation of an enterprise in the
fulfillment of given purposes. It is a dynamic process consisting of various elements and
activities. These activities are different from operative functions like marketing, finance,
production, purchasing, human resource etc. Rather these activities are common to each
and every manager irrespective of his level or status. According to Henry Fayol (the
father of management) managing means planning, forecasting, organizing, motivating,
leading and controlling activities in a business so as to achieve common objectives.
● Stoner and Freeman (1995) described management as the art of making things
done through other people.
● They went on to say that it means deciding what to do and getting others to do it.
Thus, management is a process (and not an event) that entails planning, leading,
organizing and controlling of resources (human resource, capital, financial resources etc)
Manager
Managers are people who get things done through other people. They make decisions;
allocate resources and direct activities of others to attain goals. A manager may be the
owner, operator or founder of an organisation as well as hired by an organisation to give
it direction. Managers are employed so that the operations of these organisations become
more efficient and effective.
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FUNCTIONS OF MANAGEMENT
Different experts have classified functions of management. A manager must organize
these functions in order to reach company goals and maintain a competitive advantage.
There are four fundamental functions of management. For theoretical purposes, it may be
possible to separate the function of management but practically these functions are
overlapping in nature i.e. they are highly inseparable. Each function blends into the other
and each affects the performance of others. The functions are discussed below;
A. PLANNING
It is the first tool and the basic function of management. The difference between a
successful and an unsuccessful manager lies within the planning procedure. Planning
is the logical thinking through goals and making the decision as to what needs to be
accomplished in order to reach the organisation’s objectives. It deals with chalking
out a future course of action and deciding in advance the most appropriate course of
actions for achievement of pre-determined goals. Thus, planning is deciding in
advance- what to do, when to do and how to do it. It bridges the gap from where the
organisation is and where it wants to be. Planning is necessary to ensure proper
utilization of human and non-human resources and helps in avoiding confusion,
uncertainties, risks, wastages etc.
B. LEADING
Leading is the ability to initiate action, guide, supervise and direct others (subordinates)
in pursuit of a common goal. Organizational success is determined by the quality of
leadership that is exhibited. “A leader can be a manager, but a manager is not necessarily
a leader,” said Gemmy Allen (1998). Those in leadership role must be able to influence/
motivate workers to an elevated goal and direct themselves to the duties or
responsibilities assigned during the planning process (Allen, G., (1998). Leadership has
the following elements;
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work.
● staffing-the main purpose is to put the right man on the right job. There should be
proper and effective selection, appraisal and development of personnel to fill the
roles designed on the structure. It thus involves manpower planning, recruitment,
selection, placement, training and development, remuneration and promotion and
transfer.
C. ORGANISING
It is the process of bringing together physical, financial and human resources and
developing productive relationships amongst them for the achievement of organizational
objectives. According to Henri Fayol, “To organize a business is to provide it with
everything useful for its functioning i.e. raw materials, tools, capital and personnel. To
organize a business involves determining and providing human and non-human resources
to the organizational structure. Thus, a manager must know his subordinates and what
they are capable of in order to organize the most valuable resource a company has, its
employees. This is achieved through management staffing the work division, setting up
the training for the employees, acquiring resources and organizing the work group into a
productive team. The manager must then go over the plans with the team, break
assignments into units that one person can compete, link related jobs together in an
understandable well organized style and appoint the jobs to individuals. Organising as a
process involves;
● identification of activities
● classification or grouping of activities
● assignment of duties
● delegation of authority and creation of responsibility
● coordinating authority and responsibility relationships
Principles of organising
1. Unity of command –an employee must receive commands from one supervisor
only.
2. Span of control-refers to the number of employees that report to one supervisor.
3. Full authority and responsibility.
D. CONTROLLING
It implies a measurement of accomplishment against the standards and correction of
deviation if any to ensure achievement of organizational goals. The purpose of
controlling is to ensure that everything occurs in conformities with the standards. An
effective system of control helps to predict deviation before they actually occur.
According to Theo Haimann, “Controlling is the process of checking whether or not
proper progress is being made towards the objectives and goals and acting if necessary, to
correct any deviation.” Controlling depends on accurate, reliable and enforceable
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standards and on monitoring of performance by people, machines and processes.
Therefore controlling has the following steps;
● establishment of standard performance
● measurement of actual performance
● comparison of actual performance with the standards and finding out if there are
any deviations
● taking of corrective action if necessary.
ROLES OF MANAGEMENT
Mintzberg’s ten management roles are a complete set of behaviors or roles within a
business environment. Each role is different, thus spanning the variety of all identified
management behaviors. When collected together, as an integrated whole (gestalt), the
capabilities and competencies of a manager can be further in a role specific way. In a
sense therefore they act as evaluation criteria for assessing the performance of a manager
in his role.
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2. INFORMATIONAL
3. DECISIONAL
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The explanations above justify managerial purposes in terms of;
● designing and maintaining stable and reliable systems for efficient operations in a
changing environments
● ensuring that the organisation satisfies those that own it
● boundary management- maintaining information links between the organisation
and players in the environment.
MANAGEMENT SKILLS
For a manager to carry out the management functions and roles effectively, some
management skills are required at defined levels.
2. Human skills
Refer to the ability to work with other people both individuals and in groups. The
human skills are important at the top levels of management, as they are at the
lower levels. Subordinates are more forthcoming and offer their best abilities
when working under a manager with good human skills. These managers are good
communicators; they motivate, lead and inspire enthusiasm and trust among their
subordinates.
3. Conceptual skills
Are defined as the ability to think and conceptualize lines and abstract situations,
to see the organisation as a whole and the relationships among its various sub-units
and to visualize how the organisation fits into its environment. Conceptual skills are
needed by all managers at all levels but these skills become more important as we move
up to the top management positions.
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Principles of Management
Managers must observe Fayol’s 14 principles of management when carrying out their
duties;
1. Division of labour-work should be divided into smaller units that permit
specialization.
5. Unity of direction-all operations with the same objectives should have one
manager and one plan only.
9. Hierarchy- the line of authority in the organization should run in order of rank
from top management to the lowest level of the organization.
10. Order- resources should be in the right place at the right time.
11. Equity- managers should be fair to the employees and treat the equally.
12. Stability of staff- a low staff turnover rate enhances the attainment of goals.
13. Initiative- subordinates should be given the freedom to conceive and carry out
their plans, even though some mistakes may result.
14. Team spirit – team work gives the organization a sense of unity.
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Motivation
- Definition
● Managers and entrepreneurs are tasked with ensuring that things are done through people.
For the work to be done efficiently and effectively, employees need to be motivated.
Motivation is concerned with inducing people to work to the best of their ability. Motivation
refers to those schemes designed to influence and encourage workers to perform
outstandingly. It is therefore very important to take a closer look at theories of motivation
and consider motivation of workers seriously.
● According to Appleby (1994), motivation refers to the way urges, aspirations, drives and
needs of human beings direct or control or explain their behavior. Maslow (cited in Stoner &
Freeman 1989) defines motivation as those inner and outer factors which cause, channel and
sustain the behavior of a person in order to achieve specific organizational or personal goals.
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Esteem (i.e.
Status, respect, recognition by others)
Physiological needs include homeostasis such as satisfaction of hunger, thirst, shelter deficiency,
and clothing deficiency and so on. In fact homeostasis relates to the body’s automatic efforts to
retain normal functioning.
Safety needs include safety and security, freedom from plain or threat of physical attack,
protection from danger or deprivation, the need for predictability and orderliness.
Love needs that is social needs which include affection, sense of belonging, friendships and both
the giving and receiving of love.
Esteem needs are also referred to as ego needs which relate to self-respect which involves the
desire for confidence, strength, independence and freedom, and achievement. Esteem of others
involves reputation or prestige, status, recognition, attention and appreciation.
Self-actualization needs that is the desire to become more and more what one is capable of
becoming which simply means that one wants to realize his or her potentialities and capabilities.
This hierarchy of needs implies that entrepreneurs need to consider seriously the lower level
needs if workers or staff is to cooperate at work. That is the remuneration (salary, wage, fringe
benefits) should meet decent or exclusive physiological needs (shelter, food, clothing). Pleasant
working conditions must also be ensured.
Successful entrepreneurs must consider the safety and security issues such as safe working
conditions like danger warning signs, clean work environment and good healthy facilities. It is
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also important to employees and social security after employment i.e. pension and other related
company benefits.
Social needs of workers have impact on the performance. Workers need to be loved and as such
entrepreneurs need to instill a sense of belonging in workers. Entrepreneurs also need to employ
friendly supervision, cohesive work group, and team spirit and general sound relations with
employees. Workers also need professional associations to meet their professional problems.
Another area of concern is self-esteem. In this case entrepreneurs should make use of social
recognition, job title, high status job and feedback from the job itself if employees are to be
motivated in their work.
Self actualization is one aspect that does motivate employees i.e. workers are motivated by
challenging job, opportunities for creativity, achievement in work and advancement in the
organisation and as such entrepreneurs should note that.
If hygiene factors did not reach a certain standard e.g. salary, working conditions, job security,
and poor supervision workers feel bad about their jobs and unhappy. Hygiene factors are also
called preventive factors. Positive motivation and a feeling of well-being could only be achieved,
not by just improving these hygiene factors but by improving genuine motivators such as
recognition, achievement responsibility, advancement and the work itself.
Motivators/growth factors
NB: The Motivation – hygiene theory of Herzberg is an extension of Maslow’s Hierarchy. The
emphasis in this theory is that entrepreneurs must consider both the hygiene factors and the
growth factors/motivators.
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● Good customer relations
● Promotes team spirit (team work) or cooperation and support by employees
● Promotes entrepreneurship by employees that is innovativeness, creativity and initiative ness
resulting in the growth or expansion of the enterprise
ACTIVITY
3. State the role that is associated with each of the following statements
SUMMARY
Management is a process of deciding what to do and getting others to do it. As such, it is
important for the management to perform the management functions (planning, leading,
organising and controlling- PLOC) with diligence so as to facilitate the accomplishment
of set organizational goal. Entrepreneurs should thus seek knowledge on how to be
effective and efficient in their various areas of operations considering the environments in
which they operate in. Thus management of business works shops, seminars and other
discussion and consultative forums can be organized to encourage exchange of ideas.
Appropriate management style should also be chosen depending on the environment.
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CHAPTER 5
MARKETING
Marketing is the management process responsible for identifying, anticipating and
satisfying customer requirements profitably. (CIM)
There are many other definitions that expand on the CIM's own definition. Here is what
Dibb et al ( 2001) has to say:
This is a more detailed definition and identifies some specific activities. Marketing as an
activity differs from marketing as a concept. A market orientation can prevail outside the
marketing department. The related term 'marketing concept' is fundamental to the
modern approach to marketing. Kotler (1991) says this:
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The marketing concept holds that the key to achieving organizational goals lies in
determining the needs and wants of target markets and delivering the desired
satisfactions more efficiently and effectively than the competition.
Needs are basic human requirements such as food, clothing, shelter, exercise, etc. Some
people might be able to satisfy their needs for exercise by going for a run in a public
park.
Wants refer to needs directed to specific objectives that might satisfy the need, For
example, people might want to meet their needs for exercise by joining an exclusive
country club to play golf. The marketing manager of an exclusive country club may carry
out various marketing activities to transform the needs of people for exercise into wants
to play golf at a country club.
FAST FORWARD
Kotler (1991) also uses the word demand which refers to the wants being backed up by
an ability to prairie can the potential customer afford the membership fees to join an
exclusive country club? It is necessary for us to strike a clear distinction between
marketing as an activity, and marketing as a concept of how an organisation should go
about its business.
● Product
(a) Product development and enhancement of physical products is usually carried out
in
conjunction with R&D and production. These often involve technically minded people
who
may have different attitudes and approaches when perceiving and solving problems. With
regard to service marketing, there may be other kinds of technicality. For example, if a
firm
of solicitors wishes to provide independent financial advice, the very demanding
regulatory
regime governing such services is likely to be a key consideration in the marketing of the
new service.
(b) Packaging refers to 'all the activities of designing and producing the container for a
product'. (Kotler, 2003). Packaging serves various purposes and involves several
considerations.
(i) Protection of product e.g. sturdy boxes for breakable products
(ii) Preservation of the product e.g. plastic bags to keep bread and cakes fresh and
hygienic
(iii) Security of product e.g. small digital camera memory cards packaged in large plastic
packs to deter shoplifters
(iv) Convenience. Packaging is designed to facilitate storage by supplier or customer, as
Well as convenience of use e.g. different types of nozzles on drinks and sauce
containers
(v) Branding e.g. the Coca-Cola bottle is a huge source of promotion for the company
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(vi) Profitability e.g. larger sized nozzles on tubes and bottles encourage more use.
Larger sized cans or bottles usually encourage greater consumption.
● Place
Distribution decisions address the question of 'where do our customers want to receive
their goods or services?' This is an aspect where there has been significant change and
development, and there is now much more scope for market decision making, especially
with the advent of e-commerce. Place decisions may also influence an organisation's
globalization strategy. If clients and/or customers have overseas locations it may be
beneficial to set up distribution facilities locally. The presence of overseas facilities
enables the organisation to extend its market coverage and global reach. It is important
to understand the structure of the distribution channel and the role of the players within it.
A key concept is channel captaincy, which refers to the organisations that hold the most
power within a channel and can drive changes in it. In the past, for example, food
manufacturers controlled the retail food industry as they were fewer in number, and
bigger in size, than the supermarkets and other independent retailers. Supermarkets have
since become bigger and more successful, and can usually dictate terms to manufacturers
and other suppliers. Marketers are likely to be involved in activities such as outlet
planning, supply chain management, and route to market decisions. They may be
involved in order-processing, warehousing, logistics,
stockholding and control, transport operations, delivery tracking and IT systems
development. They may also be involved in export operations and the use of shipping and
forwarding skills.
● Promotion
Promotion is, of course, the focus of a great deal of marketing attention and might, with
justification, be regarded as the marketing specialist's home turf. Nevertheless, it does not
take place in a vacuum. It must not promise what cannot be delivered, it must work
within budget (particularly where sales promotion is concerned) and individual aspects of
promotion must not undermine the overall corporate image. It is important to remember
the product or service's Unique Selling Proposition (USP) or Basic Consumer
Benefit (BCB) and ensure that the message is in alignment with these. The medium of
communication must then match the message. Promotional tools include advertisements,
press releases, sales promotions, in-store demonstrations, exhibitions, trade fairs and
public relations.
● Price
Cost is a major consideration in price-setting and here the marketer must utilize the
expertise of the management accountant. Also associated with this aspect of the mix is
the whole topic of terms of sale: expert advice is necessary if maximum protection is to
be obtained against the customer who does not or cannot pay. Factors influencing price
include costs, competition, customer expectations and business objectives.
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managers and specialists to undertake the detailed work of marketing in a coordinated
and effective fashion.
The creation of a good marketing plan is likely to be a time-consuming exercise, since it
should deal with both current circumstances and plans for the future.
(a) It should be based on detailed knowledge of both the target market and the
company involved.
(b) It should give sufficient detail of intentions to support the design and operation of all
marketing-related activities
.
The marketing plan and corporate strategy
It is important to remember how the marketing plan fits into overall corporate
strategy. Students are often confused by the appearance of environmental analysis in the
marketing planning process and assume that this means that the marketing plan is the
same thing as the overall corporate strategic plan. This may be true in some highly
marketing-oriented organisations, but it is not necessarily hence the marketing plan and
the corporate strategic plan are not the same thing. The difference is largely one of scope:
the corporate plan has to consider all aspects of the organisation's business, while a
marketing plan is principally about marketing activities. The marketing plan is aligned
with the corporate plan and supports it.
T FORWARD
What goes into the marketing plan?
There is no standard template or list of contents for a marketing plan. Different
organisations will find it
appropriate to consider different things at different times in their development. We will
look at one
possible detailed layout for a marketing plan in Section 3. In this section we will look in
general terms at
What is likely to appear in most marketing plans?
(a) Situation analysis. Any planning process should start with the collection and analysis
of
basic data. In the marketing context this is often called situation analysis. It may be
appropriate for situation analysis to consider the items listed below.
• The wider environmental factors of the PESTEL model
• Strengths, weaknesses, opportunities and threats
• Marketing research data, including demographics data, trends, needs and growth
• Current and planned products and services
• Critical issues
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(b) Marketing strategy. The statement of marketing strategy will describe in detail all
the
marketing concepts, practices, activities and aids that will be used. It will reiterate the
marketing objectives in some form, and will probably give a detailed account of how the
chosen marketing mix will be applied. This section is likely to be of considerable size.
(c) Numerical forecasts. The marketing plan must include quantitative data about
required
resources and forecast results. Costs must be given in detail and realistic sales estimates
must be provided. In particular, the cost of marketing activities must be specified.
(d) Controls. Planning is worthless unless control mechanisms are established to ensure
that
the plan is properly executed. These may include intermediate organizational and sales
milestones, the design of routine performance measures, the establishment of an
appropriate marketing organisation, and the development of contingency plans.
2 Situation analysis
Situation analysis involves consideration of both the environment and internal factors.
The environment can be divided into the macro-environment, consisting of the six
PESTEL elements, and the micro- or market environment. Internal and environmental
factors are summarized in a SWOT analysis.
(a) The business environment. The operation of any business implies interaction with its
environment and the first stage of the detailed planning process is likely to be the
collection
and analysis of environmental information. For this purpose, the business environment is
often split into two parts.
FAST FORWARD
(i) The macro-environment may be analyzed into six elements.
• Political • Technological
• Economic • Ecological or 'green'
• Social • Legal
The acronym PESTEL may be used. PEST and STEP are also common, when the legal
environment is included under politics and so-called 'green' issues are included under the
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social heading. Your syllabus uses PESTEL, so that is what we will use in this Study
Text. A marketing plan need not include a detailed PESTEL analysis, but it should
explain those aspects of it that have affected its development.
Action Programme 1
(ii) The micro-environment consists of the markets in which the business operates or
plans to operate. It includes current and prospective customers and existing and
potential competitors. The micro-environment also includes any distribution systems
used by the business. Headings such as those below may be appropriate.
• Target markets • Products and services
• Market needs • Competition
• Market geography • Costs
• Market demographics • Suppliers
• Market trends • Critical issues
• Market forecasts
• Market growth
(b) Internal analysis. Like the overall strategic plan it is derived from, a marketing plan
should
reflect the characteristics of the business concerned. It will inevitably refer to current and
planned products and capabilities and be designed to exploit the organisation's resources
to
the full. An important aspect of the internal analysis is product-market background,
which
sets the scene for those less familiar with the products and markets involved.
The environmental and internal analyses are traditionally summarized and entered into
the
plan under the headings of strengths, weaknesses, opportunities and threats. This
SWOT
analysis highlights aspects of the overall situation that need action by the business. The
aim is to exploit strengths and opportunities, remedy areas of weakness and develop
actions which minimize threats. The analysis of SWOT must be prepared honestly and
objectively as it is a key foundation on which the marketing strategy is built.
3 Marketing strategy
Marketing strategy includes objectives and methods and may deal with such matters as
gap analysis, target markets, the marketing mix and marketing research. The marketing
strategy section of the marketing plan should describe in detail the organisation's
marketing objectives and methods.
(a) Marketing objectives. The objectives of the marketing plan are derived from the
corporate
plan, which is designed to support the overall corporate mission. A clear statement of
marketing objectives serves a number of purposes.
(i) It provides a focus for activity and a sense of purpose. This should stimulate
activity, particularly when overall objectives are broken down into personal targets.
(ii) It provides a framework for co-ordination of activity across the organisation.
(iii) IT is fundamental to the control process, since it defines success. Actual
performance is compared with what was intended, and control action taken to
correct any discrepancy. When objectives have been considered in detail, it is possible to
use them to refine a plan by means of gap analysis. Objectives will relate to both market
dynamics and financial results, and should be expressed in concrete form. Objectives may
be set for such business parameters as those
below.
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• Revenue growth
• Market share
• Profitability
• Number of outlets
• Customer retention
• Brand recognition
• Marketing expenses
• Staff levels and training
(b) Target markets. It will be appropriate to define clearly just what the target market is.
The
nature of this definition will depend partly on the scale of the marketing operation
envisaged. For example, a company operating nationally in a lifestyle segment might
target
prosperous retired people nationwide, while a locally based professional service business
might target start-ups and small traders within a 20-mile radius of its base.
(c) Products and their positioning. Product positioning is a continuation of the process
of
determining the target market. Product positioning is about the way the target market
perceives the product's characteristics, in relation to those of competing products.
There are two basic product positioning strategies.
• 'Me too': the product is positioned to meet the competition head-on.
• Gap-filling: the product is positioned to exploit gaps in the market.
(d) The marketing mix. A marketing plan will not necessarily give complete details of
every
component of the marketing mix. Instead, it will concentrate on those parts that are new
or
crucial to success. For example, a plan built around a new or enhanced product that will
be
distributed through established channels is likely to give significant product detail, and
explain the aim of the new features in market terms. Place, on the other hand, is unlikely
to
receive more than a brief mention.
(e) Marketing research. Early marketing research should have played its part in
supporting the
design of the marketing plan. However, it is not confined to this phase of operations.
Marketing research activities should form part of the marketing plan, so that continuing
feedback may be obtained upon the degree of success achieved.
4 Numerical forecasts
Numerical forecasts tie down what is to be achieved and form the basis of the control
process.
This section of the marketing plan could also be called a budget.
4.1 Typical forecast quantities
• Turnover
• Market share
• Marketing spend
• Units of sales
• Costs
• Breakeven analysis
Phasing and analysis. It will be appropriate to present numerical forecasts broken down
in two ways.
(a) Phased by time period. A year's total may be broken down into monthly or quarterly
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increments.
(b) Analyzed by marketing characteristic. For example, sales and expenses might be
analyzed
by product type or by market segment.
4.5 Controls
Control is vital if management is to ensure that planning targets are achieved. The
control process involves three underlying components.
– Setting standards or targets
– Measuring and evaluating actual performance
– Taking corrective action
(a) Performance measures. The data contained within the numerical forecasts section of
the
plan provides the raw material for performance measures. Mechanisms must be put in
place for collecting information on actual results, so that comparisons can be made and
control action taken. Overall performance is often judged by analyzing two main
indicators:
sales and market share.
(i) Sales analysis is based on the comparison of actual with budgeted turnover, but
this is only the first stage. It is appropriate to delve deeper and consider the effects
of differences in unit sales and selling price. Further analysis by product, region,
customer and so on may be required.
(ii) Market share analysis. Market share is important to overall profitability, and the
attainment of a given market share is likely to be an important marketing objective.
Market share should always be analyzed alongside turnover, since the growth or
decline of the market as a whole has implications for the achievement of both types
of objective.
FAST FORWARDAST FORWARD
(b) Marketing organisation. Individual responsibilities within the overall marketing
plan should
be given and the persons responsible named. One example of a specific responsibility is
the
preparation of performance reports. Other roles will include that of overall responsibility
(probably discharged by the Marketing Manager or Brand Manager), management of
promotional effort and management of marketing research effort.
(c) Implementation milestones. Progress in implementing a programme can be
monitored by
the establishment of milestones and the dates by which they should be achieved.
Marketing at Work
Examples for the launch of a new car might include:
• First delivery to show rooms
• First thousand sold
• Breakeven sales achieved
(a) Contingency planning. Events in the real world very rarely go according to plan. It is
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necessary for planners to consider problems that might arise and make appropriate
preparations to deal with them. There are several requirements.
(i) The organisation must have the capability to adapt to new circumstances. This will
almost certainly imply financial reserves, but may require more specific resources,
such as management and productive capacity.
(ii) There is a range of possible responses to any given contingency. The organisation
should consider its options in advance of needing to put them into action.
(iii) A prompt response will normally be appropriate. Achieving this depends to some
extent on having the resources and having done the planning mentioned above, but
It will also depend on a kind of organizational agility. In particular, decision-making
processes need to be rapid and effective.
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CHAPTER 6
CUSTOMER CARE
Objectives
By the end of the unit you should be able to:
● Define customer care
● Discuss the tips of customer care
● Design a customer programme and charter
Customer care
● is the manner in which customers are treated by the business
● Customer care creates a new orientation in an organisation with and increasing focus on
improving the delivery of the needed services by the customers.
● This should always be viewed as the clientele having rights and expectations that must be
fulfilled.
● As an entrepreneur one needs to appreciate that customer care should be part and parcel
of his/her business operations if you intend to achieve success.
● The customer care vision by organisation embraces employees that put its customers first
and that is open transparent, accountable and responsive
● The customer is king and always right as a way of doing business
● The customer is always observed as having a right to demand quality services from the
organisation
● In the modern business world there is an increasing focus on enhancing service delivery
and on ascertaining that the delivered as promised
● An entrepreneur should be responsible, accessible and quick to help source problems
● Should be reliable and deliver what he/she promises on time
● Should be knowledgeable and courteous
● Should be empathetic and should understand the needs of customers
● Work area should always be clean and organized.
●
1. Responsiveness
● this refers to the willingness as well as readiness of the entrepreneur or his employees in
providing the services within reasonable time immediately if not sooner
2. Competence
-This refers to the possession of the required skills and knowledge by those who deliver the
services to the customer. This will create confidence.
3. Accessibility
● this refers to the degree of approachability and ease of contact of the entrepreneur or his
employees
● drop what you are doing ignored to greet and serve customer
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4. Courtesy
● This refers to politeness, respect, consideration and friendliness of your organization’s
contact such as receptionist, secretaries, telephonist, etc, they must be polite and
courteous at all times – remember, a smile goes a long way.
5. Communication
● keep your customer well informed in a language and style they understand
● it is important to hear and understand what your customers are saying
● communicate effectively with your suppliers as well
6. Credibility
● this refers to being trustworthy and faithful
● put customers at heart
● they should feel that he/she is given priority and should have the trust that any order will
be executed and received when expected
7. Security
● customer should be protected from danger, risk or doubt within the premises
8. Knowledge of Customer
● the entrepreneur should know the client specific requirements
● be able to recognize regular clients
● strive to provide individualized attention
● Understand what makes them buy is it need Price?
9. Tangibles
● This could include the physical evidence (i.e. building, good handling, tools, equipment,
packages etc). This could also include the appearance of your personnel
● employees must be neat, orderly and clean
● If customers are put first, the entrepreneur will be rewarded with new business and
increased profit margins and sales.
● Customer care creates new customers
● Constructive consumer dialogue enables the entrepreneur to know and understand what
the customers needs and wants
● It builds good relationships and loyalty with customers
● Can make passive customers become in violated participants (i.e. loyalty)
● Create corporate excellence
● Build good reputation and good image i.e. it is a tool for good corporate image building
● Business can become a market driven entity as you get information on what your
customers need and want.
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7. present information logically and comprehensively
8. stick to your commitments
9. Always inform your customers on what happens at your business if it may affect them (i.e.
sale, new product? Services
10. be fair and honest when dealing with customers
11. demonstrate the right skills at the right time
12. always give customers professional treatment
13. know the customers business and needs
2. Customer satisfaction is ultimately the result of the sum total of the customer’s experience at
your establishment.
● Customers come back to a place that has provided a pleasant experience for them. Thus
owners and managers need to focus not on tangible as ends themselves but on how all the
particulars combine to create a certain experience.
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7. Properly hold complaints all the time.
8. Make recommendations that are best for the customers.
9. Recommend a competitor when there’s a need that you can’t satisfy.
10. Make yourself available after the sale.
1. telephone
● number of rings before the telephone is answered are given
●
2. Enquires
● short turn around time
● follow up
● courtesy options offered to caller
3. Correspondence
● Correct
● Shorthorn around time
● Acknowledgement of receipt
5. Outgoing services
● automatic follow up
● customer feedback
● be sure that your customer’s charter informs clients about the availability of a system of
redress in case of grievances
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CHAPTER 7
Objectives
By the end of the unit you should be able to:
● differentiate between bookkeeping and accounting
● keep records and control stock in a business
● interpret and apply basic financial statements
What does it mean when someone asks you for an account of something?
● Giving a report of some event/activity that has taken place.
This is the major objective and purpose of this business activity, Accounting.
Bookkeeping: it is concerned with the recording of data only. This used to be done in
books, thus the name bookkeeping.
● A bookkeeper is responsible for this duty. Nowadays books may be used, but a lot
of accounting data is recorded using computers.
Definition of Accounting
The process of identifying, measuring and communicating economic information to
permit informed judgements and decisions by users of the information.
● An Accountant does the analysis and interpretation of the data which has been
recorded by the bookkeeper.
i. Present and Potential Investors :they want to see whether or not the business
is profitable (viability of the business)
ii. Prospective buyers of the company: where to buy or not to buy
iii. Lenders : Banks and Financial institutions ,when the owner of a business
wants to borrow money
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iv. Suppliers/Creditors: Whether it is safe to supply on credit and analyse if they
will be paid back their dues.
v. Customers: they need to know if there will be a constant supply of products
from the business
vi. Government/Taxman: for calculating tax payable by the business
vii. Managers of the firm: for internal decision making
viii. Employees: need to access their job security
ix. General public
Source documents
Source document
● Source documents are the documents from which original information to the books of
primary entry is obtained e.g. receipts, invoices, debit note, credit note and statement of
account
● Receipts are used by the entrepreneur or supplier when the transactions involve cash e.g.
where a customer tenders cash, a receipt may be written out. Below is a sample of a receipt
CHEGUTU
Telefax: 703301
Purchases Amount__
5 x 2l Mazoe Orange crush $30 000.00
Sub total$30 000.00
Less discount $ 3 000.00
Signature…………… Total $27 000.00
Thank You
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Invoice is a note given by the supplier or seller to the customer when goods are bought on credit
to show that the customer has not paid for the goods. That is an invoice is used for credit sales.
The invoice should have the following details:
Date of purchase
Invoice number
Seller’s name, address, telephone, fax, email (not all of this information may be applicable)
Buyer’s name, address, telephone, fax, email (not all of this information may be applicable)
Goods or services bought
Amount to be paid
Terms of sale
Amount of discount if any
Appreciation message (e.g. Thank You for doing business with us)
Invoice 00214
Date: 26/02/04
MASVINGO
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Debit Note is used to correct an undercharge on a customer’s account e.g. when the price shown
on the invoice is too low or when some items have not been shown. Sometimes a second invoice
is issued in this instance rather than a debit note.
Total to be debited:
Reasons for debit:
Credit Note is used to correct an overcharge e.g. if 25 items are sent, but only 20 were requested
on the order, then a credit note will be prepared to reduce the bill by the value of those 5 items.
The extra 5 items would be returned to the supplier. A credit note can also be used where goods
or services are unsatisfactory e.g. goods are damaged or wrong price charged.
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The following is a layout of a credit note
Credit Note
Customer’s Name & Address
Customer Ref:
Date:
Supplier’s Name & Address
Credit Note No:
Total to be credited
Statement
Statement is a summary of all of the invoices, payments, and credit and debit notes during a
period of time. A running balance (total) is used to show the effect of each transaction i.e.
invoices and debit notes increase the total amount which is owed, and credit notes and payments
reduce the amount which is owed. This is essential as it helps the supplier and the buyer to keep a
record of invoices sent and paid during a period of time.
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Date:
Supplier’s Name & Address
Balance remaining
Specimen
Details Amount Balance
5/02/04 Invoice No. 011 $1 000.00 $1 000.00
10/02/04 Credit Note 005 $ 300.00 $ 700.00
20/02/04 Invoice No. 13 $ 800.00 $1 500.00
25/02/04 Payment Received $ 600.00 $ 900.00
28/02/04 Invoice No. 16 $1 200.00 $2 100.00
NB: The balance column shows a running total of how much is owed at each date. Invoices and
Debit Notes are added to the balance as they increase the amount which is owed; credit notes and
payments are subtracted from the balance as they decrease the amount which is owed.
The other documents used by the business are enquiry, quotation, price list, delivery note and
consignment note.
Enquiry letter is a letter from the customer asking about prices, range of goods, specifications etc
Quotation is a reply to the enquiry giving details about the specific items or services that the
customer has enquired about.
Price list is a list showing all of the items for sale together with their prices.
Order
Supplier’s Name & Address Customer’s Name & Address
Customer Ref:
Date:
____________________________________________________________
Item Description Quantity Unit price Total________
TOTAL_________________
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NB: customer ref maybe used as a special code number given to the customer to help the supplier
identify any previous dealings with that customer. If a letter is used instead of an order form,
these columns should still be used as part of the body of the letter so that the order is clear and
easy to understand.
Delivery Note is a list of items sent and the quantities of each item. It is sent by the supplier for
the customer to check carefully that the correct items and quantities have been delivered and then
sign. The delivery note only shows items and quantity. The delivery note should be given a
special number so that he or she can find his copy easily.
Delivery note
Customer’s Name & Address:
Customer Ref:
Date:
Supplier’s name & Address
Delivery Note No:
Customer’s signature………………_______________________________
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Consignment Note is used with or instead of a delivery note where the goods are delivered by
someone other than the supplier e.g. for goods delivered by sea or rail.
Entrepreneurs should consider the following. When choosing a supplier: prices, quality, delivery,
customer service, location, terms of payment, discounts and business hours.
Cashbook
This is the book of original entry used to record all cash transactions that is all money that comes
into and goes out of the business on a daily basis. A cashbook can be used to determine the
amount of money left over at the end of the month. Below is a layout of a cashbook
Example
1/02 E Gobvu starts business with capital: Cash $ 5 000.00
Bank $50 000.00
8/02 Sales (cash) $15 000.00
5/02 Buys stock with cheque $10 000.00
15/02 Telephone bill paid by cheque $ 5 000.00
18/02 Pay cash into the bank $10 000.00
20/02 Sales (cheque) $20 000.00
22/02 Pay wages (cash) $10 000.00
23/02 Withdraw from the bank to keep in business $ 5 000.00
28/02 E Gobvu writes cheque for personal use $15 000.00
Notes
The cash book is divided into two halves that are Debit Side (Dr) or Receipts side and the Credit
Side Payment side (Cr). This means that when money comes into the business, it is recorded on
the left hand side (Receipts) and on the right hand side (Payment) for money going out of the
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business.
● Capital refers to the money being invested by the entrepreneur into the business.
● Purchases refer to goods bought by the business for resale.
● Drawings relates to money taken out of business for personal use.
● Transfer from Bank to Cash refers to money taken out of bank account to be kept as cash in
business. This transaction has to be recorded in the cashbook to show that the money has
been moved from one place to the other, otherwise the totals for the money left in the bank
and in cash at the end of the month will be incorrect.
● When money is withdrawn from the bank account, money has gone out of the bank as such
there is need to record it I the Bank column on the Payments side of the Cash Book. This
money is added to our supply of cash in the business and a record has to be made on the cash
column on the Receipts side of the cashbook. The reverse is true when the business transfers
cash from the business into the bank.
● Balance carried forward (C/F) is determined at the end of the month by subtracting the total
payments (money out) from the total receipts are $25 000 and total cash payments are $20
000, therefore $5 000 is left at the end of the month $25 000 has come in and $20 000 has
gone out. $5 000 is the balance carried forward because it is the amount that will be starting
the next month and will be recorded as balance b/f (balance brought forward)
Purchases journal
This is a book of primary entry where goods on credit for re-sale are recorded. The transactions
are recorded as follows:
Sales Journal
● This is a book of primary entry where goods returned by customers are recorded
General Journal
This is used to enter all transactions which cannot conveniently be entered into one of the other
subsidiary books e.g. fixed assets bought on credit such as furniture.
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Date Details Folio Dr Cr
01/02 Office furniture 100 000.00
Alice Mabinge 100 000.00
02/02 Stationery 10 000.00
Alice Mabinge
Notes:
● The ledger is divided into two halves that is the left-hand side called debit side and the right
hand side called credit side. The abbreviations Dr and Cr are used respectively at the top of
each account as shown above.
● The first column is for dates, the second for particulars of the transactions, the third, a folio
column (referred to hereafter) and the fourth, or money column for the amount of each
transaction.
● The two sides of the account (sometimes contained on two pages facing each other) are
numbered alike and are together called a folio.
● The universal rule in entering or posting transactions to the ledger is that credit the giver and
debit the receiver.
ACCOUNTING EQUATION
When an entrepreneur starts a business he supplies part of the resources (Capital).He
seeks assistance from other sources (Liabilities), so as to have adequate resources .These
resources are the assets of the business. At any point of time the assets of any entity must
be equal (in monetary terms) to the total of equities. This can therefore be expressed as
ASSETS = CAPITAL + LIABILITIES
What are the resources? Who supplies the equities to acquire the assets?
Account
It is a place where all information referring to a particular asset or liability or capital is
entered.
Business is not entirely carried out on cash basis, many of the things bought when a
company is established are not exhausted straight away e.g. buildings and machinery. It is
necessary therefore to have some method of showing the financial position of the
business from time to time and of calculating the amount of profit which is available for
the entrepreneur. This is the purpose of a system of accounts.
Asset Accounts
These are the actual resources in a business and can include:
i. Tangible/Fixed/Non Current assets :
● Buildings, Machinery ,Motor vehicles etc
ii. Intangible/Current assets:
● Cash: coins and paper currency, money orders
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● Bank: bank deposits and withdrawals, cheques
● Stock at hand
● Accounts receivables: goods and services sold on credit to debtors which
are being expected to be paid at an agreed time.
● Prepaid expenses: when an entrepreneur has made a payment in advance,
he has done himself a favour.
Liability Accounts
This is money owing for goods supplied to the business and can include:
i. Long term /Non Current Liabilities
● Loans
ii. Short term/Current Liabilities
● Accounts payable :credit purchases/Creditors
● Accruals: Expenses we still have to pay at the end of a financial period
e.g. rent payable, wages payable.
● Unearned revenue: this is when a product or service was paid for in
advance to us before we have supplied it e.g. unearned wages, unearned
rent
Appreciation of Books of Accounts
In business the entrepreneur should be able to appreciate books of accounts. These include the
books of original entry or prime entry and the ledger book. The books of prime entry include the
cashbook, purchases journal book, purchases returns book and the sales returns book and the
general journal book. The ledger book is the main book of accounts.
Cashbook
This is the book of original entry used to record all cash transactions that is all money that comes
into and goes out of the business on a daily basis. A cashbook can be used to determine the
amount of money left over at the end of the month. Below is a layout of a cashbook
Example
1/02 E Gobvu starts business with capital: Cash $ 5 000.00
Bank $50 000.00
8/02 Sales (cash) $15 000.00
5/02 Buys stock with cheque $10 000.00
15/02 Telephone bill paid by cheque $ 5 000.00
18/02 Pay cash into the bank $10 000.00
20/02 Sales (cheque) $20 000.00
22/02 Pay wages (cash) $10 000.00
23/02 Withdraw from the bank to keep in business $ 5 000.00
28/02 E Gobvu writes cheque for personal use $15 000.00
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25 000_ 80 000 25 000 80 000
1/03 Balance b/f
5 000 45 000
Notes
The cash book is divided into two halves that is Debit Side (Dr) or Receipts side and the Credit
Side Payment side (Cr). This means that when money comes into the business, it is recorded on
the left hand side (Receipts) and on the right hand side (Payment) for money going out of the
business.
● Capital refers to the money being invested by the entrepreneur into the business.
● Purchases refer to goods bought by the business for resale.
● Drawings relates to money taken out of business for personal use.
● Transfer from Bank to Cash refers to money taken out of bank account to be kept as cash in
business. This transaction has to be recorded in the cashbook to show that the money has
been moved from one place to the other, otherwise the totals for the money left in the bank
and in cash at the end of the month will be incorrect.
● When money is withdrawn from the bank account, money has gone out of the bank as such
there is need to record it I the Bank column on the Payments side of the Cash Book. This
money is added to our supply of cash in the business and a record has to be made on the cash
column on the Receipts side of the cashbook. The reverse is true when the business transfers
cash from the business into the bank.
● Balance carried forward (C/F) is determined at the end of the month by subtracting the total
payments (money out) from the total receipts are $25 000 and total cash payments are $20
000, therefore $5 000 is left at the end of the month $25 000 has come in and $20 000 has
gone out. $5 000 is the balance carried forward because it is the amount that will be starting
the next month and will be recorded as balance b/f (balance brought forward)
●
Purchases journal
This is a book of primary entry where goods on credit for re-sale are recorded. The transactions
are recorded as follows:
Sales Journal
● This is a book of primary entry where goods returned by customers are recorded
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General Journal
This is used to enter all transactions which cannot conveniently be entered into one of the other
subsidiary books e.g. fixed assets bought on credit such as furniture.
Notes:
● The ledger is divided into two halves that is the left-hand side called debit side and the right
hand side called credit side. The abbreviations Dr and Cr are used respectively at the top of
each account as shown above.
● The first column is for dates, the second for particulars of the transactions, the third, a folio
column (referred to hereafter) and the fourth, or money column for the amount of each
transaction.
● The two sides of the account (sometimes contained on two pages facing each other) are
numbered alike and are together called a folio.
● The universal rule in entering or posting transactions to the ledger is that credit the giver and
debit the receiver.
Example 1
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2 Paid $900 of the opening cash into the Bank a/c Cash a/c
bank
4 Bought goods on credit $78 from Purchases a/c S.Holmes a/c
S.Holmes
5 Bought a motor van by cheque $500 Motor Van a/c Bank a/c
7 Bought goods for cash $55 Purchases a/c Cash a/c
10 Sold goods on credit $98 to D.Moore D.Moore a/c Sales a/c
12 Returned goods to S.Holmes $18 S.Holmes a/c Purchases Returns
19 Sold goods for cash $28 Cash a/c Sales a/c
22 Bought fixtures on credit from Kingston Fixtures a/c Kingston a/c
Equipment Company $150
24 D.Watson lent us $100 paying us the Bank a/c Loan-D.Watson
money by cheque
29 We paid S.Holmes his account by S.Holmes a/c Bank a/c
cheque $60
31 We paid Kingston Equipment Co. by Kingston a/c Bank a/c
cheque $150
● We are going to used T-Accounts for our ledger to open up accounts using
Example 1 above. We are now practically entering the theoretically done debits
and credits in the example.
Capital a/c
Bal c/d 1000 Cash 1000
1000 1000
Cash a/c
Capital 1000 Bank 900
Sales 28 Purchases 55
Bal c/d 73
1028 1028
Bal b/d 73
Bank a/c
Cash 900 M.Van 500
Loan 100 S.Holmes 60
Kingston 150
Bal c/d 290
1000 1000
Bal b/d 290
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Purchases a/c
S.Holmes 78 Bal c/d 133
Cash 55
133 133
Bal b/d 133
S.Holmes a/c
P.Returns 18 Purchases 78
Bank 60
78 78
Sales a/c
Bal c/d 126 D.Moore 98
Cash 28
126 126
D.Moore a/c
Sales 98 Bal c/d 98
98 98
Bal b/d 98
Purchases Returns a/c
Bal c/d 18 S.Holmes 18
18 18
Bal b/d 18
Fixtures a/c
Bank 150 Bal c/d 150
150 150
Bal b/d 150
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100 1 00
Bal b/d 100
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Kingston Equipment a/c
Bank 150 Fixtures 150
TRIAL BALANCE
We have been practising the double entry concept whereby each transaction has both a
debit and credit entry. All items recorded on the credit side should equal in total those on
the debit side of the books. To see if the two totals are equal or that they balance, a trial
balance may be drawn up at the end of a financial period.
Definition: A trial balance is simply a proof of the equality of debit and credit balances
in the accounts.
● Using Example 1 which we have just balanced off, taking the Bal b/d from each
account, the following is the extracted Trial Balance as at 31 August 2010.
Dr Cr
Capital 1000
Cash 73
Bank 290
Purchases 133
Motor Van 500
Sales 126
D.Moore 98
Purchases Returns 18
Fixtures 150
Loan-D.Watson 100
1244 1244
The two sides are equal therefore the trial balance has balanced. This shows that our
transactions that we posted into the ledger are correct.
Income Statement
The main reason people set up businesses is to make profits. Losses can occur if the
business becomes unsuccessful. The calculation of profit/loss is the most important
objective of the accounting function. The profits are calculated by drawing up a special
account called a Trading Profit and Loss Account. The account is split into two sections,
one in which the Gross Profit is found and in the other, Net Profit is calculated
● Gross Profit-Calculated in the Trading Account .This is the excess of sales over
the cost of goods sold in the period.
● Net Profit-Calculated in the Profit and Loss Account. This is what is left of the
gross profit after all other expenses have been deducted.
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● Expenses-The value of all the assets that has been used up to supply goods and
services and therefore obtain revenues.
To compile a Trading Profit and Los Account, one needs to have the Trial Balance first.
Balance Sheet
After compiling the Trading Profit and Loss Account, the balances that remain on the
Trial Balance pertain to the Balance Sheet. These will usually be balances for Assets,
Liabilities and Capital.
A Balance Sheet is a record of the business Assets, Liabilities and Resultant stockholders
equity (Capital + Profit-Drawings) to depict a financial situation on a specific date.
Example 2
The following is a Trial Balance of R.Graham as at 30 September 2010.
Dr Cr
$ $
Stock 1 October 2009 2368
Carriage outwards 200
Carriage inwards 310
Returns inwards 205
Returns outwards 322
Purchases 11874
Sales 18600
Salaries and wages 3862
Rent 304
Insurance 78
Motor Expenses 664
Office expenses 216
Lighting and Heating 166
General expenses 314
Premises 5000
Motor Vehicle 1800
Fixtures and Fittings 350
Debtors 3896
Creditors 1731
Cash at bank 482
Drawings 1200
Capital 12636
33 289 33 289
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Trading Profit and Loss Account for the year ended 30 September 2010.
Sales 18 600
Less Returns inwards (205)
18 395
Less Expenses:
Carriage outwards 200
Salaries and Wages 3 862
Rent 304
Insurance 78
Motor Expenses 664
Office Expenses 216
Lighting and Heating 166
General Expenses 314 5 804
NET PROFIT 1 307
Capital 12 636
Add Net Profit 1 307
Less Drawings (1 200)
12 743
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CAPITAL STRUCTURE & CAPITAL GEARING CONCEPT
Capital structure
The capital structure is how a company finances its overall operations and growth by
using different sources of funds. This is also related to the capitalisation of a company
which describes the composition of a company’s permanent or long term capital which
consists of debt and equity.
When people are talking refer to capital structure they are most likely referring to a
company’s debt-to-equity ratio, which provides insight into how risky a company is.
Usually a company more heavily financed by debt (debt capital) poses greater risk as this
company is relatively highly levered. A healthy proportion of equity capital as opposed to
debt capital in a company’s’ capital structure is an indication of financial fitness.
Debt-Equity relationship
Shrewd use of leverage (debt) increases the amount of financial resources available to a
company for growth and expansion. The assumption is that management can earn more
on borrowed funds than it pays in interest expense and fees on these funds.
A company considered too highly leveraged (too much debt versus equity) may find itself
restricted in action by its creditors and /or may have its profitability hurt because of
paying high interest charges.
More of total liabilities means less equity and therefore indicates a more leveraged
position.
● Debt/Equity Ratio: total liabilities
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total shareholders equity.
N.B The first two are popular measurements; however it’s the capitalisation ratio that
delivers the key insights to evaluating a company’s capital position.
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alternative forms of finance can be considered.
1. Liquidity Ratios: Indicate a business’s ability to pay its short term liabilities
at the correct time. Failure to do so could result in the shutting down of the
business. When a company is able to pay its debts as they fall due, that company
is said to be liquid.
This compares assets which will become liquid within 12 months with
liabilities which will be due for payment in the same period.
This indicates the business’s ability to meet its current liabilities without
using stock.
A ratio less than 1 is not alarming a very high ratio suggests excess cash, a
credit policy that needs revamping or a change needed in the composition
of current vs. long term assets. A ratio of 1.5 means you are holding up too
much stock or too much money. The ideal ratio should be less than 1.If it
is too low then you need loosen up your credit policies and increase your
debtors.
2. Debt Management Ratios: Deal with the amount of debt in the business
capital structure and its ability to service the legal obligations.
High geared means high risk and requires you to acquire more borrowed money.
Low geared means low risk and requires you to inject more of your money.
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● Total Debt to Total Assets Ratio = Total Debt
Total Assets
Indicates how much of the business funds are being supplied by creditors.
Total debt includes all current + non current debts + lease obligations.
Indicates the ability to meet the interest requirements on both short and
long term debts. How many times can you pay the interest from your
EBIT?
A high ratio indicates a safe situation but that perhaps not enough financial
leverage is being used. A low ratio may call for immediate attention; more
sales will be needed to generate income.
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indication of future growth prospects.
The higher the DSO the higher the cash conversion cycle. This ratio
estimates the number of days it takes on average to collect the sales. By
dividing sales by 365 we are finding the average sales per day.
The ratio indicates how effective the credit granting and management
activities are. A high DSO probably indicates many uncollectible
receivables. A low ratio indicates that credit granting policies are very
restrictive than granting sales.
It measures the times in a year the business turns over its inventory/stock.
The lower the Inventory turnover the higher the cash conversion cycle.
How many times do you order? If you order more it means that you are
selling more on credit. Other things being equal and assuming that sales
are moving smoothly, a high turnover suggests efficient Inventory
management, a low turnover figure often indicates obsolete stock or lack
of inventory management.
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whereas a low ratio suggests the need to reassess the overall strategy of
the business, marketing effort and the capital expenditure programme.
STOCK CONTROL
There are several methods for controlling stock; you may opt for one method or a mixture
of two or more if you have various types of stock.
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notified and a replenishment order is placed. e.g. Book stores use red –tag
system where by a tag is placed in the stock at a point equal to order point.
When a customer takes that book to the checkout, the store is effectively
notified that it is time to reorder that title.
If your needs are predictable you may order a fixed quantity of stock every
time you place an order/order at a fixed interval.
It is secured at the ‘least unit cost’ of stocking a material. The costs that
enter into the unit cost maybe divided into two groups:
Stock Taking
● Stocktaking is an essential tool in checking that the stock records are accurate. There are
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several reasons why the actual amount of items fails to tally or agree with the stock records.
● Stock taking is simply defined as the physical counting or checking of the stock items. The
physically counted stock items may fail to agree with the stock records because
a. The items were stolen or damaged and a record was not made
b. Goods were bought/sold but a record was to made
c. Sales or purchases have been recorded incorrectly
STEPS:
1st Set a date for stock takes and informs the publics if business hours are interrupted
2nd Organize the stock to facilitate easy counting
3rd Develop a stock list
th
4 Physically count every item as per stock list and enter the figure in the ‘stock take’
column
5th Enter the last balance figure from the stock cards in the stock card column for each item
6th Deduct the stock card figure form the stock take figure and enter this amount in the
Difference column
7th Find out the reasons if there is a difference i.e. if there is more or less stock than shown
on the stock card
As shown on the stock list, during the stock take there were 150 less of ever-sharp pens and 50
more than recorded on the stock cards. The anomalies or differences should be corrected on the
stock card.
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CHAPTER 8
OBJECTIVES
By the end of this unit you should be able to:
Costing
This is the method or way of calculating the total costs of making or selling a product or
providing a service
Costs
These are all the money that the business spends to make and sell its products or services
Direct Costs
These relates to all costs that are directly related to the products or services that the business
makes or sells. There are two types of direct costs namely direct material costs and direct labour
costs.
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amount to the total direct material costs.
Direct expenses
● These are any expenses directly related to the production of the final product e.g. delivery
costs which relate only to delivery or raw materials used in production of one product, hiring
of a machine which is only used on one product.
Indirect costs
● These are all other costs that the entrepreneur/business incurs in running the business e.g.
rent, interest, electricity, and salaries of supervisor, managers, accounts clerks, secretary and
other administration expenses. Indirect costs are also known as overheads or expenses.
Direct Expense
Direct Cost per Item
Direct labour cost: - (hrs per item x number of workers x money
Direct Material Cost: - Add the cost of raw materials used to produce one product item
STEP I
=
+
+
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Indirect Cost per item:
Total Indirect costs per year
Total number of items per year
NB: In both costing processes, costs per item may be calculated using a month as the time factor
instead of a year that is “Instead of Indirect cost per year divided by Total number of items per
year” the Entrepreneur may use, “Indirect cost per month divided by number of items per month.
Exhibit
The entrepreneur – carpenter specializes in the manufacture of tables and has the following
details for costing. Calculate the total cost of one table.
Materials used: Timber 2 000.00
Nails 1 000.00
Varnish 500.00
Glue 500.00
One (1) worker takes 5 hours to produce one item. The carpenter is paid $1 000 per hour.
Other costs per month: Rent $ 5 000.00
Electricity $ 500.00
Other wages $10 000.00
Telephone $ 2 000.00
Transport $ 2 000.00
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Answer:
Direct Materials: Timber $2 000.00
Nails $1 000.00
Varnish $ 500.00
Glue $ 500.00
$4 000.00 (Direct Material/Cost)
2000 items are produced each year. Calculate the total cost per item.
1000 desks are produced each year. Calculate the total cost per item.
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iii. The entrepreneur has the following to make a product item:
Calculation of total cost of 1 (one) item where several different products are produced
If the entrepreneur produces several different types of products, it is not appropriate to allocate
the same amount of costs as in the case of one product type. This is because more time may be
spent in the making of one product and little in the other. As such, one product has a greater
proportion of the indirect costs than the other. This is achieved by calculating the Indirect cost
per item and multiplying by the number of hours to produce one item. This enables the
entrepreneur to be able to calculate a different cost for each different product which reflects the
amount of time taken to produce that product.
Exhibit:
The entrepreneur used the following in making the dress and a trouser:
Two workers are each paid $2 000.00 per hour. Working together, they take 4 hours to produce
one dress and 6 hours to produce one pair of trousers. Other costs each year:
Rent $600 000.00
Electricity $240 000.00
Transport $240 000.00
The two workers each work for 40 hours a week and fifty weeks a year. Calculate total cost per
each item.
Answer:
Direct costs:
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3rd Total Direct Cost:
Dress: Direct material cost + Direct Labour
= $1 300.00 + $16 000.00
= $17 300.00 per dress
= 1 080 000/yr
4 000 hrs/yr
= $270/hr
= $ 1 660.00/dress
Further Questions
2. Three)Workers take 4 hours for the skirt and 5 hours for the dress and are each paid $2
000.00 per hour.
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Indirect costs per year:
Each worker works for 50 hours/week and 50 weeks/year. Calculate the total cost per each item.
Retailers and wholesalers have the same types of costs and can normally do costing in the same
manner. Some costs for retailers and wholesalers are different from the costs of manufacturers
and service operators.
To calculate the total cost of an item for the wholesaler or retailer, 3 steps are followed that is:
Step 1 Calculate Direct Material Cost
Step 2 Calculate Indirect Costs
Step 3 Add up Total Costs
NB retailers/wholesalers do not have direct labour as they buy and sell goods made by other
businesses. Their employees do not make products or manufacture, and as such all wages and
salaries are indirect costs.
The direct material costs of retailers and wholesalers take the form costs of buying goods.
The Indirect costs of the retailers and wholesalers are rent, electricity, insurance, depreciation and
so on.
Pricing
Definition: is the process of calculating an amount of money to charge customers for goods
and services produced or to be provided by the entrepreneur.
Calculations of prices of product
After costing the next process is to calculate the price for which the products should be offered
The two major methods of pricing calculation are mark-up and margin.
Mark up is profit expressed as a fraction or percentage of cost
It is calculated as: Profit (P) x 100%
Cost ©
Example: If the selling price is $250.00 and the cost is $200, calculate profit, mark up and
margin.
Solution
Profit = Selling Price – Cost
= $250.00 - $200.00
= $50.00
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Mark up = 50 (Profit)
200 (Cost)
= ¼ as a fraction or 25% as percentage
Margin = 50 (Profit)______
250 (Selling Price)
= 1/5 as a fraction /25% as percent
Further Questions
a. The entrepreneur makes Dresses and skirts and uses the following:
Two (2) workers take 3 hrs to make a dress and 4 hours to make a skirt and are each paid $1
000.00 per hour. The indirect costs per year are:
The two workers each work for 40 hours a week and so weeks a year.
i. Calculate the profit and selling price, if the Dress is marked up by 10%.
ii. If the profit on skirt is $200, what is its selling price, mark up and margin.
b. The entrepreneur produces two products ‘A’ and ‘B’. The following are incurred by the
business:
Materials Products: A B
Materials $2 000.00 $3 000.00
Two (2) workers take 6 hours to produce product ‘A’ and 10 hours to produce product ‘B’. The
workers are each paid $1 000 per hour. The indirect costs are 200 000 per year. Each worker
works for 50 hours a week and 50 weeks a year.
Find the profit and selling price of each product, if the products are marked up 50%.
Pricing factors
When setting prices the entrepreneur must consider the following variables or factors.
a. Customers
The business is expected to carry out a survey to determine how much customers are prepared to
pay for the product. The selling price should not be higher than what customers are prepared to
pay.
b. Competitors
The entrepreneur should carry out competitor’s analysis to determine the prices of competitors. If
the entrepreneur sets higher prices than its competitors, he/she will lose customers to competitors.
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Customers are economic beings who always choose the cheapest (or best value for money)
products.
As such, the highest selling price should be equal to or less than the price charged by competitors.
NB: For a successful entrepreneur the lowest price = cost + profit need and the highest price =
how much competitors charge or customers will pay, which ever is lower.
Pricing strategies
A pricing strategy is an approach or means designed to achieve the pricing objectives. The price
the entrepreneur charges will be somewhere between one that is too low to produce a profit and
that is too high to produce any demand. Product costs set a floor to the price; consumer
perceptions of the product’s value set the ceiling. The entrepreneur must consider competitors’
prices and other external and internal factors to find the best price between these two extremes.
Entrepreneurs may opt to use the following approaches or strategies in product pricing: cost based
pricing, buyer-based approach and competition-based approach.
● Cost based pricing includes cost-plus pricing, breakeven pricing and value-based pricing.
Break even pricing and value-based pricing.
● Cost-plus pricing is adding a standard mark to the cost of the product. Break even
pricing (target profit pricing) is setting price to break even on the costs of making and
marketing a product or setting price to make a target profit. Value based pricing is setting
price based on buyer’s perceptions of value rather than on the seller’s cost.
● Value pricing is offering the right combination of quantity and good service at a fair
price.
● Competition based pricing is setting prices based on the prices that competitors charge
for similar products. Consumers naturally base their judgments of a product’s value on
the prices that competitors charge for similar products. One form of competition based
pricing is going rate pricing, in which a firm bases it’s price largely on competitors’
prices with less attention paid to it’s own costs or to demand. The firm might charge the,
more, or less than its major competitors.
Another competition based pricing form is sealed-bid pricing where the entrepreneur bases
his/her price on how he/she thinks competitors will price rather than it’s own costs or on the
demand.
● Skimming Pricing comes into being when the entrepreneur sets a high price for a new
product to skim maximum revenues layer by buyer from the segments willing to pay the
high price. The firm makes fewer but more profitable sales.
● Market penetration pricing is when the entrepreneur sets a low price for a new product
in order to attract a large number of buyers and a large market share. Discount and
allowance pricing includes cash discount, quantity discount, functional discount (trade
discount) and seasonal discount.
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CHAPTER 9
BUSINESS GROWTH
Objectives
By the end of this study unit you must be able to;
● define business growth
● distinguish internal from external growth
● distinguish a merger from an acquisition
● Use various business strategic analysis tools and appreciate their limitations.
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Introduction
Business growth means an increase in size of an organization. Size covers aspects such as
operational capacity, number of employees and capital among other things. Growth is a
natural outcome for any positively performing organization. It can either be organic or
external. Organic growth is when a firm grows on its own efforts, resources and by
ploughing back profits. Organic growth occurs when a business combines its resources
with those of another business. The result will either be a merger or takeover
(acquisition).
Important terms
● Merger-This is when two business organizations combine their shareholding and
fixed assets to become one business entity.
● Acquisition-This is when one business takes over the shareholding and assets of
another.
Internal growth
Internal business growth can best be understood by use of the Ansoff Product/market
matrix.
Ansoff Product and Market Matrix
The Ansoff Growth matrix is a tool that helps businesses decides their product and
market growth strategy.
Ansoff’s product/market growth matrix suggests that a business’ attempts to grow depend
on whether it markets new or existing products in new or existing markets.
The output from the Ansoff product/market matrix is a series of suggested growth
strategies that set the direction for the business strategy. These are described below:
Market penetration
Market penetration is the name given to a growth strategy where the business focuses on
selling existing products into existing markets.
Market penetration seeks to achieve four main objectives:
• Maintain or increase the market share of current products – this can be achieved by a
combination of competitive pricing strategies, advertising, sales promotion and perhaps
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more resources dedicated to personal selling
• Secure dominance of growth markets
• Restructure a mature market by driving out competitors; this would require a much
more aggressive promotional campaign, supported by a pricing strategy designed to make
the market unattractive for competitors
• Increase usage by existing customers – for example by introducing loyalty schemes
A market penetration marketing strategy is very much about “business as usual”. The
business is focusing on markets and products it knows well. It is likely to have good
information on competitors and on customer needs. It is unlikely, therefore, that this
strategy will require much investment in new market research.
Market development
Market development is the name given to a growth strategy where the business seeks to
sell its existing products into new markets.
There are many possible ways of approaching this strategy, including:
• New geographical markets; for example exporting the product to a new country
• New product dimensions or packaging: for example
• New distribution channels
• Different pricing policies to attract different customers or create new market segments
Product development
Product development is the name given to a growth strategy where a business aims to
introduce new products into existing markets. This strategy may require the development
of new competencies and requires the business to develop modified products which can
appeal to existing markets.
Diversification
Diversification is the name given to the growth strategy where a business markets new
products in new markets.
This is an inherently more risk strategy because the business is moving into markets in
which it has little or no experience.
For a business to adopt a diversification strategy, therefore, it must have a clear idea
about what it expects to gain from the strategy and an honest assessment of the risks.
BUSINESS PORTFOLIO ANALYSIS
A business portfolio is a collection of businesses and products that make up a company.
The best business portfolio is one that fits the company's strengths and helps exploit the
most attractive opportunities.
The company must:
(1) Analyze its current business portfolio and decide which businesses should receive
more or less investment, and
(2) Develop growth strategies for adding new products and businesses to the portfolio,
whilst at the same time deciding when products and businesses should no longer be
retained.
The best known tool for business analysis is the Boston Consulting Group(BCG) model .
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Using the BCG Box (as illustrated above) a company classifies all its SBU's(Strategic
Business Units) according to two dimensions:
On the horizontal axis: relative market share - this serves as a measure of SBU
strength in the market
On the vertical axis: market growth rate - this provides a measure of market
attractiveness
By dividing the matrix into four areas, four types of SBU can be distinguished:
● STARS(high growth and high market share)
High growth rate requires high levels of investments to cope with competitors in the
markets. This can cause significant cash outflows from the business. High market share
should provide cash for these investments. Cash generated from operations is to be
re-invested into the business.
Main challenge for the business is to maintain or even increase its market share to
generate cash for growing needs of the business.
Eventually, at the maturity of the market star will be turned into cash cow generating cash
that could be invested elsewhere.
Is the future of the organization.
Product development and innovation is the key to success as new competitor are
emerging in the market. This will keep the business ahead of others.
Cash generated from cash cows can be utilized on star.
This is the part of portfolio demanding cash for his growing needs but does not generated
cash because of low market share.
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It has potential to become star if market share is increased otherwise as the time passes it
will became dog rather than becoming cash cow.
Marketing and innovation both are useful tools at this stage.
It requires greater management time and resources to prevent the investment being
eroded.
Either heavy investments should be made or it should be sold but this option only
transfers problem to the buyers, it does not solve the problem.
Strategic alliance with other competitor facing the same problem or acquisition by
successful competitor may help resolve the issue.
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CHAPTER 10
RISK MANAGEMENT
Objectives
By the end of the topic students should be able to:
● Define risk
● Define risk management
● Assess risk
● Identify risk
● Outline principles of risk management
Example of risk management: A NASA model showing areas at high risk from impact
for the International Space Station.
Risk management is the identification, assessment, and prioritization of risks(defined in
ISO 31000 as the effect of uncertainty on objectives, whether positive or negative)
followed by coordinated and economical application of resources to minimize, monitor,
and control the probability and/or impact of unfortunate events[or to maximize the
realization of opportunities.
Risks can come from uncertainty in financial markets, project failures, legal liabilities,
credit risk, accidents, natural causes and disasters as well as deliberate attacks from an
adversary. Several risk management standards have been developed including the Project
Management Institute, the National Institute of Science and Technology, actuarial
societies, and ISO standards.
In ideal risk management, a prioritization process is followed whereby the risks with the
greatest loss and the greatest probability of occurring are handled first, and risks with
lower probability of occurrence and lower loss are handled in descending order. In
practice the process can be very difficult, and balancing between risks with a high
probability of occurrence but lower loss versus a risk with high loss but lower probability
of occurrence can often be mishandled.
Intangible risk management identifies a new type of a risk that has a 100% probability of
occurring but is ignored by the organization due to a lack of identification ability. For
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example, when deficient knowledge is applied to a situation, a knowledge risk
materializes. Relationship risk appears when ineffective collaboration occurs.
Process-engagement risk may be an issue when ineffective operational procedures are
applied. These risks directly reduce the productivity of knowledge workers, decrease cost
effectiveness, profitability, service, quality, reputation, brand value, and earnings quality.
Intangible risk management allows risk management to create immediate value from the
identification and reduction of risks that reduce productivity.
Risk management also faces difficulties in allocating resources. This is the idea of
opportunity cost. Resources spent on risk management could have been spent on more
profitable activities. Again, ideal risk management minimizes spending and minimizes
the negative effects of risks.
Method
For the most part, these methods consist of the following elements, performed, more or
less, in the following order.
1. identify, characterize, and assess threats
2. assess the vulnerability of critical assets to specific threats
3. determine the risk (i.e. the expected consequences of specific types of attacks on
specific assets)
4. identify ways to reduce those risks
5. prioritize risk reduction measures based on a strategy
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○ The basis upon which risks will be evaluated, constraints.
4. Defining a framework for the activity and an agenda for identification.
5. Developing an analysis of risks involved in the process.
6. Mitigation or Solution of risks using available technological, human and
organizational resources.
Identification
● After establishing the context, the next step in the process of managing risk is to
identify potential risks. Risks are about events that, when triggered, cause
problems. Hence, risk identification can start with
● Risk sources may be internal or external to the system that is the target of risk
management.
Examples of risk sources are: stakeholders of a project, employees of a company or the
weather over an airport.
● Problem analysis- Risks are related to identified threats. For example: the threat
of losing money, the threat of abuse of privacy information or the threat of
accidents and casualties. The threats may exist with various entities, most
important with shareholders, customers and legislative bodies such as the
government.
When either source or problem is known, the events that a source may trigger or the
events that can lead to a problem can be investigated. For example: stakeholders
withdrawing during a project may endanger funding of the project; privacy information
may be stolen by employees even within a closed network; lightning striking an aircraft
during takeoff may make all people onboard immediate casualties.
The chosen method of identifying risks may depend on culture, industry practice and
compliance. The identification methods are formed by templates or the development of
templates for identifying source, problem or event. Common risk identification methods
are:
● Objectives-based risk identification Organizations and project teams have
objectives. Any event that may endanger achieving an objective partly or
completely is identified as risk.
● Scenario-based risk identification in scenario analysis different scenarios is
created. The scenarios may be the alternative ways to achieve an objective, or an
analysis of the interaction of forces in, for example, a market or battle. Any event
that triggers an undesired scenario alternative is identified as risk.
● Taxonomy-based risk identification the taxonomy in taxonomy-based risk
identification is a breakdown of possible risk sources. Based on the taxonomy and
knowledge of best practices, a questionnaire is compiled. The answers to the
questions reveal risks.
● Common-risk checking in several industries, lists with known risks is
available. Each risk in the list can be checked for application to a particular
situation.
● Risk charting This method combines the above approaches by listing resources
at risk, Threats to those resources Modifying Factors which may increase or
decrease the risk and Consequences it is wished to avoid. Creating a matrix under
these headings enables a variety of approaches. One can begin with resources and
consider the threats they are exposed to and the consequences of each.
Alternatively one can start with the threats and examine which resources they
would affect, or one can begin with the consequences and determine which
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combination of threats and resources would be involved to bring them about.
Assessment
Once risks have been identified, they must then be assessed as to their potential severity
of loss and to the probability of occurrence. These quantities can be either simple to
measure, in the case of the value of a lost building, or impossible to know for sure in the
case of the probability of an unlikely event occurring. Therefore, in the assessment
process it is critical to make the best educated guesses possible in order to properly
prioritize the implementation of the risk management plan.
The fundamental difficulty in risk assessment is determining the rate of occurrence since
statistical information is not available on all kinds of past incidents. Furthermore,
evaluating the severity of the consequences (impact) is often quite difficult for immaterial
assets. Asset valuation is another question that needs to be addressed. Thus, best educated
opinions and available statistics are the primary sources of information. Nevertheless,
risk assessment should produce such information for the management of the organization
that the primary risks are easy to understand and that the risk management decisions may
be prioritized. Thus, there have been several theories and attempts to quantify risks.
Numerous different risk formulae exist, but perhaps the most widely accepted formula for
risk quantification is:
Rate of occurrence multiplied by the impact of the event equals risk
Risk Options
Risk mitigation measures are usually formulated according to one or more of the
following major risk options, which are:
1. Design a new business process with adequate built-in risk control and containment
measures from the start.
2. Periodically re-assess risks that are accepted in ongoing processes as a normal feature
of business operations and modify mitigation measures.
3. Transfer risks to an external agency (e.g. an insurance company)
4. Avoid risks altogether (e.g. by closing down a particular high-risk business area)
Later research has shown that the financial benefits of risk management are less
dependent on the formula used but are more dependent on the frequency and how risk
assessment is performed.
In business it is imperative to be able to present the findings of risk assessments in
financial terms. Robert Courtney Jr. (IBM, 1970) proposed a formula for presenting risks
in financial terms. The Courtney formula was accepted as the official risk analysis
method for the US governmental agencies. The formula proposes calculation of ALE
(annualized loss expectancy) and compares the expected loss value to the security control
implementation costs (cost-benefit analysis).
Potential risk treatments
Once risks have been identified and assessed, all techniques to manage the risk fall into
one or more of these four major categories
● Avoidance (eliminate, withdraw from or not become involved)
● Reduction (optimize - mitigate)
● Sharing (transfer - outsource or insure)
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● Retention (accept and budget)
Risk avoidance
This includes not performing an activity that could carry risk. An example would be not
buying a property or business in order to not take on the legal liability that comes with it.
Another would be not flying in order not to take the risk that the airplane were to be
hijacked. Avoidance may seem the answer to all risks, but avoiding risks also means
losing out on the potential gain that accepting (retaining) the risk may have allowed. Not
entering a business to avoid the risk of loss also avoids the possibility of earning profits.
Hazard Prevention
Hazard prevention refers to the prevention of risks in an emergency. The first and most
effective stage of hazard prevention is the elimination of hazards. If this takes too long, is
too costly, or is otherwise impractical, the second stage is mitigation.
Risk reduction
Risk reduction or "optimization" involves reducing the severity of the loss or the
likelihood of the loss from occurring. For example, sprinklers are designed to put out a
fire to reduce the risk of loss by fire. This method may cause a greater loss by water
damage and therefore may not be suitable. Halon fire suppression systems may mitigate
that risk, but the cost may be prohibitive as a strategy.
Acknowledging that risks can be positive or negative, optimizing risks means finding a
balance between negative risk and the benefit of the operation or activity; and between
risk reduction and effort applied. By an offshore drilling contractor effectively applying
HSE Management in its organization, it can optimize risk to achieve levels of residual
risk that are tolerable
Modern software development methodologies reduce risk by developing and delivering
software incrementally. Early methodologies suffered from the fact that they only
delivered software in the final phase of development; any problems encountered in earlier
phases meant costly rework and often jeopardized the whole project. By developing in
iterations, software projects can limit effort wasted to a single iteration.
Outsourcing could be an example of risk reduction if the outsourcer can demonstrate
higher capability at managing or reducing risks. For example, a company may outsource
only its software development, the manufacturing of hard goods, or customer support
needs to another company, while handling the business management itself. This way, the
company can concentrate more on business development without having to worry as
much about the manufacturing process, managing the development team, or finding a
physical location for a call center.
Risk sharing
Briefly defined as "sharing with another party the burden of loss or the benefit of gain,
from a risk, and the measures to reduce a risk."
The term of 'risk transfer' is often used in place of risk sharing in the mistaken belief that
you can transfer a risk to a third party through insurance or outsourcing. In practice if the
insurance company or contractor go bankrupt or end up in court, the original risk is likely
to still revert to the first party. As such in the terminology of practitioners and scholars
alike, the purchase of an insurance contract is often described as a "transfer of risk."
However, technically speaking, the buyer of the contract generally retains legal
responsibility for the losses "transferred", meaning that insurance may be described more
accurately as a post-event compensatory mechanism. For example, a personal injuries
insurance policy does not transfer the risk of a car accident to the insurance company.
The risk still lies with the policy holder namely the person who has been in the accident.
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The insurance policy simply provides that if an accident (the event) occurs involving the
policy holder then some compensation may be payable to the policy holder that is
commensurate to the suffering/damage.
Some ways of managing risk fall into multiple categories. Risk retention pools are
technically retaining the risk for the group, but spreading it over the whole group
involves transfer among individual members of the group. This is different from
traditional insurance, in that no premium is exchanged between members of the group up
front, but instead losses are assessed to all members of the group.
Methods of transferring
Partnership and: Joint venture brings client and contractor together to share the costs and
benefits on the project or business.
BOOT CONTRACT ( Build Own Operate and Transfer)
ROT (Refurbish Operate and Transfer)
PPP ( Public Private Partnership )
Insurance
-A 3rd party accepts insurable risk for the payment of a premium. It covers: Direct
property damage
-Indirect consequential loss
Legal liability
Personal liability.
Risk retention
Involves accepting the loss, or benefit of gain, from a risk when it occurs. True self
insurance falls in this category. Risk retention is a viable strategy for small risks where
the cost of insuring against the risk would be greater over time than the total losses
sustained. All risks that are not avoided or transferred are retained by default. This
includes risks that are so large or catastrophic that they either cannot be insured against or
the premiums would be infeasible. War is an example since most property and risks are
not insured against war, so the loss attributed by war is retained by the insured. Also any
amounts of potential loss (risk) over the amount insured is retained risk. This may also be
acceptable if the chance of a very large loss is small or if the cost to insure for greater
coverage amounts is so great it would hinder the goals of the organization too much.
Individual Cover
This is usually a response measure undertaken by an individual through such measures as
taking medical aid scheme, Life assurance, employment cover, e.t.c
Group Cover
This is undertaken mainly when there are several people undertaking business within the
same entity e.g. in a partnership, cooperative e.t.c
Create a risk management plan
Select appropriate controls or countermeasures to measure each risk. Risk mitigation
needs to be approved by the appropriate level of management. For instance, a risk
concerning the image of the organization should have top management decision behind it
whereas IT management would have the authority to decide on computer virus risks.
The risk management plan should propose applicable and effective security controls for
managing the risks. For example, an observed high risk of computer viruses could be
mitigated by acquiring and implementing antivirus software. A good risk management
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plan should contain a schedule for control implementation and responsible persons for
those actions.
According to ISO/IEC 27001, the stage immediately after completion of the risk
assessment phase consists of preparing a Risk Treatment Plan, which should document
the decisions about how each of the identified risks should be handled. Mitigation of risks
often means selection of security controls, which should be documented in a Statement of
Applicability, which identifies which particular control objectives and controls from the
standard have been selected, and why.
Implementation
Implementation follows all of the planned methods for mitigating the effect of the risks.
Purchase insurance policies for the risks that have been decided to be transferred to an
insurer, avoid all risks that can be avoided without sacrificing the entity's goals, reduce
others, and retain the rest.
Review and evaluation of the plan
Initial risk management plans will never be perfect. Practice, experience, and actual loss
results will necessitate changes in the plan and contribute information to allow possible
different decisions to be made in dealing with the risks being faced.
Risk analysis results and management plans should be updated periodically. There are
two primary reasons for this:
1. to evaluate whether the previously selected security controls are still applicable
and effective, and
2. To evaluate the possible risk level changes in the business environment. For
example, information risks are a good example of rapidly changing business
environment.
Limitations
If risks are improperly assessed and prioritized, time can be wasted in dealing with risk of
losses that are not likely to occur. Spending too much time assessing and managing
unlikely risks can divert resources that could be used more profitably. Unlikely events do
occur but if the risk is unlikely enough to occur it may be better to simply retain the risk
and deal with the result if the loss does in fact occur. Qualitative risk assessment is
subjective and lacks consistency. The primary justification for a formal risk assessment
process is legal and bureaucratic.
Prioritizing the risk management processes too highly could keep an organization from
ever completing a project or even getting started. This is especially true if other work is
suspended until the risk management process is considered complete.
It is also important to keep in mind the distinction between risk and uncertainty. Risk can
be measured by impacts x probability.
Areas of risk management
Enterprise risk management
In enterprise risk management, a risk is defined as a possible event or circumstance that
can have negative influences on the enterprise in question. Its impact can be on the very
existence, the resources (human and capital), the products and services, or the customers
of the enterprise, as well as external impacts on society, markets, or the environment. In a
financial institution, enterprise risk management is normally thought of as the
combination of credit risk, interest rate risk or asset liability management, market risk,
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and operational risk.
In the more general case, every probable risk can have a pre-formulated plan to deal with
its possible consequences (to ensure contingency if the risk becomes a liability).
From the information above and the average cost per employee over time, or cost accrual
ratio, a project manager can estimate:
● The cost associated with the risk if it arises, estimated by multiplying employee
costs per unit time by the estimated time lost (cost impact, C where C = cost
accrual ratio * S).
● the probable increase in time associated with a risk (schedule variance due to risk,
Rs where Rs = P * S):
○ Sorting on this value puts the highest risks to the schedule first. This is
intended to cause the greatest risks to the project to be attempted first so
that risk is minimized as quickly as possible.
○ This is slightly misleading as schedule variances with a large P and small
S and vice versa are not equivalent. (The risk of the RMS Titanic sinking
vs. the passengers' meals being served at slightly the wrong time).
● the probable increase in cost associated with a risk (cost variance due to risk, Rc
where Rc = P*C = P*CAR*S = P*S*CAR)
○ Sorting on this value puts the highest risks to the budget first.
○ See concerns about schedule variance as this is a function of it, as
illustrated in the equation above.
Risk in a project or process can be due either to Special Cause Variation or Common
Cause Variation and requires appropriate treatment. That is to re-iterate the concern about
external cases not being equivalent in the list immediately above.
Risk management activities as applied to project management
In project management, risk management includes the following activities:
● Planning how risk will be managed in the particular project. Plans should include
risk management tasks, responsibilities, activities and budget.
● Assigning a risk officer - a team member other than a project manager who is
responsible for foreseeing potential project problems. Typical characteristic of
risk officer is a healthy skepticism.
● Maintaining live project risk database. Each risk should have the following
attributes: opening date, title, short description, probability and importance.
Optionally a risk may have an assigned person responsible for its resolution and a
date by which the risk must be resolved.
● Creating anonymous risk reporting channel. Each team member should have
possibility to report risk that he/she foresees in the project.
● Preparing mitigation plans for risks that are chosen to be mitigated. The purpose
of the mitigation plan is to describe how this particular risk will be handled –
what, when, by who and how will it be done to avoid it or minimize consequences
if it becomes a liability.
● Summarizing planned and faced risks, effectiveness of mitigation activities, and
effort spent for the risk management.
Risk management for megaprojects
Megaprojects (sometimes also called "major programs") are extremely large-scale
investment projects, typically costing more than US$1 billion per project. Megaprojects
include bridges, tunnels, highways, railways, airports, seaports, power plants, dams,
wastewater projects, coastal flood protection schemes, oil and natural gas extraction
projects, public buildings, information technology systems, aerospace projects, and
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defence systems. Megaprojects have been shown to be particularly risky in terms of
finance, safety, and social and environmental impacts. Risk management is therefore
particularly pertinent for megaprojects and special methods and special education have
been developed for such risk management.
Risk management of Information Technology
Information technology is increasing pervasive in modern life in every sector.
IT risk is a risk related to information technology. This relatively new term due to an
increasing awareness that information security is simply one facet of a multitude of risks
that are relevant to IT and the real world processes it supports.
A number of methodologies have been developed to deal with this kind of risk.
Risk management and business continuity
Risk management is simply a practice of systematically selecting cost effective
approaches for minimizing the effect of threat realization to the organization. All risks
can never be fully avoided or mitigated simply because of financial and practical
limitations. Therefore all organizations have to accept some level of residual risks.
Whereas risk management tends to be preemptive, business continuity planning (BCP)
was invented to deal with the consequences of realized residual risks. The necessity to
have BCP in place arises because even very unlikely events will occur if given enough
time. Risk management and BCP are often mistakenly seen as rivals or overlapping
practices. In fact these processes are so tightly tied together that such separation seems
artificial. For example, the risk management process creates important inputs for the BCP
(assets, impact assessments, cost estimates etc.). Risk management also proposes
applicable controls for the observed risks. Therefore, risk management covers several
areas that are vital for the BCP process. However, the BCP process goes beyond risk
management's preemptive approach and assumes that the disaster will happen at some
point.
Risk communication
Risk communication is a complex cross-disciplinary academic field. Problems for risk
communicators involve how to reach the intended audience, to make the risk
comprehensible and relatable to other risks, how to pay appropriate respect to the
audience's values related to the risk, how to predict the audience's response to the
communication, etc. A main goal of risk communication is to improve collective and
individual decision making. Risk communication is somewhat related to crisis
communication.
Bow tie diagrams
A popular solution to the quest to communicate risks and their treatments effectively is to
use bow tie diagrams. These have been effective, for example, in a public forum to model
perceived risks and communicate precautions, during the planning stage of offshore oil
and gas facilities in Scotland. Equally, the technique is used for HAZID (Hazard
Identification) workshops of all types, and results in a high level of engagement. For this
reason (amongst others) an increasing number of government regulators for major hazard
facilities (MHFs), offshore oil & gas, aviation, etc. welcome safety case submissions
which use diagrammatic representation of risks at their core.
Communication advantages of bow tie diagrams:
● Visual illustration of the hazard, its causes, consequences, controls, and how
controls fail.
● The bow tie diagram can be readily understood at all personnel levels.
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● "A picture paints a thousand words."
Seven cardinal rules for the practice of risk communication
(As first expressed by the U.S. Environmental Protection Agency and several of the
field's founders
● Accept and involve the public/other consumers as legitimate partners.
● Plan carefully and evaluate your efforts with a focus on your strengths,
weaknesses, opportunities, and threats.
● Listen to the public's specific concerns.
● Be honest, frank, and open.
● Coordinate and collaborate with other credible sources.
CHAPTER 11
LEGAL REQUIREMENTS
Objectives
By the end of the unit you should be able to:
Describe the various legal requirements applicable to business in Zimbabwe including;
● Labour legislation
● Taxation
● Collective bargaining
● Contacts
● Insolvency
Taxation
To tax is to impose a financial charge or other levy upon a taxpayer (an individual or
legal entity) by a state or the functional equivalent of a state such that failure to pay is
punishable by law.
Taxes may be paid in cash or kind (although payments in kind may not always be
allowed or classified as taxes in all systems). The means of taxation, and the uses to
which the funds raised through taxation should be put, are a matter of hot dispute in
politics and economics, so discussions of taxation are frequently tendentious.
VAT
VAT stands for Value Added Tax. VAT is like a tax on sales and it is always charged to
the ultimate consumer of goods and services.
● Unlike sales tax, however, the value added tax is not collected solely at the final
point of sale.
● - VAT is added and collected at each stage of production and distribution when
goods pass from one firm to another.
● - At each stage, a trader must charge the tax on his customer at the stipulated rate,
but he may deduct from the tax collected any tax which he himself has on goods
and services supplied to him.
Refund of VAT
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If a firm liable to VAT but has paid more than it has collected from its customers, then it
may be eligible for a refund of VAT. The entries will be
Debit- cash with refund received
Credit- VAT A/c with tax refund received
This will normally apply to firm which are zero rated for VAT. They apply a zero rate to
their sales but are eligible for refund on their payment for goods and services.
-All exports are zero rated
Corporate Tax
Businesses liable for corporate tax under the tax act are called upon to pay tax on their
income in their profits/ income in the year following that in which they earn it.
The corporation tax on current profits will normally be payable until the following year,
but full provision should be made for the tax when the profit arises.
Due date for corporation tax- apart from the payments in advance, corporate tax becomes
within nine months of the end of company’s year, or one month after the assessment of
the corporation Tax payable is determined.
NB- Corporation tax is assessed and charged on the full amount of company’s profits
arising in its accounting period. Profits are to be computed by aggregating the company’s
income from all sources, together with its long term capital gains.
PAYE
This stands for PAY AS YOU EARN. Income tax is deducted from employees under
The PAYE Scheme.
-The tax due in respect of any pay is deducted from that pay as it is paid. The tax
deducted is remitted periodically to the Tax collector by the employer.
NSSA
This stands for National Social Security Authority. It is responsible for the Health and
safety of all Zimbabweans. It ensures that productivity,
Labour Legislation
The labour legislation is provided for by the labour relations Act, Chapter 28:01. The
purpose of the Act is to advance social justice and democracy in the work place.
1. Giving effect to the fundamental rights of employees provided for and part II of
the Act.
2. Provide a legal framework within which employees and employers can bargain
collectively for the improvement of conditions of employment.
3. the promotion of fair labour standards
4. The promotion of the participation by employees in decisions affecting their
interest in the work place.
5. Securing the just, effective and expeditious resolution of disputes and unfair
labour practices
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Rights of Employees
1) Employees are entitled to membership of trade unions and workers
committees. Any employee as between himself and his employer has the right
to be a member or an officer of a trade union.
2) Prohibition of forced Labour-excludes the
● Any labour required by way of parental discipline
● Any labour required by virtue of an enactment during a period of
public emergency or in the event of any other emergency or
disaster that threatens the wellbeing of the community
● Any labour
SICK LEAVE
Sick leave shall be granted in terms of this section to an employee who in terms of
section 14 (Labour Relations Act ) is prevented from attending duties because he is ill or
injured or undergo medical treatment which was not occasioned by his failure to take
reasonable precautions.
These are the conditions
a. Ninety days sick leave on full pay
b. Subject to section (3), one hundred and eighty days sick leave on full pay and half
pay.
Maternity Leave
Leave shall be granted for 90 days on full pay to a female who saved for at least one year.
COLLECTIVE BARGAINING
Formation of Workers Committees
Any employees may appoint or elect a workers committee to represent their interest.
● No managerial employee shall be appointed or elected to a workers committee nor
shall a workers committee represent the interest of managerial employees, unless
such workers committee is poised sorely of managerial employees appointed or
elected to represent their interest.
WORKS COUNCIL
In every establishment in which a workers committee representing employees other than
managerial employees has been elected, there shall be a works council
● A works council shall be composed of an equal number of members representing
the employer and the workers committee.
● The conditions shall be determined by the employer
TRADE UNIONS
-Any group of employees may form a trade union
-Any group of employers may form an employer’s organization
- Any trade unions or employers organizations may form a federation.
CONTRACTS
Employment contract
The essentials are simple to state i.e. the employee lets his services of a defined nature to
the employer in exchange for a fixed or ascertainable remuneration and until there is
agreement on these two points the contract is not complete
● By entering into the service of the employer the employee subjects himself to the
employer’s control.
GENERAL CONTRACTS-
● A working definition of a contract is an agreement which is or is intended to be
enforceable at law. It is therefore important that an agreement be there before a
contact come into existence. Agreement by consent, true agreement, a meeting of
minds, a coincidence of the wills, consensus ad idem means the same (R.H.
Christie)
●
SALE CONTRACT
A sale in Roman Dutch Law has been defined as “a contract in which one person
LEASE CONTRACTS
The nature of a contract of lease is best seen as a temporary sale, the lessor corresponding
to the seller, the lessee to the buyer and the rent to the price, the subject- matter of the
contract being transferred not permanently but temporarily ( for an agreed period) ( R.H.
Christie 1997).
-To qualify for a treatment as a lease rather than an in nominate contract, the contract
must conform to the pattern of giving the use and occupation of specified property for a
specified period time in exchange for a specified rent.
- There is the right to enjoy the benefit of property and take the fruits but not to destroy or
appropriate its substance.
Formalities
● According to Christie, no formalities are required for the formation of a lease
which may be made in writing, orally, tacitly or by combination of these methods.
INSOLVENCY
The current system is that a debtor who cannot pay his debt may be ordered by the High
Court, own his own application or that of a creditor to hand over his property to a trustee
for sale and distribution among his creditors.
Voluntary Surrender
A debtor may surrender his estate personally or by an agent and an executor, guardian or
curator of an estate for which he is responsible.
- A partnership estate may be surrendered by all the active partners, together with their
own estates.
- The debtor must file a petition with an additional copy of the statement of affairs.
- The petition must satisfy the court on four matters:
1. That the estate contains sufficient free residue ( i.e. assets which no creditor has a
particular right of Preference) to meet the cost of sequestration
2. The court must be satisfied that the surrender will be to the benefit of creditors
generally.
3. the court must be satisfied treat the estate is insolvent
4. The debtor must be careful to make a full and honest disclosure of all relevant
facts ( Chpt 24:03 and Christie)
Compulsory Sequestration
CHAPTER 12
BUSINESS ETHICS
Objectives
By the end of the study unit you must be able to;
● define and appreciate the nature of business ethics
● relate ethics and social responsibility
● identify various business ethical issues
● describe various forms of social responsibility
● Outline strategies for dealing with social responsibility issues.
Nature of ethics
Ethics is the study of right and wrong actions and how conduct should be judged as to be
Good or bad. Ethics is about how we should live our lives and, in particular, how we
should behave towards other people. They are the moral principles which guide thinking,
decision making and action. It is therefore relevant to all forms of human activity.
Business ethics is not really separate or different from ideas that apply in the general
context of human life. Professionals of all specialisations, entrepreneurs included, should
be aware of the general principles of ethics and be capable of applying them in their
everyday work. It is important, however, to note that ethics and law are not the same.
Ethics and Social responsibility
An organisation exercises social responsibility when its acts respect the general public
interest.
(a) Extortion. Government officials in some countries have been known to threaten
companies with the complete closure of their local operations unless suitable payments
are made.
(b) Bribery. Payments may be made to obtain services to which a company is not legally
Entitled.
(c) Grease money. Multinational companies are sometimes unable to obtain services to
which they are legally entitled because of deliberate stalling by local officials. Cash
payments to the right people may then be enough to 'oil the wheels'.
(d) Gifts. In some cultures (such as Japan) gifts are regarded as an essential part of
civilisednegotiation, even in circumstances where to Western eyes they might appear
ethically dubious.Managers operating in such a culture may feel at liberty to adopt the
local custom.
● Pricing issues
There are several pricing practices that have attracted criticism. Not all can be described
as improper, however.
(a) Active collusion among suppliers to fix prices is illegal in most countries, but the
existence of a more or less fixed market price does not necessarily imply that collusion is
taking place. A tendency to compete in areas other than price is a natural feature of
oligopoly markets.
(b) Predatory pricing is an issue when newcomers attempt to break into a market.
Established suppliers utilize their cash reserves and economies of scale to sell at prices
the newcomer cannot match. Withdrawal from the market follows.
(c) Failure to disclose the full price associated with a purchase has been rightly
criticized as unethical. However, it must be recognized that there are occasions when it is
impossible to compute the eventual full price, as when cost escalation is accepted by both
parties to a contract. The measure of propriety is whether there is any intention to
deceive.
● Place issues
Where long and complex distribution channels are used there is potential for disputes and
conflicts of interest. Even where relationships of trust have been built up over long
The American Marketing Association has produced a statement of the code of ethics to
which it expects members to adhere. Members of the American Marketing Association
(AMA) are committed to ethical professional conduct. They have joined together in
subscribing to this Code of Ethics embracing the following topics. Marketers must accept
responsibility for the consequence of their activities and make every effort to ensure that
their decisions, recommendations, and actions function to identify, serve, and satisfy all
Relevant publics: customers, organisations and society.
It is understood that the above would include, but is not limited to, the following
responsibilities of the marketer; the area of product development and management
• Disclosure of all substantial risks associated with product or service usage.
• Identification of any product component substitution that might materially change the
product or impact on the buyer's purchase decision.
• Identification of extra-cost added features.
• Avoidance of false and misleading advertising.
• Rejection of high pressure manipulation, or misleading sales tactics.
• Avoidance of sales promotions that use deception or manipulation.I.n the area
attribution
• Not manipulating the availability of a product for purpose of exploitation.
• Not using coercion in the marketing channel.
• Not exerting undue influence over the reseller’s choice to handle the product the area of
• Not engaging in price fixing.
• Not practicing predatory pricing.
• Disclosing the full price associated with any purchase in the area of marketing research
• Prohibiting selling or fund raising under the guise of conducting research.
Social responsibility
There is a growing feeling that the concerns of the community ought to be the concerns
of business, since businesses exist within society, and depend on it for continued
existence. Business therefore has a moral obligation to assist in the solution of those
problems which it causes. Businesses and businessmen are also socially prominent, and
must be seen to be taking a lead in addressing the problems of society. Enlightened
self-interest is probably beneficial to business. In the long term, concern over the damage
which may result from business activity will safeguard the interests of the business itself.
In the short term, responsibility is a very valuable addition to the public relations
activities within a company. As pressure for legislation grows, self-regulation can take
the heat out of potentially disadvantageous campaigns. More and more, it is being
realized that it is necessary for organisations to develop a sense of responsibility for the
consequences of their actions within society at large, rather than simply setting out to
provide consumer satisfactions. Social responsibility involves accepting that the
organisation is part
Of society and, as such, will be accountable to that society for the consequences of the
actions which it takes. Three concepts of social responsibility are profit responsibility,
stakeholder responsibility and societal responsibilities at Work
● Profit responsibility
Profit responsibility argues that companies exist to maximize profits for their proprietors.
Milton
Friedman asserts:
'There is one and only one social responsibility of business: to use its resources and
engage in
activities designed to increase its profits so long as it stays within the rules of the game –
which is to say, engages in open and free competition without deception or fraud.'
Thus, drug companies which retain sole rights to the manufacture of treatments for
dangerous diseases are obeying this principle. The argument is that intervention, to
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