ESD Notes

CHAPTER I
ENTREPRENEURSHIP SKILLS DEVELOPMENT

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
History of entrepreneurship in Zimbabwe
Introduction
Zimbabwe has for centuries had strong entrepreneurial abilities. There has been evidence of all
industries stretching from primary, secondary and tertiary industry. Agriculture, mining, trade,
manufacturing industries were there before the 19th century. The only argument could then be the
scale and the technology level. In fact, the history of entrepreneurship in Zimbabwe dates back to the
civilization era. In the Mutapa and Rozvi States, there were successful business initiators/ owners who
became very wealthy.
By about 1200 to 1890 AD African Entrepreneurs on the plateau between Limpopo and Zambezi
Rivers became more advanced due to iron technology. The pre-colonial entrepreneurs included the
iron Smiths (boiler makers) or fitting and turning craftsmen (mhizha), potters, farmers (hurudza),
hunters (hombarume), among others.
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
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ruet@cooltoad.com & babanoku@live.com ruet@cooltoad.com & babanoku@live.com
Zimbabweans have been great miners way before the arrival of the British in the 1880s. Entrepreneur – The land Issue
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. • When the British arrived they introduced the reserve system and translocated the native Zimbabweans to
infertile dry inhospitable areas.
Entrepreurship in the Manufacturing (secondary) Industry • In 1894 the first reserves were set up in Shangani and Gwaai and this affected the entrepreneurs in farming.
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. • After the defeat of the Ndebele, the settlers seized their 6 000 acres displacing many natives and those
displaced became fulltime labourers or squatters.
Metallurgist and Iron smith (Mhizha)
• The settlers started ill treating the Ndebele like they were doing the Shona.
Entrepreneur – metallurgists crushed iron ore and smelt it with very hot fire. At Great Zimbabwe
there is still evidence of clay furnace, forge and bellow. This smelting separated the metal from the • To solve their labour problems, the company introduced forced labour. The chiefs were instructed to
stone. As the pure iron cooled, it hardened again, and the village smiths could hammer it into shape of recruit able bodied men and hand them over to the BSAC as labourers- “chibharo”. The Shona and
hoes, axes and knifes. This was a revolutionary development in the way of life of Africans. Ndebele so enslaved ran away into the hills to escape. The presence of white settlements contrary to the
agreements entered into.
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 • Again this did not please the Ndebele who wanted to claim their ancestral land back as in the reserves there
(matemo) etc. The hunters needed spears (mapfumo), bows and arrows etc. Jewellery such as golden was food shortage and starvation at times.
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 CATTLE
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 • Livestock was seized to force men to go to work for the settler
was used only to make light arrow heads and jewellery. Bigger items such as hoes and axes took much
more time and labour • Soon after the defeat of the Ndebele in the Anglo Ndebele war, the whites confiscated the Ndebele cattle
numbering about 250 000.
Entrepreneur – village smiths often paid tributes to their Chief or King with hoes, axe heads and other
• This drastically reduced the Ndebele herd and the Ndebele wanted their cattle back as it was a sign of
items from iron. Hoes were used for special payments such as lobola. prestige.
The use of iron made it easier to hunt wild animals, till land and undertake domestic tasks. People who TAXATION
lived near deposits became entrepreneurs in mining, smelting, and fabrication (boiler making) and For example the Hut Tax of 1903 was enacted to raise revenue for settlers and to force black men to
traded their products for other goods. 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
Entrepreneur-Potter income.
Some African Entrepreneurs were involved in pottery designing and making clay pots.
The Native Reserve Order in Council: 1898.
Brewing Industry
Millet, rapoko, and sorghum were processed and brewed into different beer flavors. As it is today, The Act created reserves in dry inhospitable areas. This affected the entrepreneurial activities of blacks in
after work villagers would gather and drink. This industry had strong competition and successful agriculture. The Act also effectively removed all native chiefs who were anti- settlers and replaced them with
entrepreneurs were known for exceptional brews and good customer care puppet settler administrators.
Land Bank acts: 1912.
Colonization and its effect on African entrepreneurship The land bank act provided new white settler farmers with free tillage for five years and the same period as
grace before commencing to repay loans from the state owned Land bank.
Colonization negatively affected the Zimbabwean entrepreneurs and/or industrialists as well as their
The Morris Carter Commission: 1925.
governance.
Divided the whole country into agro-zones based on rainfall patterns from the highest rainfall region 1 to
Wars the lowest rainfall region 5. Natives were translocated to regions 4 and 5.
When the British arrived, major wars were fought. These are the War of Dispossession or Anglo- The Land Apportionment Act: 1930.In 1930 whites who numbered 50 000 were allocated 49 000 000
Ndebele War: 1893-4; First Chimurenga: 1896-7; and the 2nd Chimurenga: 1966-79. These wars acres of prime land while blacks who numbered 1 000 000 were allocated 28 000 000
disturbed the smooth running of entrepreneurial activities by blacks in Zimbabwe in so far as farming, Acres of the worst land in regions 4 and 5. The translocation of blacks greatly affected their farming
mining, hunting, among others, were concerned. entrepreneurial activities and was accompanied with untold violence and starvation and malnutrition became
endemic... The Land Apportionment Act of 1930 confirmed and legalized the displacement of Africans
Farming that had been ongoing earlier.
Up until 1906, ninety percent of Southern Rhodesia’s agricultural produce came from black farmers employed in the informal sector (which is about 75% of the employed people in Zimbabwe). This means that
and many whites did not like this state of affairs. As a result, the Rhodesia Native Labour Bureau the remaining 25% is shared between the state-owned enterprises and the private enterprises in the formal
(RNLB) stopped blacks from competing with whites and between 1908 and 1915, 1.5 million acres of sector. Apart from being the largest employer, the informal sector is the largest foreign currency earner, among
the best land was taken from blacks and given to whites. New boundaries were created to exclude other crucial roles it plays to the economy.
fertile high rainfall areas from newly created reserves. The latter were located in semi arid areas.
Blacks in regions 1, 2 and 3 were made to pay higher grazing fees and taxes. Since many could not pay
they were removed and settled in reserves which were situated far away from markets and rail and What is an entrepreneur?
tarred motor roads. By the 1920s, 65% of the black population had been forced into reserves. This led An entrepreneur is the originator (initiator) of an enterprise (economic/business undertaking) in order to satisfy
to cycle of poverty among Africans which persists up to today -2004. 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
The Land Husbandry Act: 1951. 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.
The Act barred any African family from owning more than five herd of cattle or eight acres of land in the Successful entrepreneurs are not gamblers but take calculated and moderate risks in business. It should,
communal lands. 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.
The Tribal Trust Land Act: 1965. What is entrepreneurship?
Various authors define entrepreneurship differently, but their definitions somewhat amount to the same
The Act segregated the ownership of land between white areas and black areas. Natives could only occupy land meaning.
in communal lands without holding title to it. In Towns natives could only lease property and no black man The following are some of the definitions of entrepreneurship:
could own a house in town until after 1980. 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
The Land Tenure Act: 1969. resources to meet an identified need and thereby create wealth.
Whereas Appleby defines entrepreneurship as such, Stoner & Freeman (1992) view entrepreneurship as
The act divided the land on racial lines and designated the best 45 000 000 acres as European land and shared seemingly a discontinuous process of combining resources to produce new goods and services.
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.
Analysis of definitions
Mining Both definitions do not fall short of the fact that entrepreneurship is a systematic and logical event as shown by
In mining, pieces of repressive legislation were put in place by the British upon their arrival. For the term ‘Process’. That is entrepreneurship is not a haphazard activity. However, Stoner & Freeman have
example Minerals and Mining Rights laws restricted the blacks from carrying on with their moved a step further in an attempt to distinguish entrepreneurship from management as they look at
entrepreneurial activities in mining. In fact, one had to secure a prospectus license for mining of which entrepreneurship as a discontinuous process. That is, it is a discontinuous phenomenon appearing then
it was difficulty for the blacks. disappearing until it reappears to initiate another change, unlike management which is a continuous event.
Hunting The idea of ‘creative and innovative ideas,’ shows that the two definitions are complete. In business,
Laws were also put in place in hunting. Wildlife Parks and Game Parks were created. It became illegal entrepreneurs should be able to come up with changes or new approaches, means, processes, machinery, tools
to hunt in the parks. One would be treated as a poacher if found in the parks. Thus, the blacks’ 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
entrepreneurial activities were affected by such parks.
and process innovation.
Whereas Appleby clearly states, the idea of “management and organizational skills” in his definition, Stoner &
Post Colonial Era Freeman have remained silent about it. Organizational skills and management are crucial for successful
During the colonial era black entrepreneurs were so limited. The reason being the inability of blacks to entrepreneurs. These relate to the ability of the entrepreneur to plan, organize, lead and control the
access means of production. Technical Education was also biased. From 1980 we saw the cropping of organizational members’ activities and resources in order to achieve the stated goals of the enterprise. In other
great entrepreneurs from the black populace. There were business Start ups in the transport sector, words, the emphasis here is the ability to organize the other factors of production or resources into creative
retailing, manufacturing, farming, and many industries. 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:
The government supporting schemes has been the major driver facilitating entrepreneurial activities.
Sources of funds be obtained from AGRIBANK, SEDCO, etc Land Labour Capital
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. Entrepreneurship
Entrepreneurship and Patriotism Production of goods and services
In Zimbabwe, as elsewhere in the world, patriotic entrepreneurs play a pivotal role in stabilizing and
resuscitating the economy. In other words, across the globe, nations largely depend on the entrepreneurs in For the business to be successful the ‘needs and wants’ should be identified first through a feasibility study.
both the informal and formal sectors. Statistics, in Zimbabwe, shows that 3 000 000 (three million) people are 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 Success oriented/optimism
Stoner & Freeman’s. Thus, for Appleby, new goods and services should not just be produced for unknown Successful entrepreneurs are optimistic, that is successful entrepreneurs do not have ‘ifs’ or ‘buts’ about
customers as this is tantamount to wastage of resources. succeeding. All they think about is how they are going to succeed and not what they are going to do if they fail.
Moreover, Appleby’s definition appears to be more comprehensive than that of Stoner & Freeman as he Perception of opportunity or opportunity seeking
mentions the idea of ‘wealth creation’. The major aim of any business entity is to create wealth or increase the Entrepreneurs should be able to see the unfilled areas or gaps in products, process and application of services.
owner’s equity by maximizing profit. Without profit maximization or creation of wealth, the business will not That is successful entrepreneurs are able to see and act on new business opportunities.
survive.
Moderate risk taking
Entrepreneurs are expected to be able to take moderate and calculated risks. This is contrary to the stereotype
Entrepreneurship distinguished from Intrapreneurship that entrepreneurs are gamblers or high-risk takers.
Investor's or entrepreneurs are innovative and creative but not all of them are able to come up with innovations,
and as such they leave innovations to innovative managers or employees. An employee or manager who is
Goal setting
innovative and creative in an existing organization is known as an intrapreneur. Managers or employees who
In setting a new business, entrepreneurs are expected to have the ability to set goals which are specific,
carry out entrepreneurial roles are aware of opportunities and they initiate changes to take full advantage of
measurable, achievable, and realistic and time bound (SMART) basing on their (ENTREPRENEURS) strengths,
them.
weaknesses, opportunities and threats (SWOT).
Moreover, their goals must be consistent with their interests, values and talents in order to achieve them. Their
The fundamental issue about the entrepreneur is that he/she has to have innovative ideas and transforms them
belief in the reality of their goals is the primary factor in the fulfillment of those goals. Their plans may seem
to profitable activities within an existing organization. In other words, he/she is an initiator or originator of the illogical to others but they are perfectly logical in the context of their own personal values and desires.
commercial undertaking.
Long-term perspective
The word intrapreneurship is attributed to Gordon Pinchott an American who founded a school for
Successful entrepreneurs can tolerate considerable amount of frustration and delay in need gratification and they
entrepreneurs to help managers from large corporations to take responsibility for creating innovations and
devote a lot of time and effort in goals that often yield profits at a distant point in the future. Entrepreneurs
turning ideas into profitable reality.
should be able to accommodate hurdles, difficulties and temporary failures in business.
Relationship between entrepreneurship and Patriotism Self-motivation/self esteem/self faith/self confidence
Patriotism is the spirit of loyally supporting one’s nation. The major thrust of patriotism in the context of Effective entrepreneurs have solid and stable self-esteem and self-motivation which stem from healthy feeling of
entrepreneurship in an economy is to refrain from corruption and sabotage or subversion. Thus, the self worth and self-acceptance. Entrepreneurs with a positive self-image are basically satisfied to be the type of
relationship between entrepreneurship and patriotism is reflected in the following roles that a patriotic people they are. This self-faith is even important than self-confidence especially when serious setbacks and
entrepreneur plays to the nation that is the entrepreneur should have the spirit of: failure occur.
a) Creating jobs without oppressing fellow citizen workers i.e. the entrepreneur will be expected to provide
good working conditions and be worker – centered. Innovativeness/initiative ness/creativeness
b) Charging fair and affordable prices Effective entrepreneurs have the ability to come up with new products, methods or techniques of production
c) Producing quality products which compare with international standards and the accompanying machinery and tools.
d) Conserving natural resources
e) Practicing good ethics and social responsibility in business and the community Adventuresome ness
f) Generating foreign currency without externalizing it or taking it to the black or parallel market for Successful entrepreneurs are adventuresome i.e. they are interested in testing out and experimenting phenomena
exchange, but to the registered banks for official exchange in an endeavor to come up with solutions to the needs and wants of people.
g) Generating government revenue through paying corporate tax.
h) Playing supportive role to the giant firms by being subcontracted in construction, manufacturing and Commitment
distribution To succeed in business, you must be committed. Commitment means that you are willing to put your business
i) Reducing anti-social activities such as theft, robbery, murder, promiscuity by creating employment for before almost everything else.
self and other citizens
j) Reducing rural to urban migration by creating employment opportunities in rural areas Some of the characteristics of an entrepreneur include; patience, friendliness, hardworking, reliability, dedicated
ness, responsibility, objectivity, rationality, honesty, determination, courage, flexibility, imaginativeness and
Entrepreneurial characteristics knowledge.
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 In a word, successful entrepreneurs must have appropriate personal characteristics, business skills where
entrepreneurial or personal characteristics. The following are some of the characteristics of successful necessary.
entrepreneurs.
Roles of Small and Medium Enterprises
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 What is a small business?
decide to do something about them now and not tomorrow.
A small business is generally a business that has low annual sales, few assets such as buildings, equipment, creation since 1980 i.e. Ministry of National Affairs and Employment creation now Ministry of Youth
vehicles, serves local markets rather than national and international markets, has small number of employees and Development, Gender and Employment Creation. Moreover, the following institutions were introduced by the
usually the owner is solely responsible for the success or failure of the venture. government to enable potential entrepreneurs to establish themselves:
There are two kinds of small businesses that is survival and growth businesses a) Small enterprise development corporation (SDECO)
• Survival businesses are small businesses which allow owners to make a living but the focus is b) Infrastructural Development Bank of Zimbabwe
on keeping the business alive e.g. backyard businesses/home based businesses. c) Agribank
• Growth businesses are larger and allow owners to make more money e.g. manufacturing d) Affirmative Action Group (AAG)
operations in the industry. e) Zimbabwe Cross Boarders Association
f) Zimbabwe Tuck shop Association
Reasons for continued survival of small firms The government has also introduced the Ministry of Small and Medium Enterprises to ensure that small
• Small businesses are able to be more flexible, innovative and can react to changes much businesses succeed. Black empowerment and indigenization policy was also put in place to promote
quicker entrepreneurship. Land redistribution exercise is a good example to government entrepreneurship initiatives to
• Small businesses play a supportive role to the giant firms by being subcontracted in promote self-sustenance and the development of the country.
construction, distribution, service and manufacturing sectors
• Small businesses serve small markets (market riches) where large firms do not have interest Activity
• Small firms receive government support through the Ministry of Small to Medium Enterprises, i) Analyze the history of entrepreneurship in Zimbabwe
ministry of Youth Development Gender and Employment Creation and Ministry of Higher and ii) Examine the effects of colonization on entrepreneurship in Zimbabwe
Tertiary Education that is they receive support in form of training and funds. Small firms also iii) Analyze the government initiatives to promote entrepreneurship in Zimbabwe since 1980.
pay lower taxes. iv) Discuss the roles of the following in promoting entrepreneurship in Zimbabwe
• Small firms supply their goods and services in smallest lots than giant firms which usually a) AAG
supply in bulk b) Ministry of Small and Medium Enterprises
• Small firms offer specialized and personalized services to customer’s e.g. electrical businesses. c) Zimbabwe Cross Boarders Association
• Small firms remain small usually during the initial phases of new technology or innovation or
product introduction as the firms will be studying market reactions and modifying the products.
Roles played by small firms to the economy
• Small businesses create employment for the business owner as well as the other fellow citizens
(employment creation)
• Small businesses increase the range of goods and services available to the local community
(provision of goods and services) especially in rural areas where goods and services were
previously unavailable.
• Small businesses reduce anti-social activities such as theft, robbery, promiscuity and burglary
• Small businesses reduce rural-urban migration as more goods and services and employment
opportunities become available in rural areas. This will help to decrease the pressures on urban
in terms of sanitary problems, theft, robbery and promiscuity.
• Small firms contribute in the improvement of the standard of living of the community
• Small firms contribute in stabilizing the economy through increased employment, reduced
prices and improved standard of living
• Small businesses help in indigenizing the economy. If the economy is in the hand so
indigenous people, resources are not expatriated.
• Small firms help in the generation of foreign currency
• Small firms contribute in the production of quality and affordable products by being in
competition with giant businesses
• Small firms contribute to government revenue through payment of business and employment
taxes
• Small businesses contribute to the national income of the country (GDP – Gross Domestic
Products) and to the improvement of the balance of payment
Government Entrepreneurship initiatives
Government entrepreneurship initiatives are efforts by the government to promote self-sustenance,
entrepreneurship and indigenization in order to stabilize the economy. In an effort to promote
entrepreneurship and self-sustenance, the government established the Ministry responsible for employment
CHAPTER 2 *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
BUSINESS ENVIRONMENT IN ZIMBABWE entrepreneur can now buy more producer goods.
Objectives Exchange rates are yet another factor of macroeconomics which may affect the activities of the entrepreneur.
By the end of this unit you should be able to: 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
• Describe the entrepreneurship environment in Zimbabwe foreign products such as spare parts, ingredients, raw materials and fuel.
• Evaluate how the macro and micro environmental factors affect entrepreneurs
• Discuss entrepreneurial survival and growth strategies 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.
Entrepreneurship environment
Entrepreneurship environment relates to the factors or variables which directly or indirectly affect the activities Thus, given these macro-economic issues, the entrepreneur is expected to have a predictive mind for efficient
of the entrepreneur either positively or negatively. management of the enterprise.
The environment is split into two. That is macro and microenvironments. 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
Macro – environment an instinctive way, yet consistent economic forces underlie them. Entrepreneurs are encouraged to keep track of
This is also known as external environment. This environment consists of all those factors, which indirectly the trends of the behaviors of individual consumers, firms and industries in business as their (entrepreneurs)
affect the business activities of the entrepreneur either positively or negatively. The external environment investment activities are based on them.
involves PEST analysis and natural phenomena.
Social environment
PEST stands for Political, Economic, Social and Technological environmental variables. 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
Political Environment that people buy, the attributes they value, and the opinions they have are based on culture. Food consumption,
Political factors may provide initiative situations towards the success of the entrepreneur especially where the acquisition and preparation are interrelated with other aspects of culture such as religious values and beliefs. For
political climate is not stable. Political disturbances may result in the closure of business either permanently or example, Christians consider pork unclean. Thus, to the entrepreneur it is evident that customer’s actions in the
temporarily. Extreme political disturbances or instability such as tribal or civil conflicts may cause permanent society are shaped by their lifestyles and behaviors which stem from their society’s culture. That is people of
closure of enterprises. However, this depends on the nature of the business of the entrepreneur. Some political different social classes have different lifestyles and behavioral patterns.
climates may promote the success of the entrepreneur. At first glance, it would seem that domestic politics Language is another aspect of culture which has influence on the entrepreneur’s activities. Thus, a successful
should pose no threat and that a company should have minimal problems at home. This is often not the case. entrepreneur must achieve expert communication. This requires a thorough understanding of the language of
Although a company’s major political problems usually derive from political conditions overseas, it must still pay the customer’s language as well as the ability to speak or write clearly.
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 Technological environment
important to know the direction each is likely to take for example in Britain the Labour party has traditionally Today, we are living in a global village which requires entrepreneurs to move with technological breakthroughs
tended to be more restrictive on both foreign and home trade. and changes. Entrepreneurs are expected to be well versed with Internet systems for effective communication
with suppliers, customers and the publics in general.
Economic nationalism is another factor which leads to an unfavorable business climate e.g. some other Technology relates to the processes, techniques, tools and machinery used in business to produce or offer
organisations are said to be sponsoring foreign media which are said to be anti-government. If the entrepreneur products to customers. Poor technology results in inefficiency and ineffectiveness. Thus, the advice to the
is not nationalistic in his or her business activities he/she may lose his/her business license. 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.
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 Natural phenomena
by Britain and America that there is lack of rule of law, democracy and violation of human rights. South Africa These are the situations or conditions which can adversely or positively affect the entrepreneur’s activities.
also faced political sanctions based on allegations that there were apartheid, foreign currency crisis and fuel These may include natural disasters such as road accidents, fire outbreaks, floods, drought, earthquakes, good
shortage can grossly affect the entrepreneur’s business activities negatively. 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.
Economic environment Microenvironment
The macroeconomics focuses on aggregate economic conditions that may affect the business either positively or This relates to those conditions which directly affect the entrepreneurial investment activities either positively or
negatively e.g. inflation, exchange rates, lending or interest rates, and unemployment. negatively. The microenvironment is made up of employees, providers of finance, suppliers, customers and
Macro-economic issues set the environment within which a business operates. Because of this, entrepreneurs government among others.
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 Employees
business decisions and to avoid surprises. 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 1. Market penetration
skills and technologies effective personnel and industrial relations policies and practices and provision of social - Gaining more market share with the current company market products in their current markets.
and leisure facilities. Entrepreneurs should give due consideration to the design of work methods and job - The strategy can be implemented as follows.
satisfaction, make every reasonable effort to give security of employment. If employees are not treated well, the a) promoting more usage of the product
entrepreneur will lose them to his/her rivals. b) attracting competitors’ customers
c) convincing non users to use the existing product
Providers of finance
These are the financial institutions which supply financial services to the entrepreneurs. Entrepreneurs need to 2. Market development strategy
consider the interest or lending rates together with the accompanying finance changes fixed on them by the - company efforts to find or develop new markets for its current products
financial institutions as these costs of financial services have adverse effect on their investment activities. Apart a) This can be done by identifying potential uses in the current sales area where interests for a
from that, the entrepreneurs also need to consider return on investment in terms of the funds which they may product or services can be stimulated.
need to invest with the financial institutions. On the other hand, the entrepreneurs are expected to prove their b) Selling new products to existing or current markets.
credit worthiness and credibility by paying back the borrowed funds (loans) within the contractual time frame as c) Seeking additional distribution channels in its present location.
this will enable the entrepreneurs to even receive preferential treatment and favor in times of need.
3. Product development
Customers - in addition to penetrating and developing markets management should consider new product
To many entrepreneurs, responsibilities to customers may be seen as no more than a natural outcome of good possibilities
business. Customers are people who make the business successful. The entrepreneurs need to understand the - Company develops a product’s new features; different quality levels and also tries to come up with a
needs and wants of customers first before production activities take place in order to avoid wastage of resources technological breakthrough a potential product.
by producing goods and services for unknown customers. Customers must be put first by providing:
• Good value for money B. Integrative Growth
• The safety and durability of products - business sales and profits can be increased through
• Prompt and courteous attention to queries and complaints a) Backward integration
• Long-term satisfaction e.g. serviceability, adequate supply of products and replacement of parts b) Forward integration
• Full and unambiguous information to potential customers c) Horizontal integration
If customers feel that they are ill treated, the entrepreneur loses them to the customer-driven enterprises.
Ansoff’s Growth Strategies Grid:
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. Ansoff’s Growth strategies
1. Market penetration
a) market development
b) product development
Entrepreneurship Strategies
2. Integrative growth
Growth strategies a) backward integration
A. Intensive Growth Strategies b) forward integration
According to Ansoff’s product market expansion grid, a company is exposed to growing dimensions under c) horizontal integration
intensive growth
3. Diversification growth
a) Concentric diversification - expenses of training and keeping on travelling for - gives up freedom in management decisions
supervisor - obligatory purchases franchiser even if better
b) Horizontal - risk in credit extensions prices elsewhere are available
c) Conglomerate - have become expensive
a) Backward Integration – is when a company acquires one or more of its suppliers to gain more control Disadvantages to the franchisee
and generate more profit.
2) Buying an established business
b) Forward Integration – is when a company acquires some wholesalers and retailers especially when they Advantages
are they are highly profitable.
- a business with a goodwill increases the
likelihood of successful operation
c) Horizontal Integration – is when a company acquires one or more competitors provided the - has a proved location for successful operation
government policies allow e.g. monopoly, oligopoly. - has an established clientele
- its inventory is already on the shelves
Diversification Growth. - Its equipment is already available and its
resources and capabilities are known.
- 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 Disadvantages
strength to be successful. - the buyer inherits any ill will of the existing firm
- certain employees may be inherited which are not
assets to the firm
Types of diversification - inherited clientele may not be the most desirable
a) Concentric diversification and changing the firms image is usually difficult
- Holds that the company could seek new products that have technological and or marketing synergies - procedures of the former may be difficult to
follow
with the existing product lines even though the new products themselves may appeal to different groups - renovation expenses
of customers. - purchase price may not be satisfying
b) Horizontal Diversification
- holds that a company can produce totally unrelated products using different manufacturing methods or
processes
c) Conglomerate Diversification
- Holds that a company seeks new business that have no relationship to the company’s current
technology products or market suppose a company is producing fax machines and now seeks to
produce furniture
OTHER ENTREPRENEURSHIP STRATEGIES
- a strategy is a method used to achieve a goal
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.
Advantages to the franchiser Advantages to the franchisee
- increased distribution
- less risk with market tested products
- some operating costs are transferred
- pre established promotion and advertising
- marketing/distribution costs shared
programs provided
- production accepted by locals when local - Financial and may be provided.
franchise ownership is held
- Credit available in buying inventory and supplies
- Retains quality control of products is a franchise
- Decision making assistance, management
agreement
procedure and training.
-
Disadvantages to the franchiser - control of franchisees are far away
• Competition
CHAPTER 3 • Location
• Infrastructure and facilities
DEVELOPING A BUSINESS PLAN • Raw materials
• Machinery and equipment
OBJECTIVES • Labour and other costs such as electricity insurance, water,
security etc.
By the end of this unit you should be able to:
BUSINESS PLANNING
• Define a business idea. Definitions of A Business Plan
• Generate a feasible and profitable business idea. Several definitions of a business plan can be observed.
• Develop a Business Proposal.
• Define a Business Plan • A business plan is a written statement setting forth the
• Discuss the elements/components of a business plan. business mission and objectives, its operational and financial details, its
• Develop a viable business plan. ownership and management structure, and how it hopes to achieve its
objectives.
GENERATION/CREATION OF A BUSINESS IDEA
• Every business emerges from an idea. • It is a written document describing all relevant internal and
external elements and strategies for achieving objectives of
• Businesses get started when people (customers) manifest
a business.
Their needs and wants.
• Entrepreneurs develop business ideas out of the needs and
• A business plan is a document designed to provide sufficient
wants of people.
information about a new or existing business to convince
Usually entrepreneurs exploit the weakness of the existing
• financial backers to invest in the business.
providers of goods and services to start their own ventures.
The purpose/importance of a business plan:
The term business idea defined:
• It provides a blueprint, or a plan, to follow in developing and
A business idea is a short and precise description of the basic
operating the business. It helps keep one’s creativity on
operations of the business.
target and helps one concentrate on taking the actions that
are needed to achieve the business goals and objectives.
A business idea must show the following :
a) Product to be offered. • It helps to clarify the business idea. The process involved in
b) Target market/potential customers. creating a business plan means that the entrepreneur has to
c) Target customers’ needs. ask a number of key questions about their idea. This should
d) Selling approach. ensure that before starting up, the business idea would have
been considered with care.
Profitability and Feasibility of the business idea:
• It can serve as a powerful money-raising tool. The Plan will
• A business idea must be profitable and feasible. often be used as a means of sharing potential investors of
• To determine the profitability and feasibility of a business lenders the viability and profitability of the business.
• idea one needs to carryout a feasibility study and SWOT Financial institutions insist on seeing a business plan before
analysis. any loan is granted. Private shareholders may invest if they
• Feasibility study relates to a detailed investigation of all believe in the entrepreneur. Professional providers of venture
• aspects of a business idea in order to determine if it is likely capital demand evidence of careful planning first.
to be successful.
• Before starting a business, it is essential to research that • It can be an effective communication tool for attracting and
• business idea to find if it is feasible. dealing with personnel, suppliers, customers, providers of
• A business idea should be practical and profitable. capital, etc. It helps them understand your goals and
operations.
In terms of feasibility, the entrepreneur needs to consider the following: • It can help you develop as manager/entrepreneur, because it
provides practice in studying competitive conditions,
• Availability of a viable market
promotional opportunities and situations that can be 4. Description of The Business
advantageous to your business. 5. Ownership and Management structure
6. Marketing Plan
• It provides an effective basis for controlling operations so one 7. Production/Operational Plan
can monitor progress over time, to see if your actions are 8. Financial Plan/Analysis
following your plans. 9. Milestone schedule
10. Appendix
HOW TO PREPARE A BUSINESS PLAN
You should start by considering your business background, origins, philosophy,
mission and objectives. Then, you should determine the means for fulfilling the 1. Cover Sheet
mission and obtaining the objectives.
On the cover sheet you should include identifying information so that readers will
A sound approach is to: immediately know the business name, address, phone numbers, names and titles of
1. Determine where the business is at present (if an ongoing the principals (owners), and the date the Plan was prepared.
business) or what is needed to get the business going.
2. Decide where you would like the business to be at some point 2. Table of Contents
in future.
3. Determine how to get there. In other words, determine the Because the table of contents provides the reader an overview of what is
best strategies for accomplishing the objectives in order to contained in the plan itself, it should be written and presented concisely in
achieve your mission. outline form, using numerical and alphabetical designators for headings and
subheadings.
The following is one feasible approach you can use in preparing a business
3. Executive Summary
plan
1. Survey consumer demands for your products and decide how
It is the most important part of the business plan. It should be designed to
to satisfy those demands.
motivate the reader to go on to the other section of the plan. It should
2. Ask questions that cover everything from you firm’s target
convey a sense of commitment, challenge, plausibility, credibility and
market to its long-run competitive prospects.
integrity.
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
It can include:
business, involving the owners, managers, and key
employees, if possible. • Major aims and objectives
5. Plan for every facet of the business’ structure, including • Marketing strategy
finances, operation, sales, distribution, personnel, and • Financial projections
general administrative activities. • Financial requirements
6. Prepare a business plan that will use your time and that of • Current business position:
your personnel most effectively. Legal form, when formed, principal owners and key
personnel.
• Major achievements.
COMPONENTS OF A BUSINESS PLAN NB Executive summary is written last, after the rest of the plan
has been developed and should just be that – a summary –so
• The contents of a business plan vary tremendously, depending upon the type keep it short.
of business, the expertise of the entrepreneur, who the plan is aimed at and
how much time is spent researching the plan. 4. Description of the Business
Include the following:
• However, regardless the specific format used an effective plan should
include at least the following a) Introduction
1. Cover sheet
2. Table of contents Relevant brief history and background of the proposed business
3. Executive summary
How the idea for the business original and what has been done to three trading periods i.e. Trading, Profit and Loss
develop the idea up to this point. • Account; Income and Expenditure Statements; Cash
Owners and manager and their experiences • Flow statements; Balance Sheets etc.
Products – capitalization/sources of funds • There should be an analysis of costs/volume/Profits
Brief outline of success and achievement (CVP) where appropriate.
Date or proposed date for commencement • Also include budget forecasting for : Production; Sales
Name of business and trading name and Expenses.
Legal identity/legal form • Show the Financing of the business.
Industry that it fall under
location - business addresses 9. Milestone Schedule
SWOT Analysis
• This involves the determination of objectives and the
timing of accomplishments.
5. Ownership and Management Structure
• It is like a map of how you will go from one place/stage
Describe the owners including those you identified by name and title
in your business to the next.
above
Give more detail about their experience, qualifications • Deadlines should be established and monitored.
and expertise.
Describe your management team, along with their abilities, training
and experience. 10. Appendix
Draw an organisation Chart
This section includes supporting documentation for your Business Plan e.g.
Draw a table showing name, position, qualifications and experiences,
duties and responsibilities of managers and employees.
Include organizational structure, including employee policies and • Names of References and Advisors and their addresses
procedures. and phone numbers
• Bargains, Tables, Charts
• Resumes of officers
6. Marketing Plan • Supportive market research
• Brochures of other published information describing
Include information about: the products you provide.
• Letters of recommendations or endorsements etc.
a) Marketing objectives
b) The target market
c) Sales and marketing mix strategy
d) Competitors analysis Generate your own business idea and develop its viable business plan.
e) Research – that leading to product design – confirmation of demand
and future research planned.
7. Product/Operational Plan
• This motives the details of converting inputs to outputs valued by
customers
Specify products/services to be produced
•
Raw materials and suppliers
•
Optional location for production activities
•
Costing of the products offered.
•
8. Financial/Plan/Analysis
• Indicate the expected financial results of your
operations
• Show prospective investors or lenders
• Include projected financial statements at least up to
nature i.e. they are highly inseparable. Each function blends into the other and each affects
CHAPTER 4 the performance of others. The functions are discussed below;
BUSINESS MANAGEMENT A. PLANNING
It is the first tool and the basic function of management. The difference between a
Objectives
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
• Define management accomplished in order to reach the organisation’s objectives. It deals with chalking out a
• Discuss the management functions future course of action and deciding in advance the most appropriate course of actions
• Describe the roles of management for achievement of pre-determined goals. Thus, planning is deciding in advance- what to
• Outline the principles of management 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
Business non-human resources and helps in avoiding confusion, uncertainties, risks, wastages etc.
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 following are involved in planning;
the factors of production, i.e. land, labour and capital so as to achieve the business defining objectives and standards to be achieved
objectives. Businesses can be in any of the following sectors of the economy; farming, deciding who is going to do it
mining, retailing, art and craft, wholesaling etc. Thus, this chapter will focus on the functions determining the actions and activities to be done in order to achieve the
of management as well as the roles of management in an enterprise. objectives and standards
determining the resources to use
Management determining the time-frame for the activities
Management has been described as a social process involving responsibility for economic assigning responsibilities
and effective planning and regulation of operation of an enterprise in the fulfillment of given designing a control procedure
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’s questions in planning
manager irrespective of his level or status. According to Henry Fayol (the father of 1. where are we? -in terms of goals, resources, standards etc
management) managing means planning, forecasting, organizing, motivating, leading and 2. where do we want to go? –objectives, markets, customers etc
controlling activities in a business so as to achieve common objectives. 3. how do we get there? –strategies to reach the intended destination ( time, resources,
marketing mix)
• Stoner and Freeman (1995) described management as the art of making things done 4. are we getting there?
through other people.
• They went on to say that it means deciding what to do and getting others to do it.
B. LEADING
Thus, management is a process (and not an event) that entails planning, leading, organizing
and controlling of resources (human resource, capital, financial resources etc) 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
Manager that is exhibited. “A leader can be a manager, but a manager is not necessarily a leader,” said
Managers are people who get things done through other people. They make decisions; Gemmy Allen (1998). Those in leadership role must be able to influence/ motivate workers
allocate resources and direct activities of others to attain goals. A manager may be the to an elevated goal and direct themselves to the duties or responsibilities assigned during the
owner, operator or founder of an organisation as well as hired by an organisation to give it planning process (Allen, G., (1998). Leadership has the following elements;
direction. Managers are employed so that the operations of these organisations become more
efficient and effective. directing – it is that part of managerial function which actuates the organizational
methods to work efficiently for achievement of organizational goals, and sets in
motion the action of people because planning ii the mere preparation for doing
work.
FUNCTIONS OF MANAGEMENT
staffing-the main purpose is to put the right man on the right job. There should be
Different experts have classified functions of management. A manager must organize these
proper and effective selection, appraisal and development of personnel to fill the
functions in order to reach company goals and maintain a competitive advantage. There are
roles designed on the structure. It thus involves manpower planning, recruitment,
four fundamental functions of management. For theoretical purposes, it may be possible to
selection, placement, training and development, remuneration and promotion and
separate the function of management but practically these functions are overlapping in
transfer.
supervision- implies overseeing the work of subordinates by their superiors. It is the Work performance evaluations are a form of control as it connects performance assessments
act of watching and directing work and others. to rewards and corrective actions. Evaluating employees is a continual process that takes
place regularly within a company.
motivation- means inspiring, stimulating or encouraging the subordinates to work with
zeal.
ROLES OF MANAGEMENT
communication- the process of passing information, experience, opinion etc from one
person to another. It is a bridge of understanding. The ten management roles of a manager identified by Mintzberg
Mintzberg intensively studied five CEOs and their organizations, along with a calendar of
their scheduled appointments for a month. Additional data collected during a week of
C. ORGANISING structured observations included anecdotal data about specific activities, chronological
It is the process of bringing together physical, financial and human resources and developing records of activity patterns, a record of incoming and outgoing mail, and a record of the
productive relationships amongst them for the achievement of organizational objectives. executive’s verbal contacts with others. On the basis of this data, Mintzberg divided
According to Henri Fayol, “To organize a business is to provide it with everything useful for managerial activities into interpersonal, informational and decisional roles.
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 Mintzberg’s ten management roles are a complete set of behaviors or roles within a business
structure. Thus, a manager must know his subordinates and what they are capable of in environment. Each role is different, thus spanning the variety of all identified management
order to organize the most valuable resource a company has, its employees. This is achieved behaviors. When collected together, as an integrated whole (gestalt), the capabilities and
through management staffing the work division, setting up the training for the employees, competencies of a manager can be further in a role specific way. In a sense therefore they act
acquiring resources and organizing the work group into a productive team. The manager as evaluation criteria for assessing the performance of a manager in his role.
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 Mintzberg’s ten managerial roles
classification or grouping of activities
assignment of duties ROLES DESCRIPTION EXAMPLES OF ACTIVITIES
1. INTERPERSONAL
delegation of authority and creation of responsibility
coordinating authority and responsibility relationships a. Figurehead Symbolic head, obliged to perform a Greeting visitors, signing documents
number of team duties of a legal or social
nature
Principles of organising Responsible for the motivation of Performing all activities that involves
1. unity of command –an employee must receive commands from one supervisor only. b. Leader subordinates, staffing and training, selects subordinates
and disciplines.
2. span of control-refers to the number of employees that report to one supervisor.
3. full authority and responsibility. Maintains a network of outside contacts
and informers who provide favors and Acknowledging mail, external board work
c. Liaison information
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 2. INFORMATIONAL
to ensure that everything occurs in conformities with the standards. An effective system of a. Monitor -Seeks and receives wide range of special -reading periodical and reports
control helps to predict deviation before they actually occur. According to Theo Haimann, information -maintaining personal contacts
“Controlling is the process of checking whether or not proper progress is being made -nerve centre of internal and external -installation and maintenance of
information about the organisation information systems
towards the objectives and goals and acting if necessary, to correct any deviation.”
Controlling depends on accurate, reliable and enforceable standards and on monitoring of Holding meetings, making phone calls to
performance by people, machines and processes. Therefore controlling has the following Transmits information form outsiders or relay information, sending memos
steps; from the subordinates to members of the
b. Disseminator organisation
establishment of standard performance Holding board meetings and giving
Transmits information to outsiders on information to the media
measurement of actual performance organizational policies, actions, results etc
comparison of actual performance with the standards and finding out if there are any through speeches and reports.
deviations c. Spokesman
taking of corrective action if necessary.
3. DECISIONAL working under a manager with good human skills. These managers are good
a. Entrepreneur Initiates new projects, spot opportunities, Organising strategy review sessions to communicators; they motivate, lead and inspire enthusiasm and trust among their
identify areas of business developments develop new programmes subordinates.
Responsible for corrective action when Resolving conflicts among staff, adapt to
b. Disturbance handler organization faces unexpected disturbances external changes and organising strategies
and crises that involves disturbances and conflict
3) Conceptual skills
Scheduling, requesting, authorization and
Responsible for the allocation of budgeting activities
organizational resources of all kinds, setting Are defined as the ability to think and conceptualize lines and abstract situations,
c. Resource allocator of priorities, budgeting to see the organisation as a whole and the relationships among its various sub-units
Responsible for representing the Participating in collective bargaining and to visualize how the organisation fits into its environment. Conceptual skills are
organisation at major negotiations with needed by all managers at all levels but these skills become more important as we
unions, suppliers and generally defend
interests move up to the top management positions.
d. Negotiator
Principles of Management
Managers must observe Fayol’s 14 principles of management when carrying out their duties;
The roles point to managers needing to be organizational generalists and specialists because 1. Division of labour-work should be divided into smaller units that permit specialization.
of;
• system imperfections and environmental pressures 2. Authority and responsibility-organizational structure should clearly show levels of
• their formal authority is needed even for certain basic routines authority and responsibility.
• in all of this they are still fallible and human 3. Discipline-discipline results from good leadership at all levels of the organization. It is
necessary to develop obedience, diligence and respect.
The explanations above justify managerial purposes in terms of;
• designing and maintaining stable and reliable systems for efficient operations in a 4. Unity of command- an employee must receive commands from one supervisor only.
changing environments
• ensuring that the organisation satisfies those that own it 5. Unity of direction-all operations with the same objectives should have one manager and
one plan only.
• boundary management- maintaining information links between the organisation and
players in the environment.
6. Subordination of individual interest to the common good- the interests of an individual or
group should not take precedence over interests of the organization.
MANAGEMENT SKILLS
7. Remuneration-rewards for work should be fair to the worker and employer.
For a manager to carry out the management functions and roles effectively, some
management skills are required at defined levels. 8. Centralization- the proper degree between centralization and decentralization should
be found.
Management skills and levels
1) Technical skills 9. Hierarchy- the line of authority in the organization should run in order of rank from
Include knowledge of and proficiency in a certain specialized area such as top management to the lowest level of the organization.
engineering, computers, and finance etc. e.g. an accounting manager should be
proficient and conversant with accounts receivables and account payable, to enable 10. Order- resources should be in the right place at the right time.
him to help the accounting clerks who might have some problems. The first line
managers and middle management are more involved in the technical aspects than 11. Equity- managers should be fair to the employees and treat the equally.
top management.
12. Stability of staff- a low staff turnover rate enhances the attainment of goals.
2) Human skills 13. Initiative- subordinates should be given the freedom to conceive and carry out their
plans, even though some mistakes may result.
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 14. Team spirit – team work gives the organization a sense of unity.
levels. Subordinates are more forthcoming and offer their best abilities when
Motivation
- Definition
- Managers and entrepreneurs are tasked with ensuring that things are done through people. For
the work to be done efficiently and effectively, employees need to be motivated. Motivation is
concerned with inducing people to work to the best of their ability. Motivation refers to those
schemes designed to influence and encourage workers to perform outstandingly. It is therefore
very important to take a closer look at theories of motivation and consider motivation of
workers seriously.
- According to Appleby (1994), motivation refers to the way urges, aspirations, drives and needs of
human beings direct or control or explain their behavior. Maslow (cited in Stoner & Freeman
1989) defines motivation as those inner and outer factors which cause, channel and sustain the
behavior of a person in order to achieve specific organizational or personal goals.
Theories of Motivation and their implications to the entrepreneur
There are many theories of motivation and any theory or study which aids an understanding of how
best to motivate people at work must be useful. All entrepreneurs have a duty to motivate their
employees for the success of their enterprise. Motivated workers take more pride in their jobs and
work better. But many entrepreneurs do not know how to motivate their staff. Entrepreneurs must Physiological needs include homeostasis such as satisfaction of hunger, thirst, shelter deficiency, and
know how to apply the theories of motivation in particular work situations. There are two clothing deficiency and so on. In fact homeostasis relates to the body’s automatic efforts to retain
contrasting approaches that is the content theories and process theories (cognitive theories) normal functioning.
- Content theories attempt to explain those specific things which actually motivate the individual
at work. These theories are concerned with identifying people’s needs and their relative Safety needs include safety and security, freedom from plain or threat of physical attack, protection
strengths and the goals they pursue in order to satisfy these needs. Content theories place from danger or deprivation, the need for predictability and orderliness.
emphasis on the nature of needs and what motivates.
Love needs that is social needs which include affection, sense of belonging, friendships and both the
- Process theories attempt to identify the relationship among the dynamic variables which make up
giving and receiving of love.
motivation. These theories are concerned more with how behavior is initiated, directed and
sustained. Process theories place emphasis on the actual process of motivation.
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
Major content theories of motivation include reputation or prestige, status, recognition, attention and appreciation.
• Maslow’s hierarchy of needs model
• Alderfer’s modified need hierarchy model Self-actualization needs that is the desire to become more and more what one is capable of becoming
• Herzberg’s two-factor theory which simply means that one wants to realize his or her potentialities and capabilities.
• McClelland’s achievement motivation theory IMPLICATIONS OF MASLOW’S HIERARCHY OF NEEDS TO THE
ENTREPRENEUR
Maslow’s hierarchy of needs theory Once a lower need has been satisfied, it no longer acts as a strong motivator and only unsatisfied
Maslow’s theory claims that human motives develop in sequence according to five levels of need needs motivate a person.
arranged in a hierarchy of importance. Maslow’s basic proposition is that people want beings, they
always want more, and what they want depends on what they have already. The hierarchy begins This hierarchy of needs implies that entrepreneurs need to consider seriously the lower level needs if
with the lowest level i.e. physiological needs to the need for love (social), esteem needs to the need workers or staff is to cooperate at work. That is the remuneration (salary, wage, fringe benefits)
for self-actualization at the highest level. Below is the pyramid to show the hierarchy should meet decent or exclusive physiological needs (shelter, food, clothing). Pleasant working
conditions must also be ensured.
Successful entrepreneurs must consider the safety and security issues such as safe working conditions
like danger warning signs, clean work environment and good healthy facilities. It is also important to
employees and social security after employment i.e. pension and other related company benefits.
Social needs of workers have impact on the performance. Workers need to be loved and as such
entrepreneurs need to instill a sense of belonging in workers. Entrepreneurs also need to employ
friendly supervision, cohesive work group, and team spirit and general sound relations with
employees. Workers also need professional associations to meet their professional associations to
meet their professional problems.
Another area of concern is self-esteem. In this case entrepreneurs should make use of social 2. Match the following activities with the appropriate management function
recognition, job title, high status job and feedback from the job itself if employees are to be a. monitoring to check whether a budget is being followed
motivated in their work. b. deploying human resources to different departments
c. setting organizational goals and the mission statement
Self actualization is one aspect that does motivate employees i.e. workers are motivated by d. giving rewards to staff performing well?
challenging job, opportunities for creativity, achievement in work and advancement in the
organisation and as such entrepreneurs should not that.
3. State the role that is associated with each of the following statements
Herzberg’s two factor theory
a. a manager representing his organisation at a special award ceremony
Hygiene theory
He presents his tow factor theory of motivation which elaborates the differences between higher and
b. resolving conflicts between 2 divisions of the same organisation
lower needs. This theory states that factors which create satisfaction at work are those stemming c. restructuring the organisation so that it becomes more responsive to clients
from the intrinsic content of job e.g. recognition and responsibility, meaning and challenge. These d. making a presentation on the organisation
satisfy higher needs. These are called satisfiers or motivators or growth factors. Another set of
factors which entrepreneurs must take cognizance of is dissatisfies or hygiene factors. These factors
stem from the extrinsic job context e.g. working conditions, pay, and supervision. These satisfy
lower needs. An important point to note in this theory is that as dissatisfaction stems from lower
needs not being satisfied, when these are satisfied, this only removes dissatisfaction and does not
increase motivation.
If hygiene factors did not reach a certain standard e.g. salary, working conditions, job security, 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, SUMMARY
achievement responsibility, advancement and the work itself. 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,
Below is a representation of Herzberg’s two-factor theory organising and controlling- PLOC) with diligence so as to facilitate the accomplishment of
Hygiene or Maintenance factors set organizational goal. Entrepreneurs should thus seek knowledge on how to be effective
Salary, job security, working conditions, Level of quality of supervision, company and efficient in their various areas of operations considering the environments in which they
Policy and administration, Interpersonal relations, The Dissatisfies operate in. Thus management of business works shops, seminars and other discussion and
consultative forums can be organized to encourage exchange of ideas. Appropriate
Motivation & job satisfaction management style should also be chosen depending on the environment.
The satisfiers:
Sense of achievement, Recognition, Responsibility, Nature of work, Growth and advancement,
Opportunity of creativity
Motivators/growth factors
NB: The Motivation – hygiene theory of Herzberg is an extension of Maslow’s Hierarchy. The
emphasis in this theory is that entrepreneurs must consider both the hygiene factors and the growth
factors/motivators.
Importance of motivating employees
- Increased productivity
- Increased efficiency and effectiveness
- Good corporate image building
- Increased sales and profits
- Good customer relations
- Promotes team spirit (team work) or cooperation and support by employees
- Promotes entrepreneurship by employees that is innovativeness, creativity and initiative ness
resulting in the growth or expansion of the enterprise
ACTIVITY
1. List the four management functions.
The basic marketing mix offers us a useful framework within which to discuss the
CHAPTER 5 relationship of Marketing activities to other organizational functions.
• PRODUCT
MARKETING (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
By the end of the study you must me able to: may have different attitudes and approaches when perceiving and solving problems. With
• Define marketing regard to service marketing, there may be other kinds of technicality. For example, if a firm
• Describe the marketing mix elements of solicitors wishes to provide independent financial advice, the very demanding regulatory
• Apply the marketing mix to product and service situations regime governing such services is likely to be a key consideration in the marketing of the
new service.
• Prepare a marketing plan
(b) PACKAGING refers to 'all the activities of designing and producing the container for a
Marketing is the management process responsible for identifying, anticipating and satisfying
product'. (Kotler, 2003). Packaging serves various purposes and involves several
customer requirements profitably. (CIM)
considerations.
There are many other definitions that expand on the CIM's own definition. Here is what
(i) Protection of product e.g. sturdy boxes for breakable products
Dibb et al (2001) has to say:
(ii) Preservation of the product e.g. plastic bags to keep bread and cakes fresh and
hygienic
Marketing consists of individual and organizational activities that facilitate and expedite satisfying
(iii) Security of product e.g. small digital camera memory cards packaged in large plastic
exchange relationships in a dynamic environment through the creation, distribution, promotion and
packs to deter shoplifters
pricing of goods, services and ideas.
(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
This is a more detailed definition and identifies some specific activities. Marketing as an
containers
activity differs from marketing as a concept. A market orientation can prevail outside the (v) Branding e.g. the Coca-Cola bottle is a huge source of promotion for the company
marketing department. The related term 'marketing concept' is fundamental to the
(vi) Profitability e.g. larger sized nozzles on tubes and bottles encourage more use.
modern approach to marketing. Kotler (1991) says this: Larger sized cans or bottles usually encourage greater consumption.
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 • PLACE
effectively than the competition. 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
Needs are basic human requirements such as food, clothing, shelter, exercise, etc. Some development, and there is now much more scope for market decision making, especially
people might be able to satisfy their needs for exercise by going for a run in a public park. with the advent of e-commerce. Place decisions may also influence an organisation's
Wants refer to needs directed to specific objectives that might satisfy the need, For example, globalization strategy. If clients and/or customers have overseas locations it may be
people might want to meet their needs for exercise by joining an exclusive country club to beneficial to set up distribution facilities locally. The presence of overseas facilities enables
play golf. The marketing manager of an exclusive country club may carry out various the organisation to extend its market coverage and global reach. It is important to
marketing activities to transform the needs of people for exercise into wants to play golf at a understand the structure of the distribution channel and the role of the players within it. A
country club. key concept is channel captaincy, which refers to the organisations that hold the most
FAST FORWARD power within a channel and can drive changes in it. In the past, for example, food
Kotler (1991) also uses the word demand which refers to the wants being backed up by an manufacturers controlled the retail food industry as they were fewer in number,
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 and bigger in size, than the supermarkets and other independent retailers. Supermarkets have
activity, and marketing as a concept of how an organisation should go about its business. 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,
The Marketing Mix 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
The marketing mix refers to a set of marketing variables which a firm can use to satisfy the forwarding skills.
needs of its target market. McCarthy calls them the 4Ps of marketing. They are: price,
promotion, product and place. • PROMOTION
Promotion is, of course, the focus of a great deal of marketing attention and might, with
Marketing activities 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.
Product Life Cycle
a) Product development
The product life cycle is defined as the period that starts with the initial product design (research
• Product development begins when the company finds and develops a new-product idea.
and development) and ends with the withdrawal of the product from the marketplace. It is
During product development, sales are zero and the company's investment costs mount.
characterized by specific stages, including research, development, introduction, maturity,
decline, and obsolescence. Each stage is often linked with changes in sales,profits ,objectives and b) Introduction
strategies. Conventionally, four main stages compose a product's life cycle: • The need for immediate profit is not a pressure. The product is promoted to create
awareness. If the product has no or few competitors, a skimming price strategy is
• Introduction. This stage mainly concerns the development of a new product, from the employed. Limited numbers of product are available in few channels of distribution.
time is was initially conceptualized to the point it is introduced on the market. The great
majority of ideas do not reach to promotion stage. The corporation having an innovative c) Growth
idea first will often have a period of monopoly until competitors start to copy and/or • Competitors are attracted into the market with very similar offerings. Products
improve the product (unless a patent is involved as it is the case in industries such as become more profitable and companies form alliances, joint ventures and take each
pharmaceuticals). Generally, associated freight flows take place within developed other over. Advertising spend is high and focuses upon building brand. Market share
countries and/or close to markets where to product is likely to be adopted. tends to stabilise.
• Growth. If the new product is successful (many are not), sales will start to grow and new
competitors will enter the market, slowly eroding the market share of the innovative firm. d) Maturity
The product starts to be exported to other markets and substantial efforts are made to • Those products that survive the earlier stages tend to spend longest in this phase.
improve its distribution since competition mainly takes place more on the innovative Sales grow at a decreasing rate and then stabilize. Producers attempt to differentiate
capabilities of the product than on its price. This phase tends to be associated by high
products and brands are key to this. Price wars and intense competition occur. At
levels of profits.
this point the market reaches saturation. Producers begin to leave the market due to
• Maturity. At this stage, the product has been standardized, is widely available on the
poor margins. Promotions become more widespread and use a greater variety of
market and its distribution is well established. Competition increasingly takes place over
media.
cost and a growing share of the production is moved to low cost locations, particularly for
labor intensive parts. Associated freight flows are consequently modified to include a
greater transnational dimension.
• Decline. As the product is becoming obsolete, production essentially takes place in low The purpose and content of the marketing plan
costs locations while developing countries become net importers. Production and
distribution economies are actively sought as profit margins decline. Eventually, the A marketing plan is a specification of all aspects of an organisation's marketing intentions
product will be retired, an event that marks the end of its life cycle.he life cycle and activities. It is a summary document, providing a framework that permits managers and
specialists to undertake the detailed work of marketing in a coordinated and effective
For the various stages of the cycle ,different objectives and strategies can adopted.this are fashion.
digrammatically shown on the next page: 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 chosen marketing mix will be applied. This section is likely to be of considerable size.
marketing-related activities. (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
The marketing plan and corporate strategy 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
It is important to remember how the marketing plan fits into overall corporate the plan is properly executed. These may include intermediate organizational and sales
strategy. Students are often confused by the appearance of environmental analysis in the milestones, the design of routine performance measures, the establishment of an
marketing planning process and assume that this means that the marketing plan is the same appropriate marketing organisation, and the development of contingency plans.
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 The marketing plan in detail
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 1 Executive summary
principally about marketing activities. The marketing plan is aligned with the corporate It is common practice to place an executive summary at the beginning of the marketing plan.
plan and supports it. Executive summaries are provided, as their name implies, for the convenience of senior
T FORWARD executives who require a fast overview in order to avoid the time involved in detailed study.
What goes into the marketing plan? As a general rule, such summaries should be confined to a brief exposition of important
material.
There is no standard template or list of contents for a marketing plan. Different (a) Background information that helps explain why particular proposals have been made
organisations will find it appropriate to consider different things at different times in their or
development. We will look at one possible detailed layout for a marketing plan in Section 3. decisions taken
In this section we will look in general terms at What is likely to appear in most marketing (b) A description of proposed action with an indication of timescale
plans? (c) A summary of the aims or targets that are intended to be achieved
(d) An assessment of any wider implications of the proposed action
The marketing plan – an outline (e) A statement of the required investment, where appropriate
The executive summary for a marketing plan is likely to include material on the following
1 Situation analysis specific matters.
PESTEL – SWOT – Market analysis and • Marketing research
marketing objectives • Target markets and segments
• The proposed marketing mix
2 Marketing strategy • Sales forecasts
Objectives – tactics – marketing mix
2 Situation analysis
3 Numerical forecasts
Sales – expenses 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
4 Controls elements, and the micro- or market environment. Internal and environmental factors are
Marketing organisation – performance measures summarized in a SWOT analysis.
These four basic elements constitute a logical sequence of development for the basic (a) The business environment. The operation of any business implies interaction with its
building blocks of the marketing plan. Ensure that you remember this basic structure. If all environment and the first stage of the detailed planning process is likely to be the collection
else fails in the examination, it should enable you to organize your thoughts and make a and analysis of environmental information. For this purpose, the business environment is
creditable attempt at preparing a marketing plan. often split into two parts.
FAST FORWARD
(a) Situation analysis. Any planning process should start with the collection and analysis of (i) The macro-environment may be analyzed into six elements.
basic data. In the marketing context this is often called situation analysis. It may be • Political • Technological
appropriate for situation analysis to consider the items listed below. • Economic • Ecological or 'green'
• The wider environmental factors of the PESTEL model • Social • Legal
• Strengths, weaknesses, opportunities and threats The acronym PESTEL may be used. PEST and STEP are also common, when the legal
• Marketing research data, including demographics data, trends, needs and growth environment is included under politics and so-called 'green' issues are included under the
• Current and planned products and services social heading. Your syllabus uses PESTEL, so that is what we will use in this Study Text.
• Critical issues A marketing plan need not include a detailed PESTEL analysis, but it should explain those
(b) Marketing strategy. The statement of marketing strategy will describe in detail all the aspects of it that have affected its development.
marketing concepts, practices, activities and aids that will be used. It will reiterate the Action Programme 1
marketing objectives in some form, and will probably give a detailed account of how the
(ii) The micro-environment consists of the markets in which the business operates or envisaged. For example, a company operating nationally in a lifestyle segment might target
plans to operate. It includes current and prospective customers and existing and prosperous retired people nationwide, while a locally based professional service business
potential competitors. The micro-environment also includes any distribution systems might target start-ups and small traders within a 20-mile radius of its base.
used by the business. Headings such as those below may be appropriate. (c) Products and their positioning. Product positioning is a continuation of the process of
• Target markets • Products and services determining the target market. Product positioning is about the way the target market
• Market needs • Competition perceives the product's characteristics, in relation to those of competing products.
• Market geography • Costs
• Market demographics • Suppliers There are two basic product positioning strategies.
• Market trends • Critical issues • 'Me too': the product is positioned to meet the competition head-on.
• Market forecasts • Gap-filling: the product is positioned to exploit gaps in the market.
• Market growth (d) The marketing mix. A marketing plan will not necessarily give complete details of every
(b) Internal analysis. Like the overall strategic plan it is derived from, a marketing plan component of the marketing mix. Instead, it will concentrate on those parts that are new or
should reflect the characteristics of the business concerned. It will inevitably refer to current crucial to success. For example, a plan built around a new or enhanced product that will be
and planned products and capabilities and be designed to exploit the organisation's resources distributed through established channels is likely to give significant product detail, and
to the full. An important aspect of the internal analysis is product-market background, explain the aim of the new features in market terms. Place, on the other hand, is unlikely to
which sets the scene for those less familiar with the products and markets involved. The receive more than a brief mention.
environmental and internal analyses are traditionally summarized and entered into the plan (e) Marketing research. Early marketing research should have played its part in supporting
under the headings of strengths, weaknesses, opportunities and threats. This SWOT the design of the marketing plan. However, it is not confined to this phase of operations.
analysis highlights aspects of the overall situation that need action by the business. The aim Marketing research activities should form part of the marketing plan, so that continuing
is to exploit strengths and opportunities, remedy areas of weakness and develop actions feedback may be obtained upon the degree of success achieved.
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.
4 Numerical forecasts
3 Marketing strategy Numerical forecasts tie down what is to be achieved and form the basis of the control
Marketing strategy includes objectives and methods and may deal with such matters as gap process.
analysis, target markets, the marketing mix and marketing research. The marketing strategy This section of the marketing plan could also be called a budget.
section of the marketing plan should describe in detail the organisation's 4.1 Typical forecast quantities
marketing objectives and methods. • Turnover
• Market share
(a) Marketing objectives. The objectives of the marketing plan are derived from the • Marketing spend
corporate plan, which is designed to support the overall corporate mission. A clear statement • Units of sales
of marketing objectives serves a number of purposes. • Costs
(i) It provides a focus for activity and a sense of purpose. This should stimulate • Breakeven analysis
activity, particularly when overall objectives are broken down into personal targets. Phasing and analysis. It will be appropriate to present numerical forecasts broken down in
(ii) It provides a framework for co-ordination of activity across the organisation. two ways.
(iii) IT is fundamental to the control process, since it defines success. Actual (a) Phased by time period. A year's total may be broken down into monthly or quarterly
performance is compared with what was intended, and control action taken to increments.
correct any discrepancy. When objectives have been considered in detail, it is possible to use (b) Analyzed by marketing characteristic. For example, sales and expenses might be
them to refine a plan by means of gap analysis. Objectives will relate to both market analyzed
dynamics and financial results, and should be expressed in concrete form. Objectives may be by product type or by market segment.
set for such business parameters as those
below. 4.2 Breakeven analysis
• Revenue growth Breakeven analysis is a management accounting technique that should be of interest to
• Market share marketing
• Profitability managers. The cumulative sales of a product reach their breakeven point when the total
• Number of outlets revenue is high enough to cover both the variable and fixed costs of producing and selling
• Customer retention that quantity of product. The breakeven point is a vital hurdle that must be cleared if the
• Brand recognition marketing plan is to be considered successful, and a profit made on the sale of the product.
• Marketing expenses
• Staff levels and training 4.5 Controls
(b) Target markets. It will be appropriate to define clearly just what the target market is. Control is vital if management is to ensure that planning targets are achieved. The control
The nature of this definition will depend partly on the scale of the marketing operation process involves three underlying components.
– Setting standards or targets
– Measuring and evaluating actual performance
– Taking corrective action CHAPTER 6
(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 CUSTOMER CARE
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: Objectives
sales and market share. By the end of the unit you should be able to:
(i) Sales analysis is based on the comparison of actual with budgeted turnover, but • Define customer care
this is only the first stage. It is appropriate to delve deeper and consider the effects • Discuss the tips of customer care
of differences in unit sales and selling price. Further analysis by product, region, • Design a customer programme and charter
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
Customer care
- is the manner in which customers are treated by the business
decline of the market as a whole has implications for the achievement of both types
- Customer care creates a new orientation in an organisation with and increasing focus on
of objective.
improving the delivery of the needed services by the customers.
FAST FORWARDAST FORWARD - This should always be viewed as the clientele having rights and expectations that must be
(b) Marketing organisation. Individual responsibilities within the overall marketing plan fulfilled.
should - As an entrepreneur one needs to appreciate that customer care should be part and parcel of
be given and the persons responsible named. One example of a specific responsibility is the his/her business operations if you intend to achieve success.
preparation of performance reports. Other roles will include that of overall responsibility - The customer care vision by organisation embraces employees that put its customers first
(probably discharged by the Marketing Manager or Brand Manager), management of and that is open transparent, accountable and responsive
promotional effort and management of marketing research effort. - The customer is king and always right as a way of doing business
(c) Implementation milestones. Progress in implementing a programme can be monitored - The customer is always observed as having a right to demand quality services from the
by organisation
the establishment of milestones and the dates by which they should be achieved. - In the modern business world there is an increasing focus on enhancing service delivery and
Marketing at Work on ascertaining that the delivered as promised
Examples for the launch of a new car might include: - An entrepreneur should be responsible, accessible and quick to help source problems
• First delivery to show rooms - Should be reliable and deliver what he/she promises on time
• First thousand sold - Should be knowledgeable and courteous
• Breakeven sales achieved - Should be empathetic and should understand the needs of customers
(a) Contingency planning. Events in the real world very rarely go according to plan. It is - Work area should always be clean and organized.
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 Ten tips for customer care
almost certainly imply financial reserves, but may require more specific resources, 1. Reliability
such as management and productive capacity. - this refers to consistency of performance and dependability
(ii) There is a range of possible responses to any given contingency. The organisation - perform the service right the first time fulfill promises
should consider its options in advance of needing to put them into action. - be impartial and avoid favouritism
(iii) A prompt response will normally be appropriate. Achieving this depends to some - Be firm with friends and relatives as far as business transactions are concerned.
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 2. Responsiveness
processes need to be rapid and effective. - this refers to the willingness as well as readiness of the entrepreneur or his employees in
providing the services within reasonable time immediately if not sooner
3. Competence
-This refers to the possession of the required skills and knowledge by those who deliver the
services to the customer. This will create confidence.
4. Accessibility
- this refers to the degree of approachability and ease of contact of the entrepreneur or his
employees
- drop what you are doing ignored to greet and serve customer
8) stick to your commitments
9) Always inform your customers on what happens at your business if it may affect them (i.e. sale,
5. Courtesy new product? Services
- This refers to politeness, respect, consideration and friendliness of your organization’s 10)be fair and honest when dealing with customers
contact such as receptionist, secretaries, telephonist, etc, they must be polite and courteous 11)demonstrate the right skills at the right time
at all times – remember, a smile goes a long way. 12)always give customers professional treatment
13)know the customers business and needs
6. Communication
- keep your customer well informed in a language and style they understand Who gets to decide if a customer service is good?
- it is important to hear and understand what your customers are saying 1. customer service is a function of your customers perceptions not your standards in other words,
- communicate effectively with your suppliers as well the customers gets to decide if he or she has received good services
- even though all of your standards may have been met if the customer does not feel well
7. Credibility served, your customer service is poor
- this refers to being trustworthy and faithful -customer satisfaction is ultimately the result of the sum total of the customer’s experience
- put customers at heart
- they should feel that he/she is given priority and should have the trust that any order will be 2. Customer satisfaction is ultimately the result of the sum total of the customer’s experience at
executed and received when expected your establishment.
- Customers come back to a place that has provided a pleasant experience for them. Thus
8. Security owners and managers need to focus not on tangible as ends themselves but on how all the
- customer should be protected from danger, risk or doubt within the premises particulars combine to create a certain experience.
9. Knowledge of Customer Prime examples of poor customer care
- the entrepreneur should know the client specific requirements 1. poor delivery and accessibility of services
- be able to recognize regular clients 2. poor quality and state of merchandise
- strive to provide individualized attention 3. existence of long queues of customers waiting to be served
- Understand what makes them buy is it need Price? 4. dirty environment of business
5. failure in meeting client expectations
10. Tangibles
- This could include the physical evidence (i.e. building, good handling, tools, equipment,
packages etc). This could also include the appearance of your personnel
- employees must be neat, orderly and clean Dealing with unprincipled customers
- never show that customer is wrong or behaving badly
- always take it that he/she is right
Benefits/importance of customer care - appreciate and understand at there should be some customer’s who visit your business with
hidden agenda and ulterior motives (i.e. competitors of those interested in policing I’ve price
control monitors
- If customers are put first, the entrepreneur will be rewarded with new business and increased - make very attempt to deter their bad intentions by being upright in your dealings
profit margins and sales.
- Customer care creates new customers You can defeat unprincipled customers by taking the following steps:
- Constructive consumer dialogue enables the entrepreneur to know and understand what the 1. continue to show a good image of your business
customers needs and wants 2. smile when talking to customers
- It builds good relationships and loyalty with customers 3. accept blunders where you can realize them promise to improve and make an apology
- Can make passive customers become in violated participants (i.e. loyalty) 4. avoid arguing with customers
- Create corporate excellence 5. always hold your composure and avoid losing your temper in front of your customer
- 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 Building Customer Trust
need and want. From a customer’s point of view, there is probably no concept more important than trust. How can
you strengthen customer trust?
Perquisites of meeting Customers expectations 1. Keep your promises
2. Make promises that you can keep
1) be courteous and tactful 3. do everything to keep the commitments you make
2) be friendly and helpful 4. if you cannot fulfill the promises let the customer know
3) deal promptly and decisively with customers 5. call back if you promise even if you don’t have the information the customer is
4) rectify faults quickly and keep promises expecting
5) listen to customers attentively and respond promptly 6. Following up on an order to be sure everything is okay.
6) avoid being sarcastic when dealing with customers 7. Properly hold complaints all the time.
7) present information logically and comprehensively 8. Make recommendations that are best for the customers.
9. Recommend a competitor when there’s a need that you can’t satisfy. CHAPTER 7
10. Make yourself available after the sale.
RECORD KEEPING AND STOCK CONTROL
Creating Customer Comfort
Customer care is also defined as meeting needs and creating comfort. Meeting needs is a given,
creating comfort is a function of enabling the customer to feel a sense of control when he/she is at Objectives
your business. Customers feel in control when they know the drill i.e. when they know how things By the end of the unit you should be able to:
work and how to get things done • differentiate between bookkeeping and accounting
• keep records and control stock in a business
Develop and maintain a customer charter • interpret and apply basic financial statements
- Make sure that there is availability and visibility of both a mission statement and customer
charter. The customer’s charter will remind your workers always to abide by its contents and
What does it mean when someone asks you for an account of something?
will assure customers of their expectations of the services and what move to take if they are
not met. Your customers’ charter should indicate the standards of services to be delivered Giving a report of some event/activity that has taken place.
and the way in which the worker will perform their duties This is the major objective and purpose of this business activity, Accounting.
1. telephone
- number of rings before the telephone is answered are given DIFFERENCE BETWEEN BOOKKEEPING AND ACCOUNTING
-
Bookkeeping: it is concerned with the recording of data only. This used to be done in
2. Enquires
books, thus the name bookkeeping.
- short turn around time
- follow up • A bookkeeper is responsible for this duty. Nowadays books may be used, but a lot of
- courtesy options offered to caller accounting data is recorded using computers.
3. Correspondence Definition of Accounting
- Correct The process of identifying, measuring and communicating economic information to permit
- Shorthorn around time informed judgements and decisions by users of the information.
- Acknowledgement of receipt • An Accountant does the analysis and interpretation of the data which has been
recorded by the bookkeeper.
4. Delivery deadlines met
Delays explained and apology given
The accounting process
5. Outgoing services It involves:
- automatic follow up Recording Classifying Summarising Interpreting of
- customer feedback
- be sure that your customer’s charter informs clients about the availability of a system of business activities capable of being expressed in monetary terms.
redress in case of grievances
Users of accounting information
(i) Present and Potential Investors :they want to see whether or not the business is
profitable (viability of the business)
(ii) Prospective buyers of the company: where to buy or not to buy
(iii) Lenders : Banks and Financial institutions ,when the owner of a business wants
to borrow money
(iv) Suppliers/Creditors: Whether it is safe to supply on credit and analyse if they will
be paid back their dues.
(v) Customers: they need to know if there will be a constant supply of products
from the business
(vi) Government/Taxman: for calculating tax payable by the business
(vii) Managers of the firm: for internal decision making
(viii) Employees: need to access their job security
(ix) General public
Source documents The following is a sample of an invoice
Information used in the process of completing financial transactions is called source Invoice 00214
documents. These can include invoices, receipts, credit and debit notes, purchase orders, Date: 26/02/04
customer billings, bank statements etc. These are the starting of any accounting process.
Gobvu Manufacturing (Pvt) Ltd
P O Box 39
Source document KWEKWE
Telefax: 055 50221
- 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 To: Makayepuva (Pvt) Ltd
- Receipts are used by the entrepreneur or supplier when the transactions involve cash e.g. where a Chuma street
customer tenders cash, a receipt may be written out. Below is a sample of a receipt
MASVINGO
Tel: 039 62043
Books of primary entry is obtained
Item purchased Quantity Unit cost Total______
Receipt 0023
500ml super stick glue 500 $100.00 $50 000.00
Date: 25/02/04
less 5% discount if paid
Gobvu Manufacturing (Pvt) Ltd
within 30 days
P O Box 22
Total $50 000.00
CHEGUTU
Telefax: 703301 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
Purchases Amount__ issued in this instance rather than a debit note.
5 x 2l Mazoe Orange crush $30 000.00
Sub total$30 000.00
Less discount $ 3 000.00 Below is an example of a debit note
Signature…………… Total $27 000.00
Debit Note
Invoice is a note given by the supplier or seller to the customer when goods are bought on credit to Supplier’s name & address
show that the customer has not paid for the goods. That is an invoice is used for credit sales. The Supplier Ref:
invoice should have the following details: Date:
Customer’s Name & Address
Date of purchase Debit Note No
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) Item description Quantity Unit price Total___________
Goods or services bought
Amount to be paid Total to be debited:
Terms of sale Reasons for debit:
Amount of discount if any
Appreciation message (e.g. Thank You for doing business with us)
Credit Note is used to correct an overcharge e.g. if 25 items are sent, but only 20 were requested on
the order, then a credit note will be prepared to reduce the bill by the value of those 5 items. The
extra 5 items would be returned to the supplier. A credit note can also be used where goods or
services are unsatisfactory e.g. goods are damaged or wrong price charged.
The following is a layout of a credit note
Enquiry letter is a letter from the customer asking about prices, range of goods, specifications etc
Credit Note Quotation is a reply to the enquiry giving details about the specific items or services that the
Customer’s Name & Address customer has enquired about.
Customer Ref:
Date: Price list is a list showing all of the items for sale together with their prices.
Supplier’s Name & Address
Order Note is a letter requesting goods from the supplier.
Credit Note No:
Below is a layout of an order note
Item Description Quantity Unit price Total______
Total to be credited Order
Supplier’s Name & Address Customer’s Name & Address
Reason for credit: Customer Ref:
Date:
____________________________________________________________
Statement
Item Description Quantity Unit price Total________
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 TOTAL_________________
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.
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
Below are the layout and a specimen of a statement understand.
Statement Delivery Note is a list of items sent and the quantities of each item. It is sent by the supplier for the
From………/…………/………To……./………/……… customer to check carefully that the correct items and quantities have been delivered and then sign.
Customer’s Name & Address The delivery note only shows items and quantity. The delivery note should be given a special
Customer Ref: number so that he or she can find his copy easily.
Date:
Supplier’s Name & Address Below is the layout of Delivery Note
Date Details Amount Balance_________ Delivery note
Customer’s Name & Address:
Balance remaining Customer Ref:
Date:
Specimen Supplier’s name & Address
Details Amount Balance Delivery Note No:
5/02/04 Invoice No. 011 $1 000.00 $1 000.00
10/02/04 Credit Note 005 $ 300.00 $ 700.00 Item description Quantity___________
20/02/04 Invoice No. 13 $ 800.00 $1 500.00
25/02/04 Payment Received $ 600.00 $ 900.00
28/02/04 Invoice No. 16 $1 200.00 $2 100.00
Balance remaining $2 100.00 Customer’s signature………………_______________________________
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 Consignment Note is used with or instead of a delivery note where the goods are delivered by
payments are subtracted from the balance as they decrease the amount which is owed. someone other than the supplier e.g. for goods delivered by sea or rail.
The other documents used by the business are enquiry, quotation, price list, delivery note and
consignment note. Entrepreneurs should consider the following. When choosing a supplier: prices, quality, delivery,
customer service, location, terms of payment, discounts and business hours.
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
Appreciation of Books of Accounts money is added to our supply of cash in the business and a record has to be made on the cash
In business the entrepreneur should be able to appreciate books of accounts. These include the column on the Receipts side of the cashbook. The reverse is true when the business transfers
books of original entry or prime entry and the ledger book. The books of prime entry include the cash from the business into the bank.
cashbook, purchases journal book, purchases returns book and the sales returns book and the general - Balance carried forward (C/F) is determined at the end of the month by subtracting the total
journal book. The ledger book is the main book of accounts. 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
Cashbook month and will be recorded as balance b/f (balance brought forward)
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 Purchases journal
of money left over at the end of the month. Below is a layout of a cashbook This is a book of primary entry where goods on credit for re-sale are recorded. The transactions are
recorded as follows:
Debit side (Receipts side) Dr Credit side (Payments side) Cr
Date Details (Receipts) Cash Bank Date Details (Payments) Cash Bank Example: Mutsvedu (Pvt) Ltd
10 February bought $5 000 stocks on credit from E Gobvu
18 February bought $5 000 stocks on credit from T Timothy
Example
1/02 E Gobvu starts business with capital: Cash $ 5 000.00 Mutsvedu D Purchase’s journal for the month of February 2011
Bank $50 000.00 Date Details Folio Dr Cr
8/02 Sales (cash) $15 000.00 10/02 E Gobvu $10 000.00
5/02 Buys stock with cheque $10 000.00 18/02 T Timothy $ 5 000.00
15/02 Telephone bill paid by cheque $ 5 000.00 Dr Purchases A/C $15 000.00
18/02 Pay cash into the bank $10 000.00
20/02 Sales (cheque) $20 000.00 Sales Journal
22/02 Pay wages (cash) $10 000.00 - This is a book of primary entry where goods returned by customers are recorded
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 Example: Mutsvedu (Pvt) Ltd
Mutsvedu D Sales Returns Journal for the Feb 2004
20/02 B Sali returned goods $2 000.00
E Gobvu cash book for the month of February 2011 22/02 T Tom returned goods $5 000.00
Date Receipts (Details) Cash Bank Date Payments (Details) Cash Bank
1/02 Capital 5 000 50 000 5/02 Purchases 10 000 Date Details Folio Dr Cr
8/02 Sales 15 000 15/02 Telephone bill 5 000 20/02 B Sali $2 000.00
18/02 Deposit 10 000 18/02 Deposit 10 000 22/02 T Tom $5 000.00
20/02 Sales 20 000 22/02 Wages 10 000 Dr Sales Returns $7 000.00
23/02 Withdrawal 5 000 23/02 Withdrawal 5 000
28/02 Drawings 15 000 General Journal
25 000_ 29/02
80 000 Balance c/f 5 000 45 000 This is used to enter all transactions which cannot conveniently be entered into one of the other
25 000 80 000 subsidiary books e.g. fixed assets bought on credit such as furniture.
1/03 Balance b/f 5 000 45 000
Example; Mutsvedu (Pvt) Ltd
01/02 Received an invoice of $100 000.00 for office furniture bought on credit form Alice Mabinge
Notes 02/02 Bought stationary on credit from Alice Mabinge $10 000.00
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 business.
- Capital refers to the money being invested by the entrepreneur into the business. Date Details Folio Dr Cr
- Purchases refer to goods bought by the business for resale. 01/02 Office furniture 100 000.00
- Drawings relates to money taken out of business for personal use. Alice Mabinge 100 000.00
- Transfer from Bank to Cash refers to money taken out of bank account to be kept as cash in 02/02 Stationery 10 000.00
business. This transaction has to be recorded in the cashbook to show that the money has been Alice Mabinge
The Ledger Book • Bank: bank deposits and withdrawals, cheques
This is the main book of account. All other books of account are subsidiary to the ledger and are • Stock at hand
used to record transactions as they occur, prior to their entry or posting to the ledger.
• Accounts receivables: goods and services sold on credit to debtors which are
The ledger is ruled as follows: being expected to be paid at an agreed time.
Dr Cr • Prepaid expenses: when an entrepreneur has made a payment in advance, he
Date Details Folio Amount Date Details Folio Amount 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
Notes: • Loans
- The ledger is divided into two halves that is the left-hand side called debit side and the right hand (ii) Short term/Current Liabilities
side called credit side. The abbreviations Dr and Cr are used respectively at the top of each • Accounts payable :credit purchases/Creditors
account as shown above. • Accruals: Expenses we still have to pay at the end of a financial period e.g.
- The first column is for dates, the second for particulars of the transactions, the third, a folio rent payable, wages payable.
column (referred to hereafter) and the fourth, or money column for the amount of each
transaction. • Unearned revenue: this is when a product or service was paid for in advance
- The two sides of the account (sometimes contained on two pages facing each other) are to us before we have supplied it e.g. unearned wages, unearned rent
numbered alike and are together called a folio. Appreciation of Books of Accounts
- The universal rule in entering or posting transactions to the ledger is that credit the giver and In business the entrepreneur should be able to appreciate books of accounts. These include the
debit the receiver. 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
ACCOUNTING EQUATION journal book. The ledger book is the main book of accounts.
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 Cashbook
are the assets of the business. At any point of time the assets of any entity must be equal (in 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
monetary terms) to the total of equities. This can therefore be expressed as
of money left over at the end of the month. Below is a layout of a cashbook
ASSETS = CAPITAL + LIABILITIES Debit side (Receipts side) Dr Credit side (Payments side) Cr
Date Details (Receipts) Cash Bank Date Details (Payments) Cash Bank
What are the resources? Who supplies the equities to acquire the assets? Example
1/02 E Gobvu starts business with capital: Cash $ 5 000.00
Account Bank $50 000.00
It is a place where all information referring to a particular asset or liability or capital is 8/02 Sales (cash) $15 000.00
entered. 5/02 Buys stock with cheque $10 000.00
15/02 Telephone bill paid by cheque $ 5 000.00
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 18/02 Pay cash into the bank $10 000.00
20/02 Sales (cheque) $20 000.00
necessary therefore to have some method of showing the financial position of the
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
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
E Gobvu cash book for the month of February 2011
Date Receipts (Details) Cash Bank Date Payments (Details) Cash Bank Example: Mutsvedu (Pvt) Ltd
1/02 Capital 5 000 50 000 5/02 Purchases 10 000 Mutsvedu D Sales Returns Journal for the Feb 2004
8/02 Sales 15 000 15/02 Telephone bill 5 000
18/02 Deposit 10 000 18/02 Deposit 10 000 20/02 B Sali returned goods $2 000.00
20/02 Sales 20 000 22/02 Wages 10 000 22/02 T Tom returned goods $5 000.00
23/02 Withdrawal 5 000 23/02 Withdrawal 5 000
28/02 Drawings 15 000 Date Details Folio Dr Cr
25 000_ 29/02
80 000 Balance c/f 5 000 45 000 20/02 B Sali $2 000.00
25 000 80 000 22/02 T Tom $5 000.00
1/03 Balance b/f 5 000 45 000 Dr Sales Returns $7 000.00
General Journal
Notes This is used to enter all transactions which cannot conveniently be entered into one of the other
The cash book is divided into two halves that is Debit Side (Dr) or Receipts side and the Credit Side subsidiary books e.g. fixed assets bought on credit such as furniture.
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. Example; Mutsvedu (Pvt) Ltd
- Capital refers to the money being invested by the entrepreneur into the business. 01/02 Received an invoice of $100 000.00 for office furniture bought on credit form Alice Mabinge
- Purchases refer to goods bought by the business for resale. 02/02 Bought stationary on credit from Alice Mabinge $10 000.00
- 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 Date Details Folio Dr Cr
moved from one place to the other, otherwise the totals for the money left in the bank and in 01/02 Office furniture 100 000.00
cash at the end of the month will be incorrect. Alice Mabinge 100 000.00
- When money is withdrawn from the bank account, money has gone out of the bank as such 02/02 Stationery 10 000.00
there is need to record it I the Bank column on the Payments side of the Cash Book. This Alice Mabinge
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 The Ledger Book
cash from the business into the bank. This is the main book of account. All other books of account are subsidiary to the ledger and are
used to record transactions as they occur, prior to their entry or posting to the ledger.
- 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.
The ledger is ruled as follows:
$5 000 is the balance carried forward because it is the amount that will be starting the next
Dr Cr
month and will be recorded as balance b/f (balance brought forward)
Date Details Folio Amount Date Details Folio Amount
-
Purchases journal
This is a book of primary entry where goods on credit for re-sale are recorded. The transactions are
recorded as follows:
Example: Mutsvedu (Pvt) Ltd
10 February bought $5 000 stocks on credit from E Gobvu Notes:
18 February bought $5 000 stocks on credit from T Timothy - 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
Mutsvedu D Purchases journal for the month of February 2011
transaction.
Date Details Folio Dr Cr
- The two sides of the account (sometimes contained on two pages facing each other) are
10/02 E Gobvu $10 000.00 numbered alike and are together called a folio.
18/02 T Timothy $ 5 000.00
- The universal rule in entering or posting transactions to the ledger is that credit the giver and
Dr Purchases A/C $15 000.00
debit the receiver.
Sales Journal
- This is a book of primary entry where goods returned by customers are recorded
Capital a/c S.Holmes a/c
DOUBLE ENTRY SYSTEM P.Returns 18 Purchases 78
It is based on the Double entry concept which is one of the universally acknowledges Bal c/d 1000 Cash 1000 Bank 60
accounting concepts. It says that for every transaction there is a debit and credit entry. 1000 1000 78 78
• Debit the receiver Bal b/d 1000
• Credit the giver Motor Van a/c
Bank 500 Bal c/d 500
Cash a/c 500 500
Example 1 Capital 1000 Bank 900
Sales 28 Purchases 55 Bal b/d 500
2010 Debit (Dr) Credit (Cr) Bal c/d 73
August 1 Started business with $1000 cash Cash Account Capital Account 1028 1028
2 Paid $900 of the opening cash into the Bank a/c Cash a/c Bal b/d 73 Sales a/c
bank Bal c/d 126 D.Moore 98
4 Bought goods on credit $78 from Purchases a/c S.Holmes a/c Cash 28
S.Holmes Bank a/c 126 126
Cash 900 M.Van 500
5 Bought a motor van by cheque $500 Motor Van a/c Bank a/c Loan 100 S.Holmes 60 Bal b/d 126
7 Bought goods for cash $55 Purchases a/c Cash a/c Kingston 150
10 Sold goods on credit $98 to D.Moore D.Moore a/c Sales a/c Bal c/d 290 D.Moore a/c
12 Returned goods to S.Holmes $18 S.Holmes a/c Purchases Returns 1000 1000 Sales 98 Bal c/d 98
19 Sold goods for cash $28 Cash a/c Sales a/c Bal b/d 290 98 98
22 Bought fixtures on credit from Fixtures a/c Kingston a/c Bal b/d 98
Kingston Equipment Company $150 Purchases Returns a/c
24 D.Watson lent us $100 paying us the Bank a/c Loan-D.Watson Purchases a/c Bal c/d 18 S.Holmes 18
S.Holmes 78 Bal c/d 133 18 18
money by cheque
Cash 55 Bal b/d 18
29 We paid S.Holmes his account by S.Holmes a/c Bank a/c
cheque $60 Fixtures a/c
31 We paid Kingston Equipment Co. by Kingston a/c Bank a/c 133 133 Bank 150 Bal c/d 150
cheque $150 Bal b/d 133 150 150
Bal b/d 150
Opening up accounts and closing them in the ledger
When transactions transpire within a month/financial period they are posted into the ledger
Loan- D.Watson a/c
of the company’s books from subsidiary books. Accounts for related transactions are Bal c/d 100 Bank 100
recorded in the same accounts and these are balanced off at the end of a period. 100 100
Bal b/d 100
• 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.
Kingston Equipment a/c
Bank 150 Fixtures 150
To compile a Trading Profit and Los Account, one needs to have the Trial Balance first.
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 Balance Sheet
side of the books. To see if the two totals are equal or that they balance, a trial balance may After compiling the Trading Profit and Loss Account, the balances that remain on the Trial
be drawn up at the end of a financial period. Balance pertain to the Balance Sheet. These will usually be balances for Assets, Liabilities
and Capital.
Definition: A trial balance is simply a proof of the equality of debit and credit balances in
the accounts. 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.
• 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. Example 2
The following is a Trial Balance of R.Graham as at 30 September 2010.
Dr Cr
Trial Balance as at 31 August 2010 $ $
Stock 1 October 2009 2368
Dr Cr Carriage outwards 200
Carriage inwards 310
Capital 1000 Returns inwards 205
Cash 73 Returns outwards 322
Bank 290 Purchases 11874
Purchases 133 Sales 18600
Motor Van 500 Salaries and wages 3862
Sales 126 Rent 304
D.Moore 98 Insurance 78
Purchases Returns 18 Motor Expenses 664
Fixtures 150 Office expenses 216
Loan-D.Watson 100 Lighting and Heating 166
1244 1244 General expenses 314
Premises 5000
Motor Vehicle 1800
The two sides are equal therefore the trial balance has balanced. This shows that our Fixtures and Fittings 350
transactions that we posted into the ledger are correct. Debtors 3896
Creditors 1731
FINAL ACCOUNTS OF A SOLE TRADER Cash at bank 482
Drawings 1200
Capital 12636
• Income Statement/Trading Profit and Loss Account
33 289 33 289
• Balance Sheet
Income Statement
The main reason people set up businesses is to make profits. Losses can occur if the
business becomes unsuccessful. The calculation of profit/loss is the most important
objective of the accounting function. The profits are calculated by drawing up a special Stock at 30 September 2010 was $2946.
account called a Trading Profit and Loss Account. The account is split into two sections, Required:
one in which the Gross Profit is found and in the other, Net Profit is calculated Draw up a:
• Gross Profit-Calculated in the Trading Account .This is the excess of sales over the 1. Trading Profit and Loss Account for the year ended 30 September 2010.
cost of goods sold in the period. 2. Balance Sheet as at 30 September 2010.
• Net Profit-Calculated in the Profit and Loss Account. This is what is left of the gross
profit after all other expenses have been deducted.
• Expenses-The value of all the assets that has been used up to supply goods and
services and therefore obtain revenues.
Trading Profit and Loss Account for the year ended 30 September 2010.
CAPITAL STRUCTURE & CAPITAL GEARING CONCEPT
Sales 18 600
Less Returns inwards (205)
18 395 Capital structure
The capital structure is how a company finances its overall operations and growth by using
Less Cost of goods sold: different sources of funds. This is also related to the capitalisation of a company which
Opening Stock 2 368 describes the composition of a company’s permanent or long term capital which consists of
Add Purchases 11 874 debt and equity.
Less Returns outwards (322)
Add Carriage inwards 310 When people are talking refer to capital structure they are most likely referring to a
Less Closing Stock (2 946) 11 284 company’s debt-to-equity ratio, which provides insight into how risky a company is. Usually
GROSS PROFIT 7 111 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
Less Expenses: a company’s’ capital structure is an indication of financial fitness.
Carriage outwards 200
Salaries and Wages 3 862 • Equity Capital: in a company’s’ capital structure, equity consists of a
Rent 304 company’s common and preferred stock plus retained earnings, which are
Insurance 78 summed up in the shareholders equity account in the balance sheet.
Motor Expenses 664
Office Expenses 216 • Debt Capital: the debt component of a company’s ’capitalisation should
Lighting and Heating 166 consist of short term borrowings (notes payable), the current portion of long
General Expenses 314 5 804 term debt (interest), long term debt, 2/3 of the principal amount of operating
NET PROFIT 1 307 leases and redeemable preferred stock.
Balance Sheet as at 30 September 2010 Debt-Equity relationship
Shrewd use of leverage (debt) increases the amount of financial resources available to a
Non Current Assets company for growth and expansion. The assumption is that management can earn more on
Premises 5 000 borrowed funds than it pays in interest expense and fees on these funds.
Fixtures and Fittings 350
Motor Vehicle 1 800 A company considered too highly leveraged (too much debt versus equity) may find itself
7 150 restricted in action by its creditors and /or may have its profitability hurt because of paying
high interest charges.
Net Current Assets 5 593
A company’s’ debt-equity relationship varies according to the industry it falls, line of
Current Assets 7 324 business and stage of development. However common sense tells us that generally no matter
Stock 2 946 what kind of business or level of development it is at, these companies should have lower
Debtors 3 896 debt and higher equity levels. This status reflects a very positive sign of investment quality.
Bank 482
Current Liabilities 1 731
Creditors 1 731 Capital Ratios and indicators
Three different ratios are used to assess the financial strength of a company’s’ capitalisation
Total Assets 12 743 structure.
• Debt ratio: total liabilities
Capital 12 636 Total assets.
Add Net Profit 1 307
Less Drawings (1 200) More of total liabilities means less equity and therefore indicates a more leveraged
position.
12 743
• Debt/Equity Ratio: total liabilities
total shareholders equity. Unfortunately, not every person buying or starting a business has massive amounts of capital
available, and a highly geared deal is all that is open to them. In these cases, alternative forms
of finance can be considered.
• Capitalisation Ratio: total debt
total capitalisation
• Capital Gearing ratio: owner's equity (or capital)
(Total debt = the sum of obligations categorised as debt + total shareholders
equity) Borrowed funds
Expressed as a percentage, a low number is indicative of a healthy equity cushion, which
is always more desirable than a high percentage of debt. Gearing is a measure of financial leverage, demonstrating the degree to which a firm's
activities are funded by owner's funds versus creditor's funds.
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.
ACCOUNTING RATIO ANALYSIS
The analysis of Accounting statements help in the diagnosis of trends which indicate the
Capital gearing concept magnitude , timing, or risk ness of the business’s future cash flows. Ratios compare
accounting variables and they are drawn from both the Income Statement and Balance
Few people have the money to cover all the initial expenses in starting a business. This is Sheet. Ratios need very careful handling. They are very useful if used correctly and very
why bank loans are so vitally important to stimulate the economy. The million dollar misleading otherwise.
question is what percentage should the entrepreneur contribute and what should come from
the bank or finance institution. 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.
The first thing that the banks check is if the entrepreneur’s contribution is in the form of When a company is able to pay its debts as they fall due, that company is said to be
imaginative cash. The owner should not have made other loans or taken the money from the liquid.
house bond, but has the finance available in the form of cash in the bank. The reason is that
banks would often look for surety in the form of an asset, such as the owner’s primary
• Current Ratio = Current Assets
residence.
Current Liabilities
Once sufficient capital is raised, the outstanding amount can be borrowed. This is
This compares assets which will become liquid within 12 months with
called a geared deal, with gearing simply being the amount borrowed in relation to
liabilities which will be due for payment in the same period.
the total set-up amount of the business.
A current ratio of 2 is standard. Ratio of 1 or less is considered low and
In an ideal world, the business owner is able to contribute enough own capital to secure a indicative of financial difficulties. Very high rates suggest excess current
gearing ratio of 50%, ensuring that the repayments are generally manageable. If a prospective assets that are probably having an adverse effect on the long term
business owner is able to put down 100% of the cost, he has the option of not having any profitability of the business. If it is more than 2 that means that we are too
gearing or perhaps investing in a business worth twice as much, again with a 50% gearing liquid, so we need to reduce or work on one of them.
ratio. Investing in a larger business creates a possibility of better future returns.
It is also possible to secure gearing ratios of as high as 20% from finance institutions. These
• Quick/Acid Test Ratio = Current Assets - Stock
higher ratios are not always advisable, because the higher the gearing ratio, the higher the
Current Liabilities
chance of business failure becomes because of higher monthly installments on the
repayment of the loan, as well as the effects of interest on the remaining 80% of the total
This indicates the business’s ability to meet its current liabilities without using
cost of the business. Obviously, the financiers expect a rate of return that is higher than the
stock.
interest rate, with the ability to pay off the loan within a specified time, usually five years.
The higher the gearing, the more difficult this becomes.
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
Finance institutions are generally a bit more lenient when it comes to franchise finance
current vs. long term assets. A ratio of 1.5 means you are holding up too
because of these brands’ proven abilities to produce returns on investment. Most of these
much stock or too much money. The ideal ratio should be less than 1.If it is
institutions use a guideline of expecting gearing of between 30 and 50%, although when
too low then you need loosen up your credit policies and increase your
economies are depressed few would consider a gearing ratio of lower than 40%.Some
debtors.
financial institutions may allow higher gearing ratios when an existing business is being
bought out and there is a cash flow history, as opposed to starting from scratch.
2. Debt Management Ratios: Deal with the amount of debt in the business • Return on Investment (ROI) = Net Profit
capital structure and its ability to service the legal obligations. Total Assets
High geared means high risk and requires you to acquire more borrowed money. It indicates the ability of the business to earn satisfactory returns on all assets
Low geared means low risk and requires you to inject more of your money. it employs. The higher the rate the better because provides some indication
of future growth prospects.
• Total Debt to Total Assets Ratio = Total Debt
Total Assets • Return on Equity (ROE) = Net Profit or Net Profit
Capital Market value of Equity
Indicates how much of the business funds are being supplied by creditors.
Total debt includes all current + non current debts + lease obligations. It indicates return on the owners’ investment in the business. It is an
accounting measure on how well management is performing
A high ratio indicates the use of financial leverage to magnify earnings, while
a low ratio indicates relatively low use of creditors’ funds. E.g. manufacturing
and mining companies need to use more of creditors’ funds because can not 4. Asset Management Ratios: They indicate how efficiently the business is using
afford to buy all needed machinery at once. Their products are high priced its assets .They can also be called Activity Ratios. If too much money is tied up in
and can pay back their obligations wit time. certain types of assets that could be more productive elsewhere then the business is
not profitable as it should be.
• Days Purchases Outstanding = Credit Purchases
Purchases/365 • Days Sales outstanding = Credit Sales
Sales/365
Indicates how prompt a business is at paying its bills.
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
• Times Interest Earned Ratio = Earnings before Interest(EBIT) dividing sales by 365 we are finding the average sales per day.
Interest
The ratio indicates how effective the credit granting and management
Indicates the ability to meet the interest requirements on both short and long activities are. A high DSO probably indicates many uncollectible receivables.
term debts. How many times can you pay the interest from your EBIT? A low ratio indicates that credit granting policies are very restrictive than
granting sales.
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 • Inventory turnover Ratio = Cost of goods Sold
sales will be needed to generate income. Average stock
• Fixed charges coverage Ratio = EBIT + Lease expenses It measures the times in a year the business turns over its inventory/stock.
Interest + Lease expenses
The lower the Inventory turnover the higher the cash conversion cycle. How
Provides a more comprehensive picture of the business’s ability to meet its many times do you order? If you order more it means that you are selling
legal financial requirements. more on credit. Other things being equal and assuming that sales are moving
smoothly, a high turnover suggests efficient Inventory management, a low
A high ratio is more desirable than a low one. turnover figure often indicates obsolete stock or lack of inventory
management.
3. Profitability Ratios: Relate income to sales, assets or capital. • Long Term Asset Turnover Ratio = Sales
Non current Assets
• Net Profit Margin = Net Profit
Net Sales It provides an indication of a business ability to create sales based on long
term asset base. The ratio provides an indication of how effective the
This ratio is used to measure the efficiency of management. A low margin business in using its assets. The higher the ratio, the more effective the
indicates that not too much sales are guaranteed relative to expenses or that utilisation of assets. A low ratio indicates that the marketing effort requires
expenses are out of control or both. attention.
• Total Asset Turnover Ratio = Sales It aims to reduce cost by cutting stock to a minimum. Items are delivered
Total Assets when needed and used immediately. This method carries the risk of running
out of stock, so you need to be confident that your suppliers can deliver on
It is an indication of the business ability to generate sales in relation to its demand.
total asset base. A high turnover normally reflects good management,
whereas a low ratio suggests the need to reassess the overall strategy of the (ii) Batch control/2 Bin System
business, marketing effort and the capital expenditure programme. A quantity of an item equal to the order quantity is set aside (frequently in a
separate / 2nd bin), and not touched until all main stock is used up. When this
stock (safety stock) needs to be used, the purchasing department is notified
and a replenishment order is placed. e.g. Book stores use red –tag system
where by a tag is placed in the stock at a point equal to order point. When a
STOCK CONTROL customer takes that book to the checkout, the store is effectively notified that
it is time to reorder that title.
Why do we control stock?
If your needs are predictable you may order a fixed quantity of stock every
To maintain stock levels that will minimise the Total Stock Cost.
time you place an order/order at a fixed interval.
Objectives of Inventory Management (iii) Economic Order Quantity(EOQ)
A firm wishing to maximise profits will have the following objectives:
This is the quantity of materials used at each order point that minimises the
• Maximise customer service total annual stocking cost for a material n a fixed order quantity inventory
• Low cost plant operation system.
• Minimum inventory investment
It is a standard formula used to arrive at a balance between holding too much
Maximise customer service or too little stock.
It describes the availability of items when needed and it is a measurement of inventory
management effectiveness. The customer in this case can be either one of the following; a EOQ formula: Q = 2DS
purchaser, distributor, another plant or work station where the next operation is to be C
performed. Some measures of customer service are percentage of orders shipped on
schedule, percentage of line items shipped on schedule and order days out of stock. Safety Where Q=Quantity ordered at each order point
stock is essential in cases of uncertainty so as not to disappoint your customers. D=Annual demand for a material in units
S=Average cost of completing an order
Low cost plant operation C=Cost of carrying one unit in inventory for one year.
Efficient inventory build up allows continuous production to occur resulting in lower set up
costs and an increase in production capacity due to production resources being used a It is secured at the ‘least unit cost’ of stocking a material. The costs that enter
greater portion of the time for processing as opposed to set up. Lower ordering costs per into the unit cost maybe divided into two groups:
unit and quantity discounts can be used to achieve this objective.
• Costs which decrease as the size of the order are increased.
Minimum inventory investment a. Purchase price (quantity discounts)
Batching economies in procurement shipments e.g. truckloads can reduce/minimise the b. Cost of placing an order
amount of money you use in inventory transportation and carrying costs. c. Stock-out costs e.g. lost contribution through lost sale and
cost of production stoppages
METHODS OF STOCK CONTROL
To maintain effective control over stock, it is necessary to determine:
• What should be the maximum and minimum stocks • Costs which tend to increase as the size of the order is increased.
a. Cost of storage
• What may be regarded as a standard order for a particular commodity and
b. Charges attributable to storage e.g. interest on investment,
• The point at which a further supply should be ordered. insurance, damage, obsolescence, and cost of warehouse
space.
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.
(iv) Stock Review
In this method you have regular reviews of stock. At every review you place
(i) Just in Time (JIT) an order to return stocks to a predetermined level.
(v) First in First Out(FIFO) CHAPTER 8
This system ensures that perishable stock is used efficiently so that it does
not deteriorate. Stock is identified by date received and moves on through COSTING AND PRICING
each stage of production in strict order
Stock Taking OBJECTIVES
- Stocktaking is an essential tool in checking that the stock records are accurate. There are several Define the following costing terms
reasons why the actual amount of items fails to tally or agree with the stock records. • Costing
- Stock taking is simply defined as the physical counting or checking of the stock items. The • Costs
physically counted stock items may fail to agree with the stock records because • Direct costs
(a) The items were stolen or damaged and a record was not made
(b) Goods were bought/sold but a record was to made • Direct labour
(c) Sales or purchases have been recorded incorrectly • Direct expenses
• Indirect costs
How to carry out a stock take
Calculate total costs per item
STEPS: Discuss the importance of costing to the entrepreneur
1st Set a date for stock takes and informs the publics if business hours are interrupted Define pricing
2nd Organize the stock to facilitate easy counting Calculate prices of products
3rd Develop a stock list Discuss the pricing factors
4th Physically count every item as per stock list and enter the figure in the ‘stock take’ column
5th Enter the last balance figure from the stock cards in the stock card column for each item
6th Deduct the stock card figure form the stock take figure and enter this amount in the
Definition of costing terms
Difference column
7th Find out the reasons if there is a difference i.e. if there is more or less stock than shown on Costing
the stock card This is the method or way of calculating the total costs of making or selling a product or providing a
service
Below is a specimen of a stocktaking list
Costs
Stock taking list These are all the money that the business spends to make and sell its products or services
Item Stock take Stock card Difference
Direct Costs
Eversharp pen 1 000 1 150 -150 These relates to all costs that are directly related to the products or services that the business makes
Pencil sharpener 200 200 0 or sells. There are two types of direct costs namely direct material costs and direct labour costs.
Ruler 300 350 +50
Exercise book (A4) 1 000 1 000 0 Direct Material costs
- These are all the money that the business/entrepreneur spends on the parts and materials that
become part of or are directly related or linked to the final product or service that it/he/she
makes or sells.
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 - NB: for a retailer’s or wholesalers, the costs of buying goods to resell are the direct material
card. costs. To be considered or counted as direct material costs, the amount of material must be easy
to calculate and the cost of the material must be big enough to add a considerable amount to the
total direct material costs.
Direct labour costs
- These are all the money that the business or entrepreneurs spends on wages, salaries and benefits
for the people who are directly involved in the production of its or his/her products or services
- The time spent on making the product must be easy to calculate and the cost of the direct labour
must be big enough to add a considerable amount to the total direct labour costs. Retailers and
wholesalers do not have employees working directly in making products, so they do not have any
direct labour costs. For retailers and wholesalers, all salaries and wages are indirect costs.
Stage I: Calculate Direct Material Costs
Direct expenses The entrepreneur should calculate the costs of all material
- These are any expenses directly related to the production of the final product e.g. delivery costs That become part of or are directly related to the product or service
which relate only to delivery or raw materials used in production of one product, hiring of a
That are easy to calculate and have a big enough cost to be counted
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, Stage II: Calculate Direct Labour Costs
interest, electricity, and salaries of supervisor, managers, accounts clerks, secretary and other That is work out the costs of wages, salaries and benefits for the employees who work
administration expenses. Indirect costs are also known as overheads or expenses. directly in the production of the product or service
Calculate total cost per item Stage III: Calculate Indirect Costs
- Costing for a manufacturing or service operator. When calculating the cost of producing an These are all other costs that the business incurs per month such as rent, electricity,
item, the entrepreneur should ensure that all costs are included. That is direct and indirect costs. insurance, depreciation, water and so on.
The entrepreneur must therefore, calculate the direct maternal cost, direct labour and direct
expenses of producing the item and then add a proportion of the indirect costs to find the Costing calculations where not more than one product is produced.
TOTAL COST of producing the item.
- Formula: Total Cost = Direct Cost + Indirect Cost Exhibit
- Before we calculate the total cost per item, it is important to have the costing processes: The entrepreneur – carpenter specializes in the manufacture of tables and has the following details
- Costing Process Where More Than One Product Is Produced for costing. Calculate the total cost of one table.
Materials used: Timber 2 000.00
STEP I Nails 1 000.00
Direct Material Direct labour cost: Direct Direct Cost Varnish 500.00
Cost: - Add the - (hrs per item x Expense per Item Glue 500.00
cost of raw + number of workers + =
materials used to x money 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
produce one
Electricity $ 500.00
product item Other wages $10 000.00
Telephone $ 2 000.00
Transport $ 2 000.00
STEP II 100 items are produced each month
Indirect Cost per year
Answer:
Add up all the indirect costs for the year Direct Materials: Timber $2 000.00
Nails $1 000.00
Varnish $ 500.00
Indirect Cost per item:
Glue $ 500.00
Total Indirect costs per year $4 000.00 (Direct Material/Cost)
Total number of items per year
Direct Labour: 1 x 5 hours/item x $1000/hr = $5000.00
Indirect Cost/item: Rent $ 5 000.00
Electricity $ 500.00
Other wages $10 000.00
STEP III Total cost per item: Telephone $ 2 000.00
Transport t $ 2 000.00
Direct cost per item + indirect cost per item $19 500.00
Indirect Cost/item: $19 500.00
NB: In both costing processes, costs per item may be calculated using a month as the time factor 100 items/month
instead of a year that is “Instead of Indirect cost per year divided by Total number of items per year” = $195.00/item
the Entrepreneur may use, “Indirect cost per month divided by number of items per month. Total cost of one item: Direct material cost + Direct Labour Cost + Direct Expenses + Indirect
Cost = $4 000.00 + $195.00
Costing calculations in detail (Manufacturer or service operator) =$4 195.00
NB: There are not direct expenses
Further Questions
i) The entrepreneur uses the following to make a garment:
Materials: Fabric $2 000.00 Two workers are each paid $2 000.00 per hour. Working together, they take 4 hours to produce one
Thread $ 500.00 dress and 6 hours to produce one pair of trousers. Other costs each year:
Elastic $ 500.00 Rent $600 000.00
A tailor takes 4 hours to produce the garment and charges $500.00 per hour. Other costs per year Electricity $240 000.00
are as follows: Transport $240 000.00
Rent $100 000.00
Transport $ 20 000.00 The two workers each work for 40 hours a week and fifty weeks a year. Calculate total cost per each
Electricity $ 30 000.00 item.
Answer:
2000 items are produced each year. Calculate the total cost per item. Direct costs:
ii) The entrepreneur produces desks and uses the following: 1st calculate direct material cost:
Materials: Timber $10 000.00 Materials Dress Trousers
Nails $ 1 000.00
Varnish $ 500.00 Fabric $800.00 $1 000.00
Paint $ 2 000.00 Thread $300.00 $ 400.00
Zip $100.00 $ 100.00
Direct expenses $5 000.00 Buttons $100.00__ $ 100.00_
Workers take 3 hours to make one desk. They are each paid $1 000.00 per hour. Other costs of $1 300.00 $1 600.00 per item
running the business per year are:
Rent $10 000.00 2nd calculate direct labour cost
Electricity $ 5 000.00 Dress: 2 workers x 4hrs x $2 000.00
Water $ 7 000.00 = $16 000.00 per dress
Transport $20 000.00
Other wages $20 000.00 Trousers 2 workers x 4 hours x $2 000.00
= $24 000.00 per pair of trousers
1000 desks are produced each year. Calculate the total cost per item.
3rd Total Direct Cost:
iii) The entrepreneur has the following to make a product item: Dress: Direct material cost + Direct Labour
= $1 300.00 + $16 000.00
Materials $50 000/item = $17 300.00 per dress
Indirect costs $2 000 000/year
40 000 items are produced per year Trousers: $1 600.00 + $24 000
Workers take 2 hours to produce 1 (one) item. Calculate the total cost of product item. = $25 600.00 per pair of trousers
Calculation of total cost of 1 (one) item where several different products are produced 4th calculate indirect costs: Rent $6 000 000.00
Electricity $ 240 000.00
If the entrepreneur produces several different types of products, it is not appropriate to allocate the Transport $ 240 000.00_
same amount of costs as in the case of one product type. This is because more time may be spent in $1 080 000/year
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 5th calculate production hours per year
multiplying by the number of hours to produce one item. This enables the entrepreneur to be able 1 Workers x 40 hrs/week x 50 weeks/year = 4 000hrs/year
to calculate a different cost for each different product which reflects the amount of time taken to
produce that product. 6th indirect cost per hour:
Exhibit: Formula: indirect cost/year
The entrepreneur used the following in making the dress and a trouser: Production hrs/yr
Material Dress Trousers = 1 080 000/yr
4 000 hrs/yr
Fabric $800.00 $1 000.00
Thread $300.00 $ 400.00 = $270/hr
Zip $100.00 $ 100.00
Button $100.00 $ 100.00 7th calculate indirect cost per item:
Dress: 2 workers x 4hrs x $270/hr
Pricing
= $ 1 660.00/dress 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.
Trousers: 2 workers x 6 hrs x $270/hr Calculations of prices of product
= $ 3 240.00/pair 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.
8th Total cost: Dress: $1 300.00 + $16 000.00 + $1 660.00 Mark up is profit expressed as a fraction or percentage of cost
= $18 960.00 It is calculated as: Profit (P) x 100%
Cost ©
Trousers: $1 600.00 + $24 000.00 + $3 240.00
= $28 840.00 Margin is profit expressed as a fraction or percentage of selling price
It is calculated as: Profit (P)______ x 100%
Selling Price (SP
Further Questions
Note that Profit = Selling Price – Cost
The entrepreneur used the following to make a skirt and a Dress:
Materials Skirt Dress Example: If the selling price is $250.00 and the cost is $200, calculate profit, mark up and
margin.
Fabric $2 000.00 $3 000.00
Elastic $ 50.00 - Solution
Zip - $ 80.00 Profit = Selling Price – Cost
Lace $ 90.00 $ 100.00 = $250.00 - $200.00
= $50.00
2 Three)Workers take 4 hours for the skirt and 5 hours for the dress and are each paid $2 000.00
per hour. Mark up = 50 (Profit)
200 (Cost)
= ¼ as a fraction or 25% as percentage
Indirect costs per year:
Margin = 50 (Profit)______
Rent $600 000.00 250 (Selling Price)
Electricity $360 000.00 = 1/5 as a fraction /25% as percent
Transport $240 000.00
Each worker works for 50 hours/week and 50 weeks/year. Calculate the total cost per each item. Further Questions
a) The entrepreneur makes Dresses and skirts and uses the following:
Costing for a retailer or wholesaler Material Dress Skirt
Fabric $2 000.00 $3 000.00
Retailers and wholesalers have the same types of costs and can normally do costing in the same Thread $ 200.00 $ 700.00
manner. Some costs for retailers and wholesalers are different from the costs of manufacturers and Buttons $ 30.00 $ 30.00
service operators.
Two (2) workers take 3 hrs to make a dress and 4 hours to make a skirt and are each paid $1 000.00
To calculate the total cost of an item for the wholesaler or retailer, 3 steps are followed that is: Step 1 per hour. The indirect costs per year are:
Calculate Direct Material Cost
Step 2 Calculate Indirect Costs Rent $600 000.00
Step 3 Add up Total Costs Electricity $240 000.00
Other wages $ 30 000.00
Total cost = Direct Material Cost + Indirect cost
The two workers each work for 40 hours a week and so weeks a year.
NB retailers/wholesalers do not have direct labour as they buy and sell goods made by other i) Calculate the profit and selling price, if the Dress is marked up by 10%.
businesses. Their employees do not make products or manufacture, and as such all wages and ii) If the profit on skirt is $200, what is its selling price, mark up and margin.
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.
• Value pricing is offering the right combination of quantity and good service at a fair price.
b) The entrepreneur produces two products ‘A’ and ‘B’. The following are incurred by the
business: • 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
Materials Products: A B prices that competitors charge for similar products. One form of competition based pricing
Materials $2 000.00 $3 000.00 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
Two (2) workers take 6 hours to produce product ‘A’ and 10 hours to produce product ‘B’. The its major competitors.
workers are each paid $1 000 per hour. The indirect costs are 200 000 per year. Each worker works Another competition based pricing form is sealed-bid pricing where the entrepreneur bases his/her
for 50 hours a week and 50 weeks a year. price on how he/she thinks competitors will price rather than it’s own costs or on the demand.
Find the profit and selling price of each product, if the products are marked up 50%.
• Skimming Pricing comes into being when the entrepreneur sets a high price for a new
Pricing factors product to skim maximum revenues layer by buyer from the segments willing to pay the high
When setting prices the entrepreneur must consider the following variables or factors. 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
a) Customers seasonal discount.
The business is expected to carry out a survey to determine how much customers are prepared to pay
for the product. The selling price should not be higher than what customers are prepared to pay.
b) Competitors
The entrepreneur should carry out competitor’s analysis to determine the prices of competitors. If
the entrepreneur sets higher prices than its competitors, he/she will lose customers to competitors.
Customers are economic beings who always choose the cheapest (or best value for money) products.
As such, the highest selling price should be equal to or less than the price charged by competitors.
c) Cost and Profit
The entrepreneur must consider the costs incurred in producing the product or the costs that the
business is going to incur in producing the product. For the business to make a profit the
entrepreneur must set his/her selling price higher than the costs incurred.
NB: For a successful entrepreneur the lowest price = cost + profit need and the highest price = how
much competitors charge or customers will pay, which ever is lower.
Pricing strategies
A pricing strategy is an approach or means designed to achieve the pricing objectives. The price the
entrepreneur charges will be somewhere between one that is too low to produce a profit and that is
too high to produce any demand. Product costs set a floor to the price; consumer perceptions of the
product’s value set the ceiling. The entrepreneur must consider competitors’ prices and other
external and internal factors to find the best price between these two extremes. 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.
The Ansoff Growth matrix is a tool that helps businesses decides their product and market
CHAPTER 9 growth strategy.
Ansoff’s product/market growth matrix suggests that a business’ attempts to grow depend
BUSINESS GROWTH on whether it markets new or existing products in new or existing markets.
Objectives
By the end of this study unit you must be able to;
• define business growth
The output from the Ansoff product/market matrix is a series of suggested growth strategies
• distinguish internal from external growth that set the direction for the business strategy. These are described below:
• distinguish a merger from an acquisition
• Use various business strategic analysis tools and appreciate their limitations. Market penetration
Introduction Market penetration is the name given to a growth strategy where the business focuses on
Business growth means an increase in size of an organization. Size covers aspects such as selling existing products into existing markets.
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 Market penetration seeks to achieve four main objectives:
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 • Maintain or increase the market share of current products – this can be achieved by a
those of another business. The result will either be a merger or takeover (acquisition). combination of competitive pricing strategies, advertising, sales promotion and perhaps
more resources dedicated to personal selling
Important terms
• Merger-This is when two business organizations combine their shareholding and • Secure dominance of growth markets
fixed assets to become one business entity.
• Acquisition-This is when one business takes over the shareholding and assets of • Restructure a mature market by driving out competitors; this would require a much more
another. aggressive promotional campaign, supported by a pricing strategy designed to make the
market unattractive for competitors
Internal growth
Internal business growth can best be understood by use of the Ansoff Product/market • Increase usage by existing customers – for example by introducing loyalty schemes
matrix. 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
Ansoff Product and Market Matrix 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 • STARS(high growth and high market share)
A business portfolio is a collection of businesses and products that make up a company. High growth rate requires high levels of investments to cope with competitors in the
The best business portfolio is one that fits the company's strengths and helps exploit the markets. This can cause significant cash outflows from the business. High market share
most attractive opportunities. should provide cash for these investments. Cash generated from operations is to be re-
invested into the business.
The company must:
Main challenge for the business is to maintain or even increase its market share to generate
(1) Analyze its current business portfolio and decide which businesses should receive more cash for growing needs of the business.
or less investment, and Eventually, at the maturity of the market star will be turned into cash cow generating cash
that could be invested elsewhere.
(2) Develop growth strategies for adding new products and businesses to the portfolio, Is the future of the organization.
whilst at the same time deciding when products and businesses should no longer be retained. 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.
The best known tool for business analysis is the Boston Consulting Group(BCG) model . Cash generated from cash cows can be utilized on star.
The BCG Model • CASH COW (low growth rate/ high market share)
This is the main cash generating unit for the business.
Using the BCG Box (as illustrated above) a company classifies all its SBU's(Strategic There is very difficult to sustain growth rate because of market is at the maturity stage.
Business Units) according to two dimensions: Business should focus on maintaining its market share.
Growth is only possible through increase market share probably at the expense of others.
On the horizontal axis: relative market share - this serves as a measure of SBU strength Competition is robust at this stage; marketing is primarily activity at this stage.
in the market Innovation would not help at this stage because new development can quickly be copied by
competitors.
On the vertical axis: market growth rate - this provides a measure of market
attractiveness
• QUESTION MARK(high growth rate/low market share)
By dividing the matrix into four areas, four types of SBU can be distinguished:
This is the part of portfolio demanding cash for his growing needs but does not generated
cash because of low market share.
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. CHAPTER 10
• DOG (low growth rate/ low market share)
RISK MANAGEMENT
It does not provide any growth to business either way.
It may still generate some cash for the business so it is wise to retain it in absence of other Objectives
investment proposal, if not, it should be disposed to realize cash. By the end of the topic students should be able to:
Strategies decided to re-position it to cash cow should be carefully considered otherwise it
will waste money which could be used on star. • Define risk
Market share can be obtained by selling standard products at relatively low price as an • Define risk management
incentive to buy the product. Cost-efficiency is key to success. Perhaps by targeting people • Assess risk
of a lower – middle class. • Identify risk
• Outline principles of risk management
Using the BCG Box to determine strategy
Example of risk management: A NASA model showing areas at high risk from impact for
Once a company has classified its SBU's, it must decide what to do with them. In the the International Space Station.
diagram above, the company has one large cash cow (the size of the circle is proportional to
the SBU's sales), a large dog and two, smaller stars and question marks.
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
Conventional strategic thinking suggests there are four possible strategies for each SBU: 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
(1) Build Share: here the company can invest to increase market share (for example turning opportunities.
a "question mark" into a star)
Risks can come from uncertainty in financial markets, project failures, legal liabilities, credit
(2) Hold: here the company invests just enough to keep the SBU in its present position 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
(3) Harvest: here the company reduces the amount of investment in order to maximise the Institute, the National Institute of Science and Technology, actuarial societies, and ISO
short-term cash flows and profits from the SBU. This may have the effect of turning Stars standards.
into Cash Cows.
In ideal risk management, a prioritization process is followed whereby the risks with the
(4) Divest: the company can divest the SBU by phasing it out or selling it - in order to use greatest loss and the greatest probability of occurring are handled first, and risks with lower
the resources elsewhere (e.g. investing in the more promising "question marks"). 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
LIMITATIONS OF THE BCG MATRIX can often be mishandled.
It does not consider profit margin.
It does not take account of any ethical reason for holding an investment e.g. creation of an Intangible risk management identifies a new type of a risk that has a 100% probability of
employment in the region. occurring but is ignored by the organization due to a lack of identification ability. For
It does not identify any criteria for deciding acceptable growth rate and market share. example, when deficient knowledge is applied to a situation, a knowledge risk materializes.
There may be any other strategic reason for holding investment e.g. cross-selling benefits, Relationship risk appears when ineffective collaboration occurs. Process-engagement risk
strengthening up-side or downside supply chain. 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.
6. Mitigation or Solution of risks using available technological, human and
organizational resources.
Method
For the most part, these methods consist of the following elements, performed, more or
less, in the following order. Identification
1. identify, characterize, and assess threats • After establishing the context, the next step in the process of managing risk is to
2. assess the vulnerability of critical assets to specific threats identify potential risks. Risks are about events that, when triggered, cause problems.
3. determine the risk (i.e. the expected consequences of specific types of attacks on Hence, risk identification can start with
specific assets) • Risk sources may be internal or external to the system that is the target of risk
4. identify ways to reduce those risks management.
5. prioritize risk reduction measures based on a strategy
Examples of risk sources are: stakeholders of a project, employees of a company or the
Principles of risk management weather over an airport.
The International Organization for Standardization (ISO) identifies the following principles • Problem analysis- Risks are related to identified threats. For example: the threat of
of risk management 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
Risk management should: shareholders, customers and legislative bodies such as the government.
• create value When either source or problem is known, the events that a source may trigger or the events
• be an integral part of organizational processes that can lead to a problem can be investigated. For example: stakeholders withdrawing
• be part of decision making during a project may endanger funding of the project; privacy information may be stolen by
• explicitly address uncertainty employees even within a closed network; lightning striking an aircraft during takeoff may
• be systematic and structured make all people onboard immediate casualties.
• be based on the best available information
• be tailored The chosen method of identifying risks may depend on culture, industry practice and
• take into account human factors compliance. The identification methods are formed by templates or the development of
• be transparent and inclusive templates for identifying source, problem or event. Common risk identification methods are:
• be dynamic, iterative and responsive to change
• be capable of continual improvement and enhancement • Objectives-based risk identification Organizations and project teams have
objectives. Any event that may endanger achieving an objective partly or completely
Process 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
According to the standard ISO 31000 "Risk management -- Principles and guidelines on
analysis of the interaction of forces in, for example, a market or battle. Any event
implementation," the process of risk management consists of several steps as follows:
that triggers an undesired scenario alternative is identified as risk.
• Taxonomy-based risk identification the taxonomy in taxonomy-based risk
Establishing the context 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
Establishing the context involves: questions reveal risks.
• Common-risk checking in several industries, lists with known risks is available.
1. Identification of risk in a selected domain of interest Each risk in the list can be checked for application to a particular situation.
2. Planning the remainder of the process. • Risk charting This method combines the above approaches by listing resources at
3. Mapping out the following: risk, Threats to those resources Modifying Factors which may increase or decrease
o the social scope of risk management the risk and Consequences it is wished to avoid. Creating a matrix under these
o the identity and objectives of stakeholders headings enables a variety of approaches. One can begin with resources and consider
o The basis upon which risks will be evaluated, constraints. the threats they are exposed to and the consequences of each. Alternatively one can
4. Defining a framework for the activity and an agenda for identification. start with the threats and examine which resources they would affect, or one can
5. Developing an analysis of risks involved in the process.
begin with the consequences and determine which combination of threats and governmental agencies. The formula proposes calculation of ALE (annualized loss
resources would be involved to bring them about. 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
Assessment or more of these four major categories
Once risks have been identified, they must then be assessed as to their potential severity of • Avoidance (eliminate, withdraw from or not become involved)
loss and to the probability of occurrence. These quantities can be either simple to measure, • Reduction (optimize - mitigate)
in the case of the value of a lost building, or impossible to know for sure in the case of the • Sharing (transfer - outsource or insure)
probability of an unlikely event occurring. Therefore, in the assessment process it is critical • Retention (accept and budget)
to make the best educated guesses possible in order to properly prioritize the
implementation of the risk management plan. Risk avoidance
The fundamental difficulty in risk assessment is determining the rate of occurrence since This includes not performing an activity that could carry risk. An example would be not
statistical information is not available on all kinds of past incidents. Furthermore, evaluating buying a property or business in order to not take on the legal liability that comes with it.
the severity of the consequences (impact) is often quite difficult for immaterial assets. Asset Another would be not flying in order not to take the risk that the airplane were to be
valuation is another question that needs to be addressed. Thus, best educated opinions and hijacked. Avoidance may seem the answer to all risks, but avoiding risks also means losing
available statistics are the primary sources of information. Nevertheless, risk assessment out on the potential gain that accepting (retaining) the risk may have allowed. Not entering a
should produce such information for the management of the organization that the primary business to avoid the risk of loss also avoids the possibility of earning profits.
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 Hazard Prevention
risk formulae exist, but perhaps the most widely accepted formula for risk quantification is:
Hazard prevention refers to the prevention of risks in an emergency. The first and most
Rate of occurrence multiplied by the impact of the event equals risk 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 Options
Risk reduction
Risk mitigation measures are usually formulated according to one or more of the following
major risk options, which are: 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
1. Design a new business process with adequate built-in risk control and containment the risk of loss by fire. This method may cause a greater loss by water damage and therefore
measures from the start. may not be suitable. Halon fire suppression systems may mitigate that risk, but the cost may
be prohibitive as a strategy.
2. Periodically re-assess risks that are accepted in ongoing processes as a normal feature of
business operations and modify mitigation measures. 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
3. Transfer risks to an external agency (e.g. an insurance company) 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
4. Avoid risks altogether (e.g. by closing down a particular high-risk business area) tolerable
Modern software development methodologies reduce risk by developing and delivering
software incrementally. Early methodologies suffered from the fact that they only delivered
Later research has shown that the financial benefits of risk management are less dependent software in the final phase of development; any problems encountered in earlier phases
on the formula used but are more dependent on the frequency and how risk assessment is meant costly rework and often jeopardized the whole project. By developing in iterations,
performed. software projects can limit effort wasted to a single iteration.
In business it is imperative to be able to present the findings of risk assessments in financial Outsourcing could be an example of risk reduction if the outsourcer can demonstrate higher
terms. Robert Courtney Jr. (IBM, 1970) proposed a formula for presenting risks in financial capability at managing or reducing risks. For example, a company may outsource only its
terms. The Courtney formula was accepted as the official risk analysis method for the US software development, the manufacturing of hard goods, or customer support needs to
another company, while handling the business management itself. This way, the company Risk retention
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 Involves accepting the loss, or benefit of gain, from a risk when it occurs. True self
call center. 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.
Risk sharing 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
Briefly defined as "sharing with another party the burden of loss or the benefit of gain, from be infeasible. War is an example since most property and risks are not insured against war, so
a risk, and the measures to reduce a risk." 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
The term of 'risk transfer' is often used in place of risk sharing in the mistaken belief that large loss is small or if the cost to insure for greater coverage amounts is so great it would
you can transfer a risk to a third party through insurance or outsourcing. In practice if the hinder the goals of the organization too much.
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, Individual Cover
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 This is usually a response measure undertaken by an individual through such measures as
losses "transferred", meaning that insurance may be described more accurately as a post- taking medical aid scheme, Life assurance, employment cover, e.t.c
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 Group Cover
holder namely the person who has been in the accident. The insurance policy simply
provides that if an accident (the event) occurs involving the policy holder then some This is undertaken mainly when there are several people undertaking business within the
compensation may be payable to the policy holder that is commensurate to the same entity e.g. in a partnership, cooperative e.t.c
suffering/damage.
Create a risk management plan
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 Select appropriate controls or countermeasures to measure each risk. Risk mitigation needs
among individual members of the group. This is different from traditional insurance, in that to be approved by the appropriate level of management. For instance, a risk concerning the
no premium is exchanged between members of the group up front, but instead losses are image of the organization should have top management decision behind it whereas IT
assessed to all members of the group. management would have the authority to decide on computer virus risks.
Methods of transferring 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
Partnership and: Joint venture brings client and contractor together to share the costs and mitigated by acquiring and implementing antivirus software. A good risk management plan
benefits on the project or business. should contain a schedule for control implementation and responsible persons for those
actions.
BOOT CONTRACT ( Build Own Operate and Transfer)
According to ISO/IEC 27001, the stage immediately after completion of the risk assessment
ROT (Refurbish Operate and Transfer) 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
PPP ( Public Private Partnership ) 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
Insurance been selected, and why.
-A 3rd party accepts insurable risk for the payment of a premium. It covers: Direct property Implementation
damage
Implementation follows all of the planned methods for mitigating the effect of the risks.
-Indirect consequential loss 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
Legal liability others, and retain the rest.
Personal liability. Review and evaluation of the plan
Initial risk management plans will never be perfect. Practice, experience, and actual loss • the probable increase in time associated with a risk (schedule variance due to risk, Rs
results will necessitate changes in the plan and contribute information to allow possible where Rs = P * S):
different decisions to be made in dealing with the risks being faced. o 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 analysis results and management plans should be updated periodically. There are two risk is minimized as quickly as possible.
primary reasons for this: o 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
1. to evaluate whether the previously selected security controls are still applicable and passengers' meals being served at slightly the wrong time).
effective, and • the probable increase in cost associated with a risk (cost variance due to risk, Rc where
2. To evaluate the possible risk level changes in the business environment. For Rc = P*C = P*CAR*S = P*S*CAR)
example, information risks are a good example of rapidly changing business o Sorting on this value puts the highest risks to the budget first.
environment. o 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
Limitations Variation and requires appropriate treatment. That is to re-iterate the concern about external
cases not being equivalent in the list immediately above.
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 Risk management activities as applied to project management
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 In project management, risk management includes the following activities:
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 • Planning how risk will be managed in the particular project. Plans should include risk
bureaucratic. management tasks, responsibilities, activities and budget.
• Assigning a risk officer - a team member other than a project manager who is
Prioritizing the risk management processes too highly could keep an organization from ever responsible for foreseeing potential project problems. Typical characteristic of risk
completing a project or even getting started. This is especially true if other work is officer is a healthy skepticism.
suspended until the risk management process is considered complete. • Maintaining live project risk database. Each risk should have the following attributes:
opening date, title, short description, probability and importance. Optionally a risk
It is also important to keep in mind the distinction between risk and uncertainty. Risk can be may have an assigned person responsible for its resolution and a date by which the
measured by impacts x probability. risk must be resolved.
• Creating anonymous risk reporting channel. Each team member should have
Areas of risk management 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,
Enterprise risk management
when, by who and how will it be done to avoid it or minimize consequences if it
becomes a liability.
In enterprise risk management, a risk is defined as a possible event or circumstance that can
• Summarizing planned and faced risks, effectiveness of mitigation activities, and
have negative influences on the enterprise in question. Its impact can be on the very
effort spent for the risk management.
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 Risk management for megaprojects
of credit risk, interest rate risk or asset liability management, market risk, and operational
risk. Megaprojects (sometimes also called "major programs") are extremely large-scale investment
projects, typically costing more than US$1 billion per project. Megaprojects include bridges,
In the more general case, every probable risk can have a pre-formulated plan to deal with its tunnels, highways, railways, airports, seaports, power plants, dams, wastewater projects,
possible consequences (to ensure contingency if the risk becomes a liability). coastal flood protection schemes, oil and natural gas extraction projects, public buildings,
information technology systems, aerospace projects, and defence systems. Megaprojects
From the information above and the average cost per employee over time, or cost accrual have been shown to be particularly risky in terms of finance, safety, and social and
ratio, a project manager can estimate: environmental impacts. Risk management is therefore particularly pertinent for megaprojects
and special methods and special education have been developed for such risk management.
• 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). Risk management of Information Technology
Information technology is increasing pervasive in modern life in every sector. Seven cardinal rules for the practice of risk communication
IT risk is a risk related to information technology. This relatively new term due to an (As first expressed by the U.S. Environmental Protection Agency and several of the field's
increasing awareness that information security is simply one facet of a multitude of risks that founders
are relevant to IT and the real world processes it supports.
• Accept and involve the public/other consumers as legitimate partners.
A number of methodologies have been developed to deal with this kind of risk. • Plan carefully and evaluate your efforts with a focus on your strengths, weaknesses,
opportunities, and threats.
Risk management and business continuity • Listen to the public's specific concerns.
• Be honest, frank, and open.
Risk management is simply a practice of systematically selecting cost effective approaches • Coordinate and collaborate with other credible sources.
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.
• "A picture paints a thousand words."
supplies purchased or they may, as above debit the tax paid in a VAT a/c. the tax is an
expense to be debited in P&L
CHAPTER 11
Corporate Tax
LEGAL REQUIREMENTS 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.
Objectives The corporation tax on current profits will normally be payable until the following year, but
By the end of the unit you should be able to:
full provision should be made for the tax when the profit arises.
Describe the various legal requirements applicable to business in Zimbabwe including;
Due date for corporation tax- apart from the payments in advance, corporate tax becomes
• Labour legislation within nine months of the end of company’s year, or one month after the assessment of the
• Taxation corporation Tax payable is determined.
• Collective bargaining NB- Corporation tax is assessed and charged on the full amount of company’s profits arising
• Contacts in its accounting period. Profits are to be computed by aggregating the company’s income
• Insolvency from all sources, together with its long term capital gains.
PAYE
Taxation This stands for PAY AS YOU EARN. Income tax is deducted from employees under The
PAYE Scheme.
To tax is to impose a financial charge or other levy upon a taxpayer (an individual or legal -The tax due in respect of any pay is deducted from that pay as it is paid. The tax deducted is
entity) by a state or the functional equivalent of a state such that failure to pay is punishable remitted periodically to the Tax collector by the employer.
by law.
NSSA
Taxes may be paid in cash or kind (although payments in kind may not always be allowed or This stands for National Social Security Authority. It is responsible for the Health and safety
classified as taxes in all systems). The means of taxation, and the uses to which the funds of all Zimbabweans. It ensures that productivity,
raised through taxation should be put, are a matter of hot dispute in politics and economics,
so discussions of taxation are frequently tendentious.
Labour Legislation
VAT
VAT stands for Value Added Tax. VAT is like a tax on sales and it is always charged to the The labour legislation is provided for by the labour relations Act, Chapter 28:01. The
ultimate consumer of goods and services. purpose of the Act is to advance social justice and democracy in the work place.
- Unlike sales tax, however, the value added tax is not collected solely at the final point 1. Giving effect to the fundamental rights of employees provided for and part II of the
of sale. Act.
- - VAT is added and collected at each stage of production and distribution when 2. Provide a legal framework within which employees and employers can bargain
goods pass from one firm to another. collectively for the improvement of conditions of employment.
- - At each stage, a trader must charge the tax on his customer at the stipulated rate, 3. the promotion of fair labour standards
but he may deduct from the tax collected any tax which he himself has on goods and 4. The promotion of the participation by employees in decisions affecting their interest
services supplied to him. in the work place.
5. Securing the just, effective and expeditious resolution of disputes and unfair labour
practices
Refund of VAT
If a firm liable to VAT but has paid more than it has collected from its customers, then it Rights of Employees
may be eligible for a refund of VAT. The entries will be
1) Employees are entitled to membership of trade unions and workers
Debit- cash with refund received
committees. Any employee as between himself and his employer has the right to
Credit- VAT A/c with tax refund received
be a member or an officer of a trade union.
This will normally apply to firm which are zero rated for VAT. They apply a zero rate to
2) Prohibition of forced Labour-excludes the
their sales but are eligible for refund on their payment for goods and services.
Any labour required by way of parental discipline
-All exports are zero rated
Any labour required by virtue of an enactment during a period of
public emergency or in the event of any other emergency or
Exemption from VAT disaster that threatens the wellbeing of the community
Some firms are exempted from VAT. This means they do not need to charge VAT to their Any labour
customers but it also means that they cannot claim a refund of the tax they pay on materials
and supplies which they buy. Such firms should include VAT in the cost of materials and
3) Protection against discrimination - The conditions shall be determined by the employer
- No employer shall discriminate any employee on ground o race, tribe play of origin,
political opinion, colours, creed, gender, pregnancy, HIV/AIDS or any disability
4) Right to fair labour Standards
FUNCTIONS OF WORKS COUNCIL
6) Right to democracy in the work place-No person shall hinder, obstruct or prevent any
- To focus the best interest of the establishment and employees on the best possible
employee from forming or conducting any workers committee for the purpose of airing
any grievance, negotiating any mater or advancement or protecting the rights or interest use of it human, capital, equipment and other resources so that maximum
of employees. productivity and optimum employment standards may be maintained.
-No person shall threaten any employee with any reprisal for any lawful action taken by - To foster, encourage and maintain good relations between employer and employees
him in advancing or protecting his rights or interest. at all levels
- To promote the general and common interest including health, safety and welfare of
both establishment and its workers.
SICK LEAVE - To promote and maintain the effective participation of employees in the
Sick leave shall be granted in terms of this section to an employee who in terms of section establishment, and to seek mutual corporation and trust of employees and employer.
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. TRADE UNIONS
These are the conditions -Any group of employees may form a trade union
a) Ninety days sick leave on full pay -Any group of employers may form an employer’s organization
b) Subject to section (3), one hundred and eighty days sick leave on full pay and half - Any trade unions or employers organizations may form a federation.
pay.
CONTRACTS
Maternity Leave Employment contract
Leave shall be granted for 90 days on full pay to a female who saved for at least one year. 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
COLLECTIVE BARGAINING on these two points the contract is not complete
Formation of Workers Committees - By entering into the service of the employer the employee subjects himself to the
Any employees may appoint or elect a workers committee to represent their interest. employer’s control.
- No managerial employee shall be appointed or elected to a workers committee nor
shall a workers committee represent the interest of managerial employees, unless GENERAL CONTRACTS-
such workers committee is poised sorely of managerial employees appointed or - A working definition of a contract is an agreement which is or is intended to be
elected to represent their interest. 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
Functions of Workers Committee minds, a coincidence of the wills, consensus ad idem means the same (R.H. Christie)
1) Represent the employees concerned in any matter affecting their rights and interest -
2) Negotiate with employer concerned a collective bargaining agreement of the SALE CONTRACT
employees concerned A sale in Roman Dutch Law has been defined as “a contract in which one person promises
3) Recommend collective job action to the employees concerned to deliver a thing to another, who on his part promises to pay a certain price”
4) Where a works council is or is to be constituted at any work place, elect some of its - It is the exchange of property for a price or, because the equivalent Latin words are found
members to represent employees on the works council. in Judgments, the exchange of merx for a premium.
The general requirements of the formation of a contract of sale are no different from those
EFFECTS OF COLLECTIVE BARGAINING applicable to any contract but identification as noted be an agreement to exchange property
Every collective bargaining agreement which has been negotiated by a workers committee for a price.
shall be referred by the workers to the employees and the trade union concerned and if -The property must be defined with sufficient and there must be certainty that the parties are
approved by the trade union and more than 50% of the employees, shall become binding on in agreement on what is being bought and sold.
the employer and the employees concerned. PRICE- According to R.H. Christie (1997) the price must be expressed in money. If it is
expressed in property or services the contract will not be a sale, but if it is expressed partly in
WORKS COUNCIL money and partly in goods or services (As with the common trade agreement) the contract
In every establishment in which a workers committee representing employees other than will be a sale only if money is the major consideration.
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.
CHAPTER 12
LEASE CONTRACTS
The nature of a contract of lease is best seen as a temporary sale, the lessor corresponding to BUSINESS ETHICS
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 Objectives
1997).
By the end of the study unit you must be able to;
-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 • define and appreciate the nature of business ethics
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 • relate ethics and social responsibility
appropriate its substance. • identify various business ethical issues
Formalities • describe various forms of social responsibility
- 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. • Outline strategies for dealing with social responsibility issues.
Nature of ethics
INSOLVENCY
Ethics is the study of right and wrong actions and how conduct should be judged as to be
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 Good or bad. Ethics is about how we should live our lives and, in particular, how we should
for sale and distribution among his creditors.
behave towards other people. They are the moral principles which guide thinking, decision
Voluntary Surrender making and action. It is therefore relevant to all forms of human activity. Business ethics is
A debtor may surrender his estate personally or by an agent and an executor, guardian or
not really separate or different from ideas that apply in the general context of human life.
curator of an estate for which he is responsible.
- A partnership estate may be surrendered by all the active partners, together with their own Professionals of all specialisations, entrepreneurs included, should be aware of the general
estates.
principles of ethics and be capable of applying them in their everyday work. It is important,
- The debtor must file a petition with an additional copy of the statement of affairs.
- The petition must satisfy the court on four matters: however, to note that ethics and law are not the same.
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 Ethics and Social responsibility
2. The court must be satisfied that the surrender will be to the benefit of creditors An organisation exercises social responsibility when its acts respect the general public
generally.
3. the court must be satisfied treat the estate is insolvent interest.
4. The debtor must be careful to make a full and honest disclosure of all relevant facts (
Chpt 24:03 and Christie)
Social responsibility requires that organisations do not act in a way which harms the
Compulsory Sequestration general public or is socially irresponsible. Business ethics relate to business morality rather
A Creditor with a liquidated claim of not less than $ 100 or creditors with liquidated claims
totaling less than $200 or the agent of such a creditor may petition the court for the than society's interests. On the other hand, social responsibility relates to society at large.
compulsory sequestration of a debtor. However, because corporate decisions subsume marketing decisions the terms ethics and
- A liquidated claim means one based on an obvious and ascertainable legal ground and
capable of quick ready proof. A creditor whose claim is disputed and could be established by social responsibility are often used interchangeably.
action has no locus standi
- The creditor has to prove to be insolvent and the acts of insolvency which are:
A) Absenting him to evade payment of debts Ethics and the law
B) Failing to satisfy a writ of execution
Ethics deal with personal moral principles and values, but laws are the rules that can actually
C) Disposing of property to the prejudice of creditors
D) Removing his property to meet the prejudice of creditors be enforced in court. Behavior which is not subject to legal penalties may still be unethical.
E) Making offering a non-statutory assignment or arrangement with creditors( Even if made
Different cultures view business practices differently. While the idea of intellectual property
without prejudice)
F) Giving notice of suspension or suspending payment of his debts is widely accepted in Europe and the USA, in other parts of the world ethical standards are
quite different.Unauthorised use of copyrights, trademarks and patents is widespread in (d) Gifts. In some cultures (such as Japan) gifts are regarded as an essential part of
countries such as Taiwan, Mexico and Korea. According to a US trade official, the Korean civilisednegotiation, even in circumstances where to Western eyes they might appear ethically
view is that ' ... the thoughts of one man should benefit all', and this general value means dubious.Managers operating in such a culture may feel at liberty to adopt the local custom.
that, in spite of legal formalities, few infringements of copyright are punished. • Pricing issues
ETHICAL ISSUES IN BUSINESS MARKETING There are several pricing practices that have attracted criticism. Not all can be described as
• M Product issues improper, however.
Ethical issues relating to products usually revolve around safety, quality, and value and (a) Active collusion among suppliers to fix prices is illegal in most countries, but the
frequently arise from failure to provide adequate information to the customer. This may existence of a more or less fixed market price does not necessarily imply that collusion is
range from omission of uncomfortable facts in product literature to deliberate deception. A taking place. A tendency to compete in areas other than price is a natural feature of oligopoly
typical problem arises when a product specification is changed to reduce cost. Clearly, it is markets.
essential to ensure that product function is not compromised in any important way, but a (b) Predatory pricing is an issue when newcomers attempt to break into a market.
decision must be taken as to just what emphasis, if any, it is necessary to place on the Established suppliers utilize their cash reserves and economies of scale to sell at prices the
changes. Another, more serious, problem occurs when product safety is compromised. newcomer cannot match. Withdrawal from the market follows.
Product recall may become necessary. At Work (c) Failure to disclose the full price associated with a purchase has been rightly criticized
• Promotion issues as unethical. However, it must be recognized that there are occasions when it is impossible
Ethical considerations are particularly relevant to promotional practices. Advertising and to compute the eventual full price, as when cost escalation is accepted by both parties to a
personal selling are areas in which the temptation to select, exaggerate, slant, conceal, distort contract. The measure of propriety is whether there is any intention to deceive.
and falsify information is potentially very great. Questionable practices here are likely to • Place issues
create cynicism in the customer and ultimately preclude any trust or respect. Also relevant Where long and complex distribution channels are used there is potential for disputes and
to this area is the problem of corrupt selling practices. It is widely accepted that a small conflicts of interest. Even where relationships of trust have been built up over long periods
gift such as a diary is a useful way of keeping a supplier's name in front of an industrial of time, business pressures can lead to hard decisions and a perception by distributors that
purchaser. Most business people would condemn the payment of substantial bribes to they have been treated unfairly. Here are some examples of conduct by manufacturers that
purchasing officers to induce them to favor a particular supplier. But where does the distributors could reasonably complain of.
dividing line lie between these two extremes? • Requiring high levels of stock holding by intermediaries
• Manipulating discount structures to the detriment of distributors
(a) Extortion. Government officials in some countries have been known to threaten • Ending distribution agreements at short notice
companies with the complete closure of their local operations unless suitable payments are • Dealing direct with end users at Work
made. Ethical codes
(b) Bribery. Payments may be made to obtain services to which a company is not legally It is now common for businesses to specify their ethical standards. Some have even
Entitled. published a formal declaration of their principles and rules of conduct. This would
(c) Grease money. Multinational companies are sometimes unable to obtain services to typically cover payments to government officials or political parties, relations with customers
which they are legally entitled because of deliberate stalling by local officials. Cash payments or suppliers, conflicts of interest, and accuracy of records. Ethical standards may cause
to the right people may then be enough to 'oil the wheels'. individuals to act against the organisation of which they are a part. More often, business
people are likely to adhere to moral principles which are 'utilitarian', weighing the costs and
benefits of the consequences of behavior. When benefits exceed costs, the behavior can be
Page 101 of 131 Page 102 of 131
said to be ethical. This the philosophical position upon which capitalism rests, and is often
cited to justify behavior which appears to have socially unpleasant consequences. For It is understood that the above would include, but is not limited to, the following
example, food production regimes which responsibilities of the marketer; the area of product development and management
Appear inhumane are often justified by the claim that they produce cheaper food for the • Disclosure of all substantial risks associated with product or service usage.
Majority of the population. • Identification of any product component substitution that might materially change the
product or impact on the buyer's purchase decision.
The American Marketing Association has produced a statement of the code of ethics to • Identification of extra-cost added features.
which it expects members to adhere. Members of the American Marketing Association • Avoidance of false and misleading advertising.
(AMA) are committed to ethical professional conduct. They have joined together in • Rejection of high pressure manipulation, or misleading sales tactics.
subscribing to this Code of Ethics embracing the following topics. Marketers must accept • Avoidance of sales promotions that use deception or manipulation.I.n the area attribution
responsibility for the consequence of their activities and make every effort to ensure that • Not manipulating the availability of a product for purpose of exploitation.
their decisions, recommendations, and actions function to identify, serve, and satisfy all • Not using coercion in the marketing channel.
Relevant publics: customers, organisations and society. • Not exerting undue influence over the reseller’s choice to handle the product the area of
• Not engaging in price fixing.
AMA Code of ethics • Not practicing predatory pricing.
Marketers' professional conduct must be guided by; • Disclosing the full price associated with any purchase in the area of marketing research
1 The basic rule of professional ethics: not knowingly to do harm. • Prohibiting selling or fund raising under the guise of conducting research.
2 The adherence to all applicable laws and regulations. • Maintaining research integrity by avoiding misrepresentation and omission of pertinent
3 The accurate representation of their education, training and experience. research data.
4 The active support, practice and promotion of this Code of Ethics. • Treating outside clients and suppliers fairly.
Honesty and Fairness Any AMA members found to be in violation of any provision of this Code of Ethics may
Marketers shall uphold and advance the integrity, honor and dignity of the marketing have his or her Association membership suspended or revoked.
profession (Reprinted by permission of The American Marketing Association)ion Programme 3
1 Being honest in serving consumers, clients, employees, suppliers, distributors and the Social responsibility
public. There is a growing feeling that the concerns of the community ought to be the concerns of
2 Not knowingly participating in conflict of interest without prior notice to all parties business, since businesses exist within society, and depend on it for continued existence.
involved. Business therefore has a moral obligation to assist in the solution of those problems which it
3 Establishing equitable fee schedules, including the payment or receipt of usual, customary causes. Businesses and businessmen are also socially prominent, and must be seen to be
and/or legal compensation or marketing exchanges.ights and Dutiesarketing Exchange taking a lead in addressing the problems of society. Enlightened self-interest is probably
Process beneficial to business. In the long term, concern over the damage which may result from
Participants in the marketing exchange process should be able to expect business activity will safeguard the interests of the business itself. In the short term,
1 Products and services offered are safe and fit for their intended uses. responsibility is a very valuable addition to the public relations activities within a company.
2 Communications about offered products and services are not deceptive. As pressure for legislation grows, self-regulation can take the heat out of potentially
3 All parties intend to discharge their obligations, financial and otherwise, in good faith. disadvantageous campaigns. More and more, it is being realized that it is necessary for
4 Appropriate internal methods exist for equitable adjustment and/or redress of grievances organisations to develop a sense of responsibility for the consequences of their actions
concerning purchases.
Page 103 of 131 Page 104 of 131
within society at large, rather than simply setting out to provide consumer satisfactions. discovers a fault in a product and recalls the product without being forced to, before any
Social responsibility involves accepting that the organisation is part injury or damage is caused, acts in a proactive way.
Of society and, as such, will be accountable to that society for the consequences of the • Reactive strategy
actions which it takes. Three concepts of social responsibility are profit responsibility, A reactive strategy involves allowing a situation to continue unresolved until the public,
stakeholder responsibility and societal responsibilities at Work government or consumer groups find out about it. The company might already know about
• Profit responsibility the problem. When challenged, it will deny responsibility, while at the same time attempting
Profit responsibility argues that companies exist to maximize profits for their proprietors. to resolve the problem. In this way, it seeks to minimise any detrimental impact.
Milton • Defensive strategy
Friedman asserts: A defensive strategy involves minimising or attempting to avoid additional obligations
'There is one and only one social responsibility of business: to use its resources and engage arising from a particular problem. There are several defense tactics.
in • Legal maneuvering
activities designed to increase its profits so long as it stays within the rules of the game – • Obtaining support from trade unions
which is to say, engages in open and free competition without deception or fraud.' • Lobbying government ting at Work
Thus, drug companies which retain sole rights to the manufacture of treatments for During 2001, a group of large pharmaceutical companies initiated proceedings in the South
dangerous diseases are obeying this principle. The argument is that intervention, to provide African courts against the South African government. They wished to prevent the
products at affordable prices, will undermine the motivation of poorer groups to be self- government from importing cheap, private copies of their anti-AIDS drugs. The
sufficient, or to improve their lot. Proponents of this view argue that unless the market is pharmaceutical companies suffered predictable abuse for 'putting profits before people' and
allowed to exercise its disciplines, groups who are artificially cushioned will become victims worldwide negative publicity. The companies were following a defense strategy in that they
of a 'dependency culture', with far worse consequences for society at large. were attempting to prevent the financial damage that would follow the South African
• Stakeholder responsibility government's taking the 'moral high ground'. This is also an excellent example of the tough
Stakeholder responsibility arises from criticisms of profit responsibility, concentrating on the dilemmas that ethical considerations can induce.
obligations of the organisation to those who can affect achievement of its objectives, for • Accommodation strategy
example, customers, employees, suppliers and distributors. An accommodation strategy involves acknowledging responsibility for actions, probably
• Societal responsibility when one of the following circumstances pertains.
Societal responsibility focuses on the responsibilities of the organisation towards the general (a) There is encouragement from special interest groups
public. In particular, this includes a responsible approach to environmental issues and (b) There is a perception that a failure to act will result in government intervention
concerns about employment. A socially responsible posture can be promoted by an The essence of the strategy is action to forestall more harmful pressure.
organisation via cause related marketing, when charitable contributions are tied directly to This approach sits somewhere between a proactive and a reactive strategy.
the sales revenues from one of its products.
Strategies for social responsibility RRRRRRR
An organisation can adopt one of four types of strategy for dealing with social
responsibility issues.
• Proactive strategy
A proactive strategy implies taking action before there is any outside pressure to do so and
without the need for government or other regulatory intervention. A company which
Page 105 of 131 Page 106 of 131
References
REVISION
1. Jerky Hokang and Stevenson Douglass (1998) International labour organisation start Your
ENTREPRENEURSHIP
Business.ILO.Harare
2. McGuckin F (1998) Business for beginners: Step By Step to start your new business East Leigh Entrepreneur- entrepreneurs are innovative and creative outside an existing organisation, but not all
of them are able to come up with innovations, and as such they leave innovations to innovative
Management services .London managers or employees. Intraprenuer- is an employee or manager who is innovative and creative in
an existing organisation. Managers or employees who carry out entrepreneurial roles are aware of
3. Zimmerer T W and Scaborough, N M (2005) Essentials of Entrepreneurship and small business opportunities and they initiate changes to take full advantage of them. Intrapreneurship- The
Management Prentice Hall.NewDelhi fundamental issue about the intraprenuer is that he / she has to have innovative ideas and transforms
them to profitable activities within an existing organisation. In other words, he / she is an initiator
4. Hisrich.R.D and Peters M P (2002) Entrepreneurship Tatq McGraw Hill New Delphi or originator of the commercial undertaking.
5. Holt,D T (1992) Entrepreneurship Prentice Hall London Benefits of entrepreneurship
6. Marcouse, I, Gillspie ,A, Martin , B Malcolm S and Wall N (2003) Business studies 2nd Ed Economic growth- one reason the Government started paying attention to small new firms is that
they seem to provide most of the new jobs in our economy.
Hodder Arnold .London Productivity- is the ability to produce more goods and services with less labour and other inputs.
One reason for the Greater interest in entrepreneurship has been the growing recognition of its role
7. Need Harm D and Dransfield R (2000) Advanced Business and Dexel Oxford
in raising productivity.
8. Moyana H & Sibanda M (2001) African Heritage Revised Edition. Zimbabwe Publishing House New technologies, Products and Services-entrepreneurship can bring in new technologies; new
products and services to the consumers, hence can change the lives of the people.
:Harare
9. Stoner J.A.F; Freeman. R.E. and Gilbert.D.R.JR(1995) Management 6th Edition Prentice Hall
Entrepreneurship
International Englenwood Cliffs. New Jersey.
mkjskslsls Entrepreneurial characteristics Entrepreneurship environment
Microenvironment Macro environment
SWOT PESTL
• Innovative political
• Choosing moderate risk economic
• Optimism social cultural
Responsible technological
• Seizing opportunity legal
• Profit oriented distributors
• Reliable market
• Drive and energy demand
• Goal setting competitors
• Industriousness Suppliers
Innovative
Entrepreneurs must show an innovative turn of mind and convert opportunities they observe into
active programmes for achievement. A high degree of creativity is needed for the entrepreneur to
survive in an environment dominated by large firms who are enjoying economies of scale.
Industriousness
Once entrepreneurs are committed to a course, they become absorbed in, that is, the burden of
failure would bother them too much and too long. Bearing in mind that big achievements do not
come easily or quickly, however, they strive towards the accomplishment of their tasks, that is,
working to bring their plans to actuality.
Choosing moderate risks
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Entrepreneurs who are willing to take up moderate risk seem to earn higher return on assets than They provide the resources needed by the company to produce its goods and services. Managers
entrepreneurs who either takes risks or extravagant risks. must watch supply availability, shortages, delays, labour strikes and other events can costs sales in the
Optimism in novel situations short run and damage satisfaction in the long run.
Entrepreneurs tend to be optimistic in unfamiliar situations. The odds may not be clear, but the Customers and consumers
circumstances may be appealing. In these situations they are no reason why they cannot win out The company needs to study its customer markets closely. Customer markets consist of individual
through their abilities. They go ahead, not put off by lack of guidelines, and frequently make more of and Households that buy goods and services for personal consumption. Customer markets consists
whatever opportunities there are than cautious persons who wait for the odds to become better. of businesses, resellers and Government markets which buy goods and services either for the further
Responsible processing, for use in their production process or for resell at a profit for further processing, for use
Achievement oriented persons willing assume responsibility for the project or tasks they believe can in their production process or for resell at a profit or to produce public services.
manage successfully through their own competencies. They know their own skills. Their attitude is
therefore of aggressive realism. Factors affecting the location or setting up of a business
Seizing opportunities
Entrepreneurial persons are quick to see and seize opportunities. They show an innovative turn of Capital requirement
mind and convert opportunities they observe into active programmes for achievement. In realising The new entrepreneur should raise enough capital for the new business, hence the following sources
an opportunity, they are not overwhelmed by obstacles, but rather are challenged to figure out ways of finance may be considered: Commercial Banks through acquiring loans, personal savings, and
to get around them. They often come up with innovative ways to overcome obstacles. credit finance Houses, etc.
Profit oriented Customers/ market
This is primarily the object towards the attitude of money. Entrepreneurs tend to respect money but Entrepreneurs should consider the market for the product. Therefore, the new entrepreneur should
not that they are greed. When their operations are profitable, they view the profit as an indicator that undertake market research so as to establish the possible customers or market.
they are winning the game. When business is profitable, it tells them that their activities are sound Government Policy/ Political
and should be strengthened or enlarged. This involve the political influence and the power struggle environment consisting of laws,
Honest and integrity Government agencies and pressure groups that influence and limit various organisations and
In all businesses dealing must be the motto of an entrepreneur. individuals in a given society also affects entrepreneurship. The Government often sets up
Reliable parameters/regulations for entrepreneurial development.
The entrepreneur must be the person who can be relied upon Suppliers/ Raw Materials
Drive and energy These are players in the Entrepreneurial Environment, whose main function is to provide the
The entrepreneur must have a drive to get more work done in less time, and if required to do so, resources needed by the company to produce goods and services. The entrepreneur should watch
despite the objections of others. supply availability, shortages and delays, etc.
Goal setting Labour Supply
The entrepreneur has to set specific, measurable, achievable, realistic and timely goals for the The new entrepreneur should be able to provide both the skilled and unskilled workers so as to
enterprise. boost the production of the company depending on area of need.
Communication
Entrepreneurship environment Communication lines are very important in sense that these facilitate the movement of raw materials
Economic from the areas of production to the company and to the markets. The communication lines to be
There must be a sufficient stock of capital to fund new enterprises and institutions (like bank) must considered could include proper roads, railway lines, air transport, sea transport, etc.
be willing to direct capital to new entrepreneurs. Relevant Technology
Social Technology and new markets also influence the Entrepreneurial Environment. Company that does
Other cultures stresses individualism, which encourages the innovations of entrepreneurs, this is the not keep up with the technological changes are often overtaken and find their products outdated and
same in Zimbabwe. Social mobility also affects entrepreneurship. soon become small players in the big game.
Political Distributors And Intermediaries
The political environments consist of the laws; Government agencies and pressure groups that These help the entrepreneurs to promote, sell and distribute the goods to the final buyers. Direct
influence and limit various organisations and individuals in a given society. The Zimbabwean market out reach is often difficult to new entrepreneurs and the business environment has these two
Government set up laws, which encourage entrepreneurship. players as stakeholders in developing small ventures.
Technical Competitors
New technologies create new markets and opportunities. Companies that do not keep with the Greater customer satisfaction is a major aspect in entrepreneurship development. The marketing
technological change will soon find their products outdated and will miss new product and market concept in entrepreneurial development stresses that to be successful, a company should provide
opportunities Greater customer satisfaction and the entrepreneurial environment therefore calls for strategies in
Competitors marketing, strategies to shrug off competition and gain competitive advantage through positioning
The marketing concept states “ to be successful, a company must provide a Greater customer oneself strategically in the minds of the customer the marketing mix often breaks this barrier in the
satisfaction and value than its competitors. Thus, entrepreneurs must do more than simply adapt to entrepreneurship environment.
needs of target customers. They also must gain strategic advantage by positioning their offering
strongly against competitors” offering in the minds of the customers. Small firms should develop
strategies that give them better rates of return than large firms enjoy.
Distributors and intermediaries
They help one company promote, sell, and distribute its goods to the final buyers.
Suppliers
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Limited liability, easy to raise money, business is conducted for the mutual benefit of members.
Surplus belongs to members and is distributed equitably, cooperative enterprises are based on the
Legal Forms Of Business philosophy of equality, and mutual self-help, and cooperative enterprises are free to employ managers
with relevant experience and qualifications
Disadvantages
Difficult in finding members who possesses much needed technical and / skills, lack of commitment
Sole Proprietorship Partnership by some members to the long term success of a cooperative, seeing it as a means for short term gain
Corporation
rather than long run development, sometimes there are breakdowns in communications between
members. Regular meetings are important to freely express their views. Each member has one and
shares responsibility for the cooperatives, the possibility of members disagreeing over the business
goals cannot be ruled out. Members of the cooperative have differing perceptions of the objectives
Public Private and views about how much each member should be paid, about working hours, conditions of
employment.
Sole proprietorship Social responsibility and Ethical issues in Business:
This is one man owned business. However, this must be licensed. Social responsibility:
Advantages Is the obligation that entrepreneurs and the business community have towards the welfare or well
It is easily and inexpensively formed, it is subject to fair Government regulations; the business pays being of a society. It should be responsible for the upholding social and ethical values of the
no corporate income tax. community, contributing towards the well being of the community and responding constructively to
Limitations (Disadvantages) complaints from local residents or politicians.
It is difficult for a proprietorship to obtain large sums of capital, the corporate has unlimited personal Business ethics
liability for business debts, which can result in losses Greater than the money invested in the Ethics are codes of conduct and values that are accepted by society as being right and proper. An
company, The life of the business is limited to the life of the individual who created it. ethic is a moral principle or set of moral values held by an individual or a group. Ethics are the
values and principles, which influence how individuals, groups and society behave. Business ethics
are therefore the values and principles, which operate in the world of business.
Partnership Ethical decisions
Exists whenever two or more persons associate to conduct a non –corporate business. This can • Health of consumers
operate under different degrees of formality ranging from informal, oral understandings which • Environmental health
formal agreement filed with the secretary of the State. • Bribes and corruption unethical
Advantages
• Profiteering
Low cost and ease of formation
Disadvantages • Sexual harassment
Unlimited liability, limited life of the organisation, difficult of transferring ownership and difficult of • Bill of right: freedom of expression, speech and association
raising large amounts of capital. Social responsibility
Corporation Involves giving back to the community, assisting the less fortunate by donating to charity, sponsoring
Is a legal entity created by a State. It is separate and distinct from its owners and managers social institutions e.g. schools, homes for the aged, blind, e.t.c, taking care of harmful waste products
Advantages and dangerous emissions, assisting in creating employment and in reducing the rate of crime,
Unlimited life, that is, a corporation can continue after its original owners and managers have registering the company and conducting business according to the laws of the country.
deceased, easy transferability of ownership, interest and this could be divided into shares of stock in Importance of social responsibility
turn can be transferred far more easily than can proprietorships or partnerships interests. It involves promoting community and social development, promotion of unity and co-operation in
Disadvantages the community, co-operation between the community and business organisation and community
Corporate earnings are subject to double taxation, that is, earnings of the corporation are taxed and support for the business, air business practices, possible increase in sales, market share and profit,
then any earnings paid out as dividends are again taxed as income to the stakeholders, Setting up of a motivated workers, productivity and efficiency and health relationship between the entrepreneur and
corporation and fitting requires State and federal reports which is a more complex and time the community.
consuming, It requires a Charter; which could be done by incorporators or hired lawyers. A Charter Ethical Issues in Business
includes the following: name of the proposed corporation, types of activities it will pursue, amount • These are principles.
of capital stock, number of directors, name and addresses of directors. Finally the Charter is filled • Codes of conduct.
with the secretary of the State in which the firm will be incorporated. • Rules and values that define right and wrong in business.
Importance of Corporations Examples of accepted Business Ethics
Limited liability reduces risks borne by the investors, and other things held contact; the lower the Avoiding bribes and corruption, being courteous, respectful, honest and fair towards customers,
firm’s risk the higher its value, a firm’s value is independent on its growth opportunities, which in maintaining of confidentiality, avoiding sexual harassment of employees, recognising worker’s rights,
turn are dependent on the firm’s ability to attract capital. Since corporations can attract capital easily maintaining efficiency, productivity and profits, avoiding profiteering and exploitation of customers
than proprietorships/ partnerships, they have superior growth opportunities, the value of an asset and not showing favouritism in selection and promotion.
also depend s on its liquidity which means the case of selling the asset and converting it into cash,
corporations are taxed differently than proprietorships/partnerships and under certain conditions the Importance Of Ethical Issues In Business
tax laws favour corporations. Improvement in the company image, enhancing of efficiency and productivity, boosting of sales and
Co-operative profits, sound relations between the entrepreneur and the people, safety in the working environment,
Is a group of persons who voluntarily come together to start and operate a business. motivated workers because of honesty and fairness in dealing with all employees, protection of the
Advantages
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rights of individuals, e.g. the right to privacy, an equitable distribution of benefits and costs leading to transparent, accountable and responsive. The customer is always the King and is right as a way of
motivation and a healthy working relationship. doing business, among others.
The Major Components of a Business Plan Ten tips of customer care
Executive Summary Communicate with customers-keep your customers well informed in language and style they
• Name of business/name of owners of the business / project. understand. It is important to hear and understand what your customers are saying. Communicate
• Business address, location, form and type of business. effectively with your suppliers as well.
• Required loan amount. Reliability- this refers to consistency of performance and dependability. Perform the service right
the first time. Fulfil promises on time. Be impartial and avoid favouritism. Be firm with friends and
• Purpose of loan.
relatives as far as business transactions are concerned.
• Mission, Vision and Objectives of the business. Responsiveness- this refers to the willingness as well as readiness of the entrepreneur of the
Background Of The Project / Business entrepreneur or his employees in providing the services within reasonable time immediately if not
• State if it is a new business, type of business. sooner.
• State location of business and address. Competence- thus refers to the possession of the required skills and knowledge by those who
Socio-Economic Benefits To The Owner deliver the services to the customer. This will create confidence.
Psycho-socio-economic emancipation. Accessibility- this refers to the degree of approachability and ease of conduct of the entrepreneur or
• Socio mobility (movement from lower class to middle class or upper class). his employees. Drop what you are doing to greet and serve a customer.
• Acquisition of material property (e.g. cash, home, automobile etc). Courtesy- this refers to politeness, respect, consideration and friendliness or your organisation’s
• Improvement of standard of living (afford good education, entertainment and health services). contact such as receptionists, secretaries, telephones, etc, they must be polite and courteous at all
To The Economy times- remember a smile goes a long way.
• Creation of employment Credibility- this refers to be trustworthy and faithful, put customers at heart, they should feel that he
or she is given priority and should have the trust that any order will be executed and received when
• Generation of foreign currency
expected.
• Plan supportive role to the giant firms by being subcontracted Security- customers should be protected from danger, risk or doubt within the premises
• Improvement of standard of living Knowledge of the customer- the entrepreneur should know the client specific requirements, be
• Contributing Government revenues through paying corporate tax and income tax able to recognise regular clients, strive to provide individualised attention and understand what it
• Contributing to GNP and GDP makes them buy it at that price
• Reduce rural to urban migration Tangibles- this could include the physical evidence, that is, building, good handling, tools,
• Reduce antisocial Activities equipment, packages, etc. this could also include the appearance of your personnel.
Justification Of The Report: Importance of customer care
• Unexploited Opportunities. If the customers are put first, the entrepreneur will be rewarded with the new business and increased
profit margins and sales. Customer care creates new customers. Constructive consumer dialogue
• Lack of Competitors.
enables the entrepreneur to know and understand what the customers’ needs and wants. It builds
• To meet the gap between Supply and Demand. good relationships and loyalty with customers. Can make passive customers become in. Can create
• To generate income for the owner and enjoy improved standard of living. corporate excellence. Build good reputation and good image, that is, it is a tool for good corporate
• To reduce anti-social Activities in the owner’s community. image building. Business can become a market driven entity as you get information on your what
Organisation And Management your customers need and want
• Organisation chart, number of employees to be engaged. Prerequisite of meeting customer’s expectations
• State how the business will be managed. • Be courteous and tactful
Organisation, Plan And Feasibility Study • Be friendly and helpful
• Target market, demand analysis, suppliers, and competitors’ analysis, product pricing, distribution • Deal promptly and decisively with customers
and promotional strategies. • Rectify faults quickly and keep promises
Production Plan • Listen to customers attentively and respond promptly
• Costing of the main products. • Avoid being sarcastic when dealing with the customers
• Cash flow Forecast. • Present information logically and comprehensively
• Cost and Sales plan. • Stick to your commitments
• Manufacturing, Trading, Profit, Loss Account and Balance Sheet (projected). • Always inform your customers on what happens at your business if times may affect them, that
is, sale, new product/services
CUSTOMER CARE • Be fair and honest when dealing with customers
Customers’ care
This is the attention given to customers, the ways of handling customers in order to continue to • Demonstrate the right skills at the time
attract them and ensure the continued existence of a business. Besides customer care also creates a • Always give customers professional treatment
new environment in an organisation with and increasing focus on improving the delivery of the • Know the customers ’ business and needs
needed services by the customers. This should always be viewed as the clientele having rights and the Employment Creation
expectations that must be fulfilled. As an entrepreneur one needs to appreciate that customers should The process of creating work or some Activity involves people gainfully. Creating is coming up or
be part and parcel of his or her business operations if you intend to achiever success. The customer establishing something that offers employment to people. Employment is a State of being engaged
care vision by an organisation embraces employees that put its customers first and that is open, in some work i.e. being gainfully engaged so one can support himself, his family, dependants and the
country. One can be self-employed by personally stating some income generating project.
Page 113 of 131 Page 114 of 131
Ways of creating employment in Zimbabwe:
• Establishing Agricultural Projects.
• Opening up State Farms in which people can be employed. Sources / Methods Of Financing
• Resettling people, giving them land so that they can be self employed Personal savings-sole traders and partnerships rely on their own resources to finances their
businesses. These sources are usually their personal savings. The savings may be in form of insurance
• Establishing Small and Large Business Projects through indigenisation.
policies, or money kept in a deposit or savings account. Sloe proprietors and partners may borrow
• Encouraging people to become cross-border traders and be self-employed. money from their relatives. All these are limited sources of capital.
• Prospecting and opening up new mines. Hire- purchase-not all business owners go into business when they have enough money. For this
• Legalising and controlling gold mining by individual to encourage self-employment. reason, business use hire purchase to acquire capital assets such as land, furniture, fixtures, fittings
• Forming business and agricultural co-operatives. and motor vehicles. Hire purchase is way by which a hired property becomes the property of the
• Encouraging indigenous people to invest within the country. hirer after a certain number of payments.
• Attracting external investors to have big businesses that offer employment to locals. Leasing-leasing is another way of hiring. In a lease, the hirer uses an asset for certain period of time
Why do SMEs survive? in return for a payment. Unlike hire purchase, the hirer never becomes the owner of the asset. Thus a
• Government subsidies so as to assist SMEs get inputs at lower cost prices. lease to firms. Leasing enables small businesses to acquire the latest equipment without buying it
outright.
• Accessible of low interest Government loans especially through Agric-Bank for farming business.
Building societies-they exist to provide long term loans for the buying of homes on the security of
• Assistance from the Ministry of Small and Medium Enterprise. the Houses and land so bought.
• Most SMEs are close to their customers as compared to giant competitors; hence survive on the Finance Houses-finance Houses are involved in the business of hire purchase, credit sales and
basis of meeting better customer’s needs. leasing. Examples of finance Houses are Standard Chartered Finance House, Scotfin, Fincor and
• Government’s Black empowerment policy. UDC. Finance companies raise their fund by borrowing from commercial banks and merchant
• Government’s indigenous policy. Banks, discounting Bills and by advertising to the Public.
• Entrepreneurship training programmes for SMEs facilitated and encouraged by the Government. Commercial Banks-commercial or joint Stock banks perform a very important role in the banking
• Government and Reserve Bank of Zimbabwe continued, monitoring/checking and control of systems. Commercial banks obtain their funds from their customers who may be private individuals,
levels of inflation. firms’ and Government Institutions.
• Relaxation of import and export regulations and laws by the Government, for example on
scarce items like fuel
• Government supported cross- border trading associations
Similarities and differences between motivating managers and motivating general workers:
Roles played by SMEs in the National Economy Similarities Differences
SMEs provided a means of production of mobilising the resources of a country and strengthen its Providing satisfaction at current levels or lower level is General workers are Greatly motivated by satisfying lower
capacity, strengthened to generate employment and wealth for the general benefit of regional and first achieved. Then at higher levels other forms of levels or existence needs while managers are Greatly motivated
national economies. They promote national and regional economic development. SMEs development needs of satisfaction are needed. by satisfying higher levels and growth needs [Maslow and
Motivational factors become necessary [Maslow Needs Alder Theories]
programme can focus on empowering specific groups of people such women or those on the margin Hierarchy] Non financial rewards have Greater motivation effect for
of society their by alleviating poverty and assisting those who are disadvantaged. SMEs development Both financial and non –financial rewards are used to managers, while general workers are easily motivated through
can promote perform an important role in the overall development of the private sector, including motivate both workers and managers [Maslow], since financial rewards since they get less salaries than managers
the promotion of privatisation. SMEs promote more flexibility innovative and competitive economic in life people need both rewards Intrinsic factors such as recognition and responsibility
structure. SMEs in some sectors have considerable comparative advantages over large enterprises, Intrinsic and extrinsic job factors could be used to motivate more managers than general workers, since these
motivate workers and managers [Hertzberg two factor have satisfied extrinsic needs.
which enable them to respond more quickly and effectively to changing and increasingly global theory]
trends. Being locally based, small businesses are better equipped to respond to the grass roots needs
to the communities and markets they serve. Closer ties can be created with customers, employees and
suppliers. SMEs also create employment.
Why small firms fail
• Lack of market approach to business (marketing and market research)
• Inability to plan strategically
• Poor communication skills
• Inability to cope with stress
• Desire for instant gratification, greediness
• Blaming external causes for failure
• Lack of networking
• Refusing to delegate responsibilities
• Unwillingness to accept constructive criticism
• Lack of balance in one’s life
• Lack of managerial experience
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b. The land is the people
c. The land is the economy, the economy is the land
Maslow’ Hierarchy Of Needs Theory (Motivate of Workers). d. People first
3. The Public Relations Programmes carried out by businesses are meant for:
a. Establishing rapport and mutual understanding
b. Establishing identities
c. Building Corporate Image
d. Sustaining good mutual relationships with the community
4. The most important things to the business are:
a) Profits
b) Competitors
c) Customers
d) Distribution
5. Customer care can be defined as:
a) Motivating workers to handle customers well
b) The manner in which customers are cared for in an enterprise
c) The process of distributing goods and services to the customers
d) Non personal selling of the products
6. Assets are determined as:
Assets = Liabilities + Capital
a) Assets = Balance - Trial Balance
b) Assets = Capital + Liabilities
c) Assets = Capital - Liabilities
Physiological needs (bodily needs)
7. The simplest business organisation form is:
These include food, clothes, water and sex, these are basic needs, and the employer should ensure an
adequate salary to enable workers to access the basic needs for the survival, entrepreneur to provide a) Private Limited Company
b) Partnership
lunches and teas. Company Houses could also be provided.
c) Public Limited Company
Safety Needs
d) Sole proprietorship
It involves involve the need to be protected from danger and other forms of harm, the employer
8. When an Entrepreneur takes risks, decisions are made:
thus should provide a safety working environment, pensions schemes, medical aid schemes, offering
a) With complete certainty
contract to workers, protective clothing such as safety shoes, etc., risk awareness campaigns
b) Under conditions of calculated uncertainty
Social needs
c) With less effort
It involved the need to be loved and to love, a sense of belonging, relationships, socialisation and
d) Unconditionally
interaction with others, the employer / entrepreneur could allow workers to form and get involved in
9. Research proves that owners of small businesses are:
workers committees, football or other sports clubs, provide teas and lunches where the workers
a) Not highly motivated
interact, organise get together parties, also allowing the formation of informal organisations at work.
b) Earn more money
Esteem Needs
c) Work harder and are more creative
The need for recognition and self-respect, the start of higher order needs, the entrepreneur could
d) None of the above
award bonuses based on performance, promote high performs, providing paid for holidays to hard
10. Which of the following is a financial projection?
workers, verbal appraisals, e.g. well done, long service award/ worker of the year awards, giving tittles
a) Profit Forecast
or branded offices, providing personalised company vehicles.
Self-Actualisation needs b) Cash Flow Forecast
c) Projected Balance Sheet
• The highest level
d) All of the above
• The need for an individual to reach full potential
11. Which of the following is an Entrepreneurship quality?
• Allows workers to fully explore their potential a) Moderate risk Taking
• Send workers for further staff development b) Industrious
c) Initiative
REVISION QUESTIONS (ENTREPRENEURSHIP) d) All of the above
The highest level, the need for an individual to reach full potential, allow workers to fully explore 12. When choosing a supplier which factor would you consider?
their potential, send workers for further staff development. a) Quality of Supplies
1. Entrepreneurship reforms in Zimbabwe have been championed through: b) Prices of Materials
a. Capitalism c) Terms of Payment
b. Indigenisation d) All of the above
c. Affirmative Action 13. Which of the following document would you use to ask about prices, range of goods, and
d. Proprietorship specification?
2. The Economic Recovery Programme for the Zimbabwean Government is based on the 10 a) Quotation letter
point Plan of which the main premise is: b) Inquiry letter
a. Land first
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c) Price list d) All of the above
d) Order letter 25. The letters SWOT are used to represent:
14. Which of the following is a source document for credit transactions? a) Stretch, wealth, opportunity and threat
a) Receipt b) Strength, weaknesses, opportunity and treat
b) Debit note c) Streng, weaknesses, opportunity and teat
c) Credit note d) Strength, weakness, opportunity and threat
d) Invoice 26. The portfolio management that is characterised by fast growing operation as represented by
15. The physical counting of items of stock to check that the stock records are accurate is the BCG matrix is:
known: a) Star
a) Stock Control b) Cash cow
b) Stock Level measurement c) Dog
c) Stock Taking d) None of the above
d) Record Keeping 27. Which of the following is one of the intense Growth Strategies?
16. Which document is used to record the day-to-day movements of stock in and out the a) Market penetration
business storeroom? b) Market development
a) Voucher c) Product development
b) Cash Book d) All of the above
c) Invoice 28. The following are types of diversification growth except:
d) Stock card a) Concentric diversification
17. Direct costs are equal to: b) Horizontal diversification
a) Direct material costs + direct Labour costs c) Conglomerate diversification
b) Direct material costs + indirect costs d) Vertical diversification
c) Direct Material Costs + Direct Labour Costs + Direct Expenses 29.The type of diversification that holds that a company can produce totally unrelated products
d) Direct Material costs + Direct Labour Costs + Indirect Costs using different manufacturing method or process are called:
18. Unprincipled customers can be defeated by: a) Horizontal diversification
a) Patience and tolerance b) Conglomerate diversification
b) Avoiding arguing with them c) Concentric diversification
c) Listening to complaints and try to offer solutions d) None of the above
d) All of the above 30.The type of diversification that holds that a company seeks new business that has no relationship
19. The Entrepreneur of a business is one who: to the company’s current technology products is:
a) Bears the losses and re-centres the profit a) Conglomerate diversification
b) Bears the risks of the enterprise b) Horizontal diversification
c) Takes the decisions on the structure of the firm c) Concentric diversification
d) All of the above d) None of the above
20. A Memorandum of Association is a document:
a) Which helps partners register their business? 31. Franchising can be defined as:
b) Contains the objects of the company a) A system of distributing products or services through associated resellers
c) Gives the internal regulation of a company b) A system of manufacturing goods for re-sale
d) States the shares of a shareholder c) A system of distributing goods or services without rights from the franchiser
21. Find the odd one out: d) None of the above
a) Catalogue 32. The following are advantages of franchising to the franchiser except:
b) Order letter a) Increase distribution
c) Price list b) Share operating costs
d) Quotation c) Returns quality control of products
22. Production is the: d) Less risk with market tested products
a) Creation of utility 33. A situation where by two companies decide to get together and form a third company is
b) Transformation of goods known as:
c) Satisfaction of human wants a) Co-operative
d) Manufacturing of goods b) Partnership
23. A newly formed private limited company is issued with: c) Joint-Venture
a) A Memorandum of Association d) None of the above
b) An Article of Association 34. The scheme that is designed to influence and encourage workers to perform outstandingly is
c) A Certificate of Incorporation called:
d) A Certificate of Trade a) Performance Appraisal
24. One of the following is an Entrepreneurial characteristic: b) De-motivation
a) Risk c) Motivation
b) Innovative d) Key Result Areas
c) Creativity 35. Which of the following is part of the importance to motivate employees?
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a) Increased productivity b) New Economic Recovery Priority Programme (NERPP)
b)Increased efficiency and effectiveness c) New Economic Structural Adjustment Programme (NESAP)
c) Good Corporate Image building New Zimbabwe Programme For Economic And Social Transportation (NZIMPREST)
d)All of the above 48. The new economic turn around programme in Zimbabwe is based on:
a) New entrepreneurs
b) Land Reform
36. The rules/ principles that define the right and wrong conduct in business are: c) Affirmative Action
a) Ephics d) Central Bank
b) Ettics
c) Ethics 49. Why do business require the Public relations Department?
d) All of the above a) Building Corporate Image
37. The method or a way of calculating the total costs of making or selling a product or b) Marketing the Businesses
providing a service is known as: c) Establishing of their Identities
a) Manufacturing d) Creating of more Employment
b) Costing 50. The following are advantages of a sole trader except?
c) Expenses a) Lack of Capital
d) None of the above b) High Risk
38. What are direct costs? c) More Independence
a) These relates to all costs that are directly related to the products or services that the business d) Unlimited liability
make.
b) The money that the business spends to make and sell products.
c) The money the business or entrepreneur spends on the parts and materials.
d) All of the above. 1. Explain the factors affecting the choice of a business location?
39. Direct material costs could be defined as: • Proximity to suppliers.
a) All the money that the business or entrepreneur spends on wages, salaries and benefits • Proximity to markets.
b) All the money that the business or entrepreneur spends on parts or materials that become • Accessibility by customers.
part or directly related or linked to the final product or service
• Accessibility by suppliers.
c) All the money that the business spends on wages and salaries
d) Al of the above • Number, size and location of competitors.
40. Direct labour costs could be explained as: • Availability of services e.g. telephone, water, etc.
a) All the money the business spends or entrepreneur to make and sell its products or service • Space – adequacy and suitability.
b) All the money the business /entrepreneur spends on wages, salaries and benefits for the • Type of goods and services to be provided.
people who are directly involved • Value of business.
c) Expenses related to the Production 2. Discuss the Entrepreneurship macro-environment of a Zimbabwean business.
d) None of the above Entrepreneurship macro-environment refers to the external factors that impact on the business e.g.
43. Which of the following is the odd one out? Competition, Cultural Accesses, Suppliers, Capital requirement, etc.
a) Licence • Credit facilities.
b) Certificate of Incorporation • Inflationary trends.
c) Certificate of Trading
• Demand conditions.
d) Certificate of Origin
44. The reward for a successful entrepreneur is: • Input costs.
a) Wages • Labour availability.
b) Profits • Legal requirements.
c) Interests • Political requirements.
d) Rent • Political environment.
45. When choosing a supplier which factor would you consider the most? • Socio –cultural environment.
a) Quality of suppliers 3. Write brief notes on the following entrepreneurial development terms:
b) Price of material • Black Empowerment
c) Terms of Payment
• Self-Sustenance
d) Nearness to customers
46. The owners of a business in a partnership are called…………… • Indigenisation
a) Shareholders • Entrepreneurial Culture
b) Sole traders Black Empowerment
c) Partners • Involves, enables or permits the black people the opportunity to own the means of production
d) Promoters or productive forces e.g. the current land redistribution exercise in Zimbabwe, (Agrarian
47. The economic recovery programme launched by the Zimbabwean government in early 2006 is Reform) is a good example of black empowerment.
called? • The government in an effort to implement this philosophy of black empowerment has relaxed
a) New Economic Partnership For Africa’s Development (NEPAD) some business regulations e.g. banking and farming.
Page 121 of 131 Page 122 of 131
• The government has also made it possible for individual blacks to own shares in economic • Improvement of standard of living
enterprises by privatising its Parastatals, e.g. Dairy board, CSC, e.t.c. • Contributing government revenues through paying corporate tax and income tax
NB. The concept of privatisation also facilitated indigenisation. • Contributing to GNP and GDP
Self-Sustenance • Reduce rural to urban migration
• Involves promoting the idea of self-supporting in terms of the means to survive or means of • Reduce antisocial Activities
living. Justification Of The Report
• This involves supplying or to satisfy one’s needs without external assistance. • Unexploited Opportunities.
• Skills training programmes launched at various training centres like Kaguvi Training Centre, • Lack of Competitors.
Mupfure Self –Help College in order to promote the concept of self-sustenance.
• To meet the gap between Supply and Demand.
• Being self-reliant and independent, the idea being to eradicate dependency syndrome within the
• To generate income for the owner and enjoy improved standard of living.
people.
• To reduce anti-social Activities in the owner’s community.
• Deliberate attempt by the government to promote self –sustenance through relevant ministries
Organisation And Management
e.g. Ministry of Small and Medium Enterprises.
INDIGENISATION • Organisation chart, number of employees to be engaged.
• Involves enabling the natives / local people or indigenous to own and control the means of • State how the business will be managed.
production and enterprises. Organisation, Plan And Feasibility Study
• In pursuit of this philosophy, the government enabled the establishment of (Indigenous Business • Target market, demand analysis, suppliers, and competitors’ analysis, product pricing, distribution
Development Co-operation), AAG, Zimbabwe Tuck-Shop Association, and Zimbabwe Cross and promotional strategies.
Boarders Association. Production Plan
• Colonial legislative restrictions were removed to facilitate indigenous people to play a role in the • Costing of the main products.
economic enterprising and development of the nation. • Cash flow Forecast.
• A process meant to emancipate indigenous people psychologically, economically and socially by • Cost and Sales plan.
decentralising the economy which is largely in the hands of foreigners • Manufacturing, Trading, Profit, Loss Account and Balance Sheet (projected).
Entrepreneurial Culture 5. Identify and explain ten tips of customer care
• Is the spirit of focusing on the emergence of new opportunities, the means of capitalising on Customers’ care
them and the creation of the structure appropriate of pursuing them. This is the attention given to customers, the ways of handling customers in order to continue to
• Entrepreneurial culture also involves a way of identifying opportunities in terms of needs and attract them and ensure the continued existence of a business.
wants of people and resources to implementing innovative for new thoughtfully planned Ten tips of customer care:
ventures. • Communicate with customers.
• Involves initiating projects to satisfy the needs and wants of the people profitably with the • Answer customer questions clearly.
turbulent and dynamic environment (technological, social, economic, natural and political • Be honest with customers.
environment) • Show customers a variety of articles.
• Entrepreneurial culture also relates to what the entrepreneur values and believes and uses for the • Offer customers a wide choice.
success of the enterprise, e.g. some entrepreneurs value customers or believe that the customer is • Analyse customer needs in the area you are operating.
the King as a way of doing business e.g. avoiding profiteering or degrading other entrepreneurs • Attend or try to meet the needs of the customers.
when promoting products. • Provide Greater customer satisfaction.
4. Outline The Major Components Of A Business Plan
• Arrange goods neatly and ostentatiously.
Executive Summary
• Be kind and friendly to customers.
• Name of business/name of owners of the business / project.
• Provide a constant supply of goods.
• Business address, location, form and type of business.
• Come up with unique and relevant services and goods.
• Required loan amount.
• Be flexible in dealing with customers.
• Purpose of loan.
• Always apply business ethics and principles.
• Mission, Vision and Objectives of the business.
Background Of The Project / Business • Be helpful to customers, delight customers.
• State if it is a new business, type of business. • Meet and even exceed customer expectations.
6. Define the term employment creation and suggest and explain five ways of creating
• State location of business and address.
employment in Zimbabwe
Socio-Economic Benefits To The Owner.
Employment Creation
Psycho-socio-economic emancipation.
The process of creating work or some Activity involves people gainfully. Creating is coming up or
• Socio mobility (movement from lower class to middle class or upper class). establishing something that offers employment to people. Employment is a State of being engaged
• Acquisition of material property (e.g. cash, home, automobile etc). in some work i.e. being gainfully engaged so one can support himself, his family, dependants and the
• Improvement of standard of living (afford good education, entertainment and health services). country. One can be self-employed by personally stating some income generating project.
To The Economy Ways of creating employment in Zimbabwe
• Creation of employment • Establishing Agricultural Projects.
• Generation of foreign currency • Opening up State Farms in which people can be employed.
• Plan supportive role to the giant firms by being subcontracted • Resettling people, giving them land so that they can be self employed
Page 123 of 131 Page 124 of 131
• Establishing Small and Large Business Projects through indigenisation. • Accessible of low interest Government loans especially through Agri-Bank for farming business.
• Encouraging people to become cross-border traders and be self-employed. • Assistance from the Ministry of Small and Medium Enterprise.
• Prospecting and opening up new mines. • Most SMEs are close to their customers as compared to giant competitors, hence survive on the
• Legalising and controlling gold mining by individual to encourage self-employment. basis of meeting better customer’s needs.
• Forming business and agricultural co-operatives. • Government’s Black empowerment policy.
• Encouraging indigenous people to invest within the country. • Government’s indigenous policy.
• Attracting external investors to have big businesses that offer employment to locals. • Entrepreneurship training programmes for SMEs facilitated and encouraged by the government.
7. Discuss the Importance of Social responsibility and Ethical issues in Business • Government and Reserve Bank of Zimbabwe continued, monitoring/checking and control of
Definition levels of inflation.
Is the obligation that entrepreneurs and the business community have towards the welfare or well • Relaxation of import and export regulations and laws by the Government, for example on
being of a society. scarce items like fuel
Social responsibility • Government supported cross- border trading associations
• Giving back to the community.
• Assisting the less fortunate by donating to charity.
• Sponsoring social institutions e.g. schools, homes for the aged, blind, e.t.c.
• Taking care of harmful waste products and dangerous emissions.
• Assisting in creating employment and in reducing the rate of crime.
• Registering the company and conducting business according to the laws of the country.
Importance of social responsibility
• Promoting community and social development. 10. With reference to appropriate content motivation theories and techniques explain the
• Promotion of unity and co-operation in the community. similarities and differences between motivating managers and motivating general
• Co-operation between the Community and Business Organisation and Community Support for workers
the Business.
• Fair Business practices. Similarities Differences
• Possible increase in sales, market share and profit. Providing satisfaction at current levels or lower level General workers are Greatly motivated by
• Motivated workers, productivity and efficiency is first achieved. Then at higher levels other forms of satisfying lower levels or existence needs
• Health relationship between the entrepreneur and the community. needs of satisfaction are needed. while managers are Greatly motivated by
Ethical Issues in Business Motivational factors become necessary [Maslow satisfying higher levels and growth needs
Needs Hierarchy] [Maslow and Alder Theories]
• These are principles.
Both financial and non –financial rewards are used to Non financial rewards have Greater
• Codes of conduct. motivate both workers and managers [Maslow], motivation effect for managers, while general
• Rules and values that define right and wrong in business. since in life people need both rewards workers are easily motivated through financial
Examples of accepted Business Ethics Intrinsic and extrinsic job factors could be used to rewards since they get less salaries than
• Avoiding bribes and corruption. motivate workers and managers [Hertz berg two managers
• Being courteous, respectful, honest and fair towards customers. factor theory] Intrinsic factors such as recognition and
• Maintaining of confidentiality. responsibility motivate more managers than
• Avoiding sexual harassment of employees. general workers, since these have satisfied
• Recognising worker’s rights. extrinsic needs.
• Maintaining efficiency, productivity and profits.
• Avoiding profiteering and exploitation of customers.
• Not showing favouritism in selection and promotion.
Importance Of Ethical Issues In Business
• Improvement in the company image.
• Enhancing of efficiency and productivity.
• Boosting of sales and profits.
• Sound relations between the entrepreneur and the people.
• Safety in the working environment.
• Motivated workers because of honesty and fairness in dealing with all employees.
• Protection of the rights of individuals, e.g. the right to privacy.
• An equitable distribution of benefits and costs leading to motivation and a healthy working
relationship.
8. Giving practical examples explain why S.M.E’s continue to survive despite the threat of
the harsh Zimbabwe Business Environment
• Government subsidies so as to assist SMEs get inputs at lower cost prices.
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Thread 20 000 70 000
Buttons 3 000 3 000 $223 000
11. In a rented building, the entrepreneur makes dresses and skirts and uses the following $373 000
per product: Direct Labour Costs = No. of workers x No. of Hrs worked x cost of labour per hour
Material Dress Skirt Labour cost per dress = 2 workers x 3 hrs. x $200 000
Fabric $200 000 $300 000 =$1 200 000
Thread $20 000 $70 000 Labour costs per skirt = 2 workers 4 hrs x $200 000
Buttons $3 000 $3 000 =$1 600 000
Two workers take three hours to make a dress and four hours to make a skirt and are paid each Total Direct costs = Direct material Costs + Direct Labour Costs
$200 000 per hour. For dress, Direct Cost = $223 000 + $1 200 000
The indirect costs per year are = $1 423 000
Rent $6 000 000 For, Direct Costs = $373 000 + $1 600 000
Electricity $4 000 000 = $1 973 000
Other wages $3 000 000 Indirect costs per different item
The two workers each work for 40 hours a week and 50 weeks in a year. General indirect (overheads) costs per year
Question Rent $6 000 000
If the dress is marked up by 10%, calculate the: Electricity $4 000 000
a). Profit of the dress? Other Wages $3 000 000
Total cost per dress = [$1 442 500] $13 000 000
Profit = 10% * $1 442 500
= $144 250
b) Selling price of the dress? Indirect cost per hour = Indirect costs per year
Selling price per dress = [$1 456 920] Product hrs per year
Total cost per skirt = [$1 999 000]
Where production cost per year= No. of workers x No. of workers x No. of workers per
If the desired profit on skirt is $800 000, calculate the skirt’s year.
a) Selling price? = 2 workers x 40 hrs x 50 weeks per year
Selling Price = [$2 799 000] = 4 000Hrs/Yr
b).Mark up? Hence:
Mark up = $800 000 Indirect costs per different item produced = No. of workers x hrs x indirect costs per hr
$1 999 000 Indirect costs per dress = 2 workers x 3hrs x $3 250
= 0.4 or 40% = $19 500
c) Margin? Indirect costs per skirt = 2 workers x 4hrs x $3 250
Margin (%) = Profit = $26 000
Selling Price Total cost per different item produced
Total cost per item = Direct costs + Indirect Costs
= $800 000 Total cost per dress = $1 423 000 = $19 500
= $1 442 500
= 28.5% Total cost per skirt = $1 973 00 + $26 000
Basic steps and formulae = $1 999 0000
Step 1: Calculating Pricing Related values per item
Calculate total cost per item Total cost per dress is = $1 442 500
1.1 Direct cost per item = Direct materials + Direct Labour cost Given mark-up = 10%
1.2 Indirect Cost = Indirect cost per hour + Indirect cost per item Therefore profit after mark-up = Profit $
1.3. Total cost per item = Direct Costs X Costs $
+ Indirect Costs X Profit $ = Mark up x Cost
XX = 10% x $1 442 500
Step 2 = $144 250
Calculating pricing related values Selling price per dress =?
2.0 State necessary value: Total cost per item But profit = Selling price – Cost
2.1 Profit [$] = Selling Price [$] – Cost Selling price = Cost + Profit
2.2 Mar-up [Fraction or %] = Profit [$] = $1442 500 + $14 420
Cost [$] = $1 456 920
2.3 Margin [fraction or %] = Profit [$]
Selling [$]
Calculate total cost per different item Skirt
Direct Material costs: Material Dress [$] Skirt [$] Total cost per skirt = $1 999 000
Fabric 200 000 300 000 Given profit on skirt = $800 000
Page 127 of 131 Page 128 of 131
Selling Price =?
But Profit= selling price – Cost
Hence Selling price = Cost + profit
= $ 1999 000 + $800 000
= $2 799 000
b) Mark-up (%) =?
Mark-up (%) = Profit ($)
Cost $
= $800 000
$1 999 000
= 0, 4 =40 %
c) Margin (%) =?
Margin (%) = Profit $
Selling Price
= $800 000
$2 799 000
= 0, 2858 = 28, 58%
Physiological needs (bodily needs
These include food, clothes, water and sex
11. As An Entrepreneur, Discuss How You Would Use Maslow’ Hierarchy Of Needs
These are basic needs
Theory To Motivate Your Workers.
The employer should ensure an adequate salary to enable workers to access the basic needs for
Diagram
the survival
Entrepreneur to provide lunches and teas. Company Houses could also be provided.
Safety Needs
Involve the need to be protected from danger and other forms of harm
The employer thus should provide a safety working environment, pensions schemes, medical aid
schemes, offering contract to workers, protective clothing such as safety shoes, etc.
Risk awareness campaigns
Social needs
It involved the need to be loved and to love, a sense of belonging, relationships, socialisation and
interaction with others
The employer / Entrepreneur could allow workers to form and get involved in workers
committees, football or other sports clubs, provide teas and lunches where the workers interact,
organise get together parties, also allowing the formation of informal organisations at work.
Esteem Needs
The need for recognition and self-respect
The start of higher order needs
The entrepreneur could award bonuses based on performance, promote high performs,
providing paid for holidays to hard workers, verbal appraisals, e.g. well done, long service award/
worker of the year awards, giving tittles or branded offices, providing personalised Company
vehicles.
Self-Actualisation needs
The highest level
The need for an individual to reach full potential
Allow workers to fully explore their potential
Page 129 of 131 Page 130 of 131
Send workers for further staff development
12. What factors would emerging entrepreneurs consider when setting up a business?
Capital requirement
The new entrepreneur should raise enough capital for the new business, hence the following
source of finance may be considered: Commercial Banks through acquiring loans, personal
savings, and credit finance Houses, etc.
Customers/ market
Entrepreneurs should consider the market for the product. Therefore, the new entrepreneur
should undertake market research so as to establish the possible customers or market.
Government Policy/ Political
This involve the political influence and the power struggle environment consisting of laws,
government agencies and pressure groups that influence and limit various organisations and
individuals in a given society also affects entrepreneurship. The government often sets up
parameters/regulations for entrepreneurial development.
Suppliers/ Raw Materials
These are players in the Entrepreneurial Environment, whose main function is to provide the
resources needed by the company to produce goods and services. The entrepreneur should watch
supply availability, shortages and delays, etc.
Labour Supply
The new entrepreneur should be able to provide both the skilled and unskilled workers so as to
boost the production of the company depending on area of need.
Communication
Communication lines are very important in sense that these facilitate the movement of raw
materials from the areas of production to the company and to the markets. The communication
lines to be considered could include proper roads, railway lines, air transport, sea transport etc.
Relevant Technology
Technology and new markets also influence the Entrepreneurial Environment. Company that
does not keep up with the technological changes are often overtaken and find their products
outdated and soon become small players in the big game.
Distributors And Intermediaries
These help the entrepreneurs to promote, sell and distribute the goods to the final buyers. Direct
market out reach s often difficult to new entrepreneurs and the business environment has these
two players as stakeholders in developing small ventures.
Competitors
Greater customer satisfaction is a major aspect in entrepreneurship development. The marketing
concept in entrepreneurial development stresses that to be successful, a company should provide
Greater customer satisfaction ant the entrepreneurial environment there calls for strategies in
marketing, strategies to shrug off competition and gain competitive advantage through
positioning oneself strategically in the minds of the customer the marketing mix often breaks this
barrier in the entrepreneurship environment.
Page 131 of 131
ruet@cooltoad.com & babanoku@live.com

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CHAPTER I

ENTREPRENEURSHIP SKILLS DEVELOPMENT

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