DFMT, DIAA & DBBMM

COURSE NAME: BUSINESS MANAGEMENT AND ENTERPRENEURSHIP

COURSE CODE: DFC 2101

COURSE LEVEL: YEAR II, SEMESTER I

CREDIT UNIT: 3

Entrepreneurship

Introduction

This chapter introduces the entrepreneur and entrepreneurship. It explores in great detail the
concept of entrepreneurship and the entrepreneurship ecosystem necessary for entrepreneurial
success. It also explains what entrepreneurs are, what they do and their contribution to society
and the economy.

Caution!

Before we proceed, it is worth saying that the road to becoming a successful entrepreneur is a
long, arduous and full of ups and downs. To succeed you need to:

 Keep the spirit of innovation

 Always explore uncharted waters.
 Hang on to your dreams and leave room for improvement along the way
 Learn from every failure or setback
 About all, put in a great amount of hard work and commitment.

THE ENTREPRENEUR

Meaning of entrepreneur

The entrepreneur is a person who takes the initiatives and risk to start and run a business in the
hope of making profit.

An entrepreneur is therefore someone who:

 Spots a gap in the market

 Takes the decision to go into business
 Is prepared to sacrifice their own time, effort and money to set up and run a business
 Use their entrepreneurial skills to organize and manage factors of production to create a
product or service to fill the gap in the market
 Is creative enough to come up with new ideas, develop a better way to operate a business,
find new market for a product or discover new sources of inputs.

The role of an entrepreneur in an enterprise

As the creator, and manager of a business, an entrepreneur is critical to the success or failure
of a given enterprise. The entrepreneur plays a key role in the formation and development of
the businesses. He or she acts a catalyst for the creation and growth of new business
enterprises.

Specifically speaking, the entrepreneur:

 Comes up with a business idea- a concept that has potential to be developed into a
business that can create value for customers.
 Evaluates the idea to determine its feasibility. He or she carries out market research to
see if there are enough customers for the idea. If it turns out the ideas has potentials
for success, then he or she takes a decision to pursue it. The idea then become
business opportunity and he or she goes ahead to exploit it.
 Takes the decision to go into business
 Prepares the business plan- which clearly sets out how the business will run. A
business plan is a blueprint which outlines the goals of a business and strategies for
achieving them.
 Acquire the necessary inputs- including money, equipment, labor, land and raw
materials
 Organizes all these resources, inputs or factors of production to start an enterprise. He
or she decides on how the inputs will be combined in way that minimizes the risks.
 Formulates an ideas or spots an opportunity for a business venture and then evaluates
the ideas to determine if it has the potential to develop in to a successful business.
 Decides what and how much goods and services to produces: the entrepreneur has to
ensure that the right amounts of inputs are acquired and combined in the right
proportions to meet production targets, so marketing needs can be successfully met.
  Resolves problems in creative and innovative ways
 Undertakes the risk of the business enterprises. He or she takes calculated risks to
implement the idea- create a business, produce a good or provide a services in order
to meet customer needs and in the process gain possible future returns. He or she
measures the risk by assessing what they would gain if things went well and what
they would lose if things went wrong. If the business is successful, the entrepreneur
reaps the benefits and enjoys the profits. However, if the business fails, he/she will
have to bear the losses. The desire to avoid losses motivates the entrepreneur to strive
for success.
 Uses entrepreneurial skills to set up their own enterprises- creating wealth and jobs in
the process.
 Uses personal initiatives and applies innovative new ideas that solve problems, meet
challenges, or satisfy the needs for the market.
 Implements the business operations: The entrepreneur has to out measure in place to
achieve the goals and objectives of the business plan. The success of the business
will, to a large extent, depend on the entrepreneur accessing sufficient resources using
cost effective strategies.
 Monitors business operations: Monitors business progress to ensure quality and
achievement of goals. This is important for the entrepreneur to be able assess progress
in meeting goals. The entrepreneur must be able to identify potential problems and
take proactive measures to prevent them. If problems are identified, the entrepreneur
has to adopt strategies to correct them. This minimizes delays and cost overruns, and
will increase efficiency of business operation.

How an entrepreneur contributes to business success

 Possesses required characteristics: an entrepreneur who possesses the desirable

characteristics you learnt about in the previous section will be the main contributor to the
successes of a business.
 Effectively implements the business plan. The entrepreneur who prepares a
comprehensive business plan and ensure that it is effectively implemented puts a business
on the path for success
  Fosters positive relationships: The entrepreneur who fosters and maintains good links
with all stakeholders and keeps his employees motivated will contribute to the success of
a business.
 Attempts innovation: The entrepreneur who shows initiative, pursues new innovative
ideas, attempts diversification, and is willing to develop the old by undertaking a greater
degree of risk is the one most likely to achieve higher positive growth and success for a
business.
 Organizing resources. One of the responsibilities of an entrepreneur is organizing the
resources required to set up and run their new business. A key resource for new business
is finance
 Making business decisions. When an entrepreneur set up a business and commits to
working for themselves, they become responsible for making all their own business
decisions. This is a huge responsibility, especially if the business employs people who
depend on its success for wages.
 Taking risks. As you have seen in the ‘risk and reward’ section of this topic, there are
many risks associated with becoming an entrepreneur and setting up a new business.
These risks cannot be avoided, so an entrepreneur has to be capable of taking risks.

Characteristics of successful entrepreneurs

1). Here are the 10 Best Characteristics of an Entrepreneur that one must nurture:

Creativity:

Creativity gives birth to something new. For without creativity, there is no innovation possible.
Entrepreneurs usually have the knack to pin down a lot of ideas and act on them. Not necessarily
every idea might be a hit. But the experience obtained is gold.
Creativity helps in coming up with new solutions for the problems at hand and allows one to
think of solutions that are out of the box. It also gives an entrepreneur the ability to devise new
products for similar markets to the ones he’s currently playing in.

2) Professionalism:

Professionalism is a quality which all good entrepreneurs must possess. An entrepreneur’s

mannerisms and behavior with their employees and clientele goes a long way in developing the
culture of the organization.
Along with professionalism comes reliability and discipline. Self-discipline enables an
entrepreneur to achieve their targets, be organized and set an example for everyone.
Reliability results in trust and for most ventures, trust in the entrepreneur is what keeps the
people in the organization motivated and willing to put in their best. Professionalism is one of
the most important characteristics of an entrepreneur.
3) Risk-taking:

Risk-taking ability is essential for an entrepreneur. Without the will to explore the unknown, one
cannot discover something unique. And this uniqueness might make all the difference. Risk-
taking involves a lot of things. Using unorthodox methods is also a risk. Investing in ideas,
nobody else believes in but you is a risk too.
Entrepreneurs have a differentiated approach towards risks. Good entrepreneurs are always ready
to invest their time and money. But, they always have a backup for every risk they take.
4) Passion:

Your work should be your passion. So when you work, you enjoy what you’re doing and stay
highly motivated. Passion acts as a driving force, with which, you are motivated to strive for
better.
It also allows you the ability to put in those extra hours in the office which can or may make a
difference. At the beginning of every entrepreneurial venture or any venture, there are hurdles
but your passion ensures that you are able to overcome these roadblocks and forge ahead towards
your goal.
5) Planning:

Perhaps, this is the most important of all steps required to run a show. Without planning,
everything would be a loose string as they say, “If you fail to plan, you plan to fail.”
Planning is strategizing the whole game ahead of time. It basically sums up all the resources at
hand and enables you to come up with a structure and a thought process for how to reach your
goal.
The next step involves how to make optimum use of these resources, to weave the cloth of
success. Facing a situation or a crisis with a plan is always better. It provides guidelines with
 minimum to no damage incurred to a business. Planning is one of the most
important characteristics of an entrepreneur.
6) Knowledge:

Knowledge is the key to success. An entrepreneur should possess complete knowledge of his
niche or industry. For only with knowledge can a difficulty be solved or a crisis is tackled.
It enables him to keep track of the developments and the constantly changing requirements of the
market that he is in. May it is a new trend in the market or advancement in technology or even a
new advertiser’s entry, an entrepreneur should keep himself abreast of it. Knowledge is the
guiding force when it comes leaving the competition behind. New bits and pieces of information
may just prove as useful as a newly devised strategy.
He should know what his strengths & weaknesses are so that they can be worked on and can
result in a healthier organization.
A good entrepreneur will always try to increase his knowledge, which is why he is always a
learner. The better an entrepreneur knows his playground, the easier he can play in it.
7) Social Skills:

A skillset is an arsenal with which an entrepreneur makes his business work. Social Skills are
also needed to be a good entrepreneur. Overall, these make up the qualities required for an
entrepreneur to function.
Social Skills involve the following:

 Relationship Building
 Hiring and Talent Sourcing
 Team Strategy Formulation

8) Open-mindedness towards learning, people, and even failure:

An entrepreneur must be accepting. The true realization of which scenario or event can be a
useful opportunity is necessary. To recognize such openings, an open-minded attitude is
required.
An entrepreneur should be determined. He should face his losses with a positive attitude and his
wins, humbly. Any good businessman will know not to frown on a defeat. Try till you succeed is
the right mentality. Failure is a step or a way which didn’t work according to the plan. A good
entrepreneur takes the experience of this setback and works even hard with the next goal in line.
This experience is inculcated through the process of accepted learning. Good entrepreneurs know
they can learn from every situation and person around them. Information obtained can be used
for the process of planning.
Learning with an open mind lets you look at your faults humbly. New information always makes
an entrepreneur question his current resolve. It also provides a new perspective towards a
particular aspect. Open-mindedness also enables you to know and learn from your competition.
9) Empathy:

Perhaps the least discussed value in the world today is empathy or having high emotional
intelligence. Empathy is the understanding of what goes on in someone’s mind. This a skill that
is worth a mention. A good entrepreneur should know the strengths and weaknesses of every
employee who works under him. You must understand that it is the people who make the
business tick! You’ve got to deploy empathy towards your people.
Unhappy employees are not determined and as an entrepreneur, it is up to you to create a
working environment where people are happy to come. To look after their well-being, an
entrepreneur should try to understand the situation of employees. What can be a motivational
factor? How can I make my employees want to give their best? All this is understood through
empathy.
Keeping a workplace light and happy is essential. For without empathy, an entrepreneur cannot
reach the hearts of employees nor the success he desires. Empathy is one of the most
important characteristics of an entrepreneur.
10) And lastly, the customer is everything:

A good entrepreneur will always know this; a business is all about the customer. How you grab a
customer’s attention is the first step. This can be done through various mediums such as
marketing and advertising.

It is also important that you know the needs of your customers. The product or service which is
being created by your organization needs to cater to the needs of your consumers. Personalizing
a business for consumers will also boost the sales.
The ability to sell yourself in front of a potential investment when it comes in the form of a
customer is also required. Being ready with the knowledge to please a customer, is a way to have
a successful business.
Entrepreneurial motivation

Motivation is what sustains kind of energy, creativity, drive, tenacity and commitment that fuels
entrepreneurial success. Every entrepreneur is different and so are the entrepreneurial motivation
factors that motivate and inspire them.

Factors that motivate a person to become an entrepreneur

There are many reasons why people start their own businesses. Some of these are given below:

1. Financial rewards

The most compelling motivation is the desire to create and accumulate wealth, or just improve
personal income. The main motivation for a person to become an entrepreneur is ensuring
enough money to satisfy his/her basic needs. This means making enough profits.
Entrepreneurship offers a greater possibility of achieving significant financial rewards than
working for someone else.

2. Being your own boss (to seek more independence)

Some people are actually repulsed by the idea of working for someone else. They object to a
system where reward is often based on seniority rather than accomplishment, or where they have
to conform to corporate culture. You give orders and decide what should be done, how it should
be done and when. This sounds very exciting, don’t you think? But, as we have said earlier in
this unit, everything is not always so rosy. In gaining these benefits, the entrepreneur also has to
face a lot of challenges along the way.

3. Work related

Dissatisfaction with wage employment: This may be as a result of: Poor prospects of career
advancement, following a family tradition, delayed promotions or perhaps a person already has
been passed over for promotion, lack of recognition or appreciation of special accomplishments,
poor term of service, unsatisfactory working conditions, etc.

4. Make a difference in society

The desire to do something that has a positive and long lasting impact on society. Making a
difference as an entrepreneur can be very rewarding. However, making a difference is perhaps
the hardest thing to do and most challenging. It requires a different kind of mind-set. It is not just
about making money or becoming famous or inventing new things. It may include: The desire to
reduce poverty. This is usually the motivation for social entrepreneur, it offers you the chance to
make a difference in society. You are able to pursue what is dear to your heart and impact the
lives of others people.

5. Self-satisfaction

The need for achievement or self-satisfaction: Want the feeling of satisfaction from building a
business. The sense of accomplishment that you have made it: Satisfaction –you are most likely
going to setup doing the kind of work you enjoy doing. This will give you job satisfaction and
some level of comfort at your work.

6. Pursue your interest

A desire to pursue an interest or hobby that can be turned into a viable business: Offers the
opportunity to pursue your interest-as you set up a business to do what you enjoy doing.

7. Dream to make it big

You may also go into business because somebody you know very well got into business and
become rich in a short time. Some people set up businesses after listening to stories of success by
people who had nothing but today are millionaires.

8. To build and leave a legacy

The desire to become famous and leave a lasting legacy is what drives some people into
business. They want to create a personal brand –something meaning that will outlast them.

9. Solving a problem

The thrill of solving a problem that has burdened people in your community is a good motive to
start a business. It can be very fulfilling to be the one to come up with a solution to a notorious
problem in society.

10. To fulfill a personal lifelong ambition

To fulfill their personal dreams, they have something to prove to the world and to themselves.
They have the mental and intellectual capacity, the drive and the resourcefulness to invent and to
create a unique venture. There are those people in the society whose ultimate goal is to go into
business at some defined point in their life no matter how attractive wage employment might
seem. These people are usually highly motivated internally and do not need extrinsic motivators
to go into business.

11. The desire for status, power, reputation and recognition.

This provides the ability to be involved in the total operation of the business, from sales to
operations and customer care. It offers the prestige of being the person in charge

12. Social responsibility

It creates an opportunity for a person to make a contribution or impact on society. To be able to

improve the lives of your people, newest entrepreneurs help the local economy. Some through
their innovation, make and impact on society as a whole.

13. For survival i.e. earn living

Some people go into business because they have no job prospects or little means to earn living.
So because they would have no other options they end up choosing self-employment.

14. Creativity

Running one’s own business is all about being more creative and having the independence to
make new discoveries. You can be creative and decide how activities should be done.

15. Love for adventure

Innovative people thrive on exploring new ideas and opportunities even if the outcome might be
uncertain and risky. They derive satisfaction from the thrills that arise from mixture of success
and uncertainty.

16. Influence of others

Although many aspiring entrepreneurs make a personal decision to go into business there are
also strong indications that just as many if not more get courage to take the plunge as a result of
influence or inspiration gained from close associate such as friends or relatives already in
business.

17. Rise up to the challenge

Some people love challenges and they opt for staring a new business as it is very challenging to
handle big problems. They find working for someone else boring and not challenging enough
and does not give them the opportunity to contribute their own ideas.

Benefits of becoming an entrepreneur

The primary benefits entrepreneurs enjoy when the business does well can be life changing. The
benefits of running a successful business are many and include:

 Control. You choose the work you like to do and that makes the most of your strengths
and skills. The results can be more job satisfaction.
 Excitement. Entrepreneurship can be exciting and many entrepreneurs consider their
work highly enjoyable. Each day is filled with new opportunities to challenge your
abilities, skills, and determination.
 Flexibility. Entrepreneurs can schedule their work hours around other commitments,
including spending quality time with their families.
 Rational salary. As an entrepreneur, your income is directly related to your efforts and
the success of your business.
 Freedom. Freedom to work whenever they want, wherever they want, and however they
want draws many to entrepreneurship. Most entrepreneurs don’t consider their work
actual work because they are doing something they love.
 It allows you to set your own earning. Of course, you will be the one setting you own
wage and making investments when you own the business. The work that you do would
be for something you own, which can be a huge advantage compared to when you are
working as an employee for a certain company.
 Independence. And opportunity to control their own business. The entrepreneur gets the
chance to take decisions according to his/her own wish.
 It offers the chance to make a difference in society. The entrepreneur is able to pursue
what is desire to their hearts and impact the lives of other people.
 Opportunity to make money- high profits and wealth.
 It helps the entrepreneur to work to his/her full potential.
 It offers the opportunity to their interests.
 Improved standards of living. Entrepreneurship is important as it has the ability to
improve standards of living and create wealth, not only for the entrepreneurs, but also for
related businesses.
 Agents of change. Entrepreneurs also help drive change with innovation, where new and
improved products enable new markets to be developed.
 Boost to national income. Economy wise, higher, earnings thanks to entrepreneurship
can help boost national income and tax revenue.
 Local impact. Entrepreneurs contribute in other ways as well, such as investing in
community projects and supporting local charities.

Importance of entrepreneurs to society

 Entrepreneurs create jobs: without entrepreneurs, jobs wouldn’t exist.

Entrepreneurs take on the risk to employ themselves. Their ambition to continue their
business’ growth eventually leads to the creation of new jobs. As their business
continues to grow, even more jobs are created. Thus, lowering unemployment rates
while helping people feed their families.
 Entrepreneurs create change: entrepreneur’s dreams big so naturally some of their
ideas will make worldwide change. They might create a new product that solves a
burning problem or take on the challenge to explore something never explored before.
Many believe in improving the world with their products, ideas or businesses.
 Entrepreneurs give back to society. While some have this notion of the rich being
evil and greedy, they often do more for the greater good than the average person.
They make more money and thus pay more taxes which helps fund social services.
Entrepreneurs are some of the biggest donors to charities for various causes. Some
seek to invest their money in creating solutions to help poorer communities have
access to things we take for granted like clean drinking water and good health care.
 Increase in government revenues. Through payment of value added taxes, company
income taxes and income taxes of the employees of these small businesses. This
enables government to provide public services to society.
 Utilization of local resources. They source their raw material locally and rely more
on the employment of domestic experts. This benefits local businesses and
households.
  Development of domestic/indigenous technology. The entrepreneurs are innovative,
they develop indigenous industrial machinery and equipment, evolve a management
approach in consonance with the indigenous culture. Most technologically advanced
countries also started from somewhere.
 Supplier of raw materials for larger industries. The entrepreneur also provides the
larger industries with raw materials for the expanded output. This will reduce the cost
of production, reduce the prices level and increase the level of economic welfare.
 Capital formation. People employed in entrepreneurial firms save part of their profit
leading to capital formation.
 Promotion of entrepreneurial culture. Successful entrepreneurs act as role models
and entice people to become entrepreneurs.
 Export promotion. Goods and services produced locally by entrepreneurs are
exported to earn foreign exchange for the country to import what is not produced
locally. This also improves balance of payment for the country.
 Contribution to national GDP. Entrepreneurs add value to the economy by
producing goods and services and this contributes to the country’s gross domestic
product.
 Self-reliance. Starting own businesses promotes self-reliance and lifts many people
out of poverty.
 Promotion of local talents. Staring businesses provides an avenue for people with
entrepreneurial traits to exploits their talents make a living out of it.
 Improved infrastructure. In order to stimulate entrepreneurship many countries
build roads, railway, ports, telecommunication, electricity and water to service
business. This improves the ecosystem for entrepreneurs and has a multiplier effects.

The challenges entrepreneurs face

Setting up and running a business not for everyone and it is not as easy as a walk in the park. The
process involves different decisions to be made and a lot of research, planning and
implementation to be carried out. You have to put in a lot of hard work, make dear sacrifices and
spend lots of money before you can see any benefits from it. In fact, there are usually more
challenges than aspiring entrepreneurs can imagine.
Some of the key challenges of entrepreneur-ship include:

 Risk of losing your entire investment: Small businesses have high failure rate. You face
financial difficulty at the beginning stages. You live with constant risk of failure can
bring about tremendous personal failure and in turn creates intense levels of anxiety and
stress. In addition, the financial burdens may increase and you may face difficulty
sustaining the business and be forced to close down completely with nothing to fall back
on. This can be personally devastating.
 Severe competition, against mature organization that already have well known goods or
services in the marketplace and that enjoy established customer relationships. Staying
competitive often with very limited resources is critical as a small businesses from
competitors’ in order to build a solid customer base and be profitable.
 Loneliness. It can be lonely and scary to be completely responsible for the success or
failure of your business. Most times you find yourself facing all these challenges alone
and reach the verge of quitting.
 Long hours and hard work. You are forced to become workaholic-working long hours
and under tremendous pressure to produce results. You rarely take leaves and this can
drain all your efforts and resources. You have to make big personal sacrifices and it
deprives yourself of personal, family and social life. From time to time, you have to work
long, irregular hours to be successful, especially in the beginning.
 Uncertainty of income. Starting and running a business provides no guarantee that you
will earn enough money to survive. In many cases, income is not stable or regular, and
this can cause stress and hamper your productivity and creativity. If business slow down,
your personal income can be at risk. You have an uncertain and affect your business
negatively and even drag you down with it.
 Personal sacrifices. You have no time to do personal work, because at the beginning you
have to work long hours to ensure success. You live lower quality of life until the
business picks and becomes established. It is demanding to produce results and so
entrepreneurs over exert themselves.
 Administrative difficulty. While making all the decision can be a benefit, it can also be
a burden. Being an entrepreneur comes with a lot of paperwork and compliance issues.
 You will have to dedicate a substantial amount of time to growing the business. That can
drain up your energy.
 Finding right idea and opportunity to break into the market. This can mean countless
times of trial and error.
 Difficulties acquiring the resources (including land or raw materials, financial
resources, labour and entrepreneurial ability) necessary for production and distribution of
goods and services. Most lenders are sceptical of lending to start-up entrepreneurs
because they have no track record and lack security.
 The high costs of investment, creating internal roles, building relation-ships and
operating routines in a new enterprise.
 Do all kinds of work: you are always involved in business finance. Especially when it
comes to big spending, you have to take authorization or guidance. In addition you have
to take care of management, purchasing, marketing, public relations, etc.
 Learning never ends, because technology and consumer demands are changing almost
daily. In spite of the lack of time you still have to somehow keep on learning to acquire
new skills to keep your business competitive.
 Inexperience in management. It takes great effort and proper and efficient management
at the beginning and this is often lacking in many new entrepreneurs. Lack of sharing of
knowledge, experience and the networking skills with the next generation entrepreneurs
is also a problem. This often depends on experience, reputation, and trust. Worse still,
lack of professional management approach can lead to loss of vital business
opportunities.
 Lack of financial security. Some entrepreneurs make much less money than if they were
working for someone else. There are no fringe benefits as is the case with a paid job. You
don’t get things like car allowance, pension fund, or medical aid scheme. You have to
pay for these yourself.
 Discouragement. You have to undertake business with a lot of discipline, dedication and
tenacity even in the face of many discouragements. This requires a lot of guts. On a daily
basis, you have to face many difficulties and obstacles which can be very discouraging
and sometimes you find yourself struggling to overcome or cope. You go through
emotional discomfort due to this constant pressure to succeed. The benefits often come
long after you have endured a lot of suffering of suffering and have made many personal
 sacrifices. Lack of entrepreneurial skills and a negative public attitude towards
entrepreneurial activity within some societies can affect the creation and success of
innovative new ventures.

ENTREPRENEURSHIP

Meaning of entrepreneurship

The term entrepreneurship has a wide range of meanings:

 Entrepreneurship is a business mind-set or way of thinking related to applying

enterprise skills to create value (goods and services) and sell it for profit.
 Entrepreneurship is the act of setting out on your own and starting a business instead
of working for someone else in his/her business.
 It refers to all the processes and activities involved in establishing, nurturing,
sustaining and growing a business enterprise.
 Entrepreneurship is about the desire to start anew business, produce a product or
provide a service and sell it for profit.
 Entrepreneurship is the application of enterprise skills specifically to creating and
growing organizations in order to build on identified opportunities.
 Entrepreneurship is about creativity. Entrepreneurs use innovation and hard work to
overcome obstacles to their success.
 Entrepreneurship is about fun. Nothing feels better than focused effort and
accomplishment of things that you like.
 Entrepreneurship is the skill and drive to shoulder the risk associated with setting up
and running a business.
 Entrepreneurship is about being true to your visions and your passions. As
entrepreneurs we design the business we love and work hard to provide our
customers, employees and community with the best we have to offer.

Factors that promote entrepreneurship

 Creativity. Creativity will help you identify and come up with fresh idea of
something new and unique which solves real problems or meets consumer needs,
 improve on an existing product to make it better, cheaper or more convenient, find
new use or market for an existing product.
 Accumulation of ideas. New ideas can come to you when least expect it- when you
are in a shower, falling asleep or while travelling. Write them down do not let them
get away from you. Not every idea has to be a home run. By accumulating your ideas,
you will be able to distil the great ones from the rest and be ready to run with the best.
 Leadership. Leadership is essential to entrepreneurship. You need good leadership
skills to Marshall resources –i.e. inspire, persuade and convince other people to lend
you money or invest in your idea, be flexible and adaptable, sell your idea later your
products.
 Intellectual property rights. Protecting your ideas will give you; exclusive business
rights to your idea, competitive advantage in pursuing it to market, limited monopoly
that allows you to capitalize on the idea for a period of time so that you can recover
the costs you have incurred I research and development.
 Responsiveness to opportunities. Opportunities can come and go quickly, especially
in the era of the internet where information spreads fast. Your ability to respond to the
market and new business opportunities can be the difference between success and
failure in business.
 Ability to learn from your mistakes. And those of others to implement change can
propel your businesses to success. On the other hand, rigidity can turn a start-up into
dust.
 State of the economy. A booming economy affects entrepreneurship positively
 Presence of entrepreneurial drive, attitude and mind-set
 Availability of collateral to help you access funding
 Well-developed financial market
 Favorable (business friendly) legal and regulatory conditions
 Easy access to markets-both local and global
 Easy access to debt financing
 Presence of business and managerial skills
 Strong government enforcement of contracts and property rights
 Presence of knowledge/skills
  Availability and low cost labor
 Favorable environmental conditions
 Presence of well-developed infrastructure, transports, water, power,
telecommunications
 Presence of supportive services
 Presence of incentives for entrepreneurial activities
 Lowering the cost of doing business
 Little or no competition
 Presence of supply
 Presence or availability of raw materials
 Presences of motivation
 Absence of bureaucracy
 Absence of corruption
 Short and less costly procedures to export or import goods.

Factors that tend to hinder entrepreneurship/ factor affecting entrepreneurship

 Absence of entrepreneurial drive, attitude and mind-set

 Lack of collateral to secure sufficient funding
 Poor financial markets with inadequate financial opportunities
 Unfavorable legal and regulatory conditions
 Lack of access to markets both local and global/foreign
 Lack of access to debt financing
 Lack of knowledge/skills to run a business
 Lack of technical and managerial skills
 Weak government enforcement of contracts and property rights
 Lack of and high cost of skilled labor
 Unfavorable environmental conditions
 Lack of infrastructure-transport, water, power, telecommunications
 Lack of supportive services such banking, IT, and business services
 Lack of incentives for entrepreneurial activities
 High cost of doing business
 High or severe competition from established foreign firms
 Increase in supply and availability of better substitute
 Absence or shortage of raw materials
 Lack or absence of motivation among entrepreneurs
 Presence of too much bureaucracy
 Long and costly procedures to export and imports goods
 Presence of widespread official corruption
 Recession and economic downturn

Contribution of Entrepreneurship to Economic Development

Entrepreneurship has an important role to play in the society and economy of a country.

 Utilization of local resources. Local resources, some of which would be

otherwise declared useless, are put to more gainful use. The value of the resources
are substantially improved.
 Promotion of technology. Entrepreneurs are very creative hence they contribute
to the utilization and development of technology
 Capital formation. Entrepreneurs help in the creation of wealth for the country
through job creation (as employees save their salaries and wages through the
banking system and others systems, they contribute to capital formation). As the
entrepreneurs pay tax and save their earnings they too directly contribute to
capital formation.
 Creation of employment opportunities. Entrepreneurs help in solving the
unemployment problem. Majority of indigenous Kenyan entrepreneurs are small
scale sector (SMMEs) which is a major employer in many developing countries.
 Promotion of an entrepreneurial culture. By portraying successful images,
entrepreneurs become role models to the upcoming Kenyan generation. A country
which embraces entrepreneurial culture is bound to be economically stable.
 Exports promotion. Many products manufactured by the small and micro
enterprise sector find their way to foreign markets and in return local
 entrepreneurs identify foreign markets. Through these activities, entrepreneurs are
able to earn the country foreign exchange.
 Favorable balance of payment. The improvement of the SMME sector has seen
a reduction in the rate of loss through import only. There is now a balance
between the import and export business. The rate of improvement of industries in
Kenya has gone up as a results of an improvement in the SMME sector.
 Improved marketing of locally produced products. The improvement in the
SMME sector has resulted in an improvement in the internal and external
markets. With the current competition, every business is compelled to produce
high quality products/services and aggressively market the same.
 Improved infrastructure. Creation of businesses leads to improved cities and
towns which in turn result in the improvement of roads, banking services,
telecommunication network, electricity etc.
 Promotion of home grown talent and hobbies. The SMME sectors encourages
young people to exploit their talents
 Improved growth in gross domestic product. There is now favorable trade
internally and this has seen an increase in economic growth.
 Self-reliance. Entrepreneurs enable citizens to survive comfortably without too
much borrowing.

Global Trends of Entrepreneurship

The rapid advancement of technology and communication methods, entrepreneurship has

become a popular means for survival during the past decade or so. This rapid increase in
entrepreneurship has been a result of:

 Rising entrepreneurial spirits

 Considering entrepreneurs as heroes
 Increase in entrepreneurial education-partly urged by political leaders
 Demographic and economic factors
 Gradual shift to a service economy
 Technological advancements and modern business machinery
 Independent lifestyles
  Commerce and the internet
 Additional international opportunities
 Development of e-commerce.

Revision question

1. What is mean by the term enterprising

2. What are different ways a person can be enterprising
3. How a students can be enterprising at school
4. How a person can be enterprising in the community
5. What is mean by the following term
I. Entrepreneurial
II. Entrepreneurial activities
III. Entrepreneurial mind-set or spirit
IV. Mind-set
V. Entrepreneurial culture
VI. Entrepreneurial skills
VII. Entrepreneurial competencies
VIII. Entrepreneurial ecosystem
IX. Entrepreneur
X. Classic entrepreneurs
XI. Multipreneur
1) explain cultural factors may influence entrepreneurship
2) explain how to develop an entrepreneurial culture
3) Explain the element of entrepreneurial culture
4) Explain how do you strengthen your entrepreneurial skills
5) Explain different types of entrepreneurial competencies
6) What are the pillars of the entrepreneurial ecosystem
7) Explain ways of improving the entrepreneurial ecosystem for entrepreneurial success
8) What are the importance of entrepreneurial mind-set
9) how do we nurture the entrepreneurial mind-set within the family
10) what are the characteristic of people with the entrepreneurial mind-set?

ENTREPRENEURIAL PROCESSES
In this chapter you are going to learn the vital steps involved in setting up a business. You will
get to understand and appreciate the amount of work that is involved. You will also realize that it
requires a lot of skills, careful planning, risk taking, discipline, hard work and much more to set
up a business.

Meaning of the entrepreneurial process

The entrepreneurial process refers to those series of action which a person wishing to start a
business undertake leading to the creation of an enterprise. Most of these things are done behind
the scene and the entrepreneurs have to go through all of them in order to turn his/her ideas into
commercial reality. These activities are inconsequential and often overlap. But generally they
can be grouped into five stages-namely discovery, concept development, resourcing,
actualization and harvesting.

BUSINESS ORGANIZATIONS

SOLE TRADER

A sole proprietorship, also known as a sole trader ship, individual entrepreneurship or

proprietorship is a type of enterprise owned and run by one person and in which there is no legal
distinction between the owner and the business entity. A sole trader does not necessarily work
alone and may employ other people.

Sole proprietorship – advantages and disadvantages

Consider operating as a sole trader if your business is small and capital investment is minimal.

Advantages of sole trading include that:

 you’re the boss

 you keep all the profits
 start-up costs are low
 you have maximum privacy
 establishing and operating your business is simple
 it’s easy to change your legal structure later if circumstances change you can easily wind
up your business.
Disadvantages of sole trading include that:

 you have unlimited liability for debts as there’s no legal distinction between private and
business assets
 your capacity to raise capital is limited
 all the responsibility for making day-to-day business decisions is yours
 retaining high-calibre employees can be difficult
 it can be hard to take holidays
 you’re taxed as a single person the life of the business is limited.

PARTNERSHIP

A partnership is a form of business where two or more people share ownership, as well as the
responsibility for managing the company and the income or losses the business generates.

Consider a partnership if the number of people involved is small (up to about 20) and limited
liability is not necessary.

Partnership – advantages and disadvantages

Advantages of a partnership include that:

 two heads (or more) are better than one

 your business is easy to establish and start-up costs are low
 more capital is available for the business
 you’ll have greater borrowing capacity
 high-calibre employees can be made partners
 there is opportunity for income splitting, an advantage of particular importance due to
resultant tax savings
 partners’ business affairs are private
 there is limited external regulation
 It’s easy to change your legal structure later if circumstances change.

Disadvantages of a partnership include that:

  the liability of the partners for the debts of the business is unlimited
 each partner is ‘jointly and severally’ liable for the partnership’s debts; that is, each
partner is liable for their share of the partnership debts as well as being liable for all the
debts
 there is a risk of disagreements and friction among partners and management
 each partner is an agent of the partnership and is liable for actions by other partners
 If partners join or leave, you will probably have to value all the partnership assets and
this can be costly.

To end or dissolve a partnership in Tasmania we recommend seeking legal advice regarding

what is required.

PRIVATE AND PUBLIC COMPANY

In most cases, a private company is owned by the company's founders, management, or a group
of private investors. A public company is a company that has sold all or a portion of itself to the
public via an initial public offering.

What Is a Private Company?

A private company is one that is owned by one or more individuals with a set number of
shareholders. Shares in the company are typically in private hands and are not available through
a brokerage for investors to purchase. Investing in a private company is accomplished by
reaching out to the founders or owners directly. These companies are either self-funded by the
founders, friends, family members or venture capital firms.

Sometimes, ownership in private companies can change hands many times, and, depending on
their size and market share, are often the target of private equity firms that want to fold them in
as part of their portfolio of private companies.

Private vs. Public Companies—Key Differences

The key differences between a private and public company include access to capital, availability
to investors, audited financials, valuations and risks.
Access to Capital

Public companies tend to have greater access to raising capital to expand their business, buy
additional companies or grow their business through a new venture. Companies that are public,
like Tesla, can raise money by issuing additional shares of their equity. They can also choose to
raise capital by issuing corporate bonds, and these are classified as either investment grade or
speculative grade (high yield, or junk).
Private companies have fewer options to increase their capital. If they are a relatively young
company, they can conduct a round of funding, known as Series A or Series B financing, where
venture capitalists provide capital in exchange for equity in the company. Giving away too much
equity can be problematic and dilute the percentage of control that the founders, owners, or
management have of the company.

Ease of Investing
Investors often prefer to invest in public companies because their shares are readily available for
purchase through brokerages or retirement investment plans. Selling shares of a company is also
not an issue because share sales can be done the same day a decision is made. Investors can also
trade in derivatives of the shares of companies such as options or futures contracts.
Selling shares in a private company can be trickier because there needs to be a buyer. Unlike
public companies where buyers and sellers are readily available to purchase and sell shares of a
company, in a private company, it can be more complicated. Negotiating the price of the shares
of the company can be lengthy if the two parties cannot agree on the value immediately.
Financials

Examining the financials of a company is key for both public and private companies. Although
public companies must provide audited financial statements on a regular basis, investors should
always be aware that auditors do not always find fraud. An example was in 2001, when the
accounting fraud of energy company Enron came to light, and the public accounting firm tasked
with auditing its financial statements, Arthur Andersen, was eventually dissolved.
While public companies are also scrutinized by Wall Street analysts, their analysis can also be
biased to persuade individuals to buy shares in companies.
"Many Wall Street analysts have conflicts of interest, and as an investor, you need to be aware of
them," said Alex Chalekian, CEO of Lake Avenue Financial, a financial services firm in
Pasadena, Calif. "The analysts might be valuing the company on one end, but their firm might
have a banking relationship on the other end."
Private companies face less scrutiny from shareholders because they do not have to release
down its business into 3-month snapshots," Chalekian said.

Valuations
The valuation of a private company is often based on what venture capitalists or private equity
firms value the business based on its future growth and what a buyer would be willing to pay.
Public companies are valued by their market share or what shareholders deem the value of the
business to be. Determining the valuation of either a private or public company can be tricky
since many other factors have to be accounted for, including liabilities, future earnings, and free
cash flow.

Risks
Investing in either public or private companies can be risky. Many factors can have an impact on
the future profitability of a company, such as a lack of demand resulting in low sales, geopolitics,
tariffs, trade disputes, a slowdown in the economy, and higher interest rates.

Private vs. Public Companies: The Bottom Line

There are many differences between private and public companies that investors should be aware
of.

The biggest difference is that it is easier for individuals to invest in public companies because
their stock is traded on an exchange. Anyone can buy a share from a brokerage and be a
shareholder.

Investing in private companies can be done through family offices, venture capital firms, private
equity firms, and crowdsourcing, but usually requires a minimum investment.
Learning the difference between a private company and a public company can help make you a
better investor and generate larger returns for your retirement and future.

Private limited company

Unlimited liability can be a major disadvantage for sole traders and partnerships. Private limited
companies have limited liability, meaning an investor only loses the initial stake if a company
goes bust.

In law, a private limited company is separate from the people who own it. Its finances are
separate from their personal finances. Because limited companies have their own legal identity,
their owners are not personally liable for the firm's debts.

The ownership of a limited company is divided up into equal parts called shares. Whoever owns
one or more of these is called a shareholder. Rather than owning the company, they are investors
in this separate.

A limited company is private when its shares are not available to the public by being bought and
sold on the stock exchange.

Advantages

 Private limited companies are owned by one or more shareholders. Quite often these
shareholders are supportive family members.
 Profits are only shared between shareholders. They receive this as a dividend.
 Limited companies are able to raise money by borrowing and through the share
issue of ordinary shares.
 If the company fails, the investors in a limited company are protected by the rules of
limited liability.

Disadvantages

 Limited companies must be registered with the Registar of Companies.

 The legal set up costs is expensive. Limited companies must use documents called
Memorandum of Association and Articles of Association.
 Because profits are only shared with shareholders it is harder to motivate and control
workers who do not hold shares.
 Advantages Disadvantages

Owner can retain control Must be registered with the Registrar of Companies

More able to raise money High set-up costs (legal and administrative)

Limited liability Harder to motivate and control workers

Public limited companies (plc)

As a business grows, it may choose to become a public limited company (PLC). In a

PLC, shares are sold to the public on the stock market. People who own shares are called
‘shareholders’. They become part owners of the business and have a voice in how it operates. A
chief executive officer (CEO) and board of directors manage and oversee the business’ activities.

When a business sells shares on a stock market, this is known as ‘floating on the stock
exchange’.

Advantages of being a PLC include:

 the business has the ability to raise additional finance through share capital

 the shareholders have limited liability

 increased negotiation opportunities with suppliers in terms of prices because larger businesses
can achieve economies of scale

Disadvantages of being a PLC include:

 it is expensive to set up, requiring a minimum set up cost of £50,000

 there are more complex accounting and reporting requirements

 there is a greater risk of a hostile takeover by a rival company as the company cannot control
who buys its shares

 shareholders will expect to receive a percentage of the profits as dividends

 shareholders may clash when making decisions about the business

 CORPORATIONS
A corporation is a business entity that is owned by its shareholder(s), who elect a board of
directors to oversee the organization's activities. The corporation is liable for the actions and
finances of the business – the shareholders are not.
What are the Advantages of a Corporation?

A corporation is a legal entity, organized under state laws, whose investors purchase shares
of stock as evidence of ownership in it. The advantages of the corporation structure are as
follows:
Advantages of Corporation

 Limited liability. The shareholders of a corporation are only liable up to the amount of their
investments. The corporate entity shields them from any further liability, so their personal
assets are protected. This is a particular advantage when a business routinely takes on large
risks for which it could be held liable.

 Source of capital. A publicly-held corporation in particular can raise substantial amounts by

selling shares or issuing bonds. This is a particular advantage when its shares trade on a
stock exchange, where it is easier to buy and sell shares.

 Ownership transfers. It is not especially difficult for a shareholder to sell shares in a

corporation, though this is more difficult when the entity is privately-held.

 Perpetual life. There is no limit to the life of a corporation, since ownership of it can pass
through many generations of investors.

 Pass through. If the corporation is structured as an S corporation, profits and losses are
passed through to the shareholders, so that the corporation does not pay income taxes.

What are the Disadvantages of a Corporation?

Disadvantages of Corporation

 Double taxation. Depending on the type of corporation, it may pay taxes on its income, after
which shareholders pay taxes on any dividends received, so income can be taxed twice.
 Excessive tax filings. Depending on the kind of corporation, the various types of income and
other taxes that must be paid can require a substantial amount of paperwork. The exception
to this scenario is the S corporation, as noted earlier.

 Independent management. If there are many investors having no clear majority interest, the
management team of a corporation can operate the business without any real oversight from
the owners

ORGANIZATION STRUCTER

Definition

What Is an Organizational Structure?

An organizational structure is a system that outlines how certain activities are directed in order
to achieve the goals of an organization. These activities can include rules, roles, and
responsibilities.

The organizational structure also determines how information flows between levels within the
company. For example, in a centralized structure, decisions flow from the top down, while in a
decentralized structure, decision-making power is distributed among various levels of the
organization. Having an organizational structure in place allows companies to remain efficient
and focused.
Formal organization Hierarchy
Formal Organizational Structure Elements
In a formal organizational structure, the management and divisions within a company are
typically written and explained so all employees understand how things work. This
documentation may take the form of an organizational chart that visually depicts how each
level of management works to prevent misunderstandings.

Formal structure organizations usually have a hierarchical pyramid structure with a company
president, CEO and senior managers at the top; mid-level managers in the middle; low-level
managers at the bottom. Staff employees are expected to implement decisions and processes
made at the levels above them, and they are not usually solicited for their opinions or ideas
about how the company should operate.
Informal Organizational Structure Elements

In an informal organizational structure, your business doesn’t operate under the guidelines of a
written document that spells out the rules, regulations and chain-of-command. Under this
structure, your business operates by a system developed by your employees who have proven
effective. This structure relies on relationships forged between staff members, cooperation
between teams and communication that focuses on achieving shared goals.

Informal structures are unique for every company, because they are based on the personalities
of your employees and collaborative techniques developed over time.

Advantages of Formal and Informal Organizational Structures

The primary advantage of a formal organizational structure is that it clearly delineates the roles
and responsibilities of every employee, from the top level to a staff member. As a result,
everyone in your company knows what they have to do and how they’re supposed to achieve
desired goals. The formal chain of command also keeps work processes under your control,
because there is an established method of decision-making and implementation of your
directives.

The major advantage of an informal organizational structure is that it’s highly adaptable to
change. If your business must respond to external influences that demand an organizational
shift, an informal structure is fluid enough for you to make that change quickly and efficiently.

Disadvantages of Formal and Informal Structures

The main disadvantage of a formal organizational structure is that decisions take a long time to
move down management levels to the rank-and-file, and there is often a disconnect between
executives and staff employees because they don’t interact very often.

The primary disadvantage of an informal organizational structure is that things can become too
informal, which can lead to disorganization, confusion and misinterpreted communication.
Another disadvantage is that because your business lacks a centralized management structure,
employees may take advantage of that freedom to make decisions that are not well thought out.
Principles of Management and Organization Structure
Organization Definition in Management
Organizational management refers to how an organization can be structured and managed to
ultimately reach its goals and mission. It includes many aspects of management, including
planning, organizing, leading, and controlling. Organizational management relates closely to
organizational design, but it differs slightly in several ways. Organizational design refers to the
structure of the organization, but it does not consider the impact of management functions.
Organizational management consists of many different aspects, concepts, and structures.

Basic Principles of Management

As an organization is structured, there are some basic principles of management that are
necessary to run business operations effectively. The four main functions include planning,
organizing, leading, and controlling. Planning involves setting schedules and delegating tasks to
reach company goals. Organizing involves determining a more efficient way of completing
tasks within a team and being able to adapt to changes. Leading involves giving direction and
feedback to employees, as well as training them and handling issues. Controlling involves
overlooking and monitoring the workflow to search for ways to improve efficiency or to make
changes as needed.

Some other important principles include staffing, time management, and motivation. With
staffing duties, managers may need to recruit, onboard, and train new employees, as well as
delegate new projects to current employees. Time management is also crucial to having efficient
operations and to be able to prioritize important tasks first. Motivation is also an important
factor, as employees can accomplish their tasks more quickly and thoroughly if they are
motivated to do so.

Factors Influencing Organizational Structure

The organisation function is the immediate logical function after planning. To achieve the
objectives set in the plan, somebody should work and should do the right work. The organising
function makes the people to work. The function "involves managers in decisions which result in
a system of specialised coordinated jobs." In an organisation structure so many aspects are
involved. Human and non-human elements will be working. Orgnisationál structure is an
integrated whole. Job of each worker is specified, control measures are adopted for performing
those jobs effectively. An organisational chart depicts tangibly the reporting relationships and
channels of communication. Work flow and accountability are also shown. What factors actually
determine the organisation structure? It is grouping activity of men, machine and material for
attaining a specific objective. Hence the following factors determine the organisation structure.
(This is based on four aspects given in the box.)

1. Size of the Unit. Size indicates the scale of operation. Normally there are three scales of
operation, viz., small, medium and large. Size is an important factor governing cost, efficiency
and profitability of a business enterprise. Before any business or non-business enterprise is
started, the organisers will have to decide the most profitable and viable size of the unit.
Optimum or the best size is a dynamic concept and it changes with the development of science
and technology. Therefore, technology is one factor which determines the size and the
organisation structure. To introduce new technology, in business enterprise, the activity has to be
expanded and hence the structure changes.

The size of the organisation is also determined by the capital employed in the unit. There may be
heavy capital outlay but it may be less labour intensive. In such cases the size will be small as
authority relation will be less. However, capital outlay is one factor which determines the size of
the organisation.

Another important factor which determines the size of the organisation is "men employed." If
more men are employed there will be more level of management and more authority
relationships. If men employed are less, the size of the organisation will be less and less levels of
management and authority relationships.

The nature of business unit also determines the size and organisation structure. If it is capital
goods industry with huge capital outlay, the organisation structure will be complex in nature.
Consumer goods industries will have more authority relationships in marketing division and less
in production and finance line. Thus the nature of activity also determines the organisation
structure.

2. Job Design. The bricks that develop an organisation structure are jobs. What are the jobs to be
done in an organisation has to be decided by the top brass. Job design is the first managerial
decision of the organisation structure. Jobs in a task have to be specified as one person cannot
perform a task. It is a team work. Job in each task is to be specified and assigned. What an
individual has to do to contribute to the overall tasks and objectives has to be decided. Therefore
the fundamental factor, which determines the organisation structure is "Job
designing" and "numbering" them. These numbers decide the size of the organisation.

3. Grouping of Activities. The designed jobs have to be formed into groups according to the
nature of activity. Grouping of activities are essential to achieve coordination. Each group is
termed as "DEPARTMENT." Departmentation is another factor which determines the
organisation structure. Thus in each business organisation we observe departments like
Marketing Department, Production Department, Finance Department etc which discharge their
functions. In each department we find authority relationships like Finance

Manager, Assistant Finance Section Officer, Finance Supervisor etc., each assigned with specific
job and responsibility to perform. There will be accountability to higher ups also. Like this in
every business or non-business activity, there will be grouping of similar jobs in the form of
departments which are responsible to perform to specific task. There will be sub-departments in
each basic department like Production Department in which we find (i) Purchase Department (ii)
Stores Department (iii) Technical Design Department etc. These sub-departments constitute
Production Department. All the functional departments put together forms an organisation.
Grouping of the designed jobs according to their nature and activity is another factor which
determines the organisation structure.

4. Span of Control. Another factor that determines the organisation structure is the number of
persons to be managed by each manager. This is called "Span of management." Depending upon
the nature of organisation some departments will be big in size and some will be small.
Therefore, each manager should be assigned with manageable tasks and personnel. If the tasks
are many in a department, there should be splitting the tasks into number of divisions and lower
levels are to be created. All this takes place depending upon resources and personnel available.
However, the span of management, i.e., the number of persons to be managed by each manager,
has to be decided and that becomes one of the major factors to decide the size of organisation
structure. The number varies from manager to manager and the number determines the span.
Manageable span found out by experience is six, i.e., one manager can manage six, persons
effectively.
5. Delegation of Authority. Authority relationship also decides the organisation structure. If the
span is more, there will be more authority levels and top management has to delegate authority to
each level. Authority, means "the right to make decisions without having to obtain approval from
a higher up." In an organisation structure, if the span and levels of management are more, the
delegation of authority will be more and there will be decentralisation of authority for smooth
functioning of tasks. If the span is narrow, less levels and more centralisation of authority. Thus
delegation of authority decides the organisation structure.

The specialised job designs will have narrow spans, homogenous departments, little control, little
authority and small structure will be designed. Job designs with less or no specialisation will
have heterogeneous departments, more spans of management, more delegation of authority and
forms a complex organisation structure. Although these are the factors which decide the
organisation structure, research and experience have shown that performance, attitudes,
satisfaction and other factors also influence the structure.
Types of Organization Structures
Types of organizational structures

1. Hierarchical org structure

2. Functional org structure

3. Horizontal or flat org structure

4. Divisional org structures (market-based, product-based, geographic)

5. Matrix org structure

6. Team-based org structure

7. Network org structure

At some point, you have likely seen an organizational chart for your company. And we can
probably guess what it looked like.
The typical org chart looks like a pyramid, your C-level executives at the top with lines
stretching down to middle management and finally staff-level employees.

But not every company functions best with a hierarchical organizational structure. Many types of
organizational charts exist because many types of organizational structures exist.
Let’s go through the seven common types of org structures and reasons why you might consider
each of them.

1. Hierarchical org structure

 Hierarchical org chart example (click on image to modify online)
The pyramid-shaped organizational chart we referred to earlier is known as a hierarchical org
chart. It’s the most common type of organizational structure—the chain of command goes from
the top (e.g., the CEO or manager) down (e.g., entry-level and low-level employees), and each
employee has a supervisor.

Pros

 Better defines levels of authority and responsibility

 Shows who each person reports to or who to talk to about specific projects
 Motivates employees with clear career paths and chances for promotion
 Gives each employee a specialty
 Creates camaraderie between employees within the same department

Cons

 Can slow down innovation or important changes due to increased bureaucracy

 Can cause employees to act in interest of the department instead of the company as a whole
 Can make lower-level employees feel like they have less ownership and can’t express their
ideas for the company
2. Functional org structure

Fu
nctional org chart example (click on image to modify online)
 Similar to a hierarchical organizational structure, a functional org structure starts with positions
with the highest levels of responsibility at the top and goes down from there. Primarily, though,
employees are organized according to their specific skills and their corresponding function in the
company. Each separate department is managed independently.

Pros

 Allows employees to focus on their role

 Encourages specialization
 Help teams and departments feel self-determined
 Is easily scalable in any sized company

Cons

 Can create silos within an organization

 Hampers interdepartmental communication
 Obscures processes and strategies for different markets or products in a company

3. Horizontal or flat org structure

H
orizontal or flat org chart example (click on image to modify online)

A horizontal or flat organizational structure fits companies with few levels between upper
management and staff-level employees. Many start-up businesses use a horizontal org structure
before they grow large enough to build out different departments, but some organizations
 maintain this structure since it encourages less supervision and more involvement from all
employees.

Pros

 Gives employees more responsibility

 Fosters more open communication
 Improves coordination and speed of implementing new ideas

Cons

 Can create confusion since employees do not have a clear supervisor to report to
 Can produce employees with more generalized skills and knowledge
 Can be difficult to maintain once the company grows beyond start-up status

Market-based divisional org chart example (click on image to modify online)

4. Divisional org structure

In divisional organizational structures, a company’s divisions have control over their own
resources, essentially operating like their own company within the larger organization. Each
division can have its own marketing team, sales team, IT team, etc. This structure works well for
large companies as it empowers the various divisions to make decisions without everyone having
to report to just a few executives.
Depending on your organization’s focus, there are a few variations to consider.

Market-based divisional org structure

Divisions are separated by market, industry, or customer type. A large consumer goods
company, like Target or Walmart, might separate its durable goods (clothing, electronics,
furniture, etc.) from its food or logistics divisions.

Product-based divisional org chart example (click on image to modify online)

Product-based divisional org structure

Divisions are separated by product line. For example, a tech company might have a division
dedicated to its cloud offerings, while the rest of the divisions focus on the different software
offerings—e.g., Adobe and its creative suite of Illustrator, Photoshop, InDesign, etc.

Geographical divisional org chart example (Click on image to modify online)

Geographic divisional org structure
Divisions are separated by region, territories, or districts, offering more effective localization and
logistics. Companies might establish satellite offices across the country or the globe in order to
stay close to their customers.
 Matrix org chart example (click on image to modify online)

Pros

 Helps large companies stay flexible

 Allows for a quicker response to industry changes or customer needs
 Promotes independence, autonomy, and a customized approach

Cons

 Can easily lead to duplicate resources

 Can mean muddled or insufficient communication between the headquarters and its divisions
 Can result in a company competing with itself
5. Matrix org structure
 A matrix organizational chart looks like a grid, and it shows cross-functional teams that form for
special projects. For example, an engineer may regularly belong to the engineering department
(led by an engineering director) but work on a temporary project (led by a project manager). The
matrix org chart accounts for both of these roles and reporting relationships.

Pros

 Allows supervisors to easily choose individuals by the needs of a project

 Gives a more dynamic view of the organization
 Encourages employees to use their skills in various capacities aside from their original roles

Cons

 Presents a conflict between department managers and project managers

 Can change more frequently than other organizational chart types
6. Team-based org structure

Team-based org chart example (click on image to modify online)

It’ll come as no surprise that a team-based organizational structure groups employees according
to (what else?) teams—think Scrum teams or tiger teams. A team organizational structure is
meant to disrupt the traditional hierarchy, focusing more on problem-solving, cooperation, and
giving employees more control.
 Pros

 Increases productivity, performance, and transparency by breaking down silo mentality

 Promotes a growth mindset

 Changes the traditional career models by getting people to move laterally

 Values experience rather than seniority

 Requires minimal management

 Fits well with agile companies with Scrum or tiger teams

Cons

 Goes against many companies’ natural inclination of a purely hierarchical structure

 Might make promotional paths less clear for employees

See why forming tiger teams is a smart move for your organization.

Learn more

7. Network org structure

 Network org structure example (click on image to modify online)

These days, few businesses have all their services under one roof, and juggling the multitudes of
vendors, subcontractors, freelancers, offsite locations, and satellite offices can get confusing. A
network organizational structure makes sense of the spread of resources. It can also describe an
internal structure that focuses more on open communication and relationships rather than
hierarchy.

Pros

 Visualizes the complex web of onsite and offsite relationships in companies

 Allows companies to be more flexible and agile

 Give more power to all employees to collaborate, take initiative, and make decisions

 Helps employees and stakeholders understand workflows and processes

Cons

 Can quickly become overly complex when dealing with lots of offsite processes
 Can make it more difficult for employees to know who has final say

Consider the needs of your organization, including the company culture that you want to
develop, and choose one of these organizational structures.

PROCESSES OF MANAGEMENT

Process of Management – Management Process Functions

Every business enterprise has certain pre-determined objectives. No business enterprise can
achieve its objectives until and unless all the members of the unit make an integrated and
planned effort under the directions of a central coordinating agency, which is technically
known as MANAGEMENT and the methodology of getting things done is known as
management process.

The process in general is defined as a series of actions or operations conducted to an end.

The logic of the management and the sequence in which they are performed is designated as
Management process.

Generally this includes the main functions of a manager viz.:

1. Decision making, and
2. Implementation of decisions.
Naturally these two are the functions which are included in management process.
These functions are performed by:
1. Planning,
2. Organising,
3. Staffing,
4. Motivating and
5. Controlling.

Management process, aimed at achievement of organisational goal includes these five

functions. These functions are to be performed in the sequence they are mentioned. Thus we
can say that managers have to walk along the route of management process to reach
organisational goals. The desired result, objective or goal is attained by performing certain
fundamental management functions.
Process 1. Planning:
Planning means thinking in advance the future course of action. Planning is intellectual in
nature. It is a mental exercise. It is a vision of future and preparing for it. Planning, as
decision making, is selecting among many choices. Planning forecasts future problems and
involves selection of courses of action to handle them. Foreseeing the problems is one of the
essentials of planning. Their severity is anticipated so that preparatory provisions can be
made to handle them.

Planning, as decision, answers to the following basic questions:

i. What should be done?
ii. How should it be done?
iii. Who will be responsible for doing it?
iv. Where it should be done?
v. Why is it to be done?
vi. When should it be done?
Planning involves taking decisions of action in advance. Planning emphasizes the fact that if
one knows where he is going, he is more likely to get there. Good managers endeavour to
draft a plan which will make things happen in the desired way. This is also stressed by the
saying. “Good managers make things happen. Things do not just happen to them.”

Best planning is concerned with fixing the objectives, determining the strategies policy and
prescribing the procedures as guidelines to future action. It is the most important step in the
process of getting results. It enables the management to be a step ahead of each activity,
retain initiative to make use of any opportunity and anticipate problems which may actually
arise. Thus planning assumes first step in management process.

It means that the plans must be in detail but flexible so that bear the capability of being re-
adjusted in case there is a change in working condition or in objectives of the organisation.

Process 2. Organising:
Once plan is prepared and methodology to achieve goal is decided, the jobs are required to
be allotted and allocated to a group or groups. Naturally groups are formed. The whole
process of forming groups and allocating jobs is organisation.
Thus, after planning the next important step is organising. In order to accomplish the work it
is necessary to distribute or allocate the necessary component activities among the members
of the group. Generally, the component time and cost, will be realised. After assignment of a
component activity it is a must to delegate authority, so that the allotted activity can be
accomplished. From this authority delegation arises various organisational relationships.

This task of allocation, authority delegating and establishing relationship by the manager is
known as organising. Thus organising is basically concerned with grouping the activities
required to attain the planned objectives, defining responsibilities of the people in the
organisation, delegating appropriate authority to them to discharge their respective
responsibilities and establishing structural as well as, working relationship to enable
coordination of the individual efforts towards accomplishment of objectives of the
enterprise.

The process of organising is a fundamental function of management authority and the key to
the managerial job. Delegation of authority is the key to organisation. We cannot speak of
manager unless he has authority and we cannot speak of creating an organisation unless
authority is delegated.

The organisation structure is, of course, not an end in itself but a tool for accomplishing
enterprise objectives. Efficient organisation will contribute to the success of the enterprise
and for this reason, application of organisational principles is very important.

Process 3. Staffing:
Staffing is concerned with ensuring that the right type of personnel is available to undertake
and execute the varied activities required to attain the planned objectives of the
organisation. Staffing involves filling the positions needed in the organisation structure by
appointing competent and qualified persons for the jobs. It, therefore includes activities
such as anticipating manpower needs, adoption of an appropriate selection procedure,
providing manpower appraisals and development.
This needs manpower planning and manpower management. Much of the work relating to
human resource planning and management is delegated to personnel manager. However, top
management is ultimately responsible for all activities to staffing.

Process 4. Motivating:
Motivating means inspiring the personnel with zeal to work and co-operate for the
accomplishment of common objectives.

Motivation is the process of creating organisational conditions which will impel employees
to strike to attain objectives and development. Motivation is the complex of forces starting
and keeping a person at work in an organisation. We may define motivation as a willingness
to expend energy to achieve a goal or reward.

It is a force that activates dormant energies and sets in motion the action of the people. It is
the function that kindles a burning passion for action among the human beings of an
organisation.

Motivation is a powerful tool in the hands of a manager for getting things done. Effective
motivation improves the performance of the employees. Employees can be motivated by
giving them reward, proper appreciation of work, fair treatment which helps in increasing
their enthusiasm and performance too.

There are four types of motivation techniques i.e.:

i. Positive or incentive motivation
ii. Negative or fear motivation
iii. Financial motivation
iv. Non-financial motivation.
If a manager wants to get work done by his employees, he may either hold out a promise of
a reward for them for doing work in a better or improved way, or he may constrain them, by
installing fear in them or by using force, to do the desired work. In other words, he may
utilise a positive or negative or financial or non-financial type of motivation. All these types
of motivation are widely used by management.
Process 5. Controlling:
Controlling means observing whether everything is going on according to plan or not.
Controlling is nothing but conciliation of the plan with the actual work, ensuring that the
objectives in terms of the plan are fulfilled.

Controlling includes an evaluation to determine whether the planned objectives have been
achieved or not. Controlling shows where improvements are required. Adequate control can
thus lead to innovation, improvements or modifications in previously determined objectives.

Control is a fundamental management function that ensures work accomplishment according

to plans. It is concerned with measuring and evaluating performance so as to secure the best
result of managerial efforts. It is an essential feature of scientific successful management.

Controlling is nothing but conciliation of the plan with the actual work and locating the
lapses, if any, so as to bring the methodology of work on correct track. For this the manager
has to be very alert and find out the reasons for such lapses or deviations. He is also
responsible for implementing corrective measures. All these things are ultimately aimed at
achievement of business goals.

Management can be looked upon as a process by which mangers formulate, direct and
operate organisations with coordinative human effort to attain predetermined objectives.
Management is a process concerned with planning executing and controlling the activities of
an enterprise. Managerial behaviour must be goal directed which results in a succession of
activities and events by which the organisation’s work proceeds.

Management is concerned with evolving workable plans which are then put into action
resulting in certain consequences which have to be observed, evaluated and constantly
compared with the objectives prescribed in the plan. This cyclical process can be described
as the management process.

Thus this process starts from a point i.e. planning and till it reaches the point i.e. goal some
certain distance is covered. But this wheel does not stop. It further moves to cover further
distance in forms of another activity.
A ladder, to be climbed to reach the goal is management process.

Process of Management – Planning, Organizing, Directing, Controlling and Coordinating

(1) Planning:
It means thinking about goals and objectives of the organization and deciding how best to
accomplish them. It is not day-dreaming, building castles in the air. It is a rational activity,
based on SWOT analysis—examination of strengths and weakness of the organization and
opportunities and threats posed by its external environment. The idea is how to harness the
available resources for achievement of organizational goals.

(2) Organizing:
It means acquiring and putting in place the human, physical, and financial resources and
defining relationships between them—who has authority over what and whom. It establishes
positions of authority and responsibility (chief executive officer, production manager, sales
manager, finance manager, and so on). It also lays down which superior and subordinate
will exercise control over which resources to accomplish the duties assigned to him and to
whom he will be accountable.

Again, an organization is not mere vesting of authority and responsibility in a position, it

also requires constant monitoring of whether the person holding any position is exercising
his authority and performing the duties assigned to him. If found wanting, there is also
provision for his replacement by another, more competent person.

(3) Directing:
It means influencing subordinate-behavior to ensure that he performs his task and duty ably
and willingly. This will include issuance of instructions and directions, constant supervision
of work performance, provision of suitable motivation and inspiring leadership.

All this with a view to inculcate in the subordinates a sense of belonging to the organization
such that they identify themselves with organization objectives and realize that
accomplishment of their personal goals (salary and perks, job security, stability, etc.) can be
possible only through accomplishment of organizational goals.
Thus, while ‘planning’ and ‘organizing’ functions represent the abstract aspect of
management process, ‘directing’ function personifies its tangible and concrete aspect; it
involves working with and through people.

(4) Controlling:
It means ensuring that activities of all superiors and subordinates are focused on
accomplishment of organizational goals.

The controlling function has three aspects:

(a) Determination of reasonable and realistic standards of performance for each subordinate
and department;

(b) Measurement and comparison of actual performance with prescribed standards; and

(c) Initiation of necessary corrective action where actual performance falls short of the
determined standards.

The controlling function enables management to ensure that all superiors and subordinates
of the organization ably and willingly perform their duties to enable it to accomplish its
goals.

The ‘controlling function’ reflects certain elements of the ‘planning function’; it involves
determination of realistic and reasonable standards of performance, and also speaks of
corrective action if the actual performance deviates from the standard performance level.
Sometimes corrective action may also necessitate modification of the ‘organizing’ and
‘direction’ functions.

(5) Coordinating:
The tasks or activities of an organization are grouped on the basis of their similarity. They
are assigned to different individuals and departments based on their capacity and
specialization achieved because of performance of the same task or activity again and again.
Specialization in performance of any task or activity results in greater productivity and
efficiency-level. However, division of duties also requires an effective mechanism to
integrate and focus them to achieve overall organizational objectives.

Coordination is the process of integrating or linking-up performance of different tasks and

activities to keep them focused on achievement of organizational goals. The need for
integration will be in direct proportion to the inter-dependence between individuals and
departments performing different tasks and activities.

Where performance by any individual or department wholly depends on the performance by

others, as in Fig. 2 and 3, there will be need for maximum coordination, as non-
performance, under-performance or delayed performance of one individual or group will
adversely affect the performance of others.

Management, all said and done, is an Integrated Process:

While discussing the process of management, it is convenient as also necessary to describe

each function or operation or ‘process’ separately. But this does not mean that management
process is only a series of mutually independent functions. In practice, a manager may, and
often does, perform many of these functions simultaneously and as a part of a continuum,
and not necessarily in the order in which they are listed and discussed.

Process of Management – Planning, Organizing, Staffing, Directing and Controlling

The process is defined as a series of actions or operations conducted to an end. Management
as a process emphasize that all managers, regardless of their particulars aptitudes or skills,
engage in certain interrelated activities in order to achieve their desired goals.
Management process can be divided into a set of inter-related functions. Managers have to
perform certain functions in the organizations to get the things done by others. Managers
have to perform these functions by variety of ways.

But there is no unanimity among them about the nomenclature of the functions of
management. Henry Fayol for the first time, classified managerial functions as planning,
organizing, commanding, coordinating and controlling. Appley included planning, executing
and controlling in management function.

Luther Gulick and Urwick described it as PODSCORB. PODSCORB denoted the following
function – (i) Planning, (ii) Organizing, (iii) Directing, (iv) Staffing, (vi) Coordinating, (vi)
Reporting, and (vi) Budgeting. E.F.L, Brech emphasized on planning motivating,
coordinating and controlling; while Koontz and O’Donnell take planning, organizing,
staffing, directing and controlling.

Ernest Dale emphasized on innovation and representation. Joseph Massie prescribed a list of
seven functions of management. In practice, it is not always possible to place all managerial
activities neatly into these categories since the functions tend to coalesce. Thus, G.R. Terry
described managerial functions under four heads.

The list of managerial functions varies from three to eight. There have been no new ideas,
research findings, or techniques that cannot readily be placed in the classifications of
planning, organizing, staffing, leading and controlling.

Let’s briefly define what each of these management functions encompasses:

(i) Planning:
Planning involves selecting mission and objectives and the actions to achieve them; it
requires decision-making that is, choosing further course of action from various alternatives.
It is the determination of a course of action to achieve the desired results.

Planning is a pervasive, continuous and never ending activity. It leads to move effective and
faster achievements in any organization and enhances the ability of the organization to adapt
to further eventualities.
The planning involves selection of – (a) objectives; (b) policies; (c) procedures; and (d)
programmes. This also involves taking the decision about choosing the best one out of
several alternatives available to the management. Planning involves the determination of
future course of action, that is, why in action, what is to be done how to be done and when
to be done. The answers to all such questions constitute planning functions.

The planning function involves the following steps:

(a) Determination of the objectives,
(b) Searching of alternative courses of action,
(c) Evaluation of alternatives,
(d) Formulation of a plan, policies and procedures,
(e) Preparation of concrete formation of plan on the basis of schedules programmes and
budgets.

(ii) Organizing:
Organizing is the part of management that involves establishing an internal structure of
roles for the people to fill in an organization. Organizing is considered as a process of
integrating, balancing, unifying and coordinating activities of the employees for the
accomplishment of pre-determined activities? Organization helps in establishing
relationships among the members of the enterprise.

The relationship is created in terms of authority and responsibility. According to Louis A.

Allen, “Organisation involves identification and grouping among the individual and creating
authority and responsibility relationship among them for the accomplishment of
organizational objectives.”

Thus organization involves the following steps:

(a) Identification of activities,
(b) Grouping of activities,
(c) Assignment of work,
(d) Delegation of authority to subordinate, and
(e) Establishing relationship through the organization.
Organizational functions contribute to the efficiency of the organization through employing
human and other resources of the organization.

(iii) Staffing:
Staffing involves managing the process created by organization process. Staffing involves
filling and keeping filled the positions in the organization structure. This is done by
identifying workforce requirements; inventorying the people available; and recruiting,
selecting, placing, promoting appraising, planning the careers of, compensation, and training
or otherwise developing both candidates and current work force so that tasks are
accomplished effectively and efficiently.

The manager performs the duty of job analysis, job description, appraisal of efficiency, etc.,
which come under the staffing function, since every manager is concerned with management
of human resource, he must perform the staffing function. In most of the organizations,
personnel department is set up to provide the necessary help to managers in performing their
staffing functions efficiently.

According to Koontz and O’Donnell, “The managerial function of staffing involves

managing the organization structure through proper and effective selection appraisal, and
development of personnel to fill the roles designed into the structure.”

Staffing functions involve:

(a) Manpower planning,
(b) Recruitment,
(c) Selection,
(d) Placement,
(e) Promotion,
(f) Performance appraisal, and
(g) Training and Development.

(iv) Directing:
Direction may be defined as a function which is related with instructing, guiding and
inspiring human factor in the organization to achieve organizational objectives. It is not
only a process of direction, but it includes the process of guiding and inspiring them.
‘Direction consists of the process and techniques utilized in issuing instructions and making
certain that operations are created out as originally planned.’

Theo Haimann, direction functions consists of three elements:

(a) Communication,
(b) Leadership and Supervision, and
(c) Motivation.
In the words of Marshall, “Directing involves determining the course, giving orders and
instructions and providing dynamic leadership”. Simply direction involves issuing
instructions to the subordinates, guiding, motivating and supervising them.

(v) Controlling:
Controlling deals with the measurement and correction of the performance of subordinates
against the predetermined standards. Controlling is measuring and correcting organizational
performance to ensure events conform to plans.

It involves measuring performance against goals and plans, showing where deviations from
standards exist, and helping to correct them. In short, controlling facilitates the
accomplishment of plans. Control activities generally relate to the measurement of
achievement.

Control process comprises:

(a) Fixing appropriate standard for measuring work performance;
(b) Comparing actual and planned work;
(c) Finding variances between two and reasons for the variance;
(d) Taking corrective actions.
Control keeps a check on other functions for ensuring successful functioning of
management. It brings to light all bottlenecks to move performance and operates as a
straight pointer to the needs of the situation.

A manager has to perform his functions in the organization, whatever the level of manager
or the objective of the organization.
Frequently Asked Questions (FAQs)
1. Why is management a process?
As a process, management cannot be completed in one sitting. It involves many different
activities and people to get the job done. Management usually involves more than one person
and sometimes even a group of people tasked with contributing their skills and knowledge to
achieve the end goal of managing something.
2. What are the steps in the management process?
The management process is a system that helps managers to coordinate activities, resources
and information. It includes four basic steps: planning, organizing, leading and controlling.
3. What is the product management process?
Product management is an important part of the product life cycle . The product manager is
responsible for the product from conception to launch and therefore has a lot riding on its
success or failure. The product manager sets the vision and strategy for their product and
decides how much time and money will be spent on it.
4. What are the 4 main processes of project management?
The four main processes of project management are planning, executing, monitoring and
controlling, and closing.
The management process is a series of steps that are used to perform business operations. The
process of management consists of planning, organizing, staffing, directing, controlling and
evaluating. In this article, you will learn what is a management process, the nature and
significance of the management process with an example.
How Do You Define a Management Process?
Management is a process of planning and controlling the activities of a business or other
organization. One key aspect of the management process is project management, which
involves the application of knowledge, skills, tools, and techniques to a specific project in
order to meet its requirements and objectives. The meaning of project in this context refers to
a temporary and unique endeavor that is undertaken to create a specific product, service, or
result. Product management processes include:
1. Planning
This involves determining what needs to be done when it should be done, who will do it and
how much it should cost. Planning also includes developing strategies for achieving goals that
meet the needs of stakeholders (e.g., customers).
2. Organizing
Organizing requires grouping people into teams according to their skills or knowledge so they
can work together effectively. Organizing ensures that employees have the right resources
available when they need them. For example, if one employee needs access to another
employee’s computer files while they are on vacation, then both employees should be part of
the same team so they can share those files easily via email or cloud storage services like
Dropbox or Google Drive.

The Importance of Management Process

The product management process is very crucial for an organization. It is a set of activities
that must be performed to achieve organizational goals.
The following are some facts about the management process:
1. What is the management process definition? Management process refers to a series of
activities performed by managers to achieve organizational goals. These management
process steps aim to identify, analyze and solve problems related to performance or
efficiency within an organization. When these tasks are done successfully, organizations
succeed in achieving their goals. This can be accomplished through different tools like
SWOT analysis, PESTEL etc.
2. What are the features of the management process? There are several features associated
with this tool which include: identifying problems within an organization, analyzing them
accordingly, and resolving them by implementing solutions through various methods,
 such as training employees on new technologies while also evaluating time constraints
before finalizing any decision made by top-level management members.
3. What are the types of the management process? There are two management processes:
Management by Objectives (MBO) and Management by Results (MBR). Both these tools
have their advantages and disadvantages.
Management by Objectives (MBO) is a style that focuses on achieving organizational goals
through different methods, such as training employees on new technologies and evaluating
time constraints before finalizing any decision by top-level management members. This tool
allows organizations to identify their strengths, weaknesses and improvement opportunities to
succeed in the long run.

What is the Nature of the Management Process?

The management process is a system that combines all of an organization's activities to
achieve its goals. It involves planning, organizing, leading and controlling. The term
‘management’ refers to managing an organization through its functions and activities using
certain principles and methods.
The product management process flow can be explained below:
1. Planning
This step is where you create a detailed action plan for your business goals with expected
results in mind (e.g., increased sales).
2. Organizing
This step involves arranging people, materials, machines, equipment and money to achieve set
objectives (e.g., organize human resources by team structure).
3. Leading
This step is about motivating people/workers to perform better at their tasks (e.g.,
encouraging workers through incentives such as bonus schemes).
4. Controlling
This step deals with measuring performance against corporate standards or targets set at
earlier stages.
Conclusion
Management is an unseen force that reflects the collective efforts of people. An efficient and
effective management process aligns individual interests with the organisation’s goals and
objectives as a whole. The success of organisations such as Reliance, Tata, Birla, etc., is not a
matter of luck or chance, but a result of following a deliberate process called Management.

ELEMENTARY BOOKING KEEPING, PRODUCT COSTING AND MARKETING

What is bookkeeping and why is it important?

Bookkeeping is the process of recording your company’s financial transactions into organized
accounts on a daily basis. It can also refer to the different recording techniques businesses can
use. Bookkeeping is an essential part of your accounting process for a few reasons. When you
keep transaction records updated, you can generate accurate financial reports that help
measure business performance. Detailed records will also be handy in the event of a tax audit.

Trial balance

A trial balance is a list of all the general ledger accounts (both revenue and capital) contained in
the ledger of a business. This list will contain the name of each nominal ledger account and the
value of that nominal ledger balance. Each nominal ledger account will hold either a debit
balance or a credit balance. The debit balance values will be listed in the debit column of the trial
balance and the credit value balance will be listed in the credit column. The trading profit and
loss statement and balance sheet and other financial reports can then be produced using the
ledger accounts listed on the same balance.

Purpose of trial balance

The purpose of a trial balance is to prove that the value of all the debit value balances equals the
total of all the credit value balances. If the total of the debit column does not equal the total value
of the credit column then this would show that there is an error in the nominal ledger accounts.
This error must be found before a profit and loss statement and balance sheet can be produced.
Hence trial balance is important in case of adjustments. Whenever any adjustment is performed
run trial balance and confirm if the entire debit amount is equal to credit amount.

The trial balance is usually prepared by a bookkeeper or accountant who has used daybooks to
record financial transactions and then post them to the nominal ledgers and personal ledger
accounts. The trial balance is a part of the double-entry bookkeeping system and uses the
classic 'T' account format for presenting values.
Limitations

A trial balance only checks the sum of debits against the sum of credits. That is why it does not
guarantee that there are no errors. The following are the main classes of errors that are not
detected by the trial balance.

 An error of original entry is when both sides of a transaction include the wrong
amount. For example, if a purchase invoice for £21 is entered as £12, this will result in an
incorrect debit entry (to purchases), and an incorrect credit entry (to the relevant creditor
account), both for £9 less, so the total of both columns will be £9 less, and will thus balance.
 An error of omission is when a transaction is completely omitted from the accounting
records. As the debits and credits for the transaction would balance, omitting it would still
leave the totals balanced. A variation of this error is omitting one of the ledger account totals
from the trial balance (but in this case the trial balance will not balance).
 An error of reversal is when entries are made to the correct amount, but with debits instead
of credits, and vice versa. For example, if a cash sale for £100 is debited to the Sales
account, and credited to the Cash account. Such an error will not affect the totals.
 An error of commission is when the entries are made at the correct amount, and the
appropriate side (debit or credit), but one or more entries are made to the wrong account of
the correct type. For example, if fuel costs are incorrectly debited to the postage account
(both expense accounts). This will not affect the totals. This can also occur due to confusion
in revenue and capital expenditure.
 An error of principle is when the entries are made to the correct amount, and the
appropriate side (debit or credit), as with an error of commission, but the wrong type of
account is used. For example, if fuel costs (an expense account), are debited to stock (an
asset account). This will not affect the totals.
 Compensating errors are multiple unrelated errors that would individually lead to an
imbalance, but together cancel each other out.

The balance sheet

The balance sheet is a statement of financial position of a business at a specific point in time
usually at the end of the month or year. The balance sheet sums up the economic resources
(assets), obligations (debts and other long-term liabilities) and the owner’s capital at a particular
point of time. It also shows how economic resources contributed by lenders and shareholders are
used in the business.

The Purpose of Balance Sheet

 To reveal the financial status of a business at a specific point in time

 To help you estimate whether a firm has enough funds in the short term to play off its
short-term obligations.
 To let potential financiers know if the extension of addition credit might result in a bad
debt.
 To help investors examine the amount of cash on the balance sheet to see if there is
enough available to pay them a dividend
 To enable potential buyers of a business to examine the balance sheet to see if there are
assets that could potentially be stripped away without harming the underlying business
 To help creditors and interested investors determine a company’s financial standing
because it lists what company owns and what it owes.

Limitation of the balance sheet

A single balance sheets has various limitations, which means that accountants and business
planers should not rely solely on a balance sheet to make financial plans and set goals

 Not all assets are shown on the balance sheet, for instance, intangible assets, such as
patents and skilled workforce.
 The balance sheet cannot reflect those assets which cannot be expressed in monetary
terms, such as skill, intelligence, honesty, and loyalty of workers. Because of this
person looking at the balance sheet might not get the complete understanding of
entity’s strengths.
 Valuing some assets and liabilities on the balance sheet involves subjective judgment.
For example, management has some discretion about what provisions they need to
make for trade debtors that may not pay or for obsolete stocks.
  It list down all the assets a business has but it does not tell how much money those
assets can generate in the future
 It is prepared on a historical cost basis. Changes in prices are not considered.
 Window-dressing may be done in balance sheet.
 Historical cost of balance sheet does not convey fruitful information
 Different assets are valued according to different rules
 It cannot reflect the ability or skill of staff.
 Many of the elements are reported on aggregate basis for which even the notes to the
financial statements might not provide the complete and relevant information to
understand what is value of each item included in the total figure.
 Some of the current assets are valued on estimated basis, so the balance sheet is not
in the position to reflect the true financial position of the business
For example

Balance sheet of Mr. Okello’s farm as at 31-12-2003

Liabilities shs assets shs

Long term liabilities Fixed assets

2,250,000 Land 1,200,000

Bank overdraft from stanbic
Tractor and ploughs 1,800,000
Current liabilities
3 dairy cows 2,100,000
Debts payable to creditors
1,400,000 Current assets

Unpaid wages 250,000 Crop produce in store 450,000

140,000 Crop in the field 750,000

Interest on loan
2 heifers for sale 400,000
Net capital
4,650,000 Feeds and drugs 900,000

Cash in stanbic bank 480,000

 Cash in hand 250,000

Debts receivable 360,000

Total 8,690,000 Total 8,690,000

Income statement/ profit and loss account

An income statement depicts the revenue and expenses of a business over a particular period of
time, such as a month, financial quarter, or year. It is often referred to as a statement of income.
It will tell whether you had a net profit for the period or suffered a net loss.

Meaning of profit and loss

Income statement will show the trading result. I.e. has the business made a net profits or a loss
over the past year. It includes all income and expenses accounts for a specific accounting period-
usually a year.

Purpose of profit and loss account

 Profit and loss account would help an enterprise determine how profitable business is
likely to be, which in turn helps determine if the business will be able to grow in future
 It will tell whether the business will make or lose money. Potential investors can look at
expected sales against expected costs to see if it will be worth investing in the business
 As the business looks to grow, the profit and loss account will be vital in planning and
fine tuning the business for the best possible performance.
 Banks will need information concerning a company’s ability to repay the loan-make
interest payments and determine the security of the money they loan to the company
 Profit and loss account shows how revenue is transformed into the net income. It displays
the revenue for a specific period of time and the cost and expenses. This will show the
 bank whether the company was profitable-made or lost money, during the period being
reported. This will affect the decision whether to lend money or not.
 Business owners depend on the income statement to tell them if them if the business is
running efficiently or if there are areas that need improvement
 Allows providers of finance to see whether the business is able to generate sufficient
profits to remain viable (in conjunction with the cash flow statement)
 Allows the directors of a company to satisfy their legal requirements to report on the
financial record of the business
 Helps identify whether the profit earned by the business is sustainable (“profit quality”)
 Allows shareholders/owners to see how the business has performed and whether it has
made an acceptable profit (return)

Disadvantages of an income statement

 Income statement is prepared using various accounting policies and methods. These are
subject to bias from the management or the business owners
 The application of the income statement does not provide actual costs of the asset, rather
it only provides a fair estimation of expenses
 It can be based on numerous assumptions instead of facts
 It takes time to prepare the income statement
 It may not report true cost. When assets are held on a balance sheet, then they depreciate
over their useful life, the assets true cost is therefore spilt and expensed over more than
one period.
 It does not evaluate non-revenue factors for success. The income statement only looks
revenue outcomes of activities. It does not look at how the company earns sales from its
customers and the reputational and goodwill factors.
 It is subject to data manipulation by management leading to misleading figures
 The income statement can sometimes be used against you if a competitor is able to
recognize a potential opportunity from their end that you have not yet recognized

Example of profit and loss account

Profit and loss account of Mr. Opio’s poultry farm for the year ending 31-12-2003
 Purchases and expenses shs Sales and receipts shs

Opening valuation 1,250,000 Cash in hand 800,000

Poultry feeds 890,500 Cash in stanbic bank 450,000

Wages 600,000 Egg sales 2,550,000

Pesticides 150,000 Sales of off layers 650,000

Veterinary drugs 600,000 Sales of poultry manure 120,000

Depreciation of building 200,000 Debts receivable (debtors) 400,000

Balance on loan from stanbic 500,000 Closing valuation 1,800,000

Interest due on loan

Rent on land 50,000

Debts payable (creditors) 1,000,000

100,000

Net profit 5,340,500

1,429,500 Net loss ………..

Total 6,770,000 6,770,000

Features of a profit and loss account

 Title. This states the names of the owner of farm and duration of the account
 Purchases and expenses. These are entered on the left hand side
 Sales and receipts. These are entered on the right hand side
 Total expenses and total receipts. These are indicated below the lists of expenses and
receipts, respectively
  Opening valuation. This entered under the purchases and expenditure column. This is
because it is assumed that famer had to buy the farm at the beginning of the year that
would be the expenditure incurred.
 Closing valuation. This is entered on the sales and receipts side. This is so because if the
farmer sold off the farm at the end of the year, that is the amount of money he/she would
receive
 Net profit and net loss. Net profit is obtained when sales and receipts exceed purchases
and expenditure, and a net loss is got when the reverse is true. Net profit always appears
under the purchase and expenditure side, while a net loss appears on the sales and
receipts side.

Budgeting

What is a budget?

A budget is a plan of how to spend your money. It is a plan of action showing the amounts of
money hoped to be spent and the expected income from an enterprises to be undertaken. Your
budget lists all your income and expenditures for a particular month. It is an analysis of your
income and how you intend to spend that money. Drawing up a budget is the basic step to
keeping control of all the moneys coming in and going out of your pocket during the month.

Basics Elements of a Good Budget

A good budget will take into account a few basic elements, without considering these elements;
your budget may be incomplete. Your budget should consider:

 Income. The most basic element of all budgets is income. You should keep track of how
much you make and from which sources. Make note of both pretax and post-tax income.
 Fixed expenses. Fixed expenses are those expenses over which you have little control or
are unchangeable. For example, your mortgage is a fixed expenses; your Ds TV account
is not. Once you subtract the value of your fixed expenses from your income, you will
have a better understanding of the third basic element: flexible expenses.
 Flexible (variable) expenses. Flexible expenses refer to things that you want to spend on
but don’t necessarily need. Entertainment is an example of a flexible expense, as is going
out to dinner, buying new clothes, or buying concert tickets.
  Unplanned expenses. Your budget should also consider unplanned expenses or
emergency expenses (like your car breaking down or having to replace a part in your
stove) and savings.
 Savings. Finally your budget should also consider. Savings shouldn’t be dipped into if
you can help it, even for emergencies.

Advantages of budgeting

A good budget:

 Shows the entrepreneurs early enough whether the enterprise to be undertaken is likely to
make a profit or loss
 Helps the entrepreneur to select among many alternatives, the enterprises that are likely
to be more profitable.
 Promotes coordination among the managers who execute the activities of the enterprise
 Clearly defines areas of responsibility in communication in the organization
 Provides a basis of performance appraisal.
 Enables the entrepreneur to carry out remedial action in case discrepancies emerge
 Motivates employees by giving them a common sense of purpose, especially when they
are involved in the budgeting process.

Problems of making a budget

 Goals that are set may not be achieved if there is no collective participation by all
stakeholders in budgeting. For example, if the head of a household makes a budget
without involving other family members.
 It takes a lot of time and effort to make a comprehensive budget. Time and energy are
wasted if such budget is not implemented
 Some managers over estimate costs of production so that in future they are not blamed
for incompletion due to lack of funds. This leads to overspending on part of the
entrepreneur.

Type of Budgets

There are two main types of budget, namely the partial budget and the complete budget
Partial budget

This type of budget is used when making minor changes on the enterprise. It involves estimating
the extra costs to be incurred and the returns expected from the changes made. When making a
partial budget, the changes to be made should be clearly explained.

Complete budget

This type of budget is made when a complete reorganization of the enterprise business is to be
done. It is also needed to guide the entrepreneurs when setting up an entirely new enterprise, or
when changing from one enterprise to another, e.g. from livestock (dairy) to rose flower
production. The complete budget covers all the items of expenditure and income expected.

Costing and pricing products and services

Costing is the process of calculating how much will be spent to produce a product or offer a
service, before a product or service can be priced for a profit.
Importance of costing

If an entrepreneur knows the cost of a product or service, it will enable him or her to:

(a) Set prices in such a way that the enterprise makes a profit;

(b) Identify which items are most costly and find ways of reducing certain costs;

(c) Avoid overpricing the enterprise out of competition. Overpricing is charging prices which are
well above the average market price; and

(d) Avoid underpricing the enterprise to bankruptcy. Underpricing is charging prices which are
well below the average market price.

The information an entrepreneur uses to effectively cost a product or service comes from the
records of all transactions of an enterprise. This is one of the reasons why an entrepreneur is
required to have a good record keeping system.

Types of costs

There are two main types of costs:

● Direct costs ● indirect costs

1 Direct costs
Direct costs are those costs which become part of the product or service which is being produced
or provided. These costs can be directly and completely attributed (traced) to the production of a
specific product r service.
Direct costs can further be divided into two sub-costs, namely:

(a) Direct labor costs is the money spent on salaries or wages for the people who actually make
a particular product or provide a particular service.
(b) Direct material costs are the money spent on the raw materials used to make a particular
product or provide a particular service. In other words, direct material costs are the costs of direct
materials which can easily be identified with the production of one unit of a product or provision
of one unit of a service.
2 Indirect costs
Indirect costs are the cost of all other items and payments for people needed in running an
enterprise but are not in a way easily traced to a specific product or service. This may include
costs such as:
● Rent● Electricity● Water● Telephone● Transport● Salaries and wages for employees not
directly involved in production (e., owner, security guard, secretary, cashier, etc.) ● Stationery
and postage● Repairs and maintenance● Insurance● Depreciation

(b) Direct labor costs

Tilyenji Bakery has four (4) production workers who make bread and each employee gets
K2,000 as salary per month. The bakery produces 50,000 loaves of bread per month.

The formula for calculating direct labour costs per unit produced is as follows:

Unit direct labour costs= Number of employees X salary Quantities produced

Unit direct labour costs = 4 X K 2, 50,
= K 50, 0008,
Product Pricing
What is price?
Price is:
 The amount of money customers pay for a good or service.
 What is given up in exchange to acquire a good or service
  Usually expressed in terms of a certain monetary amount per unit of item.

What is pricing?
Is the act of setting the price of a product? It is a key decision every entrepreneur has to make for
their business. Pricing is a major element of a company’s marketing strategy. The prices you
establish for goods and services impact your marketing goals and strategies, profitability and
value proposition. Planning effectively helps you weigh the long-term ramifications of
establishing certain price points and including them in promotion.
Factors Affecting Pricing Decisions
There are several factors a business needs to consider in setting the price:
 Objectives. What are the marketing or profit objectives of the firm? Your pricing should
relate to your overall company goals. Most importantly, you need to decide whether to
price with a short-term orientation.
 Competitors. This is really important. Competitor strength influences whether a business
can set prices independently, or whether it simply has to follow the normal market price
 Costs. A business cannot ignore the cost of production or buying a product when it
comes to setting a selling price. In the long-term, a business will fail if it sells for less
than cost, or if its gross profit margin is too low to cover the fixed costs of the business
 The state of the market for the product. If there is a high demand for the product, but a
shortage of supply, then the business can put prices up
 The state of the economy. Some products are more sensitive to changes in
unemployment and workers’ wages than others. Makers of luxury products will need to
drop prices especially when the economy is in downturn
 The bargaining power of the customers in the target market. Who are the buyers of
the product? Do they have any bargaining power over the price set? An individual
consumer has little bargaining power over a supermarket (though they can take their
custom elsewhere). However, an industrial customer that buys substantial quantities of a
product from a business may be able to negotiate lower or special prices.
 Legislation in the market. Some businesses operate in markets where prices are
regulated by government legislation-e.g. the rail industry
 Other elements of the marketing mix. It is important to understand that prices cannot
be set without reference to other parts of the marketing mix. The distribution channels
 used will affect price-different prices might be charged for the same product sold direct to
consumers or via intermediaries
 Stage of product life cycle. The price of a product in the decline stage of its product life-
cycle will need to be lower than when it was first launched
 Others factors including
 Stock market fluctuations
 Employment rates
 Market trends
 The customers’ expectations
 Regulatory requirements
 The nature and quality of the product
 Your revenue model
Marketing Management
Meaning of marketing
Marketing is a business function dealing with the selling of goods and services. It is a broad term
consisting of many processes which include:
 Creating value of customers
 Communicating or promoting the value to inform, educate, persuade and convince
customers to buy
 Delivery value to customers
 Exchanging values for customers
Marketing also includes:
 Pricing goods and services
 Branding of goods services
 Product placement and choosing distribution channels
 Building relationships with customers
 Capturing value from customers
Five basic purpose of marketing
1. Identifying who your customers are.
2. Understanding their needs and preferences
3. Creating the goods and services to satisfy the identified customer needs
4. Building relationships to retain the customers
 5. Meeting your company goals and objectives in the process.
Marketing mix
What is 'Marketing Mix?'

Definition: The marketing mix refers to the set of actions, or tactics, that a company uses to
promote its brand or product in the market. The 4Ps make up a typical marketing mix - Price,
Product, Promotion and Place. However, nowadays, the marketing mix increasingly includes
several other Ps like Packaging, Positioning, People and even Politics as vital mix elements.
Description: What are the 4Ps of marketing?
Price: refers to the value that is put for a product. It depends on costs of production, segment
targeted, ability of the market to pay, supply - demand and a host of other direct and indirect
factors. There can be several types of pricing strategies, each tied in with an overall business
plan. Pricing can also be used a demarcation, to differentiate and enhance the image of a product.
Product: refers to the item actually being sold. The product must deliver a minimum level of
performance; otherwise even the best work on the other elements of the marketing mix won't do
any good.
Place: refers to the point of sale. In every industry, catching the eye of the consumer and making
it easy for her to buy it is the main aim of a good distribution or 'place' strategy. Retailers pay a
premium for the right location. In fact, the mantra of a successful retail business is 'location,
location, location'.
Promotion: this refers to all the activities undertaken to make the product or service known to the
user and trade. This can include advertising, word of mouth, press reports, incentives,
commissions and awards to the trade. It can also include consumer schemes, direct marketing,
contests and prizes.

Other marketing mixes

The four Ps aren’t the only marketing mix used today. Some other modern marketing mixes
include the five Ps, the seven Ps, and the 5 Cs. Although each of these reflects certain aspects of
the four Ps, they also each possess some unique elements that alter their emphasis on the marketing
process.

The five Ps
The five Ps are product, price, place, promotion, and people. Today, many marketers use the five
Ps over the four Ps because it centers the experiences of customers and staff in the marketing
process. Typical considerations include how a customer behaves, their experience with the product,
and their overall satisfaction with the business.

The seven Ps

The seven Ps are product, price, place, promotion, people, processes, and physical evidence. The
seven Ps are a further elaboration of the five Ps, adding considerations of the processes that define
the customer experience and the physical evidence that the target market needs to see to become
customers. While processes might involve the specific customer service processes that define a
product, physical evidence can be websites or store displays that help the target market imagine
themselves using the product.

The five Cs

The five Cs are customer, company, competition, collaborators, and climate. In some respects the
five Cs reflect many of the same concerns of the four and five Ps, but with added emphasis on
external factors, such as possible outside collaborations and competitive research.

Furthermore, while “climate” refers to the social, political, and economic context surrounding the
market, “customer” refers to the target market and customer experience. “Company,” meanwhile,
refers to the place of the company and their available resources in the marketing process.
Revision question
Define the following term
I. Marketing concepts
II. Marketing objective
III. Marketing management
IV. Pricing strategies
V. Pricing objective
What is the role of marketing?
Explain the function and importance of marketing management
What is the purpose of promotion?
How do you create the right price for a new product?
Explain the benefits of sticking on your budget
Business planning
A business plan is not made up. It is based on facts discovered through research, institution and
experience. It is a summary of everything about your proposed business. It has to be truthful if
you are going to invest your or borrowed money in it. You need to participate in developing it so
that you can be able to implement it successfully.
Writing a Successful Business Plan
Before you write out business Plan read and understands the following tips.
 First, you plan should be written simply, clearly, persuasively, honestly, and to the point.
 The language must be clear and easy to understand.
 The plan should be short and to the point and well supported with relevant facts.
 The layout should be clear and logical with relevant illustrations, product descriptions,
and graphs.
 Avoid using too much technical jargon. Clearly demonstrate what the benefits of your
products are and why someone would want to use the product or service.
 Give sufficient details on the qualifications of the proposers to implement the plan
 Clearly define the market and cite the market research. Include a marketing plan to show
how you will be able to sell you’re your product
 Give a detailed and accurate description of the market competition and steps of how you
will tackle them.
 Finally you must give the reader a compelling reason to invest in the plan, or at least
support it.
How to write a successful business plan
A well-researched and written business plan is an essential tool that can transform your
organization and enable you to attract funding and achieve you objectives in a manner that is
otherwise unimaginable.
However, preparing a detailed and satisfactory business plan is a painful exercise that takes a lot
of research, preparatory work and the underlying thinking and discussions.
Writing a business plan involves of a number of sections as described below
1. Executive Summary
  This is the first section of a business plan.
 It is a snapshot or summary of the entire plan.
 It tells the reader your capabilities and what you need
 It emphasizes the factors you believe will lead to success
 It is generally short-about half a page to one page in length
 It is normally the last to be written
 The tone should be enthusiastic and upbeat.
 Its purpose is to give the reader an idea of what the business is about and make the
readers want to learn more by reading the full plan
Contents of the executive summary
The executive summary consist of five main parts
i. Introduction of your business
 Name, addresses and location
 When the company was formed
 Product or service you will sell
 The vision, goals and objectives of the company
 Legal structure of the company
 Main shareholders
ii. Business concept
 Your business idea and the product or service you sell
 The need your product meets or problem it solves
 Target market and where they are located
 Your competitive advantage-a unique selling proposition that gives a company an
advantage over competitors. This is what differentiates your business from competition.
iii. Major achievements
 Business permits/licenses you hold
 Intellectual property protection
 Supply contracts
 Test market results
 Endorsements
iv. Financial features
  Sales forecast
 Profit forecast
 Cash flow
 Return on investment
v. Financial requirements
 Start-up and operating capital needed for the planning period
 How the funds will be used
 Equity provided for the funding
 Collateral security provided for the funding
2. Business Description
The first section of the plan you must work on is the business description and vision. You need
to explain to the reader where the business is now and where you want to take it by the use of
clear goals and objectives. You should include a statement of mission statement.
 Give a short description of the industry and state the present outlook as well as future
possibilities.
 Explain who you are as a company. This should include:
 What your organization does
 Where it is located
 How long it has been in operation
LEADERSHIP AND MANAGEMENT STYLES

Business leadership

Meaning of leadership

Leadership is the action of leading people towards achieving a particular goal. It is the ability to
influence the behavior and action of people to do something in orders to achieve a given goal.
Many people take leadership to represent:

 getting others to follow

 the use of authority in decision-making
 a personal characteristic
 an ability to achieve effective performance in others

The work of the leader involves; persuading, motivating, directing, coaching, communicating,
inspiring and encouraging people to believe in and work together in order to achieve a given
goal. A part of leadership function is coordination which involves communication, supervision
and direction by management.

A business leader influences employees by inspiring and motivating them. A good leader is
someone people look up to for guidance and direction because he/she is trustworthy.

A good leader inspires people by:

 Creating the rules

 Creating vision for a company
 Setting clear goals for employees to achieve and communicating them clearly
 guiding the people through their work so that they can do it properly
 Motivating people to do their level best in pursuit of the objectives held by the leader or
company
 Building team spirit and inspiring them to believe in the vision, objective or goal and
work together towards achieving it
 Gaining the trust of the people by keeping his/her words and leading by example
 Working with and empowering those who follow them.
A good leader influence other people because he/she has:

 Social intelligence and interpersonal skills. Knows how to speak to and interact with
people and respects their views and gets along well with others
 Good personality. He/she is sociable, approachable and open minded
 Good behavior. Shows that they are trustworthy. They are always professional, strong
willed and role models. They are responsive to suggestions and criticism.
 Reliability. A good leader needs to be reliable. If you do not trust someone, it is unlikely
you will follow their advice or leadership.
 Communicates with charisma. Encourages cooperation and communication among
employees
 Visionary. Able to paint the picture of the desirable future for followers and has good
and strong beliefs in his/her vision goals.
 Decision-making ability (is decisive). Ready to make reasonable and timely decisions
and stand accountable for their outcomes
 Is fair and equal. They can listen to both sides without bias and work to find a solution
that will help meet the team’s objectives.
 Knowledge of how to be a good listener. They know how to moderate and engaging
conservation in the organization, how to have a dialogue instead of a monologue, and
how to have built meaningful relationships with employees.
 Accessibility. Employees feel comfortable around them, rely on their availability, and
openly communicate with them.
 Builds his/her people (followers) to grow and get better
 Credibility and respectability. is trusted and respected by others
 Good organization skills. Know how to allocate resources and who to put where to get
the desired results.
 Is open and up-front. This means that a leader does not hide things, and what they say is
what they mean.

Leadership can manifest itself in a number of ways, from recognizing when employees need an
extra boost of reinforcement and praise, to handling conflicts between team members fairly and
decisively.
Some people are born leaders and naturally attract and easily influence followers, whether it is in
a positive or negative way. Others learn to be leaders by acquiring skills through education,
training and/or from experience.

The success of a leader will, therefore, be measured by the ability to get people to act in the
desired way.

Qualities of a Good Leader

The qualities of a good leader include the following:

 Vision or foresight to set a goal that is to be achieved.

 The ability to plan, provide direction and delegate in order to keep others moving towards
the goal.
 Effective communication skills to be able to share with others the importance of the goal
and to make sure they understand what is required in order to achieve it.
 Knowledge, skills and expertise in relevant areas.
 The ability to motivate others to cooperate, participate and want to contribute their best
towards achieving the goal.
 Generally, leaders who demonstrate personal attributes such as integrity, persistence,
determination and enthusiasm serve as role models and are able to energies others and
guide them to success.
 They have the desire to succeed-and have natural self-confidence that they will succeed;
 They clog the drains with solid waste are able to think beyond the obvious-to be creative
and to encourage others to do the same;
 They are multitalented-in order to understand discussions about a wide range of issues
affecting their business;
 They have incisive minds-to enable they key point of issues to be identified, rather than
unnecessary details;
 They are assertive-so that people do as they ask, that means they are confident and
persuasive;
 They are able to do the job themselves-so that they can demonstrate and help where
necessary;
 They regularly check that the work is being done-according to the standard they require;
  They praise or guide the members of their team
 They know what their teams must do;
 They are focused and have a vision; and
 They set a good example to the rest of the team members.

The Role of a Leader in a Business Enterprise

Business leaders have a varied number of responsibilities that range from hiring, training and
scheduling to goal setting, building morale and mentoring.

Leadership is critical to the success of a business and it has become particularly importance in
recent times because of;

 Changing organizational structures. Many business are adopting flatter structures

which require:- greater delegation, greater use of teamwork, more focus on quality
assurance, coaching, support and empowerment
 Rapid environmental change. Change is a constant feature of business life. It happens
all the time as result, the soft skills of leadership and management is becoming
increasingly important. A business leader is needed to carefully manage the change
process.
Effective leadership plays an important role in employee performance, productivity and
steering a business to success. The role of a business leader include to:
 Create the vision of where the company needs to go, define organizational goal,
formulate and execute plans to realize the vision
 Make decisions in a timely and decisive manner and stand by them
 Create organizational structure-outlining the chain of command and protocols for
effective communication
 Solve problems and conflicts in manner that reinforces the company rules
 Motivate and build the morale of workers to ensure they work hard and together through
praises and rewards
 Inspire workers by being an effective role model. Set good examples, e.g. demonstrate
good character, and practice the desired behavior-time management, doing work to high
standards, and with integrity
 Influence workers through personality, maturity and experience
  Innovate and have initiatives-by adapting new ways to create and improve the business
model
 Develop workers by training and coaching to empower them
 Build teams by hiring the right people with the right skills for the job and facilitate their
activities
 Clearly communicate the tasks, expectations, and listen to the workers. Keep them
informed and give timely feedbacks-both good and bad
 Provide the resources needed to accomplish the tasks
 Give guidance, direction and supervise the team
 Organize and coordinate the efforts of workers to ensure they are all working towards a
common goal
 Effectively delegate roles to develop and empower workers

Importance of Leadership in Business

Leadership acts as the catalyst that makes all others elements work together; without leadership,
all other business resources lie dormant. Savvy business leaders are in tune with the needs and
issues of their subordinates, and keep up to date on new developments in leadership theory and
methodology to maximize their effectiveness. Briefly, the following points justify the importance
of leadership in a business.

 Initiates action. A leader is a person who starts the work by communicating the polices
and plans to the subordinates from where the work actually starts.
 Motivation. A leader motivates the employees with economic and noneconomic rewards
to get them to work effectively and efficiently.
 Providing guidance. A leader has to not only supervise but also play a guiding role for
the subordinates. Guidance here means instructing the subordinate the way they have to
perform their work effectively and efficiently.
 Creating confidence. Confidence is an important factor which can be achieved through
expressing the work efforts to the subordinates, explaining to them clearly their role and
giving them guidelines to achieve the goals effectively. It is also important to hear from
the employees with regards to their complaints and problems.
  Building morale. Morale denotes willing co-operation of the employees towards their
work and getting them into confidence and winning their trust. A leader can be a morale
booster by achieving full co-operation so that they perform with the best of their abilities
as they work to achieve goals.
 Builds work environment. Management is getting things done from people. An
efficient work environment helps in sound and stable growth. Therefore, human relation
should be kept into mind by a leader. He/she should have personal contacts with
employees and should listen to their problems and solve them. He should treat
employees on humanitarian terms.
 Co-ordination. Co-ordination can be achieved through reconciling personal interests
with organizational goals. This synchronization can be achieved through proper and
effective co-ordination which should be a primary motive of a leader.

Leadership Styles

Meaning of leadership styles

 A leadership style is a leadership method. Leadership style is the way how:

 A leader carries out the leadership function
 A leader provides leadership function direction, implements plans and inspires, motivates
and influences people.
 A leader relates to people within and outside the enterprise
 A leader views themselves and their position.

The type of leadership style used by a business leader determines how:

The organization operates; a leader sets out to get the job done; the employees of an enterprise
relate to one another; a leaders handles an emergency situation; a leader cultivates the respect
and admiration of his/her followers; a leader mobilizes the community or followers to support a
particular course; much impact it has on an enterprises, its people and on what the enterprises
does; a leader empowers his/her followers; the business affects both the environment and its
employees; successful the leader is-i.e. how they achieve effective performance in others.

Types of Leadership Styles

Leadership styles can be categorized as being authoritarian, democratic, laissez-faire,
transactional, or narcissistic.

1. Autocratic leadership

Autocratic leadership is where the leader is a dictator. He/she issues instructions with little
opportunity for consultation with or contribution from others. The leader tells and directs and
does not discuss or persuade. The leader has absolute power over his/her employees. He/she
dictates how the company is run. Workers have little opportunity for making suggestions, even if
these would be in the company’s interest. Managers make decisions alone without the input of
the workers.

Autocratic leaders insist on doing it all themselves. They have all the power, make all the
decisions, and don’t often tell anyone else about what they’re doing. If you work for an
autocratic leader, your job is usually to do what you’re told.

An autocratic leader often maintains his/her authority by force, intimidation, threats, rewards and
punishment, or position. Although he may or may not have a clear vision, and may not be
steering the organization in the right direction, he’s not concerned with whether anyone else
agrees with he’s doing or not.

Features of Autocratic Leadership

 The leader tells subordinates what must be done and how it should be done.
 Employees have no say and there are no negotiations.
 Top-down approach with one way of communication in the form of orders and
instructions. Not concerned about the opinions of others.
 Has a de-motivating influence on other people in the business.
 Not an effective style but can be suitable in crisis situations.
 Usually adopted with unskilled workers
 Focus of power is within the manager
 Communication is top-down and one way
 Formal system of command and control
 Use of rewards and penalties

Advantages of Autocratic Leadership

  This is a top-down, directive, and full control leadership with little employee input but
gets the job done.
 An autocratic leadership allows quick decision-making, and eliminates arguments over
how and why things get done. (It allows for quick and clear decision-making that comes
with the elimination of consultation).
 At its best autocratic leadership provides a stable and secure work environment and
decisive, effective leadership.
 In times of stress and emergency, an autocratic leadership styles may well be best style to
adopt.
 However, in military and others crisis situations (such as fire rescue and police) it can be
very effective.
 For some routine and unskilled jobs, this styles of leadership is effective
 It benefits employees who require close supervision
 Quick decision making is guaranteed
 Good for inexperienced workers
 Decision making, planning or organizing needs no initiative

Disadvantage of Autocratic Leadership

 It reduces the likelihood of getting a range of different ideas from different people, and
can treat people badly, or as if they don’t matter.
 Autocratic leader is often concerned with his own power and status, he’ll be looking over
his shoulder, and moving to squash any opposition to him or his ideas and decisions.
 Innovation or the use of others’ ideas is only permissible if it’s part of the leader’s plan.
 Detrimental of team building
 It fails to utilize the talents of workers.
 It reduces employee motivation, especially among high-achieving employees who want
to advance into management.
 Most people resent being treated like this.
 It leads to high levels of absenteeism and staff turnover.
 There may be resistance if change is not clearly communicated
 It is very authoritarian
  Total control
 Non- learning and non-listening
 Non-participative-no room for staff input or involvement
 Leads to de-motivation, dissatisfaction, and dependent leadership
 Need high level of supervision
 Shuts out all potential benefits of democratic leadership
 All too often, however, it can sacrifice initiative, new ideas, and the individual and group
development of staff members for the predictability of highly structured, hierarchical
environment where everyone knows exactly what he’s supposed to do, and follows orders
without question.
 Can cause frustration and resentment because the system is so dependent on the leader
and because of the non-participation of workers
 Employees are told what to do so no creative ideas
2. Democratic Leadership

This is participative leadership where the manager consults with and involves workers in
decision making.

A democratic style of management will put trust in employees and delegates to them the
authority to do this.

The manager invites everyone to make suggestion, listens to employees’ advice and opinions and
makes a decision based on the majority views of all workers.

Democratic leadership encourages the development of leadership skills in workers and promotes
a two way form of communication in the workplace. It also encourages workers to be more
creative, innovative and engaged in their work and projects.

Democratic leadership is suitable where teamwork is essential and quality is more important than
speed to market or productivity.

Features of democratic leadership

Democratic leadership attempts to manage with democratic principles, such as self-

determination, inclusiveness, equal participation and deliberation. The following three features
characterize democratic leadership:
  Distribution of responsibility- A manager that leads democratically will distribute
responsibility among his group to facilitate participation in decision making.
 Empowering group members. Leaders must empower their members so that the
members can accomplish their responsibilities. Empowerment includes providing training
and education necessary for delegation task completion.
 Aiding group decision making process. A major role of a democratic leader is to ensure
democratic deliberation in making group decisions. This means that a leader should act as
a facilitator and mediator between group members and ensure that a psychologically
healthy and respectful environment is maintained.
 It is associated with soft human resources strategy
 Focus of power is more with the group as a whole
 Leadership functions are shared with the group
 Employees have greater involvement in decision making
 Emphasis on delegation and consultation
 It is a trade-off between speed of decision making and better motivation morale.

Advantages of Democratic Leadership

 Subordinates are more involved and willing to work towards whatever decisions are
being made due to the vested interest they have as a result of being a part of the decision
making process.
 Employees tend to have a higher level of productivity and job satisfaction because they
feel valued by their manager and that what they say or feel actually matters.
 The democratic leader essentially empowers the subordinates by recognizing the valuable
contributions they can make during the decision making process
 Employees become less competitive and more cooperative with one another, creating a
welcoming organizational culture that people like to be a part of.
 Democratic leadership techniques generally will do a better job creating job satisfaction
because it fosters a sense of participation, control and autonomy.
 Greater employee participation in decision making may also lead to greater innovation
and creative solutions to problems that will better serve an organization.
  Democratic leadership, with its emphasis on equal status, can encourage friendships and
good relationship throughout the organization.
 It helps people feel valued when their opinions are solicited, and even more so if those
opinions are incorporated into a final decision or policy.
 It motivates staff if managers listen and responds to suggestion
 It encourages workers’ participation in business affairs
 It boosts employee morale as they make contributions to the decision making process.it
makes them to feel that their opinion matters.
 It helps employees accept changes easily.
 It promotes creativity and productivity within a team environment.
 It increases job satisfaction, and helps develop people’s skills.
 Workers feel in control of their own destiny and so are motivated to work hard.
 Better decision are made
 It promotes socialization between clerical staff and administrators.
 Managers find it easier to implement changes as they are more likely to be supported by
the workers.
 Decisions may be more informed
 It creates a positive work environment for both employees and employers
 Employees contribute towards the decision making process which minimizes conflict
 It encourages creative thinking amongst employees as they contribute towards decision
making
 Productivity increases as happy workers have better work ethics.
 Staff turnover is reduced because job satisfaction is high amongst workers.
 Workers are consulted or participate in the decision making process hence feels satisfied
 Workers are aware of what is happening in the organization and thus they take interest in
producing more and more
 Workers get full opportunity to utilize their capabilities
 The democratic leadership style is best when implemented in the team environment
where productivity and efficiency take the back seat to quality.

Disadvantages of Democratic Leadership

Given below are the disadvantages of democratic leadership

 It is time consuming and requires long discussions. This slows down decision making
process. Although it can be argued that two minds are better than one, it also takes more
time to come to a decision as everyone has to be consulted.
 It is not suitable when the company needs to make decision in short time.
 What democratic leadership doesn’t necessarily do-although it can-is establish staff
ownership of the organization and its goal
 Although everyone may be asked for ideas or opinions, not all of those are used or
incorporated in the workings of the organization. If there is no real discussion of ideas,
with a resulting general agreement, a sense of ownership is unlikely. Thus, democratic
leadership may have some of the drawbacks of autocratic leadership- a lack of buy-in
 Can only be effective in situations where employees are skilled and eager to share ideas
in order to make informed decisions
 Profitable opportunities may be missed due to slow decision making
 Poor leadership skills may results in not achieving business objective and this may lead to
conflicts by the leader in his/her final decision as he/she has the final responsibility of
making decisions
 Leaders may make poor decisions based on misleading contributions by subordinates
 Everyone tries to have their say and mould the situation according to their liking, which
hinders progress
 Can turn into a disastrous condition in times of crisis when there is an urgent need of
definite and strong direction
 Employees might also resent the participative leader who only listens to their ideas but
never implement them
 The employees might not have the knowledge, skills or expertise to provide high quality
input during decision making.
3. Laissez-faire leadership
This is the opposite of autocratic leadership. It is sometimes referred to as “hands off”
leadership style. In fact laissez-faire means to “leave alone” in French. But laissez-faire is
not the same as abdication.
  The leader sets the goals and provides the workers with the materials and information
they need to get the job done
 The leader then delegates the work to team to get on with the job on their own
 The leader does not directly participate in the decision making, only offering guidance
and support when requested
 Workers have full autonomy and freedom to manage their tasks and dead-lines.
 Laissez-faire leaders are often criticized for providing little or no direction. But it can be
effective if the leader monitors what is being done and gives feedback from time to time.
 It is usually applied by managers who take over and are still new and want to acquaint
themselves better with the processes. It should not be used long term.
 Again it is effective where staff are well trained, motivated, willing to take on
responsibilities and can be trusted to do their jobs.

Features of Laissez-Faire Leadership

 This is a subordinates centred leadership style

 Leader is not part of the decision making process
 The leader allows employees to make decision within the framework of the business’
policy, especially if they have the expertise.
 However, the leader is still responsible for the decisions that are made.
 Leaders will handle conflict by allowing subordinates to find their own solutions to
problems.
 The leader gives very little direction to subordinates
 May lead to frustration on the part of the employees if they do not have the necessary
expertise.
 Such leaders are seen as weak and unsuitable by the employees.
 Only suitable when employees are highly experience and motivated
 It can also be used when the leader wants to empower the workers through delegation.
 Employees have freedom to do what they think is best
 May results in poor role definition for managers
 Only effective when staff are ready and willing to take on responsibility

Circumstance When Laissez-Faire Leadership Is Effective:

  The followers are highly trustworthy, skilled, experienced and educated
 The followers have pride in their work and the drive to do it successfully on their own
 Outside experts, such as staff specialists or consultants, are being used.
 Staff are trustworthy and experienced
 When employees are experts possess the knowledge, experiences and skills to
successfully complete tasks, and the leader has confidence in their abilities to do so.
 For situations of research and design where people are given free rein to conduct tests in
an attempt to discover something new
 For simple tasks that the leader trusts workers to perform without supervision. For
example, a manager may allow administrative assistance to decorate the offices for
Christmas.

Advantage of Laissez-Faire Leadership

 It encourages personal growth. Because leaders are so hands-off in their approach,

employees have a chance to be hands-on. This leadership style creates an environment
that facilitates growth and development.
 It encourages innovation. The freedom given to employees can encourage creativity and
innovation
 It allows for faster decision making. Since there is no micromanaging, employees under
laissez-faire leadership have the autonomy to make their own decisions. They are able to
make quick decisions without waiting weeks for an approval process
 It increases job satisfaction. In general, people are turned off by overbearing or overly
demanding bosses. While useful tool for productivity, it may backfire in the long run due
to heavy attrition. With laissez-faire, however, staff members feel more comfortable, free,
and valued. There is less chance of stress, which can lead to improved morale and
retention, as well as increased productivity in the right circumstances.
 It can free up your schedule. The negative effects of micromanaging employees is well
known, but it’s also not good for you –especially if you have ambitions for growth and
expansion. By delegating to your team, you will have more time free to plan and oversee
your various strategies. This doesn’t mean that you concede total control of day-to-day
operations, either; by being more selective in your interactions with staff, you can still
bring your influence and oversight to bear.
  The retention rate of experts can increase. Most experts prefer the freedom to make
their own decisions. If they are in a restrictive work environment, they may search for
opportunities to leave, thus increasing the turnover rate.
 Allows for innovation and creativity
 Allows the staff to make their own decision within broad guideline
 Non-authoritarian leadership
 A hands-off leadership
 It allows leaders to focus on tasks that relate directly to the business without having
to deal within administration

Disadvantage of Laissez-Faire Leadership

 Lack of role clarity. In some situations, the laissez-faire style leads to poorly defined
roles within the group. Since team members receive little to no guidance, they might not
really be sure about their role within the group and what they are supposed to be doing
with their time.
 Poor involvement with the group. Laissez-faire leaders are often seen as uninvolved
and withdrawn, which can lead to a lack of cohesiveness within the group. Since the
leader seems unconcerned with what is happening, followers sometimes pick up on this
and express less care and concern for the project.
 Low accountability. Some leaders take advantage of this style as a way to avoid
responsibility for the group’s failures. When goals are not met, the leader can then blame
members of the team for not completing tasks and living up to expectations.
 Passivity. At its worst, laissez-faire leadership represent passively or even an outright
avoidance of true leadership. In such cases, these leaders do nothing to try to motivate
followers, don’t recognize the efforts of team members, and make no attempts at
involvement with the group.
 Team members may be confused about their roles. It is difficult to determine who is
responsible for the team’s direction when each person is free to make his/her own
decision. Team members don’t know who to look to for direction and can be confused
about where and how they fit in the organization.
 The leader is viewed as uncaring and absent. The team’s perception of their leader can
largely impact their performance. Most teams want to know that their leaders cares and is
 present to understand the challenges they face. Some people begin to lose trust in the
leader and the organization if they hardly ever see or hear from the leader.
 Teams that need consistent guidance fall apart. Autonomy works best with teams that
are highly experienced and intrinsically motivated. Young team members with little or no
experience need mentorship, guidance and support. Without a strong and present leader,
this inexperienced team falls apart. This can be quite damaging, both for the team as well
as its surroundings.
 If the leader withdraws too much from their staff it can sometimes result in a lack of
productivity, cohesiveness and satisfaction.
 May leave staff feeling that they have little direction or support.
 There is no regular feedback from the leader.
 Manager does not exert sufficient control.
 It does not improve team building
 Leader lacks direct supervision of employees and fails to provide regular feedbacks.
 It hinders the productivity of those employees who require more supervision
 It can lead to lack of control, low productivity and increase in costs.
4. Paternalistic Leadership

The leader act as a father figure in the work place. The leader is more concerned about the
social and welfare needs of the workers. The leader usually consults workers before making
any decision, although he largely ignore the worker’s inputs and feedbacks-believing that
they need guidance and direction and that they are acting in the best interest of workers. In
this respect, paternalistic leadership has autocratic tendencies.

Features of Paternalistic Leadership

 This type of leadership style is usually applied where employees are not experienced and
their skills need to be nurtured and improved as well as monitored and motivated to do
better.
 The leader is authoritative and would like to be in charge.
 Decision is based on the needs of the workers.
 Looks at the welfare of workers
 The leader decides what is best for staff
  Leader tries to address employees’ needs
 Little delegation of power
 It is more less like a parent/child relationship-where the leader is seen as a “father-figure”
 It is a softer form of authoritarian leadership, which often results in better employee
motivation and lower staff turnover
 Typical paternalistic leader explains the specific reason as to why he has taken certain
actions

Advantages of Paternalistic Leadership

Although paternalistic leadership is essentially as much of a dictatorial leadership as the

autocratic form, in as much as that decisions are made at the top and communication is mostly
downward, paternalistic leadership advantages consist of:

 Feedback being invited, thus improving morale

 Overall staff turnover and absenteeism rates decrease
 Decision taking employees’ best interests into account
 The employee is rewarded with candy and toys when well behaved
 Employee loyalty, lower turnover due to emphasis placed on social needs.
 Followers follow the leader’s instruction
 Decisions made are in the best interest of employees
 The relationship between the leader and employees is solid
 Strong diplomatic relationship
 If leaders make good decisions it means followers will get benefits and more loyal

Disadvantages of Paternalistic Leadership

Paternalistic style of leadership has the disadvantages of:

 Low staff motivation if loyal connection to management is not established

 Increasing dependency of employees on the leader leading to more supervision required
 Dissatisfaction in employees if bad decisions are made
 Like a parent would have to, sometimes the employer must spank the employee
  The above disadvantage could further be made a problem through employee rights and
legislation
 Employees are dependent on the leader
 Employees have no decision making skills
 Employees are not free, they are restricted to what the leader decides
 The leader can play favorites with the reward and penalty system
 High staff turnover as dissatisfied employees leave the firm
 Working environment is like a slave labor situation
 Employees are not motivated into giving their best at all times, resulting in increased
supervision becoming necessary.
 Employees become too dependent on the leaders by simply following the instructions and
decisions made without really caring much about what has to be done.
 When employees are treated like children, they’ll act like children. This includes not
thinking for themselves, waiting to be told what to do, and not wanting to be held
accountable.
 While employees value a great salary, benefits, and other perks, they also value having
their ideas heard and considered as well as opportunities to learn and grow. In fact, your
best employees value these other things so much they’ll go elsewhere to find them.
 It may be a cliché, but its true-it’s lonely at the top. There’s a price to play for making all
the decisions, always having to be right, and holding yourself personally responsible for
everyone’s happiness.
 Performance really does matter. If you continue to reward employees based on their
likability, loyalty, and willingness to not make waves, instead of their progress toward a
goal, your business will suffer as a result

Revision question

a) What is the meaning of ethical leadership

b) What are the characteristic of ethical leaders
c) Explain the issue face by ethical managers
d) State the importance of ethical leadership skill
a) Define the term corporate governance
b) Define governance
 c) State the purpose of corporate governance
d) Define corporate governance structure or framework
e) What are the benefits of corporate governance in companies
f) Explain the limitation of corporate governance
g) State the role play by the following in corporate governance
i. Board of directors
ii. Officers and managers
iii. Shareholders
iv. Company secretaries
a) What is mean by annual general meeting (AGM)
b) What is the importance of the AGM
c) Explain the purpose of annual general meeting

PROBLEM ANALYSIS AND DECISION MAKING

A Basic Business Problem Analysis Technique

By Angela & Tom Hathaway | Jul 30, 2012 | Requirements Gathering (aka Elicitation) | 0
comments
How does your organization decide which projects to fund? When a project is done, how do you
know if it was successful? Business problem analysis is a set of techniques that identify and
evaluate areas in which stakeholders are unhappy with an existing situation. These techniques
help you understand the business problems and their context sufficiently to isolate the real pain
points, manage a problem backlog, establish a basis for measuring success, and initiate basic
cost-benefit analysis to help you make the right decision.

Business Problem Analysis:

 defines the scope for projects

 ensures common understanding of purpose of projects
 establishes foundation for funding of projects
 creates basis for development of test strategy and plan
 sells a project to all stakeholders
 facilitates cross-project risk-based management decisions
 avoids marginal-value add-ons
 When Should You Analyze Problems?
Ideally, business problem analysis should precede the development of the solution. However,
any time decision makers cannot communicate what problems the project will solve (regardless
how advanced the project is) is the best time for business problem analysis.
Who Should Analyze Problems?
Business analysts, product owners, project leaders, managers, virtually anyone working on the
project needs to understand the business and technical problems that the project will solve.
A Problem Analysis Technique

Basic Problem Definition

Step 1 Step 2 Step 3

Get a written Define who wants to Separate the "real" problems from
list containing 5 – 9 solve each the symptoms and proposed
answers to the question: problem, who cares how solutions.
“What is the problem?“ it is solved, A "real" problem has multiple
from each involved and who might resist the potential solutions. A good solution
party. solution. will cause all related symptoms to
Identify the players by disappear.
role or job title, not If necessary,
name. apply problem/symptom reduction.

Problem-solving involves identifying an issue, finding causes, asking questions and

brainstorming solutions. Gathering facts helps make the solution more obvious. Decision-making
is the process of choosing a solution based on your judgment, situation, facts, knowledge or a
combination of available data.

Processes of Decision Making

Types of Decision Makers

Problem solving and decision making belong together. You cannot solve a problem without
making a decision. There are two main types of decision makers. Some people use a systematic,
 rational approach. Others are more intuitive. They go with their emotions or a gut feeling about
the right approach. They may have highly creative ways to address the problem, but cannot
explain why they have chosen this approach.

Six Problem-Solving Steps

The most effective method uses both rational and intuitive or creative approaches. There are six
steps in the process:

1. Identify the problem

2. Search for alternatives

3. Weigh the alternatives

4. Make a choice

5. Implement the choice

6. Evaluate the results and, if necessary, start the process again

Identify the problem

To solve a problem, you must first determine what the problem actually is. You may think you
know, but you need to check it out. Sometimes, it is easy to focus on symptoms, not causes. You
use a rational approach to determine what the problem is. The questions you might ask include:

 What have I (or others) observed?

 What was I (or others) doing at the time the problem occurred?

 Is this a problem in itself or a symptom of a deeper, underlying problem?

 What information do I need?

 What have we already tried to address this problem?
For example, the apprentice you supervise comes to you saying that the electric warming oven is
not working properly. Before you call a repair technician, you may want to ask a few questions.
You may want to find out what the apprentice means by “not working properly.” Does he or she
know how to operate the equipment? Did he or she check that the equipment was plugged in?
Was the fuse or circuit breaker checked? When did it last work?
 You may be able to avoid an expensive service call. At the very least, you will be able to provide
valuable information to the repair technician that aids in the troubleshooting process.

Of course, many of the problems that you will face in the kitchen are much more complex than a
malfunctioning oven. You may have to deal with problems such as:

 Discrepancies between actual and expected food costs

 Labour costs that have to be reduced

 Lack of budget to complete needed renovations in the kitchen

 Disputes between staff

However, the basic problem-solving process remains the same even if the problems identified
differ. In fact, the more complex the problem is, the more important it is to be methodical in your
problem-solving approach.

Search for alternatives

It may seem obvious what you have to do to address the problem. Occasionally, this is true, but
most times, it is important to identify possible alternatives. This is where the creative side of
problem solving really comes in.

Brainstorming with a group can be an excellent tool for identifying potential alternatives. Think
of as many possibilities as possible. Write down these ideas, even if they seem somewhat zany or
offbeat on first impression. Sometimes really silly ideas can contain the germ of a superb
solution. Too often, people move too quickly into making a choice without really considering all
of the options. Spending more time searching for alternatives and weighing their consequences
can really pay off.
Weigh the alternatives
Once a number of ideas have been generated, you need to assess each of them to see how
effective they might be in addressing the problem. Consider the following factors:

 Impact on the organization

 Effect on public relations

 Impact on employees and organizational climate

 Cost

 Legality

 Ethics of actions

 Whether this course is permitted under collective agreements

 Whether this idea can be used to build on another idea
Make a choice
Some individuals and groups avoid making decisions. Not making a decision is in itself a
decision. By postponing a decision, you may eliminate a number of options and alternatives. You
lose control over the situation. In some cases, a problem can escalate if it is not dealt with
promptly. For example, if you do not handle customer complaints promptly, the customer is
likely to become even more annoyed. You will have to work much harder to get a satisfactory
solution.

Implement the decision

Once you have made a decision, it must be implemented. With major decisions, this may involve
detailed planning to ensure that all parts of the operation are informed of their part in the change.
The kitchen may need a redesign and new equipment. Employees may need additional training.
You may have to plan for a short-term closure while the necessary changes are being made. You
will have to inform your customers of the closure.

Evaluate the outcome

Whenever you have implemented a decision, you need to evaluate the results. The outcomes may
give valuable advice about the decision-making process, the appropriateness of the choice, and
the implementation process itself. This information will be useful in improving the company’s
response the next time a similar decision has to be made.

Creative Thinking
Your creative side is most useful in identifying new or unusual alternatives. Too often, you can
get stuck in a pattern of thinking that has been successful in the past. You think of ways that you
have handled similar problems in the past. Sometimes this is successful, but when you are faced
with a new problem or when your solutions have failed, you may find it difficult to generate new
ideas.
 If you have a problem that seems to have no solution, try these ideas to “unfreeze” your mind:

 Relax before trying to identify alternatives.

 Play “what if” games with the problem. For example, What if money was no object? What if we
could organize a festival? What if we could change winter into summer?

 Borrow ideas from other places and companies. Trade magazines might be useful in identifying
approaches used by other companies.

 Give yourself permission to think of ideas that seem foolish or that appear to break the rules. For
example, new recipes may come about because someone thought of new ways to combine foods.
Sometimes these new combinations appear to break rules about complementary tastes or break
boundaries between cuisines from different parts of the world. The results of such thinking
include the combined bar and laundromat and the coffee places with Internet access for
customers.

 Use random inputs to generate new ideas. For example, walk through the local shopping mall
trying to find ways to apply everything you see to the problem.

 Turn the problem upside down. Can the problem be seen as an opportunity? For example, the
road outside your restaurant that is the only means of accessing your parking lot is being closed
due to a bicycle race. Perhaps you could see the bicycle race as an opportunity for business rather
than as a problem.