Full-Notes On MD. JeNNIFER

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FULL Notes
Introduction To Business (University of Nairobi)
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UNIVERSITY OF NAIROBI
COLLEGE OF HUMANITIES AND SOCIAL SCIENCES
SCHOOL OF BUSINESS
In collaboration with
CENTRE
FOR OPEN AND DISTANCE LEARNING
DBA 101: INTRODUCTION TO BUSINESS
AUTHORS
KEPHA MONAYO:
LECTURER, SCHOOL OF BUSINESS
JUSTUS M. MUNYOKI:
JAMES GATHUNGU:
REVIEWER
S. M. Nzuve
EDITED BY
S. P. Nzuki

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Lecture series: DBA 101 – Introduction to Business
Published by University of Nairobi, P. O. Box 30197, Nairobi, Kenya

Printed by College of Education and External Studies, University of Nairobi, P. O. Box
30197, Nairobi, 2006
© University of Nairobi, 2006, all rights reserved. No part of this Module may be
reproduced in any form or by any means without permission in writing from the
Publisher.

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TABLE OF CONTENTS
Table of Contents ……………………………………………… iii

General Introduction ……………………………………………. ix
LECTURE 1: Introduction and General Overview of Business… 1

1.1. Introduction …………………………………………… 1
1.2. Objectives …………………………………………….. 2
1.3. Meaning of Business …………………………………. 2
1.4. Characteristics of Business …………………………… 2
1.5. Objectives of Business Organizations ………………… 4
1.6. Scope and Nature of Business ………………………… 5
1.7. Types of Industry ……………………………………… 5
1.7.1. Primary Industries ……………………………… 6
1.7.2. Secondary Industries …………………………… 7
1.7.3. Classification of manufacturing Industries …….. 7
1.7.4. Commerce ……………………………………… 9
1.7.5. Trade …………………………………………… 11
1.7.6. Categorization of Business Organization ……… 12
1.8. Sources of Business …………………………………… 12
1.9. Business as a System …………………………………. 15
1.10. An Open System of Organization ……………………. 17
1.11. Business as a Way of Life …………………………… 18
1.12. Summary ……………………………………………. 19
LECTURE 2: Business Environment …………………… 20

2.1. Introduction …………………………………………. 20
2.2. Objectives …………………………………………… 21
2.3. Meaning of Environment …………………………… 21
2.4. Types of Environments …………………………….. 21
2.4.1 Internal Environment ………………………… 22
2.4.2 External Environment ……………………….. 22
2.5. Ethics ………………………………………………… 23
2.5.1. Ethics Defined ………………………………… 24
2.5.2. Sources of Business Ethics …………………… 24
2.5.3. Benefits of Ethics to Business ………………… 25
2.6. Core Stake Holders and their Rights ………………… 25
2.7. Social Responsibility ………………………………… 27
2.7.1. Meaning of Social Responsibility …………….. 27
2.7.2. Arguments for Social Responsibility ………….. 28

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2.7.3. Arguments against Social Responsibility ………… 28

2.7.4. Social Responsibility of Business ………………… 28
2.8. Summary ………………………………………………… 30
2.9. Further Reading ………………………………………… 30
LECTURE 3: Forms of Business Organizations …………… 31

3.1. Introduction ……………………………………………… 31
3.2. Objectives ………………………………………………… 31
3.3. Private Sector …………………………………………… 32
3.4. Public Sector …………………………………………… 32
3.5. Selection of form of Business …………………………. 33
3.6. Sole proprietorship …………………………………… 34
3.7. Partnerships …………………………………………… 40
3.8. Limited Liability Companies ………………………… 46
3.9. Co-operatives ………………………………………… 54
3.10. Summary ……………………………………………. 59
3.11. Further Reading …………………………………….. 59
LECTURE 4: Public Business Enterprises

4.1. Introduction …………………………………………… 60
4.2. Objectives ……………………………………………. 61
4.3. Need for Public Enterprises ………………………… 61
4.4. Reasons for Government Enterprises ………………. 61
4.5. Reasons against Public Enterprises ………………… 62
4.6. Organization of State Enterprises …………………. 63
4.7. Government Department …………………………… 63
4.7.1. Limitations of Departmentally Enterprises .………… 64
4.8. Public Corporations/Parastatals …………………………… 64
4.8.1. Features of Public Corporations …………………… 64
4.8.2. Formations ………………………………………… 65
4.8.3. Ownership ………………………………………… 66
4.8.4. Management ……………………………………… 66
4.8.5. Capital Sources …………………………………… 66
4.8.6. Types of Public Corporations ……………………… 67
4.8.7. Advantages of Public Corporations ……………… 69
4.8.8. Disadvantages of Public Corporations …………… 71
4.8.9. Dissolution of Public Corporations ……………… 72

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4.9. Privatization ……………………………………………. 73

4.10. Summary ……………………………………………… 74
4.11. Further Readings ……………………………………… 75
LECTURE 5: Small Business Management ……………… 76

5.1. Introduction …………………………………………… 76
5.2. Objectives ……………………………………………… 77
5.3. Meaning of Small Business …………………………… 77
5.4. Characteristics of Small Business Enterprises ………… 78
5.5. Advantages of Being Small …………………………… 79
5.6. Disadvantages of Small Enterprises …………………… 80
5.7. Role of Small Businesses in Kenyan Economy………… 81
5.8. Constraints in the Development of Small Enterprises in Kenya ..83
5.9. Ownership and Management of Small Enterprises …… 85
5.10. Summary ……………………………………………… 86
5.11. Further Reading ……………………………………… 86
LECTURE 6: Principles of Management ………………… 88

6.1. Introduction …………………………………………… 88
6.2. Objectives ……………………………………………… 89
6.3. Meaning of Management ……………………………… 89
6.4. Characteristics of Management ……………………… 90
6.5. Levels of Management ……………………………… 90
6.6. Management Functions ……………………………… 91
6.6.1. Planning ……………………………………………… 92
6.6.2. Organizing …………………………………………… 95
6.6.3. Staffing ……………………………………………… 96
6.6.4. Directing ……………………………………………… 97
6.6.5. Communication ……………………………………… 98
6.6.6. Motivation …………………………………………… 99
6.6.7. Leadership …………………………………………… 100
6.6.8. Controlling ………………………………………….. 100
6.7. Development of Management Thought .…………… 101
6.8. Qualities of a Good Modern Manager ……………… 102
6.9. Summary …………………………………………… 103
6.10. Further Reading ……………………………………. 104

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LECTURE 7: Human Resource Management ………… 105

7.1. Introduction ……………………………………… 105
7.2. Objectives ………………………………………… 105
7.3. Meaning of Human Resource Management ……… 105
7.4. The role of Human Resource Management ……… 106
7.5. Human Resource Management Activities ..………… 108
7.6. Staff welfare and Disciplinary Procedures ………… 112
7.7. Summary …………………………………………… 113
7.8. Further Reading …………………………………… 113
LECTURE 8: Labour Relations ……………………… 114

8.1. Introduction ……………………………………… 115
8.2. Objectives ………………………………………… 115
8.3. Meaning of Labour Relations …………………… 115
8.4. Trade Unions …………………………………… 115
8.5. Collective Bargaining …………………………… 116
8.5.1. Features of Collective Bargaining ……………… 119
8.5.2. Merits of Collective Bargaining ………………… 120
8.5.3. Demerits of Collective Bargaining ……………… 121
8.6. Compulsory Adjudication ………………………. 122
8.6.1. Merits of Compulsory Adjudication …………… 122
8.6.2. Demerits of Compulsory Adjudication ………… 122
8.7. Grievance ……………………………………… 123
8.7.1. Causes of Grievances ………………………… 123
8.8. Discipline …………………………………….. 123
8.9. Summary ……………………………………… 125
LECTURE 9: Organization and Organization Structures… 126

9.1. Introduction …………………………………………… 126
9.2. Objectives ……………………………………………… 126
9.3. Meaning of Organization ……………………………… 127
9.4. Formal and Informal Organizations ……………. 127
9.4.1. Formal Organization …………………………………… 128
9.4.2. Informal Organization ………………………………… 128
9.5. Organization Charts ………………………………….. 131
9.5.1. Meaning ……………………………………………… 131
9.5.2. Purpose of Organization Chart ……………………… 131
9.5.3. Types of Charts ……………………………………… 131

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9.6. Organization Structures ……………………………… 134

9.6.1. Benefits of a Good Organization Structure ………….. 134
9.7. Forms of Organization Structure and Charts ………… 135
9.7.1. Line Organization …………………………………… 135
9.7.2. Line and Staff Organization ………………………… 136
9.7.3. The Divisional Organization Structures …………… 138
9.7.4. Project Organization Structure ……………………. 142
9.7.5. Matrix Organizational ……………………………. 144
9.8. Summary ………………………………………… 146
LECTURE 10: Fundamentals of Marketing ………… 148

10.1. Introduction ………………………………………. 148
10.2. Objectives ………………………………………… 149
10.3. Meaning of Marketing …………………………… 149
10.4. Marketing Concept and Theories/Philosophies …… 150
10.5. Difference between Selling and Marketing ……….. 152
10.6. Marketing Mix Variables …………………………. 153
10.6.1. Product …………………………………. 153
10.6.2. Price …………………………………… 153
10.6.3. Place (Distribution) …………………… 157
10.6.4. Promotion ……………………………. 158
10.7. Product Life Cycle ……………………………… 160
10.8. Consumer and Industrial Markets ……………… 161
10.9. Marketing Environment ………………………… 162
10.10. Summary ………………………………………. 164
10.11. Further Reading ………………………………… 165
LECTURE 11: Product Management …………… 166

11.1. Introduction …………………………………… 166
11.2. Objectives ……………………………………. 167
11.3. Meaning of Productivity ……………………… 167
11.4. Elements of Production ……………………… 167
11.4.1. Product Development ………………. 168
11.4.2. Plant ………………………………… 168
11.4.3. Purchasing …………………………. 168
11.4.4. Manufacturing Process ……………. 169
11.4.5. People ……………………………… 170

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11.5. Product Planning …………………………… 170

11.6. Production Control ………………………… 171
11.7. Industrial Productivity ……………………. 174
11.8. Logistics and Physical Distribution ………… 175
11.9. Productivity in Organizations ……………… 179
11.10. Organizational Trends in Productivity ……… 181
11.11. Summary……………………………………… 184
11.12. Further Reading …………………………………… 184
LECTURE 12: Business Finance ………………………… 185

12.1. Introduction …………………………………………… 185
12.2. Objectives ………………………………………………… 186
12.3. Meaning of Business Finance …………………………… 186
12.4. Role of Finance in Business ……………………………… 187
12.5. Objectives of Business Finance …………………………… 187
12.6. Functions of a Finance Manager …………………………… 188
12.7. Sources of Finance in Business …………………………… 188
12.8. Shares …………………………………………………….. 190
12.8.1. Meaning of a Share ……………………………… 190
12.8.2. Types of Shares …………………………………… 190
12.8.3. Kinds of Preference Shares ………………………. 190
12.8.4. Equity Shares of Ordinary Shares ………………… 191
12.8.5. Different Shares of Management or Founder Shares … 191
12.9. Debentures ………………………………………………… 191
12.9.1. Kinds of Debentures ……………………................ 192
12.10. Factors Influencing the Methods and source of Finance … 193
12.11. Financial Analysis ………………………………………… 193
12.11.1. Financial Statements ……………………………… 193
12.11.2. Financial Ratios ………………………………….. 194
12.12. Financial Institutions ……………………………………… 197
12.12.1. Purposes of Financial Institutions ………………… 197
12.12.2. Classification of Financial Institutions …………… 198
12.13. The Stock Exchange ……………………………………… 198
12.13.1. Quotation …………………………………….…… 199
12.13.2. Benefits of Quotation ……………… ……….…… 199
12.13.3. Functions of Stock Exchange .…………………… 199
12.14. Summary ………………………………………………… 200
12.15. Further Reading ………………………………………… 200

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LECTURE 13: International Business ………………… 201

13.1. Introduction …………………………………………… 202
13.2. Objectives ……………………………………………… 202
13.3. Meaning of International Business ……………………… 202
13.4. Reasons why Firms go International ……………………. 204
13.5. Forms of International Business ………………………… 206
13.6. Practices in International Trade ………………………… 208
13.7. Ways of Entering International Trade …………………… 210
13.8. Barriers to International Trade …………………………… 214
13.9. Government Policies and Restrictions of International Trade …..216
13.10. Effects of Trade Restrictions ……………………………… 217
13.11. Multinational Corporations ………………………………… 219
13.12. Summary …………………………………………………. 221
13.13. Further Reading ………………………………………… 222
GENERAL REFERENCES …………………………………… 223

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INTRODUCTION
Welcome to this Course Unit in your Bachelor of Commerce Degree Programme by

Distance Learning. The Introduction to Business Course Unit has been designed to
introduce you to the general issues in business, and therefore covers most of the areas in
the bachelor of Commerce degree programme. It is divided into thirteen different
lectures which progress from introduction and general overview of business to
international business. You will be exposed to the nature of business and its
environment, forms of business organization including public enterprises.
Principles of Management, Human Resource Management and Production Management

have also been elaborately discussed, thereby exposing the learner to various
management practices, and the crucial role played by managers in organizations. You
will also be exposed to Marketing and International Business. The unit also discusses
Labour Relations, Small Business Management and Organizational Structures as well as
Business Finance.
In this course unit you will be assessed as follows:-

 Take away assignment (Term Paper)
 Timed test (CAT – one hour)
 Final examination (two hours)
The take away assignment and timed test together constitute course work, which carries
30% of the marks, while the final examination constitutes 70% of the total marks.
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COURSE GENERAL OBJECTIVES
This is an introductory course to the study of business with an integrated approach to

achieve the following objectives:
1. to provide the learner with an overview and scope of the business world with
specific emphasis to the Kenyan emphasis.
2. to introduce students to various fields which are fundamental in business studies.
3. to provide students with a general understanding of the inter-relationships among
various fields of business and environment.
4. to help students choose business as a career
5. to prepare students to meet future challenges in the business world.
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LECTURE ONE
OVERVIEW OF BUSINESS
Lecture Outline
1.13. Introduction
1.14. Objectives
1.15. Meaning of Business
1.16. Characteristics of Business
1.17. Objectives of Business
1.18. Scope and Nature of Business
1.19. Types of Industry
1.19.1. Primary Industries
1.19.2. Secondary Industries
1.19.3. Classification of Manufacturing Industries
1.19.4. Commerce
1.19.5. Trade
1.19.6. Categorization of Business Organizations
1.20. Success of Business
1.21. Business as a System
1.22. An Open System of Organization
1.23. Business as a way of Life
1.24. Summary
1.1. Introduction
Business is both an economic activity and a way of life. Without business, the material
side of life would not be possible. It is business which manufactures and distributes
goods that customers need. Businesses avail goods and services when customers require
them. In essence, therefore there are many integrated activities which constitute
business. These activities of business bridge the gap between the manufacturer and the
ultimate customers or users.
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We have also referred to business as a way of life. This is for those who choose business
as a career. Such people may feel intrinsically rewarded by owning and running a
business.
In this chapter, we shall get a bird’s eye view of what business is, its scope, types of
businesses, the success of business among other aspects related to business.
1.2. Objectives
At the end of this lecture you should be able to:
1 Explain the meaning of business
2 Explain the characteristics of business
3 Outline the scope business
4 Categorize business organizations
5 Explain the success factors of a business
6 Explain business as system
7 Explain business as a way of life
1.2.Meaning of Business
We may define business in many ways, such as
(a) Business refers to all profit-producing activities that provide goods and services to
customers.
(b) Business means work efforts and acts of people, which are concerned or connected
with the production of wealth.
(c) A business is any enterprise, which makes, distributes, provides a product or a
service, which other members of the community need and are able and willing to
pay for. In essence, therefore business is concerned with producing and selling for
profit. From the above definitions, it would be said that business is an economic
activity whose aim is to make profit by satisfying customer’s needs.
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1.4. Characteristics of Business

The activities termed “Business” posses the following characteristics:
(a) Production and Acquisition of goods. Since it is the business of “Business” to
provide goods to people for a price, it is necessary that there are goods to be
supplied. They must therefore be either manufactured or produced so that they
can be sold and supplied.
(b) Sale or transfer acquisition of goods. Goods which have been produced or
procured for sale in return for price enter the realm of business. This activity of
selling results in the production and acquisition of wealth. Goods produced or
acquired for personal consumption, however, do not fall within the scope of
business.
(c) Dealings in goods and services. Business means dealing in goods and services.
The goods may be consumer goods, such as cloth, bread, jeans, jams, shoes,
watches, etc or producer goods such as machinery and tools. Services consist of
activities or intangibles, such as transport services.
(d) Regularity of dealings. There must be regularity and recurring nature of buying
and selling of goods or services which ensures continuity of transactions. A single
transaction involving buying and selling does not become business. For instance,
if a person sells his motor car and makes profit, it does not amount to business.
On the other hand, if he keeps a stock of cars and sells them to customers, that
would be business.
(e) Profits as reward for service rendered. Business is an activity by which owners
make their living or earn a profit. Making profit is an essential characteristic of
business. Profit is the biggest stimulus for maintaining the continuity of business.
In other words, profit is essential for survival and development of a business. The
hope of making a good profit attracts people to business. In fact, profit is, in a
sense, a reward for the individual ability or efficiency in managing an enterprise
and also for the service that he renders to the community.
(f) Uncertainty or risk about the future. Economic activity focuses on the future: and
one thing is certain about the future, its uncertainty, hence its risk. It is through
risk – taking that any businessman earns his profit. The conduct of in business
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always involves a certain amount of risk and uncertainty of return to the

entrepreneur.
1.5. Objectives of Business Organizations

Objectives of a business organization would be:
(a) To make profit - This is the prime objective of any business organization. In fact
this notion of profit differentiates business organization from non business
organizations. Non business organizations such as government agencies may not
have profits as their major motive. Business profits can be used by the business to
pay dividends to the shareholders. They may also be used to expand the business,
and in promoting its products and services, extending charitable donations to
society etc.
(b) To grow – Every business organization aspires to become bigger in size.
(c) To develop – This implies the aspiration of a business to become better. This is
normally achieved by providing quality goods and services, being prompt to
customer’s tastes and preferences etc.
(d) To survive –Every business strives to stay in business. In order to survive in a
business must adapt to the environment. (A study of business environment is to be
found in the following chapter). A business environment is quite competitive.
Businesses have to look for strategies to enable them cope and stay in business.
Note
Among others, the business objectives are to make profits to grow , to
develop as well as survive
All these four objectives discussed seem to cut across all business organizations
Other business objectives would be:
(e) To attain a certain market share – This is the proportion of the total market that the
business aspires to achieve.
(f) To increase sales turnover by a certain percentage
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(g) To double its output of new products.

(h) To launch an advertising campaign for the new range of goods and services within
certain period of time e.t.c.
Note
All profit making organizations are termed business. The profit motive
differentiates business organizations from non-business organizations.
The types of objectives of course would depend on the types and size of the business
organization.
Besides the economic objectives we have mentioned here, a business would have social
objectives too. We shall study more about social responsibility of a business in the next
chapter. However some of the social responsibility of business would be the: satisfaction
of human wants through the supply of quality goods at reasonable prices, paying fair
wages to the workers etc.
1.6. Scope and Nature of Business

We may classify business into two broad categories:
(a) Industry
(b) Commerce (including trade). Industry is concerned with the production of

goods, while commerce is concerned with the distribution of what is produced. Let us
give a brief description of each scope.
(a) Industry. This embraces the processes of extraction, production, conversion,

processing or fabrication of products. The outputs of industry are sold either for
further transformation into finished goods or for ultimate consumption. The goods
used by final consumer are called consumer goods, and those that are used in the
production of other goods are described as producer goods. For instance an
enterprise manufacturing cloth, jams, edible oils produces consumer goods. On
the other hand, a steel mill which may make steel for further fabrication into
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variety of articles, such as tools, machinery, which are used for further production
of other goods would be said to be engaged in producer or capital goods.
1.7. Types of industry.

Broadly, an industry is either Primary or Secondary. Primary industry may be either
extractive or genetic, and secondary industry is either manufacturing or construction.
1.7.1. Primary Industry

(a) Extractive Industries. Are those industries that are engaged in supplying
commodities which are extracted or raised from the earth, sea and air with
comparatively little help from man. The products of such industries are
generally used by manufacturing and construction industries for fabricating
finished goods. Fishing, mining, fruit gathering, agriculture and a forestation
are some of the examples of extractive industries.
(b) Genetic Industries: These fall under the category of primary industries.
These industries, though dependent upon nature, require a greater application
of human skill in their production. The enterprises engaged in agriculture,
forestry and fish culture are examples of genetic industries. By way of
distinguishing extractive industry from genetic industries we may give the
examples. Though agriculture is dependent upon the quality of the soil and
climatic conditions, success in this line will very much depend upon the
application of human skill and knowledge. Intensive cultivation is possible
with greater amount of capital and larger number of workers. Similarly,
cultivation of forests is necessary for securing supply of timber for various
purposes.
1.7.2. Secondary Industries

These include:-
(a) Manufacturing Industries. Manufacturing industries are concerned with the
working of raw materials or partly finished materials into finished products.
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Manufacturing processes are carried on chiefly in factory enterprises and

constitute a very large part of the total business activities. Among the
manufacturing industries we may mention milk processing plants, spinning and
weaving mills, flour mills, the making of machinery etc.
(b) Construction Industries. These are concerned with the making or
constructing of buildings, bridges, dams, roads, canals etc. The process of
laying out, fitting and connecting materials which have been already prepared
is also included in this category.
(c) Service Enterprises. Business provides not only goods but also services. At
every point in the economic system an infinite variety of services are furnished.
Examples of such businesses include; domestic services, hair dressing and
beauty therapy, vehicle repair, hotel accommodation, transport, insurance etc.
Activity1.1
Enumerate ten industries you are familiar with and classify them
into primary or secondary industries.
1.7.3 Classification of Manufacturing Industries

Manufacturing industries may either be a continuous or an Assembly type. A continuous
industry may be either analytical or synthetic. Assembly industry is also of two types.
One with similar components and the other with dissimilar components. A brief account
of each type is given as follows.
(a) Continuous Industry. It is an industry in which all the material is received at
one point and from which successive operations turn these material into a finished
product. Examples are the manufacturing of sugar, paper, cloth, etc.
(b) Assembly Industry. In an assembly industry the finished product can be
produced only after various components have been made and then brought
together for final operations, such as manufacture of shoes and automobiles.
(c) Analytical Industry. This is a type of continuous industry. In this industry the
basic material is analysed and separated into several parts so that the final product
emerges separate and distinct from the mass of original material. All refining
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industries, such as oil fall in this category. The crude mineral oil is analysed and
separated into kerosene, diesel oil, lubricating oil, and the final product petrol.
Activity1.2
Enumerate ten manufacturing industries you are familiar with and
classify them into either continuous, assembly or nalytical.
(d) Synthetical Industry. In this type of continuous industry, various

ingredients are brought together and combined in the manufacturing
process to produce a new product. Paper manufacture, paint making and soap
making are examples of this type.
(e) Assembly Industries with Dissimilar Components. In this type the
components are dissimilar and go through unlike processes, as in automobile
industry. The tyre is manufactured differently from the metals or glass.
As we had already mentioned earlier in this chapter the scope of business include,
Industry and commerce. So far we have discussed about industry. Let us now turn to
commerce.
1.7.4 Commerce
This is the process of buying and selling, as well as those activities which facilitate trade,
such as storing, grading, packaging, financing, insuring, and transporting. The principal
function of commerce is to ensure a free and smooth flow of goods from producers to
consumers by overcoming a number of hindrances.
Let us discuss these hindrances

(a) Hindrances of persons. Buyers and sellers of goods are not always situated at the
same place. Contact between them is hindered by distance. Commerce helps to
remove this hindrance between buyers and sellers by means of trade. Trade as part
of commerce therefore plays a major role in establishing contact between the
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producers and sellers of their products so that consumers as buyers obtain these
goods to satisfy their wants.
(b) Hindrances of exchange. This is got rid of with money as the medium of
exchange. Payment for goods and services is made possible through institutions
such as the banks. In this way, banks, as part of commerce , assist to remove the
hindrance of exchange and enable buyers to procure goods especially by
extending their own credit. The banks very often finance trade in various ways
e.g. issuing letters of credit, travellers cheques etc.
(c) Hindrances of place. The goods may be produced at one place and the demand
for them may be in a different place. This barrier of distance is removed by
commerce through the use of different means of transport. Goods are carried from
one place to another. Added to the direct movement of goods from the point of
production to the point of consumption or use are the services of insurance to
cover the risk of loss and packaging to protect goods against damage and
pilferage.
(d) Hindrances of time. Goods, especially in modern times are produced in

anticipation of demand. They must therefore be stored in safe place to be released
as and when demanded. The function of storing and preservation is performed by
warehouses. In other words, warehouse remove the hindrances of time by
balancing the lag between production and consumption. By so doing, warehouses
create time utility. Insurance again comes into play even where goods are stored
in warehouses and removes the risk or loss or damage through theft or fire.
(f) Hindrances of Information. Selling of products today is one of the most

complex problems that a manufacturer has to solve. His products may be the best
but he has to get prospective buyers to know about them. This lack of information
about the products is a great hindrance in the way of consumers buying them.
Advertising and salesmanship help to remove the hindrances of the lack of
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information by bringing to the notice of the people the advantages of buying the
goods and services offered.
Note
Commerce may be said to be that branch of business which facilities
exchange of goods by removing the various hindrances namely,
those of persons through trade, of exchange through money, of place
through transport, as well as insurance, and lack of information
through salesmanship and advertising. We can also say that
commerce is “the sum total of those processes which are engaged in
the removal of the hindrances of persons (trade), place (transport
and insurance) and time (warehousing) in the exchange (banking) of
commodities.”
We have noted that commerce includes trade. Let us now discuss about trade
1.7.5 Trade
Trade is the final state of business activity and involves sale and purchase of products. It
is trade which facilitates the transfer of goods from the seller to the buyer.
Types of Trade. Trade has been classified in many ways. The normal classification of
trade is (a) Internal or home Trade, and (b) Foreign or International Trade. Internal Trade,
in turn, may be either wholesale trade or retail trade, and foreign trade may be import
trade or export trade.
(a) Internal Trade is also known as home trade or domestic trade. It comprises of
buying and selling of goods within bounds of a country. All transactions connected
with it, such as payment and transporting, are national, and no external agency is
involved.
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(b) Foreign or International trade refers to buying goods from, or selling

commodities to, traders doing business in foreign lands. This type of trade involves
payment for goods in the currency of the country of the supplier of goods and
makes use of international means of transport.
(c) Retail Trade is the last link in the economic chain whereby human wants are
satisfied. The retailer assembles the various products at convenient place and
supplies them in small quantities to consumer.
(d) Wholesale trade relates to purchase of goods in large quantities from producers
and growers and their re-sales are made to retailers in small lots. It serves as link
between the manufacturers or producers and the retailers who sell them to the
ultimate consumers.
(e) International Trade is normally wholesale trade and takes the form of import or
export, or it may be entrepot trade. By import trade is meant buying goods from
supplies in foreign countries. Export trade is selling to foreign countries for their
ultimate consumption. Entrepot trade consists of importing of foreign produced
goods merely with the object of re-exporting them.
1.7.6. Categorization of Business Organization

We all know that business units differ in the form of ownership and in the way they are
organized for operation. They also differ in the formation, management and dissolution
requirements.
Broadly speaking, all business organizations may be categorized as either private or

public. The public business sector is owned and managed by the government or
shareholders while the private business sectors are those businesses that are not in the
hands of the state or the public.
In terms of ownership, business organizations may be categorised as:-

(a) Sole proprietorship
(b) Partnership
(c) Private companies
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(d) Co-operatives
(e) Cartels and syndicates.
Each of these business organizations has been described in detail in chapter three and
four.
1.8. Success of Business

Not all businesses succeed. We have had others started and after a while cramble. What is
it that makes a business successful?
A number of factors contribute to a business success. These factors include:
(a) Providing value – or customer satisfaction
This means that the product offered by a business must have utility for customers
to want to buy it. Customers find utility or satisfaction in items whose benefits
are available when and where they are wanted. Customers get utility from
products and services through their availability at the right time and at the right
place.
Let us now study the concept of utility. There are five types of utility namely:
(i) Form utility – This is the transforming of a given raw material from its
original form to another form of more value. For example transforming cotton
bales to blankets or transforming flour to chapatti or transforming tomatoes to
tomato sauce.
We can therefore say all manufacturing concerns including “Jua Kali” sector
engage themselves in creating form utility.
(ii) Place Utility

It is concerned with transporting products from a manufacturer to a location
convenient to the customer. For example, a farmer transports his cabbage to a
market place. We can also say that wholesalers, retailers provide place utility.
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(iii) Possession Utility. This is created by increasing desire or willingness to

own a product. This desire is usually created by advertisements through the
mass media, exhibitions in trade fairs, promotions campaigns etc
(iv) Time Utility. This is created by ensuring that products are made available
when customers want them. Warehouse creates time utility. They enable
producers to avail the products when required.
(b) It must be Profitable

We have also said that in order for a business to be successful, it must make profit.
If a business succeeds in identifying and meeting customers needs through the
products and services it markets, it is likely to earn a profit. Profit is the
difference between the revenue earned by a business and the cost it incurs in
providing the product or service. Without products or services that customers
like there is no profit. With profit, the business can be maintained and expanded
and the owners or shareholders paid dividends.
(c) Managerial Efficiency is Essential to any Business. A business may produce a

good or service that satisfies customers and earn some profit. But unless it is as
efficient as it competitors, these aggressive rivals will serve customers better,
make more profit and eventually drive it out of business. Other factors like a
good location, large size, and quality personnel, may help a business to remain
efficient. It is therefore managerial efficiency that determines how well the
limited resources will be utilized to achieve business objectives.
(d) It Must Adapt to the Environment

It should adapt to outside factors or environment such as government regulations,
ethical standards, and economic and technological trends is a requisite to remain
in business. In fact it is said that you either “adapt or die”. The purpose of
adapting to the environment is to stay in business.
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(e) Business Objectives - The establishment of definite and clear objectives is

essential for any business. That objective provides purpose for the organization.
These objectives must be so definite that they can clearly be described and so
realistic that they can be achieved. To set realistic objectives, a business must
consider its strengths. These are the advantage aspects of a business. An example
is adequate finance. It must also consider its weakness. These are the
disadvantage aspects of a business. An example is a weak financial position.
Thirdly the business should consider its opportunities. There are fortunes that
have to be looked for. For example providing products or services where there
are non or limited number being provided. Lastly it has to consider its threats.
These are opposing factors from outside that may thwart the growth and
development of an organization. An example would be recent competition from
foreign countries due to liberalization.
(f) Planning – Planning is another cornerstone upon which successful enterprise

depends. Planning is the analysis of a problem, thinking out the forward solution
to that problem, and then outlining the steps that must be taken to reach the
objective defined in the solution.
(g) Research - With increasing technology and increasing competition, new

methods of buying and selling and dealing with people, a business success
depends on improved methods of production, selling and the ability to manage
workers. Research may be defined as “the systematic search for new
knowledge”. Sentence incomplete
1.9. Business as System

We are quite familiar with the biological systems such as the circulatory system, nervous
system, digestive system etc. They seem to be independent but at the same time
dependent on each other. Here below we define a system.
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- A system in an organized combination of parts that form a complex entity with

interrelationships or interactions between the parts and between the system and
the environment.
- We can also say that a system is an assemblage of things connected or
independent so as to form complete unit. The whole is composed of parts in an
orderly arrangement according to plan. Hence a system is a complex whole.
From the above definitions certain characteristics of system can be discerned:
(a) A system has a number of subsystems, parts and subparts
(b) The parts or the sub systems are mutually related to each other, either
directly or indirectly.
(c) That a system has a boundary.
Note
All business organization can be seen as systems which interact with other
systems or business
The notion of boundary of a system classifies a system into two categories namely:
(a) Closed system in which one can identify all the constituent elements
but does take only energy from environment.
(b) Open system which interacts with the environment
Therefore, when we speak of a business system, we are referring to all those firms that
function to meet people’s economic needs and to the ways they interact with one another.
For example, a manufacturer interacts with the suppliers for raw material, the printers for
dailies, retailers for outlets, banks for financial matters etc.
Hence although this business is perceived to have a boundary it is an open system

because it interacts with other organizations.
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Further, it may be pointed out that an enterprise is part of an entire – cooperative system
involving. Physical (material and machinery). Biological (people or personnel) in the
organization and the social and psychological (interactions).
These systems can be found both within and outside the organisation.
As such system and sub-system can also be analysed in terms of inputs, process (or
conversion) and output model. Using this model all manufacturing organizations take
inputs from the environment and through a series of activities transform or convert these
inputs into outputs (inputs to other systems) to achieve objective. Below is a diagram
illustrating a system in terms of inputs, process output model.
Outputs from
Other organization
SERIES OF ACTIVITIES
INPUTS OUTPUTS
TRANSFORMATION OR
CONVERSION UNIT OR
AIMS ORGANIZATIONAL
Interrelated sub-systems
OBJECTIVES
FEEDBACK FEEDBACK
1.10. An Open system of Organization

The inputs can be in form of ideas, people, raw material semi finished products etc.
The outputs can be in form of:
 Goods produced, services provided, completed processes or produced in
order to achieve certain goals such as Profit, marketing standing (market
share), level of sales per month/year etc.
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Using this systems model the same form of a analysis can be applied to all types of
business organizations as systems provides a common point of reference. It also
enables us to take a general approach to study business organizations to analyse them
and derive general principles and prescription
Activity 1.3
With reference to a manufacturing concern that you are familiar with,
illustrate it as an open system highlighting its inputs, process and
outputs.
1.10. Business as a Way of Life

As mentioned earlier business is both an economic activity and a way of life. For those
who own or manage a business, it is work not simply a job it is a life style. The
decisions they make, the people they deal with, the ideas they have are not confined
between working hours. These people are faced with great demands and responsibilities
but the rewards can be great. Nevertheless these are three different types of people that
work within societies frame work to make business a success. These are the entrepreneur,
the professional manager and the functional specialist.
Let us discuss each one of them in turn.
The Professional Manager

Once an entrepreneur’s business is established, growth can be rapid. For instance, the
task would be to produce the product in quantity and market it to the consumers
effectively. To do this, the firm must add employees. And if it is successful, it may
become too large for casual relationship and unstructured organization. At that stage then
what it needs is a professional manager to organize employees into specific units, set up
rules and procedures to make operations more efficient.
In most cases this manager may not necessarily be the original owner or he may not even
be suited to do this type of work. Entrepreneurs usually like to be on their own.
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Ordinarily their concerns are with ideas and over seeing their implementation. Managers
on other hand usually assume a more concrete task of organizing personnel and other
resources as well as solving specific types of problems in the business enterprises. Let us
also note that managers may not work alone, they require services of experts, the
functional specialist.
The Functional Specialist

These are usually people trained in a specialised field of business such as accounting,
finance, marketing or production. One of their primary duties is to advice management in
their area of expertise. With some managerial skills (see elsewhere) they may supervise a
department as a production manager, marketing manager, finance manager etc.
Activity 1.4
1. Explain the meaning of business
2. Highlight the common characteristics of business
3. Provide examples of each category of a business
4. Explain factors that would contribute to a business success
5. Describe a business as a system
1.12. Summary
In this unit we have learned that business activity is one which provides
goods or services for a profit. We also noted that business activities can
broadly be classified into industry and commerce. The industry we said
is concerned with manufacturing while commerce is concerned with
distribution.
Further we highlighted the categories of business organization according
to ownership.
To be successful, we pointed out; a business organization should be able
to provide value among other factors that influence the success of
business.
LECTURE TWO
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BUSINESS ENVIRONMENT
Lecture Content
2.1 Introduction
2.2 Objectives
2.3 Meaning of Environment
2.4 Types of Environments
2.4.1 Internal Environment
2.4.2 External Environment
2.5 Business Ethics
2.5.1. Ethics Defined
2.5.2. Sources of Business Ethics
2.5.3. Benefits of Ethics to Business
2.6 Core Stake Holders and their Rights
2.7 Social Responsibility
2.7.1 Meaning of Social Responsibility
2.7.2. Arguments for Social Responsibility
2.7.3. Arguments against Social Responsibility
2.7.4. Social Responsibility of Business
2.8. Summary
2.1. Introduction
Business organizations exist and operate within the text of external environment that
presents opportunities and threats of their continued existence and growth. They also
exist in an internal environment which the management can control.
The Kenyan businesses are affected by physical, historical, economic, political-legal,

socio-cultural, competition and technological environments.
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Businesses are also faced with ethical issues such as corruption, paying taxes, producing
quality goods and services to the customers, and also being socially responsible to
employees, government, community, shareholders, creditors, suppliers and the general
public. In this Lecture we will discuss environmental forces which can affect
performance of a business firm. Various internal and external forces are explained on
how they influence organizational operations and decisions. Reasons why organizations
are involved in social responsibilities are also discussed.
2.2. Objectives
1. Explain the meaning of the term business environment
2. Distinguish between internal and external environment
3. Explain types of internal and external environment
4. Explain how internal and external environment constrains influence
organization operations and decisions
5. Explain why organizations are involved in social responsibility
6. Explain the merits of ethics to business organizations
2.3. Meaning of Environment

Environment is the aggregate of social, cultural, economic and physical conditions that
influence the life of an individual organization or community.
2.4. Types of Environment

1. Internal environment
2. External Environment
2.4.1 Internal Environments:

 Organizational policies
Policies, rules and procedures which are predetermined plans place limits on
what an organization can or cannot do.
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 Organizational Culture
Organizational culture may be constraining to the growth of a business
organization. A culture of doing things in a particular way only and not
changing with the technology of modern world.
 Top Management Style
The style of top management in an organization may be a constraint to good
working relations, recruitment policies, etc.
 Limited Resources
Due to insufficient resources an organization may be unable to improve their
production capacity.
2.4.2 External Environments

 Political-Legal
Political-legal environment includes things such as laws and regulations, taxes
and political stability. Laws regulate every area of human existence and
activities so that people do not abuse power or follow what is morally
acceptable.
 Physical/Geographical
It concerns the location of a business. In Kenya one would either locate a
business in the rural or urban area or coastal region, the highland, lake region or
arid areas. This will depend on the source of raw materials and also the market
for the finished products.
 Historical
It refers to the historical background against which business operates.
Kenya has been a British colony for many years before it achieved its
independence, inherited its basic commercial pattern from Britain. This has
influenced industrial and commercial practices and education.
 Economic
This environment is determined by the following:
 Stage of development of a country is in and the business cycle in that economy
such as depression, recession, recovery or prosperity.
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 Inflationary or deflationary trend in prices of goods and services.

 Monetary and fiscal policies of the country and the balance of payment.
 Social-Cultural
 Social factors such as family, religion, education, health and recreation may
affect operations of a business.
 Cultural factors such as social values, beliefs, customs, life styles and desires,
language, clothing, food and how it is cooked. These factors also affect
operations of a business.
 Technological
 Major factors include raw materials, processing, packaging, warehousing, plant
and machinery and skills applied.
 Technology affects major business operations, marketing and finance.
 Competitive
This environment is of two types viz:
Enterprise competition that refers to competition from organizations with similar
products and generic competition that refers to competition from firms whose
products are not similar but are used for the same purpose.
Competition will reflect pricing decisions, quality, packaging and maintenance of
standards.
2.5. Business Ethics

The term ethics comes from the Greek word ethos meaning character, guiding principles,
beliefs, standards etc.
Today ethics is a study of moral behaviour or conduct. Terms such as business ethics,
corporate ethics, medical ethics, legal ethics etc are used to indicate the particular area of
application.
Ethics may be classified as:

 Micro ethics – relating to daily operating decisions.
 Macro-ethics – relating to decisions with broad implications for a large segment
of society.
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2.5.1. Ethics Defined

Ethics is a systematic inquiry into the values that guide human actions and shape human
lives. It is a branch of philosophy that focuses on morality and the way moral principles
are applied in daily life.
Business ethics do not differ from generally accepted norms of good or bad practices.
Any kind of dishonesty is considered unethical and immoral by society and therefore any
business person who is dishonest with shareholders or partners, customers, employees,
top authorities, local authorities, competitors or community is unethical and immoral
person. A business firm that recalls a defective or harmful product from the market is an
ethical organization and will gain goodwill from customers.
2.5.2. Sources of Business Ethics

Business ethics are from three main sources viz religion, laws and culture.
Religion
Religion is considered as one of the oldest source of ethics. Despite the presence of
many different religions and different doctrinal practices and beliefs, major religions
converge on the beliefs that ethics is an expression of divine will that reveal the nature of
right and wrong in business and all other social practices.
Law
Laws are rules of conduct that are enacted by legislature. The purpose of law is to guide
human behavior in society. Laws codify ethical expectations and change.
Businesses are expected to obey the laws of a country for them to be considered ethical in
their practices.
Culture
Culture refers to a set of values, rules and standards transmitted among generations and
are aimed at shaping behaviors of each community so that such behaviors are within
acceptable limits.
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The changing phares of civilization in human history reflect the changing physical,
cultural, institutional and intellectual environment.
2.5.3 Benefits of Ethics to Business

- Ethics develops trust
Ethical managers are predictable, reliable and trustworthy.
- Ethics limits regulations
Laws either in the form of legislation, regulation or judicial decision is a reaction
to unethical actions.
- Ethics reveals poor Management
Unethical practices are an early warning signs of poor management.
- Ethics provides a clearer vision
Ethical managers have a clear vision and therefore able to formulate better
objectives.
- Ethical identifies priority objectives worth pursuing.
2.6. Core Stakeholders and Their Rights

Customers:
1. A right to a fair price
2. A right to information required to make a sound buying decision
3. A right to a product or service consistent with reasonable expectations
4. A right to products that are reasonably safe when used as intended
5. A right to products or services adequate to needs
Employees:
1. A right to fair compensation
2. A right to a safe working environment
3. A right to information relevant to job performance and security
- a right to training
- a right to candid and fair evaluation
4. A right to reasonable freedom in doing the job
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5. A right to reasonable privacy

6. A right to loyalty
7. A right to fairness in termination
8. A right to flexibility (illness, family emergency)
9. A right to job stability and security.
Investors:
1. A right to competent management aimed at producing a reasonable return on
investment
2. A right to vote on certain decisions
3. A right to (declared) dividends
4. A right to residual assets
5. A right to sell shares.
Creditors:
1. A right to timely payment
2. A right to competent management aimed at avoiding unnecessary risk
3. A right to adequate information (disclosure)
Suppliers:
1. A right to loyalty
- a right to an opportunity to bid or to adjust prices
- a right to preference over competitors
2. A right to timely advice of changes.
Communities:
1. A right to support for the common good
- a right to a safe and clean environment
- a right to decisions and actions that do not unnecessarily disrupt the
community
- a right to efficient and effective use of resources (privatization).
Competitors:
1. A right to compete
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2. A right to expect activities that do not unfairly distort the market

- a right to honest statements
- a right to “honest” pricing.
Source: Cases and Readings for Business Ethics, University of St. Thomas, 2002.
Intext Question
What are sources of business ethics?
2.7. Social Responsibility

Business organizations operate in the prevailing social, technological, political and
ethical environment. Managers must appreciate these external factors so that they can
manage their firms smoothly. A business is a living organ of society and has to mould its
philosophy and culture on the prevailing social conditions.
2.7.1. Meaning of Social Responsibility

Social responsibility is the manager’s responsiveness to public consensus. It refers to two
types of business obligations viz:
(a) the socio-economic obligation
(b) the socio-human obligation.
2.7.2. Arguments for Social Responsibility

The following are the arguments that have been advanced in favour of social
responsibility:-
1.Moral obligation:
A business is viewed as ethical if it is socially responsible.
2. Limited Resources
A business must protect the use of resources so that they are not misapplied.
3. Wealth Creation
Huge wealth generating capacity of business should be applied for societal
benefits.
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4. Employment Creation
Businesses should create employment and therefore help in economic
development.
2.7.3. Argument against Social Responsibility

1. Need for Profit Maximization
The main purpose of business is to make profits.
2. Costs of Social Responsibility
Social responsibility is unnecessary cost to business and society should take care
of such costs.
3. Lack of Social skills

Business managers are professional oriented to economic activities and do not
have social workers’ skills.
4. Lack of Accountability
Managers have to account for every expenditure and costs associated with social
issues may create audit problems.
2.7.4. Social Responsibility of Business Towards different Stakeholders

1. Shareholders/Owners
- pay dividends
- increase shareholders’ earnings
- safeguard shareholders’ interests
2. Employee or Workers
- employment conditions and welfare
- rewarding equitably
- protecting employees’ health
- equity and justice in promotion.
3. Consumer
- give quality goods and services
- give good sin proper quantity
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- being fair in prices

- offering after sale service
- responding to consumer complaints.
4.Suppliers
- equity and justice in tendering system
- paying suppliers in good time
- to foster good relations.
5. Community
- supporting community projects such as schools, cultural activities, health
and transport
- employment of minorities and handicapped members of society
- protecting the environment.
6. Government
- complying with State laws and regulations and directives
- paying taxes when due
- not to indulge in hoarding of goods or creating artificial shortages
- practicing fair trade.
2.8. Summary
In this lecture we have discussed the various environments within which
business operates. We analysed various types of environment such as
internal and external environment. Under internal environment we
explained organizational culture, top management style and limited
resources. While under macro we explained political – legal, physical,
historical, economic, social-cultural, technological and competitive
environments issues on business ethics was explained and the concept of
social responsibility and the arguments for and against adoption of social
responsibility by business were also highlighted.
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Activity
1. Explain the interaction between management and environment
2. Explain five external environmental factors that influence operations
of business.
3. What are the benefits of ethics to business organizations?
4. State argument for and against assumption of social responsibilities
by a business firm.
5. Explain the sources of ethics.
2.9 References
Francis N. Kibera, Introduction to Business pp 10 - 31
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LECTURE THREE
FORMS OF BUSINESS ORGANIZATIONS
Lecture Outline
3.1 Introduction
3.2 Objectives
3.3 Private Sector
3.4 Public Sector
3.5 Selection of a form of business Organization
3.6 Sole proprietorship
3.7 Partnership
3.8 Limited Liability Company
3.9 Co-operatives
3.10 Summary
3.1. Introduction
The Kenyan economy is made up of private sector and public sector organizations. A
person who wants to start a business has to choose one from the several types of
organizations within the private sector. The different forms of business organizations are
shown in fig. 3
3.2. Objectives
By the end of this lecture you should be able to:
1. Describe types of privately owned businesses
2. Describe kinds of limited liability companies
3. Describe kinds of partnership businesses
4. Explain merits and demerits of sole proprietorship
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KENYAN ECONOMY
PRIVATE SECTOR PUBLIC SECTOR
Sole Traders Partnerships Others Government

E.G. BUILDING Department
Cooperative
Societies Mixed Ownership
Corporations
Parastatals
Public Limited Private Producer

Companies Limited Consumer
Companies Housing
SACCO
3.3. Private Sector

These are Business firms owned by private citizens and not the state. These firms can be
small medium or large. They can be owned by one person or by thousands of people.
The main forms are shown in figure 3. Are sole proprietorships, partnerships, limited
liability companies, cooperatives and other form such as building societies.
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3.4. Public Sector
It consists of both central and local government undertakings. These organizations are
under state control such as Telkom Kenya, postal corporation and Nairobi water and
Sewerage Company among others.
3.5. Selection of Form of Business Organization

The following factors are taken into consideration while selecting a form of business
organization.
1. Easy Information
The major consideration in making a choice on what type or form of organization
that can set up easily without problems of legal formalities and cost of
establishing it.
2. Easy in Raising Capital

Another important factor is the ease with which the minimum capital required can
be raised.
3. Extent of Liability
From the point of view of risk an investor would prefer limited liability. It means
that in case of insolvency, the law would only require one to be held responsible
only upto the amount of capital agreed to be contributed.
4. Flexibility of Operation
A good form is one that allows maximum flexibility and adaptability. Change can
be introduced promptly and adjustment without difficulty.
5. Continuity and Stability

A good form should enjoy uninterrupted existence over a long period of time
without threats of closing down.
6. Retention of Business Secrets

A form that enables business secrets to be retained or vital information to be
protected is ideal.
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7. Extent of State Regulations

Different forms of organizations are exposed to varying degree of control and
regulation of the state. A good form should attract less state control and
regulation.
8. Tax Liability
The basis of taxation for various forms is different. A good form will be that
which attracts the minimum amount of tax liability.
3.6.Sole Proprietorship
It is a form of business organization in which an individual introduces his own capital,
uses his own skill and intelligence and is entirely responsible for the results of its
operations. It is owned and controlled by the owner with or without the help of family
members or few employees.
Take Note
1. “A sole trader is a person who carries on business exclusively by
and for himself.”
2. “Under the sole proprietorship form of ownership a single
individual organizes, has title to, and operates the business in his
own name.”
3. “The individual proprietor is the supreme judge of all matters
pertaining to his business subject only to the general laws of the
land and to such special legislation as may affect his particular
business.”
From the above definitions, it is clear that a sole trader is an individual

who invests his own capita and takes all the risks arising from an
enterprise.
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Features of a sole proprietorship

i. It is owned and managed by one person
ii. The owner of the business provides all the capital required and is responsible for
all the debts of the business
iii. The owner may or may not employ some people to assist in the operations of the
business
iv. The law does not distinguish the owner form the business
v. The owner has unlimited liability
vi. All the profits of the business belong to the owner.
Formation
Few legal formalities are required. In Kenya, a person who intends to start a small kiosk
needs only to make an application to his local authority for permission to set up the kiosk
and operate his specified business for example: vegetable or fruit kiosk. If permission is
granted, a trading license is issued to the trader on payment of trade licence fee.
The owner of the business may choose to register the business name (which might be his
own name or a different one) with the registrar of business names. He will also be
required to register with the revenue authorities to pay tax when the total annual sales of
the business reach a certain level.
Capital
Capital required is small compared to other forms of business. The sole trader provides
all the required capital and hence accounts for himself in the business. Therefore the law
views both the trader and his business as the same thing.
i . The main source of capital is his own savings.
ii Contribution of personal property for such as furniture, motor vehicle and other
equipment for use in the business
iii. Grants and donations from friends and relatives
iv. Inheritance from parents, and other close relatives
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v. Loans from banks, and other money lending institutions such as Industrial and
Commercial Development Corporation (ICDC), The Rural Enterprise Program
and Kenya Industrial Estates (KIE).
vi. Trade Credit: The owner of the business may arrange with suppliers of goods for
sale on credit. This enables the trader to trade with money that actually belongs to
the supplier.
The amount of capital borrowed depends on:

 Whether the available loan will be able to meet the purpose for which it is
intended
 The availability of capital from a particular source
 The interest cost on the amount borrowed
 The ability of the borrower to repay the loan.
Liability
The trader begins the same as the business has no limited liability and thus his assets and
liabilities and those of his business are one and the same thing. This means that should
the business incur excessive loses or debts such that its assets are not enough to pay for
the losses, the trader’s personal finances will be used to pay for the debts. This is a major
drawback in the sole trader kind of business. However, the sole trader is entitled to all
the profits of his business.
Advantages:
1. Small Capital Requirement
Most sole proprietorship businesses are small in scale requiring relatively small
amount of capital to start.
2. Easy to Form
Being a one-person business, it is easy to start and dissolve. This is because there
are very few legal formalities required to start it. The only requirement is a
trading license allowing him to conduct such a type of business.
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3. Prompt Decision Making

The sole trader makes all the decisions of the business alone. This means that
decisions can be made very quickly and timely.
4. Enjoyment of profits
The sole trader enjoys all the profit from his business. This is a motivation for
him to work harder. The trader is also very careful to avoid losses as he knows
he’ll suffer the losses alone.
5. Personal customer service

Due to the small size of the business, the sole trader is able to establish direct and
close contact with his customers and employees whose needs he satisfied on a
person-to-person basis. It boosts the goodwill of the trader and increases his
profits.
6. Low risk of bad debts

A sole proprietor is able to assess the credit worthiness of his customers because
of his close personal relationships. Extending credit to a few carefully selected
customers reduces the probability of bad debts.
7. High level of confidentiality

The sole trader is in a better position to keep his business secrets than in any other
form of business. This secrecy is important in competitive markets where
different techniques of survival in business are applied and have to be guarded.
8. Flexibility of the business

A sole trader business is highly flexible and adaptable when it comes to changes
of the business nature and location.
9. Easy to manage and control

Due to the small size of the business, the sole trader is in a better position to
coordinate all activities in the business and avoid fraud, which is common with
big businesses.
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Disadvantages
1. Unlimited liability of the owner
When the assets of the business are not enough to pay the liabilities of the
business, personal properties of the trader are used to pay the debts. This is
because the trader and his business cannot be separated.
2. Limited capital resources

The sole traders are often unable to raise sufficient funds for capital to start the
business. This is because they rely on personal savings and finance from
relatives, which may be limited.
3. Lack of Business Continuity

Sole trader businesses suffer from lack of continuity, as their life is equal to that
of the owner. The business is likely to close down if the owner becomes
bankrupt, dies, is unable to run the business, is imprisoned, etc.
4. Inability to expand
Expansion of his business may also be limited by his scarce resources. A sole
proprietor cannot manage to obtain loans from banks and financial institutions
due to lack of security and high interest rates changed.
5. Inadequate skills and expertise

Sole traders suffer form lack of training, skills and specialization to operate
business.
6. Long working hours

Sole traders have to work for long hours to ensure success of the business.
Conditions under which sole proprietorship is ideal

1. Where customers need special attention due to the nature of service rendered so as
to meet customers’ tastes and needs e.g. in such professions as medical, legal and
consultancy.
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2. Where capital to start a business is very small. The business is formed to provide
services/goods to a proportion of the market, which it is able.
3. Where the business is operating in an area where there is high risk and hence
decisions must be made very fast to avoid possible danger.
4. Under situations whereby the goods and services rendered are on a short term to
cater for short term needs hence it can be formed fast and dissolved fast e.g.
providing good to construction workers on a construction site till the construction
is completed.
Trends in sole proprietorship

Today there is an upsurge in proprietorship businesses all over the country as witnessed
by the establishment of many small stores and kiosks. In major towns, many large shops
have been subdivided into small stores to cater for small scale proprietorship.
The reasons for these emerging trends include:

i. Most traders cannot afford large sum of capital to start more complex business
units
ii. Retrenchment and restructuring in large private businesses and public service
have rendered many workers jobless who have resulted in self employment in sole
proprietorship.
iii. Increasing awareness of entrepreneurial culture
iv. The ease with which proprietorship can be started.
3.7. Partnerships
Partnership is an association of two or more persons who agree to carry on a lawful
business in common with the object of sharing in partnership. The partners provide
capital and share responsibilities for running the businesses according to the partnership
deed.
A partnership may be defined as the relation existing between persons who agree to carry
on a business as co-owners for profits”
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According to the Partnership Act, Cap 29 Laws of Kenya “partnership is the relationship
that subsists between persons to carry on a business in common with a view to profits.”
Features of a Partnership
i. They are formed and owned by two or more people to a maximum of twenty in
the case of ordinary partnerships and fifty in the case of partnerships formed by
professional people such as doctors, lawyers, accountants and architects.
ii. The partners provide all the capital raised jointly by the business. The capital is
raised mainly from the personal savings. They may also obtain capital from other
sources such as loans form banks and other financial institutions.
iii. The action of one partner in the business is binding to all the others. For instance,
any debts incurred by one partner on behalf of the business is binding to all
partners and the liability is spread across the partners in the proportion of their
contribution of the partnership capital.
iv. All the partners are jointly responsible for the management and operation of the
business. The partners usually share out duties and responsibilities in the
management and operation of the business as spelt out by the partnership deed.
v. Legally, there is no distinction between the business and its owners. All the
partners are therefore, jointly responsible for the debts and responsibilities in the
management and operation of the business as spelt out by the partnership deed.
vi. The partners have unlimited liability over the debts of the business save for
limited partners in limited liabilities who enjoy limited liability.
vii. Each partner acts as an agent of the business and therefore can sell and buy on
behalf of the business.
viii. The profit made by the business belongs to the partners jointly. Each partner is
entitled to the profit either equally or in the proportions agreed upon in the
partnership deed.
ix. In case the business makes a loss, the loss is shared by the partners either equally
or in proportions agreed upon the partners.
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Formation of a Partnership
There are neither special legal procedures nor formalities required.
A partnership may come in to existence by the following ways:
1. Orally, i.e. through verbal agreement

2. By action of the involved persons i.e. if by conduct, it is implied that they are
partners
3. By simple written agreement
4. By deed i.e. a written agreement under seal and signed by persons who have
agreed to form a partnership.
Sources of Finance in a Partnership

a. Partners’ capital contributions or personal savings
b. Borrowed funds from friends and relatives
c. Loans from:
 Banks
 Government agencies such as Kenya Industrial Estates, Industrial and
Commercial Development Corporation and Industrial Development Bank.
 Non-government organizations such as Faulu Kenya Ltd. And Kenya Women
Finance Trust.
d. Trade credit i.e. creditors
e. Hire Purchase
f. Lease finance
g. Ploughing back profits of the business.
Types of Partnerships
Partnerships can be categorized on the basis of:
i) Duration of the partnership
a) Temporary partnerships
These are formed for a specific time period or for a specific purpose. At the end
of such period or after the specific purpose has been achieved, the partnership is
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dissolved. An example is a joint venture between a plumber and a mason in the

construction of a building.
b) Permanent partnerships
These are formed to do business indefinitely as long as the business lasts. Such
partnerships do not get dissolved unless under special circumstances.
ii) The liability of the partners

Liability of a partner refers to the extent to which a partner is responsible to pay
the debts of the business incase the business is unable to pay them.
a) General partnership
This is also known as an ordinary partnership or an unlimited liability partnership.
It is the most common form. All partners have unlimited liability partnership.
Therefore, if the business is not able to pay all its debts, each of the partners will
be required to settle the remaining debt using their personal resources.
b) Limited partnership
This is facilitated by the Limited Partnership Act that provides for the limited
liability of some of the partners in the partnership. Such partners cannot be called
upon to raise any money more than their capital contribution. It should be
registered with the Registrar otherwise all members are exposed to unlimited
liability. Furthermore, it is not subject to similar dissolution conditions as of a
normal partnership.
The provisions of the Act include:

1. The number of partners is restricted to twenty.
2. There must be at least one member fully liable for all the debts and other
liabilities of the firm – usually a general partner.
3. In addition to the general partner(s), there is/are one or more limited partners.
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Types of Partners
1. According to Role played
i) Active partner
This partner takes part of the daily business activities on his fellow
partners’ behalf (hence forming an agency relationship) and receives
remuneration for this as he is considered to be an employee.
ii) Dormant/Silent/Sleeping/Secret Partner

This partner is in the background and is not actively involved in the
running of the business. He may have contributed to the business capital
and is thus eligible to his share of profits, but he is employed elsewhere or
is in a situation that inhibits his active involvement in business activity.
2. According to their Liability
i) General partner
This is the most active partner in terms of management and operations of
the partnership business. He has unlimited liability for the firm’s debts
and is often the one held liable for the total debts of the firm in the event
of inability to meet financial obligations as they arise.
ii) Limited partner

This partner has his liability limited to the amount contributed to the
partnership. He does not participate in the management of the business
and immediately losses his limited liability in the event of actual
participation in management.
iii) Partner by Estoppel

This is a person who behaves in such a fashion or manner that he or she is
mistaken to be a partner by third parties. He or she will be held liable to
those third parties who extend credit to the firm due to his reputation of
him/her being a partner.
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iv) Partner by Holding Out

This is a person who is declared by word or deed to be a partner by
another person. The person concerned should deny it immediately on his
coming to know of such declaration. Otherwise he/she will be held out to
be a partner and will be liable for debts of the partnership.
3. According to Age
i) Major Partner
This refers to a partner whose age is 18 years and above.
ii) Minor Partner

This is a person who while serving as a partner is under the statutory age
of eighteen years. Since he is a minor, his liability is limited to his capital.
However, on attaining the statutory majority age, he’ll rank as an active
partner with unlimited liability.
4. According to Capital Contribution

i) Real Partner
This is the opposite of a nominal partner. He is the partner who
contributes capital and name to the partnership business. He has a right to
take an active role in the management of the business.
ii) Nominal/Quasi Partner

He is not one of the owners or an actual partner, but allows his name to be
identified with the firm for prestige. He however becomes liable for the
firm’s obligations in an unlimited basis. The nominal partner lends his
name to be used by the business for a fee. The business benefits because it
uses the partner’s name for promotional purposes. Such a partner must
therefore be well known person who can enhance the firm’s prestige and
reputation.
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Conditions under which a Partnership is ideal:

1. Where capital requirements are large and difficult to raise as an individual
2. Where pooling of effort is necessary for better performance and thus efficiency
i.e. in legal and auditing professions
3. Where the law prohibits formation of body corporate i.e. audit profession
4. Where there are distinct line and specific controls such that the roles to be played
by each partner and their efforts can out rightly be judged ie. Engineering
5. Where a common bond exists and it is not likely to be diluted by inclusion of
other external parties i.e. family members and professional partnerships.
Trends in partnership business

The current trend is that family members, brothers, sisters or friends to organize
themselves into partnerships. This kind of business organization is mainly observed in
the legal fraternity, health sector and education. It is also by law that foreign investors
form partnerships with the local investors in Kenya.
3.8. Limited Liability Companies

Limited Liability Company is a business organization formed by two or more people
known as shareholders registered under Company’s Act (Cap 486) of laws of Kenya to
carry out business with the aim of making a profit.
A company can either be a private limited company or a public limited company. The
composition of each company is limited by its nature. Companies are classified on the
basis of ownership, with private limited company owned by individuals through
shareholding. Public limited company is owned by the public through the subscription of
shares by any willing person.
Meaning and Definition

According to Professor Gower the word company has no legal meaning. However in
legal theory a company is a corporation.
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A corporation is a succession or collection of persons having at law an existence, rights

and duties separate and distinct from those of the persons who are from time to time its
members. Distinguishing features of a corporation are:
- It is a personnna at law i.e. an artificial not a natural person.

It has perpetual succession i.e. its existence is maintained by the constant
succession of new members who replace those who die or are in some other
way removed
Types of Corporations
i) Corporations sole
ii) Corporation aggregate
Corporation Sole
It consists of only one member at a time holding a perpetual office. Here the office is
personified to distinguish it from the person who is from time to time the holder. Such
corporations were originally creatures of the common law and were devised to overcome
the difficulties raised by land not having an owner between the death of one holder of an
office and the appointment of a successor. Such corporations can now be created by
statute e.g. Commissioner of Lands, Public Trustee etc.
Corporation Aggregate
It consists of a number of persons so associated that in law they form a single person.
Here the undertaking is personified so that it may be distinguished from its members, e.g.
a registered company.
Features of Limited Liability Companies

i. They are legal entities: It is a legal entity treated as a separate person distinct
from shareholders. It can buy, own, possess or sell property in its own name and
can sue or be sued in a court of law in its own name. It can contract debts and
enter into binding contracts.
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ii. Limited liability: owners enjoy limited liability. They are not expected to pay the
debts of business beyond the amount of capital they have contributed into the
business. Their personal property cannot be sold to repay the debt of the business.
iii. Capital is raised in form of shares: Capital is divided into units known as shares.
Each share carries a fixed value. Capital is raised by selling the shares to
individuals or organizations.
v. Shareholders do not participate in the everyday management of the business:
Shareholders elect or appoint a board of directors to manage and operate the
business on their behalf.
vi. Sharing of profits among the shareholders: Profit is shared out among
shareholders on the basis of the number and type of shares held. When there is a
loss, the loss is not shared among shareholders but reduces the capital invested in
the business.
vii. Perpetual existence: death, bankruptcy or insanity of a shareholder does not
affect the existence of business.
viii. Legal control: formation, registration and operations of company are controlled
by law. All business activities must be carried out in accordance with the law.
ix. Annual general meeting: shareholders must meet at least once a year to receive
report from the board of directors on the performance of the company. They also
elect new directors.
x. The name of the company must end with the world “limited: law requires that
wherever the name of a company is written, it must end with the word ‘limited’
e.g. Bata Shoe Company Limited (ltd). This serve as a notice to all individuals
dealing with the company that the owner or shareholders of the company have
limited liability.
Types of Companies:
The companies Act Cap 486 Laws of Kenya place a great variety of companies at the
disposal of businessmen and businesswomen. It provides for three types of companies:
1. Companies limited by shares
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2. Companies limited by guarantee

3. Unlimited companies.
The Act provides for two forms of companies:

1. Private limited companies
2. Public limited companies.
Private Limited Companies

Features of private limited companies
a) Number of shareholders is limited to a minimum of two and a maximum of
fifty excluding the employees of the business
b) It is not allowed to sell shares to the general public. The law empowers the
company to sell shares to specific people who meet the conditions for
membership
c) Transfer of shares is restricted. If an existing shareholder wishes to sell he

must seek consent from other shareholders. The new shareholder must also be
approved and be accepted by the existing shareholders.
d) Directors are usually shareholders who own the largest number of shares in the
company. This gives these shareholders with majority shares more control and
commitment over the business
e) As soon as the company is registered and obtains its certificate of
incorporation, it can start trading.
Formation of a private limited company

It is formed by a minimum of two and a maximum of 50 persons, excluding employees of
the company. Individuals willing to start a private limited company are required to give
details on how to run the company in two documents known as th Memorandum of
Association and Articles of Association. Memorandum of Association defines the
company’s relationship with external parties, while the Articles of Association lays down
the rules and regulations for internal organization of the company.
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Ownership of a private company

The shareholders who have contributed to its formation own a private company. The
shareholders cannot easily transfer their shares without the consent of other existing
shareholders. When the transfer is allowed the person ceases to be an owner of the
company.
Management of a private limited company

A private limited company IS managed by board of directors appointed by shareholders
of the company. The board of directors may be headed by the managing director or
general manager depending on the size of the company. Large companies are headed by
managing director while small companies by general manager.
Sources of capital for a private limited company

Main source is the share contributions by shareholders. A private company is not
allowed to advertise any sale of shares to the public, but approach specific individuals
privately and request them to buy shares. Other sources include:
1. Loans and overdraft from banks and other lending financial institutions
2. Profit invested back to the company. The shareholder of the company may not
share out the profit and instead ploughing it back to the company. This increases
the capital base.
3. Leasing and renting property. It leases property for a certain period of time and
receives money. It may rent out its properties and get rent on monthly basis.
These proceeds increases capital base.
4. Hire purchase: it acquires property such as motor vehicle on hire purchase and
use the property to generate more capital
5. Loans from government agencies such as Kenya Industrial Estate (KIE) and
Industrial and Commercial Development Corporation (ICDC)
6. Trade credit: the company can acquire facilities for sale on credit and pay on a
later date. This enhances its capital.
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Public Limited Companies:

Features of public limited companies:
1. Has a minimum of seven shareholders. The maximum number of shareholders is
not controlled.
2. Shares are open for sale to members of the public. There is no restriction on who
can buy the shares.
3. Shares are easily transferable. They can be sold to anybody at any time. There is
no restriction on sale or transfer of shares from one person to another.
4. The company can raise capital from the public through the sale of shares and
debentures.
5. A public limited company is required by law to publish the prospectus before
selling shares and debentures to the general public.
6. The shares of a public limited company can be sold and bought in a stock
exchange market
7. Public limited companies are required by law to publish their annual audited
account, through the print media like magazines and newspapers.
Formation of a Public Limited Company

Public limited company is formed by a minimum of seven and infinite maximum of
members or shareholders. The directors are required to present the following documents
to the registrar of companies for registration.
i. Memorandum of association
ii. Articles of association
iii. List of directors
iv. Registration declaration
v. Directors’ statement.
Once the documents have been approved, the company will pay registration fees to be
issued with a certificate of incorporation. The company will be required to publish a
prospectus showing how it will raise the minimum and maximum capital. The
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documents will be thoroughly scrutinized and when the registrar is satisfied, a company
invites the general public to subscribe shares and start running as a business entity.
Management of a public limited company

Public limited company is managed by a team of directors with a minimum of two years
depending on the size of the company. The directors are elected by the shareholders in
an annual general meeting. The directors formulate the company policies and the
managers are responsible for the implementation of the policies.
Sources of capital for public limited company

Large portion of the public limited company’s capital is mobilized from the sale of
different types of shares and debentures to the general public. The shares are advertised
in the prospectus as stipulated in the memorandum of association. Other sources include:
1. Loans and overdraft from banks and other lending financial institutions
2. Profit invested back to the company. The shareholder of the company may not
share out the profit and instead ploughing it back to the company. This increases
the capital base.
3. Leasing and renting property: It leases property for a certain period of time and
receive money. It may rent out its properties and get rent on monthly basis.
These proceeds increases capital base.
4. Hire purchase: it acquires property such as motor vehicle on hire purchase and
use the property to generate more capital
5. Loans from government through its associated financial institutions such as
Industrial Development Bank (IDB)
6. Trade credit: The company can acquire facilities for sale on credit and pay on a
later date. The suppliers are willing to offer credit facilities depending on credit
worthy of the business.
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Difference between private limited company and public limited company
Private limited company Public limited company

1. Formed by a minimum of two and a 1. Formed by a minimum of seven and no
maximum of fifty shareholders upper limit
2. Managed by at least one director who 2. Managed by at least two directors .
may be the principal owner or elected
among the owners of the company
3. There is no free selling or buying of 3. There is free transferability of shares.
shares. Any transfer has to be endorsed by
all the shareholders.
4. There is no need for a prospectus to 4. The company has to draw up a
show how the company is to generate prospectus to show how it will generate the
capital as required by the registrar of comp- minimum and maximum capital
anies
5. The company starts operating after 5. The company has to wait for the
receiving the certificate of incorporation. submission and approval of the prospectus
and licence of trading to commence
business.
3.9. Cooperatives
Definition of a Cooperative Society:
According to Kibera(ed), a cooperative organization is an organization of members who
come together to carry out economic activities and to share proceeds equitably on the
basis of cooperative principles.
Concept of a Cooperative
Co-operation simply means working together. A cooperative society is made up of a
group of people who join together voluntarily to achieve common social and economic
benefits.
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Features of cooperatives
I. Legal entity: Cooperatives are legal entities and are treated as artificial persons
separate from the members.
ii. Limited Liability: Members of a cooperative have limited liability.
iii Cooperatives sell shares to members: the capital is raised in form of shares.
Each member is encouraged to buy as many shares as possible.
iv Voluntary membership: Anyone who qualifies to become a member may
voluntarily join the cooperative and is also free to leave at will
v. Equal participation: Each member has only one vote irrespective of the
number of shares he has in the society.
vi Control and management: The operations are democratically managed, each
member having an equal say in the running of the affairs of the cooperative.
vii Common bond: the members work together to achieve common objectives.
vii. Profit sharing: the surplus is shared among the members on the basis of
their respective contributions in the activities of the cooperative.
The Development of Cooperatives

The cooperative concept has been in practice for centuries in many communities all over
the world. However, cooperatives took their present shape in the 19th century in England.
During this period, England was going through hard economic times, workers’ incomes
were very low while the cost of living was very high. Most industrial workers could
hardly afford the high cost of essential foods, leading to general poverty. In trying to find
a solution to the common problem, many workers formed different groups which were
not successful. In 1844, a group of workers popularly known as the Rochdale pioneers
formed a cooperative store which succeeded, and laid down the principles upon which
cooperatives are organized. Today, the cooperative movement can be found in many
sectors of the economy in every country.
In Kenya, the cooperative movement started in 1908 with the formation of Lumbwa
cooperative society by the European farmers. In 1945, parliament passed a bill on
cooperative ordinance allowing African farmers to form cooperative societies. The
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ordinance was later replaced by the Cooperative Societies Act, making all cooperatives
come under control of Ministry of Cooperative Development.
The Cooperative Principles

1. Open and voluntary membership
The membership of a cooperative must be open to all who can fulfill the by-laws
of the society and should not be limited by social, political, tribal, racial or
religious differences.
The only limitations may be imposed on persons who reside outside the stipulated
geographical boundary or who are under 18 years of age. Agricultural
Cooperative Societies also have a condition that members must own land. Any
person who fulfils these conditions is free to join the appropriate cooperative.
2. Democratic administration
The affairs of the cooperative must be administered in a democratic manner.
Each member must have a vote and he must have only one vote even if he holds a
great number of shares or he sells to or buys from the society in large quantities.
3. Dividend or Bonus
Any profits made by a society during a year should be passed on to the members
in the form of a dividend or bonus. A part of such profits may be retained by the
society as a reserve to strengthen its financial position, because a financially
strong cooperative is in a better position to serve its members. The payment of
dividends depends on the members’ contributions.
4. Limited Interest on share capital

It should not be the intention of a cooperative to consider a return on capital the
most important thing. Ideally no interest should be paid on share capital
contributed by the members; but if the society’s constitution provides for such an
interest, there must be declared an upper limit.
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5. Promotion of cooperative education

This principle aims at making sure that the members, including employees,
officials and the general public is informed about cooperative affairs. Suitable
training programs should be organized to impact the necessary knowledge,
information and skills required.
Formation
The registration of a cooperative society renders its status to be body-corporate. The
cooperative society becomes a ‘person’ in the eyes of the law, in its own right. As a
result, a cooperative can sue and can be sued. With this legal status, a cooperative also
enjoys perpetual succession. This means that as long as the society is successful and
operative as a business, it will continue to exist.
Cooperatives in Kenya are registered by the Commissioner for Cooperative Development

(CCD), who is empowered to do so by the Cooperative Societies Act. Cooperative
societies are usually registered with limited liability.
Registration
A cooperative society before registration must fulfill the following rules:
1. It must consist of at least 10 persons for a primary cooperative society, and two
primary societies for a cooperative union. No maximum is set. The ten members
sign the application forms. Each of these members has to be:
 Eighteen years of age and above
 Resident within the area that is within the society’s area of operation or as
described and in the by-laws.
2. An application is made to the Commissioner of Cooperatives, must be signed.

 In the case of a primary cooperative society, by at least ten persons qualified
in the manner described above. In a secondary one, it must be signed by
people, duly authorized on behalf of the cooperative societies in which they
are members.
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 The application must be accompanied by four copies of an economic

appreciation for the proposed business enterprise.
The applicants are required to submit the following documents during registration:
 Four copies of the proposed by-laws (also called standard by laws)
 Four copies of the economic report (appraisal or appreciation)
 Four copies of application form
 A covering letter.
On registration, the persons who applied will received the following documents:
 A copy of the registered by-laws
 A copy of the application form
 A copy of the economic appraisal
 A copy of the Cooperative Societies Act and rules.
 Certificate of registration.
Rights and Privileges of a Cooperative Society

When the cooperative society is registered some rights and privileges, immunities and
powers are conferred upon it. They include:
 The cooperative society is given powers to hold property and do all things necessary
for the purpose of its constitution.
 Contracts entered into between a registered cooperative society and its members, to
do with disposal of agricultural produce is immune to challenge.
 The by-laws of a registered society bind it and the members are immune to challenge.
 Any debts or outstanding payments payable by a member of a registered cooperative
society constitute a first charge to shares or interest in the capital, deposits, dividends
or bonus of such a member
 The shares of interest of any member are not liable to attachment to under any
circumstances except as stated above.
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 The shares of interest of a deceased member is transmissible except as in above

liability of a former member or deceased member for the debts of a registered
member of a registered cooperative society, extends only to the debts as they existed
before death of the member or his/her cessation to be a member.
3.10. Summary
The Kenyan economy contains many forms of business organizations.
Investors wishing to start a business organization have a number of
influences that will help to decide the type of organization that one would
like to establish. Objectives of every organization are key factor in
forming an organization. Two broad categories are allowed by law of the
land i.e. private sector and public sector.
In the private sector sole traders, partnerships, limited companies and co-
operatives are the main forms of business ownership.
Activity
1. Explain the objectives of limited liability companies
2. State advantages of partnerships
3. State the differences between partnerships and private limited
company
4. Distinguish between consumer co-operative and retailer co-
operative.
3.11 Further Reading
Francis N. Kibera 1996, Introduction to Business pp 41 - 55
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LECTURE FOUR
PUBLIC BUSINESS ENTERPRISES
Lecture Content
4.1
Introduction
4.2
Objectives
4.3
Need for Public Enterprises
4.4
Reasons for Government Enterprises
4.5
Reasons against Public Enterprises
4.6
Organization of State Enterprises
4.7
Department Government Business
4.7.1 Limitations of Departmentally Ran Enterprises
4.8 Public Corporations
4.8.1 Features of Public Corporations
4.8.2 Formations
4.8.3 Ownership
4.8.4 Management
4.8.5 Capital Sources
4.8.6 Types of Public Corporations
4.8.7 Advantages of Public Corporations
4.8.8 Disadvantages of Public Corporations
4.8.9 Dissolution of Public Corporations
4.9 Privatization
4.10 Summary
4.1 Introduction
A Government owned business is where the government either directly or indirectly owns
a share in a business enterprise. This is a phenomena mostly found in socialist economies
and in developing countries of Africa, Asia, Far East and Latin America . Public
Enterprises are also found to a lesser extent in developed economies of Europe.
In the United States of America and Western Europe, the government regulates economic
activity and operations of business and industry. However, ownership and control rests
mostly in private enterprises except organizations dealing with products for use by
national defence and strategic resources.
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In this Lecture we will discuss the type of government owned enterprises from a Kenyan
perspective. A need for state enterprises is explained and the reasons for privatization.
At the end of this lecture, you should be able to:

1. Describe types of Government owned businesses.
2. Explain reasons for public enterprises.
3. Explain the organization of state enterprises.
4. Explain the formation of parastatals.
5. Explain the merits and demerits of state enterprises.
6. Explain the concept of privatization
4.3. Need for Public Enterprises

In developing countries, government enterprises have been encouraged due to the
following reasons:-
- National policies of equal distribution of national resources
- Attainment of social policy goals such as creation of employment
- Economic policies of Stabilization of commodity prices
- National policies to distribute national wealth among citizens
- National policies to spread development to all arrears of the country
Reasons for Government Enterprises

Government enterprises are established due to the following reasons:
(a) Abolition of monopoly by private enterprises. Ownership of business enterprises
rests in the state, private monopolies will cease to have too much power over the
happiness and destinies of majority of the population.
(b) Replacement of profit motive by consideration of public welfare. Private

enterprises work with an eye on profit and judge every issue from the point of
view of profit.
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(c) Greater economy and co-ordination. State enterprises ensure harmony and co-
ordination.
(d) Balanced regional development. Decisions regarding location of new plants are
taken in regard to social and regional considerations so as to spread development
in every part of the country.
(e) Assistance in economic developments. The surplus profits of state enterprises can
be used to finance schemes of national economic developments. This will reduce
the need of heavy taxation for the purposes of financing development.
(f) Better conditions of employment for workers. The state being a representative of
the people will naturally be interested in providing a better deal to workers so that
exploitation, job uncertainty etc. can be replaced by just rates.
4.5. Reasons against Government Enterprises

The following are the demerits of establishing government enterprises:
(a) Lack of Efficiency. State enterprises are generally presumed to be less efficient
than privately owned and management concerns.
(b) Lack of flexibility in operation. There is usually lack of flexibility in operations
of state enterprises since they will have to stick to the provisions of the Special
Act of Parliament establishing such enterprises.
(c) Political Interference. State enterprises are prone to frequent undue
interferences by political parties and their leaders.
(d) Exposure to Public Censure. State enterprises are exposed to the critical eyes of
the general public. Therefore persons in top management of such enterprises
may not feel free to initiate new schemes or venture on untried policies.
(e) Rigid Financial control. State enterprises are subject to strict and rigid financial
control by government auditors and parliamentary committees.
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4.6. Organization of State Enterprises

State or public enterprises are normally organized in three forms:-
(a) As departments of government
(b) As public or state corporations
(c) Ts mixed ownership corporations or companies set up under the companies Act
Cap 486
4.7. Government Department

State enterprises which are managed as part of a government department usually follow
the traditional functions government. They are managed as a department of a
government ministry and have the following characteristics;
(a) The enterprise is run by a Government Ministry with the Minister at the top
responsible to parliament for its operations
(b) The day to day operations are managed by a Board of Directors assisted by CEO
all appointed by the Minister
(c) All other staff is recruited the same way as other civil servants
(d) State enterprises are financed by annual appropriations from the treasury and
estimates of expenditure and revenue shown in the national budget. All revenue
or major portion of it is remitted to the Treasury.
(e) The budget, accounting and audit controls applicable to other government
activities apply to these enterprises.
(f) They produce largely for the state itself
(g) Such undertaking cannot be sued at law without the consent of the government
- Government Proceeding Act
4.7.1 Limitations of Departmentally Run State Enterprises

(a) They are usually at the mercy of political parties and lack stability due to
uncertainty of the tenure of political parities and Ministers
(b) Such business activities are financed by tax payers rather than the users of goods
and services
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(c) Civil servants entrusted to management such enterprises lack business acumen or
expertise
(d) Such enterprises leave no scope for initiative and skill as minor details of their
working are objects of scrutiny and questioning in parliament and outside
(e) Lack flexibility of operations necessary in business activities
they become synonymous with red-tape delays, inadequate service and
insensitivity to consumers needs
4.8. Public Corporation/Parastatals

Public corporations, also known as parastatals, are statutory bodies formed and owned by
the central government. They are established to perform specific duties or functions with
the main objectives of providing goods and services to the public. In Kenya, their
activities are found in such places as transport, communication, financial and
management services, production and marketing. These are goods and services
considered to be too essential to be left to the private sector or require heavy initial
capital investment, which very few private investors can afford. Although the main
objective is not profit driven, parastatals have to make a profit margin to sustain their
operations.
4.8.1 Features of Public Corporations

i) They are established under an Act of Parliament
ii) They are formed, owned and operated by the central government
iii) The government is the main provider of capital
iv) Management and decision making are in the hands of a director appointed
by the government
v) They are set up to perform specific functions on behalf of the Government,. For
example: Marketing boards are set up to help in the production and marketing of
certain products
vi) Most of them provide goods and services to the public at marginal profit to
sustain their operations
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vii) The profit is used to improve services to the public as well as provide revenue to
the Government
viii)They are established as legal entities with the ability to enter into contracts,
own property and can sue and be sued
4.8.2 Formation
Most public corporations are established through Acts of Parliament (while others are
formed under the existing laws e.g. the companies Act. Though very rarely)
A parliamentary bill seeking the establishment of the parastatal is published and

presented to Parliament
If passed the bill becomes an Act, which serves the same purpose as the Memorandum of
Association and the Articles of Association in limited companies. The enactment of the
law gives the corporation legal entity and limited liability. The Act outlines:
i) The proposed name of the parastatal
ii) Aims and objectives
iii) Goods or services to be produced
iv) Location
v) The appointment of top executives
vi) The powers of the Board of Directors
vii) The ministry under which it will operate
Once the bill has been enacted and becomes law, the registrar of companies issues a
certificate of incorporation
The minister then appoints the management board and the corporation starts operations
4.8.3 Ownership
The citizens of the country apparently own parastatals with effective power resting on the
hands of the management board. The central government provides all the share capital
hence owns all the shares in a parastatal
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4.8.4 Management
The government through the minister responsible appoints the top management board of
public corporations. A managing director heads the board of directors whose
responsibilities include:
i) Formulating and implementing the policies of the organization
ii) Reporting the corporation’s progress to the minister who in turn reports to
parliament
4.8.5 Capital sources

The major source is the government, which buys all the shares of the parastatal from the
taxes collected. Other sources include:
i) Borrowing from banks and other lending financial institutions. However, the
power to arrange for loans and overdrafts from banks is subject to control by
the government
ii) Hire purchase arrangement. The corporation can arrange to buy some of the
property it requires on higher purchase terms by pay in installments
iii) trade credit. Credit facilities with suppliers to supply goods or services on
credit and pay later can be arranged by the parastatal
iv)Renting and leasing. The corporations van rent or lease its unused property to
other business organizations from which it collects some revenue
v) Ploughing profits. Most of the profit made by a parastatal is ploughed back
into the corporation to improve and expand its services to the public
4.8.6 Types of Public Corporations

Public Corporations can be classified according to their functions as follows:
i) Trading and Commercial Corporations
These are parastatals established with the main aim if engaging in business to
provide goods and services with the aim if making profit. A certain proportion of
the profit goes to the government in the form of dividend while the balance is
retained for expansion and improvement of services. They can also be divided
into two categories:-
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a) Those that are monopolistic. These encounter no competition in the goods

and services they provide. Examples include the Kenya Power and Lighting
Company, the Kenya Oil Refineries, the Kenya Railways Corporation etc
b) Those that trade in competition with other privately owned business
organization,. Examples include the National Housing Corporations, the
Kenya Post Office Savings Bank, the Postal Corporation of Kenya, the
Kenya Pipeline Company and the Industrial and Commercial
Development Corporation (ICDC), THE Kenya National Trading
Corporation.
ii) Marketing Boards

These are public corporations established by the government with the main aim of
assisting local farmers in marketing or selling their produce at the best prices
possible. They have the following functions:
a) Collecting, transporting and packing the produce from the farmers
b) Primary processing, grading and packing of produce as seen fit
c) Searching for both local and international markets for the produce
d) Selling the produce on behalf of the farmers and submitting the benefits to
them
e) Assisting farmers to produce the best quality produce by providing credit
facilities for agricultural inputs and extension services
f) Undertake research on agricultural marketing, problems that fact it and
possible solutions
g) Stabilizing prices and incomes by keeping prices fairly fixed and storing any
unsold goods to act as buffer stock i.e. to be sold during an emergency
Examples of these boards include: Kenya national Cereals and Produce Board,
the Coffee Board of Kenya the Pyrethrum Board of Kenya and the Cotton Lint
and Marketing Board
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iii) Finance and Banking Corporations

These corporations are established to serve the following purposes:
a) Provide banking services to the public
b) Earn revenue for the government
c) Mobilize funds from the public and channel them to investment and economic
activities
d) Support trade, industry and other national development activities by providing
loans and other financial services to them
Examples include: the Kenya Post Office Savings Bank, the Industrial
Development Bank, the Agricultural Finance Corporation, the Kenya Industrial
Estates and Industrial and commercial Development Corporations
iv)Research Corporations
These were established to provide research services to support the development of
industry, agriculture, health and other specialized sectors of the =economy.
Examples include: the Kenya Coffee Research and Development Institute, the
Kenya Medical Research Institute and Kenya Forestry Research
v) Development Corporations
these were set up for the main purpose of developing specific regions of the
country that were considered to be economically unproductive but had the
potential of being economically productive. Examples include: the national
Irrigation Board, the Lake Basin Development Authority, the Tana River
Development Authority and the Kerio Valley Development Authority.
vi)Regulatory Corporations
These were incorporated to establish and control standards and quality of specific
goods and services and determine the direction of development of the sectors they
represent. Examples include: the Kenya Bureau of Standards, the Kenya
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Electricity Regulations Board, the Communications Commission of Kenya and

Kenya Film Corporation.
viii) Service Delivery Corporations

They are established to provide certain specialized services of national
importance. Examples include: the Kenya National Examination Council and
Kenyatta National Hospital
4.8.7 Advantages of Public Corporations

i) The goods and services at affordable prices
They consider the interest of the public when determining prices of their goods
and services since their main aim is to provide affordable goods and services.
ii) Government Support

They enjoy government support when in financial crisis and government backing
(guarantee) when borrowing money from banks and other sources
iii) Provide healthy competition

Many of the prastatals provide direct competition to organizations in the private
sector. This helps regulate prices as well as quality of goods and services.
Consumer prices are kept low and affordable as a result.
iv Provide Essential Goods and Services

Some are established to provide certain essential goods and services that would
not have otherwise been provided by the private sector due to the high cost
involved, their sensitivity, among other factors e.g. water and electricity
v) Vide revenue to the government

They are an important source of revenue to the government. The revenue arises
from:
a. Taxes such as Value Added Tax (V.A.T) collected on behalf of the
government in the course of activities
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b. Corporation tax charged on the profits the make

c. Dividends which are the government’s share in the profits made
vi) Promote Economic Development

Their operations promote the exploitation of the country’s economic resources
leading to economic development and improved standards of living of the people
vii) Provide employment
They generate employment for the public hence help in improving standards of
living
viii) Control of the development of various sectors of the economy

through public corporations, the government is able to control and direct the
development of the various sectors if the economy.
ix) Ability to hire and employ highly specialized labour force.
Disadvantages of Public Corporations

i) Lack of Profit Motivations
Their main objective is to achieve government objectives. The lack of profit
motivation leads to inefficiency and complacency in management leading to
loss making. This situation is worsened by the belief that the government will
step in to save them from collapse.
ii) Poor Management

Most parastatals suffer from poor management practices. It may result from:
a) Lack of profit motivation
b) Appointment of poor top level managers who are unqualified for their
positions
c) Political interference
d) Corruption that has often led to collapse of parastatals.
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iii) Excessive Government Control

The government controls their operations and where such control is excessive,
the management cannot make sound business decisions, especially when they
appear to be in conflict with perceived government policies.
iv) Political influence and interference

Since most senior positions in parastatals are political, they tend to suffer from
political pressure and patronage in the leadership, which undermines expected
professional management of the corporations.
v) Lack of competition
Some parastatals are monopolistic thus encounter no competition from the
private sector. As such they tend to be inefficient in their operations,
insensitive to the needs of customers and provide poor quality goods and
services. This may lead to consumer rejection and eventual collapse.
vi) Heavy burden on government resources

The government is obliged to provide goods and services to all citizens
regardless of the geographical location. Sometimes it becomes uneconomical
to provide some goods and services to some areas. The cost of providing
them may surpass the returns.
vii) Corruption and misuse of funds

Public corporations suffer from problems of inefficiency, laxity, political
interference and poor management that are all fertile ground for corruption and
financial management.
(viii) Lack of interest and commitment by the directors and managers

Top directors and managers of parastatals are merely appointees and not
owners of the organizations. As a result they lack interest and commitment to
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make sound economic decisions that may be necessary to generate

profits.
4.8.9 Dissolution of public corporations

The life of a parastatal can come to an end or be dissolved through any of the following:
i) By the voluntary action of the government through the minister responsible
ii) By action of the creditors
iii) By compulsory action of a court of law
In each of the cases above, the procedure followed is the same as in the dissolution of
limited companies.
The life of a parastatal can also end through the sale of all its shares to private investors.
This process is known as privatization. It only involves a change in the ownership,
management and control of the corporation. Its complete dissolution is not required.
4.9 Privatization
Privatization is a transfer of ownership and control of an enterprise, through the sale of
assets, from the public to the private sector. Since loss-making public enterprises have
been a drain on government resources, governments have resorted to privatization as a
cost saving device. Many of the countries that have adopted IMF-supported adjustment
programmes have had to examine their strategies for dealing with public enterprises,
particularly in the area of need to cut down on the government expenditures. In a number
of cases, privatization has been considered a viable strategy.
There are three basic forms of privatization: i) government relinquishes any interest in a
public corporation by selling all its assets to private entrepreneurs; ii) private
entrepreneurs are invited to participate in a joint ownership of an enterprise that has been
wholly owned by the government, thereby changing its status to a quasi-public enterprise;
iii) the government or a DFI acting on its behalf, sells all the equity it owns in a quasi-
public enterprise, making it wholly private.
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- Privatization is based on the premise that private enterprises are more efficient than
public ones. Thus its objective is to improve the efficiency of enterprises. It is assumed
that private ownership increases managerial accountability by making the managers
responsible to shareholders who, it is believed, are more inclined to monitor their
performance more effectively than governments; subjects managers to the financial
discipline of private capital markets; and enhances competition and the associated
improvements in allocative efficiency.
- The conventional viewpoint that parastatals are more protected but less efficient than
private firms was challenged by Grosh (1988). Grosh analysed data on sample of public
and private manufacturing firms in Kenya and found that parastatals in her sample were
relatively more efficient and less protected than private enterprises. However, until more
studies confirm these conclusions, they should be regarded as only tentative.
Mixed Ownership Corporations

In such corporations or companies the government usually owns less than 51% share
capital. The rest is owned by members of the public or private investors or other large
private corporations.
In mixed enterprises, the state has an opportunity to associate the investing public with
their capital and technical know-how.
Features:
- No state interference
- No bureaucratic control operation of business
- The organization is not run for welfare purposes but as a profit making venture
- No government auditors – it is usually audited by private professional auditing f
firms.
- It is normally efficient in operation
- Recruitment is from the labour market
- The Board of Directors are elected at annual general meeting.
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4.10. Summary
The public sector of the economy consists of those firms and industries for
which the central government are mainly responsible. The sector includes
activities of state education, armed forces, strategic industries such as water,
electricity, minerals, etc. the government may decide to engage in business
so as to control monopoly to distribute resources equitably and spread
development to all areas of the country.
Government/public businesses are organized as departments, public

corporations, or mixed ownership.
Activity 4.1
1. State three objectives of state corporations
2. Explain reasons for government involvement in business
3. State reasons why government should not engage in business
4. How are state enterprises organized?
4.11 Further Reading

Francis N. Kibera 1996 (ed), Introduction to Business pp 56 - 66
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LECTURE FIVE
SMALL BUSINESS MANAGEMENT
Lecture Content
5.12. Introduction
5.13. Objectives
5.14. Meaning of Small Business
5.15. Characteristics of Small Business Enterprises
5.16. Advantages of Being Small
5.17. Disadvantages of Being Small
5.18. Role of Small Businesses
5.19. Constraints in the Development of Small Enterprises in Kenya
5.20. Ownership and Management of Small Enterprises
5.21. Summary
5.1 Introduction
In spite of the general recognition of the role and importance of the small business
enterprise sector in a nation’s development, it has not been possible to arrive at a
universally acceptable definition of a small enterprise. Even the terms used to describe
this sector are diverse. Small business may be called micro enterprise, the informal
sector, small scale enterprises, small businesses or small firms etc
There are many examples of small business enterprises in our economy. These include: -
farming, retailing, service firms – restaurants, salons, the mushrooming bureaus, matatu
operations, motor vehicle repair services etc.
Under the manufacturing and repair category, we may cite, the ‘jua kali’ sector e.g.
welding and fabrication, posho milling etc.
5.2 Objectives
1. Explain the criteria for describing a small business enterprise
2. Highlight on the characteristics of small business enterprises.
3. Explain the advantages and disadvantages of small business
enterprise.
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4. Explain the role of small scale enterprises

5. Discuss the constraints in the development of small scale
enterprises.
6. Propose ways to assist the development of small scale enterprises
7. Explain the management of small scale enterprises
5.3. Meaning of a Small Business Enterprise

As we mentioned in our introductory note, it has not been possible to describe the small
business enterprises in definite terms. Various criteria have been used to delineate a
small business enterprise. Some of the subjective criteria used to describe this sector are
as follows:
 It is one that is own managed or family owned and controlled.
 It is one with relatively small market share, that is to say it is not dominant in
its area of operation.
 It is one that uses simple technology, that is to say simple methods in
production.
Other writers and researchers prefer to define small business enterprise in a quantitative
manner. They describe a small business as one:
 with low turn over sales
 with little capital invested
 with relatively few employees
 with relatively short life span
Take Note
With these definitions in mind we can make interference and
authoritatively say that the proportion of small business in Kenya is
much bigger than organization business
Characteristics of Small Business Enterprise

Certain basic characteristics can be drawn from these definitions.
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When we study the small business sector, certain generalization can be drawn as
follows: -
a. There is Ease of Entry: - This is because they require little capital to invest
and run the business.
b. They are less regulated and operate in very conceptive markets. Many of the
small business enterprises are close to each other engaging in similar activities.
Others too compete with big well-established businesses.
c. They provide an opportunity for self-employment - The owner of a small

scale enterprise is the manager and makes all decisions that influence the
operations of the business.
d. They use simple technology – These business tend to use locally available raw
material coupled with the use of simple methods of production
e. The sector adapts informal training approach in training their few employees.
These employees acquire their skills through being attached to an expert in the
trade, a kind of ‘apprenticeship’ training.
f. The sector uses labour intensive production methods. This is because of limited
capital. As such it is not possible for these businesses to invest heavily on
machines. Additionally they tend to rely on locally available labour.
g. There is limited capital contribution. As we have pointed out earlier the small
business enterprise owner manager raises all the money to start and run the
business. This capital may not be adequate to expand the business. Further,
because of lack of collateral security they may not have access to credit offered
by money lending institutions.
h. Many of the small businesses enterprises operate in a local area: - This occurs
because they lack the ability to produce for large markets. The few items
produced or services are consumed in the local geographical area.
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Activity 5.1
Highlight some of the small activities carried out by small business
enterprise in your area.
Advantages of Small Business Enterprises

Small businesses enterprises enjoy a number of advantages. These include;-
(a) They can be easily set up and dissolved
(b) The owners are independent and have freedom to act (although the owner must be
concerned about customers, employees, creations, suppliers and government
regulations) as there is no one else to give approval.
(c) The profits of the enterprises do not have to be shared as is the case with
partnership or large corporations
(d) There are fewer overhead costs than in larger firms, so they may be able to earn a
profit on a lower price than large company.
(e) The organizations are usually lean and have small relatively permanent staff who
may work for long hours without extra pay.
(f) Specialists (e.g. accountants) are hired when required. This reduces expenditure
(g) Staff relationships in small business are often better than in large organizations.
(h) Simplicity of organizations enables them enjoy casual relationships.
(i) Owner-manager (s) can giver personal attention to his/her client’ problems.
Let us now consider their contributions

(i) Informal skill-training approach the few employees engaged may not undergo
formal training. They may acquire their skills through being attached to an expert
in the trade, kind of “apprenticeship” training.
(ii) Labour intensive production methods. Because of limited capital, it is not possible
for such businesses to invest heavily on machines. They therefore tend to rely on
locally available labour.
(iii) Has capital contribution from a limited number of individuals – As we have
pointed out earlier these are owner manager who raises all the money to start and
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run the business. This capital may not be adequate to expand the business.
Further, because of lack of collateral security they may not have access to credit
offered by money lending institutions.
(iv) Would operate on local area.
(v) Would probably not be dominant in its level of operation.
5.6. Disadvantages of Small Business

Despite the many advantages both economic and social, business enterprises suffer from
some very serious limitations. They are as follows-:
(i) They have limited amount of capital- The amount of capital that a small scale
enterprise can get together is limited. Money lenders such as commercial banks
require collateral security, which in most cases small businesses lack. These
businesses are therefore limited to such funds as they may own or raise from
friends and relatives. As a result, they cannot expand or take advantage of large
scale operations.
(ii) There is limited managerial ability- As we mentioned earlier, small businesses

enterprises in Kenya are characterized by sole proprietorship. No individual
however is capable and be expected to posses full knowledge of all branches of
business.
(iii)There is unlimited liability- Small business enterprises liability is unlimited-It is

not only the assets of the business that are liable but also the entire personal
fortune for the debts of his business. This means that the advantage of personal
control is counterbalanced by personal risk.
Consequently we are saying that the limited capital and as break on the expenses
and development of such businesses.
(iv) Uncertainty of continuity- Permanent or continuity of business of small scale

enterprises is difficult to maintain. We have seen in many instances that when the
proprietor dies or is no longer able to run the business, the business may come to
an end; if there is no one else capable enough to take his/her place. The business,
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should it fall in weak hands the loss is not only to the proprietor but also to the
community who may lose the opportunity of enjoying the services products of
such enterprises. Despite these disadvantages the small scale enterprise or play a
pivotal role in our economy. Let us study some of their contributions to the
economy.
5.7. The Role of Small Scale Enterprises to Kenyan Economy

The small scale sector plays a major role in the local economy. This is indicated by the
following factors:
a. Employment Creation
The small-scale enterprise generally contributes more jobs than large enterprises.
This is because of the fact that it is cheaper to create more jobs in this sector than
in the large enterprise sector. More so there are more small business in Kenya
than they are large business enterprises.
b. Income Generating and Poverty Relief

The small-scale enterprise is generally recognized as being capable of generating
income for large sections of the population, particularly less educated and
unskilled. Hence the sector is regarded as being in the front line in the alleviation
of poverty and improving peoples living standards.
c. Creating Balanced Development & Distribution of Opportunities

The small business enterprises are also known for distribution of job opportunities
throughout the community. Furthermore the sector tends to create jobs for those
who might be excluded because of being minority or because of politics, race, sex
or religion.
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d. Mobilization and Utilization of Local Resources

The small business enterprises sector creates an avenue for effective mobilization
and productive use of individual or family savings. It is also likely to make use of
locally available raw material, including scrap metals. Further the enterprise
reacts faster to market changes and adapts more easily to less opportunities unlike
large enterprises.
e. National Output and Growth

The total volume of goods and services produced by small enterprises, though
usually unrecorded is huge. This is mostly for the local market. In recent times
however, the sector has begun to make significant contribution to the export
sector as well. For instance wover baskets are being exported to USA, India,
Japan, Britain and South Africa.
f. Rural-Urban Balance
Because of increased job opportunities in the rural areas as a result of continued
growth in the small enterprises, it is expected that the sector will check the drift of
people from the rural areas to urban areas.
g. Accelerating the Industrialization Process

When a country is developing, there is diversification in occupations, ranging
from agrarian to industry. Promotion of small enterprises fuels this diversification,
leading to increased per capita incomes and higher standards of living. Industry
and agriculture therefore become inter-dependent, each strengthening the base of
the other and affect the overall economy.
Take Note
We can say that the small business enterprise sector needs to be seen as
an essential component of a nation’s social-economic development plans.
This sector can not be ignored as it supports a nation’s economic growth
and development.
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Let us now examine the obstacles to the development of small business enterprises in
Kenya.
Constraints in the Development of Small Enterprises in Kenya

The growth of small business enterprises in Kenya have been hampered by numerous
constraints. These factors include:
(a) The Kenyan legal Environment is uncondusive to the small business
Obtaining licenses is a cumbersome and somewhat a bureaucratic process. Even
so many small businesses are not able to provide proper documentation to be
able to obtain such licenses.
Taxation rates are high and often ‘eat into’ profits made by the business and
more so the import duties increase the production costs of small business
making their price less competitive. We may cite farm inputs and equipments an
example of such imports that increase the cost of production of agricultural
business.
(b) The economic environment is not conducive to small business enterprises in

Kenya.
The high interest rates – (price of capital), make the cost of obtaining finance
prohibitive for such businesses. Most financial lending institutions in Kenya
charge high interest rates, making it difficult for such businesses to borrow.
Even after acquiring borrowed capital, the high interest rates make the debt
repayment a burden
(c) Most people in Kenya live below poverty line. This leads to low purchasing
power resulting in low demand for small business goods and services
(d) The sector has limited Markets: - This situation arises because the small
business enterprises lack access to export markets and market information.
They also lack access to government tenders (the government is the largest
consumer).
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(e) Infrastructure is the blood and veins of an economy. Without good

infrastructure production and distribution are bound to suffer. Our Poor Roads
lead to increased cost of obtaining raw material and distributing finished
goods. Further, there is limited electricity distribution network, consequently
not available to this sector. Much of the net works is in cities and in big towns,
servicing mostly the big enterprises. Accidentally the high cost of installing
electricity makes this service unaffordable.
(h) The price for purchasing land is prohibiting. Besides that the rental costs
are also exorbitant. There is limited industrial space at high rental costs. This
situation makes the acquisition of land by small businesses less appealing.
(i) The small sector is not able to cope with the pace of technological changes.
Big businesses enterprises often take advantage of modern technology. They
are able to produce quality goods and take advantage of economies of scale
hence serve their customers better than the small businesses. The rapid
changes in technological environment are disadvantageous to small business.
Moreover this sector has poor access to technology. Additionally there is
ineffective use of existing information technology.
Ownership and Management of Small Enterprises

The manager of a small business is usually the founder and owner. He/she usually makes
most management decisions. This centralized control could eventually impose a
constraint upon the growth of the organization as there is a limit to the ability of an
individual as compared to large enterprises. Among others, the small business owner
engages in the following in managing the business.
(a) Planning and Control

Planning as we shall study later, is essentially a decision making process. It is
deciding in advance the course of action. In small business enterprises the
following can be said about their planning. Decision making is quicker, the owner
makes most of the decisions hence jobs are not so rigidly defined as in a large
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organization. There is less formality than in large organization. Rules and

procedures are less rigid.
Controlling is a way of measuring whether everything works in conformity with

the already laid down plans. Small business enterprises do this by looking at their
production, productivity targets, sales turnover etc. Planning and control
therefore complement each other on the management of small business.
(b) Motivation
The individual owner manager may require services of other people as we pointed
out earlier since he may not do everything in the business. These employees need
to be motivated. Motivation is intensifying people’s willingness to work harder.
In small business these could be done through:
- Employees identifying themselves with organization. This creates a sense of
belonging.
- Pay and reward systems may be more personalized than in large
organizations.
- There may be a wide range of duties for individuals. This would create
satisfaction as it gets rid of monotony.
- Training and development is less formal than in large organization. The skill
is learned by being attached to an expert in the trade.
Activity 5.2
Interview a business man/Woman in your locality and try to establish why
he or she has not expanded his/her business as he or she would have liked.
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5.10. Summary
In this lecture we have pointed out that there are many terminologies used
to describe a small scale enterprise. Looking across the board of small
businesses, they seem to exhibit certain similar characteristics like self-
employment orientation, use simple technology among others.
It was clearly brought to us that like any other form of business, the small
scale enterprises have their own advantages and disadvantages.
It was clearly brought to us that like any other form of business, the small
scale enterprises have their own advantages and disadvantages.
Most businesses we see in our environment are small but they play a vital
role in our economic development. These businesses provide employment,
they are a source of revenue to many people just to mention a few of their
benefits.
Despite the pivotal role of the small business enterprises in our nation’s
economic development, a number of obstacles have hindered their growth
and development. Let us mention a few of these: lack of access to credit,
competition with other well established big businesses, rapid technologies
change e.t.c.
Let us also appreciate that small businesses provided intrinsic reward (inner
satisfaction to those who own manage them.
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Activity 5.3
1. Explain what is meant by a small business
2. List reasons why many people would like to start a small business
despite the many odds against success
3. Outline the role of the small business enterprises to Kenyan
economy
4. Explain the obstacles to the development of small business
enterprises in Kenya
5. Suggest ways to assist the growth of small business enterprises in
Kenya
6. Interview a business man/woman in your locality and try to

establish why he/she has not expanded his/her business as she or
he would have liked.
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LECTURE SIX
PRINCIPLES OF MANAGEMENT
Lecture Content
6.1 Introduction
6.2 Objectives
6.3 Meaning of Management
6.4 Characteristics of Management
6.5 Levels of Management
6.6 Management Functions
6.6.1 Planning
6.6.2 Organizing
6.6.3 Staffing
6.6.4 Directing
6.6.5 Commonwealth
6.6.6 Motivation
6.6.7 Leadership
6.6.8 Controlling
6.6.9 Development of Management Thoughts
6.7 Development of Management thought
6.8 Qualities of a Good Modern Manager
6.9 Summary
6.1 Introduction
Management is an essential element in the economic growth of any country.
Management brings together the four factors of production (viz. men, money, material
and machines) thereby enabling a country to experience economic development.
Management is essential in all organized effort either business, sports, government,
social, not for profit organisation, etc. in this lecture we will discuss management process
of planning, organizing, staffing, directing and controlling. Various components of
management will be explained.
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6.2. Objectives
At the end of this lecture you should be to:
1. Define management and explain the meaning and importance
of management.
2. Explain Functions of management
3. Discuss the development of management thought
4. Explain the qualities of a good modern manager
6.3. Meaning of Management

The term management is used in different contexts. One may refer to the management of
an enterprise to mean a group of senior managers. One may refer to management as a
subject of study.
Management Defined
In management literature we find a number of definitions of management given by
different authors:
- According to Drucker, 1974 “Management is a multi-purpose organ that manages
a business, manages a manager and manages workers and work”.
- According to Kimball and Kimball 1976, “Management may be defined as the art
of applying the economic principles that underline the control of men and
materials in the enterprise under consideration”.
- According to Koontz and O’Donnel, 1979 “Management is the creation and
maintenance of internal environment in an enterprise where individuals working
together in groups can perform efficiently and effectively towards the attainment
of group goals”.
6.4. Characteristics of Management

i. It is a process
Management is a process of planning, organising, staffing, directing and
controlling
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ii. Goal-oriented:
The major goal of management activities is to achieve objectives of a business
firm.
iii. Group activity:
All human and physical resources must be co-ordinated to achieve high
productivity.
iv. Universal application:
Management is a universal activity. It is applied to any form of activity.
v. Management is dynamic:
It involves adoption of an organization to changes in its environment.
vi. Management signifies authority:
Management cannot discharge its function without authority.
vii. Activating Factor:
Management is the factor, which activates other factors of production.
viii. Management is a human activity:
ix. Management functions can only be discharged by human beings but not a
corporate body.
6.5. Levels of Management

Levels of management refer to a line of separation between different positions held by
seniors and juniors. The levels of management are decided mainly on the basis of
fundamental functions assigned to each level. Modern management school of thought
designates the following levels:
i. Top management
ii. Middle order management
iii. Supervisory management.
Top Management:
This level is responsible for the following functions:
i. To define the objectives of the enterprise
ii. To formulate different policies for the enterprise
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iii. To set-up schedules and programmes

iv. To give general direction.
Middle Order Management

Main Functions
i. To provide plan of action
ii. To guide implementation
iii. To supervise, implementation
iv. To co-ordinate activities
v. To exercise control over lower level management.
Supervisory Management
It consists of foreman or supervisor.
Main Function:-
- To plan how work is to be done
- To organize junior staff into groups to take up tasks
- To direct juniors on how to perform their work
- To control performance of juniors.
6.6. Management Functions

The process of management refers to the performance of planning, organizing, staffing,
directing and controlling functions. These functions comprise the job of a manager
whether working for a business, social, educational, political or not for profit
organization.
Diagram showing functions of management and elements of each function:
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6.6.1. Planning
Planning is the most fundamental and guiding factor of all management functions. It is
concerned with the ‘what’, ‘how’ and ‘when’ of performance, and involves deciding in
the present about the future objectives and the courses of action for their achievement. It
thus involves:
- determination of long and short range objectives;
- development of strategies and courses of action to be followed for the
achievement of these objectives, and
- formulation of policies, procedures and rules, for the implementation of strategies
and plans.
Importance of Planning
- Minimizes risk and uncertainty
Planning provides a rational and fact based procedure for making decisions
thereby reducing risk
- Leads to success
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Planning helps organization to achieve better results.

- Focuses attention on the organization’s goals
Planning helps managers to focus attention on goals and activities
- Facilitates control
Planning sets standards and benchmarks against performance thereby helps
control of operations.
Types of Plans
Plans are arranged in a hierarchy within the organization in the following order:
Objectives:
Objectives are goals or aims which management wishes the organization to achieve.
They are end points towards which all business activities are directed.
Strategies:
A strategy is a plan which takes into account the environmental opportunities and threats
and organisational strengths and weaknesses and provides an optimal match between the
firm and the environment.
Standing Plans
Policies: Policies are guide to decision making, and establish the broad framework
within which managers operatin at various levels make decisions of a recurrent nature.
They always provide an element of discretion for the decision maker e.g. a policy could
be started as ‘In matters or promotion, preference will be given to seniority, other things
being equal.’
Procedures:
Procedures are general guides to action. They show the way to implement policies. They
are specific and lay down the sequence of definite acts.
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Methods:
A method is a prescribed way in which one step of a procedure is to be performemd. A
method is a component part of the procedure.
Rules:
Rules are detailed and recorded instructions that a specific action must or must not be
performed in a given situation.
Single-Use Plans:
Programmes:
Programmes are precise plans or definite steps in proper sequence which need to be taken
to discharge a given task.
Intext Question
What are single use plans?
Steps in Planning:
1. Establishment of Objectives:
The manager sets targets which are desired and to which all organizational effort
is to be directed.
2. Establishment of Planning Premises:
Premises or planning assumptions state the future setting or environment in which
planning takes place. Planning premises can be classified as follows:
- Internal and external premises
- Tangible and intangible premises
- Controllable and non-controllable premises.
3. Deciding the Planning Period:
Businesses vary considerably in their planning periods. Managers have to select a
particular time range for planning.
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4. Determination of Alternative Courses of Action:

There is usually different means of accomplishing the same objective.
5. Evaluating and Selecting a Course of Action:
Several courses of action have to be analysed and a manager would select the
right one.
6. Developing Derivative Plans:
Once the overall plan is completed, managers of each segment of the organization
must use the master plan to derive their respective plans.
7. Implementation, Monitoring and Control:
During implementation plans must be monitored and controlled to ensure success
of the plan.
6.6.2. Organizing
This involves identification of activities required for the achievement of enterprise
objectives and implementation of plans; grouping activities into jobs, assignment of these
jobs and activities to departments and individuals; delegation of responsibility and
authority for performance, and provision for vertical and horizontal coordination of
activities.
The manager must identify the activities to be done in his department, group them into
jobs and assign these jobs to his subordinates. He must coordinate all these activities.
It involves the following sub functions:

1. Identification of activities required for the achievement of objectives and
implementation of plans.
2. Grouping of activities so as to create self contained jobs
3. Assignment of jobs to employees
4. Delegation of authority so as to enable them to perform their jobs and to
command the resources needed for their performance.
5. Establishment of a network of coordinating relationship.
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The organizing process results into hierarchy of tasks and relationships among various
positions and position holders; and thus leads to the creation of an organization structure
or a framework for decision making and task performance.
6.6.3. Staffing
This is a continuous and vital function of management. It aims at securing suitable
personnel for manning the jobs. One should always remember that efficiency and
effectiveness will only come about if the right personnel are employed. The Human
Resources Manager should be concerned with the welfare of the staff and provide them
with the necessary facilities and conducive working environment, for increased
performance.
Promotions based on merit or seniority also encourage employees to work harder.

Arrangements for staff development should also be in place.
Thus, staffing comprises the following sub-functions:

1. Human resource planning involving determination of the number and the kind of
personnel required.
2. Recruitment for attracting suitable number of potential employees to seek jobs in
the enterprise concerned.
3. Selection of the most suitable persons for the jobs under consideration.
4. Placement, induction and orientation.
5. Transfers, promotions, termination and lay offs.
6. Training and development of employees.
Induction is concerned with introducing or orienting a new employee to the organization.

Proper orientation helps to reduce voluntary resignations which often occur within the
first six months of employment.
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6.6.4. Directing
This is the function of leading employees to perform efficiently and effectively and
contribute to their optimum to the achievement of organizational objectives. Jobs must
be clarified to subordinates and these subordinates should be given the necessary
guidance and assistance to do the right things. Efficiency is very important and involves
‘doing things right’ while effectiveness involves doing the right thing. Thus,
effectiveness is the main source of success, and efficiency can only follow once
effectiveness is in place to supplement it.
Directing involves:
- Effective communication (horizontal, vertical, two way)
- Motivation of employees
- Effective leadership should be ‘group oriented’, rather than task oriented, people
cannot be treated as machines.
6.6.5. Communication
Communication has been defined as the transfer of information or understanding from
one person to another. For communication to be complete there must be four
components: The source of the message i.e. the sender, the message itself, the channel,
or medium through which message is transmitted and the audience i.e. the receiver of the
message.
Objects of Communication:
- Providing information from internal and external sources to all concerned
- To advice the concerned people to take action
- Conveying suggestions and programmes
- Developing and training of employees
- Giving warning or admonitions to indiscipline employees
- Raising morale, confidence and courage of employee
- Motivating employees
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Types of Communication
Communication can be classified in the following way:
1. According to organisational structure;

- Formal communication
- Information communication
2. According to the point of view of direction:
a. Upward communication
b. Downward communication
c. Horizontal communication.
3. According to method of communication:

d. Verbal communication
e. Written communication
f. Gestures.
Barriers in Communication
These are obstacles or hindrances that obstruct smooth flow of communication.
- Inattention – It is where the receiver is not paying attention to the message
being communication.
- Inaccurate translation - this is where receivers understand the message
wrongly
- Vague and unclassified assumptions
- Loss in Transmission.
- Inadequate adjustment period
- Distrust where superior makes abrupt changes
- Attitude of the superior
- Noise, distance and time
- Fear – It indicates anxiety, awe, alarm or apprehension.
- Use of technical jargon. It is use of technical words which might be

difficult for some employee to understand.
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Activity 6.1
Explain ten barriers to effective communication
6.6.6. Motivation
The concept refers to energizing force or drive which makes people behave in a particular
way. The cause of behaviour is caused and directed toward accomplishment of some
goal or purpose. This could be due to either physiological (biological) or psychological
or both.
According to Abraham Maslow the concept of needs is hierarchically arranged. At the

bottom level are basic needs including desire for food, clothing, sex, education, air,
shelter and water. At the next higher level are safety and security needs such as
protection from harm, security of job or economic security etc. At the third level from
the bottom are the social needs or belongingness needs. People are always looking for
love, friendship and community membership.
After social needs are the esteem or ego needs. All human beings have the urge to be
recognized and be known for their achievements.
At the apex of the hierarchy of human needs are the self-actualizing needs. People want
to be given opportunity to realize their potentials and rise to the highest position in the
organization e.g. to be the chief executive of the organization or academically to achieve
a Ph.D. degree or to be a professor or religiously to be the Archbishop.
6.6.7 Leadership
Leadership is a process whereby a manager exerts social influence over his subordinates.
There are different approaches to the study of leadership. First the trait approach which
believes leaders are born. Another approach is behavioural that examines behaviour of
great leaders such as George Washington, Napoleon, Jomo Kenyatta and Nelson Mandela
and try to identify strong behavioural aspects.
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Finally there is the situation approach. The contention here is that leadership ability is
situation-bound.
Managers also exhibit leadership styles which form a continuum. The continuum is from
autocratic, benevolent-autocratic, consultative to participative style.
6.6.8 Controlling
This is the function of ensuring that the divisional, departmental, sectional and individual
performance are consistent with the pre-determined objectives and goals. Deviations
from the expected results should be checked and appropriate corrective measures taken.
There should be well set objectives, goals and standards of performance, which should be
known and understood by all employees.
The organization should also be flexible and change its policies, strategies or
programmes, if these are identified as the causes for underperformance. The goals and
objectives should be set in measurable terms so that it is easy to assess performance.
Steps of controlling:-
1. Measurement of performance against predetermined goals;
2. Identification of deviations from these goals;
3. Corrective action to rectify the deviations.
It is important to note that the management functions form a network and are performed
simultaneously, and in interactions with the environment which comprises economic,
social, political, technological and market forces.
6.7 Development of Management Thought

Management used to be practised by our forefathers during ancient times. For many years
management has risen today to be the central activity of our age and economy. It is a
powerful and innovative force on which our society depends for material support and
national well being.
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1) Early influences or pre-scientific management era:

Problems of management and administration were of interest to students of
government in early civilizations and biblical times. e.g.
5000 BC – Sumerian civilization - Emphasized on use of written records

4000 – 2000 BC – Egyptians emphasized functions of planning, organizing and
controlling
13000 – 1200 BC – Prophet Moses and Jethro formulated principles of
organization such as delegation of authority
1300 AD - Venetians applied business law and later book-keeping and accounts.
2) Scientific Management Movement

This movement came up immediately after the Industrial Revolution of Western
Europe and United States of America. Various pioneers such as Frederick
Winslow Taylor, Henry L. Gautt, Frederick and Lilian Gilbreth, H. Emerson,
Henri Fayol came up with principles of management.
Example is Henry Fayol’s 14 principles of management as follows:

a. Division of work
b. Authority and Responsibility
c. Discipline
d. Unity of Command
e. Unity of Direction
f. Subordination of individual interest to general interest
g. Remuneration
h. Centralisation
i. Scalar Chain
j. Order
k. Equity
l. Stability of tenure of personnel
m. Initiative
n. Exprit de Corps.
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These principles are applicable even today.
6.8 Qualities of a Good Modern Manager
1) Knowledge of the Organization:

A good manager should have an insight of the organization as a whole, its
objectives, aims, policies and employees.
2) Technical Ability
A good manager should be a person of sound technical knowledge.
3) Ability to Communicate
A good manager should be able to communicate fluently, accurately, simple yet
effective.
4) Cooperation
A good manager should know the art of getting cooperation from all employees.
5) Orderly
A good manager; should be orderly, disciplined, positive in thought.
6) Ability to Judge
He should be able to make correct assessment of people, places and events and
make correct judgements.
7) Emotional Ability
He should not be temperamental but cool and patient.
8) Tactfulness
He should be very tactful and shroud, able to make ingenious compromise and be
diplomatic.
6.9. Summary
The economic development and management of resources of a country
depend on effective management by all those in responsible positions.
Management is the process of planning, organizing, staffing, directing and
controlling the efforts of human resources to achieve definite organizational
goals.
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There are three levels of management viz top management, middle and
lower management.
Development of management thought started from early influences to

scientific management movement to the present modern times.
Management functions of planning, organizing, staffing, directing and

controlling are applicable to all types of organizations including
government, educational, business, social and not for profit organizations
and in all economic systems such as capitalistic, socialistic and mixed
systems.
A good manager must be a good communicator so that he is able to

communicate policies, rules, methods, programmes, procedures and
instructions to his employees among other qualities.
Activity 6.2
1. What is the nature of management?
2. Explain how management is the integration of men, money and
materials
3. Explain the steps of the planning process
4. What is the importance of staffing in management
5. Describe the different levels of management?
6.10. Further Reading

Francis N. Kibera, 1996, Introduction to Business pp 82 - 114
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LECTURE SEVEN
HUMAN RESOURCE MANAGEMENT
Lecture Outline
7.1 Introduction
7.2 Objectives
7.3 Meaning of Human Resource Management
7.4 The Role of Human Resource Management
7.5 Human Resource Management Activities
7.6 Staff welfare
7.7 Summary
7.1 Introduction
In lecture five, we discussed about principles of management, and now hope you are
conversant with the management functions, and the major characteristics of management.
In this lecture, you are going to learn about human resource management, which deals
with issues related to the management of people in an organization.
6.2 Objectives
1. Describe the meaning of human resource management
2. Explain the role of human resource management
3. Identify various human resource activities
4. Differentiate between training and Development
5. Explain the recruitment and selection process
6. Discuss ethical issues in human resource management.
7.3. Meaning of Human Resource Management

Human Resource Management (HRM) is the strategic and operational management of
activities to enhance the performance of human beings in an organization. A human
resource manager deals with motivating people, in which costs, numbers, control and
systems interact and play a part, while in manpower planning, the manager deals with the
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numerical elements of forecasting, supply-demand matching and control, in which people

are a part.
The need for human resources management has been generating a lot of interest and will
continue to do so in the 21st century, because of the dynamic nature of organizations.
Personnel departments are now often referred to as human resource departments. Not
only has the name changed, but the responsibilities of these departments have also
shifted.
Organizations are social systems, composed of roles, interactions and relationships

among people occupying various positions in its structure. The human beings in the
organization constitute the most important resource in any organization. Whereas
competitors can easily adapt the technological, product and other strategic maneuvers of
an organization, employee motivation capabilities and climate of human endeavour are
the things which one organization cannot copy from another.
Human assets of an organization, unlike physical assets, continuously appreciate in value,

as knowledge, abilities and skills all grow with training and experience. It is important
for management at all levels to understand the human assets in the organization, and be
able to respond to their needs. In many organizations, the work of dealing with
employees in handled by the personnel department and the skill is called personnel
management. The management of people at work is one of the primary keys to
organizational success. A good management of employees (Human resources can
enhance productivity, quality and service).
7.4. The Role of Human Resource Management

Human Resource (Personnel) Management is the planning, organizing, staffing,
directing, coordinating and controlling of the procurement, development, compensation,
integration, maintenance and separation of human resources to the end that individual
organizational and societal objectives are accomplished. Planning, organizing, staffing,
directing, coordination and controlling are management functions, while procurement,
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development, compensation, integration, maintenance and separation are personnel

operative functions.
Management Functions
Since these functions were discussed in the previous lecture, we will just mention them in
this lecture, as follows;
1. Planning – Effective managers must spent some time in planning, that is,
determining in advance of a personnel programme that will contribute to goals
established for the enterprise.
2. Organizing – An organization is a means to an end. The manager must form an
organization by designing the structure of relationships among jobs, personnel
and physical factors.
3. Staffing – Obtaining qualified staff for the organization, through the process of
recruitment, selection and placement.
4. Directing – Once there is a plan and organization to execute that plan. The next
step is to direct ie getting people to go to work willingly and effectively.
5. Coordinating – Putting together all the activities and tasks in a coordinated
manner.
6. Controlling – Concerned with regulating activities in accordance with the
personnel plan, which in turn was formulated on the basis of an analysis of
fundamental organization goals.
Personnel Operation Functions

1. Procurement – Obtaining the proper kind and number of personnel necessary to
accomplish organizational goals. This deals with the determination of human
requirements and their recruitment, selection and placement.
2. Development – Deals with the increase of skill, through training that is necessary
for proper job performance. This must continue to grow because of changes in
technology, the realignment of jobs and the increasing complexity of the
managerial task.
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3. Compensation – The adequate and equitable remuneration of personnel for their

contributions to organization objectives.
4. Integration – This is one of the most difficult and frustrating challenges of
management concerned with the attempt to effect a reasonable reconciliation of
individual, societal and organizational interests.
5. Maintenance – Once you have a willing and able workforce, the next stage is
maintenance which deals with maintenance of physical conditions of the
employees – health, safety etc.
6. Separation – Ensures that the citizen is returning to the society in as good form
as possible. The organization must have good retirement benefits, pension
schemes etc.
7.5. Human Resource Management Activities

1. Human resource planning and analysis
This comprises of communication, information and assessment systems that are
vital to the coordination of HR activities. The manager attempts to anticipate the
forces that will influence the future supply and demand for employees. Planning
deals with a careful assessment of the organizational staffing needs in order for
the organization to attain its objectives. It also involves forecasting the future
needs of the firm.
2. Equal employment opportunity compliance

Human resource management seeks to ensure that job seekers are given equal
employment opportunities and that there is no discrimination. People should be
given an equal opportunity and be employed on merit. In some countries, for
example in the United States, clear legislation exists to guard against
discrimination on the basis of sex, religion and disabilities.
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3. Recruitment and Selection

Recruitment is the process of appealing to potential employees willing to apply
for a job in an organization. Generally, organizations can source for potential
employees from internal or external sources.
Internal sources include transfers, job rotation, promotions, or recall from

retirement; the main advantages of this include improved morale, reduced cost of
induction and better evaluation of the workers by the employee. However,
internal sources may lead to in breading (discourages new blood from coming in)
and the sources may dry up (get exhausted).
External sources include new entrants into the labor market. Unemployed but trained
jobless persons and retired experienced persons. These may be sourced from:
 Public employment agencies
 Colleges and professional associations
 Friends and relatives
 Private employment agencies
 Advertisements
Advantages of external sources are that it prevents in breeding, and offers an opportunity
to choose from a wider market, disadvantages include cost of training and induction, and
time for training.
Selection. Selection is the second step in personnel procurement, and is the process of
choosing the individuals who possess the necessary skills, abilities and personality to
successfully fill specific jobs in an organization. It involves screening the applicants in
order to select the most promising applicants and rejecting the others. Short - listed
applicants are then subjected to interviews, either oral, written or both so that the most
successful applicant is selected for hiring.
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Placement. After the selection process, the successful applicant is given an offer to take
up the job. The offer should clearly state the terms of employment, and should form a
contract agreement between the employee and the applicants. Thus, it must be signed by
both the employer and the applicant as a way of acceptance of the contract.
Induction. The process of induction deals with introducing or giving orientations to the
new employee in the organization. It involves giving the employee general history of the
firm, its culture and operations, and employee benefits such as leave, medical, insurance,
pensions, and so on. It should also deal with hours of work, treatment of overtime and
lunch breaks.
4. Staffing
This ensures that there is adequate supply of appropriately qualified individuals to fill
vacancies in an organization. It requires a clearly defined job analysis, description and
specifications.
Job analysis is the systematic gathering and analyzing of information about the
content of jobs, human requirements and the context in which jobs are performed.
Job description indicates the tasks, duties and responsibilities of a job. It identifies
what is to be done, why it is to be done, where it will be done, when it will be done,
and by whom.
Job specification lists the knowledge, skills and abilities an individual needs to
perform the job satisfactorily.
Once the job analysis description and specification have been done, it becomes easy
to carry out the recruitment and selection process.
5. Training and Development (T & D)

Training is a specific aspect of human resource development which aims at improving
performance. It is achieved by helping employees to acquire knowledge, skills and
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attitudes useful in performing their current duties as well as preparing them for more
challenging or higher responsibilities. The basic concepts of training and
development efforts include:
i) The objective of training and development must tie directly into the
organizations objective, such as profits, customer service, expansion and so
on.
ii) Training and Development must take into account the individuals interest’s
abilities and ambitions for the future and career plans in general.
iii) Most of what an employee learns in the work situation should be learned in
the job environment of superior – subordinate relationship.
iv) The body of principles of learning and teaching have been validated as
effective in the training and development process.
v) Criteria for measuring the process of Training and Development efforts must
relate directly to the achievement of organizations objectives as were
predetermined.
Benefits of training are many, and include reduction of learning time and cost People
learn the job quickly and perform better, with minimum wastage on time and materials.
- less supervision – through reduction of problems such as absenteeism, lateness
and accidents.
- Improved job performance – increased output, improved quality, work done on
time.
- Better recruitment and selection – training opportunities help attract right type of
employees.
- Reduced labor turn over – by developing employees potential and their job
satisfaction.
- Reduced costs: resulting from the above benefits.
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Activity 7.1
1. In view of the benefits of training, identified, is it justified to
spend money on training? Explain.
2. Explain why it is necessary for firms to have a clear training and
development program for their staff.
6. Human Resource Development

This involves training and development of the employees in order to prepare
employees for technological changes and prepare organizations for future
challenges.
Career planning identifies paths and activities for individual employees as they
develop within an organization.
Training is a learning process whereby people acquire skills or knowledge to aid

in the achievement of goals. Development is a broader term, and focuses on
individuals gaining new knowledge and skills needed for both the present and the
future.
7. Compensation and benefits

This deals with rewarding or enumerating the staff for their work. Organizations
should have clear guidelines in terms of their wages and salary structures. There
should be clear policies to govern the pay system. The purpose of wage and salary
administration is to provide pay that is both competitive and equitable.
Other benefits such as housing, healthcare, allowances and bonus schemes should
also be clearly specified.
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Take Note
A human resource department deals with all aspects of staff in an
organization. It is responsible for the sourcing of sufficiently qualified
staff to work in the organization, their compensation and welfare issues,
as well as their retirement. It is the department that handles all the
disciplinary issues in the organization, as well as the grievances that
staff may have. It is therefore important that the department is handled
by people with the necessary relevant qualifications
7.6. Staff Welfare

Generally, staff welfare has to do with their well being in an organization. These include
health, safety, sports, social welfare activities like funeral arrangement, tea breaks, and
transport arrangement.
Activity 7.2
Prepare a schedule of activities that you would be involved in on a
typical day. As a human resource manager of Bidii Enterprises, a
medium manufacturing firm.
7.7. Summary
We have learnt that human resource management involves managing
of human beings in an organization. We have also identified the
managerial functions of planning, organizing, staffing, directing and
controlling. Besides these functions the manager must also deal with
the issues of procurement of human resources, human resource
development, staff compensation, integration, maintenance, and
separation. We have learnt that human resource management also
deals with staff training and development.
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Activity 7.3
1. Imagine that you are the human resource manager of a large
manufacturing company that has employed nearly 200
employees. Can you identify some of the things you could do
to raise staff morale?
1. Discuss the various personnel operations functions
2. Explain the need for training of personnel.
7.8. Further Reading

Blunt, O.P. (1990) Personnel Management in Africa. London,
Longman
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LECTURE EIGHT
LABOUR RELATIONS
Lecture Content
8.1 Introduction
8.2 Objectives
8.3 Meaning of Labour Relations
8.4 Trade Unions
8.5 Collective Bargaining
8.5.1 Features of Collective Bargaining
8.5.2 Merits of Collective Bargaining
8.5.3 Demerits of Collective Bargaining
8.6 Compulsory Adjudication
8.6.1 Merits of Compulsory Adjudication
8.6.2 Demerits of Compulsory Adjudication
8.7 Grievance
8.7.1 Causes of Grievances
8.8 Discipline
8.9 Summary
8.1. Introduction
In Lecture 7, we mentioned that one of the responsibilities of a personnel department is to
negotiate with trade unions on maters affecting workers, terms and conditions of their
employment. This is really the subject matter of labor relations. Harmonious relations
between these two parties are essential not only for the organization to achieve its
objectives but also for the individual employee to realize his potential and subsequently
to an economy benefiting its terms of availability of goods and services produced.
Without a peaceful working environment this would not be possible. It is therefore
important that management and labour unions understand each other’s functions,
objectives among other aspects that may influence their operations
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In this unit we shall learn how management and workers relate to each other at the work
place.
8.2. Objectives
At the end of this lecture you shall be able to:
1. Explain the meaning of the labour Relations.
2. Explain the objectives of Trade Unions
3. Highlight on ways trade unions use to achieve their objectives.
4. Explain the concept of collective bargaining
5. Highlight on causes of grievances
6. Highlight on the ways of resolving grievances.
7. Explain the concept of discipline.
8. Explain aims of discipline.
8.3. Meaning of Labour Relations

Labour Management Relations or Simply Labour Relations are the ways in which
employees and their employers relate to each other professionally at the place of work. It
is the relations between workers and the employers in the working situations which may
be either in the industry or any other organisation where the individual is compensated
for the services rendered.
This explanation brings forth certain features about labour relations: These are:
(a) There is a contract between the worker and the employer
(b) The relationship only exists in the working environment
(c) The worker is compensated or paid for services rendered to the other
8.4. Trade Unions

Employees in their various organisations are usually represented by the trade unions. We
may define a trade union as an association of workers formed to look after the interest of
the workers. Consequently we can say that the matter of labour relations are usually
associated with trade unions activities. Trade unions like any other organisation have
certain objectives that they aspire to achieve.
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Here are some of the trade Union objectives.
Objectives of Trade Unions

Broadly speaking, the functions of the trade unions are very comprehensive, much more
so than their counterparts in the past. The major reasons for the rise of this situation are:
(a) that the contemporary trade unions have a clear perception of their ultimate
goals.
(b) that the attitude of top management has changed. In the past trade unions
were viewed as resistance organisations formed to antagonize the of an
organization.
(c) that the contemporary trade unions have become more realistic in their
demand.
(d) Trade unions play positive role in organizations. For instance training their
members to be more productive workers, looking after their welfare.
(e) the legislation of labour laws has greatly improved trade unions and
employer relations. These laws have empowered unions to fight for their
rights more forcefully.
(f) the registration and recognition of the trade unions as the only bargaining
agents of workers has greatly improved their bargaining strength.
We can conclusively say that this situation has enabled trade unions to focus on their
objectives. These objectives of trade unions can be categorised into militant and fraternal.
Let us explain each one of these objectives in turn.
(i) Militant means ready to fight for or actively engage in the use of force or
pressure. Hence the militant objectives of trade Unions are those demands that the
Unions make to their employers.
These may include:-
(a). To secure fair wages for their members.
(b). To demand for better working and living conditions.
(c) Fight for shorter working hours.
(d) To negotiate with employers on behalf of labourers.
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(e) To control the supply of labour in order to force the employer to give
better wages.
(ii) Fraternal means brotherly or stop fighting. Hence the fraternal objectives
of trade Unions are those supportive or promotive ways and used trade unions
for the benefit of their members. These may include:-
(a) To offer financial support to members during periods of temporary
unemployment, for instance during strikes or lock-outs by
management.
(b) To safeguard job security to their members.
(c) To provide for vocational, cultural or recreational facilities.
(d) To cooperate with management in order to facilitate technological
advancement by broadening workers understanding on the underlying
issues for the benefit of both parties.
(e) To offer responsive co-operation in improving levels of production,
discipline and high standard living for their members and workers in
general.
(f) Instilling in their members a sense of responsibility towards industry
and community.
(g) To provide legal advice to their members.
(h) To facilitate effective means of expression, representation in various
bodies that deal with labour matters.
(i) To unite workers under the philosophy of ‘unity is strength’.
(j) To secure their rights as trade unions, for the benefits of all its
members.
Activity 8.1
Talk to a representative of a trade union in your locality and try to
establish their trade union objectives. How are the trade union
objectives achieved?
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Achievement of Trade Unions Objectives

The objectives of a trade union are achieved by pursuit of traditional methods. These are:
(a) By employees forming a trade union. Trade unions may be formed on the basis
of either craft or industry in which its members are employed, such as general
unions and professional employers’ associations. By so joining together the
employees become stronger in terms of bargaining with the employer.
(b) By registration of trade union as the only bargaining agent. Under this
arrangement the representative union is the only one entitled to advocate for the
interests of its members.
(c) By collective bargaining. This is the essence of labour relations. It is through
collective bargaining that the terms and conditions of employment are determined
and under which the work of negotiation is performed satisfactorily.
(d) By grievance processing and handling procedure. Under this process,
grievances are redressed by a correction of the situation or by channelling them
‘up the line’. When a grievance reaches the chief executive officer, it has to be
satisfactory dealt with by him or sent to an outside agency for settlement.
(e) By negotiated agreements with the management. These negotiations may
deal with wages, hours of work, terms and conditions of employment, job
security, medical personnel etc.
(f) By arbitration. This is where unsettled or unresolved disputes are resolved by an
outside agency that is normally referred to as a third party.
(g) By mutual insurance. This is done through common contributions of members
to meet the financial needs of members. This money may be extended to the
members when there are work stoppages for influence during lockouts, strikes
when the employer is not obliged to pay wages to the employers.
(h) Using strikes and other forms of labour protest. This is resorted to by workers
as the last resort to achieve their objective. A strike can be defined as a total
boycott of work. It is a labour protest intended to pressurise management to lead
to the Union demands.
Other forms of protest include sit-ins, go-slows, stool down etc.
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Take Note
Among the ways used by trade unions to achieve their objective the
most popular, commonly used and preferred way is the use of
collective bargaining.
8.5. Collective Bargaining

Collective bargaining is a process by which employer and employee confer in good
faith and come to a mutual understanding about terms and conditions of work and as
well as other work related aspects. In essence therefore it can be said to be a private
negotiation between the employer and the employee. It is private in that it does not
involve a third party. Collective bargaining is usually done through the representatives
of a trade union and management representatives. From this explanation the following
features of collective bargaining emerge;
8.5.1. Features of Collective Bargaining

These include:
a. It is done through representation of workers by their trade union and
management senior executives.
b. It fosters a spirit of self-confidence as each party has the facts and the data
to table.
c. It fosters a spirit of self-reliance as each party negotiates on its own behalf.
d. It fosters a spirit of give and take as there are offers and counter offers at
the negotiating table.
e. It fosters a spirit of private negotiation as it does not involve a third party.
f. It is based on industrial charter of 1962 which advocates for resolving
disagreements or disputes at the lowest possible level.
g. It calls for preparation for negotiation so as to obtain genuine facts to be
tabled.
h. It calls for willingness on both parties to accept offers being floated.
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i. It is a group action as opposed to individual action as it is initiated through

the representatives of workers.
j. It is flexible and mobile and not fixed or static. Once a settlement has
been reached over an issue, and an agreement signed, other issues emerge
and have to be negotiated. It is therefore an ongoing process between
management and labour.
k. It is a two party negotiation process. The parties are the management and
the trade union. An involvement of a third party ‘kills’ the spirit of
collective bargaining that of mutual reciprocal negotiations.
From these points, we have outlined about collective bargaining, it is evident that the
process has numerous merits.
8.5.2. Merits of Collective Bargaining

Collective bargaining as a means of resolving differences between management and
workers has the following merits:
(a) It is democratic in nature in that it is done through representatives of either party.
(b) It is the way of solving disputes at the lowest possible level without involving a
third party, other than the trade union and management.
(c) It is the way of solving disputes amicably through offers and counter offers.
(d) When dispute is resolved amicably through collective bargaining the two parties
concerned remain satisfied.
(e) The amicable resolution of a dispute between management and labour enhances
industrial peace.
(f) Collective bargaining reduces government expenditure which would otherwise be
incurred by way of investigation and arbitration of a dispute.
(g) Collective bargaining reduces expenditure that would otherwise be incurred
through compulsory adjudication of the industrial court.
(h) Collective bargaining serves as emotional release channel whereby bottled up bad
feelings are aired, discussed, clarifications made leading to signing of agreements,
known as collective bargaining agreements (CBA).
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Note
Collective bargaining is the negotiation between management and
workers’ trade union.
Despite this flowery picture about collective bargaining process as a way of resolving a
dispute, it has its own demerits.
8.5.3. Demerits of Collective Bargaining

(a) Collective bargaining requires proper research of facts which are a requisite for
preparation for negotiations.
(b) Workers are often dis-advantaged as much of the information or facts may not be
provided by management. Again this information may be given in piece meals or
delayed.
(c) At times collective bargaining may lead to unrealistic demands on the part of
employees.
(d) Collective bargaining overlooks individual problem.
Take Note
Collective bargaining is the negotiation between management and workers
trade union.
If disputes persists, that is to say if they are not resolved amicably through the process of
collective bargaining, the only alternative left is through compulsory adjudication by the
industrial court hearings.
8.6. Compulsory Adjudication

8.6.1. Merits of Compulsory Adjudication.
The merits of compulsory adjudication include:
(a) It involves an impartial third party.
(b) It is a more efficient way of handling disputes as it uses more experienced
judges of long service who are well vast with labour matters.
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(c) There is closer use of the law.

(d) Compulsory adjudication gives a fair hearing to both parties involved.
(e) It is the last resort of solving disputes. The industrial court gives the final
verdict biding to both parties concerned.
Nevertheless, compulsory adjudication as a means of resolving a disputes has its own

demerits.
8.6.2 Demerits of using Compulsory Adjudication

The demerits may include:
(i) This process is time-wasting. Much time is spent in trying to
investigate, gather information and data to resolve the differences.
(ii) Compulsory adjudication follows a complicated procedure before a final
judgement is made.
(iii) In most cases, the employee is dis-advantaged due to the government
and employer alliance with one another.
We may conclude here by observing that disputes are not only disturbing to the
employers and the organization but are also time wasting and costly
Despite these private negotiations through collective bargaining we pointed out,

individual employees may have their unique complaints or grievances.
8.7 Grievance
A grievance is defined as anything that an employee thinks or feels it is wrongand
generally accompanied by an actively disturbing feeling. It does not have to be justified.
The main features that emerge out of this definition are: (a) That a grievance is any
complaint or dis-satisfaction which is expressed before management whether oral or in
writing. It is a symptom of an underlying problem. (b) A grievance is an individual
complaint.
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Having comprehended the meaning of grievance, let us now try to point out some of the
causes of grievances in organizations.
8.7.1 Causes of Grievances

Complaints and grievances arise in the mind of workers due to various reasons. As a
matter of fact, their occurrence depends to a large extent on the atmosphere of industrial
organization and the inter personal relationship of management with their workers. We
may therefore say that grievance occur due to:
(a) a violation of the collective bargaining agreement by either party in labour
management matters.
(b) a violation of normal past practice by management.
(c) A violation of organizations rules by workers
(d) A violation of management responsibility to workers.
8.8 Discipline
Discipline is the process of inculcating orderliness obedience and self control.
“Discipline” in simple words therefore means orderliness. In organizations discipline
ensures that employees conform to the rules and regulations of the organization. It ties
the employee to the code of desirable behaviour.
Some authorities say that discipline is the force that prompts an individual or group to
observe rules, regulations and procedures that are deemed necessary to the attainment of
organization objectives. In essence therefore “Discipline may be considered as the force
that prompts an individual or groups to observe rules, standards and procedures deemed
necessary for an organization.
Aims of Discipline
The aims of discipline in organizations are:-
(a) to obtain willingness and acceptance of an organization rules and regulations and
procedures so that goals can be attained.
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(b) to impart an element of certainty despite several differences in informal behaviour

patterns and other changes in an organization.
(c) to develop in the employees a spirit of tolerance and desire to make self
adjustments.
(d) to give or provide direction and responsibility on the part of employees.
(e) to create an atmosphere of mutual respect and good human relations in the
organization.
(f) to increase the working efficiency and morale of the employees so that their
productivity is stepped up so that the cost of production is brought down and the
improved quality of production improved by employees abiding by work ethics,
work standards, procedures, regulations etc.
We may therefore conclude and say that discipline is essential for the smooth running and
functioning of an organization and for the maintenance of industrial peace which is the
very foundation of good Labour-relations.
Take Note
Discipline calls for a high degree of co-operation between workers and
management. By each part, observing its obligations and responsibilities in
order to attain both organizational and individual employee objectives.
8.9. Summary
In this lecture we have learned that Labour Relations is concerned with
the way the workers and management relate to each other professionally
at the place of work.
We have noticed that most of labour matters are associated with trade
union activities. To achieve their objectives trade employees have to
organize themselves first into a trade union.
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Broadly, trade union objectives can be classified into militant and

fraternal objectives. These objectives are achieved through the pursuit of
traditional methods like registering themselves, by use of collective
bargaining process etc.
We have also appreciated the process of collective bargaining as it fosters

good Labour Relations. Collective bargaining is also a way of resolving
disputes. Further we have noted that discipline is an essential component
in pursuing harmonious Labour Relations.
Activity 8.1
1. Explain the meaning of labour relations.
2. Highlight on the objectives of trade unions.
3. What ways are used by trade unions to achieve their objectives?
4. Explain what is meant by collective bargaining.
5. Highlight on causes of grievances
6. Explain the objectives of discipline in organization
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LECTURE NINE
ORGANIZATION AND ORGANIZATION STRUCTURES
Lecture Content
9.1 Introduction
9.2 Objectives
9.3 Meaning of Organization
9.4 Formal and Informal organizations
9.4.1 Formal Organization
9.4.2 Informal Organization
9.5 Organization Charts
9.5.1 Meaning
9.5.2 Purpose of Organizational Chart
9.5.3 Types of charts
9.6 Organization Structures
9.6.1 Benefits of a Good Organizational Structure
9.7 Forms of Organization Structure and Charts
9.7.1 Line Organization
9.7.2 Line and Staff Organization
9.7.3 The Divisional Organization Structure
9.7.4 Project Organization Structure
9.7.5 Matrix Organization
9.8 Summary
9.1 Introduction
Organizations play vital role in man’s existence. In fact it has been said that we are born
in organizations, educated in organizations, spend much of our lifetime in organizations.
It is therefore of paramount importance that we study and be knowledgeable about
organizations. Equally important are the organizations structures as they may influence
the functioning and efficiency of organizations
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9.2. Objectives
1. Explain the meaning of an organization.
2. Distinguish between a formal and an informal organization.
3. Explain the meaning of an organization chart.
4. Describe various organization charts.
5. Explain the meaning of an organization structure.
6. Indicate the benefits of a good organization structure.
7. Describe the various organization structures.
8. Explain the various basis for organizational structure.
9.3 Meaning of an Organization

Organizations can also be seen as a group of members accomplishing certain goals
through group efforts. This definition covers a variety of groups such as businesses,
schools, hospitals, fraternal groups (e.g. Trade Union) religious bodies, government
agencies etc. There are three significant aspects in the above definition. We analyse
them as follows:
(a) They are Social Inventions - The word “social” as a derivative of society,
basically means a gathering of people. As we said, building, machines, plants by
themselves do not form an organization although they may be necessary
contributors to the existence of an organization. For example, if everybody resigns
from a company and no one is replaced, then it is no longer an organization even
though all material aspects of the company remain undisposed. Accordingly
therefore it is people who make up organizations.
(b) They are set up to accomplish certain goals – Let us point out here that all
organizations have reasons for their existence. These reasons are the goals towards
which all organizational efforts are directed.
(c) They require group effort – Many goals of organization require co-ordinated
group effort. Man as an individual is limited by his abilities both physiological and
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psychological. This calls for inter-independence hence forming groups to solve or

achieve more complex goals of an organisation.
Organization can be broadly be classified into (i) formal and informal organizations. Let
us examine the distinguishing factors between these organizations.
Distinction between Formal and Informal Organizations.

Let us discuss each in turn.
9.4.1. Formal organizations.

A formal organization is a deliberate creation: It can be said to be the planned
coordination of the activities of a number of people for the achievement of some
common, explicit purpose or goal, through division of labour.
Some of the objectives of a business organisation for instance would be:
- To achieve sufficient profit in order to finance the company’s growth.
- To provide quality products for their customers.
- To be socially responsible to all the stakeholders of the business.
Another distinction between formal and informal organizations depends on the degree of
structure. The formal organizations have an hierarchical structure. In this a type of
organization position, responsibility, authority, accountability and the lines of command
are clearly defined and established. We may add that it is a system of a well-defined jobs
with a prescribed patterns of communication with coordination and delegation of
authority to achieve stated objectives. An organization chart for example gives a
representation of the formal organization.
Let us now turn to the informal organizations.
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9.4.2. Informal Organization

The informal organizations or informal groups come into being due to the social,
psychological forces at the work place. They come about becauspeople interact,
communicate to each other, have some common likings or disliking.
It may be observed that the informal organizations are outside the formal authority
system and may operate within formal organization. They have their own structure with
their own followers, group goals, social roles and working patterns. Further, the informal
organization has its own unwritten rules, a code of conduct, which every member
implicitly accepts.
Here below is a summary of the distinction between a formal and an informal
organization. (Figure 9.1)
Formal and Informal Organization

ASPECT FORMAL INFORMAL
1. Origin -Deliberately & consciously -Created because of the
created to serve the operation of social/psychological
objectives of the forces operating at the work
organization place, to serve the interests of
individual members
- Spontaneous, rises for
interaction of people.
2. Purpose -Created to achieve the -Is a product of the formal
legitimate objectives of the organization; to serve the social
organization & psychological needs of
members
3. Goals -Specific stated objectives -No specific goals
4. Structure -Has an organization -No definite structural hierarchy

hierarchy which spells out
authority, responsibility
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relationships. -Flexible loosely structured

-Concerned with -No specified purpose
coordination of activities
5. Size -Tend to be large -Tend to be smaller than formal.
6. Membership - Membership is carefully - Membership is spontaneous
selected through organisation and open.
processes for instance -No limit on membership.
through interviews specific
number predetermined
number.
7. Nature of -Groups are relatively - Are quite unstable in nature.
Groups stable.
8. Number of -Whole organization may be -There may be many informal
Groups divided into groups and sub- groups in an informal
groups for organization organization.
purposes for instance. -An individual may be a member
Departments are created of several groups.
according to work patterns
-An individual is a member
of one group.
9.Authority - Legitimate authority flow -All members are equal.
through chain of command. However some individuals in
informal organization may
command more authority by
virtue of their personal qualities
e.g. Charisma, expertise.
-Authority is usually to those
who are likely to meet needs of
the members of informal leaders.
10. Behaviour of -Governed by formal rules -Behaviour governed by norms,
members and regulations. These rules beliefs and values of the groups.
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& regulations are normally - There is a varying degrees of

directed towards rationality membership participation
and efficiency.
11. Communication -Is prescribed normally - Passes through informal
through a chain of command channels
12. Abolishment Easy to abolish -Hard to abolish
Attempts to abolish may be
thwarted by members. This is
because of group cohesiveness
arising out of the psychological
satisfaction derived from these
groups.
9.5. Organization Charts

9.5.1 Meaning
The structure of an organization is depicted in the form of an organization chart. This
will show at a given movement in time how work is divided, the levels of authority and
formal organizational relationships. The organizational charts provide a pictorial
representation of the structural framework of an organization. Charts provided us with a
picture of the structure. They are means through which we see and understand the
organization as a whole.
At this juncture we may ask ourselves, “What is the purpose of depicting organization
structures into charts?”
9.5.2 Purpose of organization charts

There are many purposes served by organization charts.
These may include
- They are useful in explaining the outlines structure of an organization.
- They may be used as a basis for the analysis and review of structure.
- They may be used for training and management succession.
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- They may be used for review and formulating changes

- They indicate apparent weaknesses in the structure such as too wide a span of
control, too long a scalar chain, poor lines of communication etc.
- They also provide guidance for preparing job analysis, job evaluation and
determining the requirements of manning the organization and its training needs.
- They provide guidance to outsiders in deciding about the point at which they may
contact the organization.
9.5.3 Types of Charts

Broadly speaking there are three types of charts namely (i) Pyramidal charts (ii)
Horizontal charts and (iii) Concentric charts.
Let us start with the first one
A pyramidal chart is the traditional and most widely used type of chart. It shows the
vertical flow of authority and communication. The following chart illustrates this type of
organization structure.
Board of Directors
Managing Director
General Manager
Company Marketing Production Industrial Finance

Secretary Manager Manager Relation Manager
Manager Manager
Figure 9.2. Chart showing a Pyramidal Organization Structure
(b). The horizontal chart moves from left to right. The chief executive is shown at the
extreme left and operative workers at the extreme right. This can be illustrated as
follows:
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Company
Secretary
Marketing
Manager
Board of Manager/ General Production
Directors Director Manager Manager
Industrial
Relations
Manger
Finance
Manager
Fig 9.3. A chart showing a Horizontal Organization Structure
(c) A concentric or circular chart. They show the chief executive in the centre of a
series of concentric circles. Each of which depicts the next successive levels in the
hierarchy. The outermost circles show the operatives workers.
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Industrial
Customer Engineer
Service Maintenance
Manager Manager
Works
Sales Manager
Manager Production
Marketing Manager
Manager
General
Finance Manager Company
Manager Secretary
Advertising Industrial
manager Relations
Manager
Safety
Training Manager
Manager Wages &
Salaries
Fig 9.4 chart showing a Concentric Structure
Let us now turn to what organization charts depict, the organization structure.
9.6. Organization Structures

We may describe an Organization Structure as the pattern of relationships among
positions in an organization. It is a mechanism through which the organization achieves
its objectives. It is a means to an end and not an end in itself. An organization structure
shows the tasks and relationships as well as channels of communication of an
organization structure.
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9.6.1. Benefits of a Good Organization Structure

While there are many different structures that organizations can adopt depending upon
the type of organization, whether service or manufacturing a well-structured organization
has many benefits. Let us emulate them as follows;-
(a) A good organization enables attainment of objectives through proper co-

ordination of all activities. It is an build system of “Checks and balances” so that
the progress towards the attainment of objectives is evaluated along the way and
any new decisions required are taken.
(b) A good organization structure eliminates conflicts between individuals over
jurisdictions hence conflicts are kept to a minimum. Since each person is
assigned a particular job to perform, the responsibility of performing that job rests
solely with him/her. Hence, the interdependence is reduced to a minimum.
(c) It eliminates overlapping and duplication of work. Duplication only exist when
the work distribution is not clearly identified but also when work is performed in
a haphazard and disorganized way. Since a good organization structure demands
that the duties be clearly assigned, such duplication of work is eliminated.
(d) It decreases likelihood of “run-around” The “run arounds” occur when we do not
know who is responsible for what or being sent to wrong people for getting some
work done.
(e) It facilitates promotions since the organizational chart clearly pinpoints the
positions of individuals relative to one another, it is easier to know as to which
level a person has reached. Further, since each job is well described in terms of
qualifications and duties, the promotional stages can be more clearly established.
(f) Communication is easier at all levels of organization hierarchy. Since the lines of
communications and the flow of authority is quite clear in the organization chart,
the inter-communication is both clearer and easier and it eliminates ambiguity.
(g) It encourages creativity. Because a sense of belonging and high morale and with
the help of clear out accountability, recognition of skill and appreciation for the
contribution towards organizational growth, it encourages resourcefulness,
initiative and a spirit of innovation and creativity.
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Forms of Organizational Structures and Charts

As we learned earlier in this chapter, a formal organization structure is a deliberate
creation showing interrelations among positions in an organization, we shall now study
types or organization structure.
The types of organization structure would depend upon the type of organization itself and
its philosophy of operations. Some of the organization structures are explained as
follows:
9.7.1 Line Organization

This is the simplest form of organization structure and is most common among small
companies. Authority is embedded in the hierarchical structure and it flows in a direct
line from the top of the managerial hierarchy down to different levels of managers and
subordinates and further down to different levels of workers. These relations in the
hierarchy connect the position and tasks of each level with those above it and below. A
typical line structure can be illustrated as follows:
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MANAGING
DIRECTOR
ASSITANT
MANAGING
DIRECTOR
PLANT MANAGER
SUPERVISOR SUPERVISOR SUPERVISOR

A B C
WORKERS WORKERS WORKERS
Fig 9.5. A line Organization Structure
Line and Staff Organization

This is commonly adopted organization structure.
In this type of organization, the functional specialists are added to the line organization
structure thus giving the line advantages of specialists. The line and staff organization
structure can be illustrated as follows:-
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MANAGING DIRECTOR
LEGAL PUBLIC
OFFICER RELATIONS
ASSISTANT MANAGING
DIRECTOR
ENGINEERING
HUMAN
RESOURCE
PLANT MANAGER
SUPERVISOR SUPERVISOR
MACHINE ROOM ASSEMBLY
WORKERS WORKER
Fig 9.6. Line and staff organization structure
We may point out here that this type of organization is common in our business economy
and especially in large enterprises. The staff personnel are basically advisory in nature
and usually do not possess authority over line managers.
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9.7.3 The Divisional Organization Structures

The Divisional Organizations are also known as self contained structures.
They involve grouping people or activities with similar characteristics into a single
department or unit.
The departments operate as if they were autonomous within a large organization’s

umbrella. Decisions are generally decentralised. This facilitates communication,
coordination and control and ultimately contributing to organizations’ efficiency and
effectiveness. The semi-autonomy of departments can be a source of satisfaction to the
managers which in turn may be a source of motivation and innovation in their respectful
departments.
There are various bases used to departmentalise an organization. These include:-

(a) Departmentation by Functions
Departmentation based on a distinct and major function and is one of the most
common bases of organizing. It results into the creation of units, each one of
which deals with functionally similar activities. Functions differ from
organization to organization and depend on objectives, nature of inputs and
outputs and work activities. For instance key functions in a manufacturing
organization are, production, marketing and finance. There would be supportive
functions like Industrial Relations, Purchasing, Quality Control, Transportation,
Security etc the structure of such an organization would be depicted as follows:
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GENERAL AMANGER
PRODUCTION MARKETING FINANCE PURCHASING R&D

DEPT DEPT DEPT DEPT DEP
INDUSTRIAL HUMAN INDUSTRIAL

ENG. DEPT RESOURCE RELATIONS
DEPT DEPT
Fig 9.7 Departmentation by function
(b) Departmentation by Product

Companies with multiple product lines or products often adopt this basis of
departmentation. The manufacturing and marketing characteristics are of primary
concern. Each department is autonomous and strives to improve and expand its
own product line. Its manager is responsible for the costs, profits failures and
successes. Responsibility and accountability are easily traceable, thus making the
heads sensitive to product needs and changing consumer tastes.
The following is an illustration of departmentation by product.
GENERAL MANAGER
MANAGER MANAGER MANAGER MANAGER

FOOD DETERGENTS INSECTCIDES COSMETICS
STAFF
Fig 9.8 Departmentation by Product
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This type of organization structure facilitates the measurements of managerial

efficiency as well as operative results. It also provides feedback on the
contribution of each product or product line to the organization profit.
(b) Departmentation by Process or Activities

Department by process may be suitable for companies where production
operations flow in a sequence from one stage to another. For instance in an Sugar
Company various processes are involved. These are explanation drilling
refiningtransportationdistribution. There is a distinctive sequence in these
operations so that the finished product of one department is the basic raw material
for the department next in sequential order.
The following chart shows a possible process departmentation of a sugar factory.
PRODUCTION MANAGER
RECEPTION & CRUSHING REFINING MARKETING

WEIGHING
DEPARTMENT DEPARTMENT DEPARTMET DEPARTMENT
Fig 9.9. Departmentation by process
(d) Departmentation by Territory or Geographical

Companies having their operations on market activities in widely dispersed
geographical locations may chose to organize on territorial or geographical basis.
As their activities are depressed in branch plants, regional offices, regional
warehouses etc to take advantage of the economics of location nearer to the
customer. Multinational corporations are typical/examples of territorial
organization. Other local examples are commercial banks, insurance companies,
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Kenya Power and Lighting Company, Railways e.t.c. The diagram below shows
territorial departmentation.
GENERAL MARKETING MANAGER
COAST EASTERN NORTH CENTRAL WESTERN

DIVISION DIVISION EASTERN DIVISION DIVISION
DIVISION
Fig 9.10 Geographical Departmentation
(e) Departmentation by Customers or Service

This type of departmentation is used by organizations which deal differently with
different types of customers. As we know customers differ in their needs. Hence
the customers are key to the way, these activities are grouped. Most commercial
banks in Kenya, departmentalise their customers into Saving and Current Account
Departments. An Airline or Locomotive would departmentalise its customers into
1st Class passengers and given better attention than the Economy class passengers.
A manufacturing concern may be divided into industrial product and consumers
product buyers.
This kind of departmentation structure may be illustrated as follows:
BANK MANAGER
ASST. BANK MANAGER ASST BANK MANAGER

SAVINGS DEPARTMENT CURRENT DEPARTMENT
Fig 9.11 Departmentation by Customers
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(f) ALPHA Numerical Departmentation

ALPHA – numerical departmentation is found in many organizations. They use
alphabets or numbers as a basis to departmentalise. For instance an Insurance
company, servicing of insurance policies may be organized on the basis of
alphabetical order of the names of policy holders. In banks, ledger clerks may be
assigned work on basis of account numbers or by alphabetical order of customer’s
names.
(g) Departmentation by Shift

Under this method employees are organized on basis of “time of the day”. Thus
there would be Morning Shift, Afternoon shift or Department, Night shift etc.
Activi Activity 9.1

With reference to an organization you are familiar with try to establish
the bases for its departmentation.
9.7.4 Project Organization Structure

As you might have noted Line, Line and staff as well as functional structures emphasis
unity of command, vertical distribution of authority and specialization of task. However,
organizations – with multiple activities, facing new technologies, uncertainties in the
market, having need for innovation are moving towards project type of organization
structure. The project organization emphasis on horizontal relations and the creation of
teams for achieving specific goals. Team members are selected on basis of task related
skills and technical expertise.
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MANAGING DIRECTOR
Industrial R&D ACCOUNTING FINANCE PERSONNEL

Engineering
PROJECT A
INDUSTRIAL
ENGINEERING ELECTRICAL DESIGN ACCOUNTING PERSONNEL
ENGINEERING ENGINEERING
Fig 9.12 Project Organization structure

Once the team has accomplished its objective it is dismantled. The project organization
structures are most useful when:
(a) The project is clearly defined in terms of objectives to be achieved and the target
date for the completion of the project set.
(b) The project is separate and unique and not part of the daily work routine of the
organization.
(c) These must be different types of activities which requires specialized skills and
there have to be coordinated.
(d) The project must be temporary in nature and not extend into other elated projects.
9.7.5 Matrix Organization

A Matrix is, in a sense, a combination and interaction or project and functional structures.
The key =features of a matrix structure are that the functional and project lines of
authority are super-imposed with each officer and are shared by both functional and
project managers.
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A simple form of matrix design is illustrated as follows:
DEAN
SCHOOL OF
BUSINESS
DEPARTMENTS
CHAIRMEN
BUINESS ACCOUNTING MANAGIMENT

ADMINISTRATION SCIENCE
UNDER
GRADUATE
PROGRAMMER
MANAGER
Vertical flow of functions

PROGRAMME
Authority responsibility
MASTERS
PROGRAMM
MANAGER
Relationships
DOCTORAL
PROGRAMM
MANAGER
EXECUTIVE
DEV.
PROGRAMM
Fig 9.13 A matrix organization structure.
It can be seen from the illustration that the managers of various programmes staff their
courses from the school’s various departments and the same schools serves various
programmes. The Matrix provides clear lines of responsibility for each programme. For
example, the responsibility for the success or failure of executive development program
lies directly with its programme manager. The Matrix structure provides for coordination
among departments offering various courses and programmes. Without the matrix, such
coordination would be possible.
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Matrix organization design is most useful when there is pressure for shared resources.
For instance the various departments would offer service to each other instead of hiring
more personnel. Let us also note that each Matrix contains contains three unique sets of
role relationship.
(a) There is the top manager who heads and balances the dual chain of command.
(b) The managers of functional and project (or product) departments who share
subordinates
(c) The specialists report to both the respective functional managers and their
project manager.
We may observe therefore that an important aspect about matrix structure is that each
person working on the project has two supervisors, the project manager and the
functional manager.
Since the matrix structure integrates the efforts of functional and project authority the
vertical and horizontal lines of authority are combined and authority flows both
downwards and across. The vertical pattern is brought about by the typical line structure
where the authority flows down from supervisor to subordinates. The project authority
flows across because the authority is really meant for coordinating of activities rather
than giving orders and directions which is a vertical function.
9.8 Summary
In this unit, we have learned that an organization is a deliberate creation. It
is created to achieve certain specified objectives through coordinated
efforts of individuals. Such organizations have been referred to as formal
organizations. Some of the business organizations objectives were
mentioned in the first lecture.
Nevertheless, not all organizations are deliberately created. Some may

come about due to meet the social and physical factors operating at work
place. These kind of organizations which are not set up to meet the
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legitimate goals of the formal organization have been referred to as

informal organizations (They may serve other purposes in the organization
as we shall see in organization theory and behaviour to be taken later).
We also learned that the pictorial representation structure is known as an

organization chart. What we perceive to be about the relationships of
individuals, and the various hierarchies of an organization is an
organization structure. A good organization structure ensures efficient use
of the organizations’ resources as it reduces overlapping of human effort,
eliminates chances of conflict, enhances communication, etc.
We have also studied the various organizations structures and their
applicability in the business world.
Activity
1. Imagine an organization without an organization structure. What
would be the consequences? List them down
2. Define an organization
3. Is the University of Nairobi a formal or informal organization? Give
reasons to support your answer
4. Distinguish between an organization chart and an organization
structure
5. Explain the benefits of a good organization structure.
6. Outline and describe at least five organization structures
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LECTURE TEN
MARKETING
Lecture Content
10.1 Introduction
10.2 Objectives
10.2 Meaning of Marketing
10.3 Marketing Concept and Theories/Philosophies
10.4 The Differences between Selling and Marketing
10.5 Marketing Mix Variables
10.5.1 Product
10.5.2 Price
10.5.3 Place (Distribution)
10.5.4 Promotion
10.6 Product Life Cycle
10.7 Consumer and Industrial Markets
10.8 Marketing Environment
10.9 Summary
10.1 Introduction
In lecture eight, you leant about organizations and how they are structured and organized.
In this chapter, you will be introduced to marketing and the environment in which
marketing takes place. You will discover that marketing is very broad and encompasses
nearly everything we encounter in life. In fact every day we think about buying or selling
something, whether a good or a service. Every time we board a matatu and pay the fare,
or stop by a petrol station to fuel, some marketing activity has taken place.
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10.2. Objectives
1. Define marketing
2. Describe the marketing philosophies
3. Differentiate between marketing and selling
4. Discuss environmental factors that affect marketing
5. Discuss marketing mix variables
10.3 Definition of Marketing

As a starting point, we need to understand marketing. Basically marketing is defined as
the performance of business activities which direct the flow of goods and services from
producers to consumers. It may also be defined as “a social and managerial process by
which groups and individuals obtain what they need and want through creating something
of value”. However, the modern concept of marketing focuses on customers satisfaction,
a consumer – oriented approach, which means working from the consumer backwards,
rather than from the factory. The modern marketing concept has evolved over a period of
more than a century, from its original primitive form based on agriculture and
handicrafts, to its modern form which emphasizes customer satisfaction.
Marketing management is a process by which an organization undertakes the concept of

pricing, promotion and distribution in relation to goods, through the process of planning,
organizing, controlling and directing to create exchange with target groups.
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10.4. The Marketing Concept and Theories/Philosophies

The Marketing Concept
This is a customer oriented, goal-oriented philosophy for a firm, institution or person.
Customer Orientation Goal orientation

Needs examined and financial or nor
satisfied financial
Marketing concept
Integrated efforts – all activities

coordinated
Fig 10.1: The Marketing Concept.
The idea of marketing concept came up when marketers were trying to improve their
production. Initially, producers would just identify the product then go ahead to produce
it, with total disregard to the customer. However, it was realized that the customer was
very key to the whole process, and there was need to develop a marketing concept, in
order to be able to identify consumer needs, then seek for ways to satisfy these needs.
The main components of marketing concept are four. The target market – This is the
starting point. No company can afford to operate in every market and satisfy every need.
There is need to identify a suitable target market for its products.
1. The customers need – One needs to identify customer needs, which are dynamic
and ever changing. An in-depth understanding of the customers is very necessary,
if their needs are to be satisfied. This is done through marketing research and
suitable marketing information systems.
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2. Coordinated market – We need to have a coordinated internal marketing functions

(personnel department, pricing, advertising etc) and proper coordination between
the marketing department and other departments.
3. Profitability. The organization must earn its profit through customer satisfaction.
Profitability should be seen as a by-product that has to be gained in the long run,
by establishing a proper marketing structure, which ahs deep roots in each
department.
Marketing Management Philosophies

The term philosophy refers to the management attitude, orientation, or state of mind as
far as marketing management practice is concerned. There are five main philosophies,
also called concepts.
1. Production Concept: In economies characterized by shortage, managers are
concerned only with production since whatever they produce will be sold quickly.
This is practiced mainly in the developing countries such as Africa. Product
quality is not an issue in this concept. It works best in situations where producers
are few and large but demand is very high.
2. Product Concept: The marketer assumes that the consumers will buy products of
high quality and ignore products of inferior quality. The producer again
emphasizes production since it is assumed that little marketing effort is needed to
secure satisfactory sales and profits.
3. Selling Concept: The marketer contends that although consumers look for quality
products, they are not likely to purchase enough of the firm’s products unless
some selling effort is expended. The philosophy accepts the fact that some selling
and promotion effort by the producer is essential if his products are to be bought
in sufficient quantities, but still looks at the whole marketing process from the
seller’s point of view.
4. Marketing Concept: This requires that the marketing decisions be made by first
identifying what the consumers want and then working backwards to the
organization. The marketer should first identify the needs and wants of
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consumers, then develop a product that will satisfy these needs and wants. The
philosophy thus advocates the sovereignty of the customers.
5. Societal Marketing: In this case, the marketer is not only concerned with
satisfying consumer needs but also with the long run welfare of society at large.
Whereas the marketing concept takes the consumer as sovereign and always right,
the societal marketing concept argues that there is usually a divergence between
individual and societal needs and that, therefore, the marketer should, in trying to
satisfy individual needs and wants, consider the societal consequences of his
activities. You cannot for example, supply drugs to drug addicts, because they are
harmful to their health. Neither can you start a bar in a residential area to
entertain patrons with loud music at night thereby disturbing people.
10.5. Differences between Selling and Marketing

We now give a summary of the differences between selling and marketing, so that you
can appreciate that being a seller, you are not necessarily a marketer
Selling Marketing
1 Emphasis is on the product Emphasis is on the customers’ wants
2 Company first makes the product, Company first determines customer’s wants,
and then figures out how to sell it. then figures out how to deliver a product to
satisfy those wants
3 Management is sales-volume Management is volume oriented.
oriented
4 Does not deal with consumer Stress consumer analysis and satisfaction.
analysis
5 Not adaptive to consumer Adaptive to consumer characteristics and
characteristics and wants wants.
6 Planning is short run oriented, new Planning is long-run oriented, in terms of
products in terms of today’s tomorrow’s markets and future growth.
products and markets
7 Stresses needs of seller. Stress wants of buyers.
Table 10.1: Differences between selling and marketing
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Activity 10.1
Can on practice marketing without doing selling? Explain.
10.6 Marketing Mix Variables

The concept of marketing revolves around four main areas, namely the product to be
marketed, the price at which it is to be marketed, the channel of distribution (place) and
the promotional strategies to be used. These are what are called the 4Ps in marketing, i.e.,
Product, Price, Place and Promotion. They constitute the marketing mix. Let us look at
each one of them separately.
10.6.1 Product
A product is a complex bundle of tangible and intangible benefits that a business offers to
the market place, and covers both services and goods. It is that which is sold by the seller
to the buyer, and must satisfy the consumer’s wants. It may be seen narrowly as a
combination of physical attributes such as materials, size, colour, design, features,
performance, ability and functional utility. It is a set of tangible and intangible attributes,
including packaging, colour, price, manufactures prestige, retailer’s prestige, and services
which the buyer may accept as offering satisfaction of wants or needs. A customer will
buy a product, not just for its physical needs satisfaction but also for prestige.
A broad group of products performing the same functions and having reasonably close
appearance is called a product line. e.g. TVs sets of various sizes constitute a product line
as opposed to radios in the same electronic shop, the radios will constitute another
product line.
All products marketed by a company constitute its product mix, and has both depth
(assortment of sizes, colors, designs, etc within a product line) and breadth (the number
of product lines offered by a company to its customers.) product is the most important of
the 4Ps, as the other three depend on the product. Unless a firm can produce a product
that will provide satisfaction to its customers, it will not succeed.
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Types of Products
Based on the buyer, products may be divided into consumer and industrial products.
Consumer products are goods or services destined for the final consumer, for personal,
family or household use. It is the use but not the tangible nature of a product that makes
it a consumer product i.e. if it is purchased for personal, family or household.
Categorization of Consumer Products

1. Convenience products – inexpensive consumer products that are purchased easily
and often, with minimal effort, e.g. food, socks, and drinks.
2. Shopping products- Purchased after spending some time shopping and comparing
alternative on the basis of quality and price. Examples are electronic products
(radios, TVs, and kinds of clothing).
3. Specialty products- Relatively expensive consumer products that is unique in
some way. Consumers will therefore be willing to pay a premium to get them.
Examples include college educations, wedding cakes, unique jackets etc.
Industrial products are goods and services purchased for use in the production of other
goods or services in the operation of a business, or for resale to other consumers.
They include heavy machinery, raw materials, type writers and cash register. An
industrial buyer may be a manufacturer, retailer, wholesaler, government or other non
governmental organizations.
Branding
Branding involves the use of a unique name that differentiates a firm’s product from
those of others. Every company gives brand names to its products, some brands are used
all over the world, for example, coke is a global brand which is positioned and marketed
in the same way all over the world. To guard against brand piracy in which firms may
use other firm brand names, some of the protection techniques taken against the
counterfeiting of intellectual property include:
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Trademarks – as sign, symbol or name a pattern – which protects new methods and
processes; copyright – sign, symbol or name which protects expressed ideas.
Packaging
Like branding, packaging is one of the most important attributes of a product, it is the
placement of physical covers to products or placing the products in containers for ease of
handling, packaging plays both protection as well as desire, it guards against damage of
the product being handled, and against exposure to unsuitable conditions. Colours,
package size and shape are some of the key attributes that some promote the product. In
designing a product package, one should consider such issues as colour, size, shape and
opaqueness of the material.
Activity 10.2
Discuss the role played by packaging when dealing with flowers for
export.
10.6.2 Price
Price is critical to a firms marketing effectiveness. The price must be placed at a
competitive level, so that the firm will not lose revenue and at the same time will not lose
its customers to competitors. Price is very important, because if it is not properly done, all
the other elements of the marketing mix may be rendered ineffective.
Although prices are supposed to be set by the market forces of demand and supply, this is
often not the case, because the market is not perfect, and many factors influence pricing.
If pricing is to be effective, management must have clear objectives, which may be; to
increase sales, improve or maintain market share, earn target profit, stabilize prices, or to
prevent competition. Generally, several strategies may be adopted in pricing, depending
on the pricing objectives.
 Skim - the cream pricing
Skim the cream pricing is appropriate for new products and aims at recovering
the cost of production as quickly as possible, and so the price is placed higher
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than would be warranted by costs of production and distribution. It is assumed

that the potential customers will still buy the product, and that competitors will
not come in quickly to force the prices down. Finally, the prices are brought down
to a stable level. Skimming assists in controlling demand at the initial stage of
production, but has the limitation of attracting competitors very soon, owing to
high product profitability.
 Penetration pricing
This is also for new products, and aimed at fixing price which is sufficiently low
to encourage wide market acceptance of the product. The firm starts with a low
initial price, and later increase to the acceptable level. The advantage of this is
that it discourages potential competitors from entering the market. However, the
problem with this is that the firm will take very long to recover its development
and introduction costs.
Other Strategies (Approaches)

 Psychological pricing – This type of pricing involves use of several tactics to
attract consumer to by some of them include;
 Putting a very high price than starting it with the worlds ‘price unit’
across the prices
 Using odd prices such as 99 as opposed to the even price 100 or 699
instead of 700;
 Using very large price labels.
 Discriminative pricing – prices are allocated discriminatively either to cater
for different locations, or differential customers. For instance, a bag of potatoes
might sell at ksh 600 in Nairobi and Ksh 800 in Mombasa. We have different
prices for foreigners and locals in national parks, hotels and so forth. Children
or students often pay less for the same services as non students.
 Geographical pricing - This is closely related to discriminative pricing, but
mainly deals with discrimination on the basis of geographical location. For
instance, a bag of potatoes might sell at Ksh 800 in Nairobi but ksh 1,000 at
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Mombasa. This works where the two locations are significantly far apart or
there are barriers to prevent sellers from quickly moving goods from the low
price area to the high price area and making very high profits.
 Discount Pricing – Offer discounts to customers, in form of cash or
commodities. Marketers may provide price discounts for a tow moving
commodity to encourage more sales, or to clear stock that is about to expire –
Discounts are may also be provided for some selected products with the hope
that as customers come in to buy those products, they will be able to buy other
products as well.
10.6.3 Place (Distribution)

Place is used to refer to the distribution process that is required to get the product to the
consumer. After having decided the product strategy, the marketing manager is faced
with the important task of deciding the channels or routes through which his products will
flow the factory to potential customers. Distribution channels are the systems used for
moving goods and services to customers. It may be direct or indirect, involving use of
one or more middlemen including wholesalers, selling agents and retailers.
There are five dominant distribution channels for consumer goods.

1. Manufacture –Consumer – The shortest channel – producer sells directly to all
consumers – through direct selling or door-to-door selling. This is common for
many agricultural products, and products that are highly perishable. It is also
appropriate when the product is new and requires demonstrators as to its use or
preparation.
2. Manufacture – Retailer – Consumer: The producer sells directly to retailers,
without using wholesalers. e.g. for tea companies.
3. Manufacture – wholesaler – Retailer – Consumer: The commonest method for
most consumer products. e.g. for products like soap, detergents, cosmetics, etc.
4. Manufacture – Agent – Retailer, Consumer – Manufacture may also use agents
instead of wholesalers, where they think the wholesalers are not fair.
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5. Manufacturer – Agent – Wholesaler – Retailer Consumer: manufacturers may

sometimes appoint sole agents for various regions who sell to wholesalers, who
then sell to retailers. This happens for goods with a wide circulation e.g. sodas
and beer.
10.6.4 Promotion
This is the 4th and a very important element of the marketing mix, as it involves
techniques aimed at convincing the consumer to buy. Some marketing effort is necessary
to convince the consumers to buy. Promotion involves such techniques as;
1. Advertising
This consists of those activities by which visual or oral messages are addressed for
purposes of convincing the publics to buy the products and services, and it is a paid
form of non-personal communication. It involves use of mass media techniques like
radio, T.V and newspapers and to be effective, it should;
- Focus on outstanding, product features.
- Its message should be important to customers
- Promise distinctive benefit
- Contribute to the strengthening of brand image,
2. Sales Promotion
Refers to those promotional activities do not fall under the category of advertising,
personal selling, or publicity, and is aimed at stimulating more skills to increase shelf
space. Sales promotion activities include point of purchase displays. These activities
are complementary to advertising and personal selling.
3. Personal Selling
This involves door to door direct selling of goods by the sales persons. These sales
persons move around with the goods, convincing customers to buy. It involves five
phases
1. Creation of attention (A): The consumer must first be made aware that a new
product exists
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2. Generate Interests (I): Once the consumer is aware of the existence of the product,
he may get interested in it, and may want to inquire more about the product
3. Have the desire to buy (D): The consumer seeks to buy the product
4. The buying Activity (A): The consumer finally decides to buy the product
5. Build satisfaction (S): After using the product, the consumer derives satisfaction
from it
To make it easy for you to remember the stages, you could use the acronym AIDAS.
4. Publicity
Publicity deals with creating a public awareness about a firm and the products.
Publicity is non paid mass communication that is demand or image directed.
This is done through such activities as trade fairs, sponsoring of games/ sporting
activities, exhibitions, e.t.c, aimed at building good public relations with the
customers.
Activity 10.3
What are the main considerations that you would need to make in
deciding the best promotion tool for a product?
Take Note
Marketing mix variables are the crux of marketing, and nearly all the
marketing activities are in one way or another, centered around the
variables. As a marketer, you need to understand the various aspects of a
product, especially how it is develop, and packaged, as well as the product
life cycle. You need to know the pricing strategies commonly used by
marketers, and the promotion tools available. Finally it is important to
know how products can be distributed from the producers to the
consumers, and the role played by the marketing intermentaries.
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10.7. Product Life Cycle

Just like living things, a product has a lifespan, a lifecycle which stretches from the day
the product is released (commercialized) into the market, to the time the product sales
begin to decline. This goes through five major phases, namely introduction, growth,
maturity, saturation and decline.
1. Introduction (Pioneering Stage)

This is characterized by low sales, heavy production costs. Requires aggressive
marketing strategies in promotion. There are only a few competitors. When a new
product is adopted, it goes through a consumer adoption process, which has five
steps;
1. Awareness – of the product by the potential customer. (A)
2. Interest – interest is aroused through information and publicity (I)
3. Evaluation – The consumer evaluates the information and decides on whether
to try the product (A)
4. Trial – He tries the product to evaluate its utility, quality and other features
(T)
5. Adoption – He adopts the product for regular use. (A)
The acronym commonly used for these is AIETA
2. Growth Stage
During this phase, there is rapid growth in sales volume and profits competitors
begin to appear in the market. Distribution outlets increase rapidly, and prices
begin to fall a result of competition.
3. Mature Stage
Characterized by a continuous decline in the growth rate of its sale volume until it
levels up. Competition becomes more intense and profits decline due to increasing
high cost of marketing. Merges, acquisitions and liquidation of marginal firms is
common.
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4. Decline stage
Sales start declining in absolute volume at this stage. New products enter the market
and push out the existing competing products. The product may be abandoned unless
it is required to complement a profitable product line, or to utilize existing production
capacity so as to meet at least part of the fixed costs.
10.8. Consumer and Industrial Markets

Consumer markets are markets that serve individuals or households, mainly with
consumer products, while industrial markets serve organizations.
Some of the differences that characterize consumer and industrial markets are shown in
the table below.
ITEM INDUSTRIAL MARKET CONSUMER MARKET

Customers Organization Individual
Distribution of customers Geographical and Industrial Similar to population.
concentrations
Purchasing power Concentrated and high Distributed and low
Purchasing decisions Impersonal Complex personal

Actual benefits Perceived benefits
More rational Less rational
Influence on purchase Usually several people Sometimes several people
Impulse buying NO Sometimes
Demand Derived Direct
Product High value More sensitive
More technical
Difficult in application
Product life cycle Longer Shorter
Development and Longer Shorter
manufacturing cycle
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Advertising and Sales Less sensitive More sensitive

promotion
Information to be More complex Less complex
transferred to customers
Table 10.2: Differences between consumer and Industrial markets
10.9. Marketing Environment

Marketing environment comprises of those factors that directly or indirectly influence
marketing. They may be divided into internal (controllable) and external (uncontrollable)
factors.
Controllable factors
These are the factors generally found within the firm and are directed by the organization
and its markets. Factors directed by the top management include type of business,
corporate culture, geographic coverage, financial base, employee salaries, and staff
welfare. Markets in the organization decide on market segments, promotion mix and
production schedule.
Uncontrollable Factors
These are generally referred to as the external moment and comprises of those factors that
are external to the firm, and the firm has no control over them. They include economic
environment, technological environment, competition, the government and the social
cultural environment of independent methods.
Economic Environment
Economic environment include interest rates, unemployment, inflation, wage levels and
costs of production. For instance, when costs are stable, markets have greater
opportunity to differentiate their offerings and expand sales. High interest rates and high
levels of inflation are not desirable for economic growth. Unfortunately no firm has a
control over these variables and the firm must adapt to the changing economic conditions.
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Technological Environment. Technology encompasses the techniques; skills, processes

and knowledge that is available for production purposes. It refers to the development and
use of machinery, products and processes. Many technological advances are beyond the
control of individual firms, especially small ones. Technological advancement especially
in the area of information technology creates major challenges to firms.
The Government. The government plays a crucial role in influencing business

operations. Through its legal and regulatory framework, the government is able to
control marketing operations, for examples, through licensing of firms, discriminatory
pricing, wage legislation and so on. A country’s political environment also influences
firms. For instance, a stable political environment is conducive for business operations,
while an unstable political environment is not conducive.
Competition: A firm’s competitors often affect its marketing strategy and success in
attracting a target market. The competitive structure is comprised of monopoly (one firm
sells a product, and has control over marketing), monopolistic competition (A number of
firms offer a variety of marketing mixes, oligopoly ( a limited number of large firms
compete on non price factors); and pure competition (numerous firms sale the same items
without a differential advantages.
Social cultural: It comprises of social and cultural characteristics of the consumers.

Although a firm has control over the selection of a target market, it cannot control the
characteristics of the population. These include age, income, marital status, occupation,
race, education religion, language and place of residence. The market must seek to
communicate with consumers, anticipate problems, respond to complaints and make sure
that his or her company operates properly.
Independent Media: These can influence the governments’ consumers and the public’s
perception of a company’s products and overall image. They can provide a negative or
positive coverage about a company, through print media, radio or television.
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10.10 Summary
In this lecture, we have learnt that there is no one universally accepted
definition of marketing, but most definitions tend to emphasize the social
process and the exchange nature of marketing which enables individuals
obtain what they need and want. In marketing we recognize the
marketing concept which is composed of customer orientation (the target
market and customer needs), goal orientation (profitability and other
financial as well as non financial needs) and a coordinated market which
integrates and coordinates all activities. We cannot effectively talk about
marketing without considering the four Ps of marketing, that is the
product, the price the place, and promotion. We have also learnt that
marketing activities takes place within the confines of both the
controllable as well as the uncontrollable environmental factors.
Activity 10.2
1. Look at a few copies of either the Nation or Standard Newspaper
and identify the commonest strategies used by firms in pricing
their products. Can you identify any promotion aspects by firms
through the newspapers?
2. How should marketers interact with the independent media?
3. Why are consumers considered to be uncontrollable?
10.11 References
Cravens, D.W. (1996) Marketing Management, A.I.T.B.S. Publisher
Distributors (India)
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LECTURE ELEVEN
PRODUCTION MANAGEMENT
Lecture Content
11.1. Introduction
11.2. Objectives
11.3. Meaning of Productivity
11.4. Elements of Production
11.4.1. Product Development
11.4.2. Plant
11.4.3. Purchasing
11.4.4. Manufacturing Process
11.4.5. People
11.5. Product Planning
11.6. Production Control
11.7. Industrial Productivity
11.8. Logistics and Physical Distribution
11.9. Productivity in Organizations
11.10. Organizational Trends in Productivity
11.11. Summary
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11.1 Introduction
In the previous lecture, you learnt about marketing and you were introduced to the
marketing mix variables, which are of major concern in marketing. In this lecture you
are going to learn about productions management. Production is key in business because
it leads to a firm having actual products that can be sold. Productivity in management is
very crucial because unless it is properly managed, it will result in uneconomical
production by way of producing substandard materials or improper use of production
resources, thereby making the firm incurs losses.
10.2. Objectives
1. Define the meaning of production management.
2. Describe the elements of production management
3. Identify the major trends in productivity.
4. Discuss what is involved in product planning
5. Explain production control
6. Discuss the logistical and physical distribution
considerations in production management.
7. Discuss the key issues involving productivity in
organizations.
11.3. Meaning of Productivity and Production

Unlike the traditional (economists) views which expresses productivity as output per
labour costs, productivity may be defined as the measure of how well resources are
brought together in organizations and utilized for accomplishing a set of results.
Productivity is neither performance nor results. Nor is it production. It includes all
segments of work life. It entails reaching the highest level of performance with the least
expenditure of resources. The whole question of productivity starts with what must be
accomplished.
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These include profits, patient care, budget performance, rates volume, student enrolment
and so forth. Product management or operations management describes those functions
concerned with the use of people and machines to produce goods, services or systems to
consumers. It is concerned with ensuring that there is an effective management of
organization’s resources to provide these goods, services and systems.
11.4. Elements of Production Management

Production management revolves around five main areas; product development, plant,
purchasing, manufacturing process, and people. We now briefly consider each one of
these areas.
11.4.1 Product Development
A product includes persons places, organizations, ideas goods or services that can be
offered in a market for attention, acquisition, use or consumption and is capable of
satisfying a need or want. A firm must design a product that fits it’s production
processes. In lecture on principles of Marketing, you learnt the various stages through
which new product development goes. These include idea generation, idea screening,
Business analysis, and so on. You need to go back to that lecture and remind yourself of
the stages.
11.4.2 Plant
The Plant is the establishment of the organization for the production of goods and
services. When establishing a plant a firm has to take into consideration several factors.
Some of these include location, capacity, manufacturing method flow of material and
handling methods.
11.4.3 Purchasing
Purchasing involves the purchase of input to make the product. Production managers try
to ascertain the right amount of raw material or parts required at the right price place and
timing for manufacturing. Typically there are 6 steps carried out in a purchasing
department to buy raw materials, semi-finished parts and finished parts.
STEP 1 – Recognize Needs. Decisions have been made on the materials the product
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control selection sends. These include purchasing specifications for items to be bought
from an outside source describing the material quality required, and when it is required.
STEP 2 – Develop Specifications: Purchasing managers usually cut down costs by

evaluating carefully the specifications and doing value analysis (the systematic appraisal
of the design quality and performance requirements of an item). In this stage more than
one vendor is sought so as to create genuine competition among them. Priorities must be
set carefully so as to enable purchasing managers evaluate bids using criteria such as;
Price of the product, Quality of the product, Delivery promptness, and Service e.g., after
sale service, installation.
STEP 3 - Request Bids and Select a Vendor: Once selection of criteria is set, bids are
solicited from potential suppliers. Quotation request forms are sent to the vendors,
describing the quantity required, date required and other specifics of the product. The
purchasing manager evaluates the bids received from all the vendors and one vendor is
selected, and a contract signed allowing him to supply the amounts of the products
required.
STEP 4 – Follow Up: Follow up of the item is important especially if the item is in short
supply needs to be redesigned or serviced etc.
STEP 5 - Receive the Order: The purchasing department checks all items against the
purchase order when received to ensure that the correct amount and specifications of the
goods have been delivered in good order.
STEP 6 – Evaluation of Vendor: The vendors are evaluated in terms of reliability,

commitment and ability to supply on time.
11.4.4. Manufacturing Process

The manufacturing processes involve the transformation methods used to convert inputs
or purchase items into the finished required goods or services and the supply of these
products to the final consumer. Mass production and automation have revolutionized
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manufacturing methods and have led to higher quality and standardized products
available at lower prices.
Resource inputs are consumed by transformation process where value adding operations
are performed to yield output goods and services.
Inputs Transformations Output

Value – adding operations
Production must be done according to set specifications, for example, physical

dimensions, quality requirements, and tolerances. This is necessary so as to achieve the
best possible outputs.
11.4.5. People
The success or failure of an organization depends on the quality of its manpower. The
production manager must be actively involved in the planning and control of employees
engaged in production management. This requires active participation in recruitment and
selection of production personnel, their training and development, performance appraisal,
compensation, motivation, supervision and their general welfare.
11.5. Product Planning

Production management has the overall responsibility to ensure that material labour and
equipment resources of the organization are used to the best economic advantage.
Production management is therefore the production of products according to
specifications as influenced by the market and delivery to the market.
All the functional areas are necessary for the success of production. Product planning
and control are part of these functions and go hand in hand.
Product planning follows the production engineering decisions and covers requirements
to plan actual manufacturing of the products as has been mentioned earlier in product
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development. Planning sets down the standards required of a product whereas control
evaluates the products against their already set standards.
Both planning and control are usually performed by a separate department and serve as
the nervous system of the production department. Its chief functions are processing of
information and planning work to be performed by the operating departments. Specific
tasks include routing (determines operations, their sequence and path of materials.),
loading (assigning work to a machine or department in advance.), scheduling (time at
which operations take place), dispatching (ordering work to be done) and expediting
(follow up to check if plans are being executed). Expediting is done by reports and oral
communication with operating departments, and specialists may spend time ensuring that
key orders are finished on schedule.
Product Planning includes determining the time period of production, preparation of work
schedules to ensure that labour and material are available at the right time and in the right
quantities; and preparation of machine utilization schedules to ensure that machines and
operators are available and used optimally. Effective production planning ensures smooth
production with reduced possibilities of interruptions due to material shortages, non-
availability of machines, labour and tools required for production.
11.6. Production Control

Production control is the extension of production planning and has to work closely with
it. It ascertains that the already laid down plans are adhered to. The production control
monitors the passage along the production lines of the items to be manufactured and
ensuring that time schedules are maintained. If any delays are discovered, corrective
action is taken to remedy the situation. Production control activities also involve
checking of machine utilization, material delivery schedules, labour check utilization and
so on. It is aimed at the maximum utilization of resources at the lowest possible price for
the benefit of the organization and the ultimate consumer. In small concerns memory and
experience are relied upon to a large extent in planning and control while larger concerns
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need an efficient flexible system to plan and control the mass of information materials
and machines.
The control function therefore involves;
 Transforming marketing requirements into instructions to production departments.
 Ensuring that resources are employed for the work to which they are most suited
and that schedules are followed.
 Maintaining a balance between manufacturing processes to stop work
bottlenecks.
 Arranging manufacturing orders in the best sequence.
 Liaising between marketing and production.
Some of the key areas in which control is involved include;
Progress Control
This involves checking and reviewing all aspects of the production plan so as to ensure a
smooth production flow. It requires speed, accuracy and usual charting methods to aid
progressing.
Material Control
This ensures that the right quality and quantity of materials are available when and where
required it controls:
 Purchasing under a buyer.
 Department co-ordination – purchasing, inspecting, receiving, storing and
issuing materials.
 Simplifying and standardizing whenever possible
 Efficiency in storing in suitable accommodation with safeguard against
pilferage, deteriorating and waste.
 Planning and scheduling material requirements and control by budgets
 Stocktaking procedures to be efficient.
Stores control
Details of stocks should be readily available to production control departments so that
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they can replenish stocks whenever it is necessary. Stocks are held to make production
possible, even though demand may fluctuate. Factors aiding stock control include:
 Accurate coding and classifying of the stores
 Perpetual inventory records and physical checking of stocks.
 Efficient accounting procedures.
Quality Control
This involves controlling the quality of products by application of statistical methods
using the probability theory. Quality targets are set samples of products in production are
tested against these targets.
Inventory Control
This involves control of raw materials, work in process and finished goods. Raw
materials are the unprocessed materials that have not yet gone into to the production
process. Work in process are those material undergoing conversion, and are at various
stages of production, while finished goods are materials that have fully been converted to
finished product.
Control of plant operations

Plant is the establishment of the organization for the production of goods and services.
Some considerations to keep in mind when establishing a plant are as follows:
location – qualitative and quantitative factors
capacity – the amount of equipment necessary
layout – the organization structure plan.
Without going into details which are beyond the scope of this book, we need to note that
there are 4 types of layout;
 process or functional layout
 product layout
 fixed position layout, and
 cellular layout
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Take Note
Productivity in organizations is very crucial, and requires that proper
controls are put in place to control productivity in terms of quality as
well as quantity of output. Plant operations as well as material at various
levels of productivity need to be properly controlled and maintained.
Activity
Imagine you are in charge of a production unit in a company that deals
with manufacture of fruit juice. What are some of the controls that you
would need to maintain?
11.7 Industrial Productivity

Industrial productivity refers to several aspects including: all those aspects of
production management which seek to improve the quantity and the speed of production.
 The types of goods produced, the amount in which they are produced, the labour
and the equipment used for the production of goods in an industry under
consideration.
 The design, quality of output and the assessment of consumer needs are also
considered in this area.
 Choice of products for sale and after sale services are very important.
 Manufacturing strategy promotion, merchandising, pricing strategy and selection
of distribution play a major role in the industrial productivity.
 Industrial Productivity covers the following activities;
 Work study-this is meant to eliminate the unnecessary tasks and avoid duplication
of effort and work measurement i.e., the assessment of time needed to complete
work including relaxation.
 Motion study-concerns the analysis of fatigue caused by human body motions and
positioning of tools and control panels.
 Ergonomics – the improvement of the relationship between the employee and the
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working environment. Practical applications include work place layout, lighting,

heating and ventilation, acoustics, design of instruments and controls and design
of office furniture.
 Factory layout – machine and equipment can be arranged by product or process.
Product layout involves grouping together in one location all the equipment need
to manufacture an item from start to finish. The close proximity of different
stages in the production process cuts waiting time between process, reduces
material handling costs, and quickly identifies production – line breakdown’s
process layout places alongside each other machines and equipment concerned
with a certain type of work Skills developed on one machine can be easily put
onto others when machine break downs occur.
SAQ
Identify and discuss the main areas that require control in production
management.
11.8. Logistics and Physical Distribution

Physical distribution management refers to the flow of materials from the end of the
production line to the consumer or the transfer of goods from producers to consumers.
For many years production inefficiencies have been scrutinized and criticized in order to
increase productivity. There has been little close examination of possible savings in the
area of physical distribution now known as logistics. There is a movement towards a
closer analysis of all the aspects of logistics especially where selling and distribution
costs are high. The process of distributing products has been called different names such
as marketing, material management, logistics and physical distribution management.
Distribution is a positive factor in contributing to profitability thorough its impact on
customer service.
The idea behind the logistics concept concerns systems and rejects ideas that each
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activity should optimize its own set of logistics disregarding others in the flow of
material. Looking at the concept from a total view point may indicate that some parts of
the system operate at less than optimum to make the whole system more effective. For
example the production manager makes short runs and the transport manager more
frequent deliveries to benefit the total logistics system. Acceptance of the logistics
process implies recognition that an action affecting one part affects all others.
Logistics Mix
Customers want products available at the right time, in the right size and in perfect
condition. Several decisions have to be coordinated to make this possible. These include
 Facility decisions – number of warehouses and location
 Inventory decisions – how much stock to be held, where and when frequency of
replenishment.
 Transport decision – mode of transport and scheduling deliveries
 Communication decisions – order processing and invoicing system
 Utilization decisions – the way goods are packaged – incorporation into larger
unit size.
The main channels of distribution range from direct channels which involve only the
manufacturer and the consumer and no middlemen, to more complex ones involving
agents, wholesalers and retailers as middlemen. The channel of distributing put into
use depends on a few factors such as;
 Nature of the product; For industrial products outlets are fewer and there is no
need for a large sales force, while for consumer goods, retail outlets are necessary.
 Financial position of the manufacturer; the fewer the organizations in the chain of
distribution, the smaller the financial burden on the manufacturer.
 Variety of products to be sold. A wide variety of products to be sold may
necessitate numerous channels to be put into use.
Warehousing
These are buildings used to store the finished products and may be centralized or
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decentralized. They are therefore used to hold goods between production, break bulk,
reduce transport costs and have a quick constant supply to consumers.
Transportation
This ensures the delivery of products to the consumers, however a suitable mode of
transportation has to be selected so that products reach the consumer on time, in good
condition and with minimum costs.
Own transport
If it is a large scale firm selling to industrial users or its own retailers it may prefer to
make use of its own transport. They may consider costs of maintaining the vehicles and
the planning of work for the efficient employment of vehicles.
Outside transport
Outside transport may include; the water, ocean, air, rail, pipeline or motor carrier.
Water (Ocean) Shipping

One could choose from a variety of ocean carriers the most common being container
ships cargo vessel and the roll-one roll-off vessels. The only major problem of ocean
shipping is the limitation caused by lack of ports and port services.
Air Shipping
Most countries have air ports but air transport is very expensive. It is therefore used for
products that must reach the destination very quickly and are of high value.
Rail Transport
Rail transport is useful for bulky products within a country or across countries, especially
in connecting seaports by land.
Motor Carriers:
These are registered transporters which, along with rail transport.
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Pipeline Transport,
Pipeline transport is rare, but is useful for underground transportation of petroleum
products – it could also be used for other liquid products like milk and beer.
Choice criteria for a mode of transport

In deciding upon the transport mode to be used the following need to be taken into
consideration:
Time: The speed necessary for transportation of the goods is very important. Perishable
goods need to be transported by means of a very fast mode of transport.
Questions such as how quickly is delivery needed help in deciding upon the mode of
transport.
Reliability: Both air and water transports are reliable though nature could charge that.
Reliability is very important especially in air transport where the difference of a day
could significantly influence the salability of a product.
Cost: Expense is a major consideration. The mode of transport should be chosen when
the cost is economically justifiable.
Packaging and the Nature of the products: This determines the mode of transport as
the product should arrive at its destination undamaged. For this to be possible a special
type of transport may have to be employed.
Storage: At the destination, goods may have to be stored before being moved to their
final destinations. One may have to decide whether to invest in warehouse facilities or to
ship goods only when they are need thus eliminating the warehouse function.
Logistics therefore incorporates the flow of information and materials into, through and
out of the production system.
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Activity
Visit the yellow pages of a telephone directory and identify the main
transport agents listed therein. Identify the main features of
transporters.
11.9. Productivity in Organizations

Production is very important in any organization because it leads to the addition of
something of value to the organization. Managers should concern themselves with the
critical issue of how best to allocate the scarce organizational resources for maximum
productivity.
Productivity may be seen from four main points of view. First, there is the national
reference point of view, in which the concern in productivity of all firms in a country. It
points out to the complex interplay of all factors such as land, labour, capital, raw
materials, and so forth. The second view is productivity in industries which isolates the
factors that relate to specific industries such as petroleum, education, health care and
transportation. The third view is the individual firm or organization. Specific factors
affecting each industry are assessed. Examples include man hours, firm profitability, and
return on investment. Finally we have the individual worker. The productivity of an
individual is affected by the work environment and the available tools, processes, and
equipment.
Performance is assessed by accomplishing a set of results, and without this set of results,
there is no productivity. Productivity is a combination of effectiveness and efficiency.
Effectiveness is related to performance, and efficiency to resource utilization.
Productivity thus aims at achieving the highest results possible while consuming the least
amount of resources. We can thus assess productivity by expressing output
(effectiveness) as a ration of input (efficiency). This gives productivity index.
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Productivity Index = Output obtained = Effectiveness

Input expended Efficiency
This requires that both output and input are measurable.

Organizations experience many frustrations related to productivity. For instance, shortage
of funds, staff layoffs, strikes and hiring freezes all make firms unable to attain the
desired productivity level.
The management faces a major challenge in trying to cope with these frustrations.
Today’s productivity differs from the traditional one in three main ways.
1. Workers are different: Their attitude, needs, wants and personal goods are all
changing. Workers are placing a higher value on themselves than they formally
did. Management needs to design jobs in such a way that they are challenging to
the workers so as to boost their morale for increased productivity. Redesigning of
jobs is now a major challenge for management as workers become more
demanding for quality of work life; social justice, and higher standards of living.
2. New and changing technology: As technology advances, its impacts on

established methods, procedures and processes are disruptive. Use of appropriate
technology leads to increased productivity. Technology can provide completely
new ways and methods of doing work and can save the resources used in doing it.
It provides the potential for new gains and breakthroughs. The production
manager must concern himself with how well technological resources, equipment
and facilities can be used to further productivity at reduced production costs.
3. Accountability: Today’s labour force demands greater accountability from

management than before the traditional belief that management is solely
responsible for productivity is changing, and today, it is accepted that productivity
is no longer the sole responsibility of management. As workers demand a higher
quality of work life, they must accept, along with management, the responsibility
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for the consequences of their demands. The responsibility for productivity must
be distributed to all parts of the economy – educators, workers, public officials,
union leaders, government employees, consumers and so forth. Workers
themselves must stop wasteful ways of doing work, and realize that the waste they
see and experience will affect their pay package.
11.10. Organizational Trends in Productivity

Productivity today is affected by many factors which have led to a decline of productivity
in many organizations. These include:
1. Waste of resources due to our inability to measure, evaluate and manage

productivity of a growing white-collar workforce. Measurement of productivity
especially for service institutions, such as educational institutions and hospitals is
difficult. This has led to losses as many of these services cannot be evaluated easily.
2. Inequitable rewards and benefits to workers without matching the rewards to
productivity and accountability.
3. Delays and time lags as a result of inefficiencies in complex super-organizations.
It is always very difficult to plan, execute and coordinate processes in large
organizations without big time lags.
4. Low motivation prevails among a rising number of affluent workers with new
attitudes. The traditional ways of motivating workers do not seem to make impact
any more, and a new work ethic with attending attitudes and motivators must be
developed if productivity is to be gained from the affluent.
5. Unresolved human conflicts and difficulties in cooperation result in organization
ineffectiveness. The process of setting goals and driving towards them results in
minor and major conflicts among managers, supervisor and employees. When these
conflicts are severe, unity of action is seriously disrupted.
6. Dissatisfying and boring work has resulted from specialized and restrictive work
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processes. Too much of specialization results in boredomness among workers, with

dissatisfaction and discontent. Redesigning jobs with new work formats can be a
significant factor in eliminating boredom. Work enriching approaches and job
redesigns can bring out significant steps in productivity improvement.
7. Practitioners become obsolete because of their inability to keep pace with
accelerating information and knowledge. Information technology is changing so
rapidly that it becomes difficult for the ‘old guards’ to keep pace. Formerly, workers
could acquire specific skills based on definable attitudes and prescribed knowledge
that could be used for their entire work lines. Today the attitudes and
knowledgebase is continuously changing causing the process of skill formation to
be difficult and incoherent.
Improving Productivity
To improve productivity, management needs to devise appropriate techniques of
managing and motivating the various categories of workers. The management should
have a carefully worked out statement of productivity objective. These objectives must be
clear, and its focus must be understandable.
Work is viewed as a process, and therefore to make work more productive

requires building the appropriate controls into the process of work. Specifically,
the process of production needs built-in controls in respect to its directions, its quality, its
quantity, its standards, and its efficiency”. This follows six
steps:
1. Identify potential productivity areas
2. Quantity productivity level desired
3. Specify a measurable productivity objective
4. Develops a plan for attaining objectives
5. Establish controls for measuring progress
6. Evaluate productivity reached
1) Potential areas for productivity improvement: Management need to identify
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potential areas where improvement is needed for survival, growth, or budget

justification. Management should assess the operations performed by individuals,
responsibilities of the employees, problems encountered, the traditional ways in
doing things, and the opportunities available to the organization.
2) Quantifying productivity level. The desired productivity should be quantified for

all the potential areas identified, and productivity ratio for measurement
established.
3) Measurable productivity improvement objective. Those concerned with carrying

out the task need to specify their objective as a commitment in performances, and
share the statement with management. Accountability for the achievement of the
objective is identified in this step, and the immediate supervisor agrees to the
level and scope of accountability.
4) Develop plans for attaining the objective. Plans need to be developed to

implement completion of the commitment. The plan should include sufficient
detail of terms required to reach the objectives.
5) Establish controls for measuring progress. This sets up all activities and tasks on a
schedule to measure and report the status of and the progress made toward
completing the objective. Productivity level desired must be broken into
milestones, and feedback reports must be made to correct deviations.
6) Evaluate productivity reached. Evaluation of the entire performance process is

done to see the extent of attainment of the objectives. The results provide a basis
for accountability.
7) Finally, it is important to remember that unplanned productivity cannot help

management. It is therefore important to carefully plan the activities of the firm
and schedule the various activities in specific terms as to time and money. Time
has always been a limiting factor, and will continue to be so. Managers must
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therefore budget and schedule this resource property, for maximum productivity.
11.11. Summary
In this lecture, we have learnt that production management deals with
managing people and machines to provide goods, services and
systems to consumers in an efficient and economical manner. The
production manager must consider product development, the plant,
purchasing procedures, the manufacturing process, and the people
themselves. Proper management and coordination of these parts would
lead to efficient production for the firm. You have learnt that proper
controls in all areas of production such as process, materials, quality,
stores and inventories should be maintained.
SAQ
i. Discuss the main steps which a firm may follow to improve productivity
ii What are some of the trends in productivity in organizations?
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LECTURE 12
BUSINESS FINANCE
Lecture Content
12.1. Introduction
12.2. Objectives
12.3. Meaning of Business Finance
12.4. Role of Finance in Business
12.5. Objectives of Business Finance
12.6. Functions of a Finance Manager
12.7. Sources of Finance in Business
12.8. Shares
12.8.1. Meaning of a Share
12.8.2. Types of Shares
12.8.3. Kinds of Preference Shares
12.8.4. Equity Shares of Ordinary Shares
12.8.5. Different Shares of Management or
Founder Shares
12.9. Debentures
12.9.1. Kinds of Debentures
12.10. Factors Influencing the Methods and source of
Finance
12.11. Financial Analysis
12.11.1. Financial Statements
11.11.2. Financial Ratios
12.12. Financial Institutions
12.12.1. Purposes of Financial Institutions
12.12.2. Classification of Financial Institutions
12.13. The Stock Exchange
12.14. Summary
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12.1. Introduction
All business organizations need to obtain finance to start, operate, grow and maintain
their activities. Their survival or failure rests on how successful they have practiced
effective and efficient management of their finances.
Large enterprises operating in a competitive market have to mobilize and employ their
funds more judiciously to get maximum return from funds used by them.
Sound financial management must be exercised by all organizations including the private
sector and public sector regardless of their popular and laudable social intentions. The
taxpayers, general public, donor community and state officials are all demanding for
transparency and accountability in the use of funds. Several tools and techniques have
been developed to enable professionals in finance present a clear and correct statement of
affairs of Enterprises at any particular time that they are required.
In this lecture we shall discuss the role of finance in business organizations. We shall
also explain the various sources of finance that a business firm can get additional finance
or both operational and capital use.
12.2. Objectives
1. Explain the role of Finance in Business Organizations.
2. Identify the sources of business finance.
3. Select a source of finance for business operations.
4. Describe the operations of financial institutions.
5. Explain how financial decisions are formulated.
6. Explain the role and functions of the stock exchange.
12.3. Meaning of Business Finance

The term finance has been defined
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- As that administrative area or set of administrative functions in an

organization may have the means of carrying out its operations
efficiently and effectively.
- Finance includes those business activities which are concerned with the
acquisition and conservation of capital funds in meeting the financial
needs and overall objectives of business enterprise.
12.4. Role of Finance
Finance is an important area of management of any organization. This is so because the
effectiveness of any business enterprise will depend on sound management of funds. Its
main role is:
- Determination of the financial needs of the firm.
- Raising of funds at minimum cost.
- Making optimum allocation of funds to specific performance.
- Development of controls to evaluate the financial performance.
- Development of financial data for decision making.
12.5. Objectives of Business Finance

Objectives of Business Finance should be understood in the light of the overall objectives
of the organization. Finance objectives are as follows:
- Pay dividends – These are payments by the enterprise to the owners.

- Avoiding high level risk. A company should avoid high level risk
deals or investments to avoid failure.
- Maximization of profits – Finance function has to control costs to
maximize profits.
Intext Question
What is the role of finance in an economy?
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- Minimization of Risk - Business Finance Section has to seek such

sources of operations and actions which would avoid unnecessary risks.
- Maintenance Control – control measures have to be taken to safeguard
misuse of funds.
- Liquidity – a good enterprise has to maintain its liquidity position at all
times.
- Flexibility – Effective Management of funds enable an enterprise to
meet financial obligations in situations when cost of production is
unpredictable due to external forces.
- Profitability - This is where an organization has sufficient funds to
carry on its operations to yield long-term profits.
12.6. Functions of a Finance Manger

The following are the functions of a finance manager:
(a) Determination of the need for capital funds for the firm. He should forecast
the cash inflows and outflows of the firm, and estimate the financial needs.
(b) Coordinate with other top managers in the allocation of funds among
various assets.
(c) Raising of financial resources through supplier’s credit, lease financing
loans from banks and other financial institutions, issue of ordinary and
preferred shares etc.
(d) Dividend decisions – decisions regarding payment of surplus by the
company to its shareholders or owners of the company.
(e) Financial planning and control – preparation of budgets, cash flow
statement, profit and loss account and balance sheet.
(f) Routine functions – receipt and disbursement of cash, maintenance of
financial records, preparation of financial statement, negotiation with banks
and other financial institutions on financial aspects of the firm.
12.7. Sources of Finance
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Source of finance means the various ways in which an organization obtains its
finance for its operations. The sources of finance may be in two broad
categories:-
Intext Question
What are the functions of a finance manager of a small firm?
(a) Sources of Finance for the public sector:

Business organizations in the public sector are financed by-
- General taxation given in form of Treasury grants.
- Borrowing from the Treasury.
- Retained surplus from operations of corporations.
- Locally raised income by the corporation from normal activities
or grants.
- Grants from Donor Agent.
- Borrowing from local and international financial institutions.
(b) Sources of Finance for the Private Sector:

Business organizations in the private sector principally sole traders,
partnerships, limited companies and co-operatives have the following
sources of finance available to them.
- Retained profits
- Selling assets which are no longer required.
- Trade Credit: This is credit offered by suppliers.
- Investing Surplus Cash – firms receive interest on their
investments.
- Reducing Stocks – to release cash tied up in such stock.
- Personal Savings or loans from friends and relatives.
- Financial institutions can give loans or mortgages.
- Finance houses can be used in leasing equipment.
- Overdrafts from commercial banks – these are short-term loans.
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- Factoring – firms can sell debts owed to them by customers to

organizations such as merchant banks to receive cash.
- Issue of shares – Public companies may sell shares to the general
public while private companies may sell shares privately.
- Issue of Debentures – a debenture is an acknowledgement of a debt
given under seal of the company.
Intext Question
Which are the best sources of finance available to a private school?
12.8. Shares
12.8.1 Meaning of a Share
A share is measured by a sum of money for the purposes of liability in the first
place and of dividend in the second but also consisting of a series of mutual
convenience entered into by all the shareholders internally. A share is evidenced
by a share certificate which is issued by the company under its common seal.
Shares of any member in a company are a moveable property, transferable in the
manner provided by the Articles of Association of the Company.
12.8.2. Type of Shares

Two main types of shares are authorized by the companies Act Cap 486 Laws of
Kenya viz: Preference shares and Equity or Ordinary shares. Preference shares
(Quasi Equity) preference shares are those shares which enjoy preferential rights
both with respect to dividends and with respect to prepayment of capital either
during the lifetime of the company or on winding up.
12.8.3 Kinds of Preference Shares
(a) Cumulative preference share, - dividend payable on these shares
accumulates till it is fully paid off. A share of this type has a right to
claim the fixed dividend of current year out of future profits.
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(b) Non-Cumulative preference shares. They get dividends as and when they
are declared only out of the profits of the current year.
(c) Participating preference shares – They share in surplus profits on top of
the fixed rate after the ordinary shares have got their first claim.
(d) Non participating preference shares – They only get a fixed rate of
dividends.
(e) Convertible preference shares – Members of these shares have a right to
convert them into equity shares within a certain period.
(f) Non convertible preference shares – They do not have a right to
conversion to equity shares.
(g) Redeemable preference shares – A company may be authorized by its
articles of association to issues of preference shares which are redeemable
or repaid after a certain fixed period of time but before a specified
maximum period of time.
(h) Non-Redeemable (irredeemable) preference shares. They constitute
permanent capital of the company. They are never redeemed by the
issuing company during its lifetime. They can only be paid back if the
company is facing liquidation.
12.8.4 Equity Shares of Ordinary Shares

Ordinary Shares means all shares which are not preference shares. They share in
residual amount of distributable net profits after all types of preference shares
have got their rights. Dividend on equity share is not fixed and will vary
according to the magnitude of available profit for distribution in the form of
dividends. Equity shares vote proportionate to the paid up amount on shares.
12.8.5 Differed Shares of Management or Founders Shares

Their right to share profits is postponed or deferred until all classes of shares
including a equity have been paid. They used to have extra-ordinary voting rights
and owners of such shares enjoy controlling voice in the management of a
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company. Their face value is usually, low but market value is usually high. In
profitable undertaking, they get huge dividends.
12.9. Debentures
A debenture is an acknowledgement of a debt given under the seal of the
company and containing a contract for the repayment of the principal sum at a
specified date and payment of interest at a fixed date and fixed rate. They are
issued like shares through a prospector.
12.9.1 Kind of Debenture
(a) Registered Debentures
They are those debentures that are payable to registered holders. Such
holders are one that their names appear both on debenture certificate and
register of debentures of a company.
(b) Bearer Debentures
These are debentures which a payable to bearer and regarded as
negotiable instrument. They can be transferred by mere delivery.
(c) Secured or Mortgaged Debentures
These are secured debentures by a charge on the assets of a company.
The charge may be fixed or floating.
(d) Simple Naked or Unsecured Debentures
These are debentures that do not have a charge on the assets of a company.
The holders of such debentures can only use the company like ordinary
creditor to recover debt owed to them.
(e) Redeemable Debentures
These are debentures that are issued on the condition that they shall be
redeemed after a certain period of time.
(f) Non (irredeemable) Debentures
These are debentures that are not repayable during the life-time of a
company goes into liquidation then they become redeemable. They are
also called perpetual debentures.
(g) Convertible Debentures
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These are debentures that have an option of being converted into

preference of ordinary shares at a stated rate of exchange after a certain
period of time.
(h) Non-Convertible Debentures
These are debentures that do not have an option of being converted into
shares.
12.10. Factors Influencing the Method and Source of Finance

A number of factors exist to influence the method of raising finance for an
organization. Some of these factors include:
(a) Nature of the project:
This may determine the source of finance. A long-term project would
need more funds to be provided at a particular point in time. Such projects
are better financed by long-term loan or issue of shares while short-term
project may be financed by bank overdrafts.
(b) Nature of Business
Some methods and sources are only suitable or available to certain
forms of business.
(c) Degree of Risk Involved:
Business enterprises in high risk areas may not be attractive to commercial
banks. Their cost of finance may also be high due to high interest rate
charged.
Intext Question
What are debentures?
12.11. Financial Analysis
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Financial analysis is the process of the determination of the important operative

and financial characteristics of a firm from the accounting data. It makes use of
financial statement and financial ratio
12.11.1. Financial Statements

Balance sheet is concerned with presenting a statement of assets, capital and
liabilities
Current assets include cash and money in the bank together with near cash assets
such as stock in hand debtors.
Current liabilities are amounts owed by the firm which have to be paid in the near
future.
Share capital is the total value of the investment made by various shareholders.
12.11.2. Financial Ratios

A financial ratio is simply one accounting figure expressed in the terms of other
accounting figures.
(a) The purposes of Ratios are:
- Used as an aid to interpret performance of an enterprise over a
defined period of time.
- To help in evaluation of a firm’s historical and future trend analysis.
- To help in prediction of future performance, growth and financial
position of an enterprise.
(b) Classification of Ratios:
o Profitability ratios
o Liquidity ratios
o Activity ratios
o Market ratios
(i) Profitability Ratios
- Return on Total Assets:
= Profits before interest and tax x 100
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Total assets or capital employed

- Return on Fixed Assets
= Profits before Interest and Tax x 100
Total of Fixed Assets
- Return on Shareholders Equity:
= Profits after interest and tax x 100
Shareholders Funds
- Earning per Share:
= Earning after interest and tax less preference dividend
No. of ordinary shares issued and outstanding
- Price earning Ratio:
= Market price
Earning per share
(ii) Liquidity Ratios

- Current Ratio:
= Current assets
Current liabilities
- Quick asset/liquid ratio:
= Current assets – stocks
Current liabilities
- Acid test/cash ratio = Cash + Bank
Current liabilities
(iii) Solvency Ratios
- Debt equity ratio
= Long-term debit x 100
Equity capital
- Debt ratio
= Total liabilities x 100
Total assets
- Interest cover
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= Earning before interest and tax
Interest payable
(iv) Efficiency (or Activity) Ratios

- Total Asset Turnover Ratio
= Sales
Total assets
- Net Asset Turnover
= Sales
Total assets – current liabilities
- Fixed Asset Turnover
= Sales
Fixed assets
Debtors Turnover = Sales
Debtors
- Stock Turnover = Cost of Sales
Stock
- Average Collection Period = Debtors x 365
Credit sales
- Average Payment Period = Creditors x 365
Credit purchases
(v) Market or Investment Ratios

The following ratios are classified as falling under market or investment
ratios. The ratios and how they are calculated is as given below:
Yield Ratios
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- Dividend Yield = Dividend paid x 100

Market price
Interest yield = Interest paid x 100
Market value
Redemption Yield = Dividend paid + No. of Years to Maturity x 100
Market value of the security
Earning Yield = Earning per Share x 100

Market value per share
Price earnings ratio = Market Price
Earning per share
Dividend cover = Earning after interest and tax
Dividend paid
(c) Limitations of Financial Ratios

- The figure used in arriving at ratios are derived from accounts based on
historical cost and other accounting conventions with all their
deficiencies, inconsistencies and arbitrariness.
- Published accounts reveal only a minimum of relevant information.
- Different ratios may give conflicting messages.
- Impact of inflation may produce misleading signals.
- Changes in accounting policies such as stock valuation, post balance
sheet events and depreciation may make purpose of ratio analysis
meaningless or misleading.
Intext Question
What are the purposes of financial ratios?
12.12. Financial Institutions:
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A financial institution may be described as any institution which operates in the

financial market and engaged in the transfer of financial securities.
12.12.1. Purposes of Financial Institutions:

- Intermediation – They act as intermediaries in the system allowing
interaction between savers and borrowers.
- Provision of securities – they provide financial securities.
- Takes over the burden of risk bearing from those who have surplus to
lend.
- Provide faster transfer of funds.
12.12.2. Classification of Financial Institutions:

(a) Commercial Banks
A commercial bank is any company carrying out banking business in
Kenya. Banking business involves taking deposits of money from the
public repayable on demand or after notice and employing these deposits in
whole or in a part by lending. Commercial banks are regulated to the
Banking Act and the Central Bank of Kenya.
(b) Non Bank Financial Institution

 Finance houses
 Building societies
 Insurance companies
 Post office savings bank
 Merchant banks
 Savings and credit co-operative societies
 Hire purchase companies
 Development finance companies
 Micro finance institutions
12.13. The Stock Exchange Market
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A Stock Exchange Market consists of primary market and secondary market.

(a) Primary Market
This is a market where new issue of shares or stock are traded. It is a
market where securities which are being issued for the first time are offered.
(b) Secondary Market

It is a market for the transfer of already outstanding shares. Shares traded
on the secondary market are referred to as second hand shares and they
are merely changing hands between investors.
12.13.1 Quotation
A company is said to be quoted when its name is listed on the stock exchange and
the prices of its shares are regularly published or quoted by the stock exchange.
12.13.2 Benefit of Quotation:

- A company receives a certain amount of free advertising and
publicity.
- A company is aware of the market value of its shares.
- It is easier to raise more capital by issue of securities since
investors will respond more favourably.
- Shareholders will find a ready market for the transfer of their
shares.
- Shares are negotiable and easily acceptable as security.
- It protects investors through rules and discipline.
- International dealing may be effected through stock exchange.
12.13.3 Functions of Stock Exchange

The stock Exchange performs the following essential functions in an economy.
- Determines and test values of securities.
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- Facilitates investment process by increasing the Liquidity of

Investment Securities.
- Help in channelling large part of savings in an economy.
- Publishes useful information about companies.
- Acts as a watchdog to the investors by keeping an eye on the quoted
companies.
- Stock exchange acts as a barometer indicating the performance of an
economy.
- Provides a medium of exchange or transfer of securities.
12.14 Summary
Money, which has been called the life livelihood of an
organization, is required by all firms whether in public or private
sector. In this lecture we have learnt that there are many sources
of finance available to a business organization. These include
retained profits, selling of assets, trade credit, loans from
financial institutions and issues of shares and debentures through
the stock exchange. A stock exchange brings together sellers of
capital and buyers of that capital. We have also learnt that
financial institutions act as intermediaries that allow interaction
between savers and borrowers. Performance of a business
organization is evaluated through the use of financial ratios.
This is done to predict future performance, growth and
understand the current financial position of an organization.
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Activity
Self Assessment Questions (SAQ)
1. Discuss the various sources of finance of a joint stock
company.
2. What is the meaning of share? Explain the various kinds of
preference shares.
3. Explain the meaning of debenture.
4. What factors determine the source and method of finance?
5. Name four institutions through which a company can obtain
long-term finance.
LECTURE THIRTEEN
INTERNATIONAL BUSINESS
Lecture Content
13.1. Introduction
13.2. Objectives
13.3. Meaning of International Business
13.4. Reasons why Firms go International
13.5. Forms of International Business
13.6. Practices in International Trade
13.7. Ways of Entering International Trade
13.8. Barriers to International Trade
13.9. Government Policies and Restrictions of
International Trade
13.10. Effects of Trade Restrictions
13.11. Multinational Corporations
13.12. Summary
13.1 Introduction
In the previous lecture, you learnt about business finance, and by now you know that
firms need to identify viable sources of funds, not only for their survival, but for
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profitability. Perhaps a firm might find that it is limited in its business activities locally,
and wish to look beyond the country’s boundaries for expanded business prospects. This
lecture introduces you to international business, or simply international marketing,
sometimes also called international trade. You are going to know some of the reasons
why firms may want to turn global, and the challenges that exist in international
marketing.
13.2. Objectives
By the end of this lecture, you should be able to:
2. State the meaning of international business
3. Differentiate between international business and
domestic business.
4. Discuss the reasons why firms go international
5. Describe the common barriers to international trade.
6. Differentiate between the various forms of
international business
7. Discuss the government controls of international
trade
13.2.Meaning of International Business

International Business may be defined as any business activities that take place across
national boundaries. This includes international trade, foreign manufacturing and service
business. It may also be defined as … any business activity carried out across national
borders by business firms in pursuit of their stated aims and objectives.
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International marketing is defined as “performance of one or more of those activities

which direct the flow of goods or services across national boundaries”.
It may also be defined as the performance of those activities that direct the flow of goods
from one country to another country. It involves the marketing of goods and services
outside an organization’s home country. From the definitions given, it is clear that
international business, international trade, and international marketing are often used
interchangeably and refer to the same business practices. To be able to understand
international marketing, we need to define the various terminologies which have aspects
of cross border trading. Examples of these terminologies are:-
(a) Domestic marketing

This involves marketing within the home country. It may be done consciously as a
strategic choice or unconsciously in order to avoid the challenge of learning how to
market outside the home country.
(b) Export marketing

This is the stage towards addressing market opportunities outside the home country. The
marketer relies upon the home country production to supply products for outside
countries.
(c) International marketing

The international marketer goes beyond the export and becomes more involved in the
marketing environment in the countries in which the company is doing business. He is
more likely to source for products outside the home country in order to gain greater
competitive advantage and also seeks to establish direct representation to coordinate
marketing effort, rather than rely on the intermediaries.
(d) Multinational marketing

This begins by focusing leverage on a company’s experience and productivity, and adapts
a company’s marketing to the unique needs and wants of customers in each country. It is
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complex form of international marketing that involves an organization engaged in

marketing operations in many foreign countries.
(e) Global /Transnational marketing

This focuses upon leveraging a country assets, experience and products globally and
upon adapting what is truly unique and different in each country. It recognizes cultural
universals and unique market differences. The arena in which international trade operates
is different from the one involving local trade, because of such factors as
- different political set ups
- differences in language
- trade restrictions such as tariffs, quotas and bans imposed by the foreign country
some of the reason that motivate a firm towards international trade include
13.4. Reasons Why Firms Go International

There are many reasons why firms go international. Some these include;
1. The need to export surplus stock – as a result of increased efficiency in
productivity, firms are able to produce excess goods, and therefore look for a
market abroad for the excess stock. As a rule, a country should satisfy its local
demand before turning to international trade.
2. To earn foreign exchange. A country encourages firms to engage in international
trade so that it can earn foreign exchange Kenya for example exports tea and
coffee foreign exchange. Tourism is also very important foreign exchange earner
in Kenya.
3. To get goods not produced locally. There are instances when a country may not
be able to produce certain commodities. For example, Kenya imports crude oil
and heavy machinery from other counties.
4. To get rid of goods not required locally. A country may also produce good not
required locally, mainly for export markets. Kenya for example produces cut
flowers and Asian vegetables mainly for export markets.
5. To get technology not available locally. Through international trade a country is
able to acquire technology that it does not have. Kenya has benefited heavily
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especially in the area of telecommunications – acquisition of mobile phones

towards the end of the last millennium.
6. To foster friendly relations with other countries. International trade enables
countries to maintain friendly relations with one another.
Sometimes countries engage in international trade for political reasons to minimize

chances of conflicts as countries engage in trade.
Activity
Compare a company specializing in domestic and one
specializing in foreign trade. What are the advantages and
disadvantages of both?
Economic reasons for international trade

There are two generally accepted principles to explain the main basis for international
trade. These are:-
a. The Theory of absolute advantage

This states that each country would benefit from world trade if it specializes in the
production of those goods in which it has an absolute advantage. Kenya, for example
is able to produce and export cash crops such as tea, coffee and pyrethrum.
The theory of absolute advantage was developed by Adam Smith and holds that
countries can produce some goods more efficiently than others. It may arise due to
differences in factors such as climate, quality of land, natural resources, labour,
capital, technology or entrepreneurship countries should therefore specific in the
production of therefore specialize in the production of those products in which they
are best at, and import the others. However, this principle is not widely used as it
encourages dependence of countries among others, and may be risky in times of war.
b. The theory of comparative advantage
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This is based on the fact that whereas a country may be able to produce many
different products, there are some products in which it has a comparative advantage
over other countries. It should therefore produce these for export, while still not
ignoring the others.
The theory of comparative advantage was developed by David Ricardo in the 19 th

century and springs from the theory of absolute advantage developed by Adam Smith.
It states that nations should produce there goods for which they have the greatest
relatives advantage. The figure below shows how this works.
Labour cost of production per unit

Wheat Clothing
Country A 100 50
Country B 200 200
From the figure, country A has an absolute advantage in the production of both
clothing and wheat. It would seem that trade for this country is unprofitable, as it can
produce both products without trading with B. However, the theory of comparative
advantage holds that the two countries can still trade, since the relative costs of
production for the two countries differ. In country A, one unit of clothing costs
50/100 units of wheat, so that one unit of clothing is exchanged for 0.5 unit of wheat
[price of clothing is half the price of wheat]. In country B, one unit of clothing is
exchanged for one unit of clothing.
Thus country A can export clothing to country B, since it has relative advantage for
the commodity while country B should export wheat to country A. In this case,
country A could specialize with the production of clothing, while country B could
specialize with the production of wheat.
13.5. Forms of International Business

International business is carried out in different forms so as to accommodate the
different types of goods and services involved in a transaction and the different types
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of transactions that take place. This may differ from country to country. The forms
of international business are discussed below in detail;
Counter-trade may be defined as “…all intentional trade in which goods are

exchanged for goods…” It comes in the following forms:
 Counter purchase – In this case, exporters agree to buy a certain amount of
goods from a country whenever the country buys from them.
 Offset – this is where the seller guarantees to use the goods from the buyer’s
country of the product he is selling.
 Buy back – exporters of capital goods (e.g. mining equipment) agree to be
repaid in the output produced by the machinery.
 Barter – a swap of one good for another.
 Switch trading – this is barter trade involving a chain of buyers. A certain
company (Z) may counter trade with another company. Z may not want the
goods and thus sell the contract to another company at a discount. This
company may also not want and sell it to yet another company for a profit.
Export Documentation
Before a company can export goods, legislation must be followed, documents signed and
other requirements fulfilled. They include:
Bill of Lading: This is used when goods are shipped. It records the contract between the
shipper and exporter. It also enables the buyer to claim the goods. Information found on
it include; Serial number, name of the shipping company, name of the ship, Port of
loading, and, Port of unloading. Other details are ;Final destination, description of the
goods, number of separate cases, weights, dimensions and markings, name and address of
exporter and name and address of consignee or organization to be contacted when the
goods arrive.
Airway bill: Used for goods sent by air. The goods are consigned under it. It is also
called an air consignment note. It is merely a receipt that acts as evidence of a contract of
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carriage. It is used to control the progress of the goods and identify them through their
journey.
Road Waybill/Railway Consignment Note: This is the equivalent of the airway bill
when goods re transported by road or rail.
Commercial Invoice: This is an invoice prepared for dispatch to the buyer as a claim for
payment. Additional copies have to be produced for use by customs authorities at the
exporting and importing ends. The invoice contains such information as; Name and
address of supplier, name and address of buyer, date of invoice, the buyer’s reference,
method of carriage, order number, name of ship or air freight details and loading and
dispatching ports. It also shows net and gross weights of packages, contents and value of
each package, total value of invoice, terms of sale, and remittance instructions.
Pacing List: This is the document that indicates the goods in each package, number and
the marks. It facilitates customs inspection.
Consular invoice: It is an invoice dictated by the government of the importing country.

It is obtained in the consulate of the country concerned. It enables duty to be assessed
according to revenue laws of the importing country.
Certificate of Origin
In this document, the exporter declares the origin of the goods. It is usually issued by the
Chamber of Commerce or certified by the consular authorities of the importing country.
Certificate of Insurance: Insurance cover should be obtained by the exporter for all
stages of the transportation of the goods. It must not have the same date as the bill of
lading or airway bill or other documents and is sent to the buyer with the other shipping
documents.
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The letter of Credit: It consists of an undertaking by the bank, on behalf of its client, to
a third party stating that it will honour the requirements placed in the letter itself. This
letter has value both to the buyer and the seller.
13.6. Practices in International Trade

This section deals with the different practices that are carried out as apart of execution of
transactions in International Business. The more important types are outlined below:
a) Merchandise Imports and Exports: Exporting goods – this is where a local
business or government man sells products to a foreign country or government.
Importing goods – in this case, a local business buys goods from a foreign firm in another
country.
b) Service Imports and Exports: Importing Services – this is a situation where
services are bought from companies in foreign countries e.g. when a passenger flies to
France using KLM or British airways.
Exporting Services – when a country sells insurance, transportation, management
consulting, etc, to another country, this is an example of exporting services.
c) Licensing agreement: A foreign company may be licensed by a local firm to use
its trademarks, patents, manufacturing process or other knowledge. Royalty (a
percentage of the sales) is paid to the local firm (licensee). Example Colgate and Close –
up are manufactured in Kenya under license.
d) Management Contracts: This is an arrangement under which a company
provides managerial know-how to another organization for a fee. These contracts last a
definite period of time. Many US airlines and hotels have made such contracts.
e) Franchising: This is a form of licensing that is quickly growing. A franchisee is
a person granted the right to do business sunder a certain trademark or trade name in a
certain territory. Examples in Kenya include, Wimpy, Nandos and so on. The
Franchisee and his employees are usually given management and technical training, and
sometimes, financial assistance.
f) Contract Manufacturing: In this case, a foreign company enters into contract
with qualified local manufacturers and produce goods according to its specifications.
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The foreign corporations or bonds issued by public or private organizations in foreign

countries.
h) Turnkey projects: This is when a firm starts business in foreign country from
scratch in another country. The foreign firm there runs it for a while, then when all is
settled, local personnel is hired to continue with the operations.
13.7. Ways of Entering International Trade

Different ways have been identified in which a business enterprise can penetrate a foreign
market and begin participating in international trade. The options that can be considered
are:
1. Export from Home Base
If a company decides that exporting goods from the home country is how it will go
international, the following factors will be noted and will have to be taken into account.
 If the company is using bottles and cans as storage media the cost of transport will
rise. It must be noted that bottles and cans are bulky items to transport.
 If the good (e.g. drinks) is being exported to Europe, for example, it must meet
the European Union standards as concerns content, labeling and health and
environmental issues. A good example is that, recently, the European Union
wanted to ban the exporting of flowers from Kenya to Europe because the flowers
were said to be below the set standards. This would have been a big blow to the
Kenyan economy.
 The exporting country may be required to re-label the product for example, if it is
being exported to a non-English speaking country.
 There are risks involved in receiving payment in foreign currency especially if
there are fluctuations in the exchange rate.
Therefore, this means that there must be a market for the goods and the market
opportunities must exceed the extra costs of doing business abroad.
2. Set up an Export Agency
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This can be a good option assuming that a company has already acquired a significant
market share in the domestic market before doing business abroad. Agents are
appointed, who have some knowledge of the local market conditions and the
language, legal requirements and the best way to market the product.
Advantages of an export agent
 It is a cheap way of establishing a presence in a foreign market.
 It is faster than exporting goods from home base because the agent has the
necessary information on market conditions and legal requirements. It thus
takes a shorter time for a transaction to materialize.
 If a company later on decides to pull out of the market, the costs of
withdrawal are less.
 The terms and conditions of the overseas agent can be drawn up in such a way
extra sales will be a benefit to the company.
Disadvantages of an Export Agent
The agent may have other clientele and thus give lower priority to your product.
3. License the Product

This is an option that may be useful when the products being sold are to be manufactured
in the foreign country where they are to be sold. This involves setting up a licensing
agreement with another manufacturer. The foreign company may be licensed by a local
firm to use its trademarks, patents, manufacturing process or other knowledge in the
production of the good. The manufacturer would produce the good under license.
Advantages of licensing option
 All the risks associated with setting up a manufacturing plant in a foreign country
are avoided.
 All risks associated with the production process of the beverage, for example
would be borne by the licensee.
 The licensee pays a fee (royalty) for being allowed to manufacture the good under
license.
 All commercial risks associated with selling the product overseas are borne by the
licensee who’s in the foreign market.
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 Some agreements give the company that’s licensing its product a share in the
profits. However in this case, the risks are shared between the two companies.
Disadvantages of Licensing Option

 There may be losses if the licensee company fails to deliver the same quality of
goods as required.
 The formula of the product (f it is a soft drink) is supposed to be a secret. In this
licensing option, the formula has to be revealed to the licensee company. Once
this has happened it becomes to prevent other organizations from cloning the
product. Its originality will be lost. The competitive advantage of the company
will also be lost. The only way to avoid this is to take the risk and open up
manufacturing plants in the foreign country. The coca cola company, for this
reason, does not allow anyone else to produce its product.
4. Set up a Joint Venture or Strategic Alliance

A joint venture is an activity of any type performed by at least two firms form different
counties, in some type of partnership agreement. It is a more equal relationship between
companies than a licensing agreement. In a joint venture, both parties put equal money in
them and the rewards and risks are divided between the two or more companies. The
foreign company may have the majority shares or the local firm may be the dominant
partner. A strategic alliance may be formed with a supermarket that will exclusively sell
the products of the company.
Advantages of joint ventures and/or strategic alliance

 The two companies don’t have to set up another company. They only have to
agree to cooperate in areas of mutual benefit.
 A foreign company that enters into a partnership with the local company gets
‘political insurance’ cover.
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 When a strategic alliance is formed, the partners are operating in different stages
of the production process. This means that the company controls production
while the supermarket deals with the distribution. As a result, there is no need to
share information on how the product is made.
 There is an increase in the capital owned between the two companies.
 It is easier when in a joint venture to access the local market.
 There are lower taxes to be paid between two companies when they are in a joint
venture.
 When a foreign firm gets into a partnership with a local firm, the foreign firm is
advantaged as the local firm has better knowledge about the market conditions.
Disadvantage of joint ventures and/or strategic alliance

 In a joint venture, there is a risk of sharing the information on how the product is
made.
 Firms that enter into partnerships with the government or governmental
organizations may risk being nationalized (taken over by the government).
 There is a danger that the two companies entering into partnership may have
totally different long term plans or objectives.
5 Acquire or Merge with a Foreign Company

The need for control makes this option very attractive. This is a situation where two
companies merge and form a trade agreement to carry out trade together. There is mutual
benefit for the two companies involved.
Advantages of joint ventures and/or strategic alliance

 It is easier for the company to set up operations in the foreign country as the
facilities are already there. All that is needed are the necessary planning
permissions.
Disadvantages of joint ventures and/or strategic alliance
 The companies may have different cultures and it may be difficult for them to
work together harmoniously.
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 There may be a tendency to duplicate functions and for there to be hidden costs in
integrating two separate two systems.
 Foreign takeovers of national companies call the attention of the host counties
who are anxious to ensure national interests are taken care of.
6. Set up a Wholly-owned subsidiary

This is where the company sets up its own base in the foreign country.
Advantage of a wholly-owned subsidiary.
 The company retains complete control of all the aspects of the business.
 The company will increase competition in the foreign country’s market.
 There is an increase in the country concerned.
 The company will increase employment opportunities in the country concerned.
 The company will offer a greater choice to the consumers in the foreign country.
For these reasons, the company will be well welcomed by the host country and may even
be granted a generous financial package to set up business.
Activity
Identify at lest 5 manufacturing firms from the yellow pages of the
Postal telephone directory can you specify which ones are
multinational and which ones are domestic.
13.8. Barriers to International Trade

There are certain limitations which interfere with the extent to which a firm can perform
its marketing activities across national frontiers. These include;
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1. Political and Currency Instability. Some countries especially the developing

countries have very turbulent political environment which make it hard for
foreigners to invest in those countries. Examples include the political instability in
Somalia, Sierra Leone, Liberia, and Zaire. Invasion of white farms by formers
freedom fighters in Zimbabwe in there first half of 2000 is another example.
Currencies foremost third world countries are also rather unstable and weak
compared to the stronger currencies like the sterling pound, the US dollar, French
Mark and so forth. Some of the causes of instability among third world countries
include high foreign debt that requires high servicing costs, inflation and
unemployment.
2. Government regulations on foreign firms. These may include government’s
requirements that foreign firms enter into joint ownership with a domestic partner,
hiring national and limiting profits that can be shared.
3. National Controls. These are meant to protect infant industries from unfair
competition by outsiders. The government may impose heavy tariff duty on all
imported products, or license only a few firms to import. However, with
deregulation and liberalization the government role is set to be reduced.
4. Wage Protection
Trade restrictions, (e.g. high tariffs), make a country’s products competitive.
They thus sell their products well and the wages of the workers are secure.
However, this approach raises consumer prices and decreases exports.
5. Cultural Barriers. Different countries have different cultural values, and these
may inhibit international trade. A firm must first understand the cultural values of
the target consumers in the foreign country. Language is very important, as the
product must be marketed in a language that the foreigners can understand. It is
important for the firm to familiarize itself with the native language of the foreign
country, and also understand the customs of the people - how they live and do
things.
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Take note
In today’s most dynamic marketing world, it is very difficult for any
firm to survive by concentrating on the domestic market. This is
because even when the firm may appear to be succeeding, other
competitors will enter the market from outside the firm’s home
country and take up the local market, thereby driving the firm out of
business. There are many advantages that a firm can derive by trading
internationally, although there are also many shortcomings. The firm
must carefully weigh the options before turning international, and
find out how it benefits, and how it will deal with the challenges.
13.9. Government Policies and Restrictions of International Trade

International involves use of various government restrictions, such as tariffs, quotas, total
bans and the use of exchange control regulations, in order to limit the amount of goods
and services that can be freely exchanged between trading partners.
1. Tariffs
A tariff is a tax or duty that a government levies on a commodity or service when the
commodity /service is supplied across national boundaries. This is taxed in the form
of customs duty at all entry/exit points such as airports, railway terminals, road
terminals and ports. Tariffs levied on goods passing through the country are transits
duties, while those for commodities leaving the country are called export duties.
Those for commodities entering the country are import duties.
Import duties may either be;
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- Specific – levied according to quantity e.g. Shs 50 per Kg, and therefore remain
constants for a given consignment not varying with price. OR
- Ad Valorem – quoted as a fraction or percentage the value of the goods, and so
varies with the price of the consignment.
There are tariff schedules (list of the various charges) that guide the customs officers
in calculating the actual duty to be paid, and these take account of such trade
agreements North Atlantic Trade Organization (NATO), Preferential Trade
Agreement (PTA) and so forth.
2. Physical Controls
A Quota is a specific amount of a commodity that can be imported or exported, and is
usually fixed by the government. For example, the world market restricts the amount
of coffee that a country can export, in order to regulate the world prices of coffee.
Embargoes – severe form of quota which prohibit the flow of goods. They are given
for political reasons, for example, by refusing to buy goods from an enemy country;
or by refusing to trade with a country that is perceived to be violating human rights.
3. Restrictions related to foreign exchange

Exchange control regulations are laws or rules that a country enforces in order to
ration the limited foreign exchange available. For example, a country companies. This
helps to eliminate trade deficits, for example by refusing to license more current
imports than exports.
13.10. Effects of Trade Restrictions

Trade restrictions have both negative and positive effects in international trade.
The positive aspects include;
1. Protection of local (infant) industries. Sometimes it is possible for firms in
developed countries to produce products at lower production costs than those produced
by local firms in developing countries. Such firms, unless checked, will be able to bring
their products into the developing countries and sell them at lower prices than similar
products produced locally. This will kill the local firms as their products will not sell. The
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government therefore imposes heavy taxes on imported products in order to try and bring
the prices at par. Alternatively the government restricts the number of firs that are
licensed to important, as well as the total allowable import tonnage.
2. Protection against dumping- unless checked, some firm will export cheap, poor
quality products to unsuspecting third world countries. Some of these firms may even
export products that have been rejected in their own countries. The government therefore
has a duty to check against all these.
3. Price regulation. The restrictive measures assist in the regulation of prices for various
commodities that would otherwise have varied prices depending on where they are
imported from.
4. Wage Protection. Trade restrictions, (e.g. high tariffs), make a country’s products
competitive. They thus sell their products well and the wages of the workers are secure.
However, this approach raises consumer prices and decreases exports.
5. Cheap labour Argument. Cheap foreign imports are said to be destroying domestic
industries and hence lowering living standards. Trade barriers are thus necessary to
prevent low wage countries from flowing the markets of developed countries. For
example if it costs $16 an hour to employ a worker in the United States and $1 an hour to
employ a worker in China, free trade will threaten the prosperity of rich nations like the
United States.
6. Anti-Dumping argument. Trade restrictions are justified if goods are being dumped
on domestic markets by foreign imports. Selective intervention is recommended to
protect industries where “dumping’ is common.
7. Level playing field argument. This argument implies that if other countries have
protectionist measures then it is necessary to have the same for your own industries
otherwise the competition will be unfair.
8. Balance of Payments Argument. If a country is having a problem in its balance of
payments such that it cannot reconcile full employment with a balance of payments, it
may be forced to apply protectionist measures for its industries so that this balance may
be restored.
9. Health and safety standards. National health and safety standards for products and
services are applied to both imports and locally made goods. The process of verifying the
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items may be used as a barrier to entry. This ensures that only good quality goods enter
or are produced in a country.
The Negative Aspects are:-

1. Consumption Loss. This is the loss of welfare imposed on consumers as a result of
their inability to purchase a good at its world price due to the imposition of a tariff.
Tariffs, tariffs, as a result raise the price of a product whether it is imported or produced
locally.
2. Production Loss. This is also the loss of welfare but this time sustained by society as
a result of increased domestic production o f goods at a higher cost relative to the world
price due to the imposition of tariffs.
3. Survival of inefficient firms. This implies that a tariff kept in force for a long time,
may enable an inefficient business firm that would have been out of business a long time
ago will remain in business. As a result, resources may be prevented from transferring to
other industries in which the country has developed a comparative advantage.
4. Domestic Monopoly. A tariff may also result in the creation of a domestic monopoly
if foreign competitors are locked out. The monopoly may exploit consumers and allow
prices to rise unnecessarily.
5. Unproductive use of resources. When tariffs are enforced, resources need to be
diverted to this new task e.g. extra customs officials, and civil servants. Apart of the
tariff revenues accruing to the government will be spend on enforcement of the tariff.
This unproductive use of resources and increases the deadweight loss of the tariff.
13.11. Multinational Corporation

A multinational corporation may be defined as an organization that maintains multiple
units operating in multiple environments. It is a firm that owns, controls and manages
assets in more than one country. Multinational corporations (MNC’S) are also known as;
Multinational Enterprises (MNE), Multinational Firms (MNF) or Transnational
Corporations (in UN terminology). Multinational corporations are usually very large
organizations. The largest MNC’S are usually Japanese, American or European. The
ones based in developing countries have however growth in number and size in the last
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decades. Examples of MNC’s include:Toyota, Nestle foods, International Business

Machines (IBM), Microsoft Corporation, Bata Shoe Company and East African
Industries (Unilever)
Multinational Companies have leverage over single national companies, through business
practice and experience in different environments. The following are types of leverage
(or advantages) that have been identified.
1 Programme Transfers. A Multinational corporation can make use of strategies,
product, advertising, sales management and promotions ideas that have been found to be
effective and use them in other markets.
2 System Transfers. These corporations adopt systems that are successful in other
markets e.g. budgeting, planning, new product introduction, among others.
3 People Transfers. Skilled personnel are sent to other countries to work, and as a
result there is a large management pool of international, rather than national dimensions.
4 Scale Economies manufacturing. The Multinational Corporation can combine
components manufactured in scale efficient plants in different countries into finished
products other than having one single plant.
5 Economies of centralization of functional activities. Activities are concentrated
in one location to reduce costs instead of dispersing functional staff. This develops
greater competence.
6 Resource utilization. This deals with the ability of the Multinational Corporation
to identify sources of management, labour, money and materials that will enable it to
compete in world markets. The corporation has to scan the entire world.
7 Global Strategy. The multinational company looks for markets where it can
apply its skills, matches the market with resources and exploit the opportunities created.
Disadvantages of multinationals
1. They may be too powerful and suffer in a politically unstable world.
2. They may use their power too zealously to protect their interests. Example; it is alleged
that the International Telephone and Telegraph (ITT) company influenced American
foreign policy to help overthrow the existing Chilean government in the 1970’s as the
government wanted to take over the operations of ITT.
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3. Multinational Corporations are accused of moving investments from their home

country, where they are needed most.
4. A multinational can find its operations in a country nationalized with no compensation.
This is referred to as expropriation. Example, in Cuba, Fidel Castro’s government
nationalized American owned companies when it came into power.
5. The value of a multinational company’s investments decline if the currency in the host
country declines.
13.12 Summary
This lecture has exposed you to the many concepts of international
trade. It is now clear to you that there are many reasons why firms
may turn international. These include the need to export surplus
stock, the need to earn foreign exchange, and to get goods not locally
available. Other reasons are political, for example when a country
enters into trading partnership with another country just because they
are friends and wants to maintain good relations. Firms may turn
international either by exporting from the home base, setting up an
export agency, licensing a product, setting up joint ventures or
entering into mergers with foreign firms. You have also learnt that
there are many advantages and disadvantages of turning international.
The government plays a key role in regulating international trade
through such regulations as tariffs, subsidies and quotas. Firms
involved in international trade face such barriers as political and
currency instability, cultural barriers and national controls.
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Activity
Make a list of 20 major firms you know if in Kenya, and their main
products. Can you identify which ones are multinational and which
are not? Confirm your answer by checking in various directories such
as the Kenya Association of manufacturers as the Nation Business
Directory.
Intext Question
i. Discuss the Advantages of International Trade.
ii. Argue for and against government regulation of international
trade.
iii. Discuss the various ways by which firms go international.
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References
Faculty of Commerce(edited by Prof Francis N. Kibera), Introduction to

Business, PP. 10-31.

Business, PP. 41-55.
Business pp56-66.
Business pp 82-114
Blunt O. P. (1990): Personnel Management in Africa. London, Longman.

Cravens, D.W. (19996), Marketing Management
A.I.T.B.S Publishers & Distributors (INDIA).
Kibera, F.N. Eds. (1996): Introduction to Business: A Kenyan Perspective.
Nairobi: Kenya Literature Bureau
Introduction to Business, PP. 186 – 123, Kibera, F.N. (ed) (1996).
Keegan, W. J, 1995; Global Marketing Management. Prentice-Hall Inc. 5 th ed.
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lOMoARcPSD|35398658

Introduction To Business (University of Nairobi)

Studocu is not sponsored or endorsed by any college or university

FOR OPEN AND DISTANCE LEARNING

DBA 101: INTRODUCTION TO BUSINESS

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Lecture series: DBA 101 – Introduction to Business

Published by University of Nairobi, P. O. Box 30197, Nairobi, Kenya

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Table of Contents ……………………………………………… iii

LECTURE 1: Introduction and General Overview of Business… 1

LECTURE 2: Business Environment …………………… 20

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2.7.3. Arguments against Social Responsibility ………… 28

LECTURE 3: Forms of Business Organizations …………… 31

LECTURE 4: Public Business Enterprises

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4.9. Privatization ……………………………………………. 73

LECTURE 5: Small Business Management ……………… 76

LECTURE 6: Principles of Management ………………… 88

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LECTURE 7: Human Resource Management ………… 105

LECTURE 8: Labour Relations ……………………… 114

LECTURE 9: Organization and Organization Structures… 126

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9.6. Organization Structures ……………………………… 134

LECTURE 10: Fundamentals of Marketing ………… 148

LECTURE 11: Product Management …………… 166

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11.5. Product Planning …………………………… 170

LECTURE 12: Business Finance ………………………… 185

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LECTURE 13: International Business ………………… 201

GENERAL REFERENCES …………………………………… 223

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Welcome to this Course Unit in your Bachelor of Commerce Degree Programme by

Principles of Management, Human Resource Management and Production Management

In this course unit you will be assessed as follows:-

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COURSE GENERAL OBJECTIVES

This is an introductory course to the study of business with an integrated approach to

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1.4. Characteristics of Business

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always involves a certain amount of risk and uncertainty of return to the

1.5. Objectives of Business Organizations

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(g) To double its output of new products.

1.6. Scope and Nature of Business

(b) Commerce (including trade). Industry is concerned with the production of

(a) Industry. This embraces the processes of extraction, production, conversion,

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1.7. Types of industry.

1.7.1. Primary Industry

1.7.2. Secondary Industries