INTRODUCTIONTOBUSINESSSTUDIES

INTRODUCTIONTOBUSINESSCONCEPTS

Whatisbusiness?
AccordingtoBooneandKurtz(2003)businessconsistsofallprofit-
seekingactivitiesandenterprisesthatprovidegoodsandservicesnecessarytoaneconomicsystem,ofcou
rseataprofit.Theprofitismadeonbehalfoftheowner(SymonsandAdams1993).Businessprovidespeop
lewithfood,clothing,housing,medicalcareandtransportandalmosteverythingelsethatmakeslifeeasie
randbetter.Therearebusinessesthatwillproducegoodssuchasautomobiles(Toyota),breakfastcereals(
proctor&Gamble),computers(dell),cookingoil(Bidco)otherswillprovideservicessuchasinsurance(
Madison,BlueShield),bankingservices(KCB,Equity),carrental(KenatcoandAvis).
Abusinessisalegallyrecognizedorganizationdesignedtoprovidegoodsand/
orservicestoconsumers.Businessesarepredominantincapitalisteconomies,mostbeingprivatelyowne
dandformedtoearnprofitthatwillincreasethewealthofitsownersandgrowthebusinessitself.Theowner
sandoperatorsofabusinesshaveasoneoftheirmainobjectivesthereceiptorgenerationoffinancialreturn
sinexchangeforworkandacceptanceofrisk.Notableexceptionsincludecooperativeenterprisesandstat
e-ownedenterprises.Socialistsystemsinvolvegovernmentagencies,publicownership,state-
ownershipordirectworkerownershipofenterprisesandassetsthatwouldberunasbusinessesinacapitali
steconomy.Thedistinctionbetweentheseinstitutionsandabusinessisthatsocialistinstitutionsoftenhav
ealternativeoradditionalgoalsasidefrommaximizingorturningaprofit.
Theterm"business"hasatleastthreeusages,dependingonthescope—
thesingularusage(above)tomeanaparticularcompanyorcorporation,thegeneralizedusagetorefertoap
articularmarketsector,suchas"themusicbusiness"andcompoundformssuchasagribusiness,orthebroa
destmeaningtoincludeallactivitybythecommunityofsuppliersofgoodsandservices.
BusinessStudies,thestudyofthemanagementofindividualstomaintaincollectiveproductivitytoacco
mplishparticularcreativeandproductivegoals(usuallytogenerateprofit),istaughtasanacademicsubje
ctinmanyschools.
Profitrepresenttherewardsthatbusinesspeoplewhohavetakentheriskinstartingandrunningtheentity.
Thismaybedifferentfromaccountantthoughtofprofit-
differencebetweenthefirm’srevenueandexpenditures.Thereforethedefinitionleavesoutthenon-
profitbusinesses.Nonprofitorganizationisanorganizationthatservesaspecificcauseandisnotintended
tomakeprofits.Weneedtonotethateventhoughthemotiveoftheseorganizationsisnottomakeprofitthey
arerunlikeabusiness.
Indiscussingbusinessitisimportanttolookatthefactorsofproductionwhicharetheinputsrequiredbybus
inessesforeffectiveoperations.Therearefourfactorsofproductionnamely:naturalresources,capital,hu
manresourcesandentrepreneurship.Eachofthesefactorshascorrespondingpayment.
Humanresourcesarethepeopleorworkerswhoareabletoperformworkforthebusiness,theycontributet
heirskillsandabilitiesandinreturntheygetpaidinformofsalariesandwages.Capitalincludesequipment,
machinery,toolsandphysicalfacilitiesthatthebusinessusesinitsdailyoperation.Technology,whichisk
nowledgeortools,usedtoproduceproductsorservices,fallsunderthecapitalandhasrevolutionizedthew

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aybusinessoperates;ithashelpedachieveefficiencyandspeedformostactivitiesinbusiness.Entreprene
urshipontheotherhandisthecreationofbusinessideasandthewillingnesstotakeriskinpursuingthoseide
as.

HistoricalDevelopmentofBusiness
Businesshistorycanbetracedinsixeras;thecolonialperiod,theindustrialrevolution,theageofindustrial
entrepreneur,theproductionera,themarketingeraandtherelationshipera(Boone&Kurtz).Inthefollowi
ngparagraphswediscussactivitiesundereachera.
a) Thecolonialperiod
Thiswastheperiodpriorto1776,andemphasizewasruralandagriculturalproduction.Thereweresmallt
ownsthatfunctionedasthemarketplaceforfarmersandcraftspeople,inKenyaforexamplewehadtowns
uchasKaratinaservingassuchcitythoughmuchlaterintermsofyears.Theeconomysuccesswasprimaril
ydependentonthefarming.
b) TheindustrialRevolution
Thiswasaround1760-1800s'.Businessstartedtomovetowardsmassproductionanduseofsemi-
skilledworkersaswellastheuseofmachines.Someofthebenefitsthatfirmswereabletogetincludecostsa
vingsfromeconomiesofscaleanduseofmachines.Alsobusinessgrowthmeantthattheycouldbeabletop
urchaserawmaterialsinbulk.Specializationoflaboralsoimprovedproductionagreatdeal.Itisduringthi
speriodthatagriculturebecamemechanized,andfactoriessprangupincities.

Keystakeholdersinabusiness
Businesstobesuccessfulmustinvolveotherpeople.Thesepeopleaffectandareaffectedbythebusinessa
ndhencetheyhaveaninterestinbusiness,wecallthemstakeholders.
Thesearethecompany,owners,customers(internalandexternal),collaborationandcompetitors.
Acompanyisanarrangementforrunningthebusiness.Itreferstothebusinessitself.Itistheorganizationof
people,thebuildingsandequipmentandotherresourcesneedetooperateabusiness.Itistheprocessorsyst
emofcoreactivitiesnecessarytorunthebusiness.Companiescantakemanyformsrangingfromanindivi
dualwhoworksonhisowntoalargecorporationthatoperatesindozensofcountries.
a) Owners
Thesearethepeoplewhoprovidethecapitaltothebusiness.Ifyourecallwesaidthatanentrepreneuristhep
ersonwhocomeupwiththebusinessideaandiswillingtotakerisk.Moreoftenthannotentrepreneursmay
nothavethecapitaltofinancetheventure,itisatthispointthattheymayallowotherpeopletoinvestinthebu
sinessandbecomeco-owners.Stockholders/shareholdersareinvestorswhobecomeco-
ownersorpartialownersoffirmsbybuyingthefirm’sstock.(Madura,2007)
b) Customers
Thesearethepeoplewhobuycompaniesproductsorservicesfromthebusiness.Thecompanyexchanges
goodsandservicesforapricewithitscustomers.Agroupofcustomersisknownasamarket.Businesswilla
ttractcustomersbyprovisionofqualitydesiredgoodsandservicesatreasonableprices.Morethaneverbef
orebusinessesarerealizingtheimportancethattheiremployeesplayinensuringthattheircustomersaresa
tisfied.Towardthisendeavorfirmsarenowclassifyingtheiremployeesastheinternalcustomerandgivin
gthemtheirdeservedattention.

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 c) Collaborators
Thesearepersonsororganizationsthatworkwiththecompanybutarenotpartofit.Theyareoftenspecialis
tswhoprovidespecialservicesandsupplyrawmaterials,component,partsorproductionequipmentsfor
useintheproductionofothergoodsandservices.Theyincludebanks,creditors,accountingfirms,retailer
s,personnelagents,suppliersetc.theyareoftenreferredtoasalliances,networks,informalpartnersetc.

d) Competitors
Thesearetherivalcompaniesengagedinthebusinessasonescompany.Competitorsareinterestedinselli
ngtheirproductsandservicestoacompany’sexistingorpotentialcustomers.Allcompetitorswhoproduc
esimilargoodsandservicesarereferredtoasanindustry.Acompanystrivestoobtainanedgeoracompetiti
veadvantageoverindustrycompetitors.Thisimpliesbeingsuperiorordifferentfromcompetitorinaway.

BusinessObjectives
a) Profitability-Toaneconomist,profitistherewardforrisk-
taking;toaccountantitisthedifferencebetweenrevenueandexpenditure.Businesswilltrytoma
ximizeprofitanotionmosteconomistshailswhiletherearepeoplewhogoesforsatisfying-
i.e.thebusinesswilldecideonaprofitlevelitconsidersbeingsatisfactory.
b) Survival-
Organizationsandpeoplefacedwithdeathwillsacrificepossiblefuturegainforlifee.g.Uchumis
upermarketwhenitwasrevived.
Prestige-
Thebusinessesdoseekprestigefromhighqualityproducts,fromcarefromtheenvironment,fromtheuseo
flatesttechnologyorfromthecareoftheiremployees.
c) Growth-
Thiscouldbebasedonthefactthatasthebusinessgrowsittendstoenjoyeconomiesofscale.Itcoul
dalsorecruitfromtheowner’sdesiretogrowortolimitoreliminatecompetitorssothattherewillbe
morescopeforgreaterprofitse.g.equitybank.
d) Socialresponsibility-
Abusinesscanalsoexisttoservethesociety,businessproducetheircommoditiestothesociety.Th
erearesomebusinessesthatexisttoservepublicastheirsolepriority.

TYPESOFBUSINESSFIRMS
1. DomesticCorporation
Afirmincorporatedunderthelawsofthecountryorstateinwhichitdoesbusiness.Forexample,afirminco
rporatedintheUnitedStatesisconsideredadomesticcorporationintheUnitedStates,butaforeigncorpor
ationelsewhere
2. ForeignCorporation
Afirmthatconductsbusinessinstatesorcountriesotherthanthestateorcountryinwhichitisincorporated,
Forexample,afirmincorporatedinCanadabutconductingbusinessthroughoutNorthAmericaisconsid
eredaforeigncorporationintheUnitedStates.Alsocalledanaliencorporation.

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 3. MultinationalCorporations
Multinationalcorporationsarecompaniesthatoperateinmorethanonecountry.Thename"multinationa
lcorporation"isdistinctfrom"internationalcorporations".Thelatternamewasusedinthe1960stodesign
ateacompanywithastrongnationalidentification.Thehomemarketwasthecompany'sprimaryfocus.Fo
reignoperationswereusuallywhollyownedsubsidiariescontrolledbyhomecountrynationals.Bythe19
80s,internationalcorporationshadevolvedintomoregloballyorientedcompanies.Whilestillmaintaini
ngadomesticidentityandacentralofficeinaparticularcountry,multinationalcorporationsnowaimtoma
ximizeprofitsonaworldwidebasis.Thecorporationissolargeandextendedthatitmaybeoutsidethecontr
olofasinglegovernment.Besidessubsidiaries,amultinationalcorporationmayhavejointventureswithi
ndividualcompanies,eitherinitshomecountryorforeigncountries.
Somemultinationalsenterforeignmarketsbybuyingstakesincompaniesofaparticularcountry.
4. Complexbusinessorganizations
i) Mergers
Inbusinessamergerisacombinationoftwocompaniesintoonelargercompany.Suchactionsarecommo
nlyvoluntaryandinvolvestockswaporcashpaymenttothetarget.Stockswapisoftenusedasitallowsthes
hareholdersofthetwocompaniestosharetheriskinvolvedinthedeal.Amergercanresembleatakeoverbu
tresultinanewcompanyname(oftencombiningthenamesoftheoriginalcompanies)andinnewbranding
;insomecases,termingthecombinationa"merger"ratherthananacquisitionisdonepurelyforpoliticalor
marketingreasons.
Classificationsofmergers
i) Horizontalmerger-
Twocompaniesthatareindirectcompetitionandsharesimilarproductlinesandmarkets(e.g.Siri
us/XM)
ii) Verticalmerger-Acustomerandcompanyorasupplierandcompany.
(eg:anicecreammakermergeswiththedairyfarmwhomtheypreviouslypurchasedmilkfrom;no
w,themilkis'free')
iii) Market-extensionmerger-
Twocompaniesthatsellthesameproductsindifferentmarkets(e.g.GTEandBellAtlanticintoVe
rizon)
Mergersmaybebroadlyclassifiedin(i)Cogenericand(ii)Conglomerate.
iv) Cogeneric:withinsameindustriesandtakingplaceatthesamelevelofeconomicactivity-
exploration,productionormanufacturingwholesaledistributionorretaildistributiontotheulti
mateconsumer.
v) Conglomerate:betweenunrelatedbusiness.Twocompaniesthathavenocommonbusinessarea
s

ii) Acquisition
Anacquisition,alsoknownasatakeoverorabuyout,isthebuyingofonecompany(the‘target’)byanother.
Anacquisitionmaybefriendlyorhostile.Intheformercase,thecompaniescooperateinnegotiations;inth
elattercase,thetakeovertargetisunwillingtobeboughtorthetarget'sboardhasnopriorknowledgeoftheo
ffer.Acquisitionusuallyreferstoapurchaseofasmallerfirmbyalargerone.Sometimes,however,asmall
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erfirmwillacquiremanagementcontrolofalargerorlongerestablishedcompanyandkeepitsnameforthe
combinedentity.Thisisknownasareversetakeover.
Thebuyerbuystheshares,andthereforecontrol,ofthetargetcompanybeingpurchased.Ownershipcontr
olofthecompanyinturnconveyseffectivecontrolovertheassetsofthecompany,butsincethecompanyis
acquiredintactasagoingconcern,thisformoftransactioncarrieswithitalloftheliabilitiesaccruedbythat
businessoveritspastandalloftherisksthatcompanyfacesinitscommercialenvironment.
iii) Franchising
Isanarrangementwhereoneparty(thefranchiser)sellstherightstoanotherparty(thefranchisee)tomarke
titsproductorservice.Therearedifferenttypesoffranchiserelationshipandthisisapossibilityforinternat
ionalexpansion.Itisanattractiveoptionforcompaniesseekinginternationalexpansionwithouthavingto
undertakesubstantialdirectinvestments.
Inrecentyearsthishasincreasedinnumbersandinpopularity.Theyexistwhenanindividualorgroupofin
dividual(thefranchise)raisesasumofmoneytobuytheopportunityto;

- Useanestablishedmodelandnamee.g.wimpy,steers,kenchice.t.c.
- Sellordistributeanestablishedorrecognizedproduct
- Takeadvantageofmarketingandadvertisingwhichisorganizedcentrallybythefranchisee.g.co
ke.

Afranchiseisalegalcontractthatbindsthetwopartiesandhenceeachhastomeethis/
hersideofbargain.Thistypeofbusinesshaslowerriskascomparedtotheothersincethemachineryandthe
brandarewellestablishedandthebusinessrideonthem.
Advantagestothefranchisee
a) Protectedenvironmentinwhichtoopenabusiness
b) Accesstofreehelpandadvicefromspecialistandexpertsi.e.thefranchiser(provenmanagements
tyle)
c) Areadymarket
d) Namerecognition-
mostfranchisearenationallyorinternationallyknownthiscansignificantlyincreasethedemand
fortheproduct.Examplesforsuchinclude,MacDonald,HolidayInn.
e) Financialsupport,somefranchiseesreceivesomefinancialsupportfromthefranchisor.

Advantagestothefranchiser
a) Businessexpansionisachieved
b) Businessriskisshared
c) Franchiseeareself-motivated
d) Accessisgainedtoverywidemarket-manyoutlets.
iv) Licensing

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Iswhereacompany(thelicensor)authorizesacompanyinanothercountry(thelicensee)touseitsintellect
ualpropertyinreturnforcertainconsiderations,usuallyroyalties.Licensorsareusuallymultinationalslo
catedindevelopedcountries
v) Jointventures
Thisisusuallyajointlyownedandindependentlyincorporatedbusinessventureinvolvingtwoormoreor
ganizations.Thisisapopularmethodofexpandingabroadaseachpartycandiversify,withthebenefitofth
eexperienceoftheothersinvolvedintheventureandareductioninthelevelofrisk.Wherealargenumberof
membersareinvolvedinsuchanarrangement,thisiscalledaconsortium.

BUSINESSOWNERSHIP
Introduction
Whenenterprisesestablishabusiness,theymustdecideontheformofbusinessownership.Thereisnosin
gleformthatcanbesaidtoapplytoallindividuals,butthepersonventuringintobusinessneedtofirstconsid
erthefollowingfactors.
 Formationrequirements
 Easeofcreation
 Flexibility
 Expensestostartandmaintain
 Legalrequirements
 Governmentcontrolandregulation
 Incometaxesconsequences
 Liability

a) SoleProprietorship
Thesoleproprietorshipisbyfarthesimplestandeasiestwayforanentrepreneurtodobusiness.Inreality,as
oleproprietorshipisnotevenalegalentityatall.Thetermisusedtoimplyanindividualwhoisself-
employedandoperatesabusinessalone,butinpracticeasoletraderrarelyworkaloneinmostcaseshe/
shewillbringinotherstafftohelpoperatethebusiness.Thesoletraderacceptsalltheresponsibilityforthe
managementandfinancesofthebusiness.Byfarthisisthemostcommonformofbusinessownership.

Advantagesofthesoleproprietorship
a) Beingownbosstheownerhasthefullcontrolandthiseliminatesthatchanceforconflictormisund
erstandingduringthedecisionmaking.
b) Simplicityofcreatinganddissolving.Inmostcasesyouonlyneedanidea,moneyandasimplelice
nsetostart.Whendissolvingyoudon’thavetoconsultanyoneallyouneedtodoistosimplyputasig
nonthedoorsaying‘’outofbusiness’’.
c) Lowcostofcreatingthebusiness.Soleproprietorshipisusuallyoneoftheleastcostlyformsofbusi
nesstocreate.Becauselegalpapersarenotnecessary,start-

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 uplegalexpensesareminimal.Andsincetheowneristhebossandprobablytheonlyonetherewill
befewlaborcosts.
d) Totalcommandsoverdecisionsandprofits.Sincetheownerhasfullcontroloverthebusiness,he/
shecanmakedecisionswithoutconsultingothersandwithdrewthemoneyfromthebusinesswhe
nevertheneedarises.Andsincealltheprofitsgoestotheownerthereisgreatermotivationtogrowt
hebusiness.
e) Uncomplicatedtaxbasis.Asoleproprietorshipistaxedasapersonandnotthebusiness.

Disadvantagesofsoleproprietorship
 Noteasytoraisecapitaltostartone’sownbusiness.
 Riskoffinancialloss,astheownerrisksalltheinvestmentputinthebusiness,plusallthedebtsfrom
doingbusinessgiventheunlimitednatureofbusiness.
 Lackofcontinuity.Soleproprietorshipisestablishedbyinitialowner,operatedbytheownerandtr
endstodiewiththeowner.
 Opportunitiesforraisingfurthercapitalarelimitedthiscanseverelyrestrictthegrowthofthebusi
ness.
 Unlimitedliability.Thereisnolimitonthedebtsforwhichtheownerisliable.Whenthebusinessis
suedtheownerisliableforthedebt.
 Limitedskills.Theindividualmaybelimitedintermsofskillsthattheymaypossess,andforthisre
asonstheymaybeunabletocontrolallpartsofthebusiness.(Madura,2007)

b) Partnerships
Wheretwoormorepeopleagreetostartabusiness,themaximumlimitsofthememberistwenty.Inpart
nership,theco-ownerssharetheassets,liabilitiesandprofitsofthebusiness.
(E.g.Procter&Gamble,Johnson&Johnsonwereoneinpartnership).Intodaybusinessmostpartnershipo
ccursamongdoctors,lawyers,accountantsandotherprofessionals.Apartnershipisrelativelysimpletoe
stablishanddoesnotrequirethesameamountofrecordkeepingasacorporation.
Unlessthepartnershipagreementprovidesotherwise,thelawthatgovernswhodoesbusinessasgene
ralpartnersspreadstheownershipandmanagementamongthepartnerssothattheyshareequallyintherig
htsandresponsibilities.Therefore,thepartnersshareequallyintheprofitsandlossesofthebusiness.Each
partnerisaresidualclaimantofthebusinessandthereforehasanequalclaimtomoneyorpropertyleftinthe
businessatterminationordissolution,afteralldebtsandliabilitieshavebeenpaid.

UniformpartnershipAct
Rightsofthepartners
 Shareinthemanagementandoperationsofthebusiness
 Shareinanyprofitsthecompanymakes
 Haveaccesstothecompany’sbooksandrecords
 Receiveaformalaccountingofthebusinessaffairsofthepartnership

Obligationofthepartners
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  Shareinanylossesincurredbythebusiness
 Workforthepartnershipwithoutsalaryasnecessary
 Submittomajorityvoteorarbitrationofdifferencesthatmayariseamongthepartners
 Giveotherpartnerscompleteinformationaboutallaffairsofthepartnership.
Theco-
ownersofthebusinessprepareanagreementandwherethebusinesslifeisexpectedtobemorethanoneyea
rtheagreementmustbeinwriting.Thisdocumentiscalledpartnershipagreement.Wherenoneexistalaw
calledUniformPartnershipAct(UPA)willgovernthepartnership.Howevertheprovisionofthislawmay
notbefavourableasthedraftedagreementbythepartnersthemselvessinceitisbasedontheprinciplesdeta
iledintheaboveparagraph.
Thepartnershipagreementshouldcontain;

 Thenameofthepartnershipandthoseofeachpartners
 Ageneraldescriptionofthetypeofthebusinessthatwillbeconducted.
 Thepoweranddutiesofthepartners,includinganylimitationsorrestrictions.
 Thefinancialcontributioneachpartnerwillmake.
 Howprofitsandlossesaretobedivided
 Howpartnerscanleavethebusinessandthenewoneisadded.
 Whatstepsmustbetakentodissolvethepartnership.

Advantagesofpartnership
 Thereisincreasedcapitalduetothepartners’contributions
 Greateraccesstofinanceunlikethesoletrader
 Widerangeofexperienceandexpertisebroughtbydifferentpartners
 Thebusinessisnottaxed;ratheritistheindividualswhoaretaxed.
 Lossesaresharedamongthepartnersaccordingtotheagreedratio.
Disadvantages
 Partnersarepersonallyliableincasethebusinessincurdebts.
 Slowdecisionmakingduetoconsultation
 Adecisionbyonepartnercanlendertheotherintotroublesincetheyarejointlyliable.
 Profitisshared.
 Morerequirementswhenstartingincomparisonwithsoletrader.
 Lackofcontinuityduetodeathofonepartner.

Whatleadstopartnershipdissolution?
 Anevent,whichmakesitunlawfulforthebusinessorthepartnerstocarryonthepartnership,occur
s
 Thepartnershipwasenteredintoafixedperiodandthefixedperiodhascometoanend.
 Ifthepartnershipwasenteredintoforasingleventure/undertaking,andhascometoanend.
 Death,bankruptcyofanypartnerorbythecourtorder.

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Typesofpartnership
- Inageneralpartnership,allpartnershaveunlimitedliability.Thatisthepartnersarepersonallylia
bleforallobligationsofthefirm.
- Conversely,inalimitedpartnership,thefirmhassomepartnerswhoseliabilityislimitedtothecas
horpropertytheycontributedtothepartnership.Limitedpartnersareonlyinvestorinthepartners
hipanddonotparticipateinitsmanagement,butbecausetheyhaveinvestedinthebusiness,theysh
areitsprofitsorlosses.Alimitedpartnershiphasatleastonegeneralpartner,orpartnerswhomana
gethebusiness.Thesepartnersreceivesalary,sharetheprofitsorlossesofthebusinessandhaveun
limitedliability(Madura2007)
Otherformsofpartnerships
LimitedLiabilityPartnership(LLP)
AnLLPisaformofownershipinwhich“all”partnersreceiveslimitedliabilityprotection.TheLLPissimil
artoageneralpartnershipinthatallpartnerscantakeanactiveroleinmanagingtheday-to-
dayaffairs.However,ithastheaddedbenefitofprovidingthelimitedliabilityfeature,whichisnotavailabl
etoageneralpartnership.TheLLPformofownershipislimitediscommontoprofessionalsworkinginthe
fieldsoflaw(attorneys),accountancy,andarchitects.

KeyFeatures
 TheLLPisaflexibleformofbusiness.
 Designedprimarilyforspecificprofessionalservices
 Thepartnerswilldecidethestructureoftheorganizationandthedistributionofprofitsandlosses.
Aformal,writtenpartnershipagreementisadvisable.
 Theprofitsandlosses“flowdown”fromthepartnershiptoeachpartner.Eachpartnerisresponsibl
eforpayingtaxesontheirdistributiveshare.
 TheLLPallowseachpartnertoactivelyparticipateinmanagementaffairs.
 TheLLPprovideslimitedliabilityprotectiontoeachpartner.
 ALLPremainsineffectbasedonpartnersagreeingtoaterminationdateandaslongasallofthegene
ralpartnersremaininthepartnership.

LimitedLiabilityLimitedPartnership(LLLP)
AnLLLPisanewmodificationofthelimitedpartnership.Similartoalimitedpartnership,theLLLPconsis
tsofoneofmoregeneralpartnersandoneormorelimitedpartners.Thekeyadvantageofthisformofowner
shipisthatthegeneralpartnersreceivelimitedliabilityonthedebtsandobligationsoftheLLLP.
KeyFeatures:
 ThegeneralpartnersmanagethebusinessoperationsoftheLLLP,whilethelimitedpartnerstypic
allyonlymaintainafinancialinterest.
 TheLLLPisaflexibleformofbusiness.
 Designedtoofferlimitedliabilitytoallpartnersinthepartnership
 Thepartnerswilldecidethestructureoftheorganizationandthedistributionofprofitsandlosses.
Aformal,writtenpartnershipagreementisadvisable.

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  Theprofitsandlosses“flowdown”fromthepartnershiptoeachpartner.Eachpartnerisresponsibl
eforpayingtaxesontheirdistributiveshare.
 AnLLLPremainsineffectbasedonpartnersagreeingtoaterminationdateandaslongasalloftheg
eneralpartnersremaininthepartnership.

c) Incorporatedcompanies
Limitedcompanies
Corporationisadistinct,legalentityinitselfthatisithasalegallifeseparatefromitsowners.AccordingtoB
ooneandKurtz(2003)acorporationisalegalorganizationwithassetsandliabilitiesseparatefromthoseof
itsowner(s).Thecorporationcanenterintocontracts,borrowmoney,sueandbesuedandpaytaxesjustlik
eaperson.Thisisthemostcommonformofbusiness.Acompanymayhaveafewastwomembers/
shareholderswithnolimitationonthemembershipceiling.
Whenregisteringacompanytherearefourdocumentsthatshouldbesubmittedtotheregistrarofcompany
:
MemorandumofAssociation
Thisshouldcontainthefollowing:
 Nameofthecompany,inthecaseofaprivatecompanythenamemusthavelimitedasthelastword,i
ncaseofapubliccompanyitwillbe‘publiclimitedcompany’
 Whereitsregisteredofficeislocated,physicaladdressandthebuilding
 Theliabilityofthemembersi.e.theamountofcapitaltheyareresponsibleforproviding.
 Thecapitalofthecompany,thissetthelimitontheamountofcapitalthecompanyisallowedtoraise
(authorizedsharecapital)

ArticlesofAssociation
Thisisconcernedwiththeinternaladministrationofthecompanyanditisthosethataresettingupthecomp
anythatneedtodecideontherulestheywishtobeincludedintheirarticle.Mattersthatarenormallydealtint
hearticles;
 Theappointmentandpowerthatthedirectorswillhave
 Therulesaboutshareholdersmeetingandvoting
 Thetypesofsharesandtheshareholders’rightattachedtoeachtype.
 Therulesandproceduresoftransferringshares.
 Form10.Containsdetailsoffirstdirectorsandsecretary,theirdateofbirth,occupationanddetails
ofotherdirectorship,theyhaveheldwithinthelastfiveyears.Theymustsignanddatetheform.
 Form12.Thisisastatutorydeclarationofcompliancewithallthelegalrequirementsrelatingtothe
incorporationofacompany.Thedocumentmustbesignedbyasolicitor,formingthecompanyorb
yoneofpeoplenamedintheform10asdirectorinpresenceofacommissionerforoath.
 Afterincorporationthearticlemaybealtered,butonlywith75%majorityvote.Companieshavet
womainsourceofcontroloveritsaffairi.e.shareholdersinageneralmeetingandthedirectorswho
actonbehalfoftheshareholders(stewardship).Themostmattersuchasthechangeinconstitution,
appointmentofdirectorsrestwithitsshareholdersinaG.M.mostissuesrequireasimplemajority
vote,althoughsomemattersrequire75%majority.Giventheimportancethevotingpowerplayin
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 thecompanymanagement,thetypeofsharethatthecompanyissueisofgreatsignificance,ordinar
ysharecarryfullvotingrightsuchaspreferencesharesmaycarrynovotingrightatall.
 Thearticlesthatthedirectorsberesponsibleforthedailyrunningofthecompanymakedecisionan
dactonbehalfofthecompany.Directorscanbesanctionedordismissedinageneralmeeting.

Advantagesofalimitedcompany
 Shareholdershavelimitedliability(canonlylosewhattheyhaveputinthebusiness)
 Additionalcapitalcanberaisedthroughissuingofmoreshares.Rightissue
 Moreaccesstoadditionalcapitalfromexternallenders
 Companynameisprotectedbylaw
 Perpetualexistence
 Democraticmanagement
 Easytransferofownership

Disadvantagesofalimitedcompany
 Employeemayfeeldistantitsowners
 Companyrecordsareopentothepublice.g.annualrecords-financialdisclosure
 Expensivetoformacompany
 Decisionmakingiscomplexduetothenumberofpeopleinvolved
 AffairarestronglycontrolledaccordingtocompaniesActs
 Doubletaxation,afteracompanypaysitscorporatetaxitsownerwillhavetopaypersonaltaxeson
anydistributionsofitsprofitstheyreceivefromthecorporationintheformofstockdividend.
 Agencyproblem-
whenmanagersdonotactasresponsibleagentsfortheshareholderswhoownthebusiness.Since
managersrunthebusinessonbehalfoftheowners,theymaynotalwaysactinthebestinterestofthe
owners.Forexamplesmanagersmaytakeanexpensivetripwhichnecessarilymaynotbenefitthe
business,thisbringabouttheproblemofagency.CompanysuchasEnroninUSAwentdownduet
oagencyproblem

Keydifferencesbetweenprivatelimitedandpubliclimitedcompanies
Aprivatecompany’ssharesarenotquotedinthestockexchangeandcannotbeboughtontheopenmarket.
Forpubliclimitedcompanysharesmaybelistedintheonapplicationstockexchange.
Publiclimitedcompanyhastremendouspotentialforraisingcapitalbyinvitingthepublictosubscribefor
shares.Ontheotherhandprivatelimitedcompaniesarecurtailedfromthesameandhenceraisingcapitalb
ecomelimited.
Thecapitalrequirementforthetwoisalsodifferent,privaterequirelessauthorizedcapitalandindeednose
tminimumbutforplctheyrequiremorecapital.
Thedirectorsofplcmustbeatleasttwoandaprivateneedonlyone.
11
Privatecompanymaydispensewithpreparingoftheaccountsbutforpublicitismandatory.
NB.Businessestodayareexperiencingchangesintheglobalmarket.Thishasseenmostfirmscometogeth
ertojoinforcesinordertobeabletocopewiththedynamics.Thereareseveralwaysthatfirmsarecomingto
getherandtheseincludes;merger-wheretwoormorefirmscombinetoformonecompany,acquisition-
whereonefirmpurchasethepropertyandassumestheobligationsofanotherorwhereonefirmbuysadivis
ionorsubsidiaryfromanotherfirm.Jointventure-
isapartnershipbetweencompaniesformedforaspecificundertaking(wild2008).

Corporation(Legalperson)
Thecorporationwasconceivedtosolvethetypicalproblemsofthepartnership.Incorporatingallowsagro
upofentrepreneurstoactasone,muchthewayapartnershipdoes,withoneimportantadvantage.Sincethe
corporationisaseparatelegalentitycapableofbeingsued,itcanprotectitsownersbyabsorbingtheliabilit
yifsomethinggoeswrong.Inrecentyears,thecorporationhasdevelopedasataxreduction/planningtool.
Acorporationisessentiallyan"artificialperson"createdandoperatedwiththepermissionofthestatewhe
reitisincorporated.It'sapersonlikeyou,butonly"onpaper."Acorporationisbroughttolifewhenaperson,
theincorporator,filesaformwithastateknownasthearticlesofincorporation.Theownerofacorporationi
sknownasashareholder.
Sinceacorporationisaseparatelegalentity,thecorporationactuallyownsandoperatesthebusinessonbe
halfoftheshareholder,undertheshareholder'stotalcontrol.Thisseparationprovidesalegaldistinctionbe
tweentheownerandthebusinessandprovidesthreeimportantbenefits:
Itallowsyou,theowner,tohireyourselfasanemployee(typicallyaspresident)andthenparticipateincom
pany-fundedemployeebenefitplanslikemedicalinsuranceandretirementplans.
Sinceyouandyourcompanyarenowtwoseparatelegalentities,lawsuitscanbebroughtagainstyourcom
panyinsteadofyoupersonally.
Whendebtisincurredinthecompanyname,aseparatelegalentity,youarenotpersonallyliableandyouras
setscannotbetakentosettlecompanyobligations.
KeyFeatures:
 Acorporationmustcreatebylaws(e.g.,howthecorporationwilloperate)thatcoveritemssuchass
tockholdermeetings,directormeetings,numberofofficers,andtheirresponsibilities.
 Basedonthecorporation’sseparatelegalentitystatus,theownersofthecorporationarenotliablef
orthelossesofthebusinessesandcreditorsmayonlylooktothecorporationandthebusinessassets
forpayment.
 Aseparatebankaccountandseparaterecordsarerequiredwiththisformofentity.
 Theownershaveultimatecontrolofthecorporation;butmustelectdirectorswhointurnelectoffic
ersforthecompany.Thedirectorsmakethemajordecisions,whiletheofficersmaketheday-to-
daydecisions.
 Acorporation’slifeisperpetualinnature.
 Ownershipiseasilytransferredthroughthesaleofstockandnewownerscanbeeasilyaddedbythe
issuanceofadditionalstock.
 Thisformofownershipismorecostlytosetupandmaintainthanasoleproprietorshiporpartnershi
p.Consultanattorneyforguidanceonsettingupyourcorporateentity
12
Reasonsforincorporation
 Accessingfinance
 Youneedtoincorporateifyourbusinessinvolvespotentialliabilitythatcouldseriouslydamagey
ourpersonalfinances.
 Youneedtoincorporateifyou'retryingtoworkforotherbusinesses.
 YouneedtoincorporatetotakeadvantageoftheSmallBusinessDeduction.
 Youneedtoincorporateifyou'remakingenoughmoneythatyouneedtomanageyourincome.
 Generally,thepublicviewsincorporatedbusinessesmorefavourably

LimitedLiabilityCompany(LLC)
AnLLCisanewerformofbusinessentity.Ithasadvantagesoverboththecorporationandthepartnershipf
ormsofoperatingabusiness.TheLLC’smainadvantageoverageneralpartnershipisthat,liketheowners(
shareholders)ofacorporation,theowners(members)ofanLLCaregenerallynotresponsiblefinancially
forthedebtsandobligationsincurredinthecourseoftheLLC’sbusiness.Inaddition,anLLChastheflexibi
litytobetaxedasapartnership,soleproprietorship,orcorporation.
KeyFeatures:
 AnLLCmayhaveoneormoreowners,andmayhavedifferentclassesofowners.Inaddition,anLL
Cmaybeownedbyanycombinationofindividualsorbusinessentities.
 AnLLCistreatedasalegalentityseparatefromitsowners,similartohowacorporationistreated,r
egardlessofhowtheLLCisclassifiedfortaxpurposes.
 Ingeneral,theowners(members)areshieldedfromindividualliabilityfordebtsandobligationso
ftheLLC.
 AnLLCisformedbyfiling“articlesoforganization”withtheCaliforniaSecretaryofStatepriorto
conductingbusiness.
 ForminganLLCissimplerandfasterthanformingandmaintainingacorporation.
 LLCsdonotissuestock,andarenotrequiredtoholdannualmeetingsorkeepwrittenminutes,whic
hacorporationmusttakeinordertopreservetheliabilityshieldforitsowners.
 Eitherbeforeorafterfilingitsarticlesoforganization,theLLCmembersmustenterintoaverbalor
writtenoperatingagreement.Aformal,writtenagreementisadvisable.
 AnLLCistypicallymanagedbyitsmembers,unlessthemembersagreetohaveamanagermanage
theLLC’sbusinessaffairs.
 Generally,membersofanLLCthataretaxedasapartnershipmayagreetosharetheprofitsandloss
esinanymanner.MembersofanLLCclassifiedasacorporationreceiveprofitsandlossesinthesa
memannerasshareholdersofacorporationlegallyorganizedassuch.
 AnLLC’slifeisperpetualinnature.However,themembersmayagreeinthearticlesoforganizatio
northeoperatingagreementtoadateoreventthatwillcausetheLLCtoterminate.Inaddition,mem
bersoftheLLCmayvoteatanytimetoendthebusinessoperationsoftheLLC.

d) Co-operatives

13
Aco-
operativeorganizationcanbedefinedasanorganizationofmemberswhocometogethertocarryoutecono
micactivitiesandtoshareproceedsequitablyonthebasisofco-operativeprinciples.
Acooperativeisalegalentityownedanddemocraticallycontrolledequallybyitsmembers.Adefiningpoi
ntofacooperativeisthatthemembershaveacloseassociationwiththeenterpriseasproducersorconsume
rsofitsproductsorservices,orasitsemployees.
Cooperativesarebasedontheco-operativevaluesof"self-help,self-
responsibility,democracyandequality,equityandsolidarity"andtheco-
operativeprinciplesof“voluntaryandopenmembership;democraticmembercontrol;membereconomi
cparticipation;autonomyandindependence;educationandtraining;co-operationamongco-
operatives;andconcernforcommunity
Economicbenefitsaredistributedproportionallyaccordingtoeachmember'slevelofparticipationinthe
cooperative,forinstancebyadividendonsalesorpurchases,ratherthandividedaccordingtocapitalinves
ted.

Theco-
operativesocietyisthattypeofbusinessorganizationsinwhichmembersmakeeffortstoachieveanycom
monobjectiveonvoluntaryanddemocraticbasis.Allco-operativesmustadheretotheco-
operativeprinciples.Theseprinciplesareformulatedbyinternationalco-
operativealliancewhichisaworldwideconfederationofallco-operativeorganizations.
Theseprinciplesare;
 Openandvoluntarymembership
 Democraticadministration
 Limitedrateofinterest
 Disposalofsurplus
 Education:themembersneedtobegivenadequateeducation.
 Principleofcompetitionwithotherco-operatives.

Advantagesofco-operatives
 Loyalty-Theco-operativesocietiesarevoluntaryassociation.Membersofco-
operativesocietiesaremostlysincereandloyaltooneanother.
 Democraticadministration-alldecisionsofco-
operativesocietiesaremadeondemocraticbasis.Thememberscasttheirvotesandthesedecision
swhichhavegreatersupportofthemembersareimplemented.
 Commonbenefit-themainaimofaco-
operativesocietyistoprovidethebestservicestoallmembers.Commonbenefitistakenintoconsi
deration.
 Itisameanstoeffectare-distributionwithinthepopulation.

Disadvantages

14
  Lackofbusinessexperience-membersofco-
operativesocietiesdoesnothavetheexperienceofbusinessandasaresultthesocietiesfailtoachie
vetheirobjectives.
 Disagreementamongmembers-sometimesmembersofco-
operativesocietiesdonotagreeonspecificdutiese.g.onthemodeofelection.Thissituationmayle
adtocollapseofco-operativesociety.
 Lackofsufficientcapital-co-
operativesrelybasicallyonfinancialcontributionfrommembersforthecapitalbutinmanydevel
opingcountriestheincomesarerelativelylowandsometimesmembersarereluctanttopayhighsu
bscriptionsorjoinsocieties.
 Weaknessinmanagement-co-
operativeshasaninherentweaknessinmanagementduetoinefficientcommitteeswholackeduc
ation,experienceorwhohavepromotedthelengthofservicethanontheirability,efficiencyandq
ualifications.

CHANNELSOFDISTRIBUTION
Introduction
Distributiondescribesallthelogisticsinvolvedindeliveringacompany'sproductsorservicestotheright
place,attherighttime,forthelowestcost.
Well-
chosenchannelsconstituteasignificantcompetitiveadvantage,whilepoorlyconceivedorchosenchann
elscandoomevenasuperiorproductorservicetofailureinthemarket.Distribution(or"Place")isthefourt
htraditionalelementofthemarketingmix.TheotherthreeareProduct,PriceandPromotion.
TheNatureofDistributionChannels
Mostbusinessesusethirdpartiesorintermediariestobringtheirproductstomarket.Theytrytoforgea"di
stributionchannel"whichcanbedefinedas
"Alltheorganizationsthroughwhichaproductmustpassbetweenitspointofproductionandconsump
tion"
Whydoesabusinessgivethejobofsellingitsproductstointermediaries?
Afterall,usingintermediaries’meansgivingupsomecontroloverhowproductsaresoldandwhotheyares
oldto.
Theanswerliesinefficiencyofdistributioncosts.Intermediariesarespecialistsinselling.Theyhavethec
ontacts,experienceandscaleofoperationwhichmeansthatgreatersalescanbeachievedthaniftheproduc
ingbusinesstriedrunasalesoperationitself.

FunctionsofaDistributionChannel
Themainfunctionofadistributionchannelistoprovidealinkbetweenproductionandconsumption.Orga
nizationsthatformanyparticulardistributionchannelperformmanykeyfunctions:
Information Gatheringanddistributingmarketresearchandintelligence-
importantformarketingplanning

15
 Promotion Developingandspreadingcommunicationsaboutoffers
Contact Findingandcommunicatingwithprospectivebuyers
Matching Adjustingtheoffertofitabuyer'sneeds,includinggrading,assemblingandpackagin
g
Negotiation Reachingagreementonpriceandothertermsoftheoffer
Physicaldistributio Transportingandstoringgoods
n
Financing Acquiringandusingfundstocoverthecostsofthedistributionchannel
Risktaking Assumingsomecommercialrisksbyoperatingthechannel(e.g.holdingstock)

NumbersofDistributionChannelLevels
Eachlayerofmarketingintermediariesthatperformssomeworkinbringingtheproducttoitsfinalbuyeris
a"channellevel".Thefigurebelowshowssomeexamplesofchannellevelsforconsumermarketingchan
nels:

Inthefigureabove,Channel1iscalleda"direct-
marketing"channel,sinceithasnointermediarylevels.Inthiscasethemanufacturersellsdirectlytocust
omers.Anexampleofadirectmarketingchannelwouldbeafactoryoutletstore.Manyholidaycompanies
alsomarketdirecttoconsumers,bypassingatraditionalretailintermediary-thetravelagent.
Theremainingchannelsare"indirect-marketingchannels".
Channel2containsoneintermediary.Inconsumermarkets,thisistypicallyaretailer.Theconsumerelect
ricalgoodsmarketinKenyaistypicalofthisarrangementwherebyproducerssuchasSony,Panasonic,Ca

16
nonetc.selltheirgoodsdirectlytolargeretailerssuchasNakumattandTuskyswhichthensellthegoodstot
hefinalconsumers.
Channel3containstwointermediarylevels-
awholesalerandaretailer.Awholesalertypicallybuysandstoreslargequantitiesofseveralproducers’go
odsandthenbreaksintothebulkdeliveriestosupplyretailerswithsmallerquantities.Forsmallretailerswi
thlimitedorderquantities,theuseofwholesalersmakeseconomicsense.Thisarrangementtendstowork
bestwheretheretailchannelisfragmented-
i.e.notdominatedbyasmallnumberoflarge,powerfulretailerswhohaveanincentivetocutoutthewholes
aler.AgoodexampleofthischannelarrangementintheUKisthedistributionofdrugs.

Stockists
Adealerwhoundertakestomaintainstocksofaspecifiedproductatoraboveacertainminimuminreturnfo
rfavourablebuyingtermsgrantedbythemanufactureroftheproduct
Manufacturer’srepresentatives
Manufacturer'srepresentativeorrep,manufacturer'sbrokerandmanufacturer'sagentarealltermsusedt
odescribeindependentsalesagentswhoworkoncommission.Youdon'tpaythemasalary,justapercenta
geofwhattheysell.Manufacturer'srepsofferapractical,cost-
effectivealternativetoadirectsalesforceformanygrowingcompanies.
Warehousing
Performanceofadministrativeandphysicalfunctionsassociatedwithstorageofgoodsandmaterials.Th
esefunctionsincludereceipt,identification,inspection,verification,storage,retrievalforissue,etc.
Physicaldistribution
Physicaldistributionisthesetofactivitiesconcernedwithefficientmovementoffinishedgoodsfromthee
ndoftheproductionoperationtotheconsumer.Physicaldistributiontakesplacewithinnumerouswholes
alingandretailingdistributionchannels,andincludessuchimportantdecisionareasascustomerservice,i
nventorycontrol,materialshandling,protectivepackaging,orderprocession,transportation,warehous
esiteselection,andwarehousing.Physicaldistributionispartofalargerprocesscalled"distribution,"whi
chincludeswholesaleandretailmarketing,aswellthephysicalmovementofproducts.
Clearingandforwarding
Clearingandforwardingagentsareserviceprovidersthatcanassisttheimporter/
exportertoarrangetransport,documentationandcustomclearanceforinternationalshipments.Unlessa
nexporting/
importingcompanyhandlesavastamountoftransactionspermonth,itismuchmoreviableforthemtoma
keuseofthisservice

SOURCESOFBUSINESSFINANCE
Banksandbanking

17
Abankisacompanythatworkswiththemoneyprotectsitbutpaysyouinterestsothatitcanworkwiththem
oney.Thisisoneofthereasonswhypeoplesavetheirmoneyinabank.Moneymayalsobesafertherethanat
home.
Banksalsolendmoneytootherbusinessesandcustomers.Theycollectextramoneycalledbankingfeesw
ithwhichtheypayinteresttosaversaswellassalariesfortheirworkers.Banksmakeaprofitbecausetheyco
llectmoreinterestthantheypaytosavers.
Withoutbankstheworld’seconomywouldnotbeabletogrow.Investorswouldnotfindthemoneytheyne
edfornewprojects.Industriescouldnotbuynewmachinesandmoderntechnology.

Whatkindofservicesdobanksoffer?
Banksprovidetheircustomerswithanumberofservices.Withacheckingaccountyoucanpayyourbills.Acheckis
aslipofpaperthattellsthebankhowmuchmoneyitshouldwithdrawfromyouraccountandpaytosomeoneelse.To
day,moreandmorepeopleusetheinternetbills.Banksalsogivetheircustomersplasticcardswithwhichtheycange
tmoneyfromtheiraccounteverywhereandwhenevertheywant.Theycanalsousethemtopaywithoutcashatshops,
gasstationsandotherstores.Checkingaccountsareacomfortablewayforcustomerstohandletheirmoney.
Forpeoplewhowanttosavemoneybanksoffersavingsaccounts.Usually,bankspaymoreinteres
tforsavingsaccountsthantheydoforcheckingaccounts.Theyhopethatthecustomerswillleavetheirmon
eyinthebankforalongtime,whichiswhythebankcanworkwiththismoneyandofferitasloans.Banks,ho
wever,cannotgivealloftheirmoneyasloans.Inmostcountriesthegovernmentlimitstheamountofmon
eythatbankscanuseasloans.Theymustalwayskeepbackacertainpercentageintheformofcash.
Peoplewhoneedmoneyforcertainthingslikebuyingahouseinterest,everymonth.Ifsomeonec
annotpaybackaloanthebankusuallycantakeawayvaluableobjectslikecarsstocksbondscash-
freewayofbuyingthings.Almostallbankshaveautomatictellermachines(ATM)atwhichcustomersr
eceivemoneyfromtheiraccount.Telephonebankingisaneasywaytopayyourbillsbycallingaspecialtel
ephonenumberandtypinginacertainsequenceofdigits.Somebanksevendealwithinsurance.

Typesofbanks
- Commercialbanksarethemostimportantbanks.Theyoffermanyservices,differentformsofaccountsan
dalsoloans.While,atfirst,commercialbanksonlyoffereditsservicestobusinessesandcompanies,theya
reforeveryonetoday.
- Investmentbanksdonottakeorkeepthemoneyofindividuals.Theyhelporganizationsandlargecompani
esraisemoneyontheinternationalfinancialmarkets.
- Centralbanksmanagethebankingsysteminacountry.TheFederalReserveintheUnitedStatesandBanko
fEnglandaretwoprominentbanksthattakeoverthesetasks.TheEuropeanCentralBankisresponsiblef
orthecirculationofmoneyintheEuro
- Onlinebankscanoftengivetheircustomersmoreinterestbecausetheydonothavetheexpensesthatphysi
calbanksdo.Theycanbeaccessedovertheinternetandarebecomingmoreandmorepopular.
- Savingsandloansarebanksthatspecializeinfinancinghouses.Althoughinterestratesarehighersuchba
nksofferupto30-
yearmortgages.Customerspaybacktheirloanthroughamonthlypaymentthattheycanafford.
- DevelopmentbanksarefinancialorganizationsthathelpThirdWorldCountries.Theynotonlyprovidem
oneyfornationsinAfrica,AsiaandSouthAmerica,butalsosendaidworkersandoffertechnicalhelp.

18
Shortandlongtermfinancing
Financingisaveryimportantpartofeverybusiness.Firmsoftenneedfinancingtopayfortheirassets,equipment,an
dotherimportantitems.Financingcanbeeitherlong-termorshort-term.Asisobvious,long-
termfinancingismoreexpensiveascomparedtoshort-termfinancing.
Therearedifferentvehiclesthroughwhichlong-termandshort-
termfinancingismadeavailable.Thischapterdealswiththemajorvehiclesofbothtypesoffinancing.
Thecommonsourcesoffinancingarecapitalthatisgeneratedbythefirmitselfandsometimes,itiscapitalfromexter
nalfunders,whichisusuallyobtainedafterissuanceofnewdebtandequity.
Afirm’smanagementisresponsibleformatchingthelong-termorshort-
termfinancingmix.Thismixisapplicabletotheassetsthataretobefinancedascloselyaspossible,regardingtiming
andcashflows.
Long-TermFinancing
Long-
termfinancingisusuallyneededforacquiringnewequipment,R&D,cashflowenhancement,andcompanyexpans
ion.Someofthemajormethodsforlong-termfinancingarediscussedbelow.
 EquityFinancing
Equityfinancingincludespreferredstocksandcommonstocks.Thismethodislessriskyinrespecttocashflowcom
mitments.However,equityfinancingoftenresultsindissolutionofshareownershipanditalsodecreasesearnings.
Thecostassociatedwithequityisgenerallyhigherthanthecostassociatedwithdebt,whichisagainadeductibleexp
ense.Therefore,equityfinancingcanalsoresultinanenhancedhurdleratethatmaycancelanyreductioninthecashf
lowrisk.
 CorporateBond
Acorporatebondisaspecialkindofbondissuedbyanycorporationtocollectmoneyeffectivelyinanaimtoexpandit
sbusiness.Thisternisusuallyusedforlong-
termdebtinstrumentsthatgenerallyhaveamaturitydateafteroneyearaftertheirissuedateattheminimum.
Somecorporatebondsmayhaveanassociatedcalloptionthatpermitstheissuertoredeemitbeforeitreachesthemat
urity.Allothertypesofbondsthatareknownasconvertiblebondsthatofferinvestorstheoptiontoconvertthebondt
oequity.
 CapitalNotes
Capitalnotesareatypeofconvertiblesecuritythatareexercisableintoshares.Theyareonetypeofequityvehicle.Ca
pitalnotesresemblewarrants,exceptthefactthattheyusuallydon’thavetheexpirydateoranexerciseprice.Thatis
whytheentireconsiderationthecompanyaimstoreceive,forthefutureissuanceoftheshares,isgenerallypaidatthe
timeofissuanceofcapitalnotes.
Manytimes,capitalnotesareissuedwithadebt-for-
equityswaprestructuring.Insteadofofferingtheshares(thatreplacedebt)inthepresent,thecompanyprovidesitsc
reditorswithconvertiblesecurities–thecapitalnotes–andhencethedilutionoccurslater.

Short-TermFinancing
Short-
termfinancingwithatimedurationofuptooneyearisusedtohelpcorporationsincreaseinventoryorders,payrolls,a
nddailysupplies.Short-termfinancingcanbedoneusingthefollowingfinancialinstruments−

19
  CommercialPaper
CommercialPaperisanunsecuredpromissorynotewithapre-
notedmaturitytimeof1to364daysintheglobalmoneymarket.Originally,itisissuedbylargecorporationstoraise
moneytomeettheshort-termdebtobligations.
Itisbackedbythebankthatissuesitorbythecorporationthatpromisestopaythefacevalueonmaturity.Firmswithex
cellentcreditratingscanselltheircommercialpapersatagoodprice.
Asset-backedcommercialpaper(ABCP)iscollateralizedbyotherfinancialassets.ABCPisaveryshort-
terminstrumentwith1and180days’maturityfromissuance.ACBCPistypicallyissuedbyabankorotherfinanciali
nstitution.
 PromissoryNote
Itisanegotiableinstrumentwherethemakerorissuermakesanissue-lesspromiseinwritingtopaybackapre-
decidedsumofmoneytothepayeeatafixedmaturitydateorondemandofthepayee,underspecificterms.
 Asset-basedLoan
Itisatypeofloan,whichisoftenshortterm,andissecuredbyacompany'sassets.Realestate,accountsreceivable(A/
R),inventoryandequipmentarethemostcommonassetsusedtobacktheloan.Thegivenloaniseitherbackedbyasi
nglecategoryofassetsorbyacombinationofassets.
 RepurchaseAgreements
Repurchaseagreementsareextremelyshort-
termloans.Theyusuallyhaveamaturityoflessthantwoweeksandmostfrequentlytheyhaveamaturityofjustoneda
y!
Repurchaseagreementsarearrangedbysellingsecuritieswithanagreementtopurchasethembackatafixedcoston
agivendate.
 LetterofCredit
Afinancialinstitutionorasimilarpartyissuesthisdocumenttoasellerofgoodsorservices.Thesellerprovidesthatth
eissuerwilldefinitelypaythesellerforgoodsorservicesdeliveredtoathird-partybuyer.
Theissuerthenseeksreimbursementtobemetbythebuyerorbythebuyer'sbank.Thedocumentisinfactaguarantee
offeredtothesellerthatitwillbepaidontimebytheissueroftheletterofcredit,evenifthebuyerfailstopay.

MethodsofRaisingFinance
a) EquityFinance
Thisisthelargestsourceoffinancetoanylimitedcompanyandusuallyformsthebaseonwhichotherfinan
cesareraised.Equityisthetotalsumofthecompany’sordinarysharecapitalplusthecompany’sretainede
arningsalsoknownasrevenuereserves.
OrdinaryShareCapital
Itisthatfinancecontributedbytheordinaryshareholdersofabusiness.Thisisraisedthroughthesaleofthe
company’sordinaryshares.Itisfinancecontributedbyrealownersofthecompany.Thisfinanceisonlyrai
sedbylimitedcompanies.Itispermanentfinancetothecompanyandcanonlyberefundedintheeventofliq
uidation,i.e.inKenya;acompanycannotbuybackitsownshares(ordinaryshares).
Thisfinanceispaidordinarydividendsasreturntotheshareholder’sinvestment.Ordinarysharescarryrig
htsandusuallyeachshareisequaltoonevoteexercisedinAnnualGeneralMeetings.
Ordinarysharesarequotedatthestockexchangewheretheyaresoldandboughtbythepublicthroughbrok
ers.Ordinarysharecapitalcarriesthehighestrisksinthecompanybecauseitgetsitsreturnafterotherfinan

20
ceshavegottheirs,andalsointheeventofliquidationitispaidlast(theirvotingrightisassumedtobeusedwi
selytominimizetheserisks.)

Ordinarydividendsarenotalegalobligationonthepartofthecompanytopay.Ifthecompany’sprofitsare
good,ordinaryshareholdersgetthehighestreturnbecausetheirdividendsarevaried.Thisistheonlytypeo
ffinancethatgrowswithtimeandthisgrowthistechnicallycalledgrowthinequitywhichisfacilitatedbyre
tentionofearnings.
RightstoOrdinaryShareholders
 Theyhavearighttovote.Thisrightisgiventothembythecompany’sAct.Theyarealsoentitledtov
otebyProxyinabsentia
 Theyhavearighttoinspectcorporatebookse.g.Articlesofassociation,MemorandumofAssocia
tionandbooksofaccounts.
 Theyhavearighttoselltheirsharestootherpartiesi.e.totransfertheirownershipinsharesofacom
pany.
 Theyhavearighttoshareinresidualassetsofthecompanyduringthecompany’sliquidation.
 Theyhavearighttoapprovethepurchaseofcapitalassets.
 Theyhavearighttoamendthechartersandbylawsofthecompany(ArticlesandMemorandumof
Association)
 Theyhavearighttoapprovethesaleofthecompany’sassets.
 Theyhavearighttoapprovemergers,acquisitionsandtake-overs.
 Theyhavearighttoappointdirectors.
 Theyhavearighttoappoint/
removeauditorsofthecompanywhowilloverseethecompany’saffairs.
FeaturesofOrdinaryshareCapital
 Itisapermanentfinancetothecompanywhichcanberefundedonlyduringliquidation.
 ItisthelargestsourceoffinancetotheLtdCompany.
 Thisfinancehasaresidualclaimonprofitsandassetsduringliquidation
Ordinarysharecapitalisentitledtovotingpowers,eachshareusuallybeingequaltoonevote.
 Thisfinancecarriesavariedreturni.e.itsdividendswillvarywiththeprofitsmade.
 Ordinarysharecapitalcarriesnonominalcosttothecompany.i.e.dividendsonordinarysharecap
italarenotalegalobligationtothecompanytopay.
 Itistheonlyfinancewhichwillgrowwithtimeasaresultofretention.
 Thisfinancecannotforcethecompanyintoliquidationi.e.itdoesnotincreaseitsgearing;ontheco
ntrary,itdecreasesthegearing.
 Itcanberaisedbylimitedcompaniesonly.
AdvantagesofusingOrdinaryShareCapitalbyacompany
 Beingapermanentfinancethecompanywillinvestitinlongtermventureswithoutinconvenienci
esofpayingitback.
 Dividendpayment(toordinaryshareholders)isnotalegalobligationtothecompany,thusnothre
attoliquidityofthecompany.

21
  ThistypeoffinancecontributesvaluableideastowardstherunningofthecompanyduringtheAnn
ualGeneralMeeting.
 Thisfinanceisavailableinlargeamountsinparticularifthecompanyisquotedonthestockexchan
geinwhichcaseitcanraisesubstantialamountsofmoneytofinancethecompany’soperations.
 Ordinarysharecapitalformsabaseandthusasecurityonwhichothermoneycanberaised.
DisadvantagesofusingOrdinaryShareCapitaltoacompany
 Thecostofordinarysharecapital(ordinarydividendispaidinperpetuity).
 Thisfinancemaydisorganizeacompany’spolicyincaseshareholders’votesarecastagainstthec
ompany’spresentoperationsandpolicies.
 Itdoesinvolvealotofformalitiesinitsraisinganditmaytakealongtimetoraiseasthecompanyhast
oobtainpermissionfromthecapitalmarketauthorityandotherregulators.
 Itisveryexpensivetoraiseasitinvolvesalotofcostscommonlyknownasfloatationcostse.g.print
ingtheprospectusandsharecertificates,advertisingexpenses,costofunderwritingtheissue,bro
keragecosts,legalfees,auditor’sfees,costofcommunication.
 Theissueofordinarysharecapitalmeansthatthecompany’ssecretswillbeexposedtothepublicth
roughpublishedstatementswhichmaybedangerousfromcompetitors’pointofview.

b) QuasiEquity/PreferenceShareCapital
Thisisfinancecontributedbyquasi-ownersorpreferenceshareholders.Itissocalledquasi-
equitybecauseitcombinesfeaturesofdebtfinanceandthoseofequityfinance.Itiscalledpreferenceshare
capitalbecauseitisaccordedpreferentialtreatmentoverordinaryshareholdersin:-
- Sharingindividend-
Itreceivesitsdividendbeforethoseofordinaryshareholders.Thusitissaidtobepreferredtodivid
ends.
- Itisaccordedpreferentialtreatmentinsharingofassetsintheeventofliquidation.Preferenceshar
eholdersgettheirclaimsonassetbeforeordinaryshareholdersgettheirs.Thusitissaidtobepreferr
edtoassets.
Inorderforasharetobecalledapreferenceshareitmustbeaccordedtheabovepreferentialtreatmentovera
ndaboveordinarysharecapital.
SimilaritiesbetweenOrdinaryandPreferenceSharecapital
 Bothfinancesearnareturninformofdividends
 Ifthepreferencesharesareirredeemablethenbothwillbepermanentsourcesoffinancetothecom
pany.
 Incasethepreferencesharecapitalisirredeemablebothwillreceivedividendsinperpetuity.
 Bothformthecompany’ssharecapital/sharefinance
 Botharedifficulttoraiseduetoalotofformalitiesthecompanymustgothroughtoraisethisfinance
.
 Bothclaimonassetsandinprofitsafterdebtfinancehashaditsclaim.
 Paymentofdividendtobothisnotalegalobligationforthecompanyi.e.neithertheordinaryshare
holdernorthepreferenceshareholdercansuethecompanytoclaimtheirdividends.

22
  Bothfinancesarenotsecuredi.e.nosecurityisattachedtosuchfinance.
 Bothfinancesareraisedstrictlybylimitedcompanies.
 Bothfinancesarelong-termfinancestothecompany.
DifferencesbetweenOrdinaryandPreferenceSharecapital
 Ordinarysharecapitalcarriesvotingrightswhereaspreferencesharecapitaldoesnotexceptifitis
convertible,andisconverted.
 Ordinarysharecapitalcarriesvariablerateofdividendswhereaspreferencedividendsarefixede
xceptforparticipativepreferencesharecapital.
 Ordinarysharecapitalreceivesitsdividendsafterpreferencesharecapitalhasbeenpaidtheirs.
 Thesharepricesofordinaryshareswillbehigherifthecompanyisdoingwellthanthoseofpreferen
ceshares.
 Preferencesharecapitalincreasesthecompany’sgearinglevelwhereasordinarysharecapitalred
ucesthegearinglevel.
 Forcumulativepreferencesharesthesemayreceivedividendsinarrearsordinarysharescannot.
 Raisingfinancebywayofordinarysharecapitaliseasierthanraisingpreferencesharecapitalasint
helattercasethecompanyhastobefinanciallystrong.
 Preferencesharecapitalisusuallysecuredbythecompany’sfinancialsoundnesswhereasordina
rysharecapitalisnot.
 Preferencesharecapitalcannotqualifyforabonusissue,whileordinarysharecapitalcan,i.e.pref
erencesharescannotreceivebonusissues.
 Ordinaryshareshaveachancetoreceivearightsissuewhereaspreferencesharescannotgetrights
issues.
c) DebtFinance-Loan
Thisisthetypeoffinancewhichisobtainedfrompersonsotherthanactualownersofthecompanyi.e.credit
orstothecompany.Thisfinancecanbeinanyofthefollowingforms:
o Loans
o Debentures
o Bankoverdrafts
o Tradecreditors
o Borrowingagainstbillsofexchange
o Leasefinance
o Mortgagefinance
o Hirepurchasefinance

Alltheabovefinanceshavealegalclaimorchargeagainstthecompany’sresourcesorassets.
ClassificationofDebtFinance
1.Shorttermfinance
Thisrangesfrom1monthupto4yearsandisgiventocustomersknowntothebankortolenders.Theagreem
entofthisloanwillmentionboththerepaymentsofprincipalandinterest,andforinterestitmustidentifyw
hetheritissimpleorcompoundinterest.Forprincipal,ithastobepaidoversometime.Thisfinanceisusuall

23
ysecuredandthetermsoftheloanwillberestrictivee.g.tobeinvestedinanareaacceptabletothebankorlen
der.Usually,thisfinanceshouldbeusedtosolveshort-termliquidityproblems.
2.Medium-termfinance
Thisfinancewillbeinthebusinessforaperiodrangingbetween4-
7years.Thistermisrelativeandwilldependuponthenatureofthebusiness.Thistypeofloanisusedforinve
stmentpurposesandisusuallysecuredbutthesecurityshouldnotbesensitivetothecompany’soperations
.Thefinanceobtainedmustbeinvestedwhilerespectingthematchingapproachtofinancingi.e.theterma
ndpaybackperiodmustbematched.Thistypeoffinanceisthemostpopularofalldebtfinancingbecausem
ostofthebusinesseswillneeditbothintheirgrowingstagesandalsointheirmaturestagesofdevelopment.
3.Long-termfinance
Thisisararefinanceandisonlyraisedbyfinanciallystrongcompanies.Itwillbeinthebusinessforaperiod
of7yearsandabove.Thisfinanceisusedtopurchasefixedassetsinparticularduringtheearlystagesofaco
mpany’sdevelopment.Itisalwayssecuredwithalongtermfixedasset,usuallylandorbuildings.Itsinvest
ment,however,mustobeythematchingapproach.Inall,thecompaniesneedingsuchfinancedonothavet
obeknowntothelenders.

OtherformsofDebtFinance
Overdrafts
Theseareveryshort-
termsourcesoffinancetothecompanyandareusuallyusedtofinancethecompany’sworkingcapitalorsol
veitsliquidityproblems.Thisfinanceisusuallynotsecuredandismorecostlythanlong-
termloansasmuchasitsinterestis1-
2%higherthanbankrates.Interestonoverdraftsiscomputedonadailybasisalthoughitmaybepaidmonth
ly.Overdraftsareusuallygiventoverywellknowncustomersofthebankalthoughover-
relianceonoverdraftsisasignofpoorfinancialmanagementpoliciesandassuchtheyshouldnotbeusedof
ten.
BillsofExchange
Asasourceoffinance,billsofexchangecanbe:-
o Discounted
o Endorsed
o Givenassecuritiesforloans
Abillofexchangeusdefinedasanunconditionalorderinwritingaddressedbyonepersontoanothersigne
dbythepersongivingit,requiringthepersontowhomitisaddressedtopayondemandatafixedordetermin
ablefuturedateacertainsumofmoneytotheorderofthepersonortobearer.Mostofthebillsmaturebetwee
n90-120daysalthoughtheycouldbesightbillsi.e.payableonsightorissuancei.e.payableinthefuture.
Inorderforabilltobevalidandtoserveasasourceoffinanceitshouldbe:-
o Signedbythedrawer
o Acceptedbythedrawee

24
 o Beunconditional;
o Bearappropriaterevenuestamp.

Debenturefinance
Itisadocumentthatisevidenceofadebtwhichislong-
terminnature,andconfirmsthatthecompanyhasborrowedaspecificsumofmoneyfromthebearerorpers
onnamedinthedebenturecertificate.Mostdebenturesareirredeemablethusformingapermanentsource
offinancetothecompany.Iftheseareredeemablethenthesewillbelong-
termloanswhichrangebetween10-
15years.Theycanbeendorsed,negotiated,discountedorusedassecuritiesforloans.Theycarryafixedrat
eofinterestwhichispayableaftersixmonthsi.e.twiceayear.
Classificationofdebentures
a)Classificationaccordingtosecurity
 Secureddebentures-
thesearesecuredagainstthecompany’sassetsorhaveafixedchargeagainstthecompany’sassets
.Intheeventofthecompany’sliquidationsuchdebentureswillclaimfromthatparticularasset.Th
eycouldbesecuredagainstafloatingchargeinwhichcasetheholdercanclaimonanyoralloftheco
mpany’sassetsnotyetattachedbyothersecuredcreditors.Adebentureholderwithafloatingchar
gehasastatusofageneralcreditor.However,thefloatingchargedebenturesarerareandtheyareso
ldbyfinanciallystrongcompanies.
 Unsecured(naked)debentures-
thesecarrynosecuritywhatsoeverandsuchtheyrankasgeneralcreditors.Theycarryaresidualcl
aimtothefirstclasscreditorsbutasuperiorclaimoverordinaryshareholders.Theseareraresourc
esoffinanceandaresoldbyfinanciallystrongcompanieswithagoodrecordofdividendpaymentt
otheshareholders.
b)Classifiedaccordingtoredemption.
 Redeemabledebentures-
theseareboughtbackbytheissuingcompany.Likepreferenceshares,thesehavetworedemption
periods.Thisisusuallybetween10-
15years,i.e.thecompanyhastheoptiontoredeemtheseafter10yearsbutbeforeexpiryof15years.
Inmostcasesredeemabledebenturesaresecuredagainstspecificassetse.g.landorbuildings(mo
rtgagedebentures).Theirinterestisalegalobligationonthepartoftheissuingcompany.
 Irredeemabledebentures(perpetualdebentures)-
thesecanneverbeboughtbackbytheissuingcompanyexceptintheeventofliquidationandassuc
htheyformapermanentsourceoffinancetothecompany.Thesedebenturesarerareandareonlyso
ldbyfinanciallystrongcompanieswhichmusthavehadsomegooddividendhistory.Theyareuns
ecuredandthusareknownasnakedperpetualdebentures.
c)Classifiedaccordingtoconvertibility

25
  ConvertibleDebentures-
Thesearethetypeofdebentureswhichcanbeconvertedintoordinarysharecapitalandthisconver
sionisoptionalasfollows:
- Attheoptionofthecompanyi.e.atthecompany’soption.
- Attheoptionofbothpartiesi.e.debentureholderandthecompany.
- Attheoptionoftheholder.
 Non-convertibledebentures-
Thesecannotbeconvertedintoanysharesbeitordinaryorpreferencesharesandareusuallysecure
d.
d)Subordinatedebentures(naked)
Theseareissuedwithamaturityperiodof10yearsandabove,andusuallytheycarrynosecurityanddepend
uponthegoodwillofthecompany.Theyaresocalledsubordinatebecausetheyranklastinclaimsafterallcl
assesofcreditorsexcepttradecreditors.Neverthelesstheirclaimsaresuperiortothoseofshareholdersbot
hpreferenceandordinaryshares.

HirePurchase
Thisisanarrangementwherebyacompanyacquiresanassetbypayinganinitialinstallmentusually40%o
fthecostoftheassetandrepaystheotherpartofthecostoftheassetoveraperiodoftime.Thissourceismoree
xpensivethanbankloans.Companiesthatusethissourceoffinanceneedguarantorsasitdoesnotcallforco
llateralsecuritiestoraise.Thecompanyhiringtheassetwillberequiredtohonorallthetermsofthearrange
mentwhichmeansthatifanytermisviolatedthenthehireemayrepossesstheasset.Thisfinanceiskindand
thehirerwillnotgetagoodtitletotheassetuntilheclearsthefinalinstallmentandanoptionalchargeinsome
cases.CompaniesthatofferthisfinanceinKenyaare:-
NationalIndustrialE.A.Ltd.,DiamondTrust(K)Ltd.,KenyaFinanceCorporation,CreditFinanceCo.Lt
d.Theyavailhirepurchasefacilitiesforsuchassetsas:Plantandmachineries,vehicles,tractors,heavytra
nsportmachines,aircrafts,agriculturalequipments.

BUSINESSMANAGEMENT
Definition
Managementistheprocessofachievingorganizationalgoalsthroughengaginginthefourmajorf
unctionsofplanning,organizing,leadingandcontrolling.Anotherdefinesmanagementastheprocessof
workingwithpeopleandresourcestoaccomplishorganizationalgoals.
Managementinvolvescoordinatingandoverseeingtheworkactivitiesofotherssothattheiractivitiesare
completedefficientlyandeffectively.(Coulter&Robbins2007)
Amorecomprehensivedefinitionofmanagementstatesthatmanagementisaprocessofassembli
ngandusingresources(human,financial,materialandinformation)inagoaldirectedmannertoaccompli
shtasksinanorganization.
Managersarethoseindividualswhobringtogetherthemoneymanpowermaterialsandmachiner
ynecessarytooperateabusiness.Theymakedecisionanddecidecourseofactionthattheorganizationtak

26
es.Amanagerissomeonewhoworkswithandthroughotherpeoplebycoordinatingtheirworkactivitiesi
nordertoaccomplishorganizationalgoals.
Managementlevels
Managers’decisionsvarywiththeirlevelintheorganization.Eachlevelrequiresdifferentskillstoogiven
thefactthattheyperformdifferentfunctions.
 Topmanagementincludespresident,chiefexecutiveofficer,chieffinancialofficer,andvicepre
sident(thetitlesmaydifferamongorganizations).Thedecisionsthataremadebymanagersinthis
levelarestrategicinnaturemeaningtheystretchoverfiveyearsandcoverthewholeorganization.
Decisionsinthislevelarealsounstructuredandincludeansweringquestionssuchasshouldweex
pand?Howcanweexpand?(Isitthroughacquisitionormergerorjointventures?)
 Middlelevelmanagementincludespositionsuchasregionalmanageranddepartmentalheads.T
heyareresponsibleforbusiness’sshort-
termdecisions.Muchoftheirworkinvolvesimplementingintheirregionordepartmentwhatthet
opmanagershavedeliberated.Thedecision-makinginthislevelissemi-
structuredsincetheyhavetoconformtothetopmanagementdecisions.
 Firstlinemanagement(supervisory)mostlyoverseestheemployeeswhoareengagedinday-to-
dayproductionprocess.Theydealwithissuessuchasemployeeabsenteeismandcustomercompl
aints.(Madura2007)

Amorecomprehensivedefinitionofmanagementstatesthatmanagementisaprocessofassemblingandu
singresources(human,financial,materialandinformation)inagoaldirectedmannertoaccomplishtasks
inanorganization.

Managersarethoseindividualswhobringtogetherthemoneymanpowermaterialsandmachinerynecess
arytooperateabusiness.Theymakedecisionanddecidecourseofactionthattheorganizationtakes.Ama
nagerissomeonewhoworkswithandthroughotherpeoplebycoordinatingtheirworkactivitiesinorderto
accomplishorganizationalgoals.

ManagementFunctions
1. PLANNING
Planningisthefunctionofmanagementthatinvolvessettingobjectivesanddeterminingacourseofaction
forachievingtheseobjectives.Planningrequiresthatmanagersbeawareofenvironmentalconditionsfac
ingtheirorganizationandforecastfutureconditions.Italsorequiresthatmanagersbegooddecision-
makers.
Planningisaprocessconsistingofseveralsteps.Theprocessbeginswithenvironmentalscanning,whichs
implymeansthatplannersmustbeawareofthecriticalcontingenciesfacingtheirorganizationintermsofe
conomicconditions,theircompetitors,andtheircustomers.Plannersmustthenattempttoforecastfuture
conditions.Theseforecastsformthebasisforplanning.
Plannersmustestablishobjectives,whicharestatementsofwhatneedstobeachievedandwhen.Planners
mustthenidentifyalternativecoursesofactionforachievingobjectives.Afterevaluatingthevariousalter
natives,plannersmustmakedecisionsaboutthebestcoursesofactionforachievingobjectives.Theymust

27
thenformulatenecessarystepsandensureeffectiveimplementationofplans.Finally,plannersmustcons
tantlyevaluatethesuccessoftheirplansandtakecorrectiveactionwhennecessary.
Typesofplansandplanning.
 StrategicPlanning
Strategicplanninginvolvesanalyzingcompetitiveopportunitiesandthreats,aswellasthestrengthsand
weaknessesoftheorganization,andthendetermininghowtopositiontheorganizationtocompeteeffecti
velyintheirenvironment.Strategicplanninghasalongtimeframe,oftenthreeyearsormore.Strategicpla
nninggenerallyincludestheentireorganizationandincludesformulationofobjectives.Strategicplanni
ngisoftenbasedontheorganization'smission,whichisitsfundamentalreasonforexistence.Anorganizat
ion'stopmanagementmostoftenconductsstrategicplanning.
 TacticalPlanning
Tacticalplanningisintermediate-
rangeplanningthatisdesignedtodeveloprelativelyconcreteandspecificmeanstoimplementthestrategi
cplan.Middle-levelmanagersoftenengageintacticalplanning.Tacticalplanningoftenhasaone-
tothree-yeartimehorizon.
 OperationalPlanning
Operationalplanninggenerallyassumestheexistenceofobjectivesandspecifieswaystoachievethem.O
perationalplanningisshort-
rangeplanningthatisdesignedtodevelopspecificactionstepsthatsupportthestrategicandtacticalplans.
Operationalplanningusuallyhasaveryshorttimehorizon,fromoneweektooneyear.

2. ORGANIZING
Organizingisthemanagerialfunctionofarrangingpeopleandresourcestoworktowardagoal.Thepu
rposesoforganizingincludebutarenotlimitedtodeterminingthetaskstobeperformedinordertoachieve
objectives,dividingtasksintospecificjobs,groupingjobsintodepartments,specifyingreportingandaut
horityrelationships,delegatingtheauthoritynecessaryfortaskaccomplishment,andallocatinganddepl
oyingresourcesinacoordinatedfashion.
Organizingplaysacentralroleinthemanagementprocess.Onceplansarecreatedthemanager'staski
stoseethattheyarecarriedout.Givenaclearmission,corevalues,objectives,andstrategy,theroleoforgan
izingistobegintheprocessofimplementationbyclarifyingjobsandworkingrelationships.Itidentifiesw
hoistodowhat,whoisinchargeofwhom,andhowdifferentpeopleandpartsoftheorganizationrelatetoan
dworkwithoneanother.Allofthis,ofcourse,canbedoneindifferentways.Thestrategicleadershipchalle
ngeistochoosethebestorganizationalformtofitthestrategyandothersituationaldemands.

OrganizingDecisions
Whenorganizing,managersmustmakedecisionsaboutthedivisionoflabourandworkspecialization,de
partmentalization,chainofcommand,spanofmanagement,centralization,andformalization.Collectiv
ely,thesedecisionsareoftencalledorganizationaldesign-theprocessofstructuringanorganization
DivisionofLabourorSpecialization
Divisionoflabourcontributestoincreasedproductivityandefficiencybyallowingworkerstospecialize
andbecomeproficientataspecifictask.Thisprinciple,coupledwithtechnologicaladvances,hasmadepo
28
ssiblethetremendousproductivityofindustrialcompaniesduringmostofthetwentiethcentury.Bythe19
40smostmanufacturingjobsindevelopednationswerehighlyspecialized,withworkersperformingspe
cific,standardized,andrepetitivetasks.Thisresultedinreducedstaffing,training,andcompensationcost
s,sincehighlyskilledworkerswereoftennotnecessary.Inaddition,sinceemployeesweredoingthesame
taskrepetitively,theytendedtobecomeverygoodatit.
Despitetheimprovementsinproductivitymadepossiblebythedivisionoflabour,managersmustbeawar
eofthenegativeaspectsofspecialization:fatigue,stress,boredom,lowqualityproducts,absenteeism,an
dturnover.Suchproblemshaveledtoprogramsgearedtowardjobenlargementandjobenrichment.
Departmentalization
Aftertheworktobecompletedisorganizedintoidentifiablejobsthroughaprocessofdividinglabour,jobs
arethencombinedintologicalsectionsordepartments.Doingsoallowsforeffectivecoordinationofeffor
t.Therearemanywaystodepartmentalize,eachofwhichhasimportantadvantagesanddisadvantages.O
neofthemostcommonformsisfunctionaldepartmentalization,whichinvolvesgroupingsimilarjobsint
oacommondepartment,suchasaccounting,sales,humanresources,andengineering.Anotherformispr
oductdepartmentalization,whichinvolvesorganizingaroundanenterprise'svariousproductlines.Othe
rwaysofdepartmentalizingincludeorganizingbycustomerandbygeographicterritory.Inpractice,most
largecompaniesuseahybridformofdepartmentalization,whichmeanstheycombineoneormoreofthea
bovemethodstoformtheirorganizationalstructure.

ChainofCommand
Thechainofcommandisalineofauthorityextendingfromthetoptothebottomoftheorganizationalstruct
ure.Classicprinciplesoforganizingemphasizethatonemustbeawareoftheneedtodefinetheextentofma
nagers'responsibilityandauthoritybyspecifyingtheirplaceinthechainofcommand.Anotherprincipleo
forganizingrelatedtothechainofcommandiscalledtheunityofcommand,whichstatesthatapersonshou
ldhaveonlyonesuperiortowhomheorshemustreport.
SpanofManagement
Thespanofmanagement,oftencalledthespanofcontrol,isthenumberofindividualswhoaredirectlyresp
onsibletoaparticularmanager.Aclassicprincipleoforganizingsuggeststhattherearedefinitelimitstoth
enumberofsubordinatesonemanagercansuperviseeffectively.Whenorganizing,managersmustkeept
heselimitsinmind.
Widespansofmanagementleadtoflatterorganizationalstructureswithfewerlayersofmanagement,and
arethusconsideredmoreefficient.However,ifspansbecometoowidemanagersmaynotbeabletoprovid
eadequatedirectiontosubordinates.Narrowspansofmanagementleadtotallorganizationalstructuresw
ithmanylayersofmanagement.Althoughnarrowerspansofmanagementallowforclosersupervisionof
subordinatestheyhavemanydrawbacks,includingcost,communicationproblems,anddifficultyindev
elopingtheinitiativeandautonomyofsubordinates.
Ingeneral,thetrendistowardwiderspansofmanagement,withanaccompanyingdecreaseinmanageme
nthierarchy.Technologicaladvancesininformationprocessingandcommunicationhavemadewidersp
ansofmanagementmorefeasible.
DegreeofCentralization

29
Anotherorganizingdecisionisthedegreeofcentralizationintheorganizationalstructure.Ifdecision-
makingauthorityinanorganizationishighlycentralized,thenmostmajordecisionsaremadeattheupperl
evelsofthestructure.Conversely,ifdecision-
makingauthorityisdecentralized,importantdecisionsareoftenmadeatlowerlevelsofthehierarchy.The
degreeofcentralizationthatisappropriateforagivenorganizationdependsuponmanyfactors,including
thenatureoftheenvironmentalconditionsthatfacetheenterprise,thecharacteristicsandabilitiesoflower
-
levelemployees,andthesizeoftheenterprise.Manyorganizationsarefavouringagreaterdegreeofdecen
tralizationoftheirdecision-makingauthority.
Formalization
Thedegreeofformalizationinanenterprisereferstothedegreetowhichtherearestandardizedrulesandpr
oceduresgoverningtheactivitiesofemployees.Acompanywithahighdegreeofformalizationischaract
erizedbydetailedjobdescriptionsandclearlydefinedpoliciesandprocedurescoveringawidevarietyofe
mployeebehaviours.Conversely,acompanywithalowlevelofformalizationischaracterizedbynon-
structuredjobsandfewerexplicitpoliciesandprocedures.
Ascompaniesgrowlarger,acertainamountofformalizationisinevitable.Employeesrequiresomedirect
ionintheirjobresponsibilitiesandintheproceduresrequiredforconsistencywithintheorganization'spro
ductionschema.Whenorganizing,however,managersshouldbeawareofthecostsofexcessiveformaliz
ation,whichmayincludestiflingemployeecreativityandinnovationaswellasslowingtheorganization's
responsivenesstocriticalissuesandproblems.

FactorsAffectingOrganizingDecisions
Thereisnostandardformulaforthebestwaytoorganizeanenterprise.Severalfactorshavebeenshowntoi
nfluenceorganizingdecisions.Amongthemostimportantofthesefactorsarestrategy,size,environment
alconditions,andtechnology.
Strategy
Managersorganizeinordertoachievetheobjectivesoftheenterpriseforwhichtheywork.Thus,thestrate
gyoftheenterpriseaffectsorganizingdecisions.Changesinstrategyfrequentlynecessitatechangesinthe
waytheenterpriseisorganized.
Size
Smallenterprisestendtoexhibitlessformalization,centralization,andcomplexityintheirorganizationa
lstructure.Nevertheless,enterprisesofthesamesizemaybeorganizedquitedifferentlybecauseofdiffere
ncesinstrategy,environmentalconditions,andtechnology.
EnvironmentalConditions
Thekeyfactorintheexternalenvironmentthatisrelevanttoorganizingisuncertainty.Someenterprisesfa
cecompetitiveenvironmentsthatchangerapidlyandarequitecomplex,whileothersfacerelativelystabl
econditions.Generally,turbulentenvironmentscallfororganizingdecisionsthatleadtolessformalizati
onandcentralizationintheorganizationalstructure.
Technology
Theprocessesbywhichanenterprisetransformsinputsintooutputsmayalsoaffectorganizingdecisions.
Someresearchsuggeststhatorganizingdecisionsthatleadtohighdegreesofformalization,centralizatio
30
n,andworkspecializationaremoreappropriateforroutinetechnologiesandthattheconverseistrueforno
n-routinetechnologies.

Organizationstructure
Istheformalsystemoftaskandreportingrelationshipsthatcontrols,coordinates,andmotivatese
mployeessothattheycooperatetoachieveanorganization'sgoals.
Typesoforganizationalstructures
a. FunctionalStructure
Functionalstructuregroupspeopletogetherbecausetheyholdsimilarpositionsinanorganization,perfor
masimilarsetoftasks,orusethesamekindofskills.
Thisdivisionoflabourandspecializationallowsanorganizationtobecomemoreeffective.
AdvantagesofaFunctionalStructure
CoordinationAdvantages
 Easycommunicationamongspecialists-
Peoplegroupedtogetheraccordingtosimilaritiesintheirpositionscaneasilycommunicateands
hareinformationwitheachother.
 Quickdecisions-
Peoplewhoapproachproblemsfromthesameperspectivecanoftenmakedecisionsmorequickly
andeffectivelythancanpeoplewhoseperspectivesdiffer.
 Learning-
Makesiteasierforpeopletolearnfromoneanother'sexperiences.Thusafunctionalstructurehelp
semployeesimprovetheirskillsandabilitiesandtherebyenhancesindividualandorganizational
performance.
MotivationAdvantages
 Facilitatesperformanceevaluationforsupervisor-
Supervisorsareinagoodpositiontomonitorindividualperformance,rewardhighperformance,a
nddiscouragesocialloafing.Functionalsupervisorsfindmonitoringeasybecausetheyusuallyp
ossesshighlevelsofskillintheparticularfunction.
 Facilitatesperformanceevaluationforpeers-
Allowsgroupmemberstomonitorandcontroloneanother'sbehaviourandperformancelevels.
 Createsteamwork-
Canalsoleadtothedevelopmentofnorms,values,andgroupcohesivenessthatpromotehighperf
ormance.
 Createsacareerladder-
Functionalmanagersandsupervisorsaretypicallyworkerswhohavebeenpromotedbecauseoft
heirsuperiorperformance.

DisadvantagesofaFunctionalStructure
 Servingneedsofallproducts-
Whentherangeofproductsorservicesthatacompanyproducesincreases,thevariousfunctionsc
anhavedifficulty
31
  Coordination-
Asorganizationsattractcustomerwithdifferentneeds,theymayfindithardtoservicethesediffer
entneedsbyusingasinglesetoffunctions.
 Servingneedsofallregions-
Ascompaniesgrow,theyoftenexpandtheiroperationsnationally,andservicingtheneedsofdiffe
rentregionalcustomersbyusingasingleseofmanufacturing,sales,orpurchasingfunctionsbeco
mesverydifficult.

b. DivisionalStructures:Product,Market,andGeographic
Adivisionalstructurethatoverlaysfunctionalgroupingsallowanorganizationtocoordinateinter-
grouprelationshipsmoreeffectivelythandoesafunctionalstructure
ProductStructure-
Eachproductdivisioncontainsthefunctionsnecessarytothatservicethespecificgoodsorservicesitprod
uces.
Whataretheadvantagesofaproductstructure?
Itincreasesthedivisionoflaboursothatthenumbersimilarproductscanbeincreased(suchasawidervarie
tyofapplianceslikestoves,orovens)expandintonewmarketsandproducetotallynewkindsofproducts(s
uchaswhenanappliancemakerstartstoproducecomputersorairplanes).
MarketStructure-MarketStructure-
Groupfunctionsintodivisionsthatcanberesponsivetotheneedsofparticulartypesofcustomers.
GeographicStructure-
Anorganizationfacingtheproblemofcontrollingitsactivitiesonanationalorinternationallevelislikelyt
ouseageographicstructureandgroupfunctionsintoregionaldivisionstoservicecustomersindifferentge
ographicareas.
Eachgeographicdivisionhasaccesstoafullsetofthefunctionsitneedstoprovideitsgoodsandservices.
AdvantagesofaDivisionalStructure
CoordinationAdvantages
 Qualityproductsandcustomerservice-
Functionsareabletofocustheiractivitiesonaspecifickindofgood,service,orcustomer.Thisnarr
owfocushelpsadivisiontocreatehigh-qualityproductsandprovidehigh-
qualitycustomerservice.
 Facilitatescommunication-
betweenfunctionsimprovedecisionmaking,therebyincreasingperformance.
 Customizedmanagementandproblemsolving-
Ageographicstructureputsmanagersclosertothesceneofoperationsthanaremanagersatcentral
headquarters.Regionalmanagersarewellpositionedtoberesponsivetolocalsituationssuchasth
eneedsofregionalcustomersandtofluctuationsinresources.Thusregionaldivisionsareoftenab
letofindsolutionstoregion-
specificproblemsandtouseavailableresourcesmoreeffectivelythanaremanagersatcorporateh
eadquarters.

32
  Facilitatesteamwork-
Peoplearesometimesabletopooltheirskillsandknowledgeandbrainstormnewideasforproduct
sorimprovedcustomerservice.
 Facilitatesdecisionmaking-
Asdivisionsdevelopacommonidentityandapproachtosolvingproblems,theircohesivenessin-
creases,andtheresultisimproveddecisionmaking.
MotivationAdvantages
 Clearconnectionbetweenperformanceandreward-
Adivisionalstructuremakesitrelativelyeasyfororganizationstoevaluateandrewardtheperfor
manceofindividualdivisionsandtheirmanagersandtoassignrewardsinawaythatiscloselylinke
dtotheirperformance.Corporatemanagerscanalsoevaluateoneregionaloperationagainstanot
herandthusshareideasbetweenregionsandfindwaystoimproveperformance.
 Customizedservice-
regionalmanagersandemployeesareclosetotheircustomersandmaydeveloppersonalrelations
hipswiththem-
relationshipsthatmaygivethosemanagersandemployeesextraincentivetoperformwell.
 Identificationwithdivision-
employees'closeidentificationwiththeirdivisioncanincreasetheircommitment,loyalty,andjo
bsatisfaction.

DisadvantagesofaDivisionalStructure
 Highoperatingandmanagingcosts-
becauseeachdivisionhasitsownsetoffunctions,operatingcosts-
thecostsassociatedwithmanaginganorganization-
increase.Thenumberofmanagersinanorganization,forexample,increases,becauseeachdivisi
onhasitsownsetofsalesmanagers,manufacturingmanagers,andsoon.Thereisalsoacompletely
newlevelofmanagement,thecorporatelevel,topayfor.
 Poorcommunicationbetweendivisions-
Divisionalstructuresnormallyhavemoremanagersandmorelevelsofmanagementthanfunctio
nalstructureshave,communicationsproblemscanariseasvariousmanagersatvariouslevelsinv
ariousdivisionsattempttocoordinatetheiractivities.
 Conflictsamongdivisions-
divisionsmaystarttocompetefororganizationalresourcesandmaystarttopursuedivisionalgoal
sandobjectivesattheexpenseoforganizationalones.

c. MatrixStructure
Acomplexformofdifferentiationthatsomeorganizationsusetocontroltheiractivitiesresultsinthematri
xstructure,whichsimultaneouslygroupspeopleintwoways-
bythefunctionofwhichtheyareamemberandbytheproductteamonwhichtheyarecurrentlyworking
Inpractice,theemployeeswhoaremembersoftheproductteamsinamatrixstructurehavetwobosses-
afunctionalbossandaproductboss.
33
CoordinationAdvantages
 Facilitatesrapidproductdevelopment
 Maximizescommunicationandcooperationbetweenteammembers
 Facilitatesinnovationandcreativity
 Facilitatesface-to-faceproblemsolving(throughteams)
 Providesaworksettinginwhichmanagerswithdifferentfunctionalexpertisecancooperatetosol
venon-programmeddecision-makingproblems.
 Facilitatesfrequentchangesofmembershipinproductteams
MotivationAdvantages
Thematrixstructureprovidesaworksettinginwhichsuchemployeesaregiventhefreedomandautonom
ytotakeresponsibilityfortheirworkactivities.

DisadvantagesofaMatrixStructure
 Increaseroleconflictandroleambiguity-Twobossesmakingconflictingdemandsonatwo-
bossemployeecauseroleconflict.Reportingrelationshipsinthematrixmakesemployeesvulner
abletoroleambiguity.
 Highlevelsofworkstress-
Conflictandambiguitycanincreasefeelingsofstress.Difficultyemployeeshaveindemonstrati
ngtheirpersonalcontributionstoteamperformancebecausetheymovesooftenfromoneteamtoa
nother.
 Limitedopportunitiesforpromotion-
becausemostmovementislateral,fromteamtoteam,notverticaltouppermanagementpositions.
Theextentoftheseproblemsexplainswhymatrixstructuresareusedonlybycompaniesthatdependonrap
idproductdevelopmentfortheirsurvivalandthatmanufactureproductsdesignedtomeetspecificcustom
erneeds.Matrixstructuresareespeciallycommoninhigh-techandbiotechnologycompanies.

3. STAFFING
Themanagerialfunctionofstaffinginvolvesmanningtheorganizationstructurethroughproperandeffec
tiveselection,appraisalanddevelopmentofthepersonneltofilltherolesassignedtotheemployers/
workforce.
AccordingtoTheoHaimann,“Staffingpertainstorecruitment,selection,developmentandcompensatio
nofsubordinates.”
NatureofStaffingFunction
 Staffingisanimportantmanagerialfunction-
Staffingfunctionisthemostimportantmanagerialactalongwithplanning,organizing,directing
andcontrolling.Theoperationsofthesefourfunctionsdependuponthemanpowerwhichisavaila
blethroughstaffingfunction.
 Staffingisapervasiveactivity-
Asstaffingfunctioniscarriedoutbyallmangersandinalltypesofconcernswherebusinessactiviti
esarecarriedout.

34
  Staffingisacontinuousactivity-
Thisisbecausestaffingfunctioncontinuesthroughoutthelifeofanorganizationduetothetransfe
rsandpromotionsthattakeplace.
 Thebasisofstaffingfunctionisefficientmanagementofpersonnel-
Humanresourcescanbeefficientlymanagedbyasystemorproperprocedure,thatis,recruitment,
selection,placement,traininganddevelopment,providingremuneration,etc.
 Staffinghelpsinplacingrightmenattherightjob.Itcanbedoneeffectivelythroughproperrecruit
mentproceduresandthenfinallyselectingthemostsuitablecandidateasperthejobrequirements.
 Staffingisperformedbyallmanagersdependinguponthenatureofbusiness,sizeofthecompany,
qualificationsandskillsofmanagersetc.Insmallcompanies,the

StaffingProcess-StepsinvolvedinStaffing
i) Manpowerrequirements-
Theveryfirststepinstaffingistoplanthemanpowerinventoryrequiredbyaconcerninordertomat
chthemwiththejobrequirementsanddemands.Therefore,itinvolvesforecastinganddetermini
ngthefuturemanpowerneedsoftheconcern.
ii) Recruitment-
Oncetherequirementsarenotified,theconcerninvitesandsolicitsapplicationsaccordingtothei
nvitationsmadetothedesirablecandidates.
iii) Selection-
Thisisthescreeningstepofstaffinginwhichthesolicitedapplicationsarescreenedoutandsuitabl
ecandidatesareappointedaspertherequirements.
iv) OrientationandPlacement-
Oncescreeningtakesplace,theappointedcandidatesaremadefamiliartotheworkunitsandwork
environmentthroughtheorientationprogrammes.Placementtakesplacebyputtingrightmanon
therightjob.
v) TrainingandDevelopment-
Trainingisapartofincentivesgiventotheworkersinordertodevelopandgrowthemwithinthecon
cern.Trainingisgenerallygivenaccordingtothenatureofactivitiesandscopeofexpansioninit.A
longwithit,theworkersaredevelopedbyprovidingthemextrabenefitsofin-
depthknowledgeoftheirfunctionalareas.Developmentalsoincludesgivingthemkeyandimpor
tantjobsasatestorexaminationinordertoanalyzetheirperformances.
vi) Remuneration-
Itisakindofcompensationprovidedmonetarilytotheemployeesfortheirworkperformances.Th
isisgivenaccordingtothenatureofjob-
skilledorunskilled,physicalormental,etc.Remunerationformsanimportantmonetaryincentiv
efortheemployees.
vii) PerformanceEvaluation-
Inordertokeepatrackorrecordofthebehaviour,attitudesaswellasopinionsoftheworkerstowar
dstheirjobs,regularassessmentisdonetoevaluateandsupervisedifferentworkunitsinaconcern.

35
 Itisbasicallyconcerningtoknowthedevelopmentcycleandgrowthpatternsoftheemployeesina
concern.
viii) Promotionandtransfer-Promotionissaidtobeanon-
monetaryincentiveinwhichtheworkerisshiftedfromahigherjobdemandingbiggerresponsibili
tiesaswellasshiftingtheworkersandtransferringthemtodifferentworkunitsandbranchesofthe
sameorganization.

ManpowerPlanning
ManpowerPlanningwhichisalsocalledasHumanResourcePlanningconsistsofputtingrightnumberof
people,rightkindofpeopleattherightplace,righttime,doingtherightthingsforwhichtheyaresuitedforth
eachievementofgoalsoftheorganization.HumanResourcePlanninghasgotanimportantplaceintheare
naofindustrialization.
HumanResourcePlanningprocedure
 Analyzingthecurrentmanpowerinventory
 Makingfuturemanpowerforecasts
 Developingemploymentprogrammes
 Designtrainingprogrammes
1. Analyzingthecurrentmanpowerinventory-
Beforeamanagermakesforecastoffuturemanpower,thecurrentmanpowerstatushastobeanaly
zed.Forthisthefollowingthingshavetobenoted-
 Typeoforganization
 Numberofdepartments
 Numberandquantityofsuchdepartments
 Employeesintheseworkunits
 Oncethesefactorsareregisteredbyamanager,hegoesforthefutureforecasting.

2. Makingfuturemanpowerforecasts-
Oncethefactorsaffectingthefuturemanpowerforecastsareknown,planningcanbedoneforthef
uturemanpowerrequirementsinseveralworkunits.TheManpowerforecastingtechniquescom
monlyemployedbytheorganizationsareasfollows:
 ExpertForecasts:Thisincludesinformaldecisions,formalexpertsurveysandDelphitechnique.
 TrendAnalysis:Manpowerneedscanbeprojectedthroughextrapolation(projectingpasttrends)
,indexation(usingbaseyearasbasis),andstatisticalanalysis(centraltendencymeasure).
 WorkLoadAnalysis:Itisdependentuponthenatureofworkloadinadepartment,inabranchorina
division.
 WorkForceAnalysis:Wheneverproductionandtimeperiodhastobeanalyzed,dueallowancesh
avetobemadeforgettingnetmanpowerrequirements.
 Othermethods:SeveralMathematicalmodels,withtheaidofcomputersareusedtoforecastman
powerneeds,likebudgetandplanninganalysis,regression,newventureanalysis.

36
 3. Developingemploymentprogrammes-
Oncethecurrentinventoryiscomparedwithfutureforecasts,theemploymentprogrammescanb
eframedanddevelopedaccordingly,whichwillincluderecruitment,selectionproceduresandpl
acementplans.

4. Designtrainingprogrammes-
Thesewillbebaseduponextentofdiversification,expansionplans,developmentprogrammeset
c.Trainingprogrammesdependupontheextentofimprovementintechnologyandadvancement
totakeplace.Itisalsodonetoimproveupontheskills,capabilities,knowledgeoftheworkers.

ImportanceofManpowerPlanning
 Keytomanagerialfunctions-
Thefourmanagerialfunctions,i.e.,planning,organizing,directingandcontrollingarebasedupo
nthemanpower.Human
 Efficientutilization-
Efficientmanagementofpersonnel’sbecomesanimportantfunctionintheindustrializationwor
ldoftoday.Settingoflargescaleenterprisesrequiresmanagementoflargescalemanpower.Itcan
beeffectivelydonethroughstaffingfunction.
 Motivation-
Staffingfunctionnotonlyincludesputtingrightmenonrightjob,butitalsocomprisesofmotivatio
nalprogrammes,i.e.,incentiveplanstobeframedforfurtherparticipationandemploymentofem
ployeesinaconcern.Therefore,alltypesofincentiveplansbecomeanintegralpartofstaffingfunc
tion.
 Betterhumanrelations-
Aconcerncanstabilizeitselfifhumanrelationsdevelopandarestrong.Humanrelationsbecomes
trongtrougheffectivecontrol,clearcommunication,effectivesupervisionandleadershipinaco
ncern.Staffingfunctionalsolooksaftertraininganddevelopmentoftheworkforcewhichleadsto
co-operationandbetterhumanrelations.
 Higherproductivity-
Productivitylevelincreaseswhenresourcesareutilizedinbestpossiblemanner.Higherproducti
vityisaresultofminimumwastageoftime,money,effortsandenergies.Thisispossiblethroughth
estaffinganditsrelatedactivities(Performanceappraisal,traininganddevelopment,remunerati
on)

Advantagesofmanpowerplanning
 Shortagesandsurplusescanbeidentifiedsothatquickactioncanbetakenwhereverrequired.
 Alltherecruitmentandselectionprogrammesarebasedonmanpowerplanning.
 Italsohelpstoreducethelabourcostasexcessstaffcanbeidentifiedandtherebyoverstaffingcanb
eavoided.
 Italsohelpstoidentifytheavailabletalentsinaconcernandaccordinglytrainingprogrammescan
bechalkedouttodevelopthosetalents.

37
  Ithelpsingrowthanddiversificationofbusiness.Throughmanpowerplanning,humanresources
canbereadilyavailableandtheycanbeutilizedinbestmanner.
 Ithelpstheorganizationtorealizetheimportanceofmanpowermanagementwhichultimatelyhel
psinthestabilityofaconcern.

ObstaclesinManpowerPlanning
 UnderUtilizationofManpower:Thebiggestobstacleincaseofmanpowerplanningisthefactthat
theindustriesingeneralarenotmakingoptimumuseoftheirmanpowerandoncemanpowerplann
ingbegins,itencountersheavyoddsinsteppinguptheutilization.
 DegreeofAbsenteeism:Absenteeismisquitehighandhasbeenincreasingsincelastfewyears.
 LackofEducationandSkilledLabour:Theextentofilliteracyandtheslowpaceofdevelopmentof
theskilledcategoriesaccountforlowproductivityinemployees.Lowproductivityhasimplicati
onsformanpowerplanning.

TypesofRecruitment
i) InternalRecruitment
Itisarecruitmentwhichtakesplacewithintheconcernororganization.Internalsourcesofrecruitmentare
readilyavailabletoanorganization.Internalsourcesareprimarilythree–Transfers,promotionsandRe-
employmentofex-employees.Re-employmentofex-
employeesisoneoftheinternalsourcesofrecruitmentinwhichemployeescanbeinvitedandappointedto
fillvacanciesintheconcern.Therearesituationswhenex-
employeesprovideunsolicitedapplicationsalso.
Internalrecruitmentmayleadtoincreaseinemployee’sproductivityastheirmotivationlevelincreases.Italsosave
stime,moneyandefforts.Butadrawbackofinternalrecruitmentisthatitrestrainstheorganizationfromnewblood.
Also,notallthemanpowerrequirementscanbemetthroughinternalrecruitment.Hiringfromoutsidehastobedone
.
Internalsourcesareprimarily3:
- Transfers
- Promotions(throughInternalJobPostings)
- Re-employmentofex-employees-Re-employmentofex-
employeesisoneoftheinternalsourcesofrecruitmentinwhichemployeescanbeinvitedandappo
intedtofillvacanciesintheconcern.Therearesituationswhenex-
employeesprovideunsolicitedapplicationsalso.
ii) ExternalRecruitment
Externalsourcesofrecruitmenthavetobesolicitedfromoutsidetheorganization.Externalsourcesareext
ernaltoaconcern.Butitinvolveslotoftimeandmoney.
Theexternalsourcesofrecruitment

38
 - EmploymentatFactoryLevel–
Thisasourceofexternalrecruitmentinwhichtheapplicationsforvacanciesarepresentedonbulle
tinboardsoutsidetheFactoryorattheGate.Thiskindofrecruitmentisapplicablegenerallywhere
factoryworkersaretobeappointed.Therearepeoplewhokeeponsolicitingjobsfromoneplaceto
another.Theseapplicantsarecalledasunsolicitedapplicants.Thesetypesofworkersapplyonthe
irownfortheirjob.Forthiskindofrecruitmentworkershaveatendencytoshiftfromonefactoryto
another.
- Advertisement–
Itisanexternalsourcewhichhasgotanimportantplaceinrecruitmentprocedure.Thebiggestadv
antageofadvertisementisthatitcoversawideareaofmarketandscatteredapplicantscangetinfor
mationfromadvertisements.MediumusedisNewspapersandTelevision.
- EmploymentExchanges–
TherearecertainEmploymentexchangeswhicharerunbygovernment.Mostofthegovernment
undertakingsandconcernsemploypeoplethroughsuchexchanges.Now-a-
daysrecruitmentingovernmentagencieshasbecomecompulsorythroughemploymentexchan
ge.
- EmploymentAgencies–
Therearecertainprofessionalorganizationswhichlooktowardsrecruitmentandemploymentof
people,i.e.theseprivateagenciesrunbyprivateindividualssupplyrequiredmanpowertoneedyc
oncerns.
- EducationalInstitutions–
TherearecertainprofessionalInstitutionswhichserveasanexternalsourceforrecruitingfreshgr
aduatesfromtheseinstitutes.Thiskindofrecruitmentdonethroughsucheducational
- Recommendations–
Therearecertainpeoplewhohaveexperienceinaparticulararea.Theyenjoygoodwillandastandi
nthecompany.Therearecertainvacancieswhicharefilledbyrecommendationsofsuchpeople.T
hebiggestdrawbackofthissourceisthatthecompanyhastorelytotallyonsuchpeoplewhichcanla
teronprovetobeinefficient.
- LabourContractors–
ThesearethespecialistpeoplewhosupplymanpowertotheFactoryorManufacturingplants.Thr
oughthesecontractors,workersareappointedoncontractbasis,i.e.foraparticulartimeperiod.U
nderconditionswhenthesecontractorsleavetheorganization,suchpeoplewhoareappointedha
vetoalsoleavetheconcern.

EmployeeSelectionProcess
Itisaprocedureofmatchingorganizationalrequirementswiththeskillsandqualificationsofpeople.Effe
ctiveselectioncanbedoneonlywhenthereiseffectivematching.Byselectingbestcandidatefortherequir
edjob,theorganizationwillgetqualityperformanceofemployees.Moreover,organizationwillfaceless
ofabsenteeismandemployeeturnoverproblems.Byselectingrightcandidatefortherequiredjob,organi

39
zationwillalsosavetimeandmoney.Properscreeningofcandidatestakesplaceduringselectionprocedu
re.Allthepotentialcandidateswhoapplyforthegivenjobaretested.
Butselectionmustbedifferentiatedfromrecruitment,thoughthesearetwophasesofemploymentproces
s.Recruitmentisconsideredtobeapositiveprocessasitmotivatesmoreofcandidatestoapplyforthejob.It
createsapoolofapplicants.Itisjustsourcingofdata.Whileselectionisanegativeprocessastheinappropri
atecandidatesarerejectedhere.Recruitmentprecedesselectioninstaffingprocess.Selectioninvolvesch
oosingthebestcandidatewithbestabilities,skillsandknowledgefortherequiredjob.

TheEmployeeselectionProcesstakesplaceinfollowingorder-
i) PreliminaryInterviews-
Itisusedtoeliminatethosecandidateswhodonotmeettheminimumeligibilitycriterialaiddownb
ytheorganization.Theskills,academicandfamilybackground,competenciesandinterestsofthe
candidateareexaminedduringpreliminaryinterview.Preliminaryinterviewsarelessformalize
dandplannedthanthefinalinterviews.Thecandidatesaregivenabriefupaboutthecompanyandt
hejobprofile;anditisalsoexaminedhowmuchthecandidateknowsaboutthecompany.Prelimin
aryinterviewsarealsocalledscreeninginterviews.
ii) Applicationblanks-
Thecandidateswhoclearthepreliminaryinterviewarerequiredtofillapplicationblank.Itcontai
nsdatarecordofthecandidatessuchasdetailsaboutage,qualifications,reasonforleavingpreviou
sjob,experience,etc.
iii) WrittenTests-
Variouswrittentestsconductedduringselectionprocedureareaptitudetest,intelligencetest,rea
soningtest,personalitytest,etc.Thesetestsareusedtoobjectivelyassessthepotentialcandidate.
Theyshouldnotbebiased.
iv) EmploymentInterviews-
Itisaonetooneinteractionbetweentheinterviewerandthepotentialcandidate.Itisusedtofindwh
etherthecandidateisbestsuitedfortherequiredjobornot.Butsuchinterviewsconsumetimeand
moneyboth.Moreoverthecompetenciesofthecandidatecannotbejudged.Suchinterviewsmay
bebiasedattimes.Suchinterviewsshouldbeconductedproperly.Nodistractionsshouldbetherei
nroom.Thereshouldbeanhonestcommunicationbetweencandidateandinterviewer.
v) Medicalexamination-
Medicaltestsareconductedtoensurephysicalfitnessofthepotentialemployee.Itwilldecreasech
ancesofemployeeabsenteeism.
vi) AppointmentLetter-
Areferencecheckismadeaboutthecandidateselectedandthenfinallyheisappointedbygivingaf
ormalappointmentletter.
Table5.1:DifferencebetweenRecruitmentandSelection
Basis Recruitment Selection

40
 Meaning Itisanactivityofestablishingcontactbetweenemployersa Itisaprocessofpickingupmo
ndapplicants. recompetentandsuitableem
ployees.
Objective Itencourageslargenumberofcandidatesforajob Itattemptsatrejectingunsuit
ablecandidatesItattemptsat
rejectingunsuitablecandida
tes
Process Itisasimpleprocess Itisacomplicatedprocess
Hurdles Thecandidateshavenottocrossovermanyhurdles Manyhurdleshavetobecros
sed
Approach Itisapositiveapproach Itisanegativeapproach
Sequence Itprecedesselection. Itfollowsrecruitment
Economy Itisaneconomicalmethod Itisanexpensivemethod
TimeConsuming Lesstimeisrequired Moretimeisrequired.

TrainingofEmployees
Trainingofemployeestakesplaceafterorientationtakesplace.Trainingistheprocessofenhancingtheski
lls,capabilitiesandknowledgeofemployeesfordoingaparticularjob.Trainingprocessmouldsthethinki
ngofemployeesandleadstoqualityperformanceofemployees.Itiscontinuousandneverendinginnature
.
ImportanceofTraining
 Improvesmoraleofemployees-
Traininghelpstheemployeetogetjobsecurityandjobsatisfaction.Themoresatisfiedtheemploy
eeisandthegreaterishismorale,themorehewillcontributetoorganizationalsuccessandthelesse
rwillbeemployeeabsenteeismandturnover.
 Lesssupervision-
Awelltrainedemployeewillbewellacquaintedwiththejobandwillneedlessofsupervision.Thu
s,therewillbelesswastageoftimeandefforts.
 Feweraccidents-
Errorsarelikelytooccuriftheemployeeslackknowledgeandskillsrequiredfordoingaparticular
job.Themoretrainedanemployeeis,thelessarethechancesofcommittingaccidentsinjobandthe
moreproficienttheemployeebecomes.
 Chancesofpromotion-
Employeesacquireskillsandefficiencyduringtraining.Theybecomemoreeligibleforpromotio
n.Theybecomeanassetfortheorganization.
 Increasedproductivity-
Trainingimprovesefficiencyandproductivityofemployees.Welltrainedemployeesshowboth
quantityandqualityperformance.Thereislesswastageoftime,moneyandresourcesifemployee
sareproperlytrained.

41
MethodsofTraining
 Onthejobtraining-
Onthejobtrainingmethodsarethosewhicharegiventotheemployeeswithintheeverydayworkin
gofaconcern.Itisasimpleandcost-effectivetrainingmethod.Theproficientaswellassemi-
proficientemployeescanbewelltrainedbyusingsuchtrainingmethod.Theemployeesaretraine
din
 Offthejobtraining-
Offthejobtrainingmethodsarethoseinwhichtrainingisprovidedawayfromtheactualworkingc
ondition.Itisgenerallyusedincaseofnewemployees.Instancesofoffthejobtrainingmethodsare
workshops,seminars,conferences,etc.Suchmethodiscostlyandiseffectiveifandonlyiflargenu
mberofemployeeshavetobetrainedwithinashorttimeperiod.Offthejobtrainingisalsocalledas
vestibuletrainingi.e.,theemployeesaretrainedinaseparatearea(maybeahall,entrance,receptio
nareaetc.knownasavestibule)wheretheactualworkingconditionsareduplicated.

EmployeeRemuneration
EmployeeRemunerationreferstotherewardorcompensationgiventotheemployeesfortheirworkperfo
rmances.Remunerationprovidesbasicattractiontoaemployeetoperformjobefficientlyandeffectively.
Remunerationleadstoemployeemotivation.Salariesconstituteanimportantsourceofincomeforemplo
yeesanddeterminetheirstandardofliving.Salariesaffecttheemployee’sproductivityandworkperform
ance.Thustheamountandmethodofremunerationareveryimportantforbothmanagementandemploye
es.
TypesofEmployeeRemuneration
- TimeRateMethod
- PieceRateMethod

 TimeRateMethod:Undertimeratesystem,remunerationisdirectlylinkedwiththetimespentor
devotedbyanemployeeonthejob.Theemployeesarepaidafixedpre-
decidedamounthourly,daily,weeklyormonthlyirrespectiveoftheiroutput.Itisaverysimpleme
thodofremuneration.Itleadstominimumwastageofresourcesandlesserchancesofaccidents.Ti
meRatemethodleadstoqualityoutputandthismethodisverybeneficialtonewemployeesasthey
canlearntheirworkwithoutanyreductionintheirsalaries.Thismethodencouragesemployees’u
nityasemployeesofaparticulargroup/cadregetequalsalaries.
TherearesomedrawbacksofTimeRateMethod,suchas,itleadstotightsupervision,indefiniteemployee
cost,lesserefficiencyofemployeesasthereisnodistinctionmadebetweenefficientandinefficientemplo
yees,andlessermoraleofemployees.
Timeratesystemismoresuitablewheretheworkisnon-
repetitiveinnatureandemphasisismoreonqualityoutputratherthanquantityoutput.
 PieceRateMethod:Itisamethodofcompensationinwhichremunerationispaidonthebasisofuni
tsorpiecesproducedbyanemployee.Inthissystememphasisismoreonquantityoutputrathertha

42
 nqualityoutput.Underthissystemthedeterminationofemployeecostperunitisnotdifficultbeca
usesalariesdifferwithoutput.Thereislesssupervisionrequiredunderthismethodandhencethec
ostperunitofproductionislow.Thissystemimprovesthemoraleoftheemployeesasthesalariesa
redirectlyrelatedwiththeirworkefforts.Thereisgreaterwork-efficiencyinthismethod.
Therearesomedrawbacksofthismethod,suchas;itisnoteasilycomputable,leadstodeteriorationinwork
quality,wastageofresources,lesserunityofemployees,highercostofproductionandinsecurityamongt
heemployees.
Pieceratesystemismoresuitablewherethenatureofworkisrepetitiveandquantityisemphasizedmoreth
anquality.

4. DIRECTING
Directingissaidtobeaprocessinwhichthemanagersinstruct,guideandoverseetheperformanceofthew
orkerstoachievepredeterminedgoals.Directingissaidtobetheheartofmanagementprocess.Planning,o
rganizing,staffinghavenoimportanceifdirectionfunctiondoesnottakeplace.
Directinginitiatesactionanditisfromhereactualworkstarts.Directionissaidtobeconsistingofhumanfa
ctors.Insimplewords,itcanbedescribedasprovidingguidancetoworkersisdoingwork.Infieldofmanag
ement,directionissaidtobeallthoseactivitieswhicharedesignedtoencouragethesubordinatestoworkef
fectivelyandefficiently

Characteristicsofdirecting

 PervasiveFunction-
Directingisrequiredatalllevelsoforganization.Everymanagerprovidesguidanceandinspirati
ontohissubordinates.
 ContinuousActivity-
Directionisacontinuousactivityasitcontinuousthroughoutthelifeoforganization.
 HumanFactor-
Directingfunctionisrelatedtosubordinatesandthereforeitisrelatedtohumanfactor.Sincehuma
nfactoriscomplexandbehaviourisunpredictable,directionfunctionbecomesimportant.
 CreativeActivity-
Directionfunctionhelpsinconvertingplansintoperformance.Withoutthisfunction,peoplebec
omeinactiveandphysicalresourcesaremeaningless.
 ExecutiveFunction-
Directionfunctioniscarriedoutbyallmanagersandexecutivesatalllevelsthroughouttheworkin
gofanenterprise;asubordinatereceivesinstructionsfromhissuperioronly.
 DelegateFunction-
Directionissupposedtobeafunctiondealingwithhumanbeings.Humanbehaviourisunpredicta
blebynatureandconditioningthepeople’sbehaviourtowardsthegoalsoftheenterpriseiswhatth
eexecutivedoesinthisfunction.Therefore,itistermedashavingdelicacyinittotacklehumanbeh
aviour.

43
ImportanceofDirectingFunction3
 ItInitiatesActions–
Directionsisthefunctionwhichisthestartingpointoftheworkperformanceofsubordinates.Itisf
romthisfunctiontheactiontakesplace,subordinatesunderstandtheirjobsanddoaccordingtothe
instructionslaid.Whateverareplanslaid,canbeimplementedonlyoncetheactualworkstarts.Itis
therethatdirectionbecomesbeneficial.
 ItIngratesEfforts–
Throughdirection,thesuperiorsareabletoguide,inspireandinstructthesubordinatestowork.Fo
rthis,effortsofeveryindividualtowardsaccomplishmentofgoalsarerequired.Itisthroughdirect
iontheeffortsofeverydepartmentcanberelatedandintegratedwithothers.Thiscanbedonethrou
ghpersuasiveleadershipandeffectivecommunication.Integrationofeffortsbringeffectiveness
andstabilityinaconcern.
 MeansofMotivation–
Directionfunctionhelpsinachievementofgoals.Amanagermakesuseoftheelementofmotivati
onheretoimprovetheperformancesofsubordinates.Thiscanbedonebyprovidingincentivesorc
ompensation,whethermonetaryornon–
monetary,whichservesasa“Moralebooster”tothesubordinatesMotivationisalsohelpfulforthe
subordinatestogivethebestoftheirabilitieswhichultimatelyhelpsingrowth.
 ItProvidesStability–
Stabilityandbalanceinconcernbecomesveryimportantforlongtermsunsurvivalinthemarket.
Thiscanbebroughtuponbythemanagerswiththehelpoffourtoolsorelementsofdirectionfuncti
on–
judiciousblendofpersuasiveleadership,effectivecommunication,strictsupervisionandefficie
ntmotivation.Stabilityisveryimportantsincethatisanindexofgrowthofanenterprise.Therefor
eamanagercanuseofallthefourtraitsinhimsothatperformancestandardscanbemaintained.
 Copingupwiththechanges–
Itisahumanbehaviourthathumanbeingsshowresistancetochange.Adaptabilitywithchanging
environmenthelpsinsustainingplannedgrowthandbecomingamarketleader.Itisdirectingfunc
tionwhichisofusetomeetwithchangesinenvironment,bothinternalasexternal.Effectivecomm
unicationhelpsincopingupwiththechanges.Itistheroleofmanagerheretocommunicatethenatu
reandcontentsofchangesveryclearlytothesubordinates.Thishelpsinclarifications,easyadopti
onandsmoothrunningofan
 EfficientUtilizationofResources–
Directionfinancehelpsinclarifyingtheroleofeverysubordinatetowardshiswork.Theresources
canbeutilizedproperlyonlywhenlessofwastages,duplicationofefforts,overlappingofperform
ances,etc.don’ttakeplace.Throughdirection,theroleofsubordinatesbecomeclearasmanager
makesuseofhissupervisory,theguidance,theinstructionsandmotivationskilltoinspirethesubo
rdinates.Thishelpsinmaximumpossibleutilizationofresourcesofmen,machine,materialsand
moneywhichhelpsinreducingcostsandincreasingprofits.

FunctionsofaSupervisor
44
Supervisor,beingthemanagerinadirectcontactwiththeoperatives,hasgotmultifariousfunctiontoperfo
rm.Theobjectivebehindperformanceofthesefunctionsistobringstabilityandsoundnessintheorganiza
tionwhichcanbesecuredthroughincreaseinprofitswhichisanendresultofhigherproductivity.Therefor
e,asupervisorshouldbeconcernedwithperformingthefollowingfunctions–
 PlanningandOrganizing-
Supervisor’sbasicroleistoplanthedailyworkscheduleoftheworkersbyguidingthemthenature
oftheirworkandalsodividingtheworkamongsttheworkersaccordingtotheirinterests,aptitudes
,skillsandinterests.
 Provisionofworkingconditions-
Asupervisorplaysanimportantroleinthephysicalsettingofthefactoryandinarrangingthephysi
calresourcesatrightplace.Thisinvolvesprovidingpropersittingplace,ventilation,lighting,wat
erfacilitiesetc.toworkers.Hismainresponsibilityisheretoprovidehealthyandhygienicconditi
ontotheworkers.
 LeadershipandGuidance-
Asupervisoristheleaderofworkersunderhim.Heleadstheworkersandinfluencesthemtoworkt
heirbest.Healsoguidestheworkersbyfixingproductiontargetsandbyprovidingtheminstructio
nandguidelinestoachievethosetargets.
 Motivation-
Asupervisorplaysanimportantrolebyprovidingdifferentincentivestoworkerstoperformbette
r.Therearedifferentmonetaryandnon-
monetaryincentiveswhichcaninspiretheworkerstoworkbetter.
 Controlling-Controllingisanimportantfunctionperformedbysupervisor.Thiswillinvolve
- Recordingtheactualperformanceagainstthetimeschedule.
- Checkingofprogressofwork.
- Findingoutdeviationsifanyandmakingsolutions
 LinkingPin-
Asupervisorprovestobealinkingpinbetweenmanagementandworkers.Hecommunicatesthep
oliciesofmanagementtoworkersalsopassesinstructionstothemonbehalfofmanagement.Onth
eotherhand,hehasaclosecontactwiththeworkersandthereforecaninterprettheproblems,comp
laints,suggestions,etctothemanagement.Inthisway,hecommunicatesworkersproblemsandbr
ingsittothenoticeofmanagement.
 GrievanceHandling-
Thesupervisorcanhandlethegrievancesoftheworkerseffectivelyforthishehastodothefollowi
ngthings:-
- Hecanbeindirecttouchwithworkers.
- Bywinningtheconfidenceoftheworkersbysolvingtheirproblems.
- Bytakingworkerproblemsonhumanitariangrounds.
 Reporting-
Asupervisorhasgotanimportantroletoreportaboutthecost,qualityandanysuchoutputwhichca

45
 nberesponsibleforincreasingproductivity.Factorslikecost,output,performance,quality,etcca
nbereportedcontinuallytothemanagement.
 Introducingnewworkmethods-
Thesupervisorherehastobeconsciousabouttheenvironmentofmarketandcompetitionpresent.
Thereforehecaninnovatethetechniquesofproduction.Hecanshifttheworkersintofreshschedu
leswheneverpossible.Hecanalsotrythisbesttokeeponchangingandimprovingtothephysicale
nvironmentaroundtheworkers.Thiswillresultin:
- Higherproductivity,
- HighMoraleofWorkers,
- Satisfyingworkingcondition,
- Improvinghumanrelations,
- HigherProfits,and
- HighStability
 EnforcingDiscipline-
Asupervisorcanundertakemanystepstomaintaindisciplineintheconcernbyregulatingchecksa
ndmeasures,strictnessinordersandinstructions,keepinganaccountofgeneraldisciplineoffact
ory,implementingpenaltiesandpunishmentsfortheindisciplineworkers.Alltheseabovestepsh
elpinimprovingtheoveralldisciplineofthefactory.

5. CONTROLLING
Controllingconsistsofverifyingwhethereverythingoccursinconformitieswiththeplansadopted,instr
uctionsissuedandprinciplesestablished.Controllingensuresthatthereiseffectiveandefficientutilizati
onoforganizationalresourcessoastoachievetheplannedgoals.Controllingmeasuresthedeviationofact
ualperformancefromthestandardperformance,discoversthecausesofsuchdeviationsandhelpsintakin
gcorrectiveactions
Controllinghasgottwobasicpurposes:
- Itfacilitatesco-ordination
- Ithelpsinplanning

FeaturesofControllingFunction
 Controllingisanendfunction-
Afunctionwhichcomesoncetheperformancesaremadeinconformitieswithplans.
 Controllingisapervasivefunction-
whichmeansitisperformedbymanagersatalllevelsandinalltypeofconcerns.
 Controllingisforwardlooking-
becauseeffectivecontrolisnotpossiblewithoutpastbeingcontrolled.Controllingalwayslookto
futuresothatfollow-upcanbemadewheneverrequired.

46
  Controllingisadynamicprocess-
sincecontrollingrequirestakingreviewmethods,changeshavetobemadewhereverpossible.
 Controllingisrelatedwithplanning-
PlanningandControllingaretwoinseparablefunctionsofmanagement.Withoutplanning,contr
ollingisameaninglessexerciseandwithoutcontrolling,planningisuseless.Planningpresuppos
escontrollingandcontrollingsucceedsplanning.

ProcessofControlling
i) Establishmentofstandards-
Standardsaretheplansorthetargetswhichhavetobeachievedinthecourseofbusinessfunction.T
heycanalsobecalledasthecriterionsforjudgingtheperformance.Standardsgenerallyareclassif
iedintotwo-
- Measurableortangible–
Thosestandardswhichcanbemeasuredandexpressedarecalledasmeasurablestandards.Theyc
anbeinformofcost,output,expenditure,time,profit,etc.
- Non-measurableorintangible-
Therearestandardswhichcannotbemeasuredmonetarily.Forexample-
performanceofamanager,deviation

ii) Measurementofperformance-
Thesecondmajorstepincontrollingistomeasuretheperformance.Findingoutdeviationsbecom
eseasythroughmeasuringtheactualperformance.Performancelevelsaresometimeseasytomea
sureandsometimesdifficult.Measurementoftangiblestandardsiseasyasitcanbeexpressedinu
nits,cost,moneyterms,etc.Quantitativemeasurementbecomesdifficultwhenperformanceofm
anagerhastobemeasured.Performanceofamanagercannotbemeasuredinquantities.Itcanbem
easuredonlyby-
- Attitudeoftheworkers,
- Theirmoraletowork,
- Thedevelopmentintheattitudesregardingthephysicalenvironment,and
- Theircommunicationwiththesuperiors.
- Itisalsosometimesdonethroughvariousreportslikeweekly,monthly,quarterly,yearlyr
eports.

iii) Comparisonofactualandstandardperformance-
Comparisonofactualperformancewiththeplannedtargetsisveryimportant.Deviationcanbede
finedasthegapbetweenactualperformanceandtheplannedtargets.Themanagerhastofindoutt
wothingshere-
extentofdeviationandcauseofdeviation.Extentofdeviationmeansthatthemanagerhastofindo
utwhetherthedeviationispositiveornegativeorwhethertheactualperformanceisinconformity
withtheplannedperformance.Themanagershavetoexercisecontrolbyexception.Hehastofind

47
 outthosedeviationswhicharecriticalandimportantforbusiness.Minordeviationshavetobeign
ored.Majordeviationslikereplacementofmachinery,appointmentofworkers,qualityofrawma
terial,rateofprofits,etc.shouldbelookeduponconsciously.Thereforeitissaid,“Ifamanagercont
rolseverything,heendsupcontrollingnothing.”Forexample,ifstationerychargesincreasebya
Oncethedeviationisidentified,amanagerhastothinkaboutvariouscauseswhichhaveledtodeviation.T
hecausescanbe-
- Erroneousplanning,
- Co-ordinationloosens,
- Implementationofplansisdefective,and
- Supervisionandcommunicationisineffective,etc.

iv) Takingremedialactions-
Oncethecausesandextentofdeviationsareknown,themanagerhastodetectthoseerrorsandtake
remedialmeasuresforit.
Relationshipbetweenplanningandcontrolling
Planningandcontrollingaretwoseparatefunctionsofmanagement,yettheyarecloselyrelated.Thescop
esofactivitiesifbothareoverlappingtoeachother.Withoutthebasisofplanning,controllingactivitiesbe
comesbaselessandwithoutcontrolling,planningbecomesameaninglessexercise.Inabsenceofcontroll
ing,nopurposecanbeservedby.Therefore,planningandcontrollingreinforceeachother.AccordingtoB
illyGoetz,“Relationshipbetweenthetwocanbesummarizedinthefollowingpoints:
- Planningprecedescontrollingandcontrollingsucceedsplanning.
- Planningandcontrollingareinseparablefunctionsofmanagement.
- Activitiesareputonrailsbyplanningandtheyarekeptatrightplacethroughcontrolling.
TheprocessofplanningandcontrollingworksonSystemsApproachwhichisasfollows:

Planning→Results→CorrectiveAction

Inthepresentdynamicenvironmentwhichaffectstheorganization,thestrongrelationshipbetweenthet
woisverycriticalandimportant.Inthepresentdayenvironment,itisquitelikelythatplanningfailsduetos
omeunforeseenevents.Therecontrollingcomestotherescue.Oncecontrollingisdoneeffectively,itgive
susstimulustomakebetterplans.Therefore,planningandcontrollingareinseparablefunctionsofabusin
essenterprise.

SOCIALRESPONSIBILITYOFABUSINESS

Introduction

Socialresponsibilityarisesfromthesocialpowerwhichvestsuponsocietyandsocietyhassocialcharters.
Businessshalloperateasatwowayopensystemwithopenreceiptsofinputsfromsocietyandopendisclos
ureofitsoperationstothepublic.

48
Bothsocialcostandbenefitsofanyactivityorproductorserviceshallthoroughlybecalculatedandconsid
eredinordertodecidewhetherornottoproceedwithit.

Argumentsforandagainstsocialresponsibility
 Acaseforsocialresponsibility
 Socialactionscanbeprofitablebecausetheybringtogethersocietyandbusinesswhichleadstopr
ofitmaximization.
 Socialresponsibilityisanethicalthingtodobecausetherulesofmoralityrequirethatnoonedecisi
onshouldharmothers.
 Itisinthebestinterestofbusinesstoimproveandpromotethecommunitieswhereitdoesbusiness.
 Throughsocialresponsibilitythebusinesswillimproveitscorporateimagealsoknownaspublici
mage.
 Socialresponsibilityisnecessarybecausesocialculturalnormsrequireit.

Acaseagainstsocialresponsibility
 Socialresponsibilitymightbeillegalparticularlywhenbusinessorganizationsengagethemselv
esinillegalactivities.
 SocialresponsibilityisunnecessarybecausebusinessplusGovernmentequalstomonolithi.e.so
mebusinessfirmcollidewithgovernmentofficialstoexploitthesociety.
 Socialactionscannotbemeasuredbecausemostofthemareinservicesandarenottangible.
 Socialresponsibilityviolatesthemotiveofprofitmaximizationofthebusinessbecausewhatisex
tendedassocialresponsibilityispartofprofitofthebusiness.
 Businessorganizationslacksocialskillstosolvesomesocietalproblemsbecausetheyhavenoex
perience.

Areasofsocialresponsibility
a) Towardstheconsumerandcommunity
 Sociallyresponsiblefirmsareexpectedtodothefollowingtotheconsumersandthesociety:
 Productionofcheapandbetterqualitygoodsandservices
 Locatingthefactoriesandmarketsatproperplacesandrationalizingtheuseofcapitalandlabor.
 Levelingoutseasonalvariationsinemploymentandproductionthroughaccurateforecast.
 Decidingprioritiesofproductioninthecountry’sinterestandconservingnaturalresources.
 Avoidingostentationi.e.productionofprestigiousgoods.
 Honoringcontractsandfollowinghonestytradepractices.
 Providingforaftersaleservices.
 Achievingbetterpublicrelationthrougheducationandothermeans.
 Ensuringthattheirproductsaresafeandwelldesigned.
 Preventingthecreationofmonopolies.

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 b) Towardstheemployees
Sociallyresponsiblefirmsshouldensurethefollowingtowardstheiremployeesandworkers;
 Payingafairwagetoworkers
 Ensuringjustselection,trainingandpromotion.
 Ensuringsatisfyingconditionsofworkandsocialsecuritymeasures.
 Ensuringgoodhumanrelationintermsofmaintainingindustrialpeace.
 Provisionoffreedom,selfrespectandselfrealization.Andingeneralempoweringtheemployee.
 Increaseinproductivityandefficiencybyrecognitionofmeritsbyprovidingopportunitiesforcre
ativetalentsandincentives.

c) Towardstheshareholdersandotherbusiness.
 Arousinginterestintheshareholderstoabjurehighdividendssothatenoughprofitsmaybeploug
hedbackforinnovationandexpansion.
 Fairnessinrelationwithcompetitors.Competitionwithrivalbusinessesshouldbefairandbasedo
nrulesofethics.
 Maintainingabalancebetweenheavyindustry,smallindustryandcottageindustry.
 Helpinthegrowthofprofessionalpractice.

d) Towardsthestate
 Maintainingimpartialitytowardspoliticalaffairs.
 Observingallthelawsofthelandwhichmayhavethefollowingobjectives:-
 Toprovidedirectiontotheeconomicandbusinesslifeofthecommunity.
 Tobringaboutharmonybetweenthelimitedenterpriseinterestandthewidersocialinterestofthec
ountry.
 Toprovidesafeguardagainsterrantbusinesspractices.
 Tocompelbusinesstoplayfairtoallparticipantsintheeconomyintermsofemployees,sharehold
ers,consumers,creditorsetc.
 Topreventoppressionorexploitationofweakerpartnersinbusiness.
 Toenforcemaximumproductionaccordingtotheprioritiesofsectorsandproductionlineslaiddo
wnbythegovernment.
 Toallocatelimitedresourcesaccordingtosocialprioritiesandpreferences.

STOCKMARKET

Definitionofastockmarket
Itisamarketwheresecuritiesareboughtandsold.Securitiesrefertoshares,debentures,treasurybonds,tre
asurybillsetc.
Stockreferstocapitaldetainedbyacompanythroughtheissueofshares.
Bondsaredebtinstrumentsusedtoborrowmoneyfromthepublic.
Membersofthestockexchange

50
1.Stockjobbers
Thesearememberswhobuyandsellsecuritiesintheirownnames.
Theysellsecuritiesataprofitcalleda‘turn’
Theybuysharesinwholesaleandholdthemforspeculativepurposes
2.Stockbrokers
Thesearemiddlemenbetweentheinvestingpublicandthestockexchange.
Theyareagentswhoearnacommissionfromthebuyersandsellers.
Membersofthestockexchangemustpassthroughthemfortechnicaladvice

SimilaritiesbetweenJobbersandBrokers
 Theybothoperateinthestockmarket
 Bothdon’tholdsharesforinvestmentpurposes
 Activitiesofbothareregulatedbytherulesofstockmarket.

Typesofjobbers
1.Bull-thisisaspeculatorinthestockexchangewhobuyssharesinexpectationsofariseintheirprices.
2.Bear-speculatorinthestockexchangewhosellssharesintheanticipationofafallintheirprices.
3.Stag-
aspeculatorinthestockmarketwhopurchaseslargeblockofnewissuesofsharesinanticipationintheriseo
fmarketprice.Theybuytheirsharesdirectlyfromthecompaniessellingthem.

FunctionsofStockExchange
 Providesareadymarketforstock,shares,bonds,debenturesetc.
 facilitatestheflowofnewcapitalintotheindustry
 Facilitatessavings(encouragessavingsbyindividuals)
 Protectsinvestorsbyreasonsoftherulesofthestockexchange.
 Companiesseekingcapitalareadvisedandguidedbyallstages.
 Showsthetrendofbusinessinthestockexchangeprovidesanimportantbarometerforbusinessth
roughoutthecountry.
 Investorsareabletoobtaincapitalfromthepublic.
 Itenhancestheinflowofforeigncapital.
 Thetitletoanyquotedsecurityistransferredspeedilyandcheaply.
 Disciplinesthecompany’smanagementbyensuringthatthecompaniesfulfillcertainrequireme
ntsandfollowcertainrulebeforesecuritiesarelistedinthestockexchange.
QuotationsintheStockExchange
Quotationisconsentbythestockexchangeforcompanies’securitiestobedealtwithinthestockmarketi.e.
tobeboughtandsoldinthestockmarket.
Requirementsofquotation

51
  Acompanymustbeapubliclimitedcompany
 Itmustberegisteredwiththeregistrarofcompaniesandmustsubmitacertificationofregistration.
 Thecompanymustprovidedetailsofthecurrentdirectors,companylawyers,companysecretary
,companyauditors,financialyearendandsubsidiaries(branches)ofthecompany.
 Suchacompanymustinformthestockexchangethecurrentdistributionoftheshares.
 Suchacompanymustbewillingtoofferthepublicaminimumnumberofshares.
 Suchacompanymustpayaclearingfee.
 Suchacompanymustissueaprospectustothestockexchange.
 Suchacompanymustissueastatementofdividendsandbondsissuedintheprevious5years.

AdvantagesofQuotations
 Aquotedcompanyisabletoraisefinancesquicklyandeasily.
 Aquotedcompanyisconsideredtobefinanciallystable.
 Aquotedcompanycaneasilyobtainaloan.
 Aquotedcompanycancompareitselfwithothercompanies.
 Thereisprestigeassociatedwithquotedcompanies.
 Quotedcompaniesareforcedtooperatewithincertainguidelines
Disadvantages
 Lossofsecrecy-
meansthecompanylossesitssecrecythroughthepublicationofthecompany’sshares.Thesecrec
yisalsolostbyinspectionofthebooksofaccountsbytheshareholdersorbythepublic.
 Incasethecompany’sprofitsdeclinethiswillberevealedtothepublicandwilllowerthesharepric
esofsuchacompany.
 Thereislossofcontroltoincomingshareholders.
 Itisexpensivebecauseofthefeepayabletothestockmarket.
 Theformalitiesofquotationaretediousandtiresome.
 Immediatelyafterquotationthepricesarelikelytobelow.
 Aquotedcompanycaneasilybetakenoverbypeoplebuyingsharesinthestockexchange.
TermsUseintheStockExchange
 Parvalue:itisthevalueofsharesprintedonthefaceofthesharecertificate.
 Dividends:itistheprofitthatisdistributedtotheshareholders
 Marketvalue:itisthepricethatisquotedatthestockexchangei.e.thepriceatwhichthecompany’s
sharesaretradedatthestockexchange.
 Speculation:itistheexpectationaboutthefuturechangesItheshareprices.
 Bluechips-theyareshareswithagooddividendhistorye.g.sharesofKPLC,Barclaysbank.
 Rightsissued-
itisanopportunitygiventoanexistingshareholdertopurchaseadditionalsharesfromthecompan
yusuallyatalowerpricebeforetheyareissuedtomembersofthepublic.
 Bonusissued:itiswheretheexistingshareholderisissuedwithfreesharesoutoftheretainedearni
ngs.

52
 Ex-
dividends:Itiswherethepersonbuyingsharesdoesn’treceivetherighttobuyadditionalsharesfro
mthecompanyatalowerpriceifsuchanopportunityismadeavailable.
 Cum-
dividends:Itimpliesthesharesthathavebeensoldtothebuyergivethebuyerrightstoreceivedivid
endsiftheyaredeclared.
 Ex-
rights:Meansthepersonbuyingsharesdoesn’treceivetherighttobuyadditionalsharesfromthec
ompanyatalowerpriceifsuchanopportunityismadeavailable.
 Cum-rights:Situationwherethepersonbuyingsharesreceives

53