Shamel Business Advanced Level Business Studies-1

BRIAN ROPI ADVANCED LEVEL BUSINESS STUDIES
The Need for and Nature of Business Activity

Business is a major economic activity. It can be defined as the production of goods and services
needed by people in this world to meet their basic needs.
-The basic human needs can be classified as:

(a) Social -entertainment
(b) Physical -food, warmth, shelter
(c) Status -sense of achievement, good job, large house etc
(d) Security -privacy, steady job, secure homes etc
-In all these aspects businesses have grown out of specialization to meet each need e.g. to
restaurants, security companies, construction companies, insurance companies etc.
-Specialization has brought about a high standard of living.
-Business enterprises are established where entrepreneurs combine productive resources (factors
of production) to produce an output. The four factors of production are:
1 .Land -natural resources-minerals, soil, forests, water supplies etc
2 Labor -human resources
3 Capital -financial and technological inputs such as money, machinery, buildings,
vehicles etc
4 Enterprise -this is the active factor, the entrepreneur. An entrepreneur is an originator
of a new business venture or a manager who uses a number of ways to
achieve new things. The first 3 factors of production are useless without
the fourth.
Entrepreneurship is all about risk taking yet it can be rewarded with
economic, physical and psychological benefits if the goal is achieved.
The major objective of many businesses is making profit. Profit plays a
key role in:
(1) –motivating the entrepreneur
(2) –encouraging innovation
(3) –encouraging efficiency
(4) –providing finance for expansion
(5) –for performance measurement
Qualities of an Entrepreneur
(1) –hardworking
(2) –higher achiever
(3) –like to be in control
(4) –firm and decisive
(5) –ambitious
(6) –independent
(7) –opportunist
(8) –have marketing, financial and human skills
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Good business leaders create a vision, articulate the vision, passionately own the vision, and
relentlessly drive it to completion.
(9) –able to cope up with stress-healthy
Levels of Business Activity
-There are 3 basic levels of economic activity in a country:
1 Primary
-Is the first stage of production which involves extraction/production of raw materials e.g.
agriculture (most important in Zimbabwe), mining, forestry and fishing. It is usually done on-
site.
2 Secondary
-Involves converting raw materials into something wanted by the consumer e.g. timber into
furniture, wheat into bread.
It includes all work done in factories, assembly plants, bakeries etc.
The Ministry of Industry and Commerce in Zimbabwe is the responsible authority for
encouraging trade.
3 Tertiary
-Involves the provision of services to facilitate primary and secondary activities or to enable
goods to reach the ultimate consumer, e.g. banking, legal advisors, teaching, nursing,
transportation etc.
-Thus the business system is characterized by the 4Ms of Management which are Money,
Materials, Manpower and Machinery
Sectors of the Economy
-There are basically 2 sectors in the economy;

1 Private Sector -This is the sector which is made up of individuals and firms not under
government control. Examples are sole traders, partnerships, private and public companies, co-
operatives and MNCs.
2 Public Sector -Consists of companies or firms owned by the government. These are
called parastatals e.g. NRZ, GMB, ZESA, ZRP etc.
Legal Structure of Business
1 Sole proprietor/trader
-Is a business owned by one person. However he/she may employ other people. In some cases,
family members make up the owners of the business. Examples are hair salons, bus operators,
grocery stores etc.
Advantages
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1 –easy to form (less capital and legal requirements)

2 –owner has direct control of the business (makes decisions that best suit his/her conditions
3 –all profits go to the owner
4 –enjoys major exemptions from Government legislation
5 –no double taxation
6 –has personal contact with both customers and employees
7 –easy to terminate
Disadvantages
1 –unlimited liability
2 –limited initial capital
3 –limited management expertise
4 –unstable business life
5 –difficulty in attracting qualified employees
6 –limited life
2 Partnerships
-a business owned by at least two but not more than twenty people. To enter into a partnership,
partners can have a verbal agreement or otherwise write a Partnership Deed/Agreement which is
a document setting out the following details:
a) amount of capital contributed by each member
b) salaries/wages to be paid to each member
c) rights and obligations of the partners
d) procedure for partnership dissolution) profit/loss sharing ratio
Advantages
1 –easy to form (same as sole proprietor)
2 –more capital available
3 –diversity of skills and expertise
4 –continuity
5 –personal contact with employees and clients
6 –risk is spread over a number of people
7 –relative freedom from government control
Disadvantages
1 –unlimited liability
2 –disagreements may easily lead to winding of the business
3 –all partners responsible for the acts of each other
4 –limited life
5 –profit/loss sharing ratio not necessarily equal
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3 Private Ltd and Public Ltd Companies
-any 2 or more people can form a private or public limited company
General Features
1 –separate legal entity

2 –shareholders have limited liability
3 –owners are called shareholders (buy shares)
4 –shareholders receive dividends as payments
5 –the Board of Directors manages the affairs of the company
6 –the company is governed by Memorandum and Articles of Association
7 –shareholders hold Annual General Meetings (AGMs)
a) Private Limited Companies
-have two but not more than fifty shareholders

-the right to transfer shares is limited
-should submit financial statements and auditors reports to the Registrar of Companies
-cannot sell shares to the public
Advantages
1 –shareholders have limited liabilities
2 –more capital can be raised
3 –unlimited life
4 –easy to transform into public limited companies
5 –do not have to publish annual accounts in the press
6 –control of ownership is more effective
Disadvantages
1 –not easy to form (up to six months)
2 –has to fill complex tax forms
3 –cannot raise capital through the stock exchange
b) Public limited companies
-have at least two shareholders. No maximum limit

-shares are freely transferable
-the public can be invited to subscribe to shares and debentures
-can only start business after complying with all the requirements of the Companies Act
-annual accounting reports (financial statements) are supposed to be published in the press
-must keep a register of investors and directors shareholding
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Advantages
1 –easy to raise capital through floating shares on ZSE
2 –can operate on a large scale
3 –unlimited life
4 –employees can become shareholders-increases loyalty
5 –managers and directors have room to work independently therefore prove their expertise in
their areas of specialization
Disadvantages
1 –difficult to form
2 –files always open for inspection by members of the pubic
3 –decisions take time to make due to large size of the company
4 –no personal touch between employees and customers
5 –conflict of interest-shareholders are usually interested in expanding the business
4 State Owned/Private Enterprises
-established by an Act of Parliament

-are corporate bodies with a separate legal entity
-they are managed by a Board appointed by the Minister
-the Minister can be questioned by parliament over activities of the corporation
Advantages
1 –stability of existence
2 –relative ease of additional capital
3 –ease of transferability of ownership
Disadvantages
1 –more government restrictions
2 –cost of complexity of formation
3 –double taxation of profits
5 Co-operatives
-members join together to purchase or sell goods that they cannot afford individually.
Main features
1 –formed by people who want to work together
2 –is voluntary
2 –members make equitable contributions
4 –risks and benefits are shared equally
5 –are democratically controlled
Divorce of Ownership and Control
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-The act of incorporation (registration of a new company) creates a new legal entity distinct from
the shareholders who own the company. The important implication is separation of business
affairs from those of the owners. Companies can make contracts, can sue or be sued. The legal
position of a company is completely unaffected by the death/retirement of one of the
shareholders.
-Shareholders enjoy the privilege of limited liability, i.e., they are liable to meet the debts of the
business only to the extent that they have invested in the business. It is essential in overcoming
the reluctance of people to purchase shares in a business.
Business and Economic Structure
The Economic System

-there are 3 groups which make up an economic system, and these are: individuals, business
organizations and the state.
1 Free economy/capitalization/market economy
-all resources could be owned by individuals who organize them to produce what people want.
There is no government intervention
-what is produced and the price charged is determined by market forces, that is, supply and
demand.
Advantages
1 –consumers determine demand and therefore what is produced
2 –increased competition will keep prices down and improve efficiency and standards
3 –all members of the community are free to run their businesses for profit
Disadvantages
1 –monopolistic tendencies by large firms
2 –pollution could increase as it may be difficult to control
3 –competition between businesses can lead to duplication of products and resources
2 Planned/Controlled/Command/Communist Economy
-all resources are owned and organized by the state

-decisions on what to produce are taken collectively by the government on behalf of its people
e.g. Cuba, Bulgaria
Advantages
1 –resources are used economically-eliminates wasteful competition
2 –more equal distribution of income and wealth
3 –prevents large firms controlling markets and putting up prices
Disadvantages
1 –lack of competition may reduce efficiency, enterprise and innovation
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2 –central control may make it difficult to respond quickly to changes in needs and conditions
3 –individuals loose their freedom of choice.
3 Mixed/Socialist Economies
-ownership of wealth and resources is divided between the public (government) and the private
sector.
-questions of what, how much and for whom to produce are decided partially by the free market
and partially by the central government authority. Certain goods are provided by the government
e.g. health, education and defense and the rest of the business activities are left to individuals in
the economy
-most countries in the world are under this type
International Business
-International trade is the first step towards international business. It involves the export and
import of goods from one country to another. International business embraces more to include
setting up of branches or subsidiaries in foreign countries and export not only of goods but also
capital, personnel, skills and technology.
Globalization is one of the most important changes to the external environment of most
businesses. Globalization refers to the unprecedented scope, shape, number and complexity of
business relationships conducted across international boundaries.
How Companies go International
A company which conducts business through branches/subsidiaries in a number of foreign

countries is known as a multinational company (MNC). More commonly, an organization
proceeds through several stages of internationalization to become an MNC as described below:
STAGE 1. Firm begins to export and import from a foreign source via an agent.
STAGE 2. When the turnover of business is big enough, a foreign branch or

subsidiary is established and the agent is incorporated.
STAGE 3. As the firm grows it sets up more subsidiaries. The home office becomes
the co-coordinator of activities of subsidiaries.
STAGE 4. As the activities of subsidiaries become more complex, a certain amount

of regional autonomy is given.
-The following are some of the ways in which companies go international:

1 Exporting -the selling of domestically produced goods in foreign markets.
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2 Licensing -the selling of rights to market brand-name products or to use patented

processes or copyrighted materials.
3 Franchise -a type of licensing arrangement in which a company sells a package
containing a trademark, equipment, materials and managerial guidelines.
4 Joint venture -business undertaking in which foreign and domestic companies share the
costs of building production or research facilities in foreign countries.
Why Companies go International
1. Market related factors –competition to find an established end-user market or an untapped

market and new opportunities.
2. Production-related factors –proximity to raw materials, availability of resources and advanced
technology.
3. Personnel related factors -availability of cheap labor or otherwise skilled and unskilled labor.
4. To spread risk -investing in 2 or more countries reduces risk; “not putting all your eggs in one
basket”.
5. Costs -sometimes it is cheaper to manufacture goods in a foreign country than
exporting them to it.
6. Host-Government related factors –incentives by host governments like tax concessions and
grants, tariffs aim to bring in capital, technical know-how, create jobs and diversify industrial
base.
7. Rising standards of living in developing countries have resulted in a demand for luxury goods
such as cosmetics, soft drinks and electrical appliances.
Characteristics of MNCs
1. Each geographical region has a senior operating executive in charge, reporting to the
Managing Director who is responsible for overall co-ordination.
2. Senior staff set and control policy in their respective functional areas.
3. Each region operates as a profit centre within the MNC and the home office is an international
profit centre.
4. Finished products and components are often transferred between regions on an inter-company
basis.
5. The home office furnishes the other regional companies with technology, information and
communication systems.
6. There is co-ordination so that duplication of functions does not occur.
Benefits of MNCs
1. Employment –create direct and indirect employment for the local people
2. Export markets –MNCs are able to export more effectively than local firms and thus bring in
foreign currency.
3. Balance of Payments (BOP) –the direct foreign investments create a favorable BOP for the
host country.
4. Training –since they are involved more in staff training they help improve the quality of skills
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within the business community.

5. Areas of Government Priority –MNCs are usually more able to take advantage of priority
areas in the development of a country‟s economy than local firms.
6. Technology Transfer –MNCs introduce new technology to the host countries.
Factors influencing Foreign Direct Investment (FDI)
There are about four factors that MNCs consider before investing in a country and these are:
1. The level of infrastructure
-communications
-supporting industries
2. Profitability
-availability of raw materials
-availability of low cost skilled labor
3. Government policies
-tax laws
-controls on entry and operations of foreign businesses
-restrictions on the repatriation of profits
4. General economic, social and political conditions
-political stability
-cultural biases
-stability of the value of the currency
Privatization/Deregulation
-This is the process of converting state-owned/public corporations into registered public limited
companies. By removing (Gvt) controls and restrictions on the provision of services, the
assumption is that they are open to tender from profit making companies and therefore services
will improve.
-In Zimbabwe, the Privatization Agency of Zimbabwe (PAZ) was established in 1999 to lead,
advise and manage the state of Government shareholding in over 40 institutions in line with
Government‟s policy of Public Enterprise Reform. To date, Government has divested in
Rainbow, Tourism Group (RTG), Jewel Bank, Cotton Company of Zimbabwe, Dairiboard
Zimbabwe, and CAPS Holdings, among others.
Arguments for Privatization
1. The profit motive creates the drive to increase efficiency by improving services and reducing
costs.
2. Government can earn revenue from tax.
3. Increased competition will lead to improved standards of customer service.
4. The transfer of ownership from the state to private individuals results in a larger proportion of
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the population holding shares and so gives them a greater interest in the way business operates.
5. Privatized businesses have a wider range of capital sources which can lead to higher levels of
investment.
Arguments against Privatization
1. Consumers are worse off because they will be made to bear the costs of competition and also
may have to pay higher prices for the services.
2. They bring major job loses in order to increase efficiency in industries often regarded as being
heavily overmanned.
3. Privatization means selling the state‟s assets and placing them in the hands of the minority of
people who can afford to purchase shares in them.
Why small firms survive the activities of MNCs
1. Provision of professional and specialist services/products

2. Sub-contracting –many small firms produce goods for other larger firms
3. Personal services -e.g. hair dressing, plumbing etc can be more easily supplied by small firms
4. Limited markets –e.g. “corner shops” provide local services
5. “Being one‟s own boss” –some entrepreneurs may accept smaller profits in order to enjoy the
satisfaction of working for themselves
6. Government assistance –or advice is offered to prospective and established small businesses
on a wide range of problems
Significance of Small Businesses
1. The small firm is able to cater more precisely to its customers‟ requirements and offer
personalized service.
2. They provide care and attention as well as privacy and confidentiality which large firms may
fail to do so e.g. doctors, lawyers etc
3. Sometimes markets are small and highly specialized and can only be tapped economically by
the small firm (market niche).
4. As the market demand changes, a small firm has the flexibility to react to these changes more
easily than the large organization.
Business Strategy
-Business organizations are established for the purpose of achieving specific objectives and it is
against these objectives that the success or failure of the organization is judged.
-Objectives state what the organization is trying to achieve, how this can be done, when it must
be done and how it will know that it has succeeded.
Objectives should be:
S –pecific
M –easurable
A –ttainable
R –ealistic
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T –imebound
Why Objectives are needed

Objectives can be seen as more specific and quantifiable aims, designed to assist in the
achievements of the goals identified in the mission statement.
-They are needed because;
1. They clarify for everyone what the business is working to achieve.
2. They aid in decision-making and choice of alternative strategies.
3. They enable checks on progress and corrective action.
4. They provide means by which performance can be measured.
5. They provide a focus for individual roles in the organization.
6. They can be broken down to provide targets for each part of the organization.
7. They motivate employees.
8. They facilitate prioritization and the resolution of conflict between departments.
9. They provide shareholders with a clear idea of the business in which they have invested.
The hierarchy of Objectives
Mission Statement
-This is a broad goal based on managers‟ assumptions about the organization‟s purpose,
competencies and reason for existence. It is a permanent part of an organization‟s identity and
can do much to unify and motivate members of the organization. It is a driving force for strategic
and operational goals for the organization. In essence, a mission statement should contain:
1. –a statement of the fundamental purpose of the organization
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2. –a vision of what the organization wants to be

3. –boundaries for the organization
4. –guidance for decision-making
5. –a statement of values to guide individual behavior
6. –a statement of the characteristics of the organization and the customers it seeks to serve
Corporate Objectives/Strategic Objectives
-These relate to products, finance, markets and production. Such objectives are usually covered
in a period of 3-5 years, depending on the organization. They cover the following areas;
1. Market -the market the company wishes to be in, its desired market share and reputation
in the market place.
2. Innovation -the development of new products to meet marketing objectives
3. Productivity -targeted levels of production efficiency
4. Physical and financial resources
5. Managerial performance
6. Worker performance and attitudes
7. Corporate social responsibility
8. Profitability
Tactical Objectives
These are short-term departmental performance targets, usually covering a period of up to 6

months. The target has to be achieved if the organization is to satisfy its strategic objectives.
Operational Objectives
These are statements addressed to small groups and individuals about the day-to-day running of
the business.
Other Objectives of Organizations
1. The profit objective

2. Survival and growth
3. Product/Service objective (that satisfy consumer needs)
4. Market share
Management By Objectives (MBO)
It is a concept introduced in 1954 by Peter Drucker. In MBO managers and their staff work
together to set common goals. Workers‟ major areas of responsibility are clearly defined in terms
of measurable results (objectives). These objectives are used by workers to plan their work and
by managers to measure the progress of their staff. Periodic appraisals of performance are made
to see if progress towards the objectives is made.
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Characteristics of MBO Programs
1. Total commitment to the program from top management to the worker

2. Clearly defined goals and planning by top management
3. Objectives set by individual managers and their staff and related to the organization‟s goals;
participative style of management
4. Employee participation in setting goals
5. Regular reviews to appraise progress towards the objectives
Strengths of MBO
1. It lets individuals know what is expected of them

2. It aids planning by making managers establish goals
3. Improved communication between managers and staff
4. Everyone becomes more aware of organizational goals
5. Evaluation become fairer due to specified targets set
Weaknesses of MBO
1. Much time and effort is needed to implement MBO effectively

2. Involves too much paper work
3. Some managers pursue goals at any cost
4. Goals not properly set can demotivate staff
Business in its Environment
There are 2 parts of the business environment, the external and the internal environment. The
external environment of business refers to the external forces that play a part in influencing the
direction that the firm takes. The five basic elements of the external environment are social,
legal-political, economic, material and technological.
-The internal environment refers to those elements that have a direct influence on the daily
operations of the firm e.g. employees, suppliers, customers and creditors.
The External Environment of Business
Legal-Political
The legal element is concerned with the framework of rules laid down by the Government of
Zimbabwe within which business must operate. In Zimbabwe, the laws passed cover various
aspects of business activity which include:
i) Formation of business –The Partnership Act, the Companies Act (Ch 24:03)
ii) Labor -The Labor Relations Act (Ch 28:01); The Factories and Workers Act
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(Ch 14:08). These laws protect the rights of workers by providing for contracts of
employment, compulsory insurance, recognition of trade unions, compulsory
provident funds and industrial arbitration.
iii) Finance and Property –The Patents Act protects a company‟s rights to use its
inventions. The Copyright Bill protects authors of original literary, dramatic,
musical and artistic works against plagiarism and piracy.
iv) -Pollution – In the pursuit of the profit objective, some businesses may carry out harmful
activities like degrading the environment, producing dangerous products that deplete the
ozone layer and pollution in general. The government therefore sets antipollution
regulations in order to put in check business activities. This is also achieved through the
action of environmental lobby groups like WWF, Friends of The Earth etc.
The political environment concerns the activities of the state and trends in politics. The state
performs a numbers of roles within the economy. Zimbabwe is a mixed economy. There is a
mixture of privately owned and government owned enterprises. The central government provides
services such as health, education, defense, housing and social welfare.
-The state acts to regulate, encourage and guide the private sector of the economy. Since 1994,
the Government of Zimbabwe has embarked on deregulation/privatization of the economy.
-Many private sector firms rely heavily on public sector contracts.
Technological Environment
The technical environment in which business operates is subject to change and the successful
organization is the one that is willing and able to adapt to these environmental changes.
Technical breakthroughs have a powerful effect on business. It is the combination of the right
technology and marketing that leads to the communicational success of products.
-Technical changes can also cause changes in demand for a firm‟s products. For example, the
introduction of CTVs resulted in low demand for black and white TVs.
-Changing technology also results in changes in the processes of production and in the size and
type of workforce required e.g. computerization of the office reduces the number of workers
required but places government emphasis on skills and quality of staff. In factories, automation
has reduced the skill element in the work.
-The technological element allows the manager to access more accurate date that enables him to
plan better.
-The technical changes in transport have helped to lower the costs of moving goals and opening
new markets. Until recently, it was not possible to move perishables from areas of production to
areas of consumption without deep freezing.
According to Phillip Kotler, technology affects business in the following ways:
1) The accelerating pace of technical changes is bringing about fundamental changes in
working life and shorter product life cycles.
2) Opportunities for innovation appear limitless. This entails new products, new
Processes and new ways of working.
3) Increasing expenditure on R& D is not an option but is essential for modern business
organizations.
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4) The impact of technology can be very harmful to the society (global warming, nuclear
power, toxic substance etc) thus there is need for greater regulation.
5) Continuous product improvement is essential, though minor and less risky changes are
Preferred.
Social Environment
-Businesses operate within society. It is of utmost importance that the manager is aware of the
characteristics of the social element of the environment. The size and age distribution of the
population, its standard of living, facilities for training and education, availability of housing and
health care all affect business operations.
-A growing population is beneficial to firms in increasing the size of the potential market.
-Trends in the birth rate can affect business especially those in the health sector and early
childhood education.
-Age composition of the population can assist businesses in niche marketing, that is,
concentrating on a particular age group of the market.
-Lifestyles, values and benefits, and religious backgrounds are significant to businesses because
of their impact on labor and the purchasing behavior of people in the society.
-Increasing affluence has led to a more health-conscious society. This has led manufacturers of
foods to face the challenge of producing more nutrition health foods.
-The population is also affected by migration. The negative impact of this has been brain drain as
professionals like doctors; nurses etc are leaving the country for greener pastures in neighboring
countries and overseas.
-Generally, the social environment of business is characterized by the following:
1) –the increase in time available for leisure
2) –the increasing role of women in society and at work
3) –concern over healthy living
4) –single person households
5) –government‟s concern over the environment
6) –the desire for government‟s convenience
7) –the limitation of family size
Economic Environment
-Involves the impact of economic variables on the supply of resources and the demand from
customers. These variables include rate of growth of output and income, the level of
(un)employment, the rate of inflation, the exchange rate and BOP.
-Another important consideration is the impact of government policy on business organizations.
This involves policies relating to interest rates and circulation of money (monetary policies),
taxation and government expenditure (fiscal policies), trade policy, indigenization, land policy,
pricing policy etc. These policies have had a tremendous impact on business in Zimbabwe.
Material Environment
-This is the physical environment. It is concerned with the use and supply of land and raw
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materials, the danger from pollutants and residues and the availability of energy resources.
-Abuse of the material environment will mean that firms have to pay more for scarce resources
and face health hazards from pollution.
-The availability of resources affects the location of industries. Most MNCs locate in countries
with rich deposits of mineral resources e.g. African countries. These countries also have pools of
cheap labor.
-The organization‟s responsibilities to the material environment are:
1) –to forecast accurately its resource requirements especially when they are becoming
scarce
2) –to use energy more efficiently
3) –to reduce the levels of air, water and noise pollution
4) –to recycle water and other materials where possible
The Impact of Business on the External Environment
Decisions made by business organizations affect customers, central government, supply firms,
competition and society at large. The impact which business organizations have is both positive
and negative.
Impact on the Economic Environment
Positive effects
1) Job creation
2) Boost to the local economy –development of infrastructure e.g. roads, water, sewerage,
communications, buildings etc
3) Increased tax income for the government
4) Increased income for the local people
5) Attraction of other firms into the area
6) Greater social cohesion
Negative effects
1) Expansion at the expense of rivals – unfair competition

2) There will be pressure on resources which may push up costs e.g. rent, rates, wages etc
3) Increase in external costs e.g. congestion, pollution and noise
-The closure of businesses can also cause such problems as:
a) Rising unemployment
b) reduced opportunities – (career development)
c) reduced local spending
d) Fall in tax yield
e) Social tension
Impact on Social Environment
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Positive effects
1) Improvement in standard of living

2) Greater social cohesion
3) More job opportunities
4) Greater freedom
5) Less dependence
Negative effects
1) Pollution
2) Increase in crime
3) Individualism
4) More income has contributed to more leisurely activities, leading to immoral/anti social
behavior.
Impact on the Physical Environment
Environmental disasters such as:

1) Acid rain caused by industrial pollution – affects human health, agriculture, fishing, forests
and buildings
2) Deforestation
3) Desertification
4) Global warming
5) Ozone depletion – release of CFC
Corporate Social Responsibility
Corporate social responsibility focuses on what an organization does that affects the society in
which it exists. It also involves business and ethics, that is, the moral rules that people apply in
decision making that give rise to rights and duties in relationships among people.
-A socially responsible firm that operates in an ethical way has concern for the environment and
undertakes philanthropic activity on behalf of the disadvantaged in the society.
-According to Andrew Carnegie, the doctrine of social responsibility is based on the Charity
Principle and the Stewardship Principle.
1. The Charity Principle requires that more fortunate members of the society should
assist the less fortunate members who include the unemployed, the handicapped, the
sick and the elderly.
2. The Stewardship Principle is derived from the Bible and it requires business and
Wealthy individuals to view themselves as stewards or caretakers and thus hold their
money „in trust‟ for the rest of the society and use it for any purpose that the society
deems legitimate.
Arguments for Social Responsibility
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1. The creation of a better social environment benefits both society and business.
2. Power should be used responsibly.
3. Social involvement creates a favorable image for the company.
4. Businesses have the resources to help solve social problems.
5. Businesses and society are interdependent.
6. Social involvement discourages additional government intervention.
Arguments against Social Responsibility
1. The primary task of business is to maximize profit by concentrating on commercial

activities.
2. Social involvement results in higher prices to customers.
3. Company directors have a duty to shareholders.
4. Businesses lack the social skills to deal with the problems of society.
Corporate Culture
Organizational Culture is defined as the set of important undertakings, such as norms, values,
attitudes and beliefs shared by organizational members. Although some aspects of organizational
culture are readily apparent, many other aspects are less visible. The open aspects include the
formally expressed organizational goals, technology, structure, policies and procedures and the
hidden aspects include the informal aspects of organizational life like shared perceptions,
attitudes and feelings and the nature of human relationships.
-Culture is how and organization has learnt to deal with its environment. Organizations can
develop a culture of service, a culture of safety, a culture of innovation etc.
Three Basic Elements of Culture
1. Artifacts –these are things one sees, hears and feels when one enters an
organization e.g. its products, services and even behavior of group members.
Artifacts have also to do with the dressing one will find in an organization.
2. Espoused Values –values are things worth doing or reasons for what we do. Most
organizational cultures can trace their espoused values back to the founders of the
culture.
3. Basic assumptions –these are the beliefs that organization members take for
granted. Culture prescribes “the right way to do things” at an organization, often
through unspoken assumptions e.g. many cosmetic companies have assumed that
the appropriate marketing strategy focuses on advertising and promotions about
how their products enhance beauty.
0rganisational culture is a framework that guides day-to-day behavior and decision making for
employees and directs their actions towards completion of organizational goals. Culture must be
aligned with the other parts of organizational actions such as planning, organizing, leading and
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controlling.
Strategic Issues
-Strategy is the pattern of decisions in a company that determines and reveals its objectives,
produces principal policies and plans for achieving these goals.
-It is therefore essential in terms of:
1 Defining objectives
2 Providing a coherent framework for decision making
3 Defining the organization‟s markets
4 Achievement of competitive advantage over risks
5 Differentiating managerial roles
-Strategic management is a process by which an organization establishes its objectives,

formulates strategies to achieve these objectives.
Matching Strategy to a Company’s Situation
Strategies For Competing In Emerging Industry

-An emerging industry is one in the early formative stages
*Challenges of a start-up include;
1. acquiring and constructing facilities
2. gearing up production
3. shortage of funds to support the R&D
4. trying to broaden distribution
5. gaining buyer acceptance
Strategies
1. a bold creative/risk taking entrepreneurship
2. searching out new customer groups
3. persuasive advertising to create brand loyalty
4. perfecting technology to improve product quality
5. using price cuts to attract customers
Maturing Industry
-Translation into market maturity usually produces fundamental changes in the industry‟s
competitive environment.
Challenges
-following growth in buyer demand generates more head competition for market share
-competition produces a greater emphasis on cost and services
-international competition increases
-buyers become more sophisticated often during a harder bargain
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Strategies
-pricing the product line
-more emphasis on process innovation (manufacturing process benefits may include lower costs
and a better production quality)
-expanding internationally
-purchasing rival firms (takeover)
-strong focus on cost reduction
Stagnant/Declining Industries
-Generally a company that succeeds in declining industries rely heavily on the following:
a) a focused strategy on special market segments or niche markets
b) product differentiation based on quality improvements
c) cost reduction through productivity improvement and the process of innovation
Strategies for competing in Fragmented Industries

-The number of people are populated by hundreds and even thousands of small-medium sized
companies e.g. hair salons, food outlets etc.
-There are no market leaders
-Some find it easier to enter the market because of low entry and that the industry‟s product is
local
Strategies
1. Expansion
2. Becoming a low cost operator
3. Specialization by product type
4. Focusing on a limited geographic area
5. Backward or forward integration
Strategies for competing in International Markets

1. Licensing
2. Low cost leadership
3. Product differentiation to create a globally consistent image e.g. Coca Cola
4. Maintaining a one country production base and exporting goods to foreign markets.
Strategies for weak or crisis businesses

1. Offensive turn around strategies
2. Phase out other products (stream-line)
3. Fortify and defend (maintaining the existing levels of sales market share profitability)
4. Immediate abandonment (get out of the business by either closing down the operations
or selling out)
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MANAGEMENT
Definitions:
-Management is getting things done through people.
-It is the process undertaken by one or more persons to co-ordinate the activities of other persons
to achieve results not attainable by one person. There is no management without people.
Development of Management Theory
i) Classical Organization Theory
It is concerned with the formal structure of organizations. It focuses not on the work rate of an
individual worker but on the technical efficiency of the organization and is an attempt to
formulate universally valid principles of sound and effective management of organizations. It
was developed by Henri Fayol during the industrial revolution. He identified the manager‟s roles
as planning, organizing, leading, controlling and co-coordinating.
-Fayol believed that management was not a personal talent but a skill that could be taught. He
developed the following principles of management to serve as a guide for managers:
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1. Division of Work –Work should be divided among individuals to ensure that effort and
attention are focused on special portions of a task. Such specialization allows managers and
workers to acquire an ability, sureness and accuracy (efficiency) which will increase output.
2. Authority and Responsibility –Authority is the right to give orders and the power to exact
obedience. Responsibility is the duty to act. It leads to accountability. Managers with
responsibility to carry out a task should be given a requisite authority to undertake the task.
3. Discipline –Discipline is composed of obedience, application, energy, behavior and outward

marks of respect between employers and employees. When it is accompanied by penalties, they
should be applied judiciously to encourage common effort.
4. Unity of Command –Each subordinate should have a single superior. One person, one boss.
5. Unity of Direction –It is necessary to ensure that the effort of everyone in the organization is
directed towards the organizational goals.
6. Subordination of individual interest to general interest –the interest of one person or group
should not have priority over the interests of the organization as a whole.
7. Centralization –the extent to which authority is concentrating or dispersed (decentralized) will

vary with the circumstances of the organization.
8. Scalar chain –this is the chain of command or the hierarchy formed by managers from the
highest to the lowest. Subordinates should observe the formal chain of command unless
expressly authorized by their superiors to skip the links in the chain.
9. Remuneration –the price of services rendered by employers should be fair in accordance with
their contribution and should be satisfactory to both employees and employer. The level of pay
depends on the employees‟ value to the organization, cost of living, availability of qualified
personnel, general business conditions and success of the business.
10 Order –both materials and people should be in their proper places. The objective of order is to
avoid loss and waste.
11 Equity –all employees should be treated as equally as possible. Kindliness and justice are
necessary to obtain loyalty and devotion from the workforce.
12 Stability of tenure of personnel –high labor turnover is costly and is an effect of bad
management. Retaining productive workers should always be a high priority of the manager. It
reduces staffing costs while increasing efficiency.
13 Initiative –management should take steps to encourage worker initiative. Initiative can be
defined as new or additional work activity undertaken through self-direction.
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14 Espirit de corps –there should be unity and harmony among employees as this is key to
organizational success.
ii) Theory of Bureaucracy
-This was developed by Max Weber (1864-1924). He was a German sociologist. Weber believed
that organizations could be instruments of efficiency if they were based on the following
principles:
1. A high degree of specialization based on functional specialisms.
2. A hierarchy with well defined levels of authority.
3. Duties carried out impersonally.
4. Employment and promotion based on qualifications and merit.
5. A consistent system with formal rules and procedures.
6. Written records of decisions taken.
7. Authority vested in positions rather than individuals.
8. Separation of ownership from control.
iii) Scientific Management
It was developed by Frederick Taylor (America) in 1911. The piece rate system in use at that
time did not provide an incentive for increased output. Taylor‟s solution was the application of
scientific principles to improve methods of operation in order to secure an increase in
productivity. Greater emphasis is placed on:
1. Greater division on labor with clearly defined tasks
2. The application of logic to the management process
3. Full managerial control over the workshop
4. The measurement of work and the setting of appropriate piece rates
5. Standardization, efficiency and discipline
-Criticisms that arise accuse Taylor of concentrating on instrumental aspects of human

behavior while neglecting the psychological and social variables.
Criticisms of Classical Theory
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1. Assume that these principles are applicable universally yet circumstances differ and need
appropriate solutions.
2. Classical writers possessed a mechanistic view of human nature. Man today is not just
„economic‟ but also has social and self-actualizing needs.
3. The methods of production have changed drastically since the industrial revolution.
The aspirations of workers have also changed.
4. Classical structures are rigid and static. Today‟s business environment is dynamic and needs
organizations that are able to adapt to change- quickly.
5. Division of labor led to fragmentation of work leading to boring and repetitive tasks.
*The other school of management is the human relations school. It will be dealt with in
motivation.
Management Functions
1. Planning –This is the capstone activity in organizations. It is the process of determining
how the organization can get where it wants to go, Planning is the systematic
development of action programs aimed at reaching agreed business objectives by the
process of analyzing, evaluating, and selecting among the opportunities which are
foreseen.
Salient points about planning
1. Planning activity focuses on attaining goals.
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2. Managers at every level of the organization do planning. Through their plans, they outline
exactly what the organization must do to be successful.
3. While plans may differ in focus, they all concern achieving short (tactical) and long range
(strategic) organizational goals.
4. The length of time and scope of planning will vary according to the level in the company. Top
level management is long-range planning while the opposite is true for lower-level management.
2 Organizing –It is the function of management that assigns the tasks identified or developed
during planning to various individuals and/or groups within the organization so that the
objectives set by planning can be achieved.
1. The organizing function is to create a structure of task and authority relationships to reach the
goals set.
2. It includes developing a framework or organizational structure to indicate how personnel,

equipment and materials are to be employed to attain the predetermined goals.
3. The activities necessary to attain the objectives are grouped into working divisions,
departments or other identifiable units primarily by clustering similar and related
duties, the result of which is a network of interdependent units.
4. Each unit should have clearly defined authority, or a clearly defined list of duties and
one person to whom to report.
3 Leading –Leading is defined as the process of influencing other people to attain organizational
goals. It is behavioral in nature and involves personal interaction.
Leadership is not the same as management. It is a subset of management. Leadership involves

behavioral issues (i.e. directing and motivating people) while management is mostly non-
behavioral. It emphasizes more of planning, organizing, staffing and controlling. The leading
function‟s major purpose is to channel human behavior toward organizational goals. This is also
called motivating.
-When appropriate behavior is encouraged, the ultimate purpose is to increase productivity and
improve quality.
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4 Controlling –It is the process of ensuring that actual activities conform to planned activities. It
involves evaluating actual performance, comparing it to set goals and taking corrective action
when there is a difference between performance and goals.
-Planning and controlling are inseparable. They are called „The Siamese twins of Management”.
Types of Control
1. Precontrol/Preliminary/Preventive Control
-It takes place before work is performed. It focuses on establishing conditions that will make it
difficult or impossible for deviations from norms to occur. It involves the creation by
management of policies, procedures and rules aimed at eliminating behavior that will cause
future undesirable work results.
-Prevention is better than cure. An example of a pre-control measure is locks and bars on
windows.
2. Concurrent/Feed forward/Steering Control
-It monitors ongoing operations to ensure that objectives are pursued. It is designed to detect and
anticipate deviations from standards at various points throughout the process. Diagnostic control
devices include gauges, meters and warning lights.
3. Feedback/Post Control
-It concentrates on past organizational performance. It focuses on the end results of the process.
The information derived is used to examine and apply to future activities which are similar to the
present one. The purpose is to help prevent the same mistakes in the future.
Levels of Management
The Horizontal Perspective
1. Top Management
-Is made up of the relatively small group of executives who control the organization and in
whom the final authority and responsibility for the execution of the management process rests. It
includes the Board of Directors (BOD), Chief Executives, the Managing Director (MD), the
partners.
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-The planning function of top management consists of developing the major purpose of the
organization, its mission, global objectives and the major policy statements for implementation
by middle and lower-level managers.
-Top management is concerned with acquiring talent to fill upper-management positions. It also
keeps an eye on the environment within which the business operates.
2. Middle Management
-It is primarily responsible for developing or executing implementation strategies for the broad
policies, plans and strategies determined by top management. It consists of the functional heads
such as Marketing Manager, Production Manager, Personnel/Human Resources Director and
Finance Manager.
-Middle management is responsible for medium and long-term planning. The managers organize
within their own functional areas.
3. Lower Management
-These are called First line, Supervisory or Bottom Management. First line managers‟ duties
involve day-to-day activities and tasks of a particular section, short-term planning and
supervision of the finer details (nitty gritties) of organizing. Controlling at this level involves
meeting targets for production, sales or quality objectives.
-In reality the levels of management can vary depending on the size of the organization.
Management Skills
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CONCEPTUAL TOP MANAGEMENT
HUMAN MIDDLE MANAGEMENT
TECHNICAL BOTTOM MANAGEMENT
Technical Skills
-This is the specialized knowledge or expertise and ability in using processes, practices,
techniques, or tools of a specialty responsibility area/discipline to attain ends. Examples are
accountants, engineers, sales persons, computer programmers etc. A manager at a lower level
should have sufficient knowledge of the technical activities which he has to supervise.
Human Skills/Interpersonal Skills
-It is the ability to work with other people or to interact with other people successfully. Such
skills build cooperation within teams being led. They involve working with attitudes,
communication, individuals and groups. Since management is dealing with people about 60% of
the time, it is obvious that a manager should be able to communicate and to motivate groups as
well as individuals.
Conceptual Skills
-Conceptual skills deal with ideas and abstract relationships. It is the mental capacity and ability
to view the organization as a whole and to see how the parts of the organization relate to and
depend on one another – a holistic view of the organization. Managers with conceptual skills are
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better able to understand how various functions of the organization complement each other and
how changes in the environment affects the organization.
-The importance of these skills depend on a manager‟s level of management in the organization.
Technical skill is most important for a manager at the first-line of management. Human skills are
extremely important to managers at every level in the organization. Conceptual skills are
increasingly important as manager moves up the levels of management.
Managerial Roles
Interpersonal Roles
1. Figurehead –these are duties that are symbolic or ceremonial in nature. Invited guests at
occasions usually perform this role.
2. Leadership –involves directing and coordinating the activities of subordinates. It involves

staffing (hiring, training, promotion and dismissing) and motivating subordinates.
3. Liaison –it involves managers in interpersonal relationships outside of their areas of

command. This role involves contacts both inside and outside the organization. The aim is to
establish good relationships.
Informational Roles
1. Monitor –it involves examining the environment in order to gather information, changes,
opportunities and problems that may affect the unit.
2. Disseminator –involves providing important or privileged information to subordinates.
3. Spokesperson –the manager represents the unit to other people, internal or external.
Decisional Roles
1. Entrepreneur –it involves the process of continually looking for new ideas or new methods to
improve the unit‟s performance. The effective marketing manager, for example continually seeks
new product ideas.
2. Disturbance handler –it involves the manager making decisions to take corrective action in
response to situations out of control. The aim is to bring about stability. Emergencies like strikes,
breakdowns, disasters etc need quick responses.
3. Resource allocator –this is a manager‟s position of deciding who will get what resources.
These resources include money, people, time and equipment. Resources are always scarce.
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4. Negotiator –a manager must bargain with other units and individuals to obtain advantages for
his unit. The negotiations may concern work, performance, objectives, resources etc.
Managerial Effectiveness and Efficiency
-A manager is judged by his own performance. The criteria used is effectiveness and efficiency.
A balance of the two should be struck by any good manager in utilizing resources.
Efficient
Not reaching goals and Reaching goals and not
not wasting resources wasting resources
Not reaching goals and Reaching goals and

wasting resources wasting resources
Effectiveness
Ineffective Effective
Managerial Effectiveness –it is defined as “doing the right thing”. It is defined in terms of
resource utilization in relation to organizational goal attainment. A manager has the
responsibility of selecting the right goal and appropriate means of achieving that goal. If
organizations are using their resources to attain their goals, the managers are effective.
Managerial Efficiency –it is defined as “doing the thing right”. It measures the cost of attaining
a given goal. The higher the proportion of organizational resources that contribute to
productivity, the more efficient the manager. If minimum cost is spent to obtain the desired goal,
the manager is being efficient.
Organizational Structure
Organizational structure is represented primarily by means of a graphic illustration called an

organizational chart or organogram.
-The organizational chart has its value to managers in depicting the basic framework of the
organization. Traditionally, an organizational chart is constructed in pyramid form with
individuals toward the top of the pyramid having more authority and responsibility than the
individuals toward the bottom.
-The relative positioning of individuals within boxes on the chart indicates broad working
relationships while lines between boxes designate formal lines of communication between the
individuals.
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-A chart can tell us:
1) Who reports to whom – the chain of command.
2) How many subordinates work for each manager _ the span of control.
3) Channels of official communication through the solid lines that connect each job (box)
4) How the company is structured – by function, customer, product etc.
5) The work being done in each job – the label on the boxes.
6) The hierarchy of decision making.
7) Types of authority relationships – solid lines illustrate line authority and dotted lines show
staff and functional authority.
-In addition, the chart is a trouble-shooting tool,. It can help managers locate duplications and
conflicts as a result of awkward arrangements.
-What the chart does not show are the degrees of authority, the informal communication
channels and the informal relationships.
An Organizational Chart
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MANAGING
DIRECTOR
FUNCTIONAL FUNCTIONAL FUNCTIONAL FUNCTIONAL

MANAGER 1 MANAGER 2 MANAGER 3 MANAGER 4
W1 W2 W1 W2 W1 W2 W1 W2
Approaches to Organizational Structure
1. Functional Structure
MD
PURCHASING PRODUCTION SALES FINANCE DISTRIBUTION
- The most common approach. A function is a type of activity being performed. The major
categories are marketing, production, finance and personnel.
Advantages
1. –helps avoid overlap in the execution of basic business activities
2. –provides for occupational specialization therefore aids in training
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Disadvantages
1. –since personnel are separated, their understanding and concern for the specialty areas
outside their own is not easy to achieve
2. –communication difficulties and lack of co-operation between the functional areas can
arise, leading to hostility
3. –it does not develop generalists in the management area
2 Product Departmentation
HQ
PRODUCT PRODUCT PRODUCT

DIVISION A DIVISION B DIVISION C
FUNCTIONS FUNCTIONS FUNCTIONS FUNCTIONS FUNCTIONS FUNCTIONS
- Resources are departmentalized according to the product(s) being manufactured. This means
that all the specialists associated with particular products are grouped together in particular
product sections. It is most applicable if each product requires a unique strategy or production
process or distribution system or capital resources.
Advantages
1. –specialized knowledge of employees is used to maximum effect
2. –decisions can be made quickly within a section
3. –the performance of each group can easily be measured
Disadvantages
1. –managers give exclusive attention to their particular section and loose sight of other
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particular products
2. –cost is increased due to duplication of business functions within each product line
3 Geographic/Location Departmentation
HQ
REGIONAL REGIONAL REGIONAL

HQ HQ HQ
AREA A AREA B AREA A AREA B AREA A AREA B
- The structure is based on the place where the work is being done. As market areas and work
locations expand, physical space between various places can make the management task
extremely cumbersome. It is logical for businesses which sell their products in different
geographical regions to have such a logical structure.
Advantages
1. –it gives autonomy to area managers – facilitates decision making and adjustments to
local business environments
2. –it furnishes a training ground to develop general management structure
Disadvantages
1. –cost is increased (of personnel and facilities) due to duplication of personnel
positions and additional building sites
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4 Customer Departmentation
HQ
CUSTOMER CUSTOMER CUSTOMER

A B C
- The structure is based on response to major customers of the firm if they can be positively
identified. It is adopted mainly by firms with special segments of the market. Its advantages and
disadvantages are similar to product departmentation.
5 The Matrix Structure
35
MD
FUNCTIONAL PRODUCT
AREA AREA
W1 W2 W3 W1 W2 W3
- It combines functional managers with an overlay of project managers. These are 2 chains of
command. It is applicable in high-technology, project-based industries such as Aerospace,
Government contracting R & D etc.
Advantages
1. –it utilizes the technical resources of an organization
2. –leads to co-coordinated effort since it focuses on functional expertise on a project
3. –encourages decentralization
Disadvantages
1. –power struggle can occur
2. –costly to implement
3. –creates problems of control
Formal Organization
-This term refers to the deliberately planned structure of roles within an organization. It is
represented on the organizational structure.
-The informal structure, on the other hand, is a network of personal and social relationships or
cliques which arise at work. It is not planned or official. The power of the group leader is
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personal and behavior of the group is guided by norms rather than by rules laid down. Control is
not by means of financial rewards or penalties but by threats of expulsion.
Advantages of Informal groups
1. –a lighter workload for management
2. –work group satisfaction
3. –improved communication
4. –forces management to plan
5. –greater co-operation
Disadvantages
1. –resistance to change
2. –interpersonal and intergroup conflicts
3. –lower motivation
4. –low management control
5. –development and spread of unhelpful rumors
Authority
-It is defined as the right to give orders and the power to exact obedience. Authority should be
vested in positions, not people, should be acceptable to subordinates and should flow down the
vertical hierarchy.
Three types of Authority
1. Line Authority –This is direct authority which all superiors have over their subordinates.
Authority is delegated from the highest to the lowest e.g. Production Managers are line managers
responsible for the work of the production department.
2. Staff Authority –This is auxiliary authority based on specialist advisory or support services
e.g. legal advisors or computer services.
3. Functional Authority –It is the right to give orders in a department other than one‟s own.
Conflict between line and staff managers
Line Staff
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1. Action-oriented Study in depth
2. Intuitive Analytical
3. Short sighted Long sighted
4. Seeks simple solution Complicates the situation with detail
5. Protective of the organization Critical of the organization
Delegation
It is the act of assigning duties to subordinates. It is done to enable top managers to concentrate
on major issues especially as the organization grows in size and complexity.
-Delegation of decision making should be done through giving subordinates sufficient authority
to carry out the tasks.
-Delegation can be achieved if:
1. The subordinate possesses sufficient skills and experience
2. The objective is defined and understood
3. The subordinate is given sufficient authority and responsibility
4. The procedure is clearly understood
5. There is a clear schedule for completion of task
Span of Control
-It is the number of people directly accountable to and reporting to a manager. A span of 4-8 is
acceptable at upper levels of management and up to 15 at lower levels.
Advantages of a Narrow Span
1. –close supervision of subordinates
2. –tight control
3. –faster communication (vertical communication)
Disadvantages
1. –superiors are too closely involved in subordinates‟ work
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2. –creates a tall organizational structure
3. –high costs e.g. staffing costs
4. –stretches the communication line between managers and subordinates
Factors affecting the Span of Control
1. –the nature of the task
2. –the ability of experience of the people concerned
3. –the effectiveness of communication
4. –the cohesiveness of the team
5. –the degree of delegation exercised
Flat and Tall Organizations
A tall organizational structure is one in which the span of control is narrow and as a result there
are a large number of hierarchical levels. A flat structure has a broad span of control and
relatively few hierarchical levels.
Tall
39
MD
SNR MGR SNR MGR SNR MGR
MID MGR MID MGR MID MGR MID MGR MID MGR MID MGR
W2 W2 W2 W2 W2 W2
W1 W1 W1 W1 W1 W1
Flat
MD
W1 W2 W3 W4 W5 W6 W7 W8
Characteristics
Tall Flat
1. Decentralized authority Centralized authority
2. Many authority levels Fewer authority levels
3. Narrow span of control Wide span of control
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4. Long lines of communication Easier communication
5. High delegation Low delegation
6. Bureaucratic Easier co-ordination
Centralization
A centralized organization is one in which most decisions are taken at the centre or upper levels
of the organization. There is little autonomy for lower levels. The degree of centralization
depends on:
1. Cost
2. Desire for uniform policy
3. Size of the organization
4. Management philosophy
5. The quality of middle and junior management
6. Availability of control techniques
7. Geographical dispersion of the organization
Advantages
1. Greater control
2. Economies in staffing
3. Economies of specialization
4. Easier communications
Disadvantages
1. Excessively bureaucratic
2. Rigidity
3. Delays in decision making
4. Loss of initiative
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5. Stifles personal development
Decentralization
A decentralized organization is one in which there is considerable delegation and authority at the
lower levels of management.
-Functional decentralization involves delegation of decision making authority to specialist

functional areas/departments e.g. finance, personnel, marketing etc.
-Federal decentralization involves the grouping of activities on a product basis.

Departments/divisions are responsible for a range of products and operate autonomous business
units
Advantages
1. Decisions are made where the action is
2. Recognition of local conditions
3. Improved morale
4. Personal development
5. More responsive to the environment
Disadvantages
1. Loss of control
2. Loss of some economies of scale
3. Development of a narrow departmental view
Consequences of Poor Organizational Structure
1. Low motivation and morale
2. Ineffective decision making
3. Lack of co-ordination and control
4. Poor communication
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5. Poor adherence to organizational objectives
6. Inability to respond to changing conditions
7. Duplication of activities
8. Failure to provide opportunities for development of future managers
Motivation and Leadership
Motivating is the management process of influencing people‟s behavior to achieve stated goals.
These are basic assumptions about motivating:
1. Motivation is commonly assumed to be a good thing. People always need to be praised
for doing well.
2. Motivation is directly related to a person‟s performance.
3. Motivation should be a continuous process and should be done frequently at work.
4. Motivation is a tool within which managers can arrange job relationships in
organizations.
Theories of Motivation
The human relations school of management is the major proponent of motivation. It was
developed by Mayo and contemporary human relations researches in the 20th Century as they
studied particularly the factors which influence people‟s performance at work. They found out
that boredom and repetitiveness of many tasks reduced motivation while social contacts helped
create and sustain motivation.
-Modern theories of motivation are grouped into 2, namely Content and Process theories.
Content Theories
-They focus on what motivates people, that is, a need which must be satisfied. The need is
satisfied by a reward which is either extrinsic (outward e.g. money) or intrinsic (inward e.g. job
satisfaction).
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1 Maslow’s Hierarchy of Needs
Maslow viewed human motivation as a hierarchy of five needs, ranging from basic physiological
needs to self-actualization which fulfill the basic requirements of continued biological existence.
Once these needs are satisfied a person seeks to satisfy higher level needs. Once a need is
satisfied it no longer motivates.
ACTUALIZION
ESTEEM
Promotion
opportunities,
status
SOCIAL
(Acceptance by colleagues,
belonging, friendship, love)
SAFETY
Job security, shelter, warmth, self-
defense)
PHYSIOLOGICAL
(Adequate wage, food, clothing)
2 Alderfer’s ERG Theory
Alderfer (1972) categorized needs into three groups, namely:
i) Existence Needs –Maslow‟s fundamental needs
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ii) Relatedness Needs –Need for interpersonal relations
iii) Growth Needs –Need for personal creativity or productive influence
Alderfer stressed that when higher needs are frustrated, lower needs will return, even though they
were already satisfied. Alderfer saw people moving up and down the hierarchy of needs from
time to time and from situation to situation.
3 McGregor’s Theory X and Theory Y
McGregor (1960) suggested that many managers adopt a particular style due to their basic beliefs
concerning human nature.
i) Theory X managers assume that:
-people dislike work and will avoid it
-people must be coerced, controlled, directed and threatened in order to get them to
work.
-the average person prefers to be directed, has little ambition and avoids responsibility.
ii) Theory Y –managers assume that:
-work is as natural as play
-people can exercise self-direction
-people seek responsibility
-the potential in people can be fully exploited by managers
McGregor believed that people-centered management (Theory Y) was more effective for
motivation than work-centered management (Theory X).
4 Herzberg’s Two Factor Theory
Herzberg distinguished between motivators (which lead to job satisfaction) and hygiene factors
(which reduce job dissatisfaction).
Motivators include:
 -Recognition for work done

 -Promotion prospects
 -Sense of achievement
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 -Responsibility for tasks

Hygiene factors include:
 -Relationships within the organization

 -Rules and regulations
 -Fringe benefits and social facilities
 -Wages and salaries
 -Working environment
 -Style of management
 -Status and security
Herzberg argued that people do not work any harder if the hygiene factors are present at work,
but their output can decline if conditions deteriorate. Motivators on the other hand are intrinsic in
nature, and produce job satisfaction and higher output.
Job Enlargement
-Involves giving workers a number of tasks to perform to increase job enrichment.
Job Design
-It is the application of motivational theories to the structure of work so as to improve

productivity and the sense of satisfaction. In designing jobs, the following should be developed,
job enlargement, enrichment etc.
Job Enrichment
-This is the process of making tasks more interesting and satisfying to workers.
Job Rotation
-This involves changing a worker‟s tasks more regularly to overcome potential boredom
Mayo’s Hawthorne Experiments
In an experiment, a small group of workers were placed in separate rooms and a number of
variables were altered; wages were increased, rest periods reduced, workdays reduced.
Different outcomes were experienced. The researchers concluded that employees would work
harder if they believed management was concerned about their welfare. They also concluded that
informal work groups have a positive influence on productivity.
Process Theories
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1 Vroom’s Expectancy Theory
In expectancy theory, effort is linked not just to the desire for a particular outcome but it is
moderated by an evaluation (expectancy) that if a particular course is followed, a particular
outcome will be attained. The conclusion was:
i) Individuals will only act when they have a reasonable expectation that their behavior
will lead to the desired outcome.
ii) Effort alone is insufficient. It has to be accompanied by ability and skill.
iii) Job satisfaction results from effective job performance instead of the opposite.
iv) Job design is of crucial importance.
2 Equity Theory
In return for an input (effort, skill, training), the worker receives an outcome (pay, status, fringe
benefits). Equity exists when the ratio of one person‟s outcome to his/her inputs equals the ratio
of other workers. Workers will feel a sense of injustice if their efforts are not rewarded in a way
commensurate with the rewards of others.
Financial Motivation
Wages are the prices paid to labor. They are analyzed in terms of demand and supply of labor.
Wage rates are determined by:
i) hours of work – unsocial hours raise the pay rate
ii) nature of work
iii) training, responsibility and qualities
iv) bargaining power of trade unions
Pay Systems
1 Time rates
Under this system, earnings are calculated by multiplying the hourly time rate by the number of
hours at work.
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Condition for use
1. –where employees have no control over the speed of work
2. –where output cannot be measured or attributed to individuals.
3. –where output is of a non-standard type
4. –where quality, accuracy or care would be jeopardized by a system which relates to
pay output
5. –where periods of enforced but temporary idleness occur
Advantages
1. –less harmful to quality
2. –less harmful to health of employees
3. –simple and easy to understand
4. –appropriate in most circumstances
Disadvantages
1. –pay is not related to effort or output but merely to the time spent at work
2. –can encourage time wasting
3. –does not provide incentive for increased effort
4. –requires supervision of workforce
2 Piece rates
The earnings of an individual worker or group of workers are related to the quality of items
produced.
Conditions for use
1. -appropriate where output is standardized
2. –appropriate where output is measurable
3. –there should be a link between effort ad output
4. –appropriate where output can be attributed to an individual work and he/she receives
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a reward commensurate with effort
Advantages
1. –stimulates effort
2. –encourages workers to devise improved methods
3. –simplifies costing
Disadvantages
1. –must be adjusted for local circumstances
2. –encourages more output at the expense of quality and safety
3 Profit Share
Involves the employee receiving a share of the company‟s profits. The employee‟s basic pay is
not affected. It is introduced to:
1. –encourage employees to identify with the company
2. –provide an incentive for increased effort
3. –make employees profit and cost-conscious
4. –reduce staff turnover
4 Performance related pay (PRP)
Bonus is related to the performance of the individual. It is used for many groups of managerial,
administrative and professional workers. If performance standards are not visible in terms of
quality produced, a system of staff appraisal is established for PRP to be introduced.
Non-Financial Motivation
It includes:
1. Training
2. Effective induction
3. Opportunities for promotion and development
4. Status and recognition
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5. Job enrichment
6. Team working
7. Delegation
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LEADERSHIP
It is the process of direction and influencing the task-related activities of people so that they can
perform them effectively and efficiently. All managers should have leadership qualities.
Successful leaders should possess the following traits:
1. Adaptable to situations
2. Ambitious and achievement oriented
3. Assertive
4. Co-operative
5. Decisive
6. Dependable
7. Dominant (desire to influence others)
8. Energetic
9. Persistent
10 Self-confident
11 Tolerant
12 Responsible
The Managerial Grid
It was developed by Robert Blake and Jane Mouton and it identifies a range of managerial
behaviors based on the various ways that task-oriented and employee-oriented styles can interact
with each other.
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1.9 9.9
5.5
1.1 9.1
Five styles of management can be identified from the grid:
1. Impoverished Management (1.1) –Managers have low concern for people and low
concern for tasks or production. It is also called laissez-faire management.
2. Country-club Management (1.9) -Managers have high concern for employees but low
concern for production.
3. Task/Authoritarian Management (9.1) –Managers have high concern for production
and efficiency but low concern for employees.
4. Middle-of-the-road Management (5.5) –There is an intermediate amount of concern for
both production and employee satisfaction.
5. Team/democratic Management (9.9) –There is high concern for production and
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employee morale and satisfaction. It is the most ideal management style.
Leadership Styles
1 Autocratic Style
-The leader is authoritarian and assumes responsibility for all aspects of the operation.
Communication is one-way with little or no feedback. A paternalistic, autocratic leader demands
compliance on the grounds that he knows best. This kind of leadership can be convenient in
situations which require quick decisions, where the leader is more experienced and
knowledgeable than the employees, where employees are new to the job and emergency
situations e.g. fire brigades. However, such a style creates frustration and resentment, hinders
employees‟ development and impedes team work.
2 Democratic Style
-The leader believes in consulting employees and allowing them to share in decision making.
However, he retains the ultimate responsibility for decision-making. Such a style results in
improved decision-making, increases employee morale and causes greater commitment.
However, it is time-consuming and there is danger of loss of management control.
3 Bureaucratic Style
-These are constitutional leaders who manage by acting in accordance with the „rule book‟.
Subordinates are permitted little freedom or scope of initiative. It usually causes consistency in
performance but it is inflexible and causes resentment.
4 Free reign/Laissez-faire Style
-The leader sets goals for subordinates and clear parameters within which they work but gives
them the freedom and responsibility to achieve their objectives. This style works well if
employees are willing to assume responsibility. It motivates employees. However, its success
depends on the competence and integrity of the employees.
-All leaders/managers exert power. Power is the ability to exert influence on other people.
Sources of Power
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1 Reward Power –based on one person‟s ability to reward another person for carrying out orders
or meeting performance requirements.
2. Coercive Power –based on the influencer‟s ability to punish the influence for not meeting
requirements.
3. Legitimate Power –this is formal authority. The influencer has the right or is entitled to exert
influence on the influence.
4. Expert Power –it is based on the belief that the influencer has some relevant expertise or
special influence does not have.
5. Referent Power –this is power based on the desire of the influence to be like or identify with
the influencer.
Factors affecting Motivation
1. –pay rate and security
2. –prospects of promotion or employee development
3. –style and quality of leadership
4. –existence of informal groups
5. –desire for autonomy and responsibility
6. –working conditions
7. –opportunities to participate in decision-making
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BUSINESS COMMUNICATION
Communication is the process by which people seek to share meaning by the transmission of
symbolic messages. Communication is important to managers because:
1. –it provides a common threat for the management process of POLS.
All policies, leadership, groups and teams are activated through the regular exchange
of information.
2. –effective communication skills can enable managers to draw on the vast array of
talents available in the multicultural world of organizations.
3. –managers spend more time communicating either face-to-face, on the phone or in
writing reports.
4. –communication is the means by which business relate to their external environment.
It links organizations to their customers, suppliers, creditors, shareholders and the
wider community.
The Communication Process
Communication takes place in the relationship between a sender and receiver. The sender or
source of the message, initiates the communication. He has information, needs or desires. The
receiver is the person who senses the sender‟s message.
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A Model of Communication
TRANSMIT MESSAGE MESSAGE RECEIVER

REC
SENDER ENCODING CHANNEL DECODING
NOISE
RECEIVE FEEDBACK TRANSMIT
Effective communication involves the sender, the message, the channel and the receiver. Three
factors that can influence effective communication are encoding, decoding and noise.
1 Encoding
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This is the translation of information into a series of symbols for communication. In this case, the
sender wants to establish mutuality of meaning with the receiver by choosing symbols, usually
words and gestures that the sender believes to have the same meaning for the receiver.
Encoding Problems
i) -lack of planning
ii) -unclarified, unstated assumptions behind the message
iii) -use of jargon
iv) -lack of empathy
v) -inaccurate use of terminology
vi) -use of obsolete words, poor expression
2 Channel
The channel may be open and accessible to anyone e.g. notice boards, memorandums,
newsletters. It may also be electronic or technology-based e.g. telephones, computer networks
etc. Channels are affected by noise. Noise is any factor that disturbs, confuses or interferes with
communication. Noise can be internal (psychological and physiological) as well as external
(physical).
Transmission Problems
i) -inappropriate channel
ii) -failure to speak/write clearly
iii) -contradictory verbal/non-verbal messages
iv) -noise
v) -distortion
3 Decoding
It is the process by which the receiver interprets the message and translates it into meaningful
information. The receiver must first perceive the message and then interpret it. Decoding is
affected by the receiver‟s past experience, personal assessments of the symbols and gestures used
(people hear what they expect to hear), and mutuality of meaning with the sender.
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-Effective communication then means that the receiver‟s decoding matches the sender‟s intended
message.
Decoding Problems
i) -failure to take in the message
ii) -distractions
iii) -differing interpretations of words
iv) -information overload
v) -lack of interest in the subject matter
vi) -premature evaluation
vii) -emotional state of the recipient
Objectives of Communication
1. To enable decisions to be taken
2. To keep staff up-to-date and informed about what is going on
3. To communicate externally with suppliers, customers etc
4. To enable employees to communicate with each other
Types of Communication
1. Verbal –spoken, telephone, interviews, business meetings
2. Non-Verbal –written, body language
3. Formal –following correct laid down procedures of which records are usually kept e.g.
meetings.
4. Informal –happens where and when appropriate – interpersonal and inter-departmental
Classification of communication
1 Vertical Communication
-consists of communication up and down the organization‟s chain of command
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i) Downward Communication – starts with top management and flows down through
management levels to line workers. It follows the authority-responsibility relationship. Its major
purpose is to advise, inform, direct, instruct and evaluate employees and to provide organization
members with information about organizational goals and policies.
ii) Upward Communication – is to supply information to upper levels about what is happening at
the lower levels. It includes progress reports, suggestions, explanations, requests for aid or
decisions.
2. Horizontal Communication
-It refers to contacts (formal or informal) between people at the same level within the
organization. It is coordinative in nature and usually involves sharing information, resolving
conflicts and solving problems across the organizational structure.
-Communication is always better if it is two-way.
Criteria for Effective Communication
1. Easy accessibility to information
2. Ease of use
3. Efficiency of user-efficiency of communication media
4. Confidentiality and security of information
5. Timeliness of information
6. Accuracy of information
7. Proper use of facilities within the organization e.g. telephone, notice boards, messenger
systems, meetings etc
Barriers to Effective Communication
1. Physical barriers – these are often due to the nature of the environment. Some of them
include different locations, poor equipment, poor lighting, distractions etc
2. Attitudes – problems within the organization among staff e.g. poor management,
personality conflicts, lack of motivation and dissatisfaction by employees etc
3. System design faults – inefficient or inappropriate information systems, lack of
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supervision or training, lack of clarity in roles and responsibilities etc.
4. Psychological – concerns the state of mind of people. Personal problems like worries
or worries or otherwise happiness affects communication.
5. Different languages and cultures/semantics
6. Physiological barriers – ill-health, poor sight, discomfort etc affect communication
How managers can become better communicators
1. Examine the true purpose of each communication
2. Consider the total physical and human setting whenever communicating
3. Consult with others, where appropriate, in planning communications
4. Listen positively. A good communicator is a good listener
5. Empathy – managers should identify with the feelings and thoughts of the recipient of
the message
6. Managers should follow up their communications
7. Managers should possess proper reading and speaking skills
8. Managers should make sure their actions support their communications.
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HUMAN RESOURCE MANAGEMENT
People are an essential and very valuable resource in an organization. A business‟s success can
very often depend upon the quality of staff it employs. The relationship between employees and
employers is very important.
Employees usually expect:
1. fair wages
2. fair treatment by managers
3. reasonable working hours and good working environment
4. holidays with pay
5. appropriate training and opportunities for promotion etc
Employers also expect:
1. punctuality and cooperation from employees
2. obedience to instructions
3. government responsibility for facilities and equipment
4. loyalty and trustworthiness
5. ability to do the job well etc.
-For this reason, HRM becomes a staff function. It is an ongoing procedure that tries to keep the
organization supplied with the right people in the right positions, when they are needed.
-The main activities undertaken by the personnel/HR function can be grouped as:
1. employee resourcing
2. employee development
3. health, safety and welfare
4. pay
5. employee relations.
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The Human Resource Management Process
The HRM process includes 7 basic activities as represented in the following diagram:
HUMAN RECRUITMEN SELECTION

RESOURCE T
PLANNING
TRAINING SOCIALIZATIO
AND N
DEVELOPME
NT
PERFORMANC PROMOTIONS,
E APPRAISAL TRANSFERS, DEMOTIONS,
SEPERATIONS
Employee Resourcing
1 Manpower Planning
It involves forecasting the future demand for labor in the organization and planning to meet it. It
is accomplished through analysis of internal factors such as current and expected skills needs,
vacancies and departmental expansions and reductions as well as external factors such as the
labor market.
-Manpower planning also involves a skills audit involving an assessment of staff (including
management) capabilities and matching them against future needs. Skills can be manual, social,
intellectual, technical, managerial, administrative etc.
-Short-term manpower planning involves training for new and existing staff and replacing people
who retire. It covers a period of 1-2 years. Long-term planning (2-5 years) is geared toward
corporate objectives and proposed future objectives e.g. expansion of firm, development of new
technology, state of the economy etc.
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2 Recruitment
It is concerned with developing a pool of job candidates in line with the human resource plan. A
vacancy must first of all exist. This is followed by making a job analysis which leads to the
writing of a job description and personnel specification. A job description is a written description
of a job covering its title, purpose, duties and responsibilities and position on the organizational
chart. A personnel specification is a written description of the education, experience and skills
needed to perform a job effectively.
-The main sources of candidates are internal, external, employment agencies, educational and
training institutions, job centers etc.
-The main legislation that governs the recruitment and selection process in Zimbabwe is the
Labor Relations Act. It governs, among other things, equal employment opportunities,
prohibition of discrimination on the grounds of sex, ethnicity, disability, creed etc.
*Identify the Employment Agencies in Zimbabwe
*Discover how job descriptions and personnel specifications are made especially in
newspapers and magazines
3 Selection
It involves using application forms, CVs (resumes), interviews, skills tests and reference checks
to evaluate and screen job candidates for the managers who will ultimately select and hire a
candidate.
Interview
-It is the last and most critical part of the selection process and is a two-way exchange of
information and ideas to allow the candidates and the organization to know about each other.
-Interviews are carried out in many ways depending on the size of the organization. Candidates
are given an aptitude test in order to assess whether or not someone is suitable for the type of
work.
4 Socialization
It is also known as orientation. It is designed to help the selected individuals fit smoothly into the
organization. Newcomers are introduced to their colleagues, acquainted with their
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responsibilities and informed about the organization‟s culture, policies and code of conduct for
employees.
5 Training and Development
Training is needed to prepare new employees for change and to improve the efficiency of the
organization. The emphasis on quality, competitiveness and participation, including also the
rapid pace of technological change has increased the need for training. The objectives of training
are:
1. to provide employees with the skills, knowledge and aptitude
2. to develop workers in order to enable them to progress
3. to provide for succession
4. to improve morale
5. to attract recruits
6. to facilitate the introduction of new technologies
Types of Training
1. Induction –involves introduction of new staff to the firm as they are told about its
business and way of operation
2. Basic Skills –designed to teach basic skills required for the job by junior staff to
increase efficiency and effectiveness
3. Retraining –involves regular refresher and updating courses especially when new
technology, Health and Safety measures or new products are introduced
4. Management training –these are graduate trainee programs which are intensive,
targeted at potential managers who join the firm from school or college
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Benefits of Training,
To Employees
1. feel valued by the organization
2. improves promotion prospects
3. acquisition of transferable skills
4. may improve job satisfaction
5. employee is better able to cope with change
For the Employer
1. improves quality and motivation of staff
2. reduction in waste and scrap
3. higher level of service to customers
4. may reduce labor turnover
5. increases commitment to the organization
6. helps to develop individual, team and corporate competence
7. helps to develop a positive culture in the organization e.g. TQM
6 Performance Appraisal
It is the process of reviewing an individual‟s performance at work. It is important for:
1. identifying training needs
2. motivating staff by discussing and recognizing their achievements
3. remuneration
4. assessment of potential
5. identifying people worth of promotion
6. checking the efficiency of the organization in recruitment, selection and training
7. agreeing on future performance targets
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-Formal appraisal involves use of standardized forms which are completed by employees and
managers combined with regular interviews. Employees can also draw up a personal action plan.
-Informal appraisal takes place when managers check on the work of the employees and discuss
how it can be improved. It is an ongoing process.
-Employees usually dislike appraisals because they fear criticism and exposing their weaknesses.
Badly designed forms or poorly conducted interviews may result in subjective appraisal.
Examples of Causes of poor Solutions
Poor Performance Performance Probation
Absenteeism Lack of job knowledge Advice, support
Time wasting Lack of skills Review meetings
Missing deadlines Stress Realistic targets
Resisting change Health problems
Lack of commitment Poor Management
Poor quality output Poor working conditions
Upsetting customers Inadequate training
7 Promotions, Transfers, Demotions and Separations
They reflect an employee‟s value to the organization. High performers may be promoted or
transferred to help them develop their skills. Low performers may be demoted, transferred to less
important positions or even separated.
Functions of Personnel Managers
1. recruitment and selection
2. staff welfare – provision of essential needs
3. recommending promotions and keeping confidential staff records
4. discussing staff problems
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5. industrial relations
6. health and safety
7. training and development
8. termination of employment.
How Managers determine the Training needs of Individuals
1. performance appraisal
2. analysis of job requirements
3. organizational analysis
4. employee survey
Approaches to Training
1. On-the-job training –It involves instruction at work station where an employee works over a
series of jobs thereby learning a broad variety of skills. It can take the form of job rotation,
interrelationship (job training combined with related classroom instruction) and apprenticeship
(training under the guidance of a highly skilled co-worker). It is less costly and more relevant
and based on real problems facing the employee.
2. Off-the-job training –It takes place outside the workplace but attempts to simulate actual
working conditions. It is provided by colleagues and private training organizations. External
trainers have advantages in breath of experience and knowledge and provision of an outside
perspective.
Development
Training focuses on the skills needed to do one‟s current job. Employee development is more
future oriented, that is, it deals with preparing employers for future positions that will require
higher level skills, knowledge or abilities. All employees no matter what their levels can be
developed.
Health and Safety
The Factories and Works Act (Ch 14:08) in Zimbabwe places a general responsibility on all
employees to maintain a healthy and safe working environment.
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The Act requires employers to:
1. Prepare and distribute to employees a written statement on safety policy.
2. Educate and train the workforce in the need for safe working practices.
3. Ensure that working places are safe, all products are safe and clear instructions are
issued for safe use.
4. Consult and cooperate with employees‟ representatives.
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Conflict in Organization
It is the struggle for dominance between 2 or more elements. The conflict is interpersonal in
nature arising from the need to share resources, having different goals, values or perceptions. It
centers on departments, divisions, or other groups to achieve and maintain their identities,
missions and goals.
Types of Organizational Conflict
1 Horizontal Conflict
-It is a type of conflict between line and staff managers. It is based on clash of domains of
authority, expertise, and activity.
-The line authority attitude is that staff people interfere while staff authority attitude is that line
people are arrogant and refuse advice.
2 Vertical Conflict
-It is conflict between hierarchical levels and is manifested in subordinate-boss conflict as they
interpret roles, missions and objectives. MBO can be used to resolve this conflict.
3 Lateral Conflict
-It is interdepartmental conflict. It is based on the degree of task interdependence and the pursuit
of conflicting goals.
4 Role Conflict
-It occurs when and individual must assume various roles covering different situations that are
inconsistent. It can lead to problems of evaluation for the individual.
-Delegation can be used to resolve such conflicts.
Advantages of Conflict
1. brings change and dynamism
2. improves decision making
3. challenges people
Limitations
1. demoralizes subordinates
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2. can be emotionally disturbing
3. creates resentment and hesitation
Conflict Resolution
-It is done by clearly defining the scope of each group
-Encourage dialogue
-Line people must constantly inform staff people on problems and help solve them and vice
versa.
Industrial Relations
Trade Unions
-A trade union is a group of workers who have joined together to bargain with their employers
about pay and conditions of work, giving advice and information, defending employees‟ rights
(including legal representation), and resolving conflict. They also influence the economic,
industrial and social policy of government.
-To achieve their aims, trade unions negotiate with employers by a process known as Collective
Bargaining. Each side seeks to get the best deal and reach a collective agreement which they
both find acceptable. The need to bargain for pay increases is based on the following:
1. rise in cost of living
2. need to pay wages sufficient for retaining employees
3. need to maintain pay differentials
4. when productivity rises
-Employers also have their own representation.
Worker Participation
It refers to the inclusion of employees in the decision-making process.
Arguments for,
1. increases satisfaction and personal development
2. improves motivation and commitment
3. improves industrial relations
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4. utilizes the knowledge and experience of workers
5. democracy and consensus
6. improved information flow.
Arguments against
1. time consuming
2. conflict of interest
3. employees take a short-term view
4. workers lack managerial skill
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ORGANIZATIONAL CHANGE
Change is inevitable. It can be caused by controllable and uncontrollable factors. An important

aspect of change to talk about is Planned change. This is a systematic attempt to redesign an
organization in a way that will help it to adapt to changes in the external environment or to
achieve new goals. change is definitely influenced or necessitated by changes in the internal and
external environment of business e.g. shifts in government policy, technological breakthroughs,
redesign of an organization‟s production processes etc.
The implementation of change programs does not usually occur without resistance. Some of the
common sources of resistance to planned change are:
1. Organizational culture – employees within a company may be used to the old way of
doing things that have shaped the organization to the extent of failing to think of a
possible shift from the old normal ways even if the change may be beneficial.
2. Self interests – employees can also resist change because it may disadvantage them in
one way or the other. For example, if the change affects their present advantages like
adequate pay, job security, power, prestige, etc. employees are likely to resist the planned
change.
3. Perceptions of organizational goals and strategies – employees may not accept the need
for a new goal if they do not have the same view as management.
THE PROCESS OF CHANGE
Most efforts to bring about change may fail because of attitudes and behavior. The process of
bringing about change may involve “unfreezing” the present behavior pattern, “changing” or
developing a new behavior pattern, and then “refreezing” or reinforcing the new behavior.
Unfreezing involves making the need for change so obvious that the individual or group or
organization can readily see and accept that the change must occur.
Changing involves discovering and adopting new attitudes, values, and behaviors with the help
of a trained change agent, who leads individuals, groups, or the entire organization through the
change process.
Refreezing involves transforming a new behavioral pattern into the norm through reinforcement
and support mechanisms.
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METHODS OF DEALING WITH RESISTANCE TO CHANGE
1. Education and Communication – it involves explaining the need for and the logic of
change to individuals, groups and even the entire organization. The advantage is that
once persuaded, people can often help implement the change. However, the major
disadvantage is that it can be very time-consuming.
2. Participation and Involvement – it involves asking members of the organization to help
design the change. The advantage is that people will participate with commitment.
However, it is also time-consuming and people can design an inappropriate change.
3. Facilitation and Support – this involves offering training programs and emotional
support to people affected by the change.
4. Negotiation and Agreement – it involves negotiating with potential resistors and
soliciting written letters of understanding.
5. Manipulation and Cooptation – it involves giving key persons a desirable role in
designing or implementing the change. It can be relatively cheap and a quick solution to
resistance problems but can lead to future problems if people feel manipulated.
6. Explicit and Implicit Coercion – it involves threatening resistors with job loss, transfer
and lack of promotion. Its major problem is that it leaves people angry and creates bad
relations between employees and managers.
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CONFLICT IN SOCIETY
Sources of Conflict in Business
1. Varying Objectives
2. Bad organization
-Conflict might arise out of bad organization. A failure to create the necessary lines of
communication or the framework in which teams of people with varying expertise can operate
(e.g. design) from mean that people are making decision on insufficient information.
3. Organizational Structure
- Conflict may also be generated by the organizational structure e.g. change to matrix structure
can lead to individual or several superiors who may not agree on priorities or resource allocation.
This problem can be intensified if one or several of the superiors see the ability to command
obedience from the subordinates as a matter of prestige.
4. External Factors
-Employer-employee conflict is likely to be more marked within the employees or members of

an active trade union, when there is a tradition of labor militancy in the industry as a whole,
where demand from the product is declining and management responds with rationalization of
plant and manpower.
Ways of Resolving Conflict
1. Forcing
-the person in authority uses force as he/she is the boss
2. Smoothing
-a more diplomatic way of suppressing conflict where the manager tries to persuade one side into
giving in
3. Avoidance
-the managers avoid tracing a position or pretend to be unaware of the conflict
4. Majority
-the group conflict is resolved by a majority vote
5. Compromise
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-convincing each part to the conflict to sacrifice certain objectives in order to gain others
6. Collaboration
-the willingness of the 2 parties to identify the major causes of conflict and try to search for
solutions considered to be mutually beneficial
Advantages and Disadvantages of Internal and External Recruitment
Internal Search
Advantages
-low cost
-builds employee morale
-candidates are familiar with the organization
Disadvantages
-limited supply
-may not increase proportion of employees from protected groups
Advertisements
Advantages
-wide distribution
-can be targeted to specific groups
Disadvantages
-generates many unqualified candidates
Employee Referrals
Advantages
-knowledge about the organization provided by current employee
-can generate strong candidates because a good referral reflects on the recommender
Disadvantages
-may not increase the diversity and mix of employees
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Public Employment Agencies
Advantages
-wide contacts
-careful screening
-short term guarantee often given
Disadvantages
-high cost
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PRODUCTION AND OPERATIONS MANAGEMENT
PPODUCTION (POM)
-Is the transformation of inputs that is, raw materials, and labor into outputs (finished products).
-It is any activity undertaken by an organization which adds value to the contributing resources
by converting them into another good or service designed to meet human needs.
-The inputs of production differ from one organization to another. The outputs of one
organization may be the inputs of another.
-POM seeks to ensure that goods/services are made with the required quantity, required standard
and at the right time and in the most efficient manner. POM is concerned with acquiring the
necessary inputs, allocating and utilizing them in such a way as to maximize output.
-Production can be initiated from one of the following 3 key sources:
1. Replenishing low stock levels
2. Completing an individual customer‟s order
3. To meet demand anticipated in response to marketing effort
-The objectives of production are:
1. Achievement of required level of production
2. Reduce production costs
3. Maintain high quality levels.
Production Constraints
1. Finance - capital
2. Available technology
3. Skills of the workforce
4. Legislation
5. Economic conditions
6. Market
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Nature of Production
Added Value –it is the difference between a firm‟s sales revenue and cost of its bought-in
components, materials and services.
-It represents a profit for the firm. It excludes the cost of labor, land and capital.
-An organization will seek to increase its added value and this can be achieved in the following
ways:
1. A commitment to total quality
2. Investing in R & D
3. Improving work conditions
4. Improving purchasing and stock control
5. Value analysis/value engineering
Classification of Costs of Production
-From an economist‟s point of view production costs may be fixed or variable (marginal).
Fixed Costs
-These are costs which do not vary in direct proportion to a firm‟s output.
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Fixed costs are not always fixed, they can be stepped, that is, costs which stay constant over a
range of output and then rise suddenly at certain levels.
If a firm does not operate at its capacity, it still has to pay fixed costs.
Variable Costs
-These are costs which vary directly with output, that is, an increase in output has a
corresponding increase in costs.
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Variable costs can be clearly allocated to a particular product/service.
Semi-variable Costs
-Comprise both fixed and variable elements e.g. salaries of sales representatives, telephone
charges
Direct Costs
-These are costs which can be directly identified with the product being produced e.g. DL, DM.
DE
Indirect Costs
-These are costs incurred but cannot be allocated to specific departments or specific output.
Costing
-The ascertaining of costs of producing goods/services. There is need for accurate costing for
pricing purposes, calculation of profits, determining levels of output or resources required and
productivity agreements.
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Absorption/Total Costing
-The nature of this technique involves allocation of costs to units of output. It includes both
direct and indirect costs. It establishes a full cost per unit item so that the setting of selling price
does not cover costs only but ensures a satisfactory profit.
-Absorption costing is useful in that it gives a general cost of production in valuation of finished
goods.
Marginal/Variable Costing
-The nature of this technique is based only on the variable cost of production. It avoids arbitrary
allocation of costs. If contribution is greater than fixed costs, profit is realized.
-Marginal costing is used in the following circumstances:
1. Make or buy decisions
2. Analyzing the performance of the department/production
3. Whether or not to continue in business
4. Break-even analysis
Advantages
1. Very easy to calculate
2. Avoids difficulties in apportionment
3. Contribution of each product can be assessed
Disadvantages
1. Can give the impression that variable costs are important than fixed costs
2. Can also give the impression that fixed costs are divorced from production.
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Break-Even Analysis
-This is an extension of marginal costing which is used to identify a business‟ break-even point,
that is, the point at which it makes neither a profit nor a loss because Total Sales = Total Costs.
-It provides a minimum output which the firm must achieve to avoid a loss and start making
profit.
Break-Even (unit output) = Total Fixed Costs (F)
Contribution per Unit (C)
Break-Even (Sales revenue) = Fixed Costs x Price/Unit
Contribution/Unit
Contribution = SP-VC
SR
$(
e
u
n
TC
e
v
e BE
n a
s t
s o FC
C
Margin
of safety
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Margin of Safety –this is the amount by which sales could fall from the planned level before the
organization ceases to make a profit.
Assumptions Underlying the BEP Graph
1. Expenses may be classified into variable and fixed
2. Costs vary in a linear manner with output and revenue
3. All goods produced are sold
4. Selling price remains constant
5. If a fixed expense increases the BEP increases
Usefulness of Break-Even Analysis
-It anticipates probable future performances by attempting to answer the following questions:
1. What will be the profit/loss at a given sales volume?
2. What sales volume is required to earn a designated profit?
3. How will a given reduction in gross margin change the BEP?
4. What sales volume is needed to cover variable costs?
5. What additional sales volume will be required to cover the additional fixed costs
arising from a store modernization programme?
Limitations of Break-Even Analysis
1. Involves estimates – can create false sense of security.
2. Useful over a limited range of sales volume- a large increase in sales volume alters its
effect.
3. Fixed costs are not always fixed.
4. Variable costs nor sales revenue are likely to be linear because of discounts, overtime
payments etc.
5. Assumes all production will be sold – it translates production into demand, which may
not be realistic.
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Business Location
-Businesses have to make the important decision of the best place to locate in order to operate
well. Influence on the final location depends on the type of business, size, demands of the
production process and the market.
Factors affecting Choice of Location
1. historical reasons (power and raw materials)
2. natural resources – primary industries locate where the raw material is found e.g.
farming, fishing, mining
-Manufacturing industries may locate near the source of raw materials especially if they
are bulky and costly to transport.
3. nearness to markets and labor
4. transport
5. communication services
6. geographical factors
7. political situation
8. image of the area
9. government influence – financial incentives etc
Siting
-The site of a business is the actual area of ground it will occupy in a given location.
Factors affecting Siting
1. availability of transport
2. local bylaws and reaction of local residents
3. size, cost and physical qualities of the site
4. national and international pressure groups
5. provision of services.
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Factors Influencing Single/Multi-Site Operations
1. Type and size of the business – sole traders do better on single-site having several
outlets, depending on size of market
2. The product range – different products can have different location and citing
requirements
3. Trade restrictions – effective barriers to imports are favorable to many MNCs
4. Organization structure - a decentralized organization is easier to manage and avoiding
possible diseconomies of scales
5. Cost – changes in technology
6. Environmental considerations – attempts to develop new sites can meet with
opposition
7. Proximity of similar businesses (external economies of scale)
8. Economies of scale – managerial and administrative costs are cheaper on a single site.
When an organization expands, it can gain the advantage of operating on a large scale.
a) Internal Economies
1. Production Economies -mass production aided by better technology, specialization
and R&D.
2. Financial Economies –large firms find it cheaper and easier to borrow money and
float shares.
3. Marketing Economies –bulk buying, advertising spread over a wide range of
products, transport, packaging and administration costs.
4. Managerial Economies –Departmentation and use of specialized staff.
5. Risk-bearing economies –diversification and wide range of products and multi-
sourcing of raw materials.
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b) External Economies
-these are factors which can keep firms in an area or attract new firms. They include:
1. Labor –supply of suitable skilled labor.
2. Ancillary/support industry.
3. Marketing and distribution facilities.
4. Commercial services e.g. college training, chamber of commerce.
5. Industrial inertia – many industries can remain in their location even though the
initial advantages have declined.
6. Disintegration –individual firms specialize in single processes e.g. spinning, weaving,
ginning.
c) Diseconomies of Scale
-It is possible for a firm to grow large and then meet with problems, besides the above stated
advantages. Problems which decrease efficiency and increase cost per unit of output are called
diseconomies of scale. They include:
1. Co-ordination and control - communications and management become more complex
and difficult to organize.
2. Industrial relations – if employees are out of touch with management, motivation
becomes low and job-dissatisfaction increases.
3. Technical limitations – inability to increase production and adapt quickly to new
production methods.
Plant Layout
-The lay-out of a factory should enable a proper positioning of machinery, equipment and people
to extract the maximum productivity from the available resources.
- It should be designed to secure maximum;
- flexibility
- safety
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- efficiency
- coordination
- accessibility
- handling
- security
- visibility
- movement
Factors to consider on a single or multi-storey building depend on the nature of the business but
basically they are;
1. Costs – multi-storey buildings have lower site costs, hence office buildings have
more storey buildings than manufacturers.
2. Organization of departments – single-storey buildings can make flow of goods from
one department to another easier. Service industries do better in multi-storey buildings.
3. Ventilation and use of natural light – quite cheaper in a single-storey building.
4. Use of floor space – heavy machinery need more space, hence convenient for a single-
storey building.
Questions to ask in making Plant Layout Decisions
- What is the available space?

- What type of work is going to be done?
- What volume of work is going to be done?
- Can people and stock be clearly seen?
- What communications will be necessary?
- Are there any special servicing requirements?
- What equipment is going to be used?
- How much flexibility is required?
- How can you maximize comfort?
Analytical Plant Layout Methods
1 Layout by Process
- involves grouping of machinery performing similar tasks

- associated with batch production (e.g. bakery)
- can accommodate many different product routes (an advantage)
- ensures high utilization of machinery in a batch set-up
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2 Layout by Product
- a system in which machines and tasks are arranged according to the sequence of steps in
the production of a single product
- associated with line and flow production
- work is reduced, simplified and broken down into smaller tasks (an advantage)
- control of process is facilitated
3 Cellular Layout
- called group technology

- involves the formation of tasks, jobs and products into families with the resources
required being formed into “cells”.
4 Fixed Position Layout
- resources are taken to the site at which production occurs e.g. large construction projects.
Production Design
- the scheduling of production involves organizing the activities in a manufacturing plant

or service industry to ensure that the product or service is completed at the expected time.
There are 3 basic ways of production design namely job, batch and flow production. The method
chosen will depend on the following factors:
1. Type of product – whether durable or perishable
2. Size of the business – demand of product and capital investment to operate on a large
scale
3. Size and location of the market – therefore the volume of production required
4. Frequency of demand – whether product is a regular purchase e.g. bread, or infrequent
e.g. heaters
1. Job Production
- Used when a single product or small orders are completed by one/a group of people from
start to finish to meet the customer‟s individual requirements.
- It is suitable when the product is simple and demand is small. It is common in small
businesses e.g. carpentry, car servicing etc. It is the most expensive form of production,
very labor intensive and requires considerable flexibility and technical skills.
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Advantages
1. product can be tailored to meet customer needs
2. it makes it easier to isolate problem(s) during production
3. the workforce has greater involvement with the product. This increases job satisfaction
Disadvantages
1. For a complex technical product tailored to the needs of a customer, there has to be a
relatively large sales force with a high degree of technical expertise. This can increase
selling costs.
2. Business may need more machinery to meet delivery dates and production schedules
so as to remain competitive.
3. It requires a flexible workforce, especially in a more sophisticated product – need a
highly skilled workforce, technical supervision and competent supervisors and
management.
2 Flow Production
It uses a series of repetitive processes so that each item moves on to the next stage as soon as a
process is completed. Products pass along a conveyor belt or assembly line. It demands a high
degree of standardization, simplification and specialization.
Advantages
1. eliminates waiting time
2. encourages automation and mass production of essential goods like consumer durables
(cars, fridges, tinned foods)
Disadvantages
1. suitable for products with a large market and high demand
2. business has to be specific about design of product and demands a high degree of
standardization
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3. heavy use of machinery puts people out of their jobs
Careful planning and organization is needed to ensure continuous flow from one process
to the next.
3 Batch Production
- It falls between job and flow production

- It is the method of organizing the work on any product so that it is divided into a number
of operations and each operation is completed for a group of products (batch) before the
batch moves on to the next operation.
- All items move from one process to another, simultaneously.
- Careful planning and monitoring of production is required to reduce costs of changeover
and idle production.
- Examples are point manufacturers, housing estates, bakeries etc.
Advantages
1. enables the use of a costing system which allocates costs to each area and therefore to
each product as it passes through that process.
2. Compared with job production, it can lead to a saving in the amount of machinery used
3. Generates large quantities of stock between different production processes.
4. Provides opportunities for quality control.
Disadvantages
1. large amount of capital work in progress.
2. no product will be completed before another, lead time.
3. there is need for a very efficient control system in planning production-increases costs
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Master Production Scheduling (MPS)
-The operation managers regularly meet to review market forecasts, customer orders, inventory
levels, facility loading and capacity information so that MPS can be developed.
-The MPS is a plan for future production of end items over a short-range planning horizon that
usually spans from a few weeks to several months.
Objectives of Master Production Scheduling
1. to schedule end items to be completed promptly and when promised to customers
2. to avoid overloading and under loading the production facility so that production
capacity is efficiently utilized and low production costs results
-Planning a Management Production Scheduling will consider the;
1. location
2. site
3. plant layout
4. best way of working
5. scale of production
6. who will do the work
7. controls required
Procedure for developing MPS
1. schedulers must estimate total demand for product from all sources
2. assign orders to production lots
3. make delivery promises to customers
4. make the detailed calculation for the MPS
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*Quality is fitness for purpose
Quality Control
* Quality is fitness for purpose
-The objective is to prevent faulty components or finished goods being produced thereby
reducing scrap and rework costs and helping to increase customer satisfaction.
Aspects of Quality Control
1. quality of design –standards that meet consumer expectations
2. quality of conformance –production to required standards (SAZ, ISO)
3. quality of performance –extent to which product achieves what consumers expect
4. quality of reliability –consistency in performance over a period of time
Methods of Quality Control
1. Quality Assurance
-An approach to production in which checks and audits are carried out to ensure that quality
control procedures are followed.
-It involves working with suppliers to ensure that materials and components meet the required
standard e.g. safety, reliability, performance.
2. Production Engineering (VALUE ENGINEERING)
-This involves the use of specialist production engineers in selection, planning and installation of
modern, highly sophisticated technology in the manufacturing process.
-They monitor and evaluate manufacturing processes with a view to finding ways of improving
them. They also draw up specifications for machines and equipment that define standards of
quality to be achieved.
3. Zero Defects
-Mainly directed at workers. „Zero defects‟ programs seek to provide rewards, financial and non-
financial to workers if output of the desired quality is achieved.
-The aim is to eliminate human error at work due to boredom, fatigue and job dissatisfaction.
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4. Quality Circles
-These are groups of shop floor workers who volunteer to meet regularly and discuss production
problems e.g. rising costs, wastages, identifying their causes and looking for solutions.
-Members are trained in statistical analysis and problem-solving techniques. Worker

participation improves employee motivation and productivity.
5. Quality Standards
-The Standards Association of Zimbabwe (SAZ) adopts international standards of quality, safety
and performance and modifies them where necessary to suit local conditions.
-It works with the International Standards Organization (ISO) to promote the use of
internationally agreed terms, definitions and standards.
6. Statistical Process Control
-A 100% check on each and every product and quality is neither practical nor cost effective. For
this reason it is more usual to spot check a sample of the products using statistical sampling
techniques.
Total Quality Management (TQM)
-It is an element of loan production of redirecting organization culture toward superior product
quality.
-The quality of a product or service is a customer perception of the degree to which the
product/service meets his/her expectations.
Dimensions of Product Quality
1. Performance –how well the product performs its intended use
2. Features –special characteristics that appeal to customers
3. Reliability –likelihood of breakdowns, malfunctions or need for repairs
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4. Serviceability –the speed, cost and convenience of repairs and maintenance
5. Durability –length of time/amount of use before need for repair or replacement
6. Appearance –effects on human senses –look, feel, taste, smell or sound
7. Customer service –the treatment recognized by customers before, during and after sale
8. Safety –how well the product protects users before, during and after use
Elements of Total Quality Management
1. Top management commitment and involvement –„leadership through quality‟
2. Customer involvement –“focus groups”
3. Design products for quality –“designing for robustness”
4. Design production processes for quality
5. Control production processes for quality
6. Developing supplier partnerships
7. Customer service, distribution and installation
8. Building teams of empowered employees –quality circles
9. Benchmarking and continuous improvement. Benchmarking is the practice of
establishing internal standards of performance by looking at how world-class
companies run their business.
Productivity
-It is a measure of the efficiency of production. It shows the relationship between output of a
system and factor inputs.
Productivity = Output
Input
-Labor is used as a measure of productivity, for example
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Number of items produce
Average number of employees
To improve Productivity there are two main ways;
1. Increasing output as cost remains constant
2. Reducing cost whilst output is maintained
Work Study
-It is the technique of determining the most efficient use of labor in relation to the other factor
inputs in an organization.
-It consists of two parts, namely:
1. Method Study –used to analyze how jobs are performed with a view of improving them. The
steps involved are:
Select -the job to be studied
Record -the details of the job and method used
Examine -the details critically to eliminate any duplicate effort
Develop -a devised and improved method for equipment design, changes and
layout of workplace, sequence of operations and improvements etc
Install -the new method
Maintain - the method by reviewing on a regular basis
2. Work measurement (time study)
-used to measure and compare the time required to perform jobs by various methods, steps
involved are:
Select -work to be measured
Define -method to be used for measurement
Measure -the work to be done and how long it takes
Obtain -details of the work, content, and allowances for factors like
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personal needs and fatigue
Establish -a standard time for the defined method
Benefits of Work Study
1. An improved flow of work and avoidance of bottlenecks
2. Closer control of operations
3. Improved employee performance
4. Better utilization of space, equipment and materials
5. Provision of a basis for incentive pay
6. Increase in efficiency and productivity
Stock Control
-The basic objective in purchasing is to obtain the right quality at the right time, in the right
quantity, from the right source and at the right time.
-The purchasing department aims to:
1. supply the business with a flow of inputs to meet its requirements
2. maintain continuity of supply through good relationships with existing suppliers
while exploring alternative sources of supply
3. obtain the best value for money, taking into account reliability and quality as well as
price
-One policy decision to be made is whether large quantities should be ordered and received
infrequently or small quantities should be ordered and received frequently.
Benefits of frequent small orders
1. tests risk of obsolescence and deterioration
2. economies on insurance
3. lower capital requirements
4. economies on space
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Benefits of infrequent large orders
1. economies of purchasing and delivery (bulk buying discounts)
2. profits from rise in price of stock
3. security of supply
The criteria for choosing a supplier are likely to include:
 available capability and capacity

 delivery speed
 flexibility
 past performance
 price
 delivery reliability
 quality
Why stocks are held
Stocks take three forms:
1. Raw materials
2. Work-in-progress
3. Finished goods
Stocks are held:
1. to allow the variations in supply and to take advantage of bulk-buying discounts and
anticipated price rises
2. to allow greater flexibility and improve machine (capacity) utilization
3. for finished goods to cope with variations in demand, however, businesses can also
have stocks of unwanted goods due to:
a) inability to sell goods

b) mistakes in planning
c) lack of satisfactory stock control procedures
d) poor communication between various departments
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Purpose of Stock Control
1. to ensure adequate supply of raw materials and production purposes
2. to ensure that finished goods are available for dispatch
3. for valuation purposes
4. to control cash tied up in stock
5. to control wastage and pilferage
(a) Stock Control Charts
-A stock control chart is a graphical technique used to ensure that a business holds the optimum
levels of stock that is sufficient for the business to trade without interruption while at the same
time minimizing costs.
-It works under the following assumptions:
1. demand is known and is reasonably constant
2. all other costs are known
3. items arrive on time
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- each vertical line represents a new delivery
- stoping lines represents depletion of stock through usage
- when stocks fall to the reorder level, a new batch is ordered
- the time gap between the reorder time and delivery of suppliers is called lead time
- the reserve that is carried to cater for eventual stock out or uncertainties is called
buffer stock.
Buffer stock
-It is held in order to avoid stock out costs which are:
1. lost production
2. lost contribution from lost sales
3. loss of customer goodwill
4. high unit costs associated with urgent purchases
5. loss of bulk buying discounts
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(b) Economic order Quality (EOQ)
-It is the quantity of materials ordered at cash point that minimize the total annual stocking costs.
The costs of holding stock are:
1. interest on capital
2. storage costs
3. wastage costs
4. handling costs
5. insurance costs
EOQ = 2 pd
p = procurement cost per order
d = annual use of the material
c = carrying cost per annum
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EOQ however ignores lead time needed for stock replacement. It can create a risk of stock out
situation.
(c) Just In Time (JIT) /Zero Stock System/Stockless
-It is a stock control system in which material is scheduled to arrive exactly when it is needed for
production, and in the exact quantity.
-Raw materials inventories are recorded to zero and finished goods inventories are minimized by
matching production to demand.
Main Features of JIT
JIT Manufacturing
1. stick to production schedules
2. elimination of waste
3. enforced problem solving and continuous improvement
4. total quality management
5. dedicated and multi-skilled workforce
6. reduced equipment breakdown through preventive maintenance
7. develop long-term supplier relations
JIT Purchasing
1. develop vendor relations
2. develop long-term supplier relations
3. suppliers should be located near the firm
4. shipment delivered directly to production line
Factors to consider before switching to JIT
- eliminate all sources of uncertainty in manufacturing system
- drastically reduced time needed to set up machines
- efficient transport system
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- eliminate existence of bottleneck in production system
- establish reliable suppliers
- demand should be predictable
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MARKETING
-Marketing is all of the activities directed toward identifying and satisfying consumer needs and
wants.
-It is a management function which organizes and directs all those business activities involved in
assessing and converting consumer purchasing power into effective demand for a specific
product/service and in moving the product/service to the final consumer so as to achieve the
profit target or other objectives set by the company while satisfying the customer‟s needs and
wants.
What is a Market?
-A market is people/organizations with needs or wants and the ability for willingness and
authority to buy.
-An aggregate of people lacking any one or more of these characteristics is not a market.
*People sometimes use the word market:
1. To refer to a specific location where products are bought or sold
2. To refer to a large geographical area
3. To refer to the relationship between the demand and supply of a specific product
4. To refer to the act of selling something
Types of Markets
1. Consumer Market
-Consists of purchases and/or individuals in their households who intend to consume or benefit
from the purchased products and who do not buy products for the main purpose of making a
product for resale.
2. Organizational/Industrial Market
-Consists of individuals or groups who purchase a specific kind of product for any of following
purposes;
(a) Resale
(b) Direct use in producing other products
(c) General use in daily operations
*There are four categories of industrial markets which are;

Producer
Reseller
Government
Institutions
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The Exchange Process
THE MARKETING CONCEPT
-The increased responsiveness to customer wants is the end focus of a marketing orientation,
which is the foundation of contemporary marketing philosophy.
-The Marketing Concept involves the following:
1. Focusing on customer wants so that the organization can distinguish its product(s)
From competitors‟ offerings.
2. Integrating all of the organization‟s activities, individual production, to satisfy these
wants.
3. Achieving long-term goals for the organization through satisfying the customer needs
logically, responsibly and profitably.
The Social Marketing Concept
-It states that the social and economic justification of an organization‟s existence is the
determination of target market needs, wants and interests and the delivery of the desired
satisfactions more effectively and efficiently than competitors while preserving or enhancing
both the consumers‟ and the society‟s best interests or well being.
-It is embodied in such terms as “green marketing”, and “environmental friendliness”.
Functions of Marketing
1. Marketing Information
-Collection, analysis and distribution of all the information needed to plan, carry out and control
marketing activities, market research.
2. Purchasing
-Looking for and evaluating goods and services
3. Selling
-Promoting the product – personal selling, advertising-it is the most visible function of
marketing.
4. Transportation
-The movement of goods from one place to another
5. Storage
-Holding goods until customers need them
6. Standardization and Grading
-Sorting products according to size and quality-breaking bulk
7. Financing
-Provides the necessary cash and credit to produce, transport, store, promote, sell and buy
products.
8. Risk Taking
-Bearing the uncertainties that are part of the marketing process e.g. damage to products, theft
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and obsolescence.
Marketing Objectives
-They specify the results expected from marketing efforts and should be consistent with overall
organizational objectives.
Criteria for Good Marketing Objectives
1. Must express realistic expectations

2. Must be expressed in clear, simple terms so that all marketing personnel understand
exactly what they want to achieve
3. Must be measurable
4. Must be based upon adequate supply of the program
5. Must be time-framed
Examples of Objectives
1. Sales revenue – e.g. to achieve a turnover of $8 billion

2. Unit sales – e.g. to sell 100 000 units
3. Profit – e.g. to earn overall level of 10%
4. Market share – increase by attracting sales from competitors
5. Rate of growth – e.g. increase market share by 5%
6. Market penetration – find new markets or new parts of existing markets
7. Quality assurance – to ensure that customers always receive goods/services that give
them maximum satisfaction (utility)
-When objectives are clearly stated, they:

1. motivate staff
2. force the executives to sharpen and clarify their thinking
The Marketing Process
-Marketing entails the following;
1. Environmental Scanning
-Collection and interpretation of information about forces, events and relationships that may
affect the future of the organization. It involves identifying market opportunities and threats and
provides guidance for the design of marketing strategies (SWOT ANALYSIS).
2. Market opportunity analysis
-Describes and estimates the size, scale and potential of market segments of their interests to the
firm and assesses key competitors on these market segments.
3. Setting marketing objectives
-A market objective is a statement of what is to be accomplished through marketing activities.
4. Target market strategy
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-Describes exactly who wants and whose wants the organization will try to satisfy. It also
involves developing and maintaining the marketing mix that will produce mutually satisfying
exchanges with target markets.
5. Developing a marketing mix
-a marketing mix refers to a unique blend of product, place (distribution), promotion and pricing
strategies (4Ps) designed to produce mutually satisfying exchanges in a target market.
The traditional 4Ps of the Marketing Mix
Product Place Price Promotion
Product variety Channels List price Advertising

Quality Carriage Discounts Personal selling
Design Assortments Allowances Sales promotion
Features Locations Payment methods Publication
Brand name Inventory Creditors
Packages Transport
Extra services
Warranties
Size
TARGET MARKET
-these factors of the marketing mix can be varied in order to increase customer appeal and
change sales of the product
1. Product
-Using the findings from market research firms, develop products to satisfy consumer needs,
introduce new products or improve existing ones. Appearance factors such as size, shape, color,
label of brand name are also very important in attracting customers, as might be guaranteed and
after-sales services.
2. Price
-A price must be set which is competitive and attractive to customers. It covers cost of
production and provides a profit for the firm. The price may also be affected by discounts, credit
facilities, special promotions and pricing psychology e.g. $9 999. 99 sounds cheaper than $ 10
000. 00.
3. Place
-Is about how products are made available to the consumer. It also involves choosing the channel
of distribution e.g. retailers, wholesalers or direct selling.
4. Promotion
-Includes sales promotion, advertising, public relations and personal selling.
-These are forms of marketing communications. The aim is to;
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-tell potential customers about the benefits of the product

-remind existing customers that the product is still available
-encourage both groups to buy or use them
Market Segmentation
-In order to market successfully a firm needs to know what the total potential market is for its
product/service and tries to identify various segments within it.
-Market segmentation is defined as the process of dividing a total market into market groups
consisting of people who have relatively similar product needs. It is appropriate for
heterogeneous markets (individuals with diverse products needs).
-Thus a market segment is a group of individuals or organizations sharing one or more
characteristics that cause them to have relatively similar product needs.
Types of Segmentation Strategies
1. Undifferentiated Targeting
-This is when a firm designs a marketing mix and directs it to an entire market. It uses “mass
marketing” philosophy. This means that the firm mass produces, mass distributes and mass
promotes one product to all buyers.
2. Concentration Strategy
-It is when an organization directs its marketing effort toward a single market segment through
one marketing mix it specializes on.
3. Multi-segment Strategy
-An organization directs its marketing effort at two or more segments by developing a marketing
mix for each selected segment.
Criteria for Effective/Successful Segmentation
1. Substantiality
-A selected segment must be large enough to warrant developing and maintaining a special
marketing mix.
2. Measurability
-Segments must be identifiable and their size measurable
3. Accessibility
-A firm must be able to reach members of targeted segments with customized marketing mixes.
4. Responsiveness
-Unless one marketing segment responds to marketing mixes differently, treating the segments
separately is unnecessary.
5. Compatibility
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-The total market should be divided in such a way that the segments can be compared with
respect to the estimated sales potential, costs and profits.
Choosing Segmentation Variables
-Segmentation variables are the dimensions or characteristics of individuals, groups or

organizations that are used for dividing a total market into segments.
CATEGORY ELEMENT
DEMOGRAPHIC Age, sex, occupation, family size, religion,
ethnicity, social class, family life cycle,
education, income, nationality
GEOGRAPHIC District size, state size, urban/suburban,

rural, market density, city size, climate,
terrain, country size, province size
PSYCHOGRAPHIC Personality attributes, motives, lifestyle,

social class
BEHAVIORALISTIC Volume usage, end user, benefit

expectances, price sensitivity, purchase
occasions, brand loyalty, attitude
- One can use a single variable (single-variable segmentation) to segment a market or any
combination of the above variables (multi-variable segmentation).
Limitations of Segmentation
Firms may:
1. appeal to segments that are too small to be profitable
2. misinterpret consumer similarities and differences
3. become short-run rather than long-run oriented
4. compete in too many disparate segments
5. confuse customers
6. become locked into a declining market segment
7. be able to use certain media (due to small size of the segment)
8. be too slow to seek out innovative opportunities for new goods and services
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Target Marketing
- It involves 3 stages;
1. Market Segmentation
-Determining the characteristics of the market and dividing it into distinct groups to consumers.
2. Market Targeting
-Involves evaluating the commercial potential of each market segment and selecting any one or
more to target.
3. Product Positioning
-Developing a marketing mix specifically designed to fit each particular chosen segment and
therefore maximize potential sales.
-Developing a specific mix to influence potential customer‟s overall perception of a brand
relative to competing offerings
-Effective positioning requires;
(a) assessing the current positions occupied by competing brands
(b) determining the important dimensions underlying those positions
(c) selecting a position in the market where the organization marketing efforts will have a
greatest impact.
Positioning Bases
1. Attribute – features, benefits
2. Price and quality – e.g. high price as a signal of quality or low price as an indication of
value
3. User/application – positioning by association – personality profile
4. Product class – e.g. a margarine brand in the category of butter
5. Competitors – e.g. “we are the number one”
Evolution of Marketing
Production Era (1870-1930)

-Focuses on internal capabilities of a firm rather than desires and needs of the market.
-It was at the time of industrial revolution when there was high demand for products and less
competition; therefore there was no need for consumer research.
-The goal was to increase production to keep up with demand.
-The organization seeks to pursue efficiently in production and distribution and holds that
consumers favor products that are available and highly affordable.
Product Era
-The major task of the organization is to produce products that it thinks would be good for the
public. The emphasis is on quality, performance and features of the product.
-However, this stage leads to marketing myopia where the firm falls in love with its products
while the public may have second thoughts.
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Sales Era (1920-1950)

-The assumption was that buyers will not purchase items that are not essential.
-People will buy more goods and services if aggressive sales techniques are used e.g. personal
selling and advertising.
-The business looks at sales as the major means of increasing profit, consumer tastes and needs
receive little consideration.
-The budget and advertising, sales promotion, personal selling and other demand-stimulating
activities increase.
-It is most common with unsought goods e.g. encyclopedia, funeral policies, political candidates
etc.
-The fundamental problem with this approach is lack of understanding of the needs and wants of
the market.
Marketing Era
-It recognizes that production and extensive promotion didn‟t guarantee that customers would
buy the product. It realizes that sales depend more on customer decision to buy the product.
-The business adopts a customer orientation – where they have to determine what the customer
wants, rather than try to change the customers‟ needs to fit what is produced.
-This is also known as “outside-inside marketing”.
Societal Marketing Era

-States that the social and economic justification of any organization existence is the
determination of target market needs, wants and interests to the delivery of the desired
satisfactions more effectively and efficiently than competitors while preserving or enhancing
both the consumers and the society‟s best interests or well-being.
-It involves “green marketing”, “friendly production” and “environmental friendliness”.
Marketing Research
-marketing intelligence
-refers to data available for marketing decisions, It is everyday information about development in
the marketing environment that managers use to prepare and adjust marketing plans.
-it is the function which links the customer, consumer and public to the market through
information
-the information is used to identify and define marketing opportunities and problems, generate,
refine and evaluate marketing actions, monitor marketing performance and improve
understanding of marketing as a process.
-it is the systematic gathering, recording and analysis of information about specific issues related
to the marketing of goods/services, organization, people, places or ideas
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Market Research
-It is conducted on a special – project basis, and research methods are adapted to the problems
studied and the changes in the environment
-It is the activities undertaken by a business in order to identify and assess the needs of the
market for its products. It involves;
(a) field research (primary research) – involves collection of data from a sample of
potential customers
(b) desk research (secondary research) – collection, analysis and evaluation of
information from such sources as government statistics, journals and business
accounts.
Reasons for Information Search
1. to gain a competitive edge

2. to reduce financial and image risk
3. to determine consumer attitudes
4. to monitor the environment
5. to coordinate strategy
6. to measure performance
7. to improve advertising credibility
8. to gain support for decisions
9. to verify intuition
10 to improve effectiveness
Scope of Marketing Research
1. Market Research
-size of the market
-customer profile
-future potential market
-market segments
-geography of the market
-customer profile
-customer behavior
2. Product Research
-evaluate strengths and weaknesses of existing product(s)
-investigation of new uses from existing products
-product variations
-product development
-packaging research
-pricing policies
3. Promotion Research
-advertising tasting
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-formulation of advertising themes

-measurement of effectiveness of sales force and promotional activities
-media decisions
4. Sales Research
-examination of selling activities by outlet, territory, agencies
-identification of suitable outlets
-evaluation of sales methods
-analysis of distribution systems
5. Competitor Research
-activities of competitors
-trends and market shares
-identification of unique selling points (USPs)
Qualitative Research
-It provides information on consumer tastes and preferences, attitudes and buying habits and
motivations behind consumer behavior and attitudes.
-It is conducted by psychologists working with small groups of people within the target market.
Quantitative Research
-It concentrates on factual information such as market share, probable levels of sales at a given
price etc.
-It is concerned with who buys the product and how much they buy.
Sources of Information for Desk Research
1. Internal Information
-Company accounts, invoices and stock control methods giving information on patterns of trade.
2. Government Statistics
-They give an overall view of changing social and economic patterns e.g. demographics,
industrial etc. They are available in Zimbabwe at the Central Statistical Office.
3. The Media
-Commercial publications like journals, magazines, newspapers, bulletins etc
4. Competitor Information
-The analysis of the published accounts of competitors can also be useful in identifying the
success or failure of their strategies.
Techniques of Field Research
1. Observation
-Market researchers can observe how people behave. Observation can trace the form of audits
(e.g. stock checks), recording devices (e.g. security commercials/televisions). It is an expensive
technique and provides limited information (it is more descriptive than explanatory). Its results
can be distorted if the person is aware that he is being observed.
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2. Questionnaires
-They can be dichotomous (requiring a simple „yes‟ or „no‟ response) multiple choice questions
or open-ended.
3. Consumer Panels
-These are groups of people who agree to keep records of all their actions as consumers
4. Test Marketing
-It is sometimes used by manufacturers to gauge consumer response to a new product or
promotion before deciding whether or not to market it nationwide.
5. Retail Audits
-Involves the use of sample surveys of retailers to analyze sales in order to gauge market size and
shares, check price levels and assess the proportions of outlet stocking various brands.
Choice of Research Method
-depends upon the following factors

1. budget available
2. accuracy required
3. how quickly the information is needed
4. complexity of the method
5. accessibility of the new sample population
The Marketing Research Process
-The research process is a set of steps that a researcher goes through in planning a research
project.
Stage 1-Problem Definition

-purpose of study
-necessary background information
-kind of information needed and its use
Stage 2-Development of an approach to the Problem
-refers to research design formulation
-secondary data analysis
-data collection methods
-sample design
Stage 3-Conducting Field Work

-actual data collection is affected through interviews, telephone surveys, observations etc
Stage 4-Data Preparation and Analysis

-involves such processes as editing, coding, verification of data and processing
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Stage 5-Research Report Writing and Presentation

-involves documentation of information and presenting a discussion of findings
Sampling
-Market research data is based on a sample of the total population. A sample is that part of the
whole population whose characteristics are studied to give insights into the characteristics of the
populations as a whole.
-Statistical theory can be used to calculate the minimum size of sample necessary to give the
required degree of accuracy. The larger the size the more accurate the information but also the
greater the cost.
-The sample must be more representative of the population, it should be balanced in terms of
age, sex, type of occupation, social class etc
-A carefully chosen sample should be statistically reliable. It should produce very similar results
to those that would be achieved by asking everyone in the population.
-However, bias will also exist especially if the samples are poorly selected or too small, the
questionnaires have complex interview questions etc.
Methods of Sampling
Probability Samples
1. Random Sampling
-Every member of the population has an equal chance of being selected.
-Names and addresses for respondents may be chosen at random from the electoral register and
then visited for an interview.
2. Systematic Random Sampling
-It is similar to the above but involves selecting every nth item or person e.g. every 10th name in
the telephone directory.
3. Stratified Random Sampling
-It divides the population into groups (strata) by age, sex, occupation, social class etc and
provides a more representative cross-section of the whole. Each selected sub-group is then
randomly sampled.
Non-Probability Samples
-It excludes estimating the probability of any particular item being included.
1. Quote Sampling
-the interviewer selects a given number of the population who fulfill certain criteria such as age,
sex etc. It is used for street interviews e.g. a quota may be used to interview 25 males and 25
females for each selected age group.
2. Purposive Sampling
-It is biasing a sample towards the market being investigated e.g. a manufacturer launching a
new drug would want to discover doctors‟ likely response.
3. Cluster Sampling
-It is used to reduce costs of interviewing and traveling.
-A random group is selected from a particular area or region where they are concentrated e.g.
choosing the CBD in a town.
4. Convenience Sampling
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-gathering information from whoever is available when the survey takes place, regardless of their
age, sex, background etc.
-It involves stopping by-passers. It is very cheap but less reliable.
The Marketing Mix
1.PRODUCT
-the product offering is the heart of an organization‟s marketing program. It is usually the
starting point in creating a marketing mix.
-a product is anything that can be offered to a market for attention, acquisition, use or
consumption that might satisfy a want or need.
-the description of a product includes a range of variables, both tangible and intangible, as
represented below.
ACTUAL PRODUCT – Packaging, features, styling, quality, brand name

AUGMENTED PRODUCT – Installation, warranty, delivery and credit, after-sales services
Product Range
-firms do not produce just one but a range of related products in order to spread risks (not putting
all their eggs in one basket). The advantages are:
(a) contribution of profits
(b) economies of scale
(c) advertising and selling costs can be spread
(d) distribution costs can be reduced
-The products can be related (conglomerate) or unrelated (diversification)
Product Life Cycle

-This involves the stages that a product goes through from its inception onto the market to the
time it is eliminated or redesigned or extended.
-It can be represented as follows:
INTRODUCTION GROWTH MATURITY SATURATION

DECLINE
STAGE 1 Product Development

-research and development of the product
-high costs (research and technical development)
-preparation and marketing plan prior to launch
STAGE 2 Launch/Introduction
-advertising and bringing to market for sale
-high promotional spending
-low volume sales, high costs, high risks
-aim is to develop/create awareness
STAGE 3 Growth
-if product is successful, sales start increasing
-firms benefit from economies of scale
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-profits grow
-product penetrates the market
-firms attempt to build customer loyalty
STAGE 4 Maturity
-sales continue to rise, but at a slower rate
-majority buys the product
-packaging becomes an important part in marketing effort
-brand preference is a competitive edge
STAGE 5 Saturation
-sales stop increasing
-most people who are likely to buy have purchased the product
STAGE 6 Decline
-sales and profits decline
-substitutes appear/product becomes obsolete
-firm seeks to cut losses by eliminating the product
*A firm can opt at this stage to completely eliminate the product or extend it.
(a) Elimination –it depends on whether the decline is temporary or terminal/irreversible. It is
done when the decline is irreversible.
(b) Extension –extension strategies aim to rejuvenate the product to prolong its life. It can
involve making an adjustment in the marketing mix. Extension can be achieved through:
1. more frequent use of the product
2. repositioning it by finding new uses or new markets
3. modifying the product to retain its consumer appeal
4. technical developments e.g. new packaging
5. a wider product range
New Product Development (NPD)

-NPD is vital for all organizations for them to maintain present and future success. The ideas for
NPD are generated from the firm‟s market research and R&D projects.
-New products must be developed which cater for changing markets as consumers demand new
and better quality products.
Reasons for Product Development
1. it stimulates sales enabling existing markets to be developed

2. to enter new markets or market segments
3. to counter competition more effectively
4. to increase market share and profitability
5. to spread risks
6. to maintain market positions as innovator
7. to utilize spare capacity in production, sales etc
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Value Analysis/Engineering
-It is a technique used in product design that aims at improving efficiency and reduce production
costs by evaluating whether all the materials or components in a product have a value
commensurate with its costs.
-If for example complex expensive components are used it may be possible to replace them with
simpler lower cost items without impairing the product‟s safety, quality or performance.
-An effective value analysis team would contain experts in each of the major business functions
e.g. engineers, production managers, marketing managers, employees etc.
Branding
-Brand is a name/term/design or symbol or a combination of these which is intended to identify

the goods/services of one business from others, usually offering similar products.
-Brand Image is a perception a person has of a particular brand
-Brand Extension is a strategy by which an established brand name is applied to new products
from the same manufacturer.
-Brand Loyalty is a consumer‟s decision to consistently repurchase a brand continually because
he/she perceives that the brand has the right product features or quality at the right price.
-With brand loyalty, consumers can reduce purchasing time, thought and risk therefore
developing brand loyalty as the long-term objective of all marketing organizations and the major
reason for their continued study of consumer behavior.
Types of Brands
1. Family Brands
-the brand name is used to cover all the products of a business, even if they are widely different
and in different markets e.g. Willard, Heinz, Kellogg, and Unilever
2. Retail Brands
-the retailer, not the manufacturer is the one guaranteeing quality and consistency e.g.
Barbour‟s, Greatermans, Truworths
3. Corporate Brands
-the name of the business is incorporated into the brand name of the product e.g. Jewel Band-
CBZ
4. Individual Brand
-each product is given its own brand name
Factors to consider when selecting a brand
1. easy to spell, say or recall

2. should allude to the product uses, benefits or special characteristics
3. should be distinctive and recognizable
4. should be sufficiently versatile to be applicable to new products
5. should be capable of being registered and legally protected under The Trade
Marks Act
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6. should be adaptable to packaging and labeling requirements
Benefits of Branding
-protects quantity
-it aids in shelf selection (case of identity)
-it differentiates similar goods
-for prestige
-it facilitates product diversification
-it hampers price comparisons
-it facilitates promotional effort
Reasons for Not Branding
-to avoid the high initial costs of promoting a brand

-the physical nature of some goods may prevent branding e.g. vegetables
-to maintain a consistent quality of output
-it may be difficult to differentiate products of one firm from another e.g. safety pins, coal, wheat
etc
Packaging
-Packaging is used to develop brand image by making it distinct and easily recognizable. -It is
termed the „silent salesman‟ in marketing.
-It is often an integral part of a product designed to add to its appeal through the use of color,
shape, size, logos etc, all of which can have a significant effect on sales.
-Packaging is useful in successful advertising and promotion as it can encourage impulse buying.
*A package should have;
1. brand (product) name
2. quantity
3. expiry date
4. ingredients/nutritional information
5. guarantee
6. directions for use
7. address and contact number of manufacturer
8. health information e.g. „do not litter‟
Product strategies depend on;

1. products and market forces
2. existing competition
3. potential for new entrants
4. availability of substitute products
5. power of buyers and suppliers
-The two techniques used to analyze the product and market options available to organizations
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are the Boston Matrix (BCG) and the Ansoff Matrix by Igon Ansoff.
The Boston Matrix

-It is used to analyze the product and represents a firm‟s product range in terms of market share
and market growth
100% LOW HIGH
PROBLEM CHILD STARS
GROWTH High
DOGS CASH COWS
MARKET Low
0%
1. Stars
-these are very profitable products with high market share and high growth rate, they are usually
at the early stages of the product life cycle.
2. Cash Cows
-these are established products which require little advertising. They have a high market share
but low growth. They generate a lot of cash and are usually „milked‟ to finance other products.
3. Dogs
-they have low market share and low growth rate. They have little potential for development and
should therefore be withdrawn from sale.
4. Problem Child
-these are under-achieving products and therefore have an uncertain future. They have high
growth rate but small market share. With a cash injection they may become stars but equally
without if they are old, end up as dogs.
The Ansoff Matrix

-It considers marketing objectives or markets and products in terms of age.
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MARK MARKET PENETRATION PRODUCT

ETS Sell more to existing DEVELOPMENT
markets Sell new products to
Existin existing markets
g
MARKET EXTENSION DIVERSIFICATION
Sell more of existing Sell new unrelated products
New products to new markets to new markets
Existing New
PRODUCTS
1. Product Management –It involves improving the product and introducing new related
products. Value analysis is used to suggest ways of improving the product.
R & D is also used for new products.
2. Market Penetration –It aims to increase the sales of existing products in existing markets. It is
for additional distribution opportunities and extend promotions to organizations in the
distribution chain to persuade more wholesalers and retailers to stock the product.
3. Market Extension –The business intends to increase sales of existing products by developing
new markets. This can be achieved by extending the geographical market, looking for new uses
of the product and changing the image of the product so that it appeals to a wider range of
people.
4. Diversification –It involves selling new unrelated products in new markets.
Reasons why new products fail
Product failure is attributed either to failure in the marketing process or to an unanticipated

change in the external environment.
-inadequate market research
-misleading market research findings
-defects in the product
-activities of competitors
-insufficient or inappropriate marketing efforts
-distribution problems
-unexpectedly high costs
-inadequate sales force
2. PRICE
-To maximize sales and profits, organizations will seek to fix a price which suits the market.
Pricing Objectives
-They include the following:
1. Profitability -prices should increase overall profitability of the firm
2. Rate of return –a specified return on capital employed (ROCE)
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3. Growth –the price should provide a steady profit over a period of years to enable the
firm to survive and grow.
4. Competition –should be competitive and attractive to customers
5. Market share –a price must be set which enables a firm to at least maintain its market
share.
6. Utilization of capacity –it should cover fixed costs and enable the firm to fully utilize
capacity, thus spreading unit costs over a larger output.
Pricing Policies/Strategies
1. Skim Pricing –It uses high prices to obtain high profit margins and a quick recovery of
development costs. It is useful for products with a short life cycle and fashion items e.g.
computers, videos, toys, CDs etc
2. Penetration Pricing –The main objective is to capture a large share of the market as quickly as
possible. It depends on the expected product life. It is mainly used for products with a longer life.
Low prices are set in the initial stages of the product and gradually increased as it gains market
share. Consumer products are often introduced this way.
3. Differentiated/Discrimination Pricing –It involves the use of different prices for the same
product when it is sold in different locations or market segments e.g. wholesalers may receive
trade discounts while small buyers in remote areas may be charged a higher price due to
additional distribution costs.
4. Promotional Pricing –Involves the use of a lower and normal price either to launch a new
product or to periodically boost sales of existing products.
5. Negotiable Pricing –It is common in industrial markets and building trade. The price is
individually calculated to take account of costs, demand and any specific customer requirements.
6. Market Pricing –Prices are quoted „at market‟. They are determined by forces of supply and
demand. Common for commodity markets e.g. gold, silver, stock exchange etc
7. Premium Pricing –Involves charging a higher price than competitors to strengthen the image
perceived by consumers of a certain brand.
8. Sealed-Bid Pricing –It is common in public sector markets. It involves the use of bids or
tenders.
Market Prices
-In a free economy, market prices are determined by supply and demand
(a) individuals maximize their utility (satisfaction) by choosing how to spend their
income.
(b) consumer demand determines what producers should produce
(c) there is competition between producers leading to increased efficiency
Demand
-this is the total amount of a particular product which consumers wish to buy at a given price or
period of time.
-generally, demand increases if price falls and vice-versa
-a change in price has an income effect (low price, real income increase) and substitution effect
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(high price, consumer switch on to substitute goods or other cheaper products from competitors)
The Demand Curve
PRICE
0 QTY
Factors Influencing Changes in Demand
1. change in size and composition of population

2. consumer income
3. advertising and promotions
4. consumer tastes and preferences
5. prices of complementary goods
6. new improved goods
7. prices of substitute goods
8. taxation
9. legal requirements
Elasticity of Demand
Elasticity is the degree of responsiveness of demand to changes in demand conditions (price,

income).
1. Price Elasticity of Demand (PED)

-it measures the responsiveness of demand to changes in price
PED = % change in quantity demanded

% change in price
-If PED > 1, a small change in price causes a large change in quantity demanded therefore it is
elastic. A reduction in price causes revenue to increase.
-If PED < 1, a small change in price causes a relatively small change in quantity demanded,
therefore it is inelastic. A reduction in price causes total revenue to fall and vice-versa.
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-Unitary Elasticity is when total revenue stays the same at all prices.
Factors determining the degree of Elasticity
1. Availability of Substitutes e.g. glass has no perfect replacement therefore it is very inelastic
2. The proportion of income spent on a product –e.g. matches, salt are very inelastic – they cost a
tiny proportion of a person‟s income.
3. Necessities –e.g. bread, mealie-meal, clothing are inelastic. Luxuries e.g. computers, holidays,
satellite, television are elastic.
4. Habit forming goods –e.g. tobacco and alcohol have a relatively inelastic demand because
they make substitution more difficult for consumers to accept.
2. Income Elasticity of Demand (YED)

-it measure the responsiveness of demand to change in levels of income
YED = % change in quantity demanded

% change in income
-If income increases, the demand for necessities will probably not change but the demand for
luxuries is likely to increase.
-If income produces a fall in demand, YED is negative because people switch from „inferior‟ to
„better‟ products.
3. Gross Elasticity of Demand (XED)

-it measures the responsiveness of demand to changes in price of other products.
XED = % change in demand for A

% change in price for B
-Substitute goods have a positive XED e.g. coffee, beer, butter and margarine.
-Complementary goods have negative XED e.g. cars and petrol, VCR and video tapes.
3. PROMOTION
-The basic sum of promotion is to communicate information to customers and potential users
about the product/services on offer and to eventually persuade them to buy.
-It focuses on the distinctive features of a product called the „Unique Selling Points‟ (USPs).
-Promotion comprises advertising, public relations (PR) and sales promotion
-This is called the communication/promotion mix.
-The objectives of promotion are;

1. to increase awareness of the product
2. to target particular segments
3. to position the product in relation to its main competitors
4. to build an image for the organization
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-The promotional mix depends on;

1. the nature of the product
2. the nature of the market and its customers
3. the product life cycle
4. the relative costs and the availability of funds
(a) Advertising
-It is a controlled, impersonal conveyance of a message regarding a need-satisfying
product/service/personality/place/institution/idea by an identifiable sponsor to a specific target
audience with the objective of informing, reminding and persuading them to take a specific
action.
-The basic objectives are to:
1. inform –create brand awareness
2. persuade –develop brand awareness
3. reinforce –maintain brand loyalty
4. image –create general demand
-Advertising is not a guarantee of success. Its success depends on;

1. the appropriateness of the media chosen and the message
2. whether the product is able to satisfy and demand
3. the economic climate
4. consistency to the marketing mix
-The choice of media depends on

1. scope of coverage – the „reach‟ of the media
2. selectivity of the media
3. user friendliness of the media and its impact
4. relative cost
5. permanence of the advertisement
6. the product itself
Advertising Agencies
-These are specialist firms employing experts to advise on the most effective ways of advertising
the products/service clients.
Functions
1. they carry out market research to discover information on which to base the marketing
strategy
2. they select and book the appropriate advertising media
3. they create advertisements, devising appropriate themes and the messages and writing
advertising copy
4. they produce the advertisements
5. they look after the clients advertising budget and offer advice on future campaigns.
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Advertising Agencies in Zimbabwe

1. Advertising and Marketing Association ADMA
Benefits of Advertising
1. enables consumers to make informal decisions
2. firms can achieve economies of scale
3. promotes competition thereby resulting in high quality products
4. can help reduce sales fluctuations
Criticisms of Advertising
1. leads to higher prices
2. encourages impulse buying
3. some products may be harmful e.g. tobacco, alcohol
4. can be used to maintain monopoly power
(b) Personal Selling

-It operates at the point of sale and involves two-way communication. It is done by sales people
or sales representatives. Selling requires persuasiveness. Successful selling requires:
-interpersonal skills
-intelligence
-knowledge of the product
-energy and determination
-good appearance
-an outgoing personality
-empathy with customers
-Sales people need motivation and a financial incentive in the form of a commission.
(c) Sales Promotion

-It involves all forms of promotion other than advertising or personal selling.
-It is a process of developing the product, enhancing the promotional activities undertaken by
distributors, reinforcing advertising and selling messages, aiding recognition, attracting attention
and encouraging consumers to try the product.
-It can be categorized into 3 groups
1. Trade Promotions
-aimed at distributors (wholesalers and retailers) to persuade them to stock a firm‟s product.
Examples are
(a) special discounts
(b) bonuses such as free extra products per case
(c) cash incentives
(d) competition
2. Consumer Promotions
-used to create interest and tempt potential customers to make a purchase. Examples are;
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(a) free gifts

(b) special offers
(c) low prices for a product that draws people to shop and end up buying other things as
well
(d) free samples
(e) competitors
(f) personality promotions
(g) coupons
(h) credit cards
(i) credit facilities
3. Industrial Promotions
-these are modified versions of some consumer promotions to suit industrial goods and services.
Examples;
(a) free gift e.g. company logos for calendars, diaries
(b) catalogues
(c) free training
(d) sales force incentives
(e) trade shows and exhibitions
(d) Public Relations

-It covers a wide range of business activities. It could be in the form of articles in the newspaper
about the growth of the business, the sponsorship of the local sports event or generally „green
marketing‟.
-The aim is to present good publicity of the company, thus generating more sales.
-The PR department of the firm feeds the media with information and new stories about the good
deeds of the company and also ready to counteract any positive reports in the media and give the
organization‟s point of view.
Promotional Budgets
-the following methods can be used to determine the amount of money to be spent on
promotional activity;
1. a % of last year‟s sales volume
2. a % of next year‟s planned turnover
3. the level of expenditure of competitors
4. allocation of an arbitrary sum
-Promotions should be cost effective.
(4) DISTRIBUTION
-It is concerned with getting the product from the producer to the customer at the right quantity,
to the right place, at the right time and in the right condition.
Chain of distribution
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-It involves the links between the manufacturer and the consumer. There are 3 types which are:
1. Agents
-An agent works on behalf of another firm to perform certain specified services. They are usually
used in importing and exporting and also in domestic trade.
2. Wholesalers
-A wholesaler buys goods for resale to someone other than the eventual customer. They usually
supply goods to retailers who in turn sell to the public or to the manufacturers who use the goods
in the production process.
Functions of Wholesalers
a) they break down bulk purchases and repack them into smaller lots to retailers
b) they offer warehousing for products for the manufacturer
c) they provide financial service to manufacturer (pay cash) and extend credit to the
retailer
d) they handle publicity and promotion on behalf of the manufacturer
3. Retailers
-Retailing refers to all activities that are related directly to the sale of goods/services to the
ultimate consumer.
A Channel of Distribution for a product is the route taken by the product as it moves from the
producer to ultimate consumer.
Types of Distribution Channels
Producer Consumer (Direct channel)
Producer Retailer Consumer
Producer Wholesaler Retailer Consumer
Producer Agent Retailer Consumer
Producer Agent Wholesaler Retailer Consumer
Factors Affecting Choice of Distribution Channel
Product Factors
1. unit value/cost plus mark up
2. perishability
3. technical nature of product
Market Factors
1. financial strength
2. marketing ability of management
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3. desire for channel control
Middlemen Factors
1. middlemen policies
2. availability of suitable middlemen
3. services provided by middlemen
4. variety of products handled
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BUSINESS FINANCE
-A study of finance is concerned with the effective acquisition and management of the monetary
resources of a business.
-The objectives of a business in not necessarily to maximize profit, firms may pursue other
objectives such as survival, growth, social responsibility, acceptable ROI, market share etc.
-Businesses can raise finance through internal/external sources, that is, through savings and
borrowings. This money is needed for expansion of the business or the continuation of existing
operations.
Investment Capital is finance to acquire new fixed assets
Working Capital is finance needed for the day-to-day running of the business
-Finance is needed at each stage in the life cycle of the business as follows:
1. Start up –for the establishment of a business
2. Expansion –to achieve higher targets set
3. Consolidation –owners take stock before proceeding to the next stage
4. Development –a movement into new products and markets
5. Maturity –the business is established as a secure and diversified business
6. Decline –depends on management‟s ability to respond to changing conditions
Financial Management
-The main financial objective of a firm is to maximize the wealth of its present shareholders, the
expected returns and risks involved in the use of funds or important considerations.
Other Financial Objectives/Needs
-to develop new products
-to develop new markets
-to deal with uncertainties
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-to finance export trade
-to provide working capital
Sources of Finance
1. Borrowed Funds –must be paid with interest –borrowed from creditors
2. Equity Finance –provided by the existing owners of the business when they increase
Their investments by new partners who bring in additional capital and by individuals in the
general public who buy new shares issued by the firm
3. Internally generated finance –consists of retained profits and accumulated funds.
Factors Affecting Choice of Finance
1. Availability of different sources of finance
2. Relative cost of different methods
3. Consequences for control of the business
4. The implications of shareholder dividends
5. Tax implications
6. The risk element involved
7. Terms and repayment periods for loans
Debt Finance
Characteristics
1. Takes preference in liquidation
2. Interest is an expense and must be paid before dividends
3. Rate of interest is either fixed or based on current rate
4. Interest payments are tax deductible
5. May be secured against specific assets
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Long term Debt Finance
1. Debenture
-An „acknowledgement of debt‟. A debenture holder has lent money to the company therefore is
a creditor, not a shareholder; debentures confer no right of ownership and are usually redeemed
after a fixed period. They can be issued at different price to the nominal value on which the
interest rate is fixed. They can also be secured against specific assets or float as a charge on all
assets.
2. Mortgages
-Available from banks and building societies, and are used to purchase property –loans secured
against land and buildings.
Medium term Finance
-covers a period of 3-10 years and serves the purpose of purchasing machinery with a
corresponding life, to provide working capital requirements of a business.
1. Loans
-Flexible with the possibility of early redemption. The firm has to make fixed regular payments
of part of the principal plus interest to the creditors. Firms are usually required to pledge certain
assets as securities or collateral, that is, in the event that the firm fails to meet its commitment the
creditors have first priority to the proceeds obtained from sale of the assets pledged.
2. Hire Purchase
-A method of paying for assets by installment. The firm does not become the legal owner until
all installments have been paid.
-Used for equipment and machinery.
Advantages
1. The firm obtains assets when it needs them even before it has sufficient funds to
purchase them
2. Maintenance is provided with the package
3. The equipment can be updated to avoid obsolescence
4. The firm‟s capital is not tied up –can be employed productively elsewhere
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5. Fixed installments are of advantage during periods of rising prices
Disadvantages
1. Cost of buying is higher in the long-run
2. Assets can be repossessed if the firm fails to pay the installments
3. Leasing
-Allows the firm the use of an asset without having to buy it. Office and factory space, motor
vehicles, machines and equipment are examples of assets that can be leased.
-The firm (the lessee) pays the leasing company (the leasor) fixed regular rental payments for the
right use of the asset. The leasor remains the legal owner of the asset but the leasee assumes
responsibility for maintaining it.
Advantages
1. Capital is not tied up in fixed assets
2. Lease rental payments are deductible expenses
3. Firm can easily replace outdated equipment
Disadvantages
1. Cost of leasing is higher than cost of borrowing
2. User does not benefit from residual value when the equipment is upgraded
Short term Finance
-Used to provide working capital. They are financed by debt and have shorter repayment periods
and lower interest rates, hence less risk is involved.
1. Overdraft
-Is an arrangement between the business and its bank to draw more money from the current
account, to an agreed limit, than is deposited in it.
Advantages
1. Flexible, unsecured and cheap
2. Renewable
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3. repayable on demand and interest rates reflect current market rates rather than pre-
fixed rates.
2. Trade Credit
-When suppliers allow delayed payment for materials purchased, suppliers encourage prompt
payment by offering a cash discount.
3. Factoring A/C receivable
-This is when a firm sells its account receivables to a factor (factoring company) in exchange for
immediate cash. The factor also assumes responsibility for the collection and credit risk to these
receivable books.
Advantages
1. All sales effectively become cash sales
2. Firm can offer its customers increased credit terms
3. By paying its debts promptly, the firm will be able to improve its credit rating
4. Helps relieve the firm of the burden of debt collection
5. Helps reduce (clerical) costs because the firm has got only one customer – the factor
Stock Market
Share Capital
-Companies issue shares primarily to raise finance for expansion. This is done by subscribing
(floating) the shares to the public through the Zimbabwe Stock Exchange (ZSE)
-Shares are issued either at par (nominal value) or at a premium
-Shares are not sold directly from a company to the public but through the agency of a stock
broker. The investment in shares will earn a dividend for the investor (individual or corporate).
Investment in shares also gives part ownership of the company to the investor.
-For a company to go public, it must have a good trading record. It should issue out a minimum
of 10 million shares worth at least $50 million and the shares must be freely transferable
-There are mainly 2 types of shares, ordinary and preference shares which can be offered;
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1. Ordinary Shares
-most common form of share ownership
-receive the benefits of dividend distribution
-acquire voting rights at meetings
-receive benefits of capital growth
-if the company is liquidated they rank least in priority
2. Preference Shares
-have a fixed dividend rate expressed as a % of the nominated value of the share
-the dividends are paid before ordinary share dividends
-may be convertible to ordinary shares
a) Participating Preference Shares –have fixed dividend and additional dividend if firm‟s
profits are large enough
b) Redeemable Preference Shares –can be bought back by the company at a specified
future date
c) Deferred Shares –carry high voting rights, dividends are paid after ordinary and
preference shareholders have been paid
d) Cumulative Preference Shares –receive a fixed dividend and unpaid dividends when
profits improve
3. Rights Issue
-existing shareholders are given the option to buy additional shares at a lower price, raises capital
4. Bonus Issue
-these are issued free to shareholders. It does not raise additional finance for the company, but is
a capitalization of accumulated reserves.
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Equity finance is the sale of shareholders by a firm for cash or other things of value to the
operation of the corporation.
Advantages of Equity/Stock/Share Finance
1. Suitable for companies whose capital requirements outstretch their net cash flows
-allows firms to move away from debt financing
2. It is a permanent form of capital
3. The company is able to raise more capital without a negative impact on its gearing ratio
4. Share capital enhances a company‟s credit rating, and suppliers and creditors are
willing to deal with listed companies
Disadvantages
1. When a company is advertising for shares it makes available certain information which
may be taken advantage of by competitors
2. Quite an expensive process due to the elaborate ZSE listing requirements
Capital vs. Revenue Expenditure
Capital Expenditure
-Made when a firm spends money either to buy fixed assets or add more value to an existing
fixed asset.
-it includes such costs as:
A) Acquiring fixed assets
b) Bringing them into the firm
c) Legal costs of buying buildings
d) Carriage inwards on machinery bought
e) Any other cost needed to get the fixed asset ready for use
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Revenue Expenditure
-This is expenditure incurred in the day-to-day running of a business.
-The major difference between capital and revenue expenditure is that revenue expenditure is
chargeable to the trading/profit and loss account, while capital expenditure will result in
increased figures for fixed assets in the balance sheet.
-The above expenditure determines the type of financing to use, whether short-term or long-term.
-Long-term funds are used to finance fixed assets and the permanent part of working capital
(normal „permanent‟ operations).
Working Capital
-This is the lifeblood of a business. Working capital is the excess (or deficiency) of current assets
minus current liabilities.
-From its holdings of cash together with short-term loans and overdrafts, the firm is able to
purchase stocks of raw materials.
-Managing the level of working capital is an important aspect of financial management. In most
cases, cash outflows are usually greater than inflows.
-However, inflows must be in excess of outflows because of the need to pay interest, dividends,
and taxes and to acquire additional capital assets.
-The temporary needs of the firm cause its working capital needs to fluctuate.
-A firm‟s total financial requirements can be summarized as follows;
Financed by:
1. Temporary working capital (e.g. for expansion long/short term funds
and seasonal variation in production and sales)
2. Permanent working capital (business activities long term funds
carried out in the firm‟s normal operations)
3. Fixed assets long term funds
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-There are 2 main approaches to the optimum level of working capital that a firm should
maintain:
1. Maintain the minimum/permanent level of working capital with long-term funds and acquire
short term funds as and when they are needed. This approach is adopted if firms can raise short-
term finance at short notice.
2. Maintain the maximum level of working capital when long term financing. This approach may
result in excess working capital during certain periods. Since liquid assets earn no returns, this
may not be an efficient use of funds.
Control of Working Capital
-Working capital management is concerned with monitoring the cashflow of a business to ensure
that it has access to cash to finance normal operations.
-It involves monitoring creditors, stocks and debtors.
1. Creditors
-Although some credit is both necessary and desirable for any business, it is important to monitor
the level of indebtedness by the firm to outsiders. A high creditor figure will lead to problems in
payment. One way to check the position is by calculating the length of time taken by the firm to
pay its creditors.
AV payment period = AV trade creditors x 365
Purchase of stock on credit
-A firm should extend its credit means if it has access to means of payment for long periods.
-Another technique for monitoring the creditor figure is to rank creditors in terms of length of
credit – those owed money for longest periods can be identified to ensure that they are dealt with
as soon as possible.
2. Stock
-It is necessary to maintain sufficient stock levels to continue production and satisfy demand.
Capital should not be tied up in stock.
-Ratios can be employed to evaluate stock levels e.g.
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Stock turnover = Cost of goods sold in a year
Average cost
-It tells us how many times the average stock level is sold during a 12month cycle. A rise in
turnover ratio suggests an increase in efficiency or rise in level of activity.
3. Debtors
-In most businesses credit sales are unavoidable. It is necessary to offer credit facilities,
especially if competitors offer goods on credit.
-Generous credit terms are likely to increase the volume of trade but they also increase the
expense of the seller, therefore it is necessary to strike a balance between good terms and a strict
collection policy to minimize cash outlay.
Costs associated with credit
1. Lost interest –opportunity cost involved in an interest-free loan
2. Loss of purchasing power as prices rise
3. Cost of assessing customer credit worthiness
4. Administrative costs
5. Bad debt
6. Discounts for prompt payment
Costs of denying credit
1. Loss of customer goodwill
2. Loss of sales
3. Inconvenience of cost of collecting cash
-The debtor position can be monitored by a ratio
Debtor collection time (debtor days) = Average debtors x 365
Total credit sales
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-A lengthening of a debtor payment time over a period of time means a growing delay in the
receipt of cash.
-Another technique of monitoring debtors is to rank them in terms of age of debt. The aim is to
identify longstanding debts to recover the money.
-The control of debtors will involve the encouragement of prompt payment and the minimizing
of bad debt.
4. Cash
-A period of cash outflow will deplete the cash reserves and vice-versa. By monitoring the cash
position it is possible to make better use of resources available so that there will not be cash
shortage or even excess cash.
-A shortage of cash can be tackled by:
a) A reduction in debtors
b) A reduction in stock
c) An increase in creditors
-A surplus of cash is an opportunity cost especially if the cash is held in a zero or low interest
account. Any surplus should be:
a) Used to make early payments to creditors in order to claim discount
b) Deposited in interest bearing accounts
c) Used to buy marketable securities e.g. shares
d) Lent profitably to others
e) Used to make forward purchases of raw materials in situations of expected price rises
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BUSINESS ACCOUNTS
The need for accounting information comes from users, both outside and inside the organization.
-Each group of users has its special requirements. There are mainly 2 groups, internal and
external.
External Users
-These are users outside the firm who rely on financial statements prepared by the firm‟s
accountant. Examples of such users are shareholders, creditors, financial analysts, labour unions,
Government authorities etc.
-The preparation and presentation of accounting information to such users is called Financial
Accounting. Incorporated companies are required by The Companies Act to disclose certain
information and prepare audited financial statements.
Uses of Financial Statements
Government
-for the calculation of corporate taxes
-gross national product and other national statistic complications
-requirements for companies listed on the stock exchange
Shareholders and Potential Investors
-judge a firm‟s earning power
-judge management‟s ability to utilize resources effectively
-know the value of their shares and dividends
-they predict, compare and evaluate potential cash flows in terms of amount, timing and risks.
Financial Institutions
-to ----- credit worthiness of the firm
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Trade Unions
-when gearing is high financial institutions face high default risk
-intermediator between employees and employers, mainly uses T,P and L
-need to know about firm‟s profits to decide on its strategy during collective bargaining sessions.
Internal Users
-These are mainly the managers of the firm. Managers at all levels need quantitative information
on the past and present operations of the firm to help them judge the effectiveness of their
decisions and to plan and control future activities.
-All departments depend on the accounting department‟s records of transactions to guide their
actions.
-Internal users get their information through management accounting. Management accounting is
concerned with the preparation and presentation of financial information in such a way as to
assist managers in the formulation of policies and in the planning and control of the operations of
the firm.
-Internal reports are produced more frequently to allow management to take timely corrective
action and decision. They also contain more details given on the sources of income and expenses
incurred.
Accounting Data
-The information found in financial statements for both internal and external users usually
contains the following:
1. level of profit earned for the accounting period
2. ways in which the organization raised money e.g. borrowings
3. the liability for tax
4. production costs associated with each product
5. marketing costs associated with the products
6. ability of the organization to pay its debts
7. the amount of money available for future investment
8. whether the organization achieved to quantifiable objectives it set at the beginning of
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the financial year
9. how efficient the organization is, in the use of available finance
10. how the financial performance of the organization compares with other organizations
within the same industry or sector
Differences between Management and Financial Accounting
1. Nature
-Financial accounting classifies, records, presents and interprets in terms of money, transactions
and events that are of a financial character, and provides management with the facts and figures
necessary and the preparation of the periodic financial statements-balance sheet and income
sheet.
-Management accounting classifies, records, presents and interprets in a significant manner the
material, labour and overhead costs involved in manufacturing and selling each product, or each
job, or rendering a service.
2. Primary Users of Information
-Financial accounting statements are mainly for external users as stated previously
-In management accounting, the users are mainly management at different levels.
3. Accounting System
-Financial accounting follows the double-entry system for recording, classifying and
summarizing business transactions.
-Cost and management accounting is not based on the double-entry system. The data may be
gathered for small or large segments or activities of an organization and monetary as well as
other measures can be used for different activities of the firm.
4. Accounting Principles
-Financial accounting uses the “Generally Accepted Accounting Principles” or SAAP for
recording, classifying, summarizing and reporting business transactions.
-Management accounting is not bound to use the „GAAP‟. It can use any accounting technique or
practice which generates useful information.
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5. Unit of Measurement
-All information under financial accounting is in terms of money.
-Cost and management accounting applies any measurement unit that is useful in a particular
situation. Besides the monetary units, the cost accountant may find it useful to instil such
measures as labour hours, machine hours and product.
6. Time Span
-Financial accounting data and statements are developed for a definite period usually yearly or
quarterly. Statements are presented at regular intervals.
-Management accounting reports are prepared whenever needed. It could be weekly, monthly or
even on a daily basis. Closing inventory values and costs of goods manufactured are major
examples.
Financial Statements
-the main financial statements provided by a firm are:
1. the balance sheet which shows the financial position of a firm at a single point in
time
2. the profit and loss/income statement which provides information on the firm‟s income
generating activities during the accounting period and shows net profit or loss for the
period
3. the cash flow statement which shows how the firm acquires and uses its assets during
the accounting period
Essential Characteristics of Good Reports
1. Title –the reader should be able to know what the report consists of and the period
concerned must be stated clearly.
2. Timeliness –the report should be timely and up to date with its information. This is
especially important for reports prepared for management accounting purposes.
3. Reliability –accounting reports must present accurate data and effective decisions
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(prepare information with supporting information, that is, from source documents)
4. Understandability –the reports should be simple enough to anyone with a working
knowledge of accounts to understand, unnecessary details should be omitted.
5. Consistency –the format adopted and the treatment of accounting items should be
consistent over the years to facilitate comparability.
-Financial statements provide a means for monitoring 3 major financial conditions of an

organization:
a) Liquidity –the ability to convert assets into cash in order to meet current financial
needs and obligations.
b) General Financial Condition –the long term balance between debt and equity (the
assets left after liabilities are deducted).
c) Profitability –the ability to earn profits steadily over an extended period of time.
1. Balance Sheet
-This is a statement of the firm‟s assets, liabilities and net worth (owner‟s equity) at the specific
date/financial position of business at a given date.
-Assets –are resources which are acquired by the organization and put to use to achieve the
organization‟s objectives. Assets can be fixed (long-term), or current (short-term).
-Liabilities –are amounts of money owed to others. They may be current (to be discharged within
a year), or long tem (1 year upwards).
-Owners Equity –this represents owner‟s financial interest (net worth) in the organization. It can
be in the form of share capital + reserve.
Assets = Capital + Liabilities
Depreciation
-Fixed assets are worn down over a period of time. A depreciation allowance is made every year,
to reflect this, the accumulated depreciation is used to replace these assets when they are used up,
amount for depreciation is transferred to provision (reserve for arising uses)
2. Profit and Loss Account
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-This is a statement of the amount of profit or loss a business has made in a period of time. The
difference between revenue and expenses will be the profit or loss for the period, the components
of a Profit and Loss statement are;
1. the flow of revenue
2. the costs of producing that revenue
3. the resulting profit or loss
-Sales Revenue –derived after deducting all sales discounts, returns and allowances
-Profitability –essential for management purposes (assessment of managers) from the total
amount of sales.
-Cost of Sales –manufacturing costs, e.g. direct labour, materials, and the ------------ for
merchandising firms ----- cost of sales in the purchase price of goods sold in the period.
-Operating Expenses –selling, administration and general expenses incurred to obtain the sales
revenue for the accounting period.
-Net Profit Before Tax –is the basis for determining the firm‟s tax obligations.
-Net Profit After Tax –is the final return to owners on the firm‟s activities that year.
Revenue – Cost of Sales = Gross Profit
3. Funds Flow Statement (Cash Flow)
-It supplements the balance sheet and the profit and loss statement. It compares two successive
balance sheets to show the changes that have taken place in the period between.
-While the profit and loss statement discloses the result of the trading activities of the firm, the
funds flow statement provides information on all activities which have taken place during the
period, not just trading activities – where the firm‟s funds come from and how they are used.
-We must recognize the interrelationships between the different items of the financial statements
when examining the impact of changes on the firm.
*Take note of straight line method and reducing balance method
Limitations of Balance Sheet
1. A balance sheet is prepared at a certain date. It is possible that the position will change
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fundamentally within a short space of time.
2. The balance sheet only includes items which can be expressed in monetary terms and
ignores assets whose monetary value can not be expressed.
3. The valuation of assets depends on the method used for valuing stock, also the NBV of
fixed assets varies with the method of depreciation used.
4. The balance sheet does not reveal the current value of assets unless property is
revalued to show the current value.
5. The balance sheet does not record the value of the business unless it includes the value
of intangible assets, especially goodwill.
Goodwill – an intangible asset --------- over a period of time.
-the value of a business less the value of assets -------------- This comes as a result of the
---------as a going concern.
-customer base
-reputation for quality
-marketing skills
-workforce
-technical knowhow
-business connections
-management ability
-benefit that a business accrues as it trades over a certain period of time
-rises out of good reputation attributed by customer care, competent workforce, technology
-goodwill is an intangible fixed asset
Purchase Price - Net Assets = Goodwill
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Stock Valuation
-Valuation of stock is necessary for the pricing of issues of materials from stores and for the final
---------- of a business. The value placed on stock affects the cost of sales in the trading account,
the profit figure and consequently the low liability of the business.
-There are 3 methods of stock valuation;
1. First In First Out (FIFO)
-assumes that materials are used in the order in which they were acquired – oldest stock is issued
first and the closing stock is valued in terms of the more recent purchases.
-the effect of FIFO is to produce a higher value for ------ and therefore lower value for cost of
sales and consequently a higher figure for trading profits.
Advantages
1. Realistic – based on the assumption that issues are made in order of goods received
2. Based on prices paid
3. Closing stock based on most recent prices
4. Acceptable for tax purposes
Disadvantages
1. identical items will be priced differently because they are deemed to be from different
batches
2. values stock at the latest price, which means the highest price. This is the contrary to
prudence concept since it lowers the cost of sales thereby increasing profit.
2. Last In First Out (LIFO)
-assumes that issues are drawn from the latest batch when the batch has been used up the price of
the previous batch is used. The result is that production is charged with costs that are close to the
current market prices. LIFO understands the value of closing stock thereby reducing COGS and
the figure of profits
Advantages
1. value of closing stock is easy to calculate
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2. based on prices paid
3. issued at the most recent prices
Disadvantages
1. unrealistic because it assumes that recent stock is used/sold first
2. closing stock is not valued at most recent prices
3. not acceptable for tax purposes (SSAP 9)
4. identical items are used at different prices because they are deemed to be made out of
different batches
3. Weighted Average Cost (AVCO)
-all stock is valued at a representative average cost
= total value of stock purchases
number of items
Advantages
1. smoothes out price fluctuations – minimizes variations
2. profits of different periods can be realistically compared
3. acceptable for tax purposes (SSAP 9)
4. has the effect of smoothing out the cost of production and cost sales
Disadvantages
1. the average price does not represent prices actually paid
2. a new average must be calculated with every purchase of stock
Disclosures
-among other things, the company must also disclose;
a) the amount of money paid to directors
b) shareholdings in company other than subsidiaries
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c) salaries and other payments to the highest paid employees
d) financial information about subsidiaries
Notes to Accounts
-They are an integral part of financial statements and thus the 2 must read together the purposes
of notes;
a) to provide details omitted from the statement proper for recisions of clarity in
presentation
b) to disclose events that have occurred after the balance sheet date but which may affect
the user‟s evaluation
c) to explain the accounting policies and procedures used to prepare financial statements
d) to present other information of an unusual nature e.g. contingency provision and
expansion plans
Ratio Analysis
1. Liquidity Ratios
-they measure a firm‟s ability to meet its short term obligations. Banks and other lenders are
interested in these
a) Current Ratio = Current Assets e.g. 20 000 = 4:1
Current Liabilities 5000
-the higher the ratio, the highly liquid the firm, therefore the greater the ability to meet short term
liabilities. It should not be too high nor too low because this creates liquidity problems for the
company. An accepted ratio is 1:5 to 2 times (1:5 – 2:1)
b) Acid test/Quick Ratio = Current Assets – Stock
Current liabilities
-Stock is removed because when it comes to liquidity it is the hardest to convert.
-this ratio is the strongest method of measuring a firm‟s liquidity
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-it measures the firm‟s ability to use its quick assets to meet its current liabilities
-stock can not be turned into cash quickly at close to their book value hence they are left out
2. Profitability Ratios
-a normal profitability level is anything above 50% and above and so acceptable
-the ratios consider a company‟s profits as a measure of its efficiency of operations
a) Profit margin = Net Profit Gross Profit x 100 EBIT
Sales Sales Sales
-Cost of Sales + Gross Profit = Sales
It measures - the overall efficiency of the business
- measures management operating ability. Interest is left out because it
relates to financing rather than operating policy
3. Solvency Ratios/Liquidity
-measures the firm‟s ability to meet its long term debt payments
-they indicate the extent to which a firm is financed by debt (lenders)
-this is called the gearing or leverage of the firm (gearing ------ leverage)
Gearing ratio = Gross borrowing x 100 Fixed interest capital x 100
Equity investment Equity (total) capital
Advantages of high gearing
N.B High gearing – level at which the company depends on borrowed funds
1. increases opportunity for capital shareholders
2. the company has increased capital without diluting equity
3. interest on loan is an expense for tax purposes where a dividend is declared after tax
Disadvantages
1. increases risk of company failure
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2. increases the risk for shareholders
3. assets will be pledged, this ------- control over them
4. dividends fluctuate dramatically
5. reduces prospective creditors granting further loans
Return on Investment (under profit ratios)
-measures the return that the firm is earning on the funds available
a) Return on Total Assets = Net profit before tax
Total Assets
-measures the return on the owner‟s investment before taxes arising from the use of total
resources of the firm
b) Return On Capital Employed (ROCE) = Net profit before tax
Long term capital
-indicates how well the firm has used its permanent (long term) capital in equity and long term
debt
c) Return on Equity = Net profit before tax x 100
Owners‟ equity
-measures the return on the owners‟ equity
4. Funds management/Activity Ratios (working capital management activities)
-measures how effectively the firm has been managing its funds
a) Debtors ratio = Receivables x days in the period (fiscal) year
Sales
-this shows the average collection period for account receivables/debtors
-used to appraise credit management of the firm by comparing it to the standard credit terms
offered.
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b) Credit ratio = Payables x days in the period
Purchases
-measures average payable period and is used to compare credit terms offered by suppliers.
-less than average means the firm has not used its sources as much as possible and a lower period
means the firm is overdue on its payments
c) Stock turnover = Cost of Sales
Average stock
-indicates the number of times stock is sold on average during the period
5. Investment/Stock Exchange Ratios
a) Earnings per share (EPS) = Net Profit
Number of ordinary shares
-expresses the relationship between profits and the number of issued ordinary shares
b) Dividend Yield = Norminal value of share x 100
Cost of market price of share
-it is % return on the price paid before shares. Lower yields reflect a secure business with growth
potential while higher yields suggest riskier investments.
c) Price-earning ratio (P/E ratio) = Market price per share
Earnings per share
-companies with good profits have a higher P/E ratio and vice-versa
Limitations of Ratio Analysis
1. Ratios are based on numerical items as reflected on financial statements – ignores
significant intangible factors e.g. business ethics
2. Windows dressing techniques can result in ratios that do not reflect a firm‟s normal
operations
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3. Different accounting policies and procedures adopted by firms may hinder meaningful
comparisons of ratios
4. Different definitions may be used for common ratios e.g. some analysts may use net
profit before tax whilst others use after tax profits
5. Changes in the value of money and inflation rates affect comparability of ratios
6. Ratios are based on historical records. They do not necessarily indicate future
performance
7. They consider quantitative data and ignore qualitative data
Investment Appraisal
-Managers are often faced with a choice between alternative projects. Investment appraisal refers
to a series of analytical techniques designed to provide an answer and whether to proceed with a
planned project. The project could be about replacing equipment, expanding productive capacity,
reducing production costs, providing new facilities etc.
-The following factors influence the rate of return and risks involved in making an investment
decision:
1. The cost of capital –this is the minimum rate of return expected from a firm‟s assets
to justify investing funds in them. Cost of debt is interest – cost of equity ---
dividend rate
2. The term of finance –short term funds are risky and easier to obtain yet they cannot be used to
finance long-term projects
3. Market conditions –a severe „credit squeeze‟ may make it impossible for the firm to
obtain short term bank finance. In equity markets, it is riskier of float shares if the
market is full of new issues. The rate of interest in the market and inflation are other
factors to consider as they affect the time value of money
4. Control of flexibility –firms do not sometimes borrow to their debt limit because they want to
maintain desired levels of control and flexibility. Where investors are seeking management
control, a lower rate of return on equity is acceptable
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5. The firm‟s capital structure –capital structure is the mix of debt, preferred stock and --- equity
with which the firm plans to finance its investments. It is measured by the proportion of debt of
equity (total) capital. A firm adjusts its debts equity ratio so that it does not rely on too much
equity. (insufficient use of funds)
*Business is full of uncertainty due to difficulty in predicting future sales, operating costs, useful
life of equipment etc. However the method used in investment decisions assume that the future
can be predicted with certainty.
1. The Payback Method
-It is the simplest method used. The payback period is the time taken for the investment to
generate sufficient cash inflow to pay for itself e.g. machine cost $10 000 its useful life is 6
years. Its use is expected to bring an inflow of $2 000.
Payback Period = 10 000 - 2 000 = 8 000 = Year 1
8 000 - 2 000 = 6 000 = Year 2
6 000 - 2 000 = 4 000 = Year 3
4 000 - 2 000 = 2 000 = Year 4
2 000 - 2 000 = 0 = Year 5
Payback Period is 5 years.
Advantages
1. simple to use and easy to understand
2. it places emphasis on early return which predicts more accurate forecasts
3. an early return is quite important when liquidating is preferable to profitability
4. it considers the risk element
Disdavantages
1. measures how quickly an investment can be covered, it does not measure profitability
it doses not take into account the cash inflows that accrue over the remaining years of
the machine‟s working life
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2. the timing and amount
-depreciation is ignored
-does not consider the time value of money
2. The Discounting Methods
Net Present Value (NPV)
-Discounted cash flow is the system of comparing alternative investment projects whereby future
cash flows are given a present value by discounting them to the present. It recognizes the
changing value of money every time.
-The NPV method discounts the earnings and costs of a project at a certain rate of interest to
determine their present value. The difference between the discounted future earnings of the
project and the present investment is the NPV of the project. This assumes that the total
investment is made at present (year 0)
-If NPV is positive, the project should be accepted because the future earnings at today‟s money
value are greater than the investment, if it is negative it should be --------
-There is no ----- to determine the discount rate. It is also regarded as the opportunity cost of
capital, that is, the cost of not investing in another project.
PV = A
(1 + )n
A/y = cash flow (sum) for each period
r/t = rate of discount
n = rate of years
-The stream over the years is A +A + A
1 +r (1+ r)2 (1+r)3
NPV = PV – I I = Investment
-Present value tables are available to facilitate quick calculations
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e.g. in appraising a $ 300 000 investment project, a firm uses a discount rate of 10%. The
equipment will produce a return of $100 000 per year over a 5 year period. At the end of the 5
years the firm expects to sell the equipment for $ 10 000. Calculate the net present value.
Year 1 Cash flow $ Discount factor Present Value
0 (300 000) x1
1 100 000 x0,909 90 900
2 100 000 x0,826 82 600
3 100 000 x0,751
4 100 000 x0,683
5 100 000 x0,621
Residual 10 000 x0,621
value
Net Present Value __________________________
-If comparing 2 projects, choose the project with the highest positive NPV.
3. Internal Rate of Return(IRR)
-The IRR is the maximum rate of interest that could be paid for the use of capital for a project
without making a loss.
-It is also called the Trial and Error Method because the discount rate which produces an NPV of
zero is not predetermined as in the NPV method and one has to make a series of trial calculations
until he/she obtains the interest rate that equates the present value of the cash inflows with
outflows.
-In evaluating the project, the IRR is compared with the cost of capital to the firm. If the IRR is
greater than the cost of capital, the firm should accept the project. The higher the value of IRR,
the greater the profitability of the firm.
For example:
-the cost an item of capital equipment is $300 000 and the net cash flow expected is $100 000
per year for 4 years. Using the 3 discount rates, estimate the IRR
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Year 8% 10% 12%
1 0,93 0,91 0,89
2 0,86 0,83 0,80
3 0,79 0,75 0,71
4 0,74 0,68 0,64
@ 8% = 100 000x
@ 10% = 100 000x
@ 12% = 100 000x
-therefore the 10% rate produces the result closest to zero
Advantages of Discount Cashflow Techniques
1. all cash flows are included
2. takes timing into account
Disadvantages
1. more complex than other methods
2. the cost of capital is often difficult to ascertain
3. complex mathematically and based on expectations
Costing
Cost – this is a payment for a sacrifice of resource
Costing –is the technique and processes used in the ascertainment of cost
Cost accounting –refers to the process of determining, accumulating, classification, analysis and
interpretation of costs of a particular product/activity for planning purposes and evaluating
performance
Objectives of Cost Accounting
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1. to determine product costs
2. to facilitate planning and control of regular business activities
3. to supply information for short and long run decisions
Information provided by costing system Possible uses by management
1. cost per unit of production/service/process as a factor in pricing, decisions,
production planning and cost control
2. cost of running a section, department, organizational planning, cost control
a factory
3. wage costs for a unit of production or production, planning, decisions on
per period of production alternative methods, wages, cost
control
4. scrap/rectification costs material cost control, production
planning
5. cost behaviour with varying levels profit planning, make/buy decisions,
of activity cost control
Purposes of Costing
1. Organizations have got numerous control systems e.g. production control, quality
control etc. Cost accounting is another system of control that is used in monitoring and
controlling financial activities.
2. Correctly presented cost information is of great value to management in decision
making especially when making a choice between alternatives e.g. make/buy decisions
or accept/reject order or cease/continue production etc.
3. Management is concerned to know what costs will be in the future so that appropriate
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plans --- is made on time. Also having some standard or target to compare actual costs
greatly assists the control function.
4. Pricing decisions are also partly cost based.
*In our context „cost‟ shall refer to the cost of producing goods or providing services not the
price at which they are sold.
Classifications of Costs
1. by the nature of resource materials, labour, other expenses
2. by function selling, administration, distribution
3. by product, job, contract
4. by behaviour fixed, variable, semi-variable, direct,
5. by type indirect
6. by type subdivided by nature of the (a) DM, DL, DO/H
resources (a) direct (b) indirect (b) IM, Ind L, In O/H
Classification by Type
-Shows whether the cost is directly or indirectly associated with the production of the
goods/service e.g. flour is a direct material in the production of bread. Indirect costs would
include administrative costs like salary for the supervisor of the bakery.
Classification by Behaviour
-Relates to the impact of a change in output on the cost of production
Fixed Costs –they do not vary with the level of output. The greater the output the greater the
costs e.g. materials, labour
Semi-variable Costs –contain both fixed and variable elements e.g. electricity, telephone etc.
Techniques (types) of Costing
1. Absorption Costing
-Involves the allocation of all costs (fixed and variable) to units of output or to alternative causes
of action when making business decisions.
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-It is similar to the total costing approach.
-Direct costs (DM, DL) are easier to calculate to apportion to the total cost unlike indirect costs
(e.g. admin, rent etc)
-In absorption costing, total overheads can be apportioned on the following:
Overhead Basis of Apportionment
-rent, rates -area taken up by the activity
-heating -volume occupied
-personnel administration -number of employees involved
-indirect labour used -in proportion to direct labour
-fire insurance, depreciation -in proportion to value of capital
Advantages
1. all costs are recovered
Disadvantages
1. more complex – some (variable) costs are ----------
2. not particularly useful in accessing the effect of changes in the level of output
2. Marginal Costing
-refers to the increase in total cost as a result of producing more unit of output. It only considers
the variable aspect of costs since fixed costs do not vary with output in the short run. Instead of
identifying profit, it identifies the contribution from a particular activity.
Contribution = Sales Revenue – Variable Costs
Contribution/unit = SR – VC/unit
Circumstances to consider in applying Marginal Costing
1. analysis of the performance (profitability) of a product
2. make or buy decision
3. market pricing decisions (discount offers etc)
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4. whether to expand capacity or buy components
5. suspend or shut down activities of a branch/factory
6. introducing machines to replace hand labour
7. planning for an adequate return
Limitations of Marginal Costing
1. they do not remain the same per unit irrespective of production, ------ can be affected
by law of diminishing returns and inflation affects prices.
2. when factory is not working at normal levels, overheads are not fully spread on the
volume of output.
3. benefits received from fixed costs are not given due recognition and a false impression
may be created.
3. Standard Costing
-Costs for labour, materials and overheads are predetermined and these are designated standard
costs. Actual costs incurred are compared to standard costs and the differences between the 2 are
known as Variances. Management decisions are based on these variances.
Types of Standard Costs
1. Ideal standard costs – these assume 100% efficiency on the part of 3Ms of
management (except money)
2. Expected standard costs –reflects the highest state of efficiency that may be expected
in the actual conditions prevailing within a particular factory
3. Basic standard costs – these are a set of criteria that has been used over a number of
years and used as a measure of trends in prices and wages.
Variances
-The difference between actual costs and standard costs. The objectives of variance analysis is to
separate out of various elements causing the deviation (could be price/quantity) of
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actual/expected performance. After separating the price and quantity elements, the reasons for
the variances should then be investigated to reduce recurrence.
Types of Variances and Possible Causes
Type Possible Causes
1. material usage variance excessive usage, theft, defective materials,
reworking errors, inefficiency
2. material price variance inflation-errors-more expensive suppliers-
poor buying decisions-use of high grade
3. labour efficiency variance use of defective materials-poor moral, bad
conditions, use of wrong methods-use of
untrained labour
4. labour rate variance rise in wage rate-use of overtime labour-use
of higher grade labour
5. volume variance fall in the level of activity
6. overhead budget variance increase in price of services and errors in
budgeting
Methods of Standard Costing
1. minimizes risk in calculating product cost
2. ensures that regular checks are made on expenditure incurred
3. reduces amount of clerical work in compilation of cost accounting data
4. interpretation of management records is made simpler
5. standard cost gives recognition to the most important aspects of costing, cost control
and cost reduction
6. firm is able to pick out the areas where it is not competitive compared to other
companies
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-Standard cost can be used for other purposes like provision of incentive schemes for employees.
Cash Flows and Budgeting
-A budget is a financial plan or forecast of income and expenditure of a firm over a given period
of time.
-Budgets are useful tools in controlling and coordinating the activities of an organization. They
help control income, expenses, profit and investment.
-Budgetary control involves all the stages taken in budget preparation and monitoring.
-Control implies verifying that things are done according to laid out plans. It means giving
feedback for corrective action or feed forward for preventing action.
Purposes of Budgets
1. serve as standards by which future performance is measured
2. creation of opportunities to appraise alternative cause of action
3. set targets which enable objectives to be achieved (planning)
4. the interaction between managers and subordinates during the budget process helps
define and integrate the activities of organization members
5. used in facilitating delegation of authority more easily
6. to motivate staff
Budget Preparation
Involves:
1. identifying the objectives from which targets are set e.g. in terms of output, sales
volume and profits
2. preparing initial budgets in line with these objectives e.g. budgets for purchasing,
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production, distribution, personnel etc
3. reviewing and coordinating these budgets with adjustments for any anomalies before
final coordination and preparation
Cost Centre Monitoring
-The importance of controlling costs is often emphasized in an organization by delegating

budgets and giving managers and workers complete responsibilities for the control of costs in
their particular area of work. A cost centre is an area of business activities to which costs can be
ascribed e.g. department, person, geographical location etc. The production department is an
example of a cost centre.
-The sales department can be seen as a revenue centre since that is where revenue targets are set
and variances analyzed.
-Once a budget is allocated to a cost centre, actual performance must then be regularly checked
by managers against targets to ensure that spending is within the limits set.
The Budgeting Process
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Master Budget
-The individual budgets for trading, capital expenditure and cash flow are all incorporated into a
master budget which is a statement of the anticipated future profit/loss account and balance
sheet.
*Cash Flow –refers to money which comes into and gets out of a business over a period.
*Cash Flow Forecast –is a budget or estimate which identifies the anticipated income and
expenditure and the time it is likely to take place (6-12 months). It is used for planning and
control purposes.
Salient points about cash flow forecast
1. identifies cash shortfalls before they happen
2. enables potential surplus cash to be identified and used efficiently
3. emphasizes importance of getting maximum credit and allowing the minimum
4. encourages more efficient use of resources and control of costs
5. helps to determine decisions about when to buy stock and materials
6. helps to determine priorities between spending time obtaining work and atually
doing it
7. ensures sufficient cash is available for any necessary capital expenditure
Cash Budget
-helps to manage the firm‟s working capital
-a shortage of cash can lead to insolvency for the firm while a lack of working capital may cause
overtrading.
-cash budgets enable the firm to pinpoint the expected cash shortages ahead of time and to
provide sufficient liquid resource when needed.
Capital Budget
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-concerned with the expenditure and revenue attached to investment in capital goods included,
replacement of fixed assets, expansion of plant capacity, acquisition of new facilities etc.
-capital budgets are planned several years in advance because of the huge amount of expenditure
involved.
Sales Budget
-it foretells sales receipts and when total cost of sales is estimated.
-it is a basis for predicting the firm‟s earnings --- sales expense budget
-includes advertising, warehousing, sales persons salaries and commission
Production Budget
-It is based upon the volume of sales predicted in the sales budget.
1. Manufacturing Budget
-details the periodic rates of output for the various products to be manufactured
2. Materials Budget
-gives the details of raw materials, suppliers and parts that are needed
3. Purchasing Budget
-based on the materials budget and it shows the financial allowances for procurement
4. Labour Budget
-states the amount of direct labour required to maintain the overall production schedule
Service Department Budget
-includes personnel, administration, finance, accounting and legal departments. It is based on the
manufacturing budget.
Types of Budgets
1. Fixed (static) budgets
-Remains the same even if activity levels are different from those predicted. Used when sales and
income can be predicted with a reasonable degree of accuracy
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2. Flexible (variable) budgets
-Considers flactuations in sales volume due to changes in demand, supply and firm‟s capacity to
produce. It is more effective for up to 12 months forecasts, broken down into shorter periods e.g.
quarterly. Constant review and revisions are made at each internal ---to ensure that resources are
available when expenditure becomes necessary.
3. Stepped budgets
-Used in industries where output volume increases in a stepped manner e.g. cost of operations
may increase each time volume of output increases by 20%
4. Zero-based budgets
-Calculated in relation to the needs of each activity rather than on the basis of past spending with
an adjustment for inflation.
Advantages of Budgeting
1. facilitates co-ordination
2. tool for control
3. improves communication
4. tool for evaluating performance against a quantitative target
5. tool for motivation
6. facilitates allocation of scarce resources
7. translates strategic plans into departmental action
8. facilitates M.B.E with deviations reported and investigated
9. creates a sense of working together (MBO) for a common goal
10 responsibilities are clarified (responsibility accounting)
Limitations
1. can be used mechanically and inflexibly
2. expensive to prepare
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3. value depends upon the quality of information
4. demotivating if participation is limited and if expected results are not attained
5. can hinder flexible thinking
INFORMATION FOR DECISION MAKING
-This chapter mainly deals with quantitative methods, that is, collection, presentation and
analysis of numerical data for informed decision making.
-Such processed data can be internal or external.
-Internal information is collected from within the organization e.g. from sales, prices, costs,
experts, stock levels etc.
-External information is available in published format in the local or national press, government
publication, banks and trade associations etc. The former is called primary data and the later is
called secondary data.
Sources of Secondary Data
Government statistical sources
-Central statistical office
-Zimbabwe stock exchange
-Reserve bank
-Zim trade
-Zimbabwe Investment Centre
Non-government statistical sources
-Mweb business solution
-Reuters
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-Roberts Economic Information Services Pvt Ltd
-Intermarket Research
-Tech Research Pvt Ltd
International statistical offices
-UN statistical year book
-World bank indicators
Statistics
-Primary data is collected by means of surveys, observations, experiments and mechanical

recording of facts.
-It is not possible to collect data from the whole population under surveys because of prohibitive
costs and practically it will also be time consuming. Sampling is used when collecting data from
a representative part of the whole population.
-Statistics refers to the scientific method used for collecting data. It can be described as the
science of classifying and organizing data in information and decision making.
Steps in Statistical Investigation
1. Defining the problem –a problem wrongly defined can lead to wrong information and
consequently too costly for the business.
2. Deciding on the sample site –use sampling techniques and market research.
3. Methodology –refers to the technique of field research e.g. interviews, questionnaires.
4. Collecting, tabulating and organizing data –can be facilitated through the use of I.T.
5. Analysis and interpretation of data –it sums up whether the information collected is
able to meet the answer for the questions/problems initially identified.
6. Presentation of data –a written report aided by tables, diagrams and graphs clarifies the
data
Presentation of Data
Tabulation
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-Each graphical way of presenting large quantity of data arranged in labeled rows and columns
- ---------- visual impact to graphical representation
Bar Charts (show relationships of items)
-These are bars of standard width and different lengths to present magnitudes
-Can be used to illustrate comparisons and can only be used for relatively straight forward data.
Pie Charts
-Useful for depleting ------
-It is a segmented circle with each segment representing the proportion of each variable in the
data under study.
-Segments are expressed in percentage form.
Histograms
-Display grouped data and the width of the bar is proportioned to the class interval.
-The magnitude for a particular class is not shown by the height of the bar but its area.
Pictograms
-They use picture to represent data although visual impact is strong, simple and limited data can
be shown.
Data Analysis and Evaluation
-To make ------- of data, it is usually grouped to measure frequency.
-It is characterized by;
i) measure of central tendency (mean, median, mode)
ii) measure of dispersion (spread of data)
Measuring Central Tendency
-This refers to the finding of the mean, median, mode for a given set of data.
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-Mean – is the average of some scores and is found by adding up all the scores and dividing the
total by the number of scores.
-Median – the value which divides the observation into two equal parts, the number of which
there are as many values of --------- smaller than it as there are greater than it. It is the middle,
50% quartile.
-Mode – values of ---------- with the largest frequency. For example (1, 0998887, E) mode of this
group is 8.
-Range – maximum – minimum, helps to know quantity to sell.
1. Decision Trees
-A branching diagram that summarizes the option available overtime, in a decision process,
probabilities are allocated to the branches.
-Decisions can also be made with the aid of other techniques such as the decision tree technique
and the program evaluation review technique (PERT).
-Decision tree technique is used by managers in making important decisions that have far
reaching effects on the business.
-Technique helps managers to arrive at the correct decision based on a scientific way of -----------
--- the possibility of haphazard decision.
-A decision tree is a graphical way of eliminating the -------- of strategic decisions and the
expected outcomes come under each possible set of events.
-The technique involves decision making under different conditions.
-Decision making under certainty decision makes ----------- with -------- what the outcome and
results of all the decision alternatives will be e.g. the payment of electricity bill on time, ZESA
will not cut off the electricity supply hence jeopardizing operations.
-Decision making under risk – decision maker knows the probable outcome of his decision e.g.
he may know that the interest rates at banks may ---------- in the next 2 weeks but he knows there
is a 25% probability that it could happen, in such a case the decision maker will make a decision
that is not -------- to disadvantage him.
-Decision making under uncertainty – decision maker does not know what the probable outcome
of his decision will be consequently, he has to follow certain steps that will help in the decision
process.
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Use of Decision Trees
-Sets out the alternative course of action in the form of a tree diagram.
-Estimates the possible outcomes of the various outcomes.
-Determines the (subjection) probability for each outcome.
-Use the cutter to moderate each outcome and in doing so calculates the expected value
from each outcome.
-Selects the course of action with the highest expected value.
Structure of Decision Trees
-In decision trees, squares represent -------------- at which management decisions have to be
made.
-They are known as decision -----. The black dot at the end of a branch represents the finishing
point of a sequence of decisions.
-Circles represent points at which one of a ----- of outcomes may occur.
-A decision tree with two decision modes – the choice of one course of action necessitates a
second decision. For example, decision concerns the sale of land, the owner has the choice of
setting off immediately or developing the -------- for subsequent sale at a higher price.
Advantages
-They show clearly and logically the alternative courses of action
-They encourage managers to quantify alternative outcomes
-Encourage logical thinking and planning
-They lead to more rational decision making
-New ideas are considered
Disadvantages
-The construction of a decision tree is time consuming
-Information is not always available or complete
-Can lead to bias (neglect of non-quantifiable factors)
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-The estimate of profitability is subjective
2. Critical Path Analysis (CPA)
-It is the method of network analysis and was developed in 1957 to help schedule maintenance
projects in chemical plants.
-The objective is to achieve a timely completion of the project of optimum allocation of

resources.
-It is used for planning and control of complex projects such as construction of a bridge,
installation of a computer system or launching of a new product.
-Such projects have a number of smaller tasks which have to be carried out in sequence.
-A network diagram is constructed to show sequential relationships between the various

components.
Aims of Network Analysis
1. To facilitate the planning and coordination of large projects
2. Identify critical activities which determine the total duration of the projects
3. Identify activities which are likely to cause bottlenecks and delay
4. Determine when resources and components are needed
5. Plan the use of resources
6. Reduce and eliminate idleness
7. Reduce costs by reducing waste
8. Facilitate the corrective action when performance fall below
9. Identify important linkages and sequential dependant relationship
Steps in Network Analysis
1. Identify the basic activities
2. Estimate the time required for each activity (duration activity)
3. Determine the sequence of events(starting or finishing point of event)
4. Draw the network
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5. Determine the duration of the project by completing and earliest starting times
6. Determine the critical path by completing the latest finishing times and --------------
them to the earliest finishing times.
-The basic elements of a network model are activities and events. An activity is an operation
which consumes resources and has a definite starting and ending points. An event is the start or
end of and activity.
Dummy Activities
-Included in some network diagrams will be a -----------------
-This is known as a dummy activity.
-It is and imaginary activity which consumes neither time nor resources but is designed to show a
logical dependency of activities e.g. a motorist at a filling station can have his car filled with
petrol while at the same time an attendant could be cleaning the windscreen.
-The two activities are independent of each other, but both have to be completed before the car
leaves the filling station.
Non-critical Activities and Flout/Slack
-The concept of float/slack relationships to non-critical activities is the amount of time by which
an activity can be overrun before the whole project is delayed.
-It is the spare time available in an activity. There are 3 types of float:
1. Total Float
-It is the amount of time a path of activities can be delayed without affecting overall project
completion –LST-EST
2. Free Float
-It is the amount of time a path of activities can be delayed without affecting the commencement
of the next activity –EST of the next activity (duration –EST for this activity)
3. Independent Float
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-It is the amount of time an activity can be delayed, when all proceeding terms are completed as -
----- as possible. It is called independent because it does not affect the float on proceeding or
subsequent activities EST of next activity –(duration – LFT of last activity)
NB The critical path is the sequence of activities which takes the greatest time to accomplish.
The significance of the critical path is that any delay in the duration of the activities which lies
on the critical path will increase the duration of the whole project.
Example
Project: Coffee Preparation
Activity Description Activity Activity Duration
Proceeding Succeeding (minutes)
A fill kettle with water _ B,C,D 2
B boil water A F 5
C place coffee in a pot A G 2
D arrange cutlery on tray A E 4
E place milk and sugar on tray D I 2
F pour boiled water into pot B G 1
G stir water and let it stand C,F H 6
H strain coffee G I 2
I place pot on tray and serve E,H _ 1
-A critical path is a path that does not have delay throughout yet it is the longest path.
Advantages of Network Analysis
-The step by step procedure forces management to plan and to concentrate on critical
areas
-The analysis highlights areas where no information is available
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-The interrelationships of activities are highlighted and accounted for
-It allows managers to experiment with changes in scheduling and allocation of resources
without spending vast sums of money and taking risks
-It allows better control, for example, a delay beyond the scheduled completion time will
be brought to management‟s attention. Causes of the delay are investigated and remedial
action taken. In this way the likelihood of the project being completed in time is
increased MBE is made possible.
-Knowledge of float gives management assurance not to overreact if non-critical activity
delayed slightly
-The analysis may be extended to evaluate the costs and other resources.
Disadvantages
-No mechanism to report delays
-If delays are not reported promptly, management will be working on outdated
information
Application of Network Analysis
-product launch and promotion
-construction projects
-R & D projects
-production scheduling
3. Cost Benefit Analysis (CBA)
-is a technique involving a monetary assessment of total costs and revenues of a project, paying
particular attention to social costs and benefits that affect the community against private
economic costs. It is widely used in the public sector.
-Cost Benefit Analysis incorporates other techniques like decision tree analysis, critical path
analysis and other forecasting techniques like linear programming, building of a new motorway
would be evaluated in the following costs/benefits;
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Costs
-noise
-loss of arable lands
-economic costs of construction
-exhaust fumes
-maintenance and repairs
Benefits
-faster travel
-greater convenience
-creation of jobs
-more government revenue
Procedures in Cost Benefit Analysis
1. Define the problem –what are the objectives of the project and what are the benefits
2. State the alternatives –consider the relevant constrains such as the budget available or
influence of legislation and pressure groups
3. Estimate and appraise the costs and benefits –identify which costs and benefits to
conclude and decide on how to value them in relation to the estimated life of the
project. Social responsibility issues have to be considered
4. Select the best alternative –appropriate techniques to come up with the best decision
which can be used by management e.g. NPV
Social Costs
-These concern the community at large, they include the costs of polluting the environment, the
reduction of accidents, better services etc.
-Costs must be paid off by the firm, by the government or by the community
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Uses/Advantages of Cost Benefit Analysis
-Encourages management to consider all the costs and benefits accruing to a project
-The analysis can be used to ------------ of the operating environment in which the firm
exists. It highlights descriptively the areas important for decision making.
-Sensitivity analysis can be conducted to test the effects of certain factors on the decision
Limitations of CBA
-The analysis is difficult to operate because of the fact that it incorporates several
techniques
-It is limited by the accuracy of the data input since the cost and benefits are often
difficult to forecast let alone quantify
4. Time Series Analysis
-These are methods which take into account changes in data and project the findings into the
future to help with planning. From a time series, it is then possible to predict future values of a
variable e.g. sales on the assumption that current patterns are likely to continue.
-Time series considers seasonal, long term cyclical and irregular/random movement as treads in
data analysis
The Moving Average method
-It smoothens out the variations in data caused by seasonal or cyclical variations and so allows
the general trends to become clear. It is quick, easy and cheap to calculate and useful for short-
term predictions.
-This method may be used for forecasting future short medium term (up to 1 year) demand for
suppliers and the final product to help in budgeting medium term investment decisions, stock
control and staff planning
5. Linear Programming
-This is a statistical planning technique used to determine how to produce the highest output
from a given set of machines and equipment, taking into account any constraints such as
production time.
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It came into prominence during the WW2 to deal with the transportation, scheduling and
allocation of resources subject to contain restrictions such as costs and availability.
Types of Linear Programming problems in POM
1. Product mix – how to select the product mix or services that result in maximum profits
for planning period
2. Ingredients mix – to select the mix of major ingredients going into final products that
results in minimum operation costs for the planning period
3. Transportation – to select the distribution plan from sources to destinations that result
in minimum shipping costs for the planning period
4. Production plan – to select the amount of products or services to be produced on both
straight time and overtime labour during each month of the year to minimize costs of
labour and carrying inventory
Purposes of Published Accounts
1. give financial information of the trading activities of a company
2. to show the value/equity of capital of a company
3. ratio analysis
4. to show the income generated for the period
5. to show dividends proposed and paid during the year
6. to show cash flow of the business
7. giving information of extraordinary activities in form of notes
8. stakeholders are well informed through the directors‟ and auditors‟ reports
Problems to be considered by PLC
-The apportionment of distribution and administration expenses
-Intangible assets may show a false value since the values ---------
-Expenses of publishing copies to every shareholder
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-Financial statements are published to the public without privacy
-If accounts are disapproved by auditors, they should be prepared once more
Characteristics of an Effective Financial Account
-All the necessary notes should be published
-Net profit should not be overstated or understated
-Accounting policies should be applied consistently from one financial year to another
-A director‟s report should disclose matters as according to the company‟s account
-The balance sheet and PLC accounts should be shown in the most appropriate and
clarified format
-There should be a clear auditor‟s report to shareholders
-A company should be seen as a going concern e.g. payment of expenses
Business Plan
-Is a document that describes in detail how the business is set up.
-Covers the business structure, products and services affected and market research and marketing
strategy, a complete budget and financial projects for even up to 5 years.
-Both start-ups and existing businesses require business plans for primary resources;
i) clarifies thinking , outlining the steps to move from a business idea to success
ii) it is used for raising funds
Contents of a Business Plan
* Summary
-The introduction should clearly and concisely state the nature of the business, the amount of
external finance it seeks and the purpose of the application.
*A description of the business
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-Details should be given of the business (if it is existing business) or reasons for starting up the
business
-Legal form or original
-The capital structure
-The key personnel (qualifications, experience, responsibility, age)
*The Product or Services
-The product should be described and comparisons made with rival products
-The „position‟ in the market should also be located and its unique selling points (USP) should be
emphasized
*The Market
-The size and trends in the market should be identified
-Market shares, the degree of competition and future threats should be involved in the
assessment
*Marketing Plans
-Details strategies in relation to pricing policy, advertising and other forms of promotions, selling
and distribution, product launch and development
*Manufacturing and Operations Plan
-Deals with the production of goods
-Details of location, production facilities, techniques and capital equipment
*Financial Information
-Depends on whether the firm is a start up business or an existing one.
-For both businesses such information should be involved; cash flow forecasts, budgeted balance
sheets, working capital requirements, costing and break even analysis.
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BRIAN ROPI ADVANCED LEVEL BUSINESS STUDIES

The Need for and Nature of Business Activity

-The basic human needs can be classified as:

(9) –able to cope up with stress-healthy

Levels of Business Activity

-There are 3 basic levels of economic activity in a country:

Sectors of the Economy

-There are basically 2 sectors in the economy;

Legal Structure of Business

1 –easy to form (less capital and legal requirements)

5 –profit/loss sharing ratio not necessarily equal

3 Private Ltd and Public Ltd Companies

-any 2 or more people can form a private or public limited company

1 –separate legal entity

a) Private Limited Companies

-have two but not more than fifty shareholders

b) Public limited companies

-have at least two shareholders. No maximum limit

4 State Owned/Private Enterprises

-established by an Act of Parliament

Divorce of Ownership and Control

Business and Economic Structure

The Economic System

1 Free economy/capitalization/market economy

-all resources are owned and organized by the state

How Companies go International

A company which conducts business through branches/subsidiaries in a number of foreign

STAGE 2. When the turnover of business is big enough, a foreign branch or

STAGE 4. As the activities of subsidiaries become more complex, a certain amount

-The following are some of the ways in which companies go international:

2 Licensing -the selling of rights to market brand-name products or to use patented

Why Companies go International

1. Market related factors –competition to find an established end-user market or an untapped

within the business community.

Factors influencing Foreign Direct Investment (FDI)

Arguments for Privatization

Why small firms survive the activities of MNCs

1. Provision of professional and specialist services/products

Significance of Small Businesses

Why Objectives are needed

The hierarchy of Objectives

2. –a vision of what the organization wants to be

Corporate Objectives/Strategic Objectives

These are short-term departmental performance targets, usually covering a period of up to 6

Other Objectives of Organizations

1. The profit objective

Management By Objectives (MBO)

Characteristics of MBO Programs

1. Total commitment to the program from top management to the worker

1. It lets individuals know what is expected of them

1. Much time and effort is needed to implement MBO effectively

Business in its Environment

The External Environment of Business

The Impact of Business on the External Environment

1) Expansion at the expense of rivals – unfair competition

Impact on Social Environment

1) Improvement in standard of living

Impact on the Physical Environment

Environmental disasters such as: