Introduction to Agribusiness Management

1. Introduction to Agribusiness
1.1. The concept of Agribusiness

Agribusiness is a combination of two words agriculture and business. Literally speaking,

business means the activity of making, buying, selling, or supplying things for money and it
includes service-providing firms like consulting firms. In simple words, “business means the
state of being busy”. Broadly, business involves activities connected with the production of
wealth. It is an organized and systematized human activity involving buying and selling
goods, manufacturing goods or providing services in order to earn profit.

The word agriculture indicates plowing a field, planting seed, harvesting a crop, milking
cows, or feeding livestock. Until recently, this was a accurate picture. Nevertheless, today’s’
agriculture is radically different.

Agriculture has evolved into agribusiness and has become a vast and complex system that
reaches far beyond the farm to include all those who are involved in providing food and fiber
to consumers. Agribusiness includes not only those farms or the land but also the people and
firms that provide the inputs (for example seed, chemicals, credit etc.), process the output
(e.g. milk, grain, meat etc.), manufacture the food products (for example: ice cream, bread,
breakfast cereals etc.), and transport and sell the food products to consumers (for ex.
restaurants, supermarkets). Literally, agribusiness refers to the industry concerned with the
production, processing, and distribution of agricultural products or with farm machinery and
services.

It is apparent that the definition of agriculture has to be expanded to include concepts more
than production. Farmers rely on the input industries to provide products and service; they
need to produce agricultural commodities. They also rely on commodity processors, food
manufactures, and ultimately food distributors and retailers to purchase their raw agricultural
commodities and to process and deliver them to the consumer for final sale. The result is the
food and fiber system. The food and fiber system is increasingly being referred to as
“agribusiness”.

Davis and Goldberg first introduced the term agribusiness in 1957. It represents three part
systems made up of (1) the agricultural input sector (2) the production sector and (3) the
processing-manufacturing sector. To capture the full meaning of the term “agribusiness” it is
important to visualize these three sectors as interrelated parts of a system in which the success
of each part depends heavily on the proper functioning of the other two.

Agribusiness includes the production, processing, and supply of agricultural goods that range
from lettuce to corn syrup. Companies may focus on things like cut flowers, fresh vegetables,
or byproducts of farming such as fuels derived from farm waste. Agribusiness also
encompasses farming equipment, machinery, chemicals, suppliers, and personnel.
The following are very interesting definitions of agribusiness:

 Agribusiness is a big business that is connected to agriculture, either owning or

operating large-scale farms, or catering to those who do. Farming engaged in as a
large-scale business operation embracing the production, processing, and distribution
of agricultural products.
 Agribusiness includes the agricultural input sector, the production sector, and the
processing-manufacturing sector: Farmers, providers of farm inputs, processors of
farm outputs, manufacturers of food products, and those who transport, sell, and/or
prepare food products.
 Agribusiness is everything from farm to fork. It represents all business-related
activities involved in the production, finance, marketing and distribution of food and
fiber. The academic discipline of agribusiness combines theory and method in finance,
marketing and management to address global agricultural issues.

Agribusiness Skills and Careers

Today, a broader view of agribusiness is generally accepted as more appropriate. Here,
agribusiness includes the total input-farm-product sectors that supply farm inputs, involved in
production and finally, handle the processing, distributing, wholesaling and retailing of the
product to the final consumer.

Items listed below are break down of the types of skills and knowledge utilized by those
employed in agribusiness.

1. Agricultural production and propagation of animals, animal products, plants, plant

products, forest products;
2. The provision of services associated with agricultural production and the manufacture
and distribution of supplies used in agricultural production;
3. The design, installation, repair, operation, servicing of machinery, equipment, and
power sources, and construction of structures used in agricultural production;
4. Any activities related to the inspection, processing, and marketing of agricultural
products and primary by-products;
5. Any aspects of green house, nursery, landscaping, and other ornamental horticultural
operations;
6. The conservation, propagation, improvement, and utilization of renewable natural
resources; and
7. The multiple uses of forest land and resources.

1.2. Scope of Agribusiness

It has already indicated that agribusiness is a complex system of input sector, production
sector, processing manufacturing sector and transport and marketing sector. Therefore, it is
directly related to industry, commerce and trade. Industry is concerned with the production of
commodities and materials while commerce and trade are concerned with their distribution.
Agribusiness may encompass the primary production activities, the processing sectors and the
tertiary activities too. It has a broader scope. The modern definition of agribusiness calls for
more of an industry. Let us explain what an industry is then.

A. Industry: Industry refers to the processes of extraction and production of goods meant for
final consumption or use buy individual or buy another industry for its production. Thus,
goods used by the final or ultimate consumers are called “consumer goods” such as edible
oils, fruit jams, papaya, pickles etc.

Types of industries: Based on their nature, industries are broadly classified into following
types:

1) Extractive industries: These industries are concerned with the extraction; and utilization
of natural resources. Example: fishing, fruit gathering, agro-based industries, forestation.

2) Genetic industries: These industries include breeding of plants, seeds, cattle breeding
farm, fish hatcheries, and poultry farms. Of course, factors like nature, climate and
environment play a dominant role in these industries, yet human skill involved in their
production cannot be ignored. For example, intensive agriculture is possible with greater
amount of capital and larger number of workers.

3) Manufacturing industries: These industries are engaged in the conversion of raw material
or semi finished goods produced in the extractive industries. Some prominent examples are:
cotton textile industry, spinning and weaving mills etc. Manufacturing industries can further
be classified into five types: (i) Analytical industry (ii) Processing industry (iii) Synthetic
industry, (iv) Service industry (v) Assembly industry.

B. Commerce: Commerce is another major component of agribusiness. It includes all those

activities that are necessary to bring goods and services from the place of their production to
the place of their consumption. Thus, it includes the buying, selling of goods and service and
all those activities that facilitate trade such as storing, grading, packaging, financing,
insurance, and transportation. In simple words, commerce includes trade and aid to trade. The
principal function of trade (commerce) is to remove the hindrance of person, place, time
exchange, knowledge etc. and ensure a free and smooth flow of goods from the producers to
the consumers. Trade in fact is a branch of commerce itself. In a way, it is the final state of
business activity involving sale and purchase of commodities or goods. It does not include
aids to trade like transportation, insurance, banking, finance etc. Based on its coverage and
volume, trade is normally classified into the following types: On the basis of volume as
wholesale trade and retail trade wholesale trade involves exchange of large volume of goods
whereas retail trade involves exchange of smaller volume of goods. And on the basis of
coverage as regional trade and national trade.

The Nature of Successful Agribusiness

Today, the business has become very competitive and complex. This is mainly due to
changing taste and fashion of the consumers on one hand, and introduction of substitutes and
cheaper and better competitive goods, on the other hand. The old dictum “produce and sells
has changed overtime into produce only what customers want”. In fact, knowing what
customers want is never simple. Nevertheless, a farmer operator or farmer manager has to
give proper thought to this consideration in order to make his/her business a successful one.

The important requisites for success in a modern business are:

1. Clear objectives: Determining objectives is one of the most essential prerequisite for the
success of business. The objectives set forth should be realistic and clearly defined. Then, all
the business efforts should be geared to achieve the set objectives. In a way, objectives are
destination points for an agribusiness.

2. Planning: In simple words, planning is a pre-determined line of action. The

accomplishment of objectives set, largely, depends upon planning itself. Planning is a
proposal based on part of experience and present trends for future actions.

3. Sound organization: An organization is the art or science of building up systematical

whole by a number of but related parts. Just as human frame is built up of various parts like
heart, liver, brain, legs etc. similarly, organization of business is a harmonies combination of
men, machine material, money management etc. so that all these could work jointly as one
unit, i.e. “business”or “the agribusiness”.

4. Research: As indicated earlier, today the agricultural production philosophy “produces

what the consumer wants”. “Consumers” behavior is influenced by variety of factors like
cultural, social, personal and psychological factors. The knowledge of these factors is
acquired through market research. Research is a systematic search for new knowledge.
Market research enables a business in finding out new methods of production, improving the
quality of product and developing new products as per the changing tastes and wants if the
consumers.

5. Finance: Finance is said to be the life-blood of business enterprise. It brings together the
land, labor, machine and raw materials into production. Agribusiness should estimate its
financial requirements adequately so that it may keep the business wheel on moving.
Therefore, proper arrangements should be made for securing the required finance for the
enterprise.

6. Proper plant location, layout and size: The success of agribusiness depends largely on
the location where it is set up. Location of the business should be convenient from various
points of view such as availability of required infrastructure facilities, availability of inputs
like raw materials, skill labor, nearer to the market etc. Hence, the businessmen must take
sufficient care in the initial stages to selected suitable location for his/her business.

7. Efficient management: One of the reasons for failure of business often attributed to the
poor management or inefficient management. The one man, i.e. the proprietor may not be
equally good in all areas of the business. Efficient businessperson can make proper use of
available resources for achieving the objectives set for the business.
 8. Harmonious relations with the workers: In an agribusiness organization, the farmer
operator occupies a distinct place because he/she is the main living factor among all
factors of production. In fact, it is the human factor who makes the use of other non-
human factors like land, machine, money etc. Therefore, for successful operation of
business, there should be cordial and harmonious relations maintained with the
workers or labors to get their full cooperation in achieving business activities.

Agribusiness Formation
Agribusiness formation: Agribusinesses organizations can be formed as i) Sole proprietorship;
ii) Partnership; iii) Corporation; and iv) Cooperative.

Sole Proprietorship: A single individual owns a business and its assets, controls it, uses all
the profits generated and assumes the risk of operating his business. The word sole indicates
that the business is started and run by one individual.
Partnership: A partnership is an association of two or more persons to carry on as co-owners
of a business for profit. It may be formed when one owner takes on another owner to expand
the business, or it may be organized as a partnership from the start.
Corporation: A corporation is an association of individuals created under authority of law,
which exists and has powers and liabilities independent of its members. It is an artificial
person having no existence except in the eyes of law. It is an association of stockholders
formed with government consent and having the power to transact business in the same
manner as if was one person. A corporation has the same rights as an individual to own
property, conduct business, make contracts, sue, and be sued. A corporation is a single entity
or an individual person in the eyes of the law. The ownership of a corporation is divided into
transferable units known as share or stock.
Cooperative: According to ICA (International Cooperatives Alliance), “A cooperative is an
autonomous association of persons united voluntarily to meet their common economic, social
and cultural needs through a jointly owned and democratically controlled enterprise.”
 2. Small Business and Farmers Cooperative

2.1. Concept of Small Scale Business

Business Scale: Agribusiness could be small, medium or large scale depending on their size.
Defining the size of a business is arbitrary. i.e. Different standard used for different purposes.
For example, Some consider automobile manufacturers as big business. Legislators may
specify small business, businesses with ten employees. Even criterias used to measure the size
of businesses vary from industry to industry. But the common factors determining are:

size of capital,
number of employees,
volume of sales,
level of technology,
raw material used,
Legal forms of ownership.

Classification/scaling of businesses by size may also differ in different industries: According to

the SBA standard business the followings are considered as small business:

No. of Employees:

 Mining up to 2,500 employees

 Media industry (news pape and printing) up to 250 employees

Sales Volume

 Annual revenue up to 750,000 in Agriculture

 Annual revenue up to 33.5 million in construction

2.2. Source of fund for small Business

The adequate provision of finance is vital for a newly organized or started business venture.
Every entrepreneur planning a new venture confronts the dilemma of where to find start-up
capital. Entrepreneurs usually are not aware that numerous possibilities and combinations of
financial packages may be appropriate for new ventures.
It is important, therefore, to understand not only the various sources of capital but also the
expectations and requirements of these sources. Without this understanding, an entrepreneur
may be frustrated with attempts to find appropriate start-up capital. There are two sources of
capital to finance a new business venture: i) Debt financing, and ii) Equity financing.
Debt Financing: The use of debt to finance a new venture involves a payback of the funds
plus an interest for the use of the money. Many new ventures find that debt financing is
necessary.

Types of debt: On the basis of repayment, debt financing is categorized into two types: 1)
short-term debt, and 2) long-term debt.
1) Short-term debt: A debt which repays back within a year or less. It is often required for
working capital and is repaid out of the proceeds from sales.
2) Long-term debt: A debt which repays back to the owner within one to five years or
sometimes even more than five years. Most of the time, it is used to finance the purchase
of property or equipment. With the purchased asset, it also serves as collateral for the
loans.

Sources of debt financing: The most common sources of debt financing are:
 Commercial banks: These banks are established mainly for the purpose of granting loans
to entrepreneurs for investment in the business.
 Manufacturers’ credit: Sometimes a new venture can obtain long-term financing for a
particular piece of equipment from the manufacturers. Manufacturers are most willing to
do this when an active market exists for their new/used equipment.
 Trade credit: Also, new ventures sometimes can obtain short-term debt financing by
negotiating extended credit terms with suppliers who supply raw materials. However, this
kind of trade credit restricts the venture’s flexibility with selecting suppliers and may
reduce its ability to negotiate supplier prices.
 Accounts receivables factoring: By pledging the letters of accounts receivables with
banks or financiers, an entrepreneur can obtain loans within the limitation of its value.
 Finance companies: Credit can also be obtained from finance companies run by private
persons but the interest rates are higher than that of banks.
 Leasing companies: Leasing is a legal agreement that allows one to use a piece of
equipment, a building or land for a period of time in return for rent. Entrepreneurs can
choose this option if the cost of equipment is prohibitive to them.
 Mutual funds: Companies that collect small savings of people and invest them in various
different businesses. Prospective entrepreneurs can approach these companies as one of the
sources of capital.
 Loan associations: These are credit cooperatives from which debt can be obtained by the
entrepreneurs by becoming their members.
 Insurance companies: If an entrepreneur is a policy holder, he may be granted loan based
on the value of his insurance policy.
To secure a bank loan, an entrepreneur typically will have to answer a number of questions.
Five of the most common questions, together with descriptive commentaries, follow:
 What do you plan to do with the money? Do not plan on using funds for a high-risk
venture. Banks seek the most secure venture possible.
 How much do you need? Some entrepreneurs go to their bank with no clear idea of how
much money they need. All they know is that they want money. The more precisely the
entrepreneur can answer this question, the more likely the loan will be granted.
 When do you need it? Never hurry to the bank with immediate requests for money with no
plan. Such a strategy shows that the entrepreneur is a poor planner, and most lenders will
not want to get involved.
 How long will you need it? The shorter the period of time the entrepreneur needs the
money, the more likely he is to get the loan. The time at which the loan will be repaid
should correspond to some important milestone in the business plan.
 How will you repay the loan? This is the most important question. What if plans go awry?
Can other income be diverted to pay off the loan? Does collateral exist? Even if a quantity
of fixed assets exists, the bank may be unimpressed because it knows from experience that
assets sold at a liquidation auction bring only a fraction of their value.

Advantages of debt financing

 No give-up of ownership is required.
 More borrowing allows for potentially greater return on equity.
 During periods of low interest rates, the opportunity cost is justified since the cost of
borrowing is low.

Disadvantages of debt financing

 Cash-flow problems may occur due to regular repayments of debt along with interest.
 If borrowed heavily, debt can inhibit growth and development.

Equity financing: Equity financing involves the sale of some of the ownership in the venture.
Unlike debt financing which requires the repayment of borrowed money with interest on
principal, equity financing is money invested in the venture with no legal obligation for
entrepreneurs to repay the principal amount or pay interest on it. The use of equity funding
thus requires no repayment in the form of debt. It does, however, require sharing the
ownership and profits with the funding source. Since no repayment is required, equity capital
can be much safer for new ventures than debt financing. Yet the entrepreneur must
consciously decide to give up part of the ownership in return for this funding.

Sources of equity financing: The most common sources of equity financing are:
 Public stock offerings: Corporations raise capital through the sale of shares on public
markets in the form of common stock and preferred stock.
 Private placements: Raising capital through private placement of securities. Small
ventures often use this approach. Two of the most used methods are:
 Loans with warrants provide the investor with the right to buy stock at a fixed price at
some future date.
 Convertible debentures are unsecured loans that can be converted into stock.

Advantages of equity financing

 No burden of repayment and interest on the entrepreneur.
 No cash-flow problems since there are no regular repayments of loans and interests.

Disadvantages of equity financing

 Forces the entrepreneur to give up some degree of ownership and control.
In the extreme, the choice for the entrepreneur is: i) to take on debt without giving up
ownership in the venture, or ii) to give up a percentage of ownership in order to avoid having
to borrow. In most cases, a combination of debt and equity proves most appropriate. That is, it
is better for entrepreneurs to use both debt and equity sources of fund to finance their
business.

2.3. Concept of Farmers Cooperative

Ethiopia is known as a country with diversified nationalities. Each nation has its own unique
culture and custom of living. The system of living is in cooperation that means; they work in
group, habits of mailing commonly and living together in the nearby villages that contribute
to the development of the society.There are three well known forms of traditional
cooperatives. These are:Edir, Ekub, Debo.
Edir is one of the traditional forms of cooperatives still operating almost in all urban and rural
areas of Ethiopia. Almost the majority of the people especially heads of a particular family
are member of this Edir. The main objective for the establishment of this form of association
(Edir) is to help a family who is the member of Edir in case of getting sorrow (a family lost
one of its members, because of dying).

Edir shares a lot of similarities like voluntary membership, democratic control and
administration, fair and equal payment of compensation for a family whose members is
diedand participation of each member in accordance with the bylaws of that particular Edir
with modern form of cooperative

Member participation is very high in Edir because its foundation is based up on the
willingness of members. Edir is ranking first, of all others form of traditional association in
participating large classes of the people.

Ekub is the other traditional form of cooperative which is formed based on classes of men
with identical (similar) earning. Any community of people who do not have permanent
earning to the extent of people with high earning can form ‘Ekub’. Ekub is to similar to
modern saving and credit societies except it does not bear interest on the money saved and the
data about the amount of money saved through this form of associations is not supported with
evidence . The deposits of money in Ekub as a saving could be on daily, weekly or monthly
basis and the cumulative of money being saved is refund back to members in turn basis. The
member can solve his immediate economic and social problem with money being paid. Until
now, there is no effort made to use this money in economic development of the country.

Debo (Wenfal)is still another form of traditional form of cooperation. This is mainly a
cooperation formed at rural areas where most of the people are farmers. Although, debo do
not have a system of administration like other form of association, it is based on equivalent
labour contributed by each farmer. Debo is a system of farmer’s cooperation during the time
of farming, weeding and harvesting. It is a mechanism by which all farmers helping each
other on turn basis. Since each types of work are being done in time, the productivity per
farmers can be increased. Generally, these three traditional form of association which are
the values and customs of our society should be brought to modern form.

2.4. Cooperative principles and values

The term “principle”, derived from the Latin word “Principium” meaning “basis” has
different meanings: the primary idea, a certain thesis, a rule of an organization. The I.C.A.
Commission (1966) on Cooperative Principles faced the problem of defining the term
“principle”. The working definition adopted by the Commission was: “those practices which
are essential, that is, absolutely indispensable to the achievement of the Cooperative
Movement’s purpose”.

According to W.P. Watkins, the former Director of the ICA, “They are the ideas, inherent in
cooperation, which determine what it is as a mode of action … they are the ideas which it is
the purpose of cooperative activity to realize …” They are ideas accepted as invariable guides
to policy or conduct or action of any kind.

There were different principles adopted by cooperatives at different times the most popular
ones include Rochdale principles, Raiffessen principles and Schulze-Delitschprinciples
developed during their respective times. But the currently applied principles are developed by
ICA.

At the Vienna Congress of the I.C.A., in 1930, the Central Committee was asked to appoint a
Special Committee to examine the conditions in which the Rochdale Principles were applied
in the member countries and to state these principles in their final form. This special
Committee was formed in 1934 at the London Congress of the I.C.A. The Paris Congress of
the I.C.A. approved its report entitled “The Present Application of the Rochdale Principles of
Cooperation” in 1937.

Since the initial adoption in 1937, the ICA has revised the principles twice – once in 1966 and
once in 1995. These changes were inevitable in the middle of struggling with the changing
socio-economic environment and trying to keep the cooperative relevant in a competitive
economy. Accordingly, the principles could be changed in the future whenever need be. The
definition, principles and values of cooperatives adopted by 1995 are discussed here under.

A cooperative is an autonomous association of persons united voluntarily to meet their

common economic, social and cultural needs and aspirations through a jointly owned and
democratically controlled enterprise. (ICA, 1995)

Cooperatives are based on the values of self-help, self-responsibility, democracy, equality,

equity, and solidarity. In the tradition of their founders, cooperative members believe in the
ethical values of honesty, openness, social responsibility, and caring for others.

Principle of Voluntary and Open Membership

Open Membership means that cooperative is open to all persons who need and are able to use
the services of cooperatives and willing to accept the responsibilities of membership without
any artificial gender, social, racial, political or religious discrimination. But where
cooperatives are for specific purpose, e.g., housing, there may be understandable and
acceptable reasons why cooperative may impose a limit on membership. “Willing to accept
responsibilities of membership,” reminds members that they have obligations to their
cooperative.

Principle of Democratic Member Control

Cooperatives are democratic organizations controlled by their members who actively

participate in setting their policies and making decisions. Men and women serving as elected
representatives are accountable to the membership. In primary cooperatives members have
equal voting rights by virtue of the “one member, one vote” rule; cooperatives at other levels
are also organized in a democratic manner.
Principle of Member Economic Participation

Members contribute equitably to, and democratically control, the capital of their cooperative.
At least part of that capital is usually the common property of the cooperative. Members
usually receive limited compensation, if any, on capital subscribed as a condition of
membership. Members allocate surpluses for any or all of the following purposes: developing
their cooperative, possibly by setting up reserves, part of which at least would be indivisible;
rewarding members in proportion to their transactions with the cooperative; and supporting
other activities approved by the membership.

Principle of Autonomy and Independence

Cooperatives are autonomous, self-help organizations controlled by their members. If they

enter in to agreements with other organizations, including governments, or raise capital from
external sources, they do so on terms that ensure democratic control by their members and
maintain their cooperative autonomy.

Principle of Educations, Training and Information

Cooperatives provide education and training for their members, elected representatives,
managers and employees so that they can contribute effectively to the development of their
cooperatives. They inform the general public, particularly young people and opinion leaders,
about the nature and benefits of cooperation.

Principle of Cooperation among Cooperatives

Cooperatives must also recognize the necessity of strengthening their support organizations
and activities. It is crucially important for different kinds of cooperatives to join together
when speaking to government or promoting the cooperative way to the public. In order to
build an integrated cooperative system it is necessary that cooperatives should cooperate
among themselves. They should not compete with their own constituent members.

Principle of Concern for Community

Cooperatives serve their members most effectively and strengthen the cooperative movement
by working together through local, national, regional and international structures.
Cooperatives work for the sustainable development of their communities through policies
approved by their members.

Cooperative Values

Self-help: It means one should try to solve his problems with his own efforts, means and
resources available. But self-help succeeds only up to a point. Therefore it needs joint- efforts
with those who have the same problem. They can pool small resources and means, so that
they become more potential.
Self-responsibility: coupled with self-help and mutual self- help is the value of self-
responsibility. Every office-bearer, member and member of management must take
responsibility for his personal actions, for the activity as whole and for its impact on society.

Democracy: Democracy is a basic value of cooperatives. In the context of cooperatives, the

essence of democracy is “conscious decision” based on “freewill”. “Conscious decision”
means understanding the logic or rationale of taking decisions and be aware of the possible
consequences of the decisions and their impact on individual and institution.

Equality: Equality means equal right and opportunities, right of participation, a right to be
informed, a right to be heard, a right to be involved in the decision making. Members are to be
associated as equal as possible, without any kind of discrimination of gender, religion, caste,
creed, race, amount of share capital contribution, deposits, political affiliation etc.

Equity: It refers to how members are treated within a cooperative. It means that members
should be treated equal in how they are rewarded for their participation in the cooperative
normally through patronage dividends, allocations to capital reserves in their name or
reductions in charges. Equity ensures social justice.

Solidarity: It isan important base of cooperatives. Solidarity is collectivity. Management have

the responsibility to ensure that all members are treated as fairly as possible, that the general
interest is always kept in mind, that there is consistent effort to deal with employees
(members or non-members), as well as the non-members. It also means that a cooperative has
a responsibility for the collective interest of its members.

Honesty: Cooperatives ideal is honest dealing with members and non-members. They
regularly reveal to their members and others information relating to their performance. Scope
of honesty in cooperatives refers to monetary honesty, honesty of thoughts, commitments,
behavior and conduct, no hypocrisy or falsehood, no underhand dealings or false promises, no
dishonesty in elections. It also encompasses correct maintenance of accounts and balance
sheet, correct information to members, objectivity and fairness in personal matters.

Openness: It means that cooperatives are open to members of community they serve. They
have a commitment to serve and assist individuals in helping themselves.

Social Responsibility: In fact Social Responsibility and caring for others are overlapping
concepts. It means that cooperatives should move beyond caring for members only. They
should financially assist or organize activities beneficial to the entire community. However,
such activities can be taken up when cooperatives have surplus.

Caring for others: this value of cooperatives refers to taking interest in and care about other
people. This concept stems from humanism. Cooperatives are humane by nature though their
main concern is to achieve
4. Strategic Human Resource Management

Managing Human Resources

Human resource management means management of people at work. HRM is the process
which binds people with organizations and helps both people and organization to achieve each
other’s goals. Various policies, processes and practices are designed to help both employees
and organizations to achieve their goals.

Human resource management is a branch of management that deals with people at work; it is
concerned with the human dimensions of management of the organization. As organizations
consist of people, acquiring them, developing their skills, providing them with motivation in
order to attain higher goals and ensuring to maintain their level of commitment, are the
important activities.
According to Edwin Flippo, human resource management is defined as ‘the planning,
organizing, directing and controlling of the procurement, development, compensation,
integration, and maintenance of human resources to accomplish individual, organizational and
societal objectives.’
Human resource management can hence be concluded as a business-oriented philosophy
concerned with management of people in order to obtain added value from them and achieve
competitive advantage.

Functions of human resource management

 Human resource planning: Process of determining the number and types of employees
needed to accomplish organizational objectives.
 Job analysis: Process of describing the nature of a job and specifying the human
requirements, such as skills, and experience needed to perform it.
 Staffing: Process of recruitment and selection of human resources for an organization.
 Orientation: Acquainting new employees with particular aspects of their new job,
including pay and benefit programmes, working hours, company rules and expectations.
 Training and development: Imparting employees the skills and knowledge to perform
their jobs effectively.
 Performance appraisal: Monitoring employee performance to ensure that it is at
acceptable levels.
 Career planning: Assessing individual employee’s potential for growth and advancement
in the organisation.
 Compensation: Determining how much employees should be paid for performing certain
jobs and also provision of other benefits such as accommodation, transportation, medical
and insurance.
 Labour relations: Interacting with employees and negotiating with unions regarding
wages, service conditions, and resolving disputes and grievances.
 Record-keeping: Recording, maintaining, and retrieving employee-related information for
promotions, increments, and other actions.
 Personnel research: Through attitude surveys, employee opinions are gathered on wages,
promotions, welfare services, working conditions, job security, leadership, industrial
relations, etc., to develop appropriate personnel programs.
5. Consumer Behavior

5.1. Definition of Consumer Behavior

Philip Kotler: consumer-buying behavior refers to the buying behavior of final consumers. It
describes the buying behavior of individuals and households who buy goods and services for
personal consumption.

Consumers – individuals buying goods for personal consumption

Consumer market – a group of final consumers who buy products for final consumption.

Models of Consumer Behavior

Understanding consumer behavior implies understanding consumers buying decisions to

answer basic marketing questions like

 What consumers buy?

 Where they buy products?
 How they buy products with plan or with out plan, for example?
 When they buy products?
 Why they buy products? (But learning the whys of consumer buying behavior is not so
easy, - the answers are often locked deep within the consumer’s head)

It is through marketing research that one can learn the buying behavior of consumers.
Moreover, understanding how consumers respond to your marketing efforts (including
products, price, advertising etc.) as part of their buying behavior is believed to be important to
marketers. The commonly used model to understand the buying behavior of consumers is the
stimulus – response model.

Stimuli – there are quite a lot of factors, which stimulate customers to think of buying

products and to make ultimate decision of buying. Among others, some include

 Product
 Price
 Place
 -Promotion and others like Political factors
 Economical factors
  Socio-cultural factors.
 Technological factors

These all may strike a question in a consumer mind (black-box)

(Buyer’s decisions)
Buyer’s responses
Model of Buying behavior
Buyer’s black - Product choice
Marketing stimuli Other stimuli
- Brand choice
Product Political box
- Purchase
Price Economic
timing
Place Socio-cultural

Promotion Technology

Buyers Buying decision

Characteristics process

The starting point to understand consumer behavior is the stimulus-response model. As the
model clearly shows both marketing stimuli and other environmental stimuli may enter the
buyer’s consciousness. Then, the combination of the buyer’s characteristics and decisions.
Process may lead to certain purchase decisions.

Buyer’s characteristics

- Cultural

- Social

- Personal

- Psychological
 Buyer’s decision process

- Problem recognition

- Information search

- Evaluation

- Decision

- Post purchase behavior

5.2. Consumer Purchase Decision Process

To reach a buying decision buyers pass through certain stages; and it is called the buyer
decision process

In the buyer decision process there are five basic stages:

1. Need recognition
2. Information search
3. Evaluating of alternatives
4. Purchase decision, and
5. Post purchase behavior

Need Information Evaluation of Purchase Post

recognition alternatives purchase
search decision behavior

1. Need recognition

- The buying process starts with need recognition

- It requires the buyer to recognize a problem or need
- Buyer senses a difference between his actual state and some desired state
- The need can be triggered (caused) by internal stimuli when one of the person’s
normal needs- hunger, thirst, sex-rises to a level high enough to become a drive
 - A need can also be triggered by external stimuli for example when you see freshly
baked bread it may stimulate your hunger.

2. Information search

- In this state the consumer is motivated to search for more information

- The consumer may get information from sources like
 Personal sources – family, friends, neighbors, acquaintances
 Commercial sources – advertising, sales people, deals, packaging, displays
 Public sources – mass media, consumer-rating organization
 Experiential sources – handling, examining, using the product

 Consumers receive the most information about products from commercial source,
which are controlled by the marketer.
 The most effective sources – personal sources

Commercial sources normally inform the buyer, but personal sources legitimate or evaluate
products for the buyer.

When more information is obtained, the consumer’s awareness and knowledge of the
available products increase.

3. Evaluation of Alternatives

- It means choosing among the alternative brands (products)

- It is processing information to arrive at brand /product choices
- While evaluating a brand (a product) the consumer sees different attributes of a
product like the quality of the product, its price, ease of use, and other attributes. Like
brand image – the set of beliefs consumers hold about a particular product /brand
- It is measuring the benefits and costs of each brand
- It involves ranking products and forming purchase intentions
-
4. Purchase Decision

- In this stage the consumers actually buys the product

- The consumer will buy the most preferred brand
 - But two factors can come between the purchase intention and the purchase decision.
The first factor is the attitudes of others – for example if your friend / husband/mother/child
feels strongly that you should buy the lowest – priced product, then the chances of you to buy
a more expensive product will be reduced.

The second factor is unexpected situational factors.

factors. Most often purchase intentions are made
based on factors like expected income,
income, expected price and expected product benefit.
benefit. However,
unexpected factors too may affect your purchase intention like losing your job, a close
competitor may drop its price etc.

5. Post purchase Behavior

The marketer’s job does not end when the product is purchased. Post purchase behavior is the
stage of the buyer decision process in which consumers take further action after purchase
based on their satisfaction or dissatisfaction. To determine whether customers are satisfied or
dissatisfied we have to compare consumer’s expectation and the products’ perceived
performance.
performance. If the product falls short of expectation, the consumer is disappointed, if is
meets expectations, the consumer is satisfied, if it exceeds expectation, the consumer is
delighted.

Consumers base their expectations on information they receive from sellers, friends, and other
sources

Most of the time after major purchases there will be a cognitive dissonance,
dissonance, or discomfort
caused by post purchase conflict. The cause of such a discomfort could be losing the benefits
of the products not purchased and acquiring the drawbacks of the chosen (purchased) product.

Why is it Important to Satisfy Customers?

It is important to satisfy customers because the company’s sales come from these customers
(new customers and retained customers). It usually costs more to attract new customers than
to retain current ones, and the best way to retain current customers is to keep them satisfied.

Satisfied customers:
- Buy a product again
- Talk favorably to others about the product
- Pay less attention to competing brands & advertising, and
 - Buy other products from the same company

5.3. Factors Affecting Consumer Behavior

The following picture shows factors that affect or influence the buying behavior of
consumers.

Cultural Social

 Reference groups Personal

 Family
- Culture  Roles and statuses
 Age and life cycle stage
- Sub culture  Occupation
 Economic situation
- Social class  Life style
 Personality & self concept

Psychological

 Motivation
 Perception
 Learning
Buyer
 Beliefs & attitudes

Cultural Factors

Cultural factors exert the broadest and deepest influence on consumer behavior. They include
culture, sub-culture & social class.

Culture
- It is most fundamental factor, which determines a person’s wants and behavior.
- It is a learned behavior
- It refers to a learned behavior including values, perceptions, preferences and /or wants
learned from the family and other important institutions.
-
A child growing up in the united states is exposed to the following values: achievement and
success, activity & involvement, efficiency and practicality, progress, material comfort,
individualism, freedom, humanitarianism, youthfulness, and fitness & health.

A child growing up in Ethiopian is exposed to the following values: spiritual devotion, social
life, modesty, patriotism, humanitarianism.

Values are the building blocks of culture. Even through it varies from country to country,
every group or society has a culture. For example, the culture of Ethiopians is not totally
similar to the culture of Indians or Americans. Therefore, marketers should understand
cultural difference among people. International marketers must understand the culture in each
international market and adapt their marketing strategies accordingly.

Generally, culture is defined as the set of the basic values, perceptions, wants, and behaviors
learned by a member of society from family and other important institutions.

Subculture
Each culture consists of smaller subcultures that provide more specific identification and
socialization for its members.

A subculture is a group of people with shared value systems based on common life
experiences and situations. Sub cultures include:

- nationalities - racial groups and

- religions - geographic regions

Many subcultures make up important market segments.

Social Class
A social class is relatively permanent and ordered divisions in a society whose members share
similar values, interests, and behaviors.

Social class is not determined by a single factor, such as income, but is a measured as a
combination of occupation, income, education, wealth, and other factors. However, the lines
between social classes are not fixed and rigid; people can move to a higher social class or
drop into a lower one. Marketers are interested in social class because people within a given
social class tend to exhibit similar buying behavior.
Social Factors

Besides cultural factors, social factors including reference groups, family, and roles and
status, affect the buying behavior of consumers.

Reference Groups
A persons reference groups consist of the groups that have a direct (face-to-face) or indirect
influence on the person’s attitudes or behavior.

- Groups having a direct influence on a person are called Membership Groups

Membership Groups could take two basic forms:

a) Primary groups
b) Secondary groups

Primary Groups involve family, friends, neighbors and co-workers, with whom the person
interacts fairly continuously & informally.

Secondary Groups include religious, professional, and trade union groups, which tend to be
more formal and requires less continuous interaction.

People are significantly influenced by their reference groups in at least three ways.

1st Reference groups expose an individual to new behavior & life styles

2nd Reference groups influence the person’s attitudes & self-concept

3rd Reference groups create pressures for conformity that may affect the person’s actual

product and brand choices.

- People are also influenced by groups in which they are not members. Groups to which
a person would like to belong are called inspirational groups. (That you want to belong
in the future)
- A group whose values or behavior an individual rejects is known as dissociative
group.
Manufactories of products and brands where group’s influence is strong should determine
how to reach and influence the opinion leaders in reference groups. Opinion leaders are
people within a reference group who, because of special skills, knowledge, personality or
other characteristics, exert influence on others. Opinion leaders are found at all levels of
society, and one person may be an opinion leader in certain product areas and an opinion
follower in others.

Family
Family members can strongly influence buyer behavior. Family members are the most
influential primary reference group.

Family consists of:

b) Family of Orientation, and

c) Family of Procreation

a) Family of orientation consists of one’s parents & siblings. From parents a person
acquires an orientation toward religion, politics, economics, sense of personal
ambition, self-worth, & love.
b) Family of procreation involves one’s spouse & children

Roles and Status

A person belongs to many groups like family, clubs, organizations etc. the person’s position
in each group can be defined in terms of both role and status.

A role consists of the activities that a person is expected to perform. For example, in your own
family you may play the role of daughter, son, in your parents you may play the role of
wife/husband, in your company you may play the role of manager/accountant/ marketer-----
each of your role may influence some of your buying behavior.

Each role carries a status reflecting the general esteem given to it by society. People often
choose products that show their status in society.

Personal Factors

Personal factors, which affect the buying behavior of a person, include age and life cycle
stage, occupation, economic situation, life-style, and personality & self concept.
Age and Life Cycle Stage
- People change the products they buy over their life times.
Tastes in food, clothing, furniture, and recreation are often age related.

- Buying is also shaped by the stage of the family life cycle.

Family life cycle is the stage through which families might pass as they mature overtime.

Family Life Cycle Stages

Young Middle aged Older

Single Single Older married

Married without children Married without children Older unmarried

Married with children Married with children

Divorced with children Married without dependent children

Divorced without children

Divorced with children

Divorced without dependent children

Economic Situation
Economic situations consist of a person’s spendable income (its level, stability, and time
pattern); savings and asset (including the percentage that is liquid), debts, borrowing power,
and attitude toward spending versus saving.

Occupation
A person’s occupation also influences his or her consumption pattern. A blue-collar worker
will buy work clothes, work shoes, and lunch boxes. White-collar workers buy more suits and
ties

Lifestyle
People coming from the same subculture, social class, and occupation may have quite
different lifestyles. Lifestyle is a person’s pattern of living (mode of living) as expressed in
his/her psychographics. Psychographics involves measuring consumers’ major AIO
dimensions – activities, interests and opinions.

Activities – work, hobbies, shopping, sports, social events

Interests – food, fashion, family, recreation

Opinions – about themselves, social issues, business, products

A lifestyle profiles a person’s whole pattern of acting & interacting in the world.

Personality and Self-Concept

- Personality is a person’s distinguishing psychological characteristics that lead to

relatively consistent & lasting responses to his or her own environment.
- Personality is usually described in terms of traits such as self-confidence, dominance,
sociability, autonomy, defensiveness, adaptability, and aggressiveness.
- Personality can be useful to analyze consumer behavior for certain product or brand
choice. For example, coffee makers have discovered that heavy coffee drinkers tend to
be high on sociability.

Self-Concept
- It is a concept related to personality and is also known as self-image.
- The basic idea of self-concept is that a person’s possessions contribute to and reflect
his/her identity’ that is, “we are what we have”
Psychological Factors

A person’s buying behavior (choices) are further influenced by four major psychological
factors:

- Motivation
- Perception
- Learning, and
- Beliefs and attitudes

Motivation
People may have many needs at any given time. Some are biological (biogenetic needs).
Arising from states of tension such as hunger, thirst, or discomfort. Others are psychological
(psychogenetic needs) arising from the need for recognition, esteem or belongingness. Most
of these needs will not be strong enough to motivate the person to act at a given point in time.

- A need becomes a motive when it is aroused to a sufficient level of intensity.

- A motive (drive) is a need that is sufficiently pressing to direct the person to seek
satisfaction.

Theories of motivation: Sigmund Freud’s & Abrham Maslow pp 154

Perception
A motivated person is ready to act. How the person acts is influenced by his/her perception of
the situation. Two people with the same motivation and in the same situation may act quite
differently because they perceive the situation differently.

Perception is the process by which people select, organize, and interpret information to form a
meaningful picture of the world.

People can form different perceptions of the same stimulus because of three perceptual
processes

- Selective attention
- Selective distortion
- Selective retention

Selective attention - the tendency for people to screen out most of the information to which
they are exposed.

Selective distortion – describes the tendency of people to interpret information in a way that
will support what they already believe.

Selective retention – people may tend to retain information that supports their attitudes and
beliefs.

Learning
Learning is a change in an individual behavior arising from experience. Most human behavior
is learned.
Beliefs and Attitudes
Through doing and learning, people acquire belief & attitudes, which can influence their
buying behavior.

A belief is a descriptive thought that a person has about something.

An attitude describes a person’s relatively consistent favorable or unfavorable evaluations,

feelings, and tendencies toward an object or idea.

Consumer Buying Roles

People may play any of several roles in a buying decisions:

Initiator: the person who first suggests or thinks of the idea of buying a particular product or
service.

Influencer: a person whose views or advice influences the buying decision.

Decider: the person who ultimately makes a buying decision or any part of it – whether to
buy, what to buy, how to buy, or where to buy.

Buyer:
Buyer: the person who makes an actual purchase

User: the person who consumes or uses a product or service

4.5 TYPES OF BUYING DECISION BEHAVIOR

Based on the degree of buyer involvement and the degree of differences among brands there
are four types of buying decision behavior.

High involvement Low involvement

 Significant Complex buying Variety seeking,
buying behavior
Difference between Behavior

brands

Few differences Dissonance reducing Habitual buying

buying behavior behavior
Betweenbrands

A) Complex Buying Behavior

- In complex buying behavior consumers are highly involved in a purchase
- Consumers may also perceive significant differences among brands (products)
- Consumers may be highly involved when the product is expensive, risky, purchased
infrequently, and highly self-expressive.
- Typically, the consumer has much to learn about the product category.

Example: personal computer

B) Dissonance-Reducing Buying Behavior

- Dissonance-reducing buying behavior occurs when consumers are highly involved
with and expensive, infrequent, or risky purchase but see little difference among
brands.
Example: carpeting

(After the purchase, consumer might experience post purchase dissonance (after sale
discomfort) when they notice-certain disadvantages of the purchased product or hear
favorable things about brands not purchased.

C) Habitual Buying Behavior

Habitual buying behavior occurs under conditions of low consumer involvement and little
significant brand difference. Example, salt. Consumers have little involvement in this product
category – they simply go to the store & reach for a brand. If they keep reaching of the same
brand, it is out of habit rather than strong brand loyalty.
 - Consumer appears to have low involvement with most low-cost, frequently purchased
products

D) Variety-seeking Buying Behavior

- It occurs in situations characterized by low consumer involvement, but significant
perceived brand differences
- In such cases, consumers often do a lot of brand switching
- Brand switching occurs for the sake of variety rather than because of dissatisfaction.
The market leader will try to encourage habitual buying behavior by dominating shelf space,
keeping shelves fully stocked, and running frequent reminder advertising. Challenger firms
will encourage variety seeking by offering lower prices, special deals, coupons, free samples,
and advertising that presents reasons for trying something new.

6. Marketing Law and Management

Definition: Marketing can be defined in various ways. In order to understand the term
marketing we can use the following definitions.

Marketing is a social and managerial process by which individuals and groups obtain what
they want and need through creating, offering and exchanging products of value with others.

Marketing is the process of development and efficient distribution of goods and services to a
target market with the objective of making profit. Development refers to the identification of a
new product, its design, production, branding and packing while distribution refers to the
placement of products at the right quantity, time and to the right place where the target
consumer is available.

Marketing is a process of anticipation, management and satisfaction of demand through

exchange. Anticipation of demand refers to the estimation or forecasting how consumers
demand for products in the future changes. Management of demand also refers to the
stimulation of demand, facilitation of usage and regularity of supply. Satisfaction of demand
refers to the ability to meet or exceed the expectation of customers demand by providing after
sales service such as packing, transportation, maintenance, availability of spare parts,
guarantee etc.
Marketing consists of individual and organizational activity that facilitates and expedites
satisfying exchange relationships in a dynamic environment through the creation, distribution,
promotion and pricing of goods, services and idea. In order to further understand marketing it
is better to know the core concepts of marketing.

6.1. Marketing management

Marketing management is the process of planning and executing the conception, pricing,
promotion and distribution of ideas, goods and services to create exchange that satisfy
individual and organizational goals.

Marketing management is a process of analysis, planning, implementing and control of

programs designed to create, build and maintain beneficial exchanges with target consumer
segments through providing goods and services in the exchange process.

These definitions recognize that marketing management as:

i. A process involving analysis, planning, implementation & control

ii. Covering ideas, goods and services
iii. Resting on the notion of exchange
iv. Having a goal to produce satisfaction for the parties involved
Marketing management is an activity that can be practiced in any market such as: labor
market, raw – materials market, food market, Stock market, etc.

Philosophies of Marketing

There are five competing concepts under which organizations can choose to conduct their
marketing activities: the production concept, the product concept, the selling concept, the
marketing concept and the societal marketing concept. Let us look at each of these concepts in
detail.

a) The Production Concept/Philosophy

The philosophy is probably the oldest concept in guiding marketing (in the early 1905). The
concept holds that consumers will favor those products that are widely available and low in
cost. The management’s focuse, therefore, should be in increasing production efficiency and
wide distribution. This philosophy is a useful concept in the situations when
i. The demand for the product exceeds its supply. Here consumers are more interested in
obtaining the product than in its fine points.
ii.The products cost is high and has to be decreased to expand the market.
Some service organizations also operate on the production concept while this management
orientation can handle many cases per hour, it is open to charges of impersonality and poor
service quality.

b) The Product Concept

The product concept holds that consumers will favor those products that offer the most
quality, performance or innovative features. The management’s focus, therefore, should be on
marketing goods products and on constant improvement of the product.
Under this concept, managers assume that buyers admire well-made products and can
appraise product quality and performance. However, these managers are sometimes caught up
in a love affair with their products and do not realize that the market may be less “turned on”.

Product oriented companies often design their products with little or no customer input. They
trust that their engineers will know how to design or improve the product.

c) The Selling Concept

The selling concept holds that consumers, if left alone, will ordinarily not buy enough of the
organization’s products. The organization must, therefore, undertake an aggressive selling and
promotional effort. Marketers believed that the most important marketing activities in the
selling concept are personal selling and advertising.

This concept assumes that consumers typically show buying resistance and must be persuaded
in to buying. It also assumes that the company has available effective selling and promotional
tools to stimulate more buying. It assumes that customers who are persuaded into buying the
product will like it, and if they do not, that they will not bad-month it (talk negatively) and
they will possibly forget their disappointments and buy it again. These are indefensible
assumptions to make about buyers. Normally dissatisfied customers bad-month (talk
negatively) the product to many people. Hence, marketing based on hard selling carries high
risk. This concept is practiced most aggressively when the company has an overcapacity – to
fill his capacity and the products are unsought (those goods that buyers normally do not think
of buying).

This concept has an inside-out perspective. It starts from the company and produce what the
company can. Then, through personal selling and advertising, the company tries to maximize
its profits through increased sales volume.
d) The Marketing Concept

This concept holds that the key to achieve organizational goals consists of being more
effective than competitors in integrating marketing activities towards determining and
satisfying the needs and wants of target market.
This concept starts from the target customer’s needs and wants. It is customer oriented. The
company achieves its profit through creating and maintaining customer satisfaction. The key
to achieve organizational goals is generating customer satisfaction. Its main principle is to
love customers.

The marketing concept rests on four pillars; Target market, consumer need, integrated
marketing and profitability. These are discussed as follows.

 Target market: No company can operate in every market and satisfy every need. It is
possible for companies to do best for their customer when they define their target
market carefully and prepare a tailor market program.
 Customer Needs: Once the firm has defined its target market it has to identify the need
of the customer which is the difficult task to the marketer. Some customers have needs
of which they are not fully conscious or they cannot articulate these needs or they use
words that require some interpretation. Customer oriented thinking requires the
company to define customer needs from the customer’s paint of view. Every buying
decision involves trade-offs, and management cannot know what these are without
researching customers. The key to professional marketing is to understand their
customer’s real needs and meet them better than any competitor can. Customer’s
needs may be classified as: stated needs, real need, unstated needs, delight needs, and
secret needs.

Responding to the stated needs of the customer may not be sufficient. Therefore,
marketers should be not only responsive but also creative,. As a responsive marketer
finds a stated need and fills it, he is a reactive marketer and a creative marketer
discovers and produces a solution that consumer’s did not ask for but to which they
are looking for.

Company’s sales each period comes from two groups new customers and repeat
customers. However, it is more costly to attract new customers than to retain current
customers. Therefore, customer retention is more critical than customer attraction. The
 key to customer retention is customer satisfaction. Why is it important to satisfy a
customer? It is because a highly satisfied customer;

a) Stays loyal for a long period of time

b) Buys more as the company introduces new products
c) Talks favorably about the company and its products
d) Pays less attention to competing brands
e) Offers product/service idea to the company
f) Costs less to serve than new customers

Thus a company would be wise to check on customer satisfaction. But it cannot just rely on
customers voluntarily complaining when they are satisfied. Most of unhappy customers never
tell the company. Therefore, companies must set up suggestion and other systems to
maximize the customer’s opportunity to complain. This is the only way a company can know
how well it is doing. It is also a major way in which the company can learn how to do better.

 Integrated Marketing: This is the result of co-operation among and between various
departments of the company. When all the company’s departments work together to
serve the customer’s interests, the result is integrated marketing. Integrated marketing
takes place on two levels.
First, the various marketing functions-sales force, advertising, product management,
marketing research, and so on must work together. Too often the sales force is mad at
the product managers for setting “too high a price” or “too high a volume target” or
the advertising director and a brand manager cannot agree on an advertising campaign.
All these functions must be coordinated.
Second, marketing must be well coordinated with other departments in the company.
Marketing does not work when it is merely a department it works only when all
employees appreciate their impact on customer satisfaction. To promote teamwork
among all departments, the company carries out internal marketing as well as external
marketing. Internal marketing is the task of successfully hiring, training and
motivating able employees we want to serve the consumers well. External marketing
is marketing directed at people outside the company. In fact, internal marketing must
precede external marketing. It makes no sense to promise excellent service before the
companies’ staff is ready to provide excellent service.

 Profitability: The ultimate purpose of the marketing concept is to help organizations

achieve their goals. In the case of for profit firms, the major goal is profit, in the case
 of non-profit and public organizations; it is suriving and attracting enough funds to
perform their work.
In for-profit organizations, the key is not to aim for profit as such but to achieve them
as a by-product of doing the job well. A company targets to maximize profit and
profitability is possible through satisfying customers needs better than its competitors.

In general, there are certain obstacles to operationalize the marketing concept in organization.
Among these obstacles the following two are the major ones are it is difficult to exactly guess
customer’s needs and wants and the other is customers may want good and service, which are
socially unacceptable or harmful to their own well-being.

Besides, most companies do not want to embrace the marketing concept as organizational
philosophy until driven to it by circumstances such as; sales decline, sales growth changing,
buying patterns, Increasing competition and increasing marketing expenditure.

e) The Societal - Marketing Concept

The question whether the marketing concept is an appropriate philosophy in an age of

environmental deterioration, resource shortages, explosive population growth, world hunger
and poverty, and neglected social services is raised in the recent years. It is questioned
whether satisfying consumers wants is necessarily acting in the best long-run interests of
consumers and society.

These and other questions lead to a new concept that enlarger the marketing concept i.e. the
societal marketing concept. The societal marketing concept holds that the organizations task is
to determine the needs, wants and interests of target markets and to deliver the desired
satisfactions more effectively and efficiently than competitors in a way that preserves or
enhances the consumer’s and the society’s well-being. The societal marketing concept calls
upon marketers to build social and ethical considerations and to create balances between
customer satisfaction, companies’ objectives, and society’s interest into their marketing
practices. It believes that what is good for the customer may not be good for the society.

6.2. Marketing Functions

Marketing activities can be splits down into a few functions. This is to analyze in detail the
specific functions of marketing such as buying, selling, transportation, storage,
standardization, grading, financing, risk taking and marketing research. Any listing of
marketing functions is an arbitrary one. The functions falling under the scope of marketing
may be listed one after the other or grouped under certain major cases or categories.

Marketing functions can be broadly classified as following:-

A. Exchange Functions 1. Buying

2. Selling

3. Storage

4. Transportation
B. Physical Functions
5. Processing

6. Packaging

7. Standardization

C. Facilitating Functions 8. Financing

9. Risk Bearing

10.Market intelligence

A. Exchange Functions
The process of passing goods into the consumer's hands is called function of exchange. As
goods move through many hands before reaching the final user, title changes several times.
The exchange functions of marketing are the heart of marketing. It includes buying,
assembling and selling.

Buying and Assembling: The marketing concept holds that the needs of the customer are of
paramount importance. A producer can be said to have adopted a market orientation when
production is purposely planned to meet specific demands or market opportunities. For
example, a contract farmer, who wishes to meet the needs of a food processor, manufacturing
wheat flour and pasta, will produce only improved bread wheat variety seeds which can
attract his potential customers.

Buying is the first step in the process of marketing. Buying involves careful planning and
needs setting up of policies and procedures. The following points are considered before a
particular product is bought.

i) What to buy (Product)?

ii) When and how much to buy? (Time and quantity)
iii) From whom and where to buy? (Source)
iv) On what terms and conditions and prices? (Price)

Assembling starts after the goods have already been purchased. It is a function separate from
buying. Buying involves transfer of ownership of the goods where as assembling involves
creating and maintaining of stock of goods purchased from different sources. The problems
encountered in assembling of agricultural products are:

i) Seasonal production
ii) Difficulties in controlling quantity and quality
iii) Non- availability of information about sources of supply
iv) Low quantity of marketable surplus

Selling: The function of marketing is to ensure that the right product is made available at the
right place, in the right quantity, at the right price, at the right time and under the right
impressions to the consumer. All these righteousness is made possible by performing the sales
function. Through selling function desires are created hence it is called as creative function.
Selling is also often referred to as distribution function because distribution makes goods
move from the place of production to the place of consumption.

Thus buying, assembling and selling functions are directly concerned with change in the
ownership of goods. They are complementary in nature. For every sale there is a purchase and
for every purchase there must be sale. And, assembling precedes a sale and assembling
follows buying.
Each of these functions adds value to the product and they require inputs, so they incur costs.
As long as the value added to the product is positive, most firms or entrepreneurs will find it
profitable to compete to supply the service.

B. Physical Function
The physical functions are those activities which involve handling and movement of the
actual commodity itself. They are involved in solving the problems of when and where to do
the marketing. These include:

Storage: Dear learners, virtually all agricultural products are biological and seasonal. While
the demand for agricultural products are generally continuous throughout the year. Many of
the outputs of agriculture are harvested during relatively short period of the year. The grains,
cotton, tobacco, fruits, and vegetables are all highly seasonal in nature. Even the production of
livestock, egg, and dairy products, though continuous throughout the year, has wide variations
between the high and low periods of production. The desire for these products by consumers,
however, is often quite constant throughout the year.

Hence the need for storage to allow a smooth and preferably, uninterrupted flow of product
into the market is very essential. Dealing with a biological product, the grower does not enjoy
the same flexibility as the manufacturing counterpart in being able to adjust the timing of
supply to match demand. It would be an exaggeration to suggest that a manufacturer can turn
production on and off to meet demands. Manufacturers have also constraints but they have
more alternatives than does the farm producer. A manufacturer can for example, work
overtime, sub-contract work, and can also increase or decrease productive capacity to match
demands.
Both growers and consumers gain from a marketing system that can make farm produce items
available when needed. A farmer, merchant, cooperative, marketing board or retailer who
stores product provides services. That service costs money and there are risks in the form of
wastage, slumps in market demand and prices as the provider of storage is entitled to a reward
in the form of profit.

Transportation: Imagine the types of products you consume each day. You are able to
consume varieties of products coming from different corners. Products must be moved from
where they are produced in to the area where they will be processed and consumed. The
transport function is one of the means that make the product available where it is needed. For
an effective and efficient function of transportation, it is required to consider alternative
routes to meet timeliness, maintain product quality and minimizing shipping costs.

The wide variety of food available in our grocery stores at all times of the year would not be
possible without modern transportation. Effective transport management is critical to efficient
marketing. Whether operating a single vehicle or a fleet of vehicles, transportation has to be
carefully managed, including cost monitoring - operations on different road types, fuel and
lubrication consumption and scheduled and remedial maintenance and repair.

Processing: Most agricultural products are not in forms suitable for direct delivery to the
consumer when they are first harvested. Rather they need to be changed in some form before
they can be used. The task of processing is sometimes not included to the list of marketing
because it is a form of changing activity. However, processing need to be included as a
marketing function. The form of changing activity is one way that adds value to the product.
Changing E.g., green coffee beans into roasted beans, cotton into cloth, wheat into flour and
bread, sugarcane into sugar etc. increases the value of the product because the converted
product has greater utility to the buyer. The form the produce is to be changed and the
methods to be used in bringing about such changes are marketing decisions. Some years ago
for instances, when Ethiopia was looking to expand its tea plantation business, a prototype
manufacturing plant was established. The plant was capable of curing the tea and packing it in
individual tea bags. At that point, tests were undertaken and compared with others already on
the market, found encouraging results.

In the course of the marketing research however, it was discovered that ninety percent of the
black tea consumed is blended and not the pure variety placed in the tea bags by the
Ethiopians. Timely marketing research would have contributed a great deal to inform and
control of such illegal acts. In the past decades ago, Ethiopia did not have the acreage of tea,
nor the resources to develop a tea blending facility. Similarly, a producer of fresh fruits may
have pulping and/or canning facilities but if potential buyers want the flexibility of using the
fruits in a variety of ways, then these stages of processing serve to reduce utility and value.

Processing food products is becoming more important as societies culture and feeding habits
changes over time and as the country enters more into the international market. Today, as a
result of high growth rate of urban population, there is an increase of marketing activity in
general and the processing functions of farm products in particular.
Packaging: Packaging is enclosing commodity in a container. This is a requirement for
nearly all farm products, in all stages of marketing. It is an activity of designing and
producing the container or wrapper for a product. The container used in different stages of
marketing may be quite different, and the three general types of packages or containers may
include:
 Containers for handling from the farm to and through assembly and processing
facilities.
 Shipping containers
 Consumer packages
Technological developments in packaging of bulk foods such as meats, dairy products, and
fruits and vegetables have important implications in reducing the costs of transportation.
Packaging contributes to more efficient marketing by:

i) reducing bulk (e.g. cotton balling and compression);

ii) facilitating handling;
iii) reducing shrinkage and spoilage (canned meats, fruits);
iv) facilitating quality identification and product selection by consumers (eggs in cartons);
v) assisting in advertising and better merchandising (cheese in cartons);

Packaging can improve profitability and efficiency of the physical distribution functions. The
design of packaging is capable to contribute to an improved performance of the supply chain
in a variety of ways and some of these include: By altering the shape and dimensions of the
packaging more product can be displayed on retailers' shelves (e.g. changing from round to
square containers or glass jars helps maximize the use of limited retailing space since far more
square glass jars can be placed on a given area of retail display space than can round shaped
jars).

The package must be capable of performing under all the temperature and humidity
conditions as it passes through different channels of distribution. This means that to select or
design an appropriate packaging for particular for farm produce items, the chosen distribution
channel and its environmental conditions must be thoroughly analyzed and understood.

Product packaging also has a role in helping differentiate products of the brand names who
compute in the same market segment. Distinctive product packaging, may be in the form of
shape, size, coloring, or print can help in differentiating.

C. Facilitating Functions
The facilitating functions include product standardization, market promotion, financing, risk
bearing and market intelligence. Facilitating functions are those activities which make the
exchange process possible. Marketing, in simple terms, is the act of supplying products to
someone in exchange for something perceived to be of equal or of greater value, (Mostly in a
given sum of money). Facilitating functions are not direct parts of either the exchange of title
or the physical movement of produce.

Standardization and grading:- concerned with the establishment and maintenance of

uniform measurements of produce quality and/or quantity. This function simplifies buying
and selling as well as reducing marketing costs by enabling buyers to specify precisely what
they want and suppliers to communicate what they are able and willing to supply with respect
to both quantity and quality of product. In the absence of standard weights and measures trade
either becomes more expensive to conduct or impossible altogether. Among the most notable
advantages of uniform standards, are:

- price quotations are more meaningful

- the sale of commodities by sample or description becomes possible
- small lots of commodities, produced by a large number of small producers, can
be assembled into economic lots if these supplies are similar in grade or quality
- Faced with a range of graded produce the buyer is able to choose the quality of
product he/she is able and willing to purchase.

Quality differences among agricultural products arise for several reasons. Quality differences
may be due to production methods and/or because of the quality of inputs used. Technological
innovation can also give rise to quality differences.

In addition, a buyer's assessment of a product's quality is often an expression of personal

preference. Thus, for example, in some markets a small banana is judged to be in some sense
‘better’ than a large banana; and white maize is ‘easier to digest’ than yellow maize. It does
not matter whether the criteria used in making such assessments are objective or subjective
since they have the same effect in the marketplace. What does matter in marketing is to
understand how the buyer assesses ‘quality’. If an objective standardization is not perceived
by consumers, it is the same as those items which are not graded.

Financing: In almost any production system there are inevitable lags between investing in the
necessary raw materials (e.g. seeds, fertilizers, packaging, flavorings, etc.) and receiving the
payment for the sale of produce. During these lag periods some individual or institution must
finance the investment. The question of where the funding of the investment is to come from,
at all points between production and consumption, is one that marketing must address.

A common marketing problem that exists in many developing countries is the low level of
income leading to low levels of demand for many farm products. The challenge is to
marketing because it is the income availability that influences demand.

Marketing is also concerned with the financing of the enterprise itself. Here again some
creative solutions can be developed, can look to several alternatives such as:
- development banks
- commercial banks
- shares issues
- credit co-operatives and/or credit unions

Where these sources of finance are considered inappropriate, or are simply not available or
not sufficient to a particular enterprise, a strategic alliance in the form of a joint venture could
be the answer. These are partnerships formed to exploit market opportunities more effectively
and efficiently than either party can on its own. An enterprise, in a developing country, may
engage in a joint venture with either an indigenous partner and/or with a foreign partner. The
agreement between parties to a joint venture normally specifies their respective contributions
of resources, share of management control, profit and risk.
Whatever the source of finance under consideration, marketing has a role to play in searching
for appropriate sources of finance. Moreover, the marketing department together with other
departments or specialties should prepare and analyze such marketing projects that will
expand the activity of the enterprise. Those responsible for developing these proposals are
best placed to evaluate the compatibility between the market opportunity under consideration
and the alternative modes of financing it.

Risk bearing: In both the production and marketing of produce the possibility of incurring
losses is always present. Physical risks include the distraction or deterioration of the produce
through fire, excessive heat or cold, pests, floods, earthquakes etc. Market risks are those of
adverse changes in the value of the produce between the processes of production and
consumption.

Changes in demand structure E.g., due to change in consumer tastes, one if the many reasons
that affect marketing demand. Risks can also arise in the input market when input prices
increase to a high level in way that can affect the affordability of the items. There could also
be shortage and delay in the supply of raw materials and other inputs. All of these risks are
borne by the organization and consumers.

Risk bearing is often a little understood aspect in marketing of farm products. For example,
when making judgments as to whether a particular price is a ‘fair price’ the usual reference
point is the producer or supplier's costs. However the risks created are rarely taken into
account by those passing judgment and yet, almost inevitably, there will be occasions when
the risk taker incurs losses. Stocks will spoil, markets will fall, cheaper imports will enter the
country, and consumer tastes will change, and so on.

Risk from the time an agricultural product is harvested until it is in the hands of consumers;
there is risk of financial losses because of destruction, quality deterioration, price declines.
This risk is a cost, which must be paid for by some one. Risk is relatively more important in
agricultural sectors in contrast to other sectors. Agricultural products are biological and are
highly affected by natural conditions as weather, rainfall, natural hazards, etc. Moreover,
agricultural products are perishable and to maintain their quality for long time it may be costly
and sometimes become impossible. Thus, the danger of loss due to quality deterioration is
very high.

Another reason why agricultural marketing is more risky is because agricultural product
prices are likely to fluctuate substantially and hence prices are highly volatile to different
conditions. The main reason may be that for most agricultural products the price elasticity of
demand and income elasticity of demand are below one inelastic. The presence of such
substantial risk contributes to higher margins and other unsatisfactory conditions as a direct
cost factor, such as cost of insurance premium.

Market intelligence: As far as possible, marketing decisions should be based on accurate

information. The process of collecting, interpreting, and disseminating information relevant to
marketing decisions is known as market intelligence. The role of market intelligence is to
reduce the level of risk in decision making. Through market intelligence the seller finds out
what the customer needs and wants. One means is to find out through sales, and/or
marketing researches to find out which products are right for the market, which channels of
distribution are most appropriate, how best to promote products and what prices are
acceptable to the market. As with other marketing functions, intelligence gathering can be
carried out by the seller or another party such as a government agency, the ministry of
agriculture, or some other specialist organizations.

7. Change Management

What is Change?
Change is an alteration of a company’s strategy, organization or culture as a result of change
in its environment, structure, technology or people. A manger‘s job would be straight forward
and simple (not to say boring) if changes were not occurring in these areas. Good managers
have competence to manage change in the company’s environment. These change can be
alteration in structure (design of jobs, span of control, authority relationships or coordinating
mechanisms), in technology (equipment, work process or work methods) as well as in people
(behaviors, perceptions, expectations or attitudes).
Reasons for change
A complex structure like an organization is driven by external and internal factors in regard to
the need for change. There are a number of external forces that create the explicit need for
change.
 Market situation or market place
 Technology
 Government laws and regulations
 Economics
Parallel to the external reasons there are different internal forces for change.
 Corporate strategy
 Workforce
 Technology and Equipment
 Employee attitudes
Therefore, Change Management is the:
 Correct understanding of organizations that want or need to be changed
 Correct understanding of the people who are willing or forced to change
 The effectively realization of change
 Understanding the dynamic of change
Effective management of the change associated with a project requires:

 A Change Sponsor: The sponsor must be a senior manager with sufficient authority
to initiate the change process and the ability to sustain it through to implementation.

 A Clearly Defined Business Objective: The objective of the change must be clearly
documented and communicated to all individuals who will be impacted by the change.
In particular it is essential that the business objective is clearly understood by the
sponsor.
 A Tolerance for Ambiguity: While the objective of the change must be clear at the
start of the project, the exact nature and extent of the changes will become
progressively clearer during the progress of the project. All participants in the change
process must understand that this ambiguity is a normal part of the change process, but
that as the change progresses the ambiguity will decrease and measurable benefits will
be identified.
 Commitment at all Levels: Commitment to the change must start with the CEO,
senior management or the Change Sponsor and continue through all levels of the
agency that are affected by the change. This commitment cannot be delegated and is
demonstrated through actions such as ensuring adequate resources are assigned to the
change and providing clear support for the change process at management meetings.
 Open Communication: A formal communication plan is an essential element for
building commitment to the change. Communication up and down the organization
structure must be open and allow all participants, and other stakeholders such as
unions, to feed their views and opinions into the change process. The communication
 mechanisms adopted for the project must be dynamic and be adjusted as needed to
meet the needs of the change.
 An Appropriate Change Management Methodology: Using formal methods for
managing change is essential on complex projects when the cost of failure is high and
the probability of failure is real due to the anticipated resistance to change. Using an
appropriate Change Management methodology will increase the likelihood of
successfully implementing the changes associated with a project.

7.1. Change Management Processes

Psychologist Kurt Lewin recommends that any change effort be viewed as a process with
three distinct phases:
(1) Unfreezing,
(2) Changing, and
(3) Refreezing.

He believes that each of these phases must be handled effectively for a change to be
successful.

1. Unfreezing: is the managerial responsibility of preparing a situation for change. It

involves disconfirming existing attitudes and behaviors to create a felt need for
something new. Unfreezing is facilitated by environmental pressures, declining
performance, recognition of a problem, or awareness that someone else has found
a better way, among other things. Many changes are never tried or fail simply
because situations are not properly unfrozen at the outset.

2. Changing: The changing phase involves taking action to actually modify a

situation by changing such things as the people, tasks, structure, and/or technology
of the organization.

3. Refreezing is the final phase of the planned change process.

Designed to maintain the momentum of a change and eventually institutionalize it as part of

the normal routine, refreezing ensures that the full benefits of long-lasting change are secured.
Refreezing involves positively reinforcing desired outcomes and providing extra support
when difficulties are encountered. It involves evaluating progress and results, and assessing
the costs and benefits of the change.
And it allows for modifications to be made in the change to increase its success over time.
When all of this is not done and refreezing is neglected, changes are often abandoned after a
short time or improperly implemented. Refreezing is the final phase of the planned change
process. Designed to maintain the momentum of a change and eventually institutionalize it as
part of the normal routine, refreezing ensures that the full benefits of long-lasting change are
secured. Refreezing involves positively reinforcing desired outcomes and providing extra
support when difficulties are encountered.
It involves evaluating progress and results, and assessing the costs and benefits of the change.
And it allows for modifications to be made in the change to increase its success over time.
When all of this is not done and refreezing is neglected, changes are often abandoned after a
short time or improperly implemented.

Lewin's Three-Step Change Model

EXHIBIT
Unfreezing Movement Refreezing

Phase I Phase II Phase III

Figure I: Expanded Change Model

Phase I: Unfreezing (create a felt need for change)

This is done by:
 Establishing a good relationship with the people involved
 Helping others realize that present behaviors are not effective
 Minimizing expressed resistance to change.
Phase II. Changing (implement change)
This is done by:
 Identifying new, more effective ways of behaving
 Choosing appropriate changes in tasks, people, culture, technology, and/or structure
 Taking action to put these changes into place.

Phase III: Refreezing (Stabilize change)

This is done by:
 Creating acceptance and continuity for the new behaviors
 Providing any necessary resource support, using performance-contingent rewards and
 Positive reinforcement

Often, early in the process, the organization seeks the assistance of a change agent-a
person or a group that will manage the change process. The change agent may be a
member of the organization or an external consultant. According to Michael Beer (1980),
the power of the change agent to implement change comes from five sources:
 1. High status ascribed by members of the client organization, based on their
perception that the change agent is similar to them in behaviors, language, values,
and dress.
2. Trust in the change agent based on his or her consistent handling of information
and maintaining a proper role in the organization
3. Expertise in the practice of organizational change.
4. Dissatisfied constituencies within the client organization who perceive the change
agent to be the best opportunity to change the organization to suit their needs.
5. Established credibility based on Experiences with previous projects with the
clients organizations.
The change agent generally has the responsibility for implementing the change
process, which normally follows Lewin’s three-stage model.

7.2. Change Management Roles

The roles and responsibilities of each participant and stakeholder in the change process must
be clearly defined from the start of the project. The four key roles are:
 Chief Executive Officer who must demonstrate commitment to the change and ensure
that the Change Sponsor accepts ultimate responsibility for its successful implementation.
The CEO should also be a vocal and active champion of any major change projects that
are undertaken by the agency.
 Change Sponsorwho could be the Project Sponsor and who has the authority and
organizational power to initiate the change and sustain it through to its implementation.
The Change Sponsor must have the seniority to ensure that the necessary resources are
available throughout the change process.

 Change Agents who are responsible for making the change a reality through activities
such as design of the elements of the change and development of plans for its
implementation. Individuals with this role include the Project Manager, project team
members and key influencers within the agency.
 The individuals or groups who must actually change. Typically, these are the staff that
will use the new system or technology and includes all who are a sources or recipient of
information from the system.

An individual can have more than one of the above roles. For example, a manager may be
responsible for implementing change within their department (Change Agent) and also need
to change the way they work.
Line management must often act as Change Agents because they have the influence and
authority to make the change take place. Change Agents often need to be dedicated to the
change process and line management acting in this role may need to be able to delegate some
or all of their normal responsibilities.
Care must be taken to ensure that the most appropriate individuals are selected to act as
Change Sponsor and Change Agents. The team formed to implement the change must have a
good knowledge of current work practices and the confidence of the management and staff
that must change. If the change management team does not have experience in implementing
changes of comparable scope and complexity, it should obtain specialist advice and
assistance.
The management and staff with a detailed understanding of current work practices also play a
key role in the Change Management process by assisting with the selection of the people who
must change and the identification of the changes that are required.
The implementation of change usually requires an increase in effort by the agency. The
nature and extent of this increased effort should be identified as early in the project as
possible, with strategies developed to address this requirement. These strategies may include
use of under-utilised resources within the agency and the use of temporary resources such as
contract staff.
During the extended implementation of a large change, it is highly likely that one or more of
the key stakeholders or participants in the change process will need to be replaced. It is
essential that a formal process be identified at the start of the project to cater for these
situations and to ensure that there is adequate hand-over of responsibilities, and that
sufficient time is allowed for orienting new Sponsors and Change Agents.
Summary of key activities associated with the identification of key change management roles:
 Identify Change Sponsor, Change Agents and people who must change;
 Identify the level of effort required and develop a plan to cater for it;
 Develop a process to cater for changes in stake-holders or key participants;

7.3. Conflicts and Conflict Management

Meaning and Nature of Conflict

Conflict can be defined (Thomas K.A.) as the, “process that begins when one party perceives
that another party has negatively affected something that the first party cares about.”Conflict
must be perceived by either of the parties. Stiff oppositiondue to incompatibility of
organizational goals characterizes it. Conflict can also be causeddue to difference about
interpretation of facts or issues involved. Conflict takes an uglyturn and takes a form of
violence due to disagreement based on behavioral expectations. Itcould be covert or overt and
can be seen when one observes violent acts of individual inorganizations.

Austin defines conflict “as a disagreement between two or more individuals or groups, with
each individual or group trying to gain acceptance of its views or objective over others.”

Conflict Management focuses on maintaining conflict at functional levels for a department,

work unit, or an entire organization. Conflict management does not mean the complete
elimination of conflict nor does it refer only to conflict reduction. It means maintaining
conflict at the right level to help the department, work unit, or, organization reaches its goals.
Basic to the process of conflict management is the selection of a desired level of conflict. The
desired level of conflict varies according to the perceived conflict requirements of the unit.
Several factors affect the choice of the desired level of conflict, organizational culture place
differing values on debate, disagreement, and conflict itself. Managers in organizational
cultural, that support debate, doubt, and questioning may perceive a higher desired level of
conflict than chose who do not. The nature of the organization’s products or services also
affects the desired level of conflict. Creative and innovative products or services require a
higher level of conflict than more routine and predictable products and services.

Organizations facing fast-changing external environments require higher conflict levels for
successful adaptation than organizations facing stable external environments. Suppression and
withdrawal are two symptoms of dyes-functional low conflict. Suppression includes denial of
different and a desire to perceive similarities between parties that do not exist. Repressing
controversial information and prohibiting disagreements about legitimate issues also are signs
of suppression. Withdrawal includes reduced communication to avoid interactions that could
lead to controversy, the belief in “peace at any price”, and walking away from a disagreeable
interaction. Because of the growing complexities of organizational life and the demands made
upon individuals and groups, conflicts is more likely to be a usual occurrence than a rarity in
contemporary organizations.

Functional and Dysfunctional Conflict

Conflict that supports the individual and group goals, which leads to higher performance is
called functional conflictwhile the conflicts that hinders individual or group performance is
called dysfunctional conflict. The latter generally takes destructive form. There is thin margin
between the two types of conflicts mentioned above. While evaluating the impact of conflict
on goal achievement, individual perception and effect of group performance should be
evaluated. If the conflict contributes towards higher performance then the conflict should be
called functional or otherwise dysfunctional. Conflict can be broadly classified in three types
i.e. task oriented conflict, behavioral conflictand structural conflict or process conflict.

 Task conflict relates to the group goals or objectives to be achieved by the group.
 Behavioral conflict relates to individual’s value system, approach, attitude, ego state,
skill and norms being followed by him. Studies reveal that most of the dysfunctional
conflict falls under this category.
 Process conflict is related to how a task is being accomplished in the organization. It
is related with various processes, procedures, drills and instructions that are being
followed on a particular job. When individual differs in this regard, conflict arises.
This type of conflict can be eliminated to a large extent by following strict discipline
in the work procedure and adhering to the rules and regulations. A positive point of
functional conflict is as under:

Functional Conflict
  Conflict develops cohesiveness within the group members. A group goal therefore
becomes a priority. Individual goals are then relegated to secondary position.
 Conflict leads to innovation and creativity, as there is competing sprit among various
groups.
 Conflict provides challenging work environment and enhances opportunities for Self-
development of group that leads to formation of group norms.
 Enhance work culture leads to up gradation of various systems within the organization
and therefore growth is achieved.
Dysfunctional Conflict

Conflict may turn out to be detrimental and disastrous and having deleterious effects.
Dysfunctional nature of conflict can be identified in the following circumstances:
 When conflict does not lead to solution.
 When basic goals of the organization are neglected.
 People should be treated with due respect. If it is violated and a climate of distrust and
suspicion is created people feel defeated and demeaned which develops antagonism
and leads to conflict.
 Conflict may lead to absenteeism and subsequently to increased turn over if not
controlled in time.
 Dual management style may create hatred and lead to dysfunctional conflict.
 Disagreement with management may be considered as disloyalty, if this environment
prevails, an opportunity for creativity would be lost and employees would lose interest
in their job. This would lead to increased conflicting situations.

Nature and Scope of Conflict

Every organization has its objective. It is further broken down as departmental objectives,
group goals and lastly individual goals. When individual interacts with another individual
there is perceptual and communication problems that causes misunderstanding and leads to
individual conflict situation. It is also true of groups. Group conflicts indicate the way of
inter-group behavior in an organization. Inter-group conflict occurs due to group competition
and group cohesiveness. This leads to a feeling of ‘we’ and ‘they’. “We are always right and
they are always wrong”, hence a beginning of conflict. Aims and objectives of various
organizations differ drastically that give rise to greater competition hence a high level of
conflict. Conflict can arise between employer and employees, management and workers, one
department and another, stakeholders, shareholders, producer and customers and between
various trade unions that are often politically motivated.

Conflict can be considered as expression of hostility, negative attitude, aggression and gross
misunderstanding. It is caused due to varying interest of individual or groups. Pondy has
described that the term ‘conflict’ is used in four ways to indicate: -
 Antecedent conditions of conflicted behavior, such as scarcity of resources.
 Affective states of individuals involved such as stress, tension, hostility, anxiety etc.
  Cognitive state of individuals that is their perception or awareness or conflicted
situations.
 Conflicted behavior, ranging from passive resistance to overt aggression.

Transition of Conflict

The following are transitions of conflict:

Traditional view

During 1930-40s, conflict was considered to be bad and viewed negatively. It was considered
harmful, unnecessary and considered synonymous to violence, destruction and irrational. The
view held that the conflict arose due to poor communication, lack of openness, lack of trust
and failure of managers to be responsive to the needs and aspirations of their employees. The
view further held that the conflict must be avoided at all costs. During the same period, the
scientific management and administrative school of management that were in the state of
evolution, developed such organizational structure where responsibilities had been properly
laid down, and rules, regulations and policies had been inbuilt in the system. Thus a proper
mechanism was introduced in the management systems and an adequate attention was paid by
the managerial staff to ensure that there was no misunderstanding among the employees and
that the conflict was avoided.

Human Relations View

Human relations view, which prevailed between 1940-70 states that conflict, is a natural
occurrence of individual behavior and that the conflict cannot be avoided. The theory
propagated that we must accept conflict since we cannot eliminate the same. It further states
that organizations must lay down proper policy and procedure, set achievable goals. Have
proper communication and thereby avoid stress and strain. Resources should be properly
allocated and steps taken to avoid occurrence of conflict. An environment of trust,
cooperation, friendship and sharing is built amongst the employees so that increased
productivity for the organization is achieved. Avoidance of conflict and trust building is the
key for the prosperity of the organization.

Behavioral View

Behavioral scientists encourage conflict on various grounds. They feel that a group having
inter-group harmonious relations, peace and cooperation among group members is likely to be
non-vibrant, static in nature and can display apathetic attitude towards group members. In this
situation the groups are non responsive. What is required today is innovation, creativity and
an ability of the group to meet the social obligations. Hence there is a need for maintaining
minimal level of conflict within the group. This would lead to group being viable. Group
members should be self-critical and develop creativity. Minimum level of conflict between
the groups would increase competitiveness that will lend itself to higher productivity and
increased job satisfaction. It must be borne in mind that only minimum level of conflict is
necessary for it to be beneficial. Behavioral view proposes that because people differ in their
attitudes, values and goals, conflict is but a natural outcome in any group of people and that it
can be helpful and constructive. (Chandan S). The neo-classicists emphasized the
understanding of individual psychology, development of informal groups, informal
leadership, and a democratic-participative leadership style so as to avoid conflicts and
establish harmony in the organization.

Modern View

The modern view holds that conflict may be necessary for organizational effectiveness. It is
believed that harmonious, peaceful and cooperative groups can become static and un-
innovative. Minimum level of conflict that keeps the group alive, self critical and creative is
desirable. Modernists believe that conflict is structural in nature, is inevitable and endemic to
the organizational milieu. It is a product of systems and determined by structural factors and
integral to the nature of change. When groups interact there is bound to be difference of
opinion and disagreements, which is a cause for conflict. It exists even when there is single
individual who is faced with organizational problems like decision making. Conflict should be
welcomed and managed effectively. Some of the positive points of minimum level of conflict
are as under:
 Conflict should be expressed. By doing so, communication between two groups is
restored that promotes growth.
 Minimum level of conflict serves as pre-requisite for organizational development.
Conflict brings changes.
 Conflict helps achieve cohesion within the group that develops group identity and
members of the group follow group norms setting aside personal problems. This
tendency leads higher level of productivity, sense of identity with the organization and
increases group ability to compete with groups and departments.
 Poor decisions are detrimental to organizational growth. Minimum level of conflict
promotes stimulus for analytical thinking, which may challenge views, policies and
systems prevailing in the organization. It will lead to reviews hence new policies may
be introduced in the organizations.
 Conflict can serve as power equalizer between two parties. This is clearly observed
during management union meetings. While management is powerful at the beginning
of the discussion it however tends to equalize itself as the discussion proceeds.

Sources of Conflict

The following are the source or causes of conflict:

Communicational Aspect

Communication is an important process in the organization.Poor communication, passing of

incomplete information to a department may causeconflict because this may have far reaching
consequences in attainment of organizational goals. Importance of full and complete
communication cannot be over emphasized in thefast moving organizations in the present era
of information technology. Some of the reasonsfor poor communication are as under:

 Inadequate communication: where too much or too little information is passed from
one department to the other.
 Filtration effect: where end receiver receives very scant information having little or
no value.
 When information is not received on time: it must be noted that delayed information
has no value as the decision might have already been taken without the information.
 Barriers of culture, language.
 Inadequate training of sender and receiver.
 Noise problems.

Types of Conflict

As discussed earlier, organizations exist based on various groups and departments where
scares resources have to be put in to use through various processes. Systems and subsystems
exist in the organizations that are managed by individuals and work teams or work groups.
While interacting with each other on individual, team or group levels, there may be occasions
when conflict occurs due to perceptual differences. The conflict may be intra-personal, inter-
personal, intra-group, inter-group or intra-organizational in nature. These are discussed below.

Intra-personal Conflict

Intra personal conflict is also called the conflict within the individual. This type of
conflict can be of two types: -
1. Value Conflict:Every individual has to play certain roles, which conforms to his value
system. However, there are certain situations when an individual may have to
compromise on value system and beliefs. For example, finance manager of an
organization, while submitting tax returns to the government may conceal some facts,
which may go against his belief and value system. This situation may cause tension
and conflict within the individual.
2. Decision-Making:Problem solving is one of the important jobs every individual has to
undertake in work environment. Every problem has various courses open. At times it
is difficult for a person to select an appropriate course of action. This situation causes
conflict within the individual. He therefore will have to take decisions based on the
past experience and the knowledge. It may be noted that decision-making has become
simpler these days due to firstly; information technology where required data is
available and secondly, group decision is the norm in most of the organizations.

Inter-personal Conflict

Inter-personal conflict relates to conflict between two or more individuals and is probably the
most common and recognized form of conflict. Interpersonal conflict is caused due to
disagreement over goals and objectives of the organization. These are heightened due to
difference of opinion of individuals and when issues are not based on facts. Every
organization is full of unresolved issues and problems differing situations that lead to conflict.
Conflict can also take place between one person of a group with another person of the same
group or another group on issues relating to decision-making. Individuals may have a
difference of opinion on selection of a particular course of action that will lead to
disagreement and often result in the conflict. It is the merit of the issue, and willingness of
members of the organization to accept the others point of view that will avoid the conflict
situation.

Intra-Group Conflict

Intra-group conflict relates to values, status and roles played by an individual in the groupand
the group norms. Individual may want to remain in the group for social needs but
maydisagree with the methods and procedures followed by the group. The conflict may
arisewhen social changes are incorporated in the group. When group faces new problems
andwhen values are changed due to change in social environment. Intra-group conflict is
likeInter-personal conflict except that the people involved in the conflict episode belong to
acommon group.

Inter-Group Conflict

Conflicts between different groups, sections and departments are called inter-group
conflict.For example, conflict between production and sales departments over the quality
beingproduced and the customer requirements. Inter-group conflict causes due to factors
inherentto the organizational structure like independence, inconsistency in various policy
matter,variance on promotion criteria, reward system and different standards being adopted
fordifferent sub-units and departments. Organizational objectives can only be achieved
whenall departments work towards attainment of organizational goals. This is possible
wheninteractions between departments are smooth and cordial. Conflict can be avoided by
better communication between departments, joint decision making, removing disparity
ingroup goals and paying due respect and displaying concern for other group’s views.

Inter-Organizational Conflict

Inter-organizational conflict takes place between two dependent organizations. Conflictcan

take place between government organization, unions and the operating industry.Government
organizations function to ensure that minimum standards are followed bythe organizations.
Managers must try and reduce inter-organizational conflicts by adoptingpositive approach and
by following strictly, the rules and regulations laid down by thegovernment agencies. Conflict
can also take place between seller and buyer organizations.

Intra-Organizational Conflicts
Intra organizational conflict encompasses horizontal, vertical, line–staff and role
basedconflicts. Let us briefly study these situations.

a. Horizontal Conflict:Horizontal Conflict is caused due to incompatibility of goals,

sharing limited resources anddifference in time orientation. It leads to tension,
misunderstanding and frustration onthe part of both the parties. Horizontal conflict
relates to employees or group at the samelevel. Organizational goal at implementation
level vary from department to department.Finance department may not be able to
spare additional amount as may be required by research and development department
for new product development that may causetension, misunderstanding between two
individuals or departments. Individuals may notbe able to meet the targets of
production in given time due to variety of reason that maycause conflict with sales
department as the latter would like to flood the market with theirproduct to make the
presence felt. It has been seen that due to increased interdependenceof individuals or
groups to carry out various functions, situations do arise where there is difference of
opinion on issues that cause conflict between individuals or groups.

b. Vertical Conflict:Vertical conflict refers to conflicts that might take place between
different levels of hierarchy.Conflicts between subordinates and superior occur due to
incompatibility. It is generallycaused because of differences in perception, value
system, goals that may be assigned,cognition and difference in individual behavior.
Conflict is also caused due to inappropriatecommunication between individuals at two
different levels.

c. Line and Staff Conflict:Line and staff conflict has been traditional. Line authority
creates product and servicesand contributes directly towards the revenue generation.
While staff authority, assists lineauthority and acts in advisory capacity. Staff and line
authority have a differentpredispositions and goals. They have different skills and
expertise. Since staff authority(managers) are in the chain of command and have a day
to day access to the top boss, havea tendency to dictate terms to the line authority and
usually disregard the working knowledgeof the line authority. They have tendency to
dominate and disregard the efforts putin by line authority managers. On the contrary
staff managers have a technical knowhowand they are able to advice the line authority
to cut down cost of production and save onwastage etc. Line authority does not like
their advice at times. Staff managers get frustratedwhen their suggestions and ideas are
not implemented by line managers and hence thecause for conflict. In the process the
organizational goals are not achieved as per plans.

d. Role Conflict:A person in an organization has to perform various roles. Conflict arises
when roles assignedto him have different expectation. ‘Time’ management may cause
conflict. A person may beasked to take care of an additional section in the absence of
section head. Value system inan organization is also a cause for conflict. Supervisor is
asked to be honest while he isdealing with sale of the product while the same person
may be asked to pay commission toan official from whom a sanction is required to be
 obtained, thereby causing a conflictsituation in the ethical value system of an
individual. When an individual is line or a staffemployee and also a union
representative, has to perform duties of conflicting naturehence a role conflict.

Conflict Process

Pondy developed a conflict process model, which is useful to understand how a conflict starts.
He has delineated five steps that he calls as ‘conflict episode’. These are latentconflict,
perceived conflict, felt conflict manifest conflict, conflict resolution andconflict aftermath.

Latent Conflict

It is a first stage of conflict when conflict-promoting situations appear on the scene between
individuals and groups. In this stage potential conflict inducing forces exist. For example
demand for various resources by departments when some may get and be satisfied and others
may not get and be dissatisfied. Hence there may exist in a situation between two groups. At
this stage the seeds of dissatisfaction have been sown.

Perceived Conflict

When one party frustrates the design of the other party, people perceive that a conflict
condition exists. For example sales manager may need additional budget for promotional
activities which financial manager may not release. The sales manager may attribute lack of
finance as potential cause for fall in sales. Thus a conflict between the two may brew. At this
stage the conflict does not surface.

Felt Conflict

At this stage, the conflict is actually felt and cognized. As stated earlier, the funds are not
released by the finance manager and the problem is being surfaced and there is a likelihood of
confrontation.

Manifest Conflict

In this stage, there is not only recognition or acknowledgement of conflict but also
manifestation of conflict by covert or overt behavior. It is a stage of open dispute. Both parties
devise their strategies to face each other. In the above example sales manager may make his
point for additional funds for promotional activities especially during festival season. Finance
manager may openly turn down the request since he might have allotted additional funds for
procurement of better raw material for production department. Sales manager may argue that
better raw material has no meaning unless the facts are brought to the notice of customers,
which can only be done through promotional campaign. The debate may be unending and
frustrating.

Conflict Aftermath

Once the conflict is resolved between the two parties, there is always a party, which is looser
because the resolution is the outcome of win – lose or the compromise strategy, a stage is set
for subsequent conflict episodes. A party, which feels defeated, may start preparations and be
on the lookout for the assault to take the revenge. Conflict resolution has been added as an
additional box in the figure to elucidate that conflict aftermath is a direct function of the
results of the conflict resolution style adopted and exercised in any given situation.

Conflict Resolution Model

The following are the conflict resolution models:

Avoidance

One or both parties could avoid facing the conflict. The situation pertains to un-cooperative
and unassertive behavior on the part of parties involved. A Party may avoid facing B Party.
When situation reaches a point of negligence by A Party, B Party may take advantage of the
situation. By avoiding, the individual might side step, postpone or even withdraw from the
conflicting situation. This strategy is useful when issues involved in conflict are of a very
minor nature or when more important issues deserve attention. This strategy suits a manager
whose power base is very low and there is no chance of satisfying one’s own concerns.
Avoidance strategy should be applied when one feels that people in the organization should
cool down so that the issue can be handled at a later date in a better psychological
environment. The issue can also be postponed if additional information is required to be
obtained. Avoidance is a poor strategy hence if someone else is able to handle the situation of
conflict more effectively; he should be allowed to do so. Managers having high score on
avoidance as a strategy of conflict management, may suffer from delayed decision making
and hence the loss to the organization. Those who have a low score on avoidance thereby
wanting to attend to every single issue may spend lot of time on every trivial issue, hurt
people’s feelings and stir hostility in the organization that should be taken care of.

Competing
This strategy may be adopted when other strategies of conflict resolution are not workable.
Competing is also useful in emergencies where quick decisions are required. In this strategy
power must be used unilaterally as a weapon when unpopular decisions like termination, pay
cuts, layoffs, cost cutting and enforcing discipline are required to be taken. This strategy is
based on win-lose principle of managing conflicts. The managers who are high on power base
have an added advantage in using competing strategy because people from opposite side
would not dare confront a person who is so powerful. There is a tendency that managers using
this strategy should be careful about ‘yes’ men around them. They should identify conflicting
situations and take bold decisions based on win-lose strategy. On the other hand there are
managers who are low on competing mode, are likely to feel powerless in many situations.
Not realizing that though they have power but they are not comfortable using it. By trying to
use power, one could enhance one’s achievement. Another drawback in scoring low is that
such individuals find it difficult to take bold stand on various issues concerning organizations.
In situations when a manager is very low on ‘concern for the people’ may postpone vital
decisions on matters pertaining to subordinates that may be detrimental to organizational
effectiveness.

Collaborating
Strategy of collaboration involves attempt of one party to work with the other party in
cooperative manner and find solutions to the problem for mutual benefits. The strategy
involves identification of areas of disagreement, examining the issue in greater detail and a
workable solution arrived at, which is for mutual benefit. This strategy signifies when two
sets of solutions are important for both parties to be compromised, hence finding integrated
solution become imperative. This strategy signifies joint efforts, gain for both parties and
integrated solutions arrived at by consensual decisions. Sekaran concluded that when people
are high on collaborating, they have to be concerned about how they spend their time and
other organizational resources. Collaboration is time and energy consuming. Not all situations
need collaborative solutions. Over use of collaboration and consensual decision-making may
reflect risk aversion tendencies or an inclination to defuse responsibility. When people score
low on collaborating, they may fail to capitalize on situations, which would benefit
immensely from joint problem solving. Also by ignoring the concerns of employees,
decisions and policies may be evolved, which make the organizational members both unhappy
and uncommitted to the system. The strategy attempts a win - win solutions to their goals.

Accommodating
In accommodating mode a person scarifies his own interest for accommodating other person’s
interest. It is form of selfless generosity, obeying other person’s point of view. This mode is
usually adopted when other person’s view is stronger, you want to achieve goodwill and
indicate that you are reasonable. This strategy of conflict resolution is important when you
want other person to give at a later date when it favors you. Sekaran concluded that when
people are high on accommodating score they might be differing too much to the wishes of
others and pay very little attention to their own ideas and concern even though they may
realize that they are not getting the attention they deserve. This might even lower one’s self
esteem in addition to depriving on the influence, respect and recognition from others, since it
negates the potential contribution that individuals are capable of making to the organization.
While individual low on accommodating score, they should start thinking about whether they
lack the goodwill of others and whether others perceive them as unreasonable,
uncompromising, rigid and demanding.
Compromising
In conflict situation, compromising is a mode when both parties try to find out some
expedient, mutually acceptable solution that scarifies both the parties partially. In
compromising, there is no clear winner or loser. None of the parties is fully satisfied as they
ration the object of conflict and accept the solution which is not complete to either of the
parties. In compromising, there is a possibility of an atmosphere of ‘gamesmanship’ in the
work environment. There is also a possibility of compromising on certain principles of
behavior which are not desirable. Values, ethics, principles and long term objectives of the
organization must be protected while adopting compromising. When people are tough to
compromise, they find it hard to make concessions and land up in power struggle that must be
avoided. Compromising policies can easily be adopted when competing or collaboration
strategy fails. Research indicates that people have underlying disposition to handle conflict in
certain ways. Especially individuals have preferences among the five conflict handling
intentions. Their preferences tend to be relied upon quite consistently, and a person’s
intentions can be predicted rather well from a combination of intellectual and personality
characteristics. When confronting conflict situation, some people want to win it at any cost,
some want to find an optimum solution, some want to run away, others want to be obliging,
and still others want to “split the differences” (Robbins Stephen P.).

Women Leadership

The natural leadership talents of women:

For millions of years, men and women did different jobs, tasks that required different skills.
As natural selection weeded out less able workers, time carved differences in the male and
female brain. No two human beings are alike. Countless cultural forces influence how men
and women think and act. And each one of us is an elaborate mix of both male and female
traits. Yet, on average, each sex has its own range of abilities; each is a living archive of its
distinctive past.
Helen E. Fisher, (Ph.D) in her research identified some talents that women express more
regularly than men; aptitudes that stem, in part, from women’s brain architecture and
hormones, skills that leadership theorists now espouse as essential to leadership effectiveness.
These talents are not exclusive to women, of course, yet women display them more regularly
than men. These natural talents are:

1. Web Thinking: Women’s Contextual View

One remarkable difference is (HF) the way that men and women tend to think. Psychologists
report that when women cogitate, they gather details somewhat differently than men. Women
integrate more details faster and arrange these bits of data into more complex patterns. As
they make decisions, women tend to weigh more variables, consider more options, and see a
wider array of possible solutions to a problem. Women tend to generalize, to synthesize, to
take a broader, more holistic, more contextual perspective of any issue.

According to social scientists and business analysts, women are better able to tolerate
ambiguity—a trait that most likely stems from their ability to hold several things
simultaneously in mind

2. Mental Flexibility
Women’s brain architecture for web thinking has endowed them with another natural talent—
mental flexibility. Mental flexibility is an essential trait of leadership in our dynamic global
economy.
In a recent study of nine hundred managers at top U.S. corporations, researchers reported that
“women’s effectiveness as managers, leaders and teammates outstrips the abilities of their
male counterparts in 28 out of 31 managerial skill areas.” Among these skills was “generating
new ideas.”

3. Verbal Articulation: Words Are Women’s Tools

Women have other skills that enable them to lead. An exceptional female talent is the ability
to find the right word rapidly—basic articulation. Women’s verbal skills begin to emerge in
early childhood. Infant girls babble more than infant boys. They speak sooner, with longer
utterances and more complex grammatical constructions. By age twelve, girls excel at
grammar and spelling and at understanding and remembering what they read. Words were
women’s tools. Words still sway minds and hearts. And as contemporary women leaders have
opportunities to express their “voices” in the workplace, their power will increase.

4. Executive Social Skills

Women have what scientists call “executive social skills.” From millennia of rearing
prelinguistic babies, women have evolved a keener ability to pick up the nuances of posture
and gesture, read complex emotions in faces, and hear slight changes in tone of voice.
Women, on average, have a better sense of taste, touch, smell, and hearing.
They see better in the dark, have better peripheral vision, and remember more objects in the
room or landscape

5. Networking, Collaboration, and Empathy

Along with women’s executive social skills are their remarkable facilities for networking,
collaboration, empathy, inclusion, and sharing power. Men tend to cast themselves within
hierarchies and view power as rank and status; women, on the other hand, form cliques and
regard power as an egalitarian network of supportive connections. These traits have also been
linked with hormones.
When birds and mammals are injected with the predominantly male hormone, testosterone,
they begin to fight for rank; infusions of estrogen tend to produce nurturing and connecting
behaviors instead. These feminine dispositions to work in egalitarian teams, network, and
support others were unquestionably vital to ancestral women who needed to support one
another and their children.
Today these traits are still more impressive contributions to the contemporary business
environment

8. Farm Business Management

8.1. Definitions
Farm management is a science that deals with the proper combination and operation of
production factors including land, labor and capital, and the choice of crop and livestock
enterprises to bring about the maximum and continuous return to the most elementary
operational units of farming.
Farm management as a subject matter is the application of agricultural science, business and
economic principles in farming from the point of view of an individual farmer. The principles
may serve as a guideline for collecting and using requisite information for rational decision
making. They also provide a set of tools for the preparation of farm budgets and production
programs.
Farm management can also be defined as a sub-branch of agricultural economics which deals
with decision making on the organization and operation of a farm for securing maximum and
continuous net income consistent with the welfare of farm family.
This definition best fits the two aspects of farm life by providing an area of common ground
for their close inter-relationship in the direction of maximizing profit and utility functions
from the output of the farm as a whole.

Thus, in simple words, farm management can be defined as a science which deals with
judicious decisions on the use of scarce farm resources, having alternative uses to obtain the
maximum profit and family satisfaction on a continuous basis from the farm as a whole and
under sound farming programs. Farm management seeks to help the farmer in deciding
problems like:
 What to produce? (e.g. selection of profitable enterprises)
 How much to produce? (e.g resource use level)
 How to Produce? (e.g. selection of least cost production method)
 When to buy and when to sell, and in organization and managerial problems relating to
these decisions.
In other words, Farm Management tries to answer the basic economic questions related to a
given farm conditions. Thus, Farm management may in short be called a science of decision-
making or science of choice in farm business. The need for it arises out of changes in the farm
conditions as well as changes occurring outside of the farm, and hence need of continuous
adjustment of farm operations to these changes becomes inevitable. The principal changes
frequently encountered by the farmers are: fluctuations in price, variations in weather,
inventions in farming methods, and changes in socio-economic environment including
changes in government policy and social responses and values.

Farm Decision Making Process

As indicated before, farm management is concerned with the allocation of limited resources
among a number of alternative uses which requires a manager to make decisions. A manager,
first, must consider the resources available for attaining goals which have been set. Limits are
placed on goal attainment because most managers are faced with a limited amount of
resources. Decision-making is the most important responsibility of a manager of a farm
business or other type business. Decisions form the life-wire of the farm business. A
successful manager is one who has the skill to choose between alternatives in a constrained
environment and effective at attaining the stated objectives at best.

In a farm business, goal attainment is confined within some limits set by the amount of land,
labor and capital available. These resources may change overtime, but they are never
available in infinite amounts. The level of management skill available or the expertise of the
manager may be another limiting resource. If the limited resources could only be used one
way to produce one agricultural product, the manager’s job would be much easier. The usual
situation allows the limited resources to be used in several different ways to produce each of a
number of different products. In this case, the manager may be faced with a number of
alternative uses of the limited resources and must make decisions on how to allocate them
among the alternatives to maximize profit from the total business. This is one of the reasons
why decision making is mentioned in the definition of farm management. Without decision
nothing would happen. Even allowing things to continue as they are implies a decision,
perhaps not a good decision but a passive decision nevertheless.

The process of making a decision can be formalized into a logical and orderly series of steps.
Following these steps will not ensure a perfect decision but ensure that the decision is made
in a logical and organized manner.
1. Identify and define the problem: A manager must constantly be alert to identify
problems as quickly as possible. Most problems will not go away by themselves and
represent an opportunity to increase the profitability of the business through wise
decision making. Once identified the problem, it should be concisely defined. Good
problem definition will minimize the time required to complete the remainder of the
decision making steps. Definition of the problem involves locating the root cause of the
problem identified. This helps to identify factor responsible for the problem identified.
For the case of low yield identified as a problem, the possible cause can include low
input use such as fertilizer which may depend on several factors.
2. Collecting relevant data and information: Once a problem has been identified, the next
step should be to gather data, information and facts, and to make observations which
pertain to the specific problem.
3. Identifying and analyzing alternatives: Once the relevant information is available, the
manager can begin listing alternatives which are potential solutions to the problem.
Several alternatives may become apparent during the process of collecting data and
transforming data into information. Each alternative should be analyzed in a logical and
organized manner to ensure accuracy and to prevent something from being overlooked.
4. Making decision: Choosing the best solution to a problem is not always easy, nor is the
best solution always obvious. Sometimes the best solution is to do nothing or to go back,
redefine the problem and go through the decision-making steps again.
5. Implementing decision: Selecting the best alternative will not give the desired results
unless the decision is correctly and promptly implemented. Resources may need to be
acquired and organized. This requires some physical actions to be taken.
6. Evaluation: This is the last step in the process of decision making. It involves comparing
the result or performance of your farming business before and after the implementation
of the solution.
Classifying Decision
Decision made by farm manager can be classified in a number of ways. One way of
classification system may be to consider decisions as either organizational or operational in
nature.
Organizational decisions are those decisions made in the general areas of developing plans
for the business, acquiring the necessary resources and implementing the overall plan. Some
of such decisions include: decisions regarding selection of the best size of the farm, what
scale should be the farm operation, decisions regarding (how much land to purchase or lease;
how much capital to borrow; the level of mechanization; construction of buildings and
irrigation facilities, etc.). Therefore, organizational decisions are related to planning and
organization of the farm that tend to be long run decisions which gives shape to the overall
organization of the farm and are not modified or reevaluated more than once a year.
Compared to operational decisions, organizational decisions require heavy investment and
have long lasting effect.
Operational decisions are made more frequently than the organizational decisions and
related to the many details made on a daily, weekly or monthly basis and are repeated more
often than the organizational decisions as they follow the routines and cycles of agricultural
production. Operational decisions are frequent which involve relatively lower investment
and their effect is short lived. Some of such decisions include:
 Selecting fertilizer and seeding rates for a given field and year
 Making changes in livestock feed ration
 Selecting planting and harvesting dates
 Marketing decisions and daily work schedules
 What to produce (selection of enterprises)
 How much to produce (enterprise mix and production process)
 How to produce( selection of least cost method)
 When to produce (timing of production)

8.2. Production Functions and Relations

Production function is defined as the technical relationship between inputs and output
indicating the maximum amount of output that can be produced using alternative amounts of
variable inputs in combination with one or more fixed inputs under a given state of
technology. It is usually presumed that unique production functions can be constructed for
every production technology. The relationship of output to inputs is non-monetary; that is, a
production function relates physical inputs to physical outputs, and prices and costs are not
reflected in the function.

Forms and Types of Production Functions

Production Function Forms
Production functions can be expressed in three forms: tabular, graphic and algebraic forms.
Tabular form: Production function can be expressed in the form of a table where one column
represents input and the other indicates the corresponding total output for each input level.
The two columns constitute production function.

Input (x) Output (y)

0 2
 10 5
20 11
30 18
40 25

Graphical Form: The production function can also be illustrated in the form of a graph. In
graphical form the horizontal axis (X-axis) represents input and the vertical axis (Y- axis)
represents the output.

1400
Output (e.g Maize)

1200
1000
800
600
400
200
0
0 50 100 150 200 250
Input (e.g. fertilizer)

From the graph above, we notice that:

 the production function is a continuous curve
 inputs and outputs are perfectly divisible (otherwise, it would look like a series of
dots)
 inputs and outputs are homogenous
Algebraic Form: Algebraically production function can be expressed as Y= f(X). Where ‘Y’
represents dependent variable - output (yield of crop, livestock enterprise) and ‘X’ represents
independent variable- input (seeds, fertilizers, manure etc), ‘f =’ denotes function. When all
inputs in the production process individually expressed, the function is represented as Y=f(X 1,
X2, X3, X4 ……… Xn). In the case of single variable production function, only one variable is
allowed to vary keeping others constant, the function can be expressed as:
Y=f(X1 | X2, X3 ………. Xn). The vertical line used mark between variable and fixed input
type. In such expression all inputs before the line represent variable type. The function
denotes that the output Y depends on the variable input X 1, with all other inputs held constant.
If more than one variable input is varied and others are held constant, the relationship can be
expressed as:
Y=f(X1, X2 | X3, X4 …….. Xn)
There are different functional forms to represent production function. Some of the functional
forms include:
Linear production function, Y= a+bX
Quadratic equation, Y = a+bX ± cX2
The constant ‘a’ represents the amount of product obtained from the fixed factor if none of the
variable input is applied, while ‘b’ is the amount of output produced for each unit of X (input)
applied.
Exponential function, Y = A X b1 1 X b2 2 -commonly known as Cobb-Douglas production
function
The representation of the various symbols used in the above function is given below
Y- Dependent variable,
a - constant,
b - Coefficient,
X’s - independent variable
Types of Production Functions
Continuous Production Function: A production function applicable for those inputs which
can be split up in to smaller units. All those inputs which are measurable result in continuous
production function. Example: Fertilizers, Seeds, Plant protection chemicals, Manures, Feeds,
etc.
Discontinuous or discrete Production Function: Such a function is obtained for resources or
work units which are used or done in whole numbers. In other words, production function is
discrete if inputs cannot be broken in to smaller units. Alternately stated, discrete production
function is obtained for those inputs which are counted. Example: Ploughing, Weeding,
Irrigation etc.
Short Run Production Function (SRPF): Production Function in which some inputs or
resources are fixed. Y= f (X1 | X2, X3,…………..,Xn) Eg: Law of Diminishing returns or Law
of variable proportions
Long Run Production Function (LRPF): Production function which permits variability in
all factors of production. Y = f (X1, X2, X3… Xn).
Production Relations
Production of farm commodities involves numerous relationships between resources and
products. Some of these relationships are simple, others are complex. Knowledge of these
relationships is essential as they provide the tools or means by which the problems of
production or resource use can be analyzed. The major production relationships include:
Factor -Product relationship, Factor -Factor relationship and Product-Product relationship

Factor-Product Relations
The Factor-Product Relations deal with the production efficiency of resources. The rate at
which the factors are transformed in to products is studied by this relationship. The central
goal of this relationship is optimization of production. The relationship is known as input-
output relationship by farm management specialists and fertilizer responsive curve by
agronomists. Factor-Product relationship guides the producer in making the decision on ‘how
much to produce?’ It helps the producer to decide the optimum input level to use and
optimum output level to produce. The decision on the optimal levels of input and output is
made by using price ratio as the choice indicator. Algebraically, this relationship can be
expressed as
Y = f (X1 / X 2, X3………………Xn)

The factor - product relationship or the amount of a resource that should be used and
consequently the amount of output that should be produced is directly related to the operation
of law of diminishing returns. This law explains how the amount of product obtained changes
as the amount of one of the resources is varied keeping other resources fixed. It is also known
as law of variable proportions or principle of added costs and added returns.
The law of diminishing returns states:
An increase in capital and labor applied in the cultivation of land causes in general less than
proportionate increase in the amount of produce raised, unless it happens to coincide with the
improvements in the arts of agriculture

If the quantity of one of productive service is increased by equal increments, with the quantity
of other resource services held constant, the increments to total product may increase at first
but will decrease after certain point

The Law originally developed by early economists to describe the relationship between output
and a variable input keeping all other inputs constant if increasing amount of one input is
added to a production process while all others are constant, additional output will eventually
decline the law implies there is a “right” level of variable input to use with the combination of
fixed inputs

Limitations:
The law of diminishing returns fails to operate under certain situations. They are called
limitations of the law. These limitations under which the law doesn’t hold include: improved
methods of cultivation, new soils and insufficient capital.
Why the law of diminishing returns operates in agriculture?
The law of diminishing returns is applicable not only to agriculture but also manufacturing
industries. This law is as universal as the law of life itself. If the industry is expanded too
much, supervision will become difficult and the costs will go up. The law of diminishing
returns, therefore, sets in. The only difference is that in agriculture it sets in earlier and in
industry much later. There are several reasons for the operation of law of diminishing returns
in agriculture. Among them is:
 Excessive dependence on weather
 Limited scope for mechanization
 Soil gets exhausted due to continuous cultivation
 Cultivation extends to inferior lands
Concepts of product curves
Total product (TP): Amount of product which results from different quantities of variable
input. Total product indicates the technical efficiency of fixed resources.
Average Product (AP): It is the ratio of total product to the quantity of input used in
producing that quantity of product. AP= Y/X where Y is total product and X is total input.
Average product indicates the technical efficiency of variable input.
Marginal product (MP): Additional quantity of output resulting from an additional unit of
input used. MP = Change in total product / Change in input level (ΔY/ΔX) for discrete
change.
Total Physical Product (TPP): It is the Total Product (TP) expressed in terms of physical
units like Kgs, quintals, etc. Similarly if AP and MP are expressed in terms of physical units,
they are called Average Physical Product (APP) and Marginal Physical Product (MPP)
respectively.
Total Value Product (TVP): Expression of TPP in terms of monetary value is known as Total
Value Product. TVP = TPP*Py or Y*Py
Average Value Product (AVP): The expression of Average Physical Product in money value.
AVP = APP * Py
Marginal Value Product (MVP): When MPP is expressed in terms of money value; it is called
Marginal Value Product. MVP = MPP * Py or (ΔY/ΔX) * Py or ΔY* Py / Δ X
Relationships between Total Product (TP) and Marginal Product (MP):
– If Total Product is increasing, the Marginal Product is positive.
– If Total Product remains constant, the Marginal Product is zero.
– If Total Product is decreasing, Marginal Product is negative.
– As long as Marginal Product increases, the Total Product increases at increasing rate.
– When the Marginal Product remains constant, the Total Product increases at constant
rate.
– When the Marginal Product declines, the Total Product increases at decreasing rate.
– When Marginal Product is zero, the Total Product is at maximum.
– When marginal product is less than zero (negative), total physical product is declining
at increasing rate.
Relationship between Marginal and Average Product
– If Marginal Product is more than Average Product, Average Product is increasing.
– If Marginal Product is equal with the Average Product, Average Product is Maximum.
– When Marginal Product is less than Average Product, Average Product is decreasing.
 Table 1: Relationship between TP, AP and MP
Input Total Product Average Marginal
(X) (Y) Product Product Remark
(AP= Y/X) (MP=ΔY/ΔX
0 1 - -
1 2 2 1
Increasing Returns
2 5 2.5 3
3 9 3 4
4 14 3.5 5
Constant Returns
5 19 3.8 5
6 23 3.83 4
7 26 3.71 3
8 28 3.5 2 Decreasing Returns
9 29 3.22 1
10 29 2.9 0
11 28 2.54 -1
Negative Returns
12 29 2.16 -2
Three Regions of Production Function
The production function showing total, average and marginal product can be divided into
three regions or stages or zones in such a manner that one can locate the zone of production
function in which the production decisions are rational or not. The three sages are shown in
the figure below.

Figure 1: Stages of production

Stage I: In this stage, the average rate at which variable input (X) is transformed into product
(Y) increases until it reaches its maximum (i.e., Y/X is at its maximum). This maximum
indicates the end of Stage I.
The first stage starts from the origin i.e., zero input level. In this zone, Marginal Physical
Product is more than Average Physical Product and the Average Physical Product increases
throughout zone. Marginal Physical Product (MPP) is increasing up to the point of inflection
and then declines. Since the marginal Physical Product increases up to the point of inflection,
the Total Physical Product (TPP) increases at increasing rate. After the point of inflection, the
Total Physical Product increases at decreasing rate. Elasticity of production is greater than
unity up to maximum Average Physical Product (APP) and becomes one at the end of the
zone (MPP = APP). In this zone fixed resources are in abundant quantity relative to variable
resources. The technical efficiency of variable resource is increasing throughout this zone as
indicated by Average Physical Product. The technical efficiency of fixed resource is also
increasing as reflected by the increasing Total Physical Product. Marginal Value Product is
more than Marginal Factor Cost (MVP >MFC) and Marginal revenue is more than marginal
cost (MR > MC). This is irrational or sub-optimal zone of production. And this zone ends at
the point where MPP=APP or where APP is Maximum.

For Economic decisions Stage I is irrational zone of production. Any level of resource use
falling in this region is uneconomical. The technical efficiency of variable resource is
increasing throughout the zone (APP is increasing). Therefore, it is not reasonable to stop
using an input when its efficiency is increasing. Which means more products can be obtained
from the same resource by reorganizing the combination of fixed and variable inputs. For this
reason, it is called irrational zone of production.
Stage II: The second zone starts from where the technical efficiency of variable resource is
maximum i.e., APP is Maximum (MPP=APP)
– In this zone Marginal Physical Product is less than Average Physical Product.
Therefore, the APP is decreasing throughout this zone.
– Marginal Physical Product is decreasing throughout this zone.
– As the MPP declines, the Total Physical Product increases but at a decreasing rate.
– Elasticity of production is less than one between maximum APP and maximum TPP
and becomes zero at the end of this zone.
– In this zone variable resource is more relative to fixed factors.
– The technical efficiency of variable resource is declining as indicated by declining
APP.
– The technical efficiency of fixed resource is increasing as reflected by increasing TPP.
– The condition Marginal Value Product is equal to Marginal Factor Cost (MVP=MFC)
and Marginal Revenue is equal to Marginal Cost (MR= MC) exists in this stage
– This is rational zone of production in which the producer should operate to attain his
objective of profit maximization.
– This zone ends at the point where Total Physical Product is at maximum or Marginal
Physical Product is zero.
Stage II is rational zone of production. The area within the boundaries of this region is of
economic relevance. Optimum point must be somewhere in this rational zone. It can,
however, be located only when input and output prices are known.
Stage III: This zone starts from where the technical efficiency of fixed resource is maximum
(TPP is Maximum). In Stage II:
– Average Physical Product is declining but remains positive
– Marginal Physical Product becomes negative
 – The Total Physical Product declines at faster rate since MPP is negative.
– Elasticity of production is less than zero (Ep < 0)
– In this zone variable resource is in excess capacity
– The technical efficiency of variable resource is decreasing ( declining APP)
– The technical efficiency of fixed resource is also decreasing ( declining TPP)
– Marginal Value Product is less than Marginal Factor Cost (MVP < MFC)
– Marginal Revenue is less than Marginal Cost ( MR < MC)
– This zone is irrational zone of production.
Producer should never operate in this zone even if the resources are available at free of cost.
Stage III is also an area of irrational production. TPP is decreasing at increasing rate and MPP
is negative. Since the additional quantities of resource reduces the total output, it is not
profitable zone even if the additional quantities of resources are available at free of cost. If
farmer operates in this zone, he will incur double loss, that is, reduced production and
unnecessary additional cost of inputs.
In summary, for a Factor-Product type production relation, the optimal use of variable factor
is the level for which the VMP is equal to the factor price. It is located in stage II. The
economic meaning of the optimal solution would mean:
Increasing use of a factor by one unit is profitable if the increase in the total revenue resulting
from increased input (= the VMP) is higher than the increase in cost (i.e., the price P x paid
for one unit of the factor). If this condition fulfilled profit is maximized.

Factor-Factor Relations
This relationship deals with the resource combination and resource substitution. Cost
minimization is the goal of factor-factor relationship. Under factor-factor relationship, output
is kept constant while inputs are varied in quantity. This relationship guides the producer for a
decision on ‘how to produce’. Such a relation is explained by the principle of factor
substitution or principle of substitution between inputs. Factor-Factor relationship is
concerned with the determination of least cost combination of resources. The choice
indicators are the physical substitution ratio and price ratio. It is expressed algebraically as:
Y = f(X1, X2, / X3, X4… Xn), where we consider two variable inputs
In the production process inputs are substitutable. For instance capital can be substituted for
labor and vice versa; grain can be substituted for fodder and vice versa. The producer has to
choose that input or inputs, practice or practices which produce a given output with minimum
cost. The producer aims at cost minimization through choice of inputs and their combinations.
Concept of Isoquants:
The relationship between two factors and output cannot be presented with a two dimensional
graph. Three variables can be presented in a three dimensional diagram giving a production
surface. An isoquant is a convenient method for compressing three dimensional picture of
production into two dimensions. Hence, isoquant is defined as all possible combinations of
two resources (X1 and X2) physically capable of producing the same quantity of output.
Isoquants are also known as isoproduct curves or equal product curves or product indifference
curves. Graphical representation of isoquant is given below.
 Y X1 X2 Output
3 20 60
4 15 60
6 10 60
X2 Isoquant 10 6 60
15 4 60
X 20 3 60
O
X1
Isoquant Map or Isoproduct Contour
If a number of isoquants are drawn on one graph it is known as isoquant map. Isoquant map
indicates the shape of production surface which in turn indicates the output response to the
inputs.

Y3= 30
X2
Y2= 20
Y1= 10
O
X1
Figure 2: Isoquant Map
Isoquants further from the origin represent higher production level. The Y’s in the graph are
ordered as Y1< Y2< Y3
Characteristics of Isoquant
– Slope downwards from left to right or negatively sloped
– Convex to the origin
– Nonintersecting
– Isoquants lying above and to the right of another represent higher level of output
– The slope of isoquant denotes the marginal rate of technical substitution (MRTS).
Marginal Rate of Technical Substitution (MRTS)
MRTS refers to the amount by which one resource is reduced as another resource is increased
by one unit. Or the rate of exchange between some units of X 1 and X2 which are equally
preferred. MRTS can be represented as:

MRTS X1 for X2 = ΔX2/ΔX1

MRTS X1 for X2 = ΔX1/ ΔX2
Number of units of replaced resource
Marginal Rate of Technical Substitution=
Number units of added resource
MRTS gives the slope of Isoquant. Substitutes indicate a range of input combinations which
will produce a given level of output. When one factor is reduced in quantity, a second factor
must always be increased. Hence MRTS is always less than zero or it is negative.
Types of factor substitution
The shape of isoquant and production surface will depend up on the manner in which the
variable inputs are combined to produce a particular level of output. There can be three such
categories of input combinations.

Fixed Proportion combination of inputs: Under fixed combination, to produce a given level
of output, inputs are combined together in fixed proportion. Isoquants are ‘L’ shaped. It is
difficult to find examples of inputs which combine only in fixed proportions in agriculture.
An approximation to this situation is provided by tractor and driver combination. To operate
another tractor, normally we need another driver.
Constant rate of Substitution: For each one unit gain in one factor, a constant quantity of
another factor must be sacrificed. When factors substitute at constant rate, isoquants are linear
& negatively sloped.
Decreasing Rate of substitution: Every subsequent increase in the use of one factor in the
production process can replace less and less of the other factor. In other words, each one unit
increase in one factor requires smaller and smaller sacrifice in another factor.
Ex: Capital and labour, concentrates and green fodder, organic and inorganic fertilizers etc.
Isoquants are convex to the origin when inputs substitute for each other at decreasing rate.
Decreasing rate of factor substitution is more common in agricultural production.

Figure 3: Input Substitution Types

Isocost Line (price line or budget line)

Isocost line defines all possible combinations of two resources (X 1 and X2) which can be
purchased with a given outlay of funds. Isocost line is used in the concept of optimal input
combination in the production process.
Characteristics of Isocost line:
As the total outlay increases, the isocost line moves farther away from the origin.
Isocost line is a straight line because input prices do not change with the quantity purchased.
The slope of isocost line determined as the ratio of factor prices.
Least Cost Combination of inputs
There are innumerable possible combinations of factors which can be used to produce a
particular level of output. The problem is to find out a combination of inputs which cost the
least; a cost minimization problem. There are three methods to find out the least cost
combination of inputs. These methods are explained below.
Units of X1 Units of X2 cost of X1 Cost of X2 Total Cost
(price 3 Birr/unit) (Price 2 Birr/unit)
10 3 30 6 36
7 5 21 10 31
5 6 15 12 27
3 8 9 16 25
2 12 6 24 30
1. Simple Arithmetical calculations (presented in Table)

One possible way to determine the least cost combination is to compute the cost of all
possible combinations of inputs and then select the combination with minimum cost. This
method is suitable where a limited number of combinations produce a particular level of
output. The above table shows five combinations of inputs which can produce a given level of
output. The price per unit of X 1 is Birr 3 and of X 2 is Birr 2. The total cost of each
combination of inputs is computed and given in the column with Total Cost. Out of five
combinations, 3 units of X1 and 8 units of X2 is the least cost combination of inputs at a cost
of Birr 25 to produce the specified unit of a product.
2. Algebraic method:
Compute Marginal Rate of technical substitution
MRTS = Number of units of replaced resource / Number of units of added resource
MRTS X1 for X2 = Δ X2/ΔX1
MRTS X2 for X1 = ΔX1/ΔX2
Compute Price Ratio (PR)
PR=Price per unit of added resource/Price per unit of replaced resource
PR=Px1/Px2 if MRTS X1X2 or PR= Px2/ Px1 if MRTS X2X1
Least combination occurs at a point where MRTS and PR are equal. i.e.
ΔX2/ΔX1= P x1/Px2 MRTS X1X2
ΔX1/ΔX2= Px2/ P x1 MRTS X2X1
The same can be expressed as
ΔX2* Px2= Px1*ΔX1 or ΔX1*Px1 =ΔX2*Px2
The least cost combination is obtained when Marginal Rate of substitution is equal to Price
Ratio. If they cannot be exactly equal because of the choices available in the table, take closer
figures without letting the price ratio exceed the substitution ratio.

Units of X1 Units of X2 MRTSX2 X1 PR = Px2 /Px1

10 3 - 0.67
7 5 (7-10) /(4-3) = 3.00 0.67
5 6 (5-7) /(6-5) = 2.00 0.67
 3 8 (3-5) / (8-6) = 1.00 0.67
2 12 (2-3) /(12-8) = 0.25 0.67
Price of X1 is Birr 3 per unit, and price of X2 is Birr 2 per unit

3. Graphical Method:
Since the slope of isoquant indicates MRTS and the slope of isocost line indicates factor price
ratio, minimum cost for a given output will be indicated by the tangency of these isoclines
(isocost and isoquant lines). For this purpose, isocost line and isoquant are drawn on the same
graph.. The least cost combination will be at the point where isocost line is tangent to the
isoquant line i.e., slope of isoquant=slope of isocost line i.e. MRTS=PR
X Isocost

LCC

X2
Isoquant
X
O
X1

Product-Product Relations
Product-Product relationship deals with resource allocation among competing enterprises
(individual crop production and animal rearing). The goal of Product-Product relationship is
profit maximization through optimal combination of enterprises. Under Product-Product
relationship, inputs are kept constant while products (outputs) are varied. This relationship
guides the producer in deciding on ‘What to produce?’ Product-Product relationship is
explained by the principle of product substitution. The relationship is concerned with the
determination of optimum combination of production (enterprises). The choice indicators are
product substitution ratio and price ratio. Algebraically, product-product relation is expressed
as:
Y1=f (Y2, Y3… Yn)
Production Possibility Curve (PPC)
Production Possibility Curve is a convenient device for depicting two production functions on
a single graph. Production Possibility Curve represents all possible combinations of two
products that could be produced with a given amounts of inputs. Production Possibility Curve
is known as Opportunity Curve because it represents all production possibilities or
opportunities available with limited resources. It is called Isoresouce Curve or Isofactor curve
because each output combination on this curve has the same resource requirement. It is also
called Transformation curve as it indicates the rate of transformation of one product into
another.
How to draw Production Possibility Curve
Production Possibility Curve can be drawn either directly from production function or from
total cost curve. The method of drawing Production Possibility Curve from Production
Function is explained below.

A farmer has five acres of land and wants to produce two products namely cotton (Y 1) and
Maize (Y2). Assume all other inputs are fixed. Now the farmer has to decide how much of
land input to use for each product. This implies that amount of land that can be used to
produce Cotton (Y1) depends upon the amount of land used to produce Maize (Y 2).
Therefore, Y 1= f (Y2)
The allocation of land resource between the two products and the output from different doses
of land input are presented below

Allocation of Land in Acres Output in quintals

Y1 Y2 Y1 Y2
0 5 0 60
1 4 8 48
2 3 15 36
3 2 21 24
4 1 26 12
5 0 30 0

As evident from the above data, if all 5 acres of land are used in the production of Y 2 we
obtain 60 quintals of Y2 and do not get any of Y1. On the other hand, if all the five acres of
land are used in the production of Y1 we can obtain 30 quintals of Y1 and do not get any of Y2.
But these are the two extreme production possibilities. In between the two, there are many
other production possibilities. Plotting these two points on a graph, we get the Production
Possibility Curve.

Production Possibility Curve (PPC)

Output of Y2

O
Output of Y1

Production Possibility Curve

Types of Product-Product Relationships or Enterprise Relationship
Farm commodities bear several physical relationships to one another. These basic product
relationships include:
1) Joint Products: such relationship happen when two products are produced through single
production process. As a rule the two are combined products. Production of one (main
product) without the other (by-product) is not possible. The level of production of one decides
the level of production of another. Most farm commodities are joint products.
Ex: Wheat and Straw, cattle and manure, beef and hides, mutton and wool etc.

Y2 A

O
Y1

Graphically the quantities of Y1 and Y2 that can be produced at different levels of resources
will be shown as points AB in the figure.
2) Complementary enterprises: Complementarity between two enterprises exists when
increasing the production from one enterprise increases the production of the other enterprise.
Change in the level of production of one enterprise causes change in the other enterprise in
the same direction. That is when increase in output of one product, with resources held
constant, also results in an increase in the output of the other product. Temporarily, the two
enterprises do not compete for resources but contribute to the mutual production by providing
an element of production required by each other. The marginal rate of product substitution is
positive (> 0). Ex: crops and livestock enterprises.

As shown in the figure, range of complementarities is from point A to point B when increase
in the production of one enterprise (crop) followed by increase in the production of the other
enterprise (Livestock). After point B the enterprises will become competitive. All
complementary relationships should be taken advantage by producing both products up to the
point where the products become competitive.
3) Supplementary enterprises: Supplementarity exists between enterprises when increase or
decrease in the output of one product does not affect the production level of the other product.
They do not compete for resources but make use of resources when they are not being utilized
by one enterprise. The marginal rate of product substitution is zero. For example, small
poultry or dairy or piggery enterprise is supplementary on the farm. All supplementary
relationships should be taken advantage by producing both products up to the point where the
products become competitive.
 B

2 A
Y

Y1

The two products (Y1 and Y2) stay supplementary from A to B as shown in the graph. After
point B they become competitive enterprises.

4) Competitive enterprises: This relationship exists when increase or decrease in the

production of one product affect the production of other product inversely. That is when there
is an increase in output of one product, with resources held constant; production of the other
product decreases. Competitive enterprises compete for the same resources. Two enterprises
are competitive in the use of given resources if output of one can be increased only through
sacrifice in the production of another. The marginal rate of product substitution is negative (<
0)

Marginal rate of product substitution (MRPS)

The term marginal rate of product substitution under the product-product relationship has the
same meaning as MRTS under the factor-factor relationship. Marginal rate of the product
substitution refers to the absolute change in one product associated with a change by one unit
of the competing product. The quantity of one product to be sacrificed so as to gain another
product by one unit is given by MRPS.
MRPS = Number of units of replaced product / Number of units of added product
MRPSY1 for Y2 = ∆Y2/∆Y1
MRPSY2 for Y1 = ∆Y1/∆Y2
Types of Product Substitution
When two products are competitive, they substitute either at constant rate or increasing rate or
at decreasing rate.
1) Constant rate of Substitution:
For each one unit increase or gain in one product, a constant quantity of another product must
be decreased or sacrificed. When products substitute at constant rate, the Production
Possibility Curve is linear and negatively sloped. Or Production Possibility Curve is linear
when products substitute at constant rate. When two products substitute at constant rate, only
one of the two products will be economical to produce depending on their relative prices. This
is to say that specialization is the general pattern of production under constant rate of product
substitution. This relationship can be expressed as

∆1Y2/∆1Y1 = ∆2Y2/∆2Y1 = ……. = ∆nY2/∆nY1

Y1 Y2 ∆Y1 ∆Y2 ∆Y2/∆Y1

16 2 - - -
12 4 4 2 0.5
8 6 4 2 0.5
4 8 4 2 0.5

2) Increasing rate of product substitution:

Each unit increase in the output of one product is accompanied by larger and larger sacrifice
(decrease) in the level of production of other product. Increasing rates of substitution holds
true when the production for each independent commodity is one of decreasing resource
productivity (decreasing returns) and non-homogeneity in quality of limited resource. The
production Possibility Curve is concave to the origin when product substitutes at the
increasing rate. Increasing rate of the product substitution is common in agricultural
production. The general pattern of production is diversification i.e., profits are maximized by
producing both products.

∆1Y2/∆1Y1 < ∆2Y2/∆2Y1 < ……. < ∆nY2/∆nY1

Y1 Y2 ∆Y1 ∆Y2 ∆Y2/∆Y1

1 14 - - -
2 11 1 3 3
3 7 1 4 4
4 2 1 5 5
3) Decreasing rate of Product Substitution:
Each unit increase in the output of one product is accompanied by lesser and lesser decrease
in the production of another product. This type of product substitution holds good under
conditions of increasing returns. Production Possibility Curve is convex to the origin when
products substitute at decreasing rate. This relationship is algebraically expressed as

∆1Y2/∆1Y1 > ∆2Y2/∆2Y1 > ……. > ∆nY2/∆nY1

Y1 Y2 ∆Y1 ∆Y2 ∆Y2/∆Y1

1 10 - - -
2 6 1 4 4
3 3 1 3 3
4 1 1 2 2

IsoRevenue Line
Isorevenue line represents all possible combination of two products which would yield an
equal (same) revenue or income. Let R is the revenue from two products Y 1 and Y2 and the
prices for both products is given as Py 1 and Py2 respectively. The Isorevenue equation will be
given as:

R= Y1 * Py1 + Y2 * Py2, the line is linear as long as prices for both products do not change

Characteristics:
Isorevenue line is a straight line because product prices do not change with quantity sold.
As the total revenue increases, the isorevenue line moves away from the origin
The slope indicates ratio of product (output) prices. As long as product prices remain
constant, the isorevenue line showing different total revenues are parallel. But change in
either price will change the slope.
Determination of optimum combination of products (Economic decision):
The Economic optimum combination of the two products can be determined through three
different ways:

1) Algebraic Method:
There are three steps to determine the optimum product combination through algebraic
method.
a) Compute Marginal Rate of Product Substitution
MRPS =Number of units of replaced product/Number of units of added product
MRPSY1 for Y2 = ∆Y2/∆Y1
MRPSY2 for Y1 = ∆Y1/∆Y2
b) Workout price ratio (PR)
Price Ratio (PR) = Price per unit of added product/Price per unit of replaced product
PR= P y1/Py2 if it is MRPSY1Y2
PR= Py2/ Py1 if it is MRPSY2Y1
c) Find the combination at a point where substitution ration (MRPS) is equal to price ratio
(PR). This gives us the Optimum combination of enterprises.

Number of units replaced product Price per unit of added product

=
Number of units of added product Price per unit of replaced product

∆ Y2/∆Y1= Py1/Py2 or ∆Y1/∆Y2 = Py2/ Py1

For profit maximization, a rational producer should operate in the range where two products
are competitive and within this range the choice of products should depend upon the MRS and
PR.

2) Graphic Method:
In this method follow the procedure given below to find the optimal product combination.
Draw production possibility curve and isorevenue line on one graph.
Slope of production possibility curve indicates MRPS and the slope of isorevenue line
indicate price ratio of products.
The point of optimum combination of products is at a point where the isorevenue line is
tangent to the production possibility curve.
At the tangency point, slope of the isorevenue line and the slope of the production possibility
curve will be the same. In other words, the MRPS=PR which gives the optimum combination.
Production Possibility Curve

Optimum Combination of products

Y2

Isorevenue Line

O
Y1

3) Tabular Method:
Compute total revenue for each possible output combination and then select that combination
of outputs which yields maximum total revenue. This method is useful only when we have
few combinations.

Revenue from Y1 Revenue from Y2

Y1 Y2 Total Revenue
(Py1=50) (Py2=80)
8 2 400 160 560
5 3 250 240 490
6 4 300 320 620
4 5 200 400 600
3 7 150 560 710

Accordingly, the optimum combination includes 3 units of Y 1 and 7 units of Y2 where the
revenue at this combination is the maximum as indicated in the table.
Table 2: Summary of basic production relationships
Factor – Product Factor – Factor Product – Product

Deals with resource use Deals with resource Deals with resource
efficiency combination and resource allocation among enterprises
substitution

Optimization of the Cost minimization is the goal Profit optimization is the

production is the goal goal

Answers the question ‘How Answers the question ‘How Answers the question ‘What
much to produce?’ to produce?’ to produce?’

Considers single variable Inputs or resources varied Output of products are varied
production function keeping the output constant keeping the resource constant

Guides in the determination Concerned with the Helps in the determination of

of optimum input to use and determination of Least cost optimum combination of
optimum output to produce combination of resources products
 Price ratios are choice Substitution ratio and Price Substitution ratio and price
indicator ratio are the choice ratios are choice indicators
indicators.

Explained by the law of Explained by the principle of Explained by the principle of

diminishing returns factor substitution product substitution

Y=f(X1 | X2, X3 ……Xn) Y = f(X1 X2 / X3, X4 ...Xn) Y1=f(Y2 ,Y3, ……. Yn)

8.3. Risk and Uncertainty in Agriculture

Farmers must make decisions on crops to be planted, seeding rates, fertilizer levels and other
input levels early in the cropping season. The crop yield obtained as a result of these decisions
will not be known with certainty for several months or even several years in the case of
perennial crops. Changes in weather, prices and other factors between the time the decision is
made and the final outcome is known can make previously good decision very bad.
Because of time lag in agricultural production and our inability to predict the future
accurately, there are varying amounts of risk and uncertainty in all farm management
decisions. If everything was known with certainty, decision would be relatively easy.
However, in the real world more successful managers are the ones with the ability to make the
best possible decisions, and courage to make them when surrounded by risk and uncertainty.

Biological nature of farm enterprise entails some uncertainties in their production and prices
in addition to uncertainties related to availability of inputs. Some of them are measurable in
their parameters of probability, yet others are more or less random phenomena that cannot be
estimated with any acceptable degree of accuracy. The first category uncertainties lead to the
business risks that can be, to a considerable extent, provided for either through adjustments in
the production programs and resource use planning or through hedging, forward contracts,
insurances, etc. The latter category cannot be treated as calculable risks and are not amenable
to programs of production or resource use adjustments. How these risks and uncertainties are
accounted for in the production programs of the farmers is the central objective of this
chapter. Discussion here center around i) how do the farmers in their normative production
programs account for estimable uncertainties (risks) of price fluctuations and yield
(production) variability of farm products, and ii) how do they provide for uncertainties on the
availability of factor inputs.

Definitions
Risk is a situation in which all possible outcomes (results) of an activity are not certain (not
known), but the probabilities of alternative outcomes (results) are known or can be estimated.
Example, if a farmer know that his maize crop is likely to fail in one of the four years of
consecutive production period by 25% then this is a risk because even if he doesn’t know the
exact year he is expecting failure in one the four years of production period.
Uncertainty is a situation where all possible outcomes and the probability of the outcomes
are unknown or neither the outcome nor the probability are known . Uncertainty is not
insurable. It is a situation where an action has got a set of possible outcomes the probability of
which is completely unknown. For example, no one can assign probability to how many times
he will fall sick within a year. Farmer normally calculates his labor requirements on the
ground that his workers will be healthy throughout the year and that each labor will supply at
least eight working hours per day. Similarly, no one can precisely predict when he is going to
die. Farm manager may project his activity for the whole year and he may not reach the end of
that year before he dies. Any situation where one cannot predict what can happen is normally
regarded as uncertain situation.
Types of risk and uncertainty in agriculture
The more common sources of risk can be summarized into the general types as: production
risk, marketing risk, financial risk and technological risk

Production or yield risk: refers to the unpredictable impact of climate, crop and livestock
diseases and pests, and other natural and manmade calamities on outcome (output).
Price or marketing risk: are risk associated with the variability of output of price and its
effect on the farm income. Commodity prices vary from year to year and may have substantial
seasonal variation within a year.
Financial risk: a risk incurred when money is borrowed to finance the operation of the
business. That is, any time money is borrowed there is some chance that future income will
not be sufficient to repay the debt without using equity capital.
Technological risk: Another source of production risk is new technology. Will the new
technology perform as expected? Will it actually reduce costs and increase yields? These
questions must be answered before adopting new technology.
Probability and Expectations
To make decision in a risky world, a manager needs to understand how to form expected
value, how to use probability (chances of occurrence), and how to analyze the variability
associated with the potential outcome.
Forming expected values: The major methods used to form expected values are:
 Average (simple and weighted average)
 Most likely method
 Mathematical expectation
Average (simple average)
Consider the following price over years for maize
Table 3: Annual maize price variation
Year Average of annual price
4 years ago 2.50
3 years ago 3.05
2 years ago 2.00
Last year 4.50
Summation 12.05
 Average (expected value) = 12.05/4 = 3.01
Weighted average
This method usually weights the more recent values heavier than the older using some
predetermined weighing system on the basis of the decision maker’s experience, judgment
and performance. Example, using weighted averages to form expected value:
Table 4: Annual maize price variation with weight
Year Average annual price Weight price Result price times weight
4 years ago 2.50 1 2.50
3 years ago 3.05 2 6.10
2 years ago 2.00 3 6.00
Last year 4.50 4 18.00
Total 10 32.60
Weighted average 32.60/10 = 3.26
Most likely method
By this method, an expectation is formed by choosing the value most likely to occur (this is
the value that is relatively sure to occur). This procedure requires knowledge of the
probability associated with each possible outcome. The outcome with the highest probability
would be selected on the likely to occur.
Table 5: Possible maize yield with probability
Year Possible maize yield (qt/ha) over 4 years Probability
Year 1 15 0.1
Year 2 18 0.3
Year 3 25 0.4
Year 4 30 0.2
Total 1.00

Four possible maize yields are shown along with probability of obtaining each yield. Using
the most likely method to from an expectation, a yield of 25 quintal per ha will be selected as
this yield has the highest probability and is therefore the most likely to occur. However, there
is no assurance that this yield will occur in any given year but it will occur 40% of the time
over a long period.
Mathematical expectation
When either the true or subjective probability of the expected outcome is available it is
possible to calculate the mathematical expectation of yield, price, cost, income or profit. It is
given as:
E(Y) = ∑(Y1P1 + Y2P2 + Y3P3 + ….+ YnPn)
Where E(Y) is the expected yield
Y1, Y2,…, Yn are the yield under the various states of nature (wet, dry and normal
years)
P1, P2, P3,…, Pn are the respective probability of the state of nature.
Example: Let’s assume that there are three states of nature based on past experience viz., wet,
dry and normal. The probabilities of occurrence of these conditions are 0.2, 0.3 and 0.5,
respectively. Consider maize and sorghum yield in the three states of nature as in the
following table:
Table 6: Expected maize yield with varying state of nature
State of Nature Expected yield
Crop Wet years Normal years Dry years
Maize 35 25 15 24
Sorghum 15 25 20 22

The expected yield for maize is:

E(Y) = (0.2*35) + (0.5*25) + (0.5*15) = 24
The expected yield for sorghum is:
E(Y) = (0.2*20) + (0.5*30) + (0.3*30) = 22
Finally the values 24 and 22 quintals are used for planning purpose.
Decision making under risk
There are several elements or components to any decision involving risk. Here three of them
are considered.
There are alternative decisions or strategies available to the decision maker;
There are possible events that can occur, such as variation in weather and variation in price
and these factors create the risk because the actual outcome is not known at the time the
decision must be made; and
The consequences or result of each strategy (decision) for each possible outcome (event) may
be expressed as yield, net returns or some appropriate value.
Example: Consider a fattening program or plan
Assume that a farmer plants alfalfa feed in a given hectare of land in the winter
Oxen are purchased in winter and graze on the alfalfa and sold in the spring
All oxen must be purchased and sold after fattening
Now the farmer’s problem is on deciding how many oxen to purchase. That is:
If too few oxen are purchased and the weather is good there will be excess grazing available
and opportunity for additional profit is given up.
If too many oxen are purchased and the weather is poor, there will be insufficient forage, so
that feed may have to be purchased and profit is reduced or a loss is incurred.
Let’s further assume that the farmer has decided on three choices: purchase 30, 40 or 50 oxen.
These choices are the decision strategies and the weather can be good, average and poor with
probability of 0.2, 0.5 and 0.3, respectively.

The same three weather outcomes are possible for each of the possible strategies. This creates
nine potential consequences or results to be considered and it is helpful to organize this
information with decision tree or with pay off-matrix.
Decision tree (a diagram that traces out all possible strategies/acts), potential outcome (events
and possibility) and their consequences; and is illustrated as follow:
Table 7: Decision strategies with varying state of nature for oxen fattening program
Strategy Weather outcome Probability Net returns Expected Value
Good 0.2 6000
Buy 30 Average 0.5 4000 3800
Poor 0.3 2000
Good 0.2 5800
Buy 40 Average 0.5 5600 4160
Poor 0.3 0
Good 0.2 8000
Buy 50 Average 0.5 6000 4000
Poor 0.3 2000

The expected values are the summation of the net return weighted by their probability
(example, for the buy 30, the expected value is (0.2*600) + (0.5*400) + (0.3*200) = 3800
birr).
Pay-off matrix: This contains the same information as the decision tree but is organized in
the form of table and is illustrated below.
Table 8: Pay off matrix for oxen fattening program
Weather outcome Probability Purchase strategy
Buy 30 Buy 40 Buy 50
Good 0.2 6000 6800 800
Average 0.5 4000 5600 6000
Poor 0.3 2000 0 -2000
Minimum Value 2000 0 -2000
Maximum Value 6000 6800 8000
Expected value 3,800 4160 4000
Simple average 4,000 4133 4000

The Decision Rule

The decision rule includes the following: maximin, maximax, maximize expected value and
most likely outcome.
Maximin rule: This rule concentrates on the best possible outcome for each strategy. This
rule says that nature will always do the worst (pessimistic approach). Therefore, the strategy
with the best of the worst possible result is selected, that is, the one with the maximum of the
minimum value is selected. From the above table this rule select “buy 30” strategies as its
minimum on sequence of birr 2000 is higher than the minimum for the “buy 40 and 50”
strategy with the minimum consequence of birr 0 and 2000, respectively.
Maximax rule: This rule is just the opposite of maximum rule. That is, this rule selects the
strategy with the highest maximum value or the maximum of the maximum value. This rule
says nature will always do its best (optimistic approach). According to this rule “buy 50”
strategy will be selected since its maximum value is greater than the maximum value of the
other two strategies.
Maximize expected value: In this rule the decision is made by selecting strategy with the
highest expected value. Accordingly, this rule selects the “buy 40” strategy since it has the
highest expected value.
Most likely outcome rule: By this rule, the outcome that is most likely to occur (one with
highest probability) and then the strategy with the highest consequences for that outcome will
be chosen. Accordingly, the highest probability (0.5) and the corresponding highest
consequence (6000 birr) occur in the “buy 50 strategy”. Therefore, this rule selects “buy 50”
strategy.
The use of the different rules depends on the types of the decision maker’s attitude towards
risk and the existing financial condition of the business. There are 3 types of persons with
regard to their attitude towards risk.
Risk-averse person: Risk avoider person. Usually risk-averse person perform the one that is
sure to get with the highest probability even if the result is low. This person usually prefers to
use maximin rule for making decision. A person/business with weak financial position mostly
prefers to use this rule.
Risk taker (prefer): This is a person who tries to achieve the maximum output under risk
condition. This person prefers to use maximax rule for decision making. A person/business
with strong financial position mostly prefers to use this rule.
Risk indifferent person: A person who doesn’t care whether risk occur or not. This person
prefers the last two decision rule to make his/her decision.
Methods of Reducing Risk and Uncertainty
The various methods which can be used to reduce risk are discussed hereunder.
Diversification: Production of two or more commodities with negative correlation in their
performance parameters may reduce income variability if all prices and yields vary.
Selection of stable enterprises: Irrigation will provide more stable crop yields than dry land
farming. Production risk can be reduced by careful selection of the enterprises with low yield
variability. This is particularly important in areas of low rainfall and unstable climate.

Crop and livestock insurance: For phenomena, which can be insured, possible magnitude of
loss is lessened through converting the chance of large loss into certain cost through insurance
arrangement.
Flexibility: Diversification is mainly a method of preventing large losses. Flexibility is a
method of preventing the sacrifice of large gains. Flexibility allows for changing plans as time
passes, additional information is obtained and ability to predict the future improves.
Spreading sales: Instead of selling the entire crop output at one time, farmers prefer to sell
part of the output at several times during the year. Spreading sales avoids selling all the crop
output at the lowest price of the year but also prevents selling at the highest price.