UNIT 1 – INTRODUCTION TO BUSINESS

1.1- Definition and meaning of business

According to Brown et al (1997), business is all of the activities of an individual or group of

individuals in producing and distributing goods and services to customers for profit making. In
other words, a business is any activity that provides goods or services to consumers for the
purpose of making a profit. Examples of goods provided by a business are tangible items such as
cars, televisions, or soda. A good is a consumable, one-time benefit. Services include things such
as haircuts, hotel stays, or roller-coaster rides. Business can generate profits from the sales of
goods and/or services, and profits are the financial reward that comes from taking the risk of
running or owning a business. More specifically, profit is the amount of revenue or income that a
business owner retains after paying all the expenses associated with the operation of the
business.

Profit = Revenue – Expenses

If the expenses of the business exceed the revenue or income generated from operations, then
the business will suffer a loss.

Loss = Expenses – Revenue

Businesses that suffer extraordinary losses during a short period of time, or slowly see their
profits decline, may end up closing or filing for bankruptcy. Clearly the goal of most businesses
is to generate a profit by increasing revenue while holding expenses in check, and one of the
chief ways they do this is by providing their customers with value.

1.2- Nonprofit Businesses

Not all businesses are created to make a profit. A nonprofit organization is an organization that
serves a specific cause and is not intended to make profits. When its revenue exceeds its expenses in a
particular period, the profits are reinvested in the organization. Most nonprofit organizations are not
taxed as long as it qualifies by meeting specific requirements. Common examples of nonprofit
organizations include some hospitals, schools, charitable organizations, churches etc., .
1.3- Definitions of some basic concepts in business

 Wants - these are things you wish you could have. For instance you wish to have a jeep
car, a job, to be a governor etc.
 Needs – these are necessities of life. You cannot do without them; they include food,
shelter, clothing etc.Your needs and wants are satisfied through goods and services.
 Resources- Resources mean anything you can use to value or obtain, what you need and
want i.e. salary, influence etc.

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1.4-Goods and Services
Business provides goods and services to you. In today‘s business goods and services are many.
Examples:
 Goods: These are tangible output of production, for example, Handset, Cloth, Computer,
Radio and House, etc
 Services: These are intangible output of production. Examples of services include
education, Doctor, transport, lodging in a hotel, etc.

1.5- Activities of a business

These are some of the activities that are performed by business.
 Organising- within a business someone will be in charge to organize people and
machines as to provide products.
 Manage - if there is no one to manage finance, human resources and production, the
company can‘t go on smoothly.
 Production - it is the responsibility of a business to produce those physical items you
are using i.e. radio, wrist watches etc.
 Marketing - business is involved in advertising, distributing and selling those products
produced.
1.6- Characteristics of business
Business has some of all of these characteristics:
1. Exchange sale or transfer of goods and services. For every business there must be
exchange of goods and services for money.
2. Profit motive. For every business activities it is for profit making.
3. Dealing in goods and services. For every organization that is business oriented, it
must produce goods and services.
4. Uncertainty and risk bearing. Every business undertaking must take risk and there is
always uncertainty.
5. Continuity and regularity. A business undertaking must always be in business and
not on and off.
6. It is an organisation.
1.7- Objectives of business
 Profit. The aim of an organization is to make profit.
 Survival. Every business must have as a goal to continue to survive or exist.
 Growth. A business must not only survive, but it must have as goal to be the biggest.
 Market share. Every business concern must be able to carry out its market share
to control, aid sale its product to.
 Productivity. It must continue to produce.
 Innovation. Business must try to see that it‘s the first and best to bring up new ideas.
 Employee’s welfare. Business must maximally want to take care of its workers.

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  Service to consumer. Consumers are well satisfied as another objective of any
business concern.
 Social responsibility. Apart from doing the above objective of busineses, it must do
other things that people around the business must benefit.

1.8- Resources business uses: Factors of production or inputs

All businesses, both for-profit and nonprofit need resources in order to operate. Simply,
resources are the factors used to produce (goods and/or services). There are four categories of
resources, or factors of production:

• Land or Natural resources

• Labour or human capital
• Capital or man-made resources (machinery, factories, equipment)
• Entrepreneurship

1.8.1- Land or natural Resources

These are free gifts of nature, which are exploited in order to produce goods and services.
Natural resources have two fundamental characteristics: (1) They are found in nature, and (2)
they can be used for the production of goods and services. Examples of natural resources are
land, trees, wind, water, and minerals. They also tend to be limited. These natural resources can
be renewable, such as forests, or non-renewable, such as oil or natural gas. It‘s also possible to
invent new uses for natural resources (using wind to generate electricity, for example).

1.8.2- Labour or human resource

This involves mental or physical efforts used in the production process. Human resources are the
people who are able to perform work for a business. They may contribute to production by using their
physical abilities,such as working in a factory to construct a product. Alternatively, they maycontribute by using
their mental abilities, such as proposing a change in theexisting production process or motivating other workers.
1.8.3- Capital or man-made resources
In contrast to natural resources, capital is a resource that aids in the production of goods and
services. This factor of production includes machinery, tools, equipment, buildings, and
technology. Businesses must constantly upgrade their capital to maintain a competitive edge and
operate efficiently.

1.8.4- Entrepreneurship
An entrepreneur is someone who is willing to bear risk in order to start or run a business with the
hope of earning a profit in return. Entrepreneurs have the ability to organize the other factors of
production and transform them into a business. Without entrepreneurship many of the goods and

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services consume today would not exist. Entrepreneur decides on choices of how to combine
their resources and many more every day at what cost to achieve their aim.

1.9- Stakeholders in a business

Every business involves transactions with people. Those people are affected by the business and therefore
have a stake in it. They are referred to as stakeholders or people who have an interest (or stake) in the
business. Five types of stakeholders are involved in a business: owners, creditors, employees, suppliers,
customers, government and general public.
1.9.1- Owners

Every business begins as a result of ideas about a product or service by one or more entrepreneurs.
Entrepreneurship is the act of creating, organizing, and managing a business. Entrepreneurs are critical to the
development of new business because they create new products (or improve existing products) desired by
consumers.
People do have diverse reasons to own a business. The rewards of owning a business come in variousforms.
Some people are motivated by the chance to earn a large income.Others desire to be their own boss rather
than work for someone else. Many people enjoy the challenge or the prestige associated with owning a
business. Some people are capable of assessing opportunities and concretise them into business.
1.9.2- Creditors

Firms typically require financial support beyond that provided by their owners. The owners of a new
business may initially have to rely on friends or family members for credit because their business does not
have a history that proves it is likely to be successful and therefore able to pay off its credit in a timely
manner.
Many firms that need funds borrow from financial institutions or individuals called creditors, who provide
loans. Commercial banks commonly serve as creditors for firms. And, firms that borrow from creditors pay
interest on their loans. The amount borrowed represents the debt of the firm, which must be paid back to the
creditors along with interest payments over time. Creditors will lend funds to a firm only if they believe in
the creditworthiness of the firm. That is, the capacity of the business to perform well enough to pay the
interest on the loans and the principal (amount borrowed) in the future. The firm must convince the
creditors that itwill be sufficiently profitable to make the interestand principal payments.
1.9.3- Employees or workers

Firms hire employees to conduct their business operations. Some firms have only a few employees; others,
such as General Motors and IBM, have more than 200,000 employees. Many firms attribute their success
to their employees. Workers are entitled to salary or wage as remuneration to the services
rendered to the business. It therefore means you earn an income that enable you attend to your
own personal problems like building a house, buying a car. It enables you as a worker to make
choice of what to buy. Business enables workers to gain on the job experience about the job.
Business could send you for training outside the organization and gain experience, which could
lead you getting another job outside the organization. Employees gain from business other

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benefits like health insurance, retirement plan, sick and vacation leave etc.
1.9.4-Suppliers

These are stakeholders who supply the necessary materials used in the process of production. Obviously,
businesses commonly use materials to produce their products. For example,automobile manufacturers use
steel to make automobiles, while home builders need cement, wood siding, and many other materials. Firms
cannot complete the production process if they cannot obtain the materials.
1.9.5-Customers

These groups of stakeholders buy the output of production (goods and/or service) for consumption in order to
satisfy their needs or wants. Firms cannot survive without customers. To attract customers, a firm must provide a
desired product or service at a reasonable price. It must also ensure that the products or services produced are of
adequate quality so that customers are satisfied. If a firm cannot provide a product or service at the quality and
price that customers desire, customers will switch to the firm‘scompetitors.
1.9.6- Government
The basic thing that government gains from business is tax. Business pays various taxes to
government, which enables government to provide other services to the general public. The
government regulates as well the activities of business in an economy. For instance, the
government must ensure that quality products and services are provided to citizens.
1.9.7- General Society
Whether you patronize a business or not these days, you are likely to benefit from business.
Business provides to the general public what we call social responsibility. Therefore, all
businesses are socially responsible towards the society wherein they operate. Most businesses
benefit from the society in which they are implanted, and hence, are responsible vis-ā-vis these
communities.
1.10- Some terms related to business
Some of these terms are mostly used in business:
 Business enterprises. These are enterprise that undertakes business activities for a profit.
 Business form. A business firm is an economic unit, entity or organisation.
 A firm: It is a unit of ownership and control. It corresponds to an enterprise, e.g.,
Guinness Cameroon.
 Industry. Consists of a number of firms. For example, the brewery industries in
Cameroon consists of formerly Guinness Cameroon S.A., Les brasseries du Cameroun,
and Union Camerounaises des Brasseries (UCB).
 Commerce. It is made up of trade and all activities that make trade possible.
 Trade. It refers to the sale, transfer or exchange of goods and services and assisted by
other auxiliary functions such as banking, transportation etc. It is the exchange of goods
and services for money or other goods.

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 UNIT 2 - BUSINESS OWNERSHIP OR BUSINESS UNITS
When entrepreneurs establish a business, they must decide on the form of business ownership.
There are three basic forms of business ownership: sole proprietorship, partnership, and
corporation. The business ownership decision determines how the earnings of a business are
distributed among the owners of the business, the degree of liability of each owner, thedegree of
control that each owner has in running the business, the potential return of the business, and the
risk of the business. These types of decisions are necessary for all businesses.

2.1– Sole trader or sole proprietorship (one-man business)

A business owned by a single owner is referred to as a sole proprietorship. The owner of a sole
proprietorship is called a sole proprietor. Sole trading is mostly found in retailing business. Typical
examples of sole proprietorships include a local restaurant, a local construction firm, a barber shop, a laundry
service, and a local clothing store. The earnings generated by a sole proprietorship are considered to be
personal income received by the proprietor and are subject to personal income taxes. The sole trader starts
his business with his own capital and labour (sometimes he may borrow money from friends or
relatives assisted with labour by same people). He organises the business himself and takes all
the profit or loss arising from the operations. The sole trader therefore represents many things
at the same time. He is a capitalist because he alone owns the business and receives the profit.
He is a labourer because he performs most or all the work in the business; he is an
entrepreneur because he bears alone the risk of any financial loss. He is also a manager
because he takes decisions and controls the operation of the business.

2.1.1 -Features of a Sole Trader

(i) Ownership: A sole trader as the name implies is owned by one person.
(ii) Liability: The liability of the one man business in unlimited. That is, if the owner is
unable to pay his/her debts, both, the business asset and his personal asset can be sold to
offset the debt.
(iii) Sources of capital or finance: The capital outlay is provided by the owner. This source
of fund could be through: -
 Personal saving
 Intended capital
 Credit
 Borrowing or aids from relatives, friends etc
 Banks etc.
(iv) Legal entity: It is not a legal or separate entity. By law the business and the owner are
regarded as one person. They are not different, unlike corporate business from the owners.
(v) Motive: It is believe, that a sole trader is into business to make profit.
(vi) Method of withdrawing Capital: The owner can withdraw his capital anytime from the
business without consulting with anybody.

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(vii) No Board of Director: Because he is the owner, no board of directors that is why he does
what is in (vi).
(viii) Its Nature: It is a simplest and the commonest type of business unit you can think of.
2.1.2-- Sources of Funds of a Sole Trader
 Personal savings: It represents personal income of the owner.
 Borrowing particularly from friends and relatives
 Credit purchase from suppliers (sundry creditors). By selling goods to sole traders at
credit the suppliers are financing a sole trader.

 Donations from friends and relatives: Friends and relatives can dash you money
purposely to help you continue with your business.
2.1.3-Advantages of a Sole Trader
 It requires small capital. Can be established quickly and easily with small cash, there
are no organization fees and the services of lawyers to draw up terms are not generally required.
It is the commonest and the cheapest form of business organization.
 Easy to establish: This is because it requires no formalities and legal processes attached
to establishing the business and is subject to very few government regulations as no business of
balance sheet to the registrar of companies is required.
 Ownership of all profit: The sole trader does not share profit of the business with
anyone.
 Quick decision-making: The sole trader can take quick decisions since he has no parties
to consult or a boss whose permission he must get. He takes action as soon as circumstances
arise or as soon as he conceives an idea, such flexibility could be very vital to his success.
 Easy to withdraw his assets: Sole proprietorship can be liquidated as easily as it is
begun. All what he needs to do is to stop doing business. All his assets, liabilities and receivable
are still his.
 Single handedly formulates all policies: He determines the firms‘ policies and goals
that guides the business internally and externally and works towards them. He enjoys the
advantage of independence of actions and personal freedom in directing their own affairs.
 Boss: He is free and literally his own boss but at the same time continues to satisfy his
own customers.
 It is flexible: The owner can combine two or more types of occupation as a result of the
flexibility of his business e.g. a barber can also be selling mineral and musical records.
 Personal satisfaction: There is a great joy in knowing that a person is his own master.
The sole trader has a great deal of that. He also knew that the success and failure of the business
completely lies with him. This gives him the incentive to make his business as efficient as
possible.
 Cordial relationship, with workers and customers: Because the sole trader is usually
small, the owner can have a very close relationship with his workers to the extent that
domestic/personal issues can be discussed and addressed. He also knows firsthand information

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from customers what their wants are. It also enables him to know which of the customer‘s credits
are worthy. This kind of relationship is usually beneficial to all the parties.
 Tax saving: Unlike in companies the profits of the sole trader are not taxed, the owner
only pays his income tax.
 Privacy: The sole trader is not under any legal obligation to publish his accounts for
public consumption as in joint stock companies.
2.1.4-Disadvantages of a Sole Trader
(i) Bear all losses and risks alone: Business is full of risks and uncertainties and unlike
other forms of business organizations where risks and losses are shared among partners,
the owner of one-man business does not share these risks and losses with anybody.
(ii) Limited financial resources: Such business entities have limited finance, since financial
resources are provided by a single individual. Thus, limited financial capital limits the
potential of one-man business to grow or expand his/her activities.
(iii) Unlimited liability: Unlimited liability means that in the event of failure of the business,
the personal assets of a person can be claimed to pay debts of the business.
(iv) Lack of continuity: The business may stop to operate whenever the founder demises or
retires. Though his children or relatives may attempt to continue with the business, most
often than not they lack the zeal, and or, the ability to operate efficiently.
(v) Absence of specialisation : As stated earlier the sole proprietor does so many things by
himself. As a result of this, he may not handle aspects of the work efficiently. This
negatively affects the prospects of the business.
(vi) Limitation on expansion : Because of limited capital, the sole proprietor may not be
able to increase the size of his business. As enumerated earlier, the sole proprietor has
few source of capital. Except for banks, he may not get any substantial capital for
expansion frantically; his ability to borrow from banks depends on his collateral which
may not be enough for bank finding.
2.2- Partnership

2.2.1- Definition and meaning of partnership

Partnership is defined as the relationship that exist when two or more persons(maximum 20)
provide capital, own and manage business organization with the sole aim of making profit. The
co-owners of the business are called partners. The earnings distributed to each partner represent personal
income and are subject to personal income taxes. The partners contribute both funds and efforts to set
up and manage the business, and share profit (or loss) on an agreed basis. They also share the
losses that arise from such businesses.
2.2.2- Features of Partnership
1) Ownership: It is formed by 2-20 people.
2) The initial capital is contributed by partners.
3) Liability: Their liability is unlimited except for limited partner.
4) Formation motives: They are formed for profit reasons.

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 5) Sources of capital: contribution from the partners ploughing back profit, loans from
banks.
6) Method of withdrawing capital must be approved by other partners as laid down in their
partnership deed.
7) It has no separate legal entity.
8) It has no board of directors.
2.2.3- Types of Partnership
We have principally two types of partnership namely; ordinary and limited partnership.

 Ordinary Partnership
All members or partner take active part in the management of the business and are generally
liable to any loss or risk. All partners have equal responsibility and bear all the risks of the
business equally. All the partners have equal powers, unlimited liabilities, take active part and
profits are shared equally.

 Limited Partnership
Any members in this category, his debts are restricted to the amount of money contributed in
running the business. Not all partners take equal part in the management of their business. But
there must be a member who bears the risk and also takes active part in the business activities. In
other words, in limited partnership, there is at least one ordinary partner who has unlimited
liability.

2.2.4- Kinds of Partners

We have five kinds of partners and they include:

 Active Partner: This is the partner(s) who take active part in the formation, financing
and management of the business. They receive salary for the role they play as a manager
or managing director or director of the business as spelt out in the partnership deed.
 Dormant/Sleeping Partner: This partner contributes only the money needed for creation
of the business or for running of the business. He is not involve in managing of the
business and doesn‘t receive salary. He is only entitled to profit sharing and losses as it is
agreed upon before formation.
 Normal/Passive Partner: A normal partner is one who is not actually a partner but who
allows his name to be used in the partnership or who gives the public the impression that
he is a partner even though he may not share in the profit of the business. This is a
partner appointed because of his experience, fame or wealthy position.
 Silent Partners: A silent partner is an individual who is known to the public as a partner
but who does not take active part in the management of the firm.
 Secret Partner: A secret partner is that who is active in the affairs of the business but not
known to the public as a partner.

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2.2.5- Sources of Funds for Partnership
The following method could be used by partner to fund their business.

(i) Contribution from members;

(ii) Ploughing back profits;

(iii) Borrowing from the bank; and

(iv) Enjoying credit facilities from suppliers.

2.2.5- Article of Partnership or Deed of Partnership
This is the document that regulates the activities of the partnership business. It is the
―constitution of the partnership business aimed at guiding against, or resolving disagreements. It
is like an agreement between partners before the formation of the business. It is normally drawn
by a solicitor for the partners. The partners agree and sign the document. The deed of partnership
is not legally required. It is very essential. They include all or some of the following:-

- Name of the firm;

- Name of the partners;
- The place of business;
- The description of the nature of business;
- The amount of capital that each part is to contribute;
- The role of each partner in the business;
- The method of profits and losses sharing;
- The compensation, if any, the partners are to receive for services rendered to the business;
- The right of partners in the business;
- How long the business shall last;
- Partner‘s rights in the business;
- How matters shall be determined either by majority vote or not;
- Provision for the admission of new members;
- The arrangements concerning withdrawals or additional investment; and
- Arrangement for the dissolution of the firm in the event of death, incompetence or other
causes of withdrawal of one or more of its members.
N.B: - Once each partner agrees to sign this document, it becomes a legal document that is
enforceable in a court of law.
2.2.6 Advantages of Partnership
The following, are the advantages of partnership.

 Greater financial resources: The fact that it is formed between 2-20 people provides
more capital for such business compare to the one-man business. By so doing ability to
borrow i.e. from bank and be approved is higher and better compare to one-man. Benefits
of expansion are higher because more funds are available.

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  Combined abilities and skills: In partnership, there are various partners, with various
ideas. That is, accountants, marketers, bankers, historians, managers etc. may come to
together to form a business. They will put into use various talent which may advance the
company more compare to a one-man business, who is the only talent.
 Greater continuity: Relative to the sole proprietorship, the partnership has a very great
tendency of continuity even in death. The death of a partner may bring about a
reorganization of the partnership, but the remaining members are likely to have some
knowledge that will enable them to continue with the business.
 Ease of formation: Like-one-man business, the partnership is fairly easy to organize as
there are few governmental regulations, governing the formation of partnerships.
 Joint and better decision: That two good heads are better than one and this is applicable
to partnership business where joint and better decisions are taken. Since the opinion of
each partner is considered, it may lead to better decision making.
 Creation of employment opportunities: The large size partnership is in an
advantageous to employ more in their business because of its huge financial resources.
 Employment of valued employees: In order to secure the advice and experience of
esteemed employees; they are made partners in the firm. This is a way of enhancing their
personal work as well as that of the firm.
 Tax advantage: Partnership enjoys tax advantage. Taxes are therefore, levied upon the
individual owners rather than upon the firm as it is not recognized as a legal entity.
 Application of division of labour: This is applicable in its managerial and
administrative hierarchy.
 Privacy: Like the sole proprietorship, partnerships are not under any legal obligation to
publish their books of accounts for public consumption. Partnership businesses enjoy
privacy and secrecy of in their operations.
2.2.7 Disadvantages of Partnership
 Unlimited Liability: If the business fails in the process, assets will be sold to offset their
liabilities. In a situation where the assets cannot pay for the debt, the owners‘ personal
belongings (except in the case of limited partnership) could be sold to offset such debts.
 The business is not a legal entity: Most of the partnership business has no legal
backing.
 Disagreement and Resignation: Death of a partner can lead to the death of a business
especially the active partner. Most of the partnership ends with disagreement.
Disagreements because of action or opinion lead to resignation which could lead to total
death.
 Decline in pride of ownership: Since the partnership is owned by at least two people the
pride and joy associated with ownership is reduced. Unlike in sole proprietorship where
the owner enjoys great pride in his business.
 They may experience slow decision and policy making: Meeting that require quorum,
may not always be formed.

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  Risk of mandatory dissolution: Where a member withdraw his membership or
admission of a new partner becomes necessary, the partnership will be dissolve and
another agreement reached to admit such member.
 Limited capital: This partnership cannot get more capital through shares except through
members.
 Restriction on sale of interest: There is a difficulty in affecting transfer of ownership.
The interest of operation is not transferable without the consent of other partners.
2.3 – Joint Stock Company or Limited liability Company
A company is an association of individuals who agreed to and jointly pool their capital together
in order to establish and own a business venture distinct from others. In other words, it can be
defined again as an association of investors who buy or own shares in a company for the purpose
of carrying on a business. Those who buy or own shares are known as shareholders. They are
regarded as the owners of the company. A joint stock company could be a private limited
company (Ltd) or a public limited company (Plc).

 Private Limited Liability Company: This Company when formed has a minimum
number of two people and a maximum of fifty.
 Public Limited Liability Company: Minimum numbers of people that can form this
company are seven while the maximum is not stated. The owners are shares holders,
people are free to come in and free to sell-off their shared.

2.3.1- Method of Formation of company

Formation of Joint Stock Company starts with preparation of documents that will be presented to
the registrar of companies for his appreciation and subsequent registration. The document use for
registration includes:

(A) Memorandum of Association: It states how the company will relate with the outside world.
It will state the name, location and objectives of the company. A Memorandum of
association includes:
- The name of the company with ―limited‖ as the last word;
- Location of the company;
- Objectives of the company;
- Amount of the registered capital proposed; and
- Liability of the company‘s shareholders (statement).
(B) Article of Association: It informs about the regulation that is laid down for the internal rules
and regulations, and management of the company. They may include:
- the duties rights and position of each member of the company;
- the method of the appointment of the directors;
- how dividends are to be shared;
- how general meeting are to be held and the procedure;
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- method of electing directors and the voting rights at such election; and
- method of auditing the company‘s account.
(C) The Prospectus: This is a document of notice, circular, advertisement or other invitation
offering the public subscription or purchase of shares or debentures of a company.
(D) Certificate of Incorporation: This certificate is issued by registrar of companies to show
that a business is legally incorporated and recognize by government. A private limited company
can start operation prior to issuance of this document.
(E) Certificate of Trading: It is issued to public limited liability company. He can start a
business and exercises borrowing powers.
2.3.2- Features of a Private Company

- Membership: a minimum of 2 and a maximum of 50.

- Issuance of Shares: cannot sell shares to the public.

- Transferability of Shares: can only be transferred with the consent of other

shareholders.

- Quotation: private companies are not quoted on the floor of the stock exchange.

- Publication of Accounts: not required to publish annual account. However they must
send a copy of their audited account to the registrar of companies each year.

- Limited Liability: each shareholder possesses limited liability.

2.3.4- Features of a Public Company
(i) Membership: Minimum of seven and no maximum, but article of association could
specify maximum.
(ii) Issuance of Shares: can sell share to the public.
(iii) Transferability of Shares: shares can be transferred without the consent of other
shareholders.
(iv) Quotation as Public Companies: are quoted on the floor of the stock exchange.
(v) Publication of Accounts: required by law to publish account and to also send
a copy of audited account to the registrar of companies each year.
(vi) Limited Liability: each shareholder possesses limited liability.
2.3.5- Advantages of a Private Company
 Limited Liability: Liability is limited to the amount of money you put into the business.
In case of liquidation, your personal properties are not touched.
 Privacy: Just like the public company, it is not compulsory to publish its account yearly
as such the company has the advantage of keeping its secret.
 Continuity: The minimum number of holder of a company is two and maximum is fifty.
Continuity is possible, albeit, the death of a shareholder.
 More capital: Compare to partnership business, the chances of sourcing for funds to be
granted i.e. from banks is higher.
 Legal entity: The Company is a legal entity as such it can sue and be sued.
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2.3.6-Disadvantages of a Private Company
 Taxes: Most of these companies pay corporate tax compare to a sole trader or partnership
that pays personal income tax, the tax may be so heavy that it may be a burden on the
company.
 Share: It is unfortunate that the companies share are not publicly subscribed, even in the
exchange of shares, all member must be notify. A new member may be rejected.
 The shares of private limited companies cannot be transferred without the consent of
other shareholders.
2.3.7- Advantages of Public Limited Company
(i) Legal entity: It is a corporate body; it can sue and be sued.
(ii) Limited liability: The liabilities of the owners are limited to the shares brought into the
organization.
(iii) Ease of raising additional capital: Because of the large numbers of the owners it
makes it easy to raise fund from their contributors or selling of shares or bonds.
(iv) Expansion is unlimited: There is no limit to where the company can expand to provide
the company has a large capital.
(v) Continuity: This company life is long, even if hundred members die at a time the
chances of its survival is still there. Even in a period of resignation, disability etc., the
company is not threatened.
(vi) Adaptability: It is adaptable to small medium and large scale companies according
to the fund available to the firm.
(vii) Capital transfer: you can transfer your capital at will if you are not satisfy with the
company.
(viii) Flexibility: for the fact that we have many members as shareholders, members of
board, managers etc with diverse experience and knowledge, the running of the
company will be perfect using the verse of experience personnel thereby giving room
for flexibility.
(ix) Enjoyment of Large scale production unlike One-Man Business: Because of the
number of owners, finances, flexibility etc. a company has a better advantage of
producing goods in a large quantity.
(x) Shareholders interest is Safeguarded: Because there is no secrecy, the shareholders
have nothing to fear.
(x) No managerial responsibility: You can be a shareholder and yet you are not part of
the management. It means that others are managing the business for you.
(xi) Employees may become co-owners: Employee will become owner either by
deliberate action of the management of the companies or by buying shares.

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 (xii) Democratic management: The Company is run democratically; election of board of
directors is by vote. In meeting, if no quorum is formed there will not be a meeting.
2.3.8- Disadvantages of Public Limited Company
 Double taxation: Most corporations are faced with double taxation. In Cameroon, public
limited companies are subjected to different tax regimes. Both the profit realised by the
company and the income earned by workers and shareholders are being taxed.
 Hard to establish: Their establishment requires a lot of documentary, administrative,
administrative requirements task. Also, it requires huge amount capital for its formation
as well.
 No privacy: A public company is legally obliged to publish its account annually, making
it public affairs.
 Non-Flexibility: It is hard to switch business because the papers for registration state
what they are to do. If you change condition, it means you are to form another company
entirely. Special performance must be sought from government to transact business
outside the location in which you were registered.
 Cooperation is nonexistence: Most companies have problems of misunderstanding
between both managers and managers or with workers; it may be because of the large
nature.
 Owners are separate from managers: Therefore, there is the tendency of the managers
not running it well since they are not the owners. For instance, managers may have the
tendency to pursue their personal interests, rather than those of shareholders.
 Huge capital is required for its formation, it therefore become more complex to manage
compares to one-man business.
 Delay in policy and decision making.
 Suppression of individual initiatives.

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 UNIT 3 – TYPES OF BUSINESS UNITS (OR OWNERSHIP), PRODUCTION AND
COST ANALYSES
3.1- Meaning and definition: Types of business is the distinct business activity that one can
enter into with the aim of satisfying customers. Meanwhile kind of business is how to organize a
business in order to carry out any of the types of business.
3.2 - Producers: A producer is that person who is involved in producing those goods and
services for distribution. Producers are more involved in producing goods that we can refer to as
raw materials. You take an example of:
 Farmer- he is a producer, involve in producing yam, beans, cassava eggs.
 Mining: It involves digging for minerals like gold, diamond etc.
 Fishing: It involves going to water and catch fishes for sale to other to use for
consumption or for producing other products.
 Forestry business: Bringing in timbers into the market to sell to builders etc.
All these activities are involved in gathering products in their original forms, from natural
resources such as land and water.
3.3- Processors: Businesses that change products from their original forms into more finished
forms are processors. For examples, we have:
 Paper mills: They get raw materials from woods, waste paper and produce exercise
books, tissue papers
 Oil refineries: Crude oil is gotten from the ground and refine into petrol, diesel, jelly etc
 Steel: Raw materials are gotten from various locations and they are turn into steel and
steel is produce into another product.
These products that are processes are transformed into processed goods.

3.4 - Manufacturers: Manufacturers could combine the activities of producers and processor
together to get a finished product. Manufacturer therefore turns raw or processed goods into
finished goods. Finished goods are those products that are produced and ready for the market.
Other examples of Manufacturers are:
 Bakery: Producing different types of product of various sizes.
 Automobile factory: make cars out of processed goods like steel, aluminum, glass,
plastic etc.
Manufacturers are just involved in producing: -

- Consumer goods- you buy in the shops

- Consumables- (food, drink, cigarettes)
- Consumer durables, which have a longer life (e.g. Radios, domestic appliances,
televisions and cars-Producer goods- include: Machinery, raw materials, commercial
vehicles wares etc.
Manufactures are concern with:-

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- Product mix- Range of product and brands they produce.
- Diversified - making a range of goods which may be sold to different markets.
3.5- Intermediaries: The function of intermediaries is for them to transport and distribute goods.
An intermediary is a business that moves goods from one business to another. These
intermediaries are mostly wholesalers and retailers.
3.5.1- A Wholesaler: Is that business man that buys goods from a manufacturer in large
quantity and resell to retailers in a smaller quantity. Wholesaler performs the following
functions:
 Buying
 Selling
 Dividing or bulk breaking
 Transportation
 Ware housing
 Financing
 Risk bearing
 Market information
 Management services and advice

3.5.2- Retailers: A retailer is that business that buys goods from a wholesale and resell them
directly to the final consumer. Retailers like wholesales perform the function of wholesalers but
added are:
- Breaking the bulk
- Give credit to customer
- Located close to customer
3.6 - Service Businesses: Service business is that business that is increasing in number very
rapidly. Service business provides services instead of goods to consumers. Goods service
industry sells are intangible, which you cannot touch. Examples of such service industry include:
- Car washes
- Airlines
- lawn care specialist
- Mechanics
- Doctors
Service industries are operated to provide:

(i) Assistance for Business - for instance if you leave your destination to anywhere
in Cameroon with plane you decide to lodge in a hotel before the following morning
business discussions, it means that your business has been assisted by service industry.
Banks could equally serve as assistance for business. For instance banks grant credit to
business men to carry out their activities. Importer and exporter require bankers to aid
them in their businesses.

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 (ii) Insurance services: It is another service area that is required to reduce the risk of
trading. It covers all standard risk like theft, fire, goods on transit.
(iii) Communication: Communication is another service area that aid business. It helps
because up-to date information is required. This information can be assessed through
computers, satellite links and fax machines.
(iv) Service industry employ specialist for instance you need advertising agencies to plan a
campaign, design of art work etc.
3.7- Sectors of business activities: The activities of business organisations are categorised into
three different sectors: primary, secondary (or manufacturing) and services (tertiary).

 Primary sector: It is involved in the extraction of raw materials. Thus, primary sector
grows or takes different kind of things directly from the ground or water or in general our
surroundings and mainly deals with raw materials. Examples, haunting; fishing, mining
etc. A typical example in Cameroon is SONARA, CDC etc.
 Secondary sector produces or manufactures or transforms raw materials into finish
products. It is concerned with the transformation of raw materials into finished or semi-
finished goods. They include manufacturing and constructing industries. For example,
Chococam, Nestle company etc.
 Tertiary sector: It is involved in the provision of services.

PRODUCTION

Production is the creation of utility to satisfy human wants. The main purpose of production is to
see that what so ever is produced is consumed; therefore production is only complete when the
good reaches the final consumer or when the good is consumed.

TYPES OF PRODUCTION: There are basically two types of production namely: direct and
indirect production

 Direct production is the creation of utility to satisfy one‘s self. The goods and services
produce in this case are not taken to the market or are not meant for exchange but rather
for personal consumption.
 Indirect production is the case where people specialize in the production of a particular
good that is meant for exchange or it the creation of utility to satisfy others first before
satisfying yourself, i.e., satisfying one‘s self indirectly.

THE PRODUCT OF PRODUCTION: Products are the goods and services produced by a
company, to satisfy needs and wants of customer.

 Goods: All physical things or materials which are ready for use are known as goods.
Goods are tangible items which satisfy human wants and needs. Humans find them
important and desirable so they make efforts to acquire them.

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  Services: Services are physical and mental efforts for doing something. It cannot neither
be seen nor touched but do possess utility (services are intangible). E.g., services of
teachers, Doctors, Lawyers, Nurses, etc.

TYPES OF GOODS

 Economic good – These are goods which are produced and demanded by the consumers
who are ready to pay a price for each. Economic goods do possess utility, are limited in
supply and have opportunity cost. There are two types of economic goods namely
producer goods and consumer goods.
 Producer goods: They are also called capital goods. These are goods made by man to be
used to produce other goods. E.g., tailoring machine, Crane, etc.
 Consumer goods: These are goods which are ready to be sold and consumed by the final
consumers. It directly satisfies consumers. E.g., tooth paste, coca cola etc. There are two
types of consumer goods namely: durable consumer goods and non-durable consumer
goods or perishable goods.
(i) Durable consumer goods: These are consumer goods whose satisfaction last for
a long period of time because the goods can be used over and over. E.g., vehicles;
refrigerator; mobile phones.
(ii) Non durable consumer goods: they are also known as perishable goods. These
are consumer goods whose satisfaction last for short period of time. It cannot be
used for more than one time. E.g., Meat, milk, fish, bread, vegetables, fruits, etc.
 Free good – These are the gifts of nature; they do possess utility but do not command a
price, do not have opportunity cost and are unlimited in supply. E.g., air, sunlight and
water.
 Public goods: These are goods which are collectively owned and consumed. They are
also called collective goods. They are provided by the government from finance obtained
through taxation. E.g., street light, public taps, etc.
 Private goods: These are goods produced by private individuals and companies whose
aim is to make a profit and they are used exclusively for the satisfaction of private needs
for example food, clothing, and property. They are not free goods; they come with a price
and cannot be substituted with other goods.
 A mixed good: This is a good that has both characteristic of a private good and a public
good. Examples are health care, education, public transport, refuse collection and fire-
service.

STAGES OF PRODUCTION: The activities of business organisations are categorised into

different sectors:

 Primary production: This type of production is concerned with the extraction of raw
materials. It is concerned with domain of production like mining, fishing, agriculture,
forestry etc.
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  Secondary production: This type of production is concerned with the transformation of
raw materials into finished goods. It is in effect concerned with manufacturing industries
like food processing, car manufacture, brewery etc.
 Tertiary production: This domain of production is concerned with the provision of
services which may either be of commercial or of a social nature. It is concerned with
domains like banking, insurance, catering etc.
 Quaternary production: The quaternary sector of the economy is concerned with the
knowledge-based part of the economy which typically includes services such as
information generation and sharing, information technology, consultancy, education,
research and development, financial planning, and other knowledge-based services.
 Direct and indirect production: If a person works directly to satisfy his own wants, he
is said to be engaged in direct production. On the other hand, indirect production is
production by specialisation used to satisfy the wants of others.

BRANCHES OF PRODUCTION: There are three branches of production namely: industry,

commercial and tertiary.

 Industry: it involves the production of goods and materials. An industry produces both
consumer and capital goods.
 Primary or extractive industry: It is involved in the extraction of raw materials from
nature. They include extractive industries for example mining and quarrying and genetic,
for example farming, forestry and fishing. The products produced at this stage are in their
raw or unusable state, so they are moved to secondary industry to be transformed in their
usable state.
 Secondary or manufacturing industry: it is concerned with the transformation of raw
materials into finished goods. They include manufacturing, constructing, assembling
and continuous industries.
(i) Manufacturing: This is the transformation of raw materials into semi-finished or
finished products with the use of machines.
(ii) Constructing: This is an industry which is engaged in the construction of
buildings, dams and bridges. It uses the products of manufacturing industries
especially cement, and iron and steel.
(iii) Assembling : This is the type of industry that is involved in the assembling of
components extracted or manufactured by both manufacturing and the extractive
industries for the purpose of putting the products into an organised whole. E.g.,
cars, bicycles, computers, etc.
(iv) Continuous: In this type of industry, raw materials are fed from one end of the
factory and they emerge as finished products from the other end after passing
through various processes. Examples, textiles, paper, and sugar industries.

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FACTORS OF PRODUCTION:

Production is the act of transforming factors of production into goods and services. Production
equally involves the transformation of what has been produced. If a firm wants to increase
production, it will take time to acquire a greater quantity of certain inputs. Factors of production
include: - Labour, Land, Capital and Entrepreneur.

 Land (Natural resources) - These are resources that have been provided by nature that
can be used to produce goods and services to satisfy human wants. Land may be defined
as the free gifts of nature used in the production process. The reward of land is rent.
Land has the following characteristics: -
 Fixed: - This means the supply of available land cannot be increased.
 No production cost: - Man really does nothing to acquire the land at his disposal.
 Immobility: - Land by itself does not move except moved by man
 Appreciate: - Land does not depreciate. Instead, the value of land increases overtime.
 Not uniformly distributed: - Some countries are lucky to have vast amounts of fertile
land, mineral deposits, forests, etc., while other countries or regions do not have.
 Man-made resources (Capital) – Capital refers to the equipment, tools, structures,
machinery, vehicles; materials and skills created by man to help in the production of
goods and services. Its reward is interest. There are three main types of capital:
 Fixed capital: - This refers to capital that does not significantly change its form in the
process of production.
 Working or circulating capital: - This refers to capital that significantly changes its
form in the process of production.
 Social capital: - This refers to capital like school, hospitals, which do not directly help in
the production of goods and services.
 Labour (human resources) – This refers to the physical and mental efforts of human
beings put in the production of goods and services. Labour receives a reward known as
wages.
 The entrepreneur – An entrepreneur organises resources, i.e., he coordinates other
factors to produce goods and services. He combines the other components of the
enterprise to carry out production. He is a risk-bearer. He receives a reward known as
profit or loss.

PRODUCTION FUNCTION
In simple words, production - function expresses the relationship between the physical inputs and
physical output of a firm for a given state of technology. The production-function is a purely
technical relation that connects factor-inputs and outputs. The production-function can be written
mathematically as follows:
qx = f(F1, F2, F3 ……….. Fn) . Here, qx = the quantity of x commodity and F1, F2, F3
……….. Fn = Different factor-inputs.

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  Fixed factors and variable factors: A fixed factor is an input that cannot be increased
within a given short time period (e.g. buildings). A variable factor is one that can readily
be change at short notice.
 Short-run and long run: The short run is a time period during which at least one factor
of production is fixed. In the short run, then, output can only be increased by using more
variable factors. The long run is a time period long enough for all inputs to be varied.
However, the short period is any time period up to a year and the long run is any time
period longer than a year.

PRODUCTION IN THE SHORT RUN AND RETURNS TO THE VARIABLE FACTOR

As earlier said, production in the short-run consists of varying some but not all the factors of
production and observing how total product changes. The relationship between the output of a
product and inputs (factors of production) used to produce it is known as the production function.
In order to examine the process of production in the short run, let us assume:

 Labour is the only variable factor.

 All units of the variable factor are equally.
 Techniques of production remain constant.

TOTAL PRODUCT, AVERAGE PRODUCT (AP) AND MARGINAL PRODUCT (MP)

 Total product refers to the total output of the firm per period of time
 Average product (AP) or more accurately average physical product (APP) refers to the
output per unit input at a given level. It follows that the average product of an input is the
total output produced over a given period divided by the number of units of that input
used.
APP = ( )
 Marginal product (MP) or more accurately marginal physical product (MPP) describes
the change in total output brought by varying factor. In general MPP =

Illustration: The table below shows the total output, APP and MPP with variable number of
workers

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 Number of TPP APP MPP
workers

a 0 0 - -

1 3 3 3

2 10 5 7

b 3 24 8 14

c 4 36 9 12

5 40 8 4

6 42 7 2

d 7 42 6 0

8 40 5 2

 The law of diminishing Returns or the law of variable proportions: It states that ―As
successive units of one factor are added to fixed amounts of other factors, the average and
marginal products of the variable factor initially rise and eventually declines. The law of
diminishing returns should have been more appropriate referred to as the law of
diminishing marginal output. We may now present the data of the table above graphically
so as to have a visual image or picture of the law of diminishing return.

PRODUCTION IN THE LONG RUN AND RETURNS TO SCALE

In the long run, we talk of returns to scale and no longer of returns to the variable factor as we
did in the short run

The scale of production

The words ‗to scale‘ means that all inputs increase by the same proportion . If a firm were to
double all of its inputs-something it could do in the long-run-would it double its output? Or will
output more than double or less than double? We can distinguish three possible situations

 Constant returns to scale: This is where a given percentage increase in inputs will lead
to the same percentage increase in output.
 Increasing returns to scale: This is where a given percentage increase in inputs will lead
to a larger percentage increase in outputs.
 Decreasing returns to scale: This is where a given percentage increase in inputs will
lead to a smaller percentage increase in output.

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RETURNS TO SCALE

It refers to the rate at which output changes as the scale of production takes place when all inputs
are changed by the same percentage so that the ratios (proportions) in which these inputs are
combined remain the same.

RELATIONSHIP BETWEEN RETURNS TO SCALE AND ECONOMIES OF SCALE

Increasing return to scale are usually associated with falling average (unit) cost which can also
be referred to as economies of scale. It is so because in the absence of changes in the costs of
inputs, if output increases by a greater percentage than inputs, each unit will become cheaper to
produce.

Economies and Diseconomies of Scale

. With the expansion of the scale of production firms get certain advantages; these are termed as
economies of large scale production. But when the scale of production exceeds a certain limit, it
leads to disadvantages or diseconomies of scale to the firms. Thus the firms get economies and
diseconomies of scale with the expansion of output. These are termed as economies and
diseconomies of large scale production. Economies refer to the saving in per unit cost as output
increases. On the other hand, diseconomies refer to the disserving in the per unit cost as output
increases. Economies and diseconomies of scale are broadly classified into two groups:
A. Internal economies and diseconomies
B. External economies and diseconomies.
These are discussed as below:
(A) Internal Economies and Diseconomies
Economies and diseconomies that accrue to a firm out of its internal situation when its scale
increase are termed as internal economies and diseconomies. Now we shall discuss them in
detail.
• Internal Economies: Internal economies that accrue to a particular firm with the expansion of
its output and scale are termed internal economies. Internal economies of a firm are independent
of the action of other firms. They are internal in the sense that they are limited to a firm when its
output increases.
They are not shared by other firms in the industry. Following are the main types of internal
economies:
i. Labour Economies – Division of labour and specialization are possible more in large-
scale operations. Different types of workers can specialize and do the job for which they
are more suited. A worker acquires greater skill by devoting his attention to a particular
job. As a result of this quality and speed of work both improve.
ii. Technical economies – The main technical economies result from the indivisibilities.
Several capital goods, because of the strength and weight required, will work only if they
are of a certain minimum size. There is a general principle that as the size of a capital

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 good is increased, its total output capacity increases far more rapidly than the cost of
making it.
iii. Marketing economies – Marketing economies arise from the large scale purchase of raw
materials and other inputs. A firm may receive large discounts on the purchase of bigger
volume of raw materials and intermediate goods. Marketing economies can also be
reaped by the firm in its sales promotion activities. Advertising space (in newspapers and
magazines) and time (on television and radio), and the number of salesmen do not have to
rise proportionately with the sales. Thus per unit selling cost may also fall with the
increase in output.
iv. Managerial economies – Managerial economies arise from specialization of
management and mechanisation of managerial functions. Large firms make possible the
division of managerial tasks. This division of decision—making in large firms has been
found very effective in the increase of the efficiency of management.
v. Financial economies – Large firms can easily raise timely and cheap finance from banks
and other financial institutions and also from the general public by issue of shares and
debentures.
vi. Risk-bearing economies – A large firm can more successfully withstand the risks of
business. With the product diversification and by operating in several markets a large
firm can withstand the risk of changing consumer‘s tastes and preferences.
vii. Economies related to transport and storage costs – Large firms are able to enjoy
freight concessions from railways and road transport. Because a large firm uses its own
transport means and large vehicles, the per unit transport costs would fall. Similarly, a
large firm can also have its own storge godowns and can save storage costs.
viii. Other Economies – A large firm may also enjoy some other economies with the
expansion of its output. Prominent among them are economies on conducting research
and development activities and economies of employee welfare schemes.
As a result of all these internal economies firm‘s long-run average and marginal cost decline
with the increase in output and scale of production.
• Internal Diseconomies
Internal Diseconomies are those disadvantages which are internal to the firm and accrue to the
firm when it over expands its scale of production. The main internal diseconomies of scale are as
follows: -
i. Management Diseconomies and Diseconomies Related to Division of Labour – These
diseconomies occur primarily because of increasing managerial difficulties with too large
a scale of operations. It becomes difficult for the top management to exercise control and
to bring about proper coordination.
ii. Technical Diseconomies – If a firm frequently changes in it technologies and uses new
technologies and new machines, it may increase its costs. After a certain limit, the large
size or volume of the plant and machinery may also prove disadvantageous.

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 iii. Risk-taking Diseconomies – The business cannot be expanded indefinitely because of
the ―principle of increasing risk‖. The risk of the firm increases because of reduction in
demand, change in fashion and introduction of new substitutes in the market.
iv. Marketing Diseconomies – A large firm is forced to spend more on bringing and storing
of raw materials and selling of finished goods in the distant markets.
v. Financial Diseconomies – A large firm has to borrow a large amount of money even at
higher rate of interest. It imposes a burden on the financial position of the firm.
(B) External Economies and Diseconomies
Economies which accrue to the firms as a result of the expansion in the output of the whole
industry are termed external economies. They are external in the sense that they accrue to the
firms not out of its internal situation but from outside it i.e., from expansion of the industry
Following are the main forms of external economies.
i. Economies of Localisation/Concentration - When an industry develops in a particular
region, it brings with it all the advantages of localization. All the firms of this industry get
the following main advantages:
a. Easy availability of skilled manpower;
b. Improvement in transportation and communication facilities;
c. Availability of banking, insurance and marketing services;
d. Better and adequate sources of energy-electricity and power;
e. Development of ancillary industries.
ii. Economies of Disintegration/Specialisation – The industry can have advantages from
the economies of specialization when each firm specializes in different processes
necessary for producing a product. For instance in a cloth industry some firms can
specialise in spinning, others in printing etc. As a result of specialisation all the firms in
the industry would be benefited.
iii. Economies related to Information Services – Firms in an industry can jointly set-up
facilities for conducting research, publication of trade journals and experimentation
related to industry. Thus, besides providing market information, the growth of the
industry may help in discovering and spreading improved technical knowledge.
iv. Economies of Producer’s Organisation – Firms of an industry may form an association.
Such an association can have their own transport, own purchase and marketing
departments, own research and training centres. This will help to reduce costs of
production to a great extent and shall be mutually beneficial.
 External Diseconomies: Diseconomies which accrue to the firms as a result of the
expansion in the output of the whole industry are termed external diseconomies. The
main external diseconomies are as follows:
i. Increase in input price – When the industry expands, the demand for factor-inputs
increases. As a result the input prices (such as wages, prices of raw materials and
machinery equipments, interest rates, transport and communication rates etc.) shoot up.
This causes the cost of production to rise.

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 ii. Pressure on Infrastructure Facilities – Concentration of firms in a particular region
creates undue pressure on the infrastructure facilities – transportation, water, sanitation,
power and electricity etc. As a result, bottlenecks and delays in production process
become frequent which tend to raise per unit costs.
iii. Diseconomies due to Exhaustible Natural Resources – Diseconomies may also arise
due to exhaustible natural resources. Doubling the fishing fleet may not lead to a
doubling of the catch of fish; or doubling the plant in mining or on an oil-extraction field
may not lead to a doubling of output.
iv. Diseconomies of disintegration – When the production of a commodity is disintegrated
among various processes and sub-process, it may prove disadvantageous after a certain
limit. The problem and fault in any one unit may create limit. The problem and fault in
any one unit may create problem for whole of the industry. Coordination among different
concerns also poses a problem. As a result of external diseconomies, the LAC curve of
the firms in an industry shifts upward.
COSTS ANALYSIS

Costs of production refer to the expenditures incurred in production.

Various Concepts of Cost: The term ―Cost‖ is used in many sense and hence has many
concepts. All these need to be properly and clearly understood.

1. Real Costs
 real cost included the following two basic elements:
- exertions of all kinds of labour;
- waiting and sacrifices required for saving the capital
 It is more a psychological concept and cannot be measured.
 Therefore, it is not applied in actual practice.
2. Economic Costs
The total expenses incurred by a firm in producing a commodity are generally termed as its
economic costs. Economic costs are generally referred to as production costs as well.
The total economic costs include:

(i) Explicit Costs

 Actual payments made by a firm for purchasing or hiring resources (or factor-services)
from the factor-owners or other firms are called explicit costs.
 These are actual money expenses directly incurred for purchasing the resources.
 These are the costs which a Cost Accountant includes under the head expenses of the
firm.
 Accounting costs include all costs incurred by the firm in acquiring various inputs from
outside suppliers.

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  Examples - payments for raw materials and power; wages to the hired workers; rent for
the factory-building; interest on borrowed money; expenses on transport and publicity,
etc.
(ii) Implicit Costs
 It refers to the imputed costs of the factors of production owned by the producer himself
which are generally left out in the calculation of the expenses of the firm.
 Besides purchasing resources from other firms, a producer uses his own factor-services
also in the process of production.
 He generally does not take into account the costs of his own factors while calculating the
expenses of the firm.
 But these costs should also be taken into account.
 They are called implicit costs because producers do not make payment to others for them.
 Example, rent of his own land, interest on his own capital, and salary for his own services
as manager, etc.
(iii) Normal Profit
 Economists consider an entrepreneur as a separate and independent factor of production.
 An entrepreneur is a factor of production.
 An entrepreneur can engage himself in the work of production of a commodity only when
he hopes to get a minimum amount of remuneration as profit.
 The minimum amount which is required to keep an entrepreneur in the production is
known as normal profit.
 This normal profit is in a way reward or remuneration for an entrepreneur and, therefore,
should be treated as costs.
Thus, Total economic costs = Explicit costs + Implicit costs + Normal profit.
Generally economic costs include the following:
Cost of the raw materials, wages, interest, rent, management costs, depreciation of capital
equipment, expenditure on publicity and advertisements, transport costs, costs of the producer‘s
own resources, normal profit, other expenses etc.
3. Opportunity Cost
 The concept of opportunity cost occupies a very important place in modern economic
analysis.
 Factors of production are scarce in relation to wants.
 When a factor is used in the production of a particular commodity, the society has to
forgo other goods which this factor could have produced.
 This gave birth to the notion of opportunity cost in economics.
 Suppose a particular kind of steel is used in manufacturing war-goods, it clearly implies
that the society has to give up the amount of utensils that could have been produced with
the help of this steel.
 Hence we can say that the opportunity cost of producing war-goods is the amount of
utensils forgone.

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  Opportunity cost is the cost of the next-best alternative that has been forgone.
 From the meaning of opportunity cost two important points emerge:
(i) The opportunity cost of anything is only the next-best alternative foregone and not
any other alternative.
(ii) The opportunity cost of a good should be viewed as the next-best alternative good
that could be produced with the same value of the factors which are more or less the
same.
Thus, opportunity cost for a commodity is the amount of other next-best goods which have to be
given up in order to produce additional amount of that commodity.
Applications of Opportunity Cost
The concept of opportunity cost has been widely used by modern economists in various fields.
The main applications of the concept of opportunity cost are as follows –
(i) Determination of factor prices - The factors of production need to be paid a
price that is at least equal to what they command for alternative uses. If the
factor price is less than factor‘s opportunity cost, the factor will quit and get
employed in the better-paying alternative.
(ii) Determination of economic rent - The concept of opportunity cost is widely
used by modern economists in the determination of economic rent. According
to them economic rent is equal to the factor‘s actual earning minus its
opportunity cost (or transfer earnings).
(iii) Decisions regarding consumption pattern - The concept of opportunity cost
suggests that with given money income, if a consumer chooses to have more
of one thing, he has to have more of one thing, he has to have less of the other.
He cannot increase the consumption of all the goods simultaneously. Hence
with the help of opportunity cost he decides the consumption pattern, that is,
which goods should be consumed and in what quantities.
(iv) Decisions regarding production plan - With given resources and given
technology if a producer decides to produce greater amount of one
commodity, he has to sacrifice some amount of another commodity. Thus on
the basis of opportunity costs a firm makes decisions regarding its production
plan.
(v) Decisions regarding national priorities - With given resources at its
command a country has to plan the production of various commodities. The
decision will depend on national priorities based on opportunity costs. If a
country decides that more resources must be devoted to arms production then
less will be available to produce civilian goods. In this situation a choice will
have to be made between arms production and civilian goods. The concept of
opportunity cost helps in making such choices.
COST-FUNCTION
The functional relationship between cost and quantity produced is termed as cost function.

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C = f(Qx)
Here, C = Production-cost
Qx = Quantity produced of x goods
Cost-function of a firm depends on two things: (i) production-function, and (ii) the prices of the
factors of production. Higher the output of a firm, higher would be the production-cost. That is
why it is said that the cost of production depends on the quantum of output.
TIME ELEMENT AND COST -
Time element has an important place in the analysis of cost of production. In the theory of supply
we usually take three kinds of time-period. They are:
i. Very Short-period - Very short-period is defined as the period of time which is so short
that the output cannot be adjusted with the change in demand. In this period, the supply
of a commodity is limited to its stock, hence during this period supply remains fixed.
ii. Short Period - Short period is defined as the period of time during which production can
be varied only by changing the quantities of variable factors and not of fixed factors;
Land, factory building, heavy capital equipment, services of management of high
category are some of the factors that cannot be varied in a short period. That is why they
are called fixed factors. There are some factor-inputs that can be varied as and when
required. They are called variable factors. For instance, power, fuel, labour, raw
materials, etc. are the examples of variable factor inputs.
iii. Long Period - Long period is defined as the period which is long enough for the inputs
of all factors of production to be varied. In this period no factor is fixed, but all are
variable factors.
SHORT-RUN COST OF PRODUCTION

In the short-run, a firm employs two types of factors: fixed factors and variable factors. Costs are
also of two types: fixed costs and variable costs.
 Fixed Costs - Fixed costs (also known as supplementary costs or overhead costs) are the
costs that do not vary with the output. These are the expenses incurred on the fixed
factors of production. Examples: Rent; interest; insurance premium; salaries of
permanent employees, etc.
 Variable Costs - Variable costs (or prime costs) are the costs that vary directly with the
output. These are the expenses incurred on the variable factors of production.
a) Short run total costs of production
 Total fixed costs (TFC): Total fixed cost or overhead, indirect or unavoidable costs are
the total cost incurred on the fixed production. Fixed costs are sometimes called Sunk
costs because once you have committed yourself to pay them, that money has been sunk
into your firm.
 Total variable costs, (TVC) prime or direct cost. These costs refer to the cost borne in
acquiring variable factors of production. They include expenditures for wages, raw
materials, fuel, etc.

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  Total cost (TC) : Total cost of production refers to all the expenditures incurred in
production. They include the TFC and the TVC. It follows that:

TC = TFC + TVC

TFC = TC – TVC

TVC = TC - TFC

Consider table below to illustrate these total costs of production and the resultant graph.

Qty (Kgs) TFC TVC TC

MF MF MF

0 60 0 60

1 60 30 90

2 60 40 100

3 60 45 105

4 60 55 115

5 60 75 135

6 60 120 180

b) Short run costs of production

There are four types of these short run unit costs.

 The average fixed cost (AFC)

 The average total cost (ATC)
 The average variable cost (AVC)
 The marginal cost or incremental cost (MC)

The average fixed cost: It refers to the fixed cost per unit of output i.e. the fraction of total fixed
costs borne by each unit of output. Mathematically, AFC = OR AFC = ATC – AVC

 The average total cost (ATC or AC) : It refers to the total costs per unit of output.
Mathematically, ATC or AC = = AFC + AVC.

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  The average variable cost (AVC): It refers to the total variable cost per unit of output. It
is the fraction of TVC borne by each unit of output at a given level of production.
Mathematically, AVC = or AVC = ATC – AFC.
 Marginal cost : This is otherwise referred to as incremental cost. It is the extra cost of
producing one more unit of output. Since fixed cost do not change with output, it follows
that marginal cost are always zero. This means that marginal cost is necessarily marginal
variable cost. Mathematically, MC =

Consider table below to illustrate these costs of production and the resultant graph.

Qty TFC TVC TC AFC= ATC = AVC = MC =

(Kgs) TFC/Q TC/Q TVC/Q
MF MF MF

0 60 0 60 - - -

1 60 30 90 60 90 30 30

2 60 40 100 30 50 20 10

3 60 45 105 20 35 15 05

4 60 55 115 15 28.75 13.75 10

5 60 75 135 12 27 15 20

6 60 120 180 10 30 20 45

Long run costs of production

The long run is the time during which all costs become variable costs. The long run of any given
output is the maximum cost of producing that output when all inputs are variable.

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 UNIT 4 – BUSINESS ENVIRONMENT AND STRATEGIC DECISION MAKING
4.1- Meaning and definition
The success of a business is generally dependent on the business environment. Even after a business is created,
its entrepreneurs and managers must continually monitor the environment so that they can anticipate how the
demand for its products or its cost of producing products may change. An entrepreneur must constantly look at
the environment and operate his business within the limit of this environment. A business
concern cannot operate in isolation; there are forces that shape every business. There are factors
that a business concern can control and some he cannot control. Those factors that a business
man cannot control are called external or macro factors to a business man. The factors that
cannot easily be changed, which are referred to as macro environment include the following:
- Demography
- Economy
- Social and cultural factors
- Political and legal forces
- Technology
- Competition
Micro factors, which you can refer to as controllable factor, are those factors that you can
manipulate to your advantage. They include employees, managers, owner, financial institution,
suppliers, consumers, government agencies, competitors, and the public.
Enterprises do not operate in a vacuum but rather in a dynamic environment that has a direct
influence on how they operate and whether they will achieve their objectives. Owners of
enterprises and managers have a great deal of control over the internal environment of business,
which covers day-to-day decisions. They choose the supplies they purchase, which employees
they hire, the products they sell, and where they sell those products. They use their skills and
resources to create goods and services that will satisfy existing and prospective customers.
However, the external environmental conditions that affect a business are generally beyond the
control of management and change constantly. To compete successfully, business owners and
managers must continuously study the environment and adapt their businesses accordingly.
A business environment consists of forces which exert significant influences of business action
and operations. By this, it is meant, business organizations operate in a dynamic and complex
environment; and charges in the environment may bring opportunity or threats to the
organizations.
The environment of an enterprise is a critical factor that influences the success or failure of a
business. External factors, such as economic, social, political, and technological conditions, as
well as internal factors, such as organizational structure, management style, and corporate
culture, all play a role in shaping the environment in which a business operates.

By understanding the environment of the enterprise, business leaders can make informed
decisions, develop effective strategies, and adapt to changing circumstances. Ongoing

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monitoring and analysis of the environment are essential to ensure that the business remains
competitive and agile in response to new challenges and opportunities.

The company has to properly understand the business environment, i.e. the internal and external
environment, in which it operates, so as to survive and function smoothly. It will also help in its
growth and expansion in the long run.

Overall, the environment of an enterprise is a dynamic and complex system that requires careful
consideration and management to achieve long-term success. Businesses that can effectively
navigate and respond to their environment are more likely to thrive and achieve their goals.

4.2- Kinds of Business Environment

4.2.1 Economy: These factors may be those factors that affect consumers in terms of purchasing
power and patterns, which in turn affect business either to buy or not to buy. The purchasing
power of a consumer depends on: -
- Income
- Prices
- Savings
Major economic changes in variables such as income, cost of living, interest rates on loans,
savings and borrowing patterns has a big impact on businesses in an economy.
4.2.2 Technology: Technology creates opportunities for a company to increase consumer
satisfaction and thereby gain competitive advantage over others. Technology has been called the
process to ―creative distribution‖ in the sense that new development in technology not only
creates new products and new markets but also destroy existing ones. Businesses men need to
understand the changing technological environment and how new technologies can serve human
needs.
4.2.3 Natural environment: The natural environment can affect the location of a business, what
activities they undertake and how costly these activities are in recent times. There has been a
growing awareness of the effect of industrial activities on the physical environment, both directly
through the depletion of resources, (such as minerals and forests) and through air, land and
water. The deterioration of the natural environment is a major global concern. In many world
cities, air and water pollution have reached dangerous levels. There is great concern about certain
chemicals creating a hole on the Ozone layer and producing a ―greenhouse effect‖ that will lead
to dangerous warming of the earth.
4.2.4 Politics and the Law: Political environment could be looked at from the point of view of
the type of leadership in the nation. What are the policies of the leaders at times? How peaceful
is the nation under the leadership? Legislation are promulgated to regulate business activities
just as citizens are responsible for knowing and obeying the laws of the land, businesses must be
aware of the laws and regulation affecting their activities because violations of such laws and
regulation not only subject the company to prosecution but they are also costly in terms of the
bad publicity the company receives as a result.
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Reasons for Government Laws:

i. To protect businesses from each other

ii. To protect consumers from unfair business practices
iii. To protect the interest of the society against unofficial business behaviour.
4.2.5 Culture and society: The socio-cultural environment consists of institutions and people
that make up a social grouping. A company‘s environment scanning must focus on the beliefs,
value and norms of behaviour that are learned and shared by the people in that social grouping.
Values are defined as the likes and dislike, the positive and negative feelings that colour a
person‘s view of the word and influence his behaviour, clearly they are the source of consumers‘
needs and what that businesses most try to satisfy.
4.2.6-Specific or micro environment: The environment that is referred to as specific unlike the
general is what is directly related to his/her business.
4.2.6.1- Employees
In an organization, workers are employed that will help an organization to achieve its goals.
Employees can make a business to fail or succeed. If a business succeeds, the employees are
therefore encourage to work for the organization. If a business fails, it means workers do not
cooperate with the organization.
4.2.6.2- Managers: Managers are the decision makers in an organization; they embody its
attritions and philosophy and therefore play a central role on its performance. The success of the
organization is usually bond up with their personnel performances.

Effect of managers from the positive side can:

- Increase the profit for an organization.

- Improve cordial relationship among workers.
- It multiplier effects is that, it can improve on customer‘s inflow to the organization.
- It improves on the prospect of a business.
The negative side effect of bad managers is:

- Company can go under due to bad management.

- Frequent strikes
- Low sales, low profit etc.

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4.2.6.3- Owners: Private companies are owned and often managed by the same individuals
whereas public companies are owned by shareholder who may or may not be managers. Large
public companies are owned by their shareholders who may have voting right through which
they can influence the policy of the organization.
4.2.6.4- Financial institutions: Organisation has links with a variety of financial institutions,
such as commercial and merchant banks both at home and overseas, insurance companies and
building society. Borrowing takes place from commercial banks to finance both short – term and
long-term operation, such as the purchase of machinery. Merchant banks are often used in an
advising capacity to help in a takeover bid or to protect against a hostile takeover and they also
help to organize the issue of shares to raise capital.
4.2.6.6-Suppliers: An important activity of all organisations is the purchase of supplies of
equipment, raw materials, service, and energy and so on. An organisation is dependent on its
suppliers and managers need to ensure that the business does not become so dependent on one
supplier that it assumes a dominant position. By dividing purchases among different supplies it
may be possible to encourage competition and thereby obtain better prices and services.
4.2.6.7-Customers: The buyers of an organizations‘ products wants value for money, i.e. low
price, high quality and good service. They may be knowledgeable about the products or may be
susceptible to persuasive advertising. Final consumers are in a week bargaining position as
individuals, but when they act collectively they can determine the future of a business.
Consumers have become more militant through the formation of protection agencies and
pressure group such as the consumer association.
4.2.6.8-Government agencies: All organization have to deal with governmental bodies. Other
bodies exist to stimulate export, give advice to business and deter monopolistic practice and to
protect consumer.
4.2.6.9-Competitors
In some ways the most immediate elements of a firm‘s environment are the numbers, size and
behaviour of competing firms. Market behaviour is interdependent, if a firm tries to expand its
share of the market, it can only do so at the expense of the other. If it charges lower or higher
price than its competitors it may either loss or gain business or start a price war. In markets
where there are few competitors, there is a high degree of interdependent of decisions as
competitors analyse each other‘s strategies and the result might see an uneasy truce for a
collective decisions to share the market and not to compete. The type of market in which you
operate in will determine the number of competitors you have and the intensity of competition.

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4.2.10-The Public: Efficient companies ultimately bring benefits to everyone through lower
prices and better quality products. Poor products and after sales service can lead to a bad
reputation from which all firms might suffer in the end, irrespective of whether or not they
deserve to. Similarly, managers and workers who had been well trained help to raise the general
level of ability of the work force from which the whole economy will benefit. Many large
companies and public bodies now employ public relations specialists in order to create a
favourable image with the general public through radio, television and the newspapers. When
public opinion is favourable, companies become esteemed and known for that, for example, they
have plenty high – quality applicants for jobs.

4.3- INTERNAL AND EXTERNAL ENVIRONMENT OF AN ENTERPRISE

The environmental factors, not just affect the business, because of the changes and activities, but
these factors can also be affected by the business activities. Based on the extent of control, the
environmental factors are divided into two groups or say types – Internal Environment and
External Environment.

4.3.1- INTERNAL ENVIRONMENT

Internal Environment is that part of the business environment which is concerned with the
different factors present within the organization. It comprises of conditions, forces, members and
events which has the capability to influence the company‘s decisions and operations. It
determines the procedures and methods in which activities are carried out in the organization, as
well as it includes all of the immediate and information resources, such as technical, financial
and physical resources of the organization. These factors are:

 Value System: Value system can be defined as a set of rules and the logical and
consistent values adopted by the firm, as a standard guide, so as to regulate the conduct in
any type of circumstances.
 Vision, Mission and Objectives: Vision refers to the overall picture of what the
enterprise wants to attain, whereas mission talks about the organization and its business,
and the reason for its existence. Lastly, objectives refer to the basic milestones, which are
set to be achieved within the specific period of time, with the available resources.
 Management structure and Internal Power Relationship: Management structure
implies the organizational hierarchy, the way in which tasks are delegated and how they
relate, a span of management, relationship amidst various functional areas, the
composition of the board of directors, shareholding pattern and so forth. On the other
hand, internal power relationship describes the relationship and cordiality between the
CEO and board of directors. Further, the degree of support and contribution received
from the employees and other members of the organization strengthens the organization‘s
decision making power and its organization-wide implementation.

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  Human Resource: Human resources are the most important asset of the organization, as
they play a critical role in making or breaking the organization. The skills, competencies,
attitude, dedication, morale and commitment, amounts to the company‘s strengths or
weakness.
 Tangible and Intangible Assets: The tangible asset refers to the physical assets which
are owned by the company such as land, building, machinery, stock etc. Intangible assets
amount to the research and development, technological capabilities, marketing and
financial resources etc.

4.3.2- EXTERNAL ENVIRONMENT

External Business environment comprises of all the extrinsic factors, influences, events, entities
and conditions, often existing outside the company‘s boundaries but they have a significant
influence on the operation, performance, profitability and survival of the business enterprise.

For the purpose of continuous and uninterrupted functioning of the business, the enterprise has to
act, react or adjust according to these factors. These factors are not under the control of the
enterprise. The elements of the external environment are divided into two categories:

I - Micro Environment

Otherwise called as task environment, these factors directly influence the company‘s operations,
as it covers the immediate environment that surrounds the company. The factors are somewhat
controllable in nature. It includes:

 Competitors: Competitors are the business rivals, which operate in the same industry,
offering the same product and services, and cater to the same audience.
 Suppliers: To carry out the production process, the raw material is required which is
provided by the suppliers. The behaviour of the supplier has a direct impact on a
company‘s business operations.
 Customers: Customers are the target audience, i.e. the one who purchases and consumes
the product. The customers are given the most important place in every business,
because, the products are created and promoted for customers only.
 Intermediaries: There are a number of individuals or firms that help the business
enterprise in the promotion, selling, distribution and delivery of the product to the end
buyer, which are called as marketing intermediaries. It includes agents, distributors,
dealers, wholesalers, retailers, delivery boys, etc.
 Shareholders: Shareholders are the actual owners of the company, as they invest their
money in the company. They get their share in the profits also, in the form of a dividend.
In fact, they have the right to vote at the company‘s general meeting.

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  Employees: Employees refers to the company‘s staff, who are hired to work for the
company to help the company reach its mission. Therefore, it is very important for the
firm, to employ the right people, retain and keep them motivated so as to get the best out
of them.
 Media: Media plays an important role in the life of every company because it has the
capability to make the company‘s product popular overnight or it can also defame them,
in just one go. This is due to the fact that the reach of media is very large and so every
content which is going to air on any form of media can affect the company positively or
adversely depending on what kind of information it contains.

II - Macro Environment

Otherwise called as general environment, macro environment affects the entire industry and not
the firm specifically. That is why these factors are completely uncontrollable in nature. The firm
needs to adapt itself according to the changes in the macro-environment, so as to survive and
grow. It includes:

 Economic Environment: The economic conditions of the region and the country as a
whole have a significant bearing on the company‘s profitability. This is because the
purchasing power, saving habits, per capita income, credit facilities etc. depends greatly
on the country‘s economic conditions, which regulates the demand for the company‘s
products.
 Political and Legal Environment: The political and legal environment consists of the
laws, rules, regulations and policies which the company needs to adhere. The changes in
these laws and government may affect the company‘s decisions, open doors of new
opportunities for the business or pose a threat to the business.
 Technological Environment: Technology is ever-changing, as everyday a new and
improved version of something is launched which is created with the state-of-the-art
technology. This can be a plus point if the company is the first mover in the race, subject
to the success of the product. However, if it turns out as a failure, it will prove as wastage
of time, money and efforts. Further, every company has to keep itself updated with the
changing technology.
 Socio-Cultural Environment: Socio-cultural environment consist of those factors which
are concerned with human relationships such as customs, traditions, beliefs, values,
morals, tastes and preferences of the society at large. The company must consider these
factors on various matters such as the hiring of employees, advertising the product and
service, decision making etc.
 Demographic Environment: As the name suggests, the demographic environment
covers the size, type, structure, education level, and distribution of population in a
geographical area. The knowledge of this environment will help the firm in deciding the
optimal marketing mix for the target population.

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  Global Environment: Due to liberalization domestic companies can offer their products
and services for sale to other countries. In fact, there are many companies which are
operating in a number of nations worldwide. Hence, such companies have to follow the
laws prevalent in these countries as well as they have to adhere to international laws and
guidelines. Further, the responses and the company‘s norms must be in alignment with
the global environment

Key Differences between Internal and External Environment

The difference between the internal and external environment can be drawn clearly on the
following grounds:

1. The internal environment is composed of all those factors, events, conditions, etc. which
exist inside the company and has the capability to influence the company‘s strategic
decisions and functions, as well as they can be influenced by company‘s decisions. On
the contrary, the external environment is that part of the business environment consisting
of all those factors which do not exist within the company but can affect the company‘s
operations, decisions, survival, growth and profitability.
2. Internal environmental factors are controllable in nature, in the sense that the company
has supremacy over these factors. Conversely, external environmental factors are largely
uncontrollable in nature.
3. Internal environmental factors, either impart strength or cause weakness to the firm. As
against, external environmental factors either give opportunities or poses threats.
4. Changes in internal environmental factors affect the company only, as the factors belong
specifically to the company. In contrast, changes in external environmental factors have
an impact on the industry as a whole and so all the companies operating in the industry
gets affected by it.
5. The internal environment consists of those factors which have the potential to influence
the company‘s decisions, working and strategies. On the flip side, the external
environment comprises of those factors which can affect the survival, growth, reputation
and expansion of the company positively or negatively.

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 Comparison Chart
BASIS FOR
INTERNAL ENVIRONMENT EXTERNAL ENVIRONMENT
COMPARISON

Meaning Internal Environment refers to all the External Environment is a set of all the
inlying forces and conditions present exogenous forces that have the potential
within the company, which can affect to affect the organization's performance,
the company's working. profitability, and functionality.

Nature Controllable Uncontrollable

Comprise of Strengths and weaknesses Opportunities and threats

Affects Company only All companies operating in the industry

Bearing on Business Strategy, functions and Business survival, growth, reputation,

decisions expansion, etc.

4.4 - SWOT AND PESTEL ANALYSES

PESTEL and SWOT analysis is essential for any organization that wants to succeed in today‘s
competitive business environment. These tools provide valuable insights into the external and
internal factors that affect an enterprise's performance. By leveraging this information
effectively, organizations can develop strategies that enable them to thrive in a constantly
changing business landscape.

4.4.1- PESTEL ANALYSIS

The PESTLE analysis was invented over 50 years ago by Francis Aguilar, who was an American
scholar whose expertise was in strategic planning. PESTLE analysis is a strategic planning tool
that is used to examine various factors that affect the market environment for a business or
organization studies the key external factors (Political, Economic, Sociological, Technological,
Legal and Environmental) that influence an organization. It is a framework or tool used by
marketers to analyze and monitor the macro-environmental (external marketing environment)
factors that have an impact on an organization, company, or industry. It can be used in a range of
different scenarios and can guide people professionals and senior managers in strategic decision-
making.

The goal of PESTLE analysis is to develop a profound understanding of the external

environment where the organization operates.

PESTLE is an acronym, which stands for: -

 P = political factors,

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  E = Economic factors,
 S = Social factors,
 T = Technological factors,
 E = Environmental factors, and
 L = Legal factors;
(i) Political factors include tax policy, regulations and laws, government policies, levels of
political corruption or bureaucratic red tape, and possible major changes via new
legislation or disruptions in the political environment. . It also considers the political
stability of the country or region where the enterprise operates.
(ii) Economic factors include the overall stage of the business cycle, potential for economic
growth or contraction, interest rates and inflation, labor costs and labor supply,
unemployment rate, impact of new technology on the economy, impact of globalization
on the economy, levels of disposable income and income distribution.
(iii)Social factors include the demographic characteristics, cultural factors, and consumer
behavior that can impact the enterprise's products or services.
(iv) Technology factors include emerging technologies, R&D activity, job automation, the
rate of technological change, and the impact of technology on how people live and work
– such as an increase in remote working, reduced communication costs, rising demand
for new technology products, and more.
(v) Environmental factors: This component considers environmental issues such as climate
change, environmental regulations, and natural resources that can impact the enterprise's
operations and reputation.
(vi) Legal factors include the laws and legal framework such as health & safety laws,
employment law, consumer law, and antitrust law that can impact the enterprise's
operations and compliance requirements.

4.4.2- SWOT ANALYSIS

SWOT analysis is a strategic tool used to analyse the internal and external environment of an
enterprise. Internal factors consider the enterprise‘s internal environment, including its strengths
and weaknesses. And external factors consider the external environment, including
opportunities and threats that the enterprise faces. It stands for Strengths, Weaknesses,
Opportunities, and Threats.

SWOT analysis is a framework for identifying and analysing an organization‘s strengths,

weaknesses, opportunities and threats. These words make up the SWOT acronym. The primary
goal of SWOT analysis is to increase awareness of the factors that go into making a business
decision or establishing a business strategy.

SWOT analysis is a strategic planning tool that can be used to evaluate the strengths,
weaknesses, opportunities, and threats of an enterprise. By conducting a SWOT analysis, an

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enterprise can gain a better understanding of its internal and external environment and use this
information to make informed decisions about its future direction.

When it comes to the economy of an enterprise, a SWOT analysis can be a valuable tool for
identifying areas of strength and weakness that may impact the organization‘s financial
performance.

 Strengths: Strengths are the capabilities of an organization that enable it to perform

efficiently. Strengths may include skilled manpower, strong financial resources, strong
brand name, good reputation and organizational culture, well established distribution
network etc.
 Weaknesses: Weaknesses are the internal characteristics of an organization that prohibit
it to perform well. Organization‘s weakness may include lack of sufficient capital, weak
brand name, poor reputation, unskilled manpower, inefficient management, poor
distribution channels etc.
 Opportunities: Opportunities are the external environmental factors that may bring the
prospects for growth and higher performance. For example: technological advancement,
market developments, changes in lifestyle, changes in government regulation related to
your business.
 Threats: Threats are the external environmental factors that may undermine the
organization‘s performance. For example, new regulation that may affect the business,
changes in consumer tastes, if an organization does not adopt new developed and modern
technology it will be become a threat for the organization.
Overall, a SWOT analysis can be a valuable tool for enterprises looking to improve their
financial performance. By identifying areas of strength and weakness, and taking steps to address
these areas, an organization can position itself for long-term success in today‘s competitive
business environment.

ADVANTAGES OF PESTEL AND SWOT ANALYSES

o Provides a comprehensive understanding of the environment: PESTEL and

SWOT analysis provide a holistic view of an enterprise's environment by considering
various internal and external factors that can affect its operations.
o Helps identify opportunities and threats: These analyses help identify opportunities
that an enterprise can leverage to grow and threats that it needs to mitigate to avoid
losses.
o Facilitates strategic decision-making: The results of these analyses can be used to make
informed decisions about investments, expansions, or changes in business operations.
o Helps in risk management: By identifying potential threats, an enterprise can take
proactive measures to manage risks and minimize losses.

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DISADVANTAGES OF PESTEL AND SWOT ANALYSES

o Can be time-consuming: Conducting these analyses requires significant time and

resources, especially if an enterprise operates in multiple markets or industries.
o May not provide accurate results: The accuracy of these analyses depends on the
quality of data collected and the expertise of analysts conducting the analysis.
o Can lead to over-analysis: Over-analysing can lead to paralysis by analysis, where an
enterprise spends too much time analysing data and fails to take action.
o Limited scope: These analyses may not consider all factors that can affect an enterprise‘s
environment, such as geopolitical factors or cultural differences.

CASE STUDIES

CASE STUDY OF APPLE

This is how the environment of Apple can be analysed using PESTEL and SWOT analysis;

Apple is an international American enterprise that acts in the technological sector. The
environment of Apple depends on some factors that include; political, economic, social,
technological, environmental and legal influences for its business operations and success. In
order to understand the environment of Apple, we can use tools such as PESTEL and SWOT
analysis.

PESTEL ANALYSIS

 Political: The government policy in America is very favourable for the growing of
enterprises and the business environment of the country is a very nice ground that favours
competition amongst enterprises. Apple can count on the different regulations of the
government in the market to make sure that every enterprises works according to the
rules and policies of the government without any cheating.
 Economic: Apple has seen its sales during this year of 2023 dropping due to the high
inflation that attacks the world. This has an influence on the enterprise.
 Social: Apple has a large number of fans that will always be ready to buy their last
products. The company has been implemented in the society as the best brand and best
enterprise for the creation of smart phones and is today the leader of the market
worldwide.
 Technological: The technology of smart phones is increasing each year. As the leader of
the market, Apple has an advance in the new technologies that will him to have an
advantage in front of his competitors. We should also note that the first smart phone has
been created by Apple in 2007.
 Environmental: Climate change does not really impact Apple. No matter the climate
change, Apple will still produce its products and customers will still buy them.

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  Legal: The law of data privacy impacts the company in such a way that they should
produce products that do not still the personal data of their customers.

SWOT ANALYSIS

 Strength: Apple has a strong brand reputation and a loyal customer base that will make
the company famous over the years.
 Weaknesses: The weakness of Apple is that their products are all out of price for
customers that do not have the means to buy their products, making the market share of
the company to be limited to a certain category of customers.
 Opportunities: The opportunity that Apple has is the market of Africa. Over the years,
persons having phones increase in Africa. As the demand of phones increase, Apple will
have the opportunity to enter a new market and touch a different category of customers.
 Threats: The increase in competition with other phone manufactures like SAMSUNG
and HUAWEI increase the competition in the market, making Apple to either loss or gain
market shares.

SWOT AND PESTEL ANALYSIS IN ORANGE COMPANY:

SWOT analysis of Orange

SWOT Analysis is a useful technique for developing business strategies for both new and current
businesses. This simplified methodology is used to assess a company’s competitive standing. SWOT
analysis of Orange can help the organization develop effective and efficient business strategies.

PESTEL ANALYSIS OF ORANGE

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Orange PESTLE Analysis assesses the brand on its business tactics across various parameters. PESTLE
Analysis of Orange examines the various external factors like political, economic, social, technological
(PEST) which impacts its business along with legal & environmental factors. The PESTLE Analysis
highlights the different extrinsic scenarios which impact the business of the brand.
PESTLE analysis is a framework which is imperative for companies such as Orange, as it helps them to
better understand market dynamics & improve their business continuously. PESTLE analysis is also
referred to as PESTEL analysis. Let us start the Orange PESTLE Analysis:
a. Political Factors:
Orange is one the most prominent telecom companies based out of Europe. Political factors play an
important role in impacting the company‘s long-term profitability in any country or its market. This
company is operating in telecom services in many international markets and gets influenced by different
political situations in different countries. The political stability in any country affects its operations. Even the
taxation system and incentives imposed by governments has a severe impact on the revenue generated.
b. Economic Factors:
The economic factors such as GDP and the policies in the telecom sector set up by the government affects
the overall business strategy of Orange. As inflation rises, people have a tendency to cut their spending and
this leads to decrease in profits for the company. Other macro-economic factors such as saving rate, interest
rate, foreign exchange rate and economic cycle decides the overall demand and investment in a market. The
company and its competitors in the industry have their own strengths, weaknesses and their Unique selling
propositions for consumers. It is important to scan the economic conditions properly to decide on buying
telecom spectrum and understand the market demand and the gaps to fill in.
c. Social Factors:
Society and its culture have a very impactful role to play in people‘s choice and decisions. It is important for
Orange to understand the shared beliefs and attitude of consumers in order to decide on its functional as well
as overall business strategies. The demographics in different locations such as age, gender, education level
impacts the choices and buying decisions. The hierarchy, power and class structure in the society is a very
important social factor to be considered by the company in its marketing message and promotional
decisions. The changing work pattern with the COVID-19 pandemic, telecom industry has undergone a
major shift. It becomes essential for Orange to understand the whole scenario and work upon it accordingly.
The word-of-mouth marketing by loyal customer base impacts the buying decisions, hence it is important to
leverage this marketing by delivering good services and support.
d. Technological Factors:
With the fast-pacing technological changes in the telecom industry, it is imperative for Orange to adapt and
take the first mover advantage in this race. As 5G technology and a lot of new research is happening to
make telecom sector more efficient in the coming future. It has an opportunity lying in this space to become
more reliable and stand number one among its competitors in the industry. Technological innovations and
telecom go hand in hand; hence the brand need to spend and invest more in research and development and
needs to compete with alternative innovations like internet-based companies like Skype, Zoom and many
more to boost its market share.
e. Legal Factors:

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The legal system and institutions are not robust enough in many countries to protect the intellectual property
right of an organization. It becomes important for companies like Orange to evaluate properly the laws and
regulations of an operating country as well as for those countries where it is planning to get launched. Some
of the legal factors which it should consider in any market are consumer protection and anti-trust laws in
telecom industry. Even the Health and Safety laws, discrimination laws are vital for the telecom company to
consider. Intellectual property laws and data protection laws also impacts the operation of Orange in a
country.
f. Environmental Factors:
It is important for Orange to consider the environmental rules and regulations in an operating country. The
drastic climate change is influencing governments in different nations to form environmentally friendly
policies. The tax benefits and incentives are sometimes given to organizations working in this direction. It
should manage its operations properly to get benefitted with such policies and laws.

4.5-STRATEGIC DECISIONS OF A BUSINESS

Strategic decision-making refers to identifying the best way to achieve goals and objectives.
These goals and objectives are long-term, and strategic decision-making assists in describing a
company's main objectives to achieve shorter-term goals with a broad mission.
Michael Porter defines strategy as competitive position, ―deliberately choosing a different set of
activities to deliver a unique mix of value.‖ In other words, you need to understand your
competitors and the market you've chosen to determine how your business should react.

Strategic decisions are the decisions that are concerned with whole environment in which the
firm operates, the entire resources and the people who form the company and the interface
between the two.

Strategic decisions are made based on of a company's mission and vision or its objectives. For
example, a manager of a cat food company notices that his customers prefer higher quality and
fresh food instead of cat food sold in very large quantities for a low price.

Characteristics/Features of Strategic Decisions

a. Strategic decisions have major resource propositions for an organization. These decisions
may be concerned with possessing new resources, organizing others or reallocating others.
b. Strategic decisions deal with harmonizing organizational resource capabilities with the
threats and opportunities.
c. Strategic decisions deal with the range of organizational activities. It is all about what they
want the organization to be like and to be about.
d. Strategic decisions involve a change of major kind since an organization operates in ever-
changing environment.
e. Strategic decisions are complex in nature.

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f. Strategic decisions are at the top most level, are uncertain as they deal with the future, and
involve a lot of risk.
g. Strategic decisions are different from administrative and operational decisions.

 Administrative decisions are routine decisions which help or rather facilitate strategic
decisions or operational decisions.
 Operational decisions are technical decisions which help execution of strategic
decisions. Operational business decisions can include a range of decisions like product
inventory, customer orders or shipping needs, departmental organization, department
budgets or sales and marketing initiatives.

For instance, to reduce cost is a strategic decision which is achieved through operational decision
of reducing the number of employees and how we carry out these reductions will be
administrative decision.

Strategic Decisions Administrative Decisions Operational Decisions

Strategic decisions are long-term Administrative decisions are Operational decisions are not
decisions. taken daily. frequently taken.

These are considered where The These are short-term based These are medium-period
future planning is concerned. Decisions. based decisions.

Strategic decisions are taken in These are taken according to These are taken in accordance
Accordance with organizational strategic and operational with strategic and
mission and vision. Decisions. administrative decision.

These are related to overall These are related to working These are related to
Counter planning of all of employees in an production.
Organization. Organization.

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These deal with organizational These are in welfare of These are related to
Growth. employees working in an production and factory
organization. growth.

The differences between Strategic, Administrative and Operational decisions can be summarized
as follows: -

STRATEGIC PLANNING
a) Planning: An analytical process which involves an assessment of the future, the
determination of desired goals and objectives in the context of that future, the development of
alternative courses of action to achieve such objectives and the selection of courses of action
among those alternatives.
b) Strategy: The determination of the basic long‐term goals of an enterprise and the adoption of
courses of actions and the allocation of resources necessary to achieve these goals. It is presented
as policies whereby the organisation elaborates its goals and objectives. Strategic decision
making within any organization takes place on three levels. The difference between the three
levels of strategy in an organization is the level at which they operate in a business. The three
levels are corporate level strategy, business level strategy, and functional strategy.

 Corporate strategy is concerned with what businesses a corporation does and does not,
wish to enter.
 Business strategy is concerned with achieving the goals of a particular business within a
corporation. It is the determination of how a company will compete in a given business
and position itself among its competitors.
 Functional strategies deal with major aspects of the business‘ functional operations:
marketing, production, finance, human resources and research and development (R&D).
c) Policy: An elaboration of strategy so as to apply effectively internal resources and thereby
achieve strategic objectives and goals. While policy is a guide to action, strategy is the action
itself.
d) Strategic Planning: The process of planning the future strategy of an organisation and
documenting the strategy in an implementation plan.
(i) Effective strategic planning deals with two relevant dimensions:
1. Responding to changes in the external environment and
2. Creatively deploying internal resources to improve the competitive position of the enterprise.
(ii) Advantages of Strategic Planning (Benefits of, Needs for Strategic Planning):
1. It is a communication process and so improves the coordination in every organisation
practising it
2. It motivates managers.
3. It leads to better organisational decisions.

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4. It provides a way of controlling a business.
(iii)Strategic Plan: A mechanism for putting into effect strategic decisions. Reflects the
contingencies of the business as defined by realistic business scenarios and is articulated
by senior management. Four components:
1. A definition of the desired future scope of the organisation, including a statement of its
business and what kind of company it is and it should be.
2. A definition of the competitive advantage of the company, including its distinctive
competence in relation to its competitors and the market niche it intends to occupy.
3. A statement of mission, goals and objectives and the measures to evaluate performance.
4. A statement of how resources that are needed to implement and execute the plan will be
allocated.
(iv) Strategic Planning Process analyses and determines where the organisation intends to
be in the long term, usually three or more years in the future. The strategic planning
process begins with an assessment of the current economic situation. First, examine
factors outside of the company that can affect your company's performance. This part of
the analysis should begin early, at least a quarter or so before you begin the formal
planning process. Strategic planning process involves:
 Assessing the current business environment.
 Defining your company's purpose mission.
 Deciding what you want the business to look like in three to five years.
 Recognizing your company‘s: - strengths, weaknesses, opportunities, and threats.
 Mapping out a course to take the company from its current to its desired position.

TASKS OF STRATEGIC PLANNING

1. Identify a distinctive competence (something the organisation do really well) for the
organisation.
2. Find a niche (social and economic situation org is well suited) in the organisation‘s
environment.
3. Find the best match between the organisation‘s distinctive competencies and its available
niches.

METHOD OF STRATEGY PLANNING

It has four steps:
(i) Setting Strategic Goals (long‐term goals derived directly from organisation‘s mission
statement)
(ii) Environmental Analysis: Involves scanning the environment for threats and
opportunities.
(iii)Organisational Analysis: to better understand their own company‘s strengths and
weaknesses.

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 (iv) Formulating Business Strategy: Business Strategy consists of a set of well‐coordinated
action programmes and policies aimed at securing a long‐term sustainable competitive
advantage. Formulation of business strategy is accomplished by matching environmental
threats and opportunities with organisational strengths and weaknesses.
TOOLS OF STRATEGIC PLANNING TOOLS
There are two:
1. Boston consulting group (BCG) Matrix: a tool based on business portfolio analysis.
a. Assume that there is a company with multiple product lines. Such companies have products at
virtually every point in the product life cycle. For example, the management of a firm may use
the BCG matrix to evaluate the market growth rate and relative market shares for each of their
products.
b. There are three basic insights from the BCG matrix:
 The graphical matrix representation provides a powerful and compact visualisation of the
strengths of the firm‘s portfolio of businesses, or a whole business.
 It helps identify the ability for cash generation as well as the needs of cash for each
business.
 Because of the distinct quality of each business, it can suggest unique strategic directions.
2. Porters Competitive Strategy Framework (Porters 5 Forces Model): In the fight for
market share, competition does not come only from the other players. Rather,
competition in an industry is rooted in the underlying economic and competitive forces
exerted from beyond the established combatants in a particular industry. Porter's Five
Forces is a technique that enables better strategic planning in business. According to
Porter, there are five forces that represent the key sources of competitive pressure within
an industry.
They are:
 Competitive Rivalry.
 Supplier Power.
 Buyer Power.
 Threat of Substitution.
 Threat of New Entry.
Furthermore, Porter shows three potentially successful generic approaches for competing:
(i) Cost leadership: A firm has many avenues for pursuing this strategy, including economies
of scale, using or developing new technology and developing preferential access to raw
materials. Where competition has been sluggish, becoming a cost leader may revolutionise the
entire business
(ii) Differentiation: Requires the organisation to seek uniqueness in the eyes of the customers,
which justifies their paying a premium price for the product.
(iii) Focus: or niche strategy requires a narrow competitive scope. The organisation focuses on a
small target group and services this group or segment to the exclusion of others.

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4.6 - ENVIRONMENTAL FACTORS IN STRATEGIC PLANNING

For any business to grow and prosper, managers of the business must be able to anticipate,
recognise and deal with change in the internal and external environment. Change is a certainty,
and for this reason business managers must actively engage in a process that identifies change
and modifies business activity to take best advantage of change. That process is strategic
planning. The following diagram provides examples of factors that are agents of change and
need to be considered in the strategic planning process. Explanation of these factors is found
below.

Internal and External Environment

All businesses have an internal and external environment. The internal environment is very much
associated with the human resource of the business or organisation, and the manner in which
people undertake work in accordance with the mission of the organisation. To some extent, the
internal environment is controllable and changeable through planning and management
processes.

The external environment, on the other hand is not controllable. The managers of a business have
no control over business competitors, or changes to law, or general economic conditions.
However the managers of a business or organisation do have some measure of control as to how
the business reacts to changes in its external environment.

Internal Environment Factors

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Table below identifies important aspects of the internal environment that can significantly impact
on the well-being of a business or organisation. Generally the strategic planning process will
examine the strengths and weaknesses of the organisation, and it is likely that significant
discussion will center on the relative strength of internal environment factors.

Table : Factors in the internal environment and their effect on the business/organisation

Factor Influence on the organisation

Human Resource The knowledge, experience and capability of an organisation's

workforce is a determining factor of success. For this reason,
organisations pay particular attention to the recruitment of staff and
also to engage in the training of staff and volunteers to build the
organisation's capability. In pursuing both recruitment and training
strategies, an organisation is often limited by its financial strength.
Nevertheless, training of staff is an essential aspect of good business
management, and even in difficult financial circumstances is an
achievable strategy.

Organisational Culture The culture within the organisation is a very important factor in
business success. The attitudes of staff and volunteers, and their
ability to "go the extra mile" makes a very significant difference.
Negative attitudes can severely impact on the organisation's ability to
implement strategies for development despite however thorough the
planning processes. Positive attitudes of staff and volunteers will not
only make the management task easier but also will be noticed and
appreciated by customers of the business or members of organisation.

Organisation Structure Businesses and organisations may be impeded by their

structure, constitution and/or forms of governance. Organisation
structure is essentially the way that the work needed to carry out the
mission of the organisation is divided among its workforce.

In a non-profit organisation, the organisation will include the

management board or committee
(i.e. President, Secretary, Treasurer and Ordinary Committee
Members), the salaried staff of the organisation and all the volunteers
that have roles as coordinators of various business functions (e.g.
Event Coordinator, Promotions Coordinator and Coaching
Coordinator).When an organisation is a for-profit business that
operates in a very competitive environment, its organisation structure

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 may help or hinder the ability of the organisation to react to change.
For example, when the organisation structure has many levels of
management, decision making can be slow as information is carried
up and down the hierarchy. For this reason, "flatter" organisation
structures are often preferred i.e. people who work "at the coal face"
and one level of management above. Volunteers are normal part of
the non-profit organisation but not the profit-business. Although it is
often hard to find volunteers, the organisation structure of the non-
profit organisation can be very flexible by appointing volunteers as
needed.

Management The capability of the management team and the leadership styles
employed by managers will also have a major impact on the morale
of staff (and volunteers in a non-profit organisation) and organisation
culture. More contemporary forms of management involve workers in
decision making processes and trusting that, although managers and
workers have different viewpoints, they largely benefit by working
together to achieve the business objectives.

Assets The internal environment of the organisation can be made richer or

poorer by its assets. For example, the organisation's premises can be
pleasant and uplifting, or demure and depressing. The availability of
equipment is another asset that can significantly impact on the
internal environment. If equipment is in short supply or not of the
expected standard, then staff may be hindered in the performance of
their duties, or if equipment is used by customers then customer
satisfaction will fall.

Financial Strength Financial strength is a factor in its own right that influences the
internal environment of the organisation. Despite however good other
internal factors may be, it is very difficult for an organisation that is
too short of cash to implement strategies within the strategic plan. If
the organisation struggles financially this can impact on staff morale
as budgets need to be excessively tight.

External Environment Factors

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Table below identifies important
aspects of the external environment in
which the business operates. The
business cannot control these aspects
but can respond to change if needed.
The main problem for business
managers is to be able to respond early
to change in the external environment,
and this depends on how soon any
change is identified. Some external
environmental factors such as
economic conditions are reported daily
in the media and managers have a
wealth of information on which to
develop strategic plans. However,
some external factors may be difficult
to identify, particularly of the pace of
change is very slow or is hidden from
view.

Table : Factors in the external environment and their effect on the business/organization

Factor Influence on the organization

Economic conditions Prevailing economic conditions of the nation will have an effect on the
spending patterns of citizens. Increases in interest rates and/or a high
level of unemployment will depress consumption of non-essential
goods and services. For example. when people experience financial
hardship, they will spend much less on sport and recreation, holidays,
new cars and luxury goods. Economic conditions are global as well as
national, and when there is a global financial crisis as in 2007, changes
in the external environment can be dramatic.

Market (competition) The strength of business competition is a constantly changing factor in

the external business environment. Not only will competitors come and
go, but they will also change marketing strategies, product lines and
prices. Often such changes are not heralded and business managers
must be alert as to what competitors are doing.

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Technology Technological change has been rapid in the last 50 years and is a factor
in the external environment that constantly exerts pressure on the
business or organisation. If businesses do not adapt sufficiently quickly
to technological change, they risk losing market share. It's not just that
technological change affects the design of products, but even the
delivery of services can change.

Climate change Climate change is an insidious threat because the pace of change may
be recognisable only if considered on a decade-by-decade basis. The
effect of climate change will not fall equally on all nations and all
businesses. Businesses that depend directly on a good supply of water
e.g. agriculture, field sports will be adversely effected if climate change
results in reduced rainfall. However the flow on affects of drought will
eventually work their way through to all businesses in the effected
community.

Legal Taxation is one of most obvious changes in law through legislation.

Sometimes taxation changes occur overnight with little warning and
sometimes there is plenty of time for the business to prepare. Other law
changes that commonly affect business include Workplace Health and
Safety, Industrial Relations, Consumer Protection and Environmental
Law,

Media The media is undergoing rapid and significant change. The main driver
of this change is technology and the rise of the internet. Newspapers
once carried many pages of job adverts but now this business is
conducted by online recruitment companies such as Seek.

Political Like law, changes in government policy can be well notified and
discussed, or without warning. As an example of how government
policy has an effect, is that many organisations depend on government
financial assistance. When there is a change of government, such
funding assistance can disappear in a short space of time.

Demographic There is constant change in the make-up of the population. Some of

these changes include an increasing proportion of elderly citizens,
increasing number of two-income families, the age at which people
marry is increasing, increasing ethnic diversity, suburbs which were
once dominated by young families now have few. These demographic
changes can have a significant effect locally. For example, a sport club

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 which once prospered can begin to decline as the local area has less
and less children.

UNIT 5 – BUSINESS MANAGEMENT

Management involves the utilisation of human and other resources in a manner that best
achieves the firm‘s plans and objectives. Employees who are responsible for managing other employees
or other resources serve as managers. The functions of managers vary with their respective levels within the
firm. We have:

 Top (high-level) management: This includes positions such as president, chief executive officer
(who commonly also serves as president), chief financial officer, and vice-president. These
managers make decisions regarding thefirm‘s long-run objectives.

 Middle management is often responsible for the firm‘s short-term decisions, as these
managers are closer to the production process. Middle managers resolve problems and devise new
methods to improve performance. Middle management includes positions such as regional manager
and plant manager.

 Supervisory (first-line) management is usually highly involved with the employees who
engage in the day-to-day activities of a business concern. Supervisors deal with problems such as
worker absenteeism and customer complaints. Supervisory management includes positions such as
account manager and office manager. The middle and top managers must make production,
marketing, and finance decisions that will achieve thenew plans. The supervisory managers provide
specific instructions to thenew employees who are hired to achieve the higher production level.
5.1- Functions of managers

The primary role of managers in business is to supervise other people‘s performance.

Most management activities fall into the following categories:

 Planning: Managers plan by setting long-term goals for the business, as well short-term
strategies needed to execute against those goals. As the first step in the planning process, the
firm establishes its mission statement, which describes its primary goal. Types of business
planning include:

 Strategic Plan: The strategic plan identifies the firm‘s main business focus over a long-term
period. The strategic plan is more detailed than the mission statement and describes in general terms
how the firm‘s mission is to be achieved. The strategic plan typically includes goals and strategies
that can be used to satisfy the firm‘s mission.
 Tactical Planning: High-level and middle managers also engage in tactical planning, or
smaller-scale plans (over one or two years) that are consistent with the firm‘s strategic (long-term)

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 plan. Tactical planning normally focuses on a short-term period, such as the next year or so..
 Operational Planning: Another form of planning, called operational planning, establishes the
methods to be used in the near future (such as the nextyear) to achieve the tactical plans. When firms
engage in operational planning, they must abide by their policies, or guidelines for how tasks
should be completed. The policies are intended to prevent employees from conducting tasks in a
manner that is inefficient, dangerous, or illegal. Most policies contain procedures, or steps
necessary to implement a policy. These procedures are intended to prevent abuses Without
procedures, managers could make decisions that conflict with the company‘s goals.
 Contingency Planning: Some of a firm‘s plans may not be finalized until specificbusiness conditions
are known. For this reason, firms use contingency planning; that is, they develop alternative
plans for various possible business conditions. The plan to be implemented is contingent on the
business conditions that occur. For example, a firm that produces sports equipment may plan to boost
its production of rollerblades in response to recent demand. At the same time, however, it may
develop an alternative plan for using its resources to produce other equipment instead of roller
blades if demand declines. It may also develop a plan for increasing its production if the demand for
its rollerblades is much higher than expected. Some contingency planning is conducted to prepare for
possible crisesthat may occur. For example, airlines may establish contingency plans in the event that
various problems arise.
N.B: - A popular form of participative management is management by objectives (MBO), in which
employees work with their managers to set their goals and determine the manner in which they will
complete their tasks. The employees‘ participation can be beneficial because they are closer to the production
process. In addition, if their tasks can be completed in various ways, they may use their own creativity to
accomplish the work.

 Organizing: Managers are responsible for organizing the operations of a business in the
most efficient way, enabling the business to use its resources effectively. The organizing
function involves the organization of employees and other resources in a manner that is consistent
with the firm‘s goals. Once a firm‘s goals are established (from the planning function), resources are
obtained and organized to achieve those goals. The organizing function occurs continuously
throughout the life of the firm. This function is especially important for firms that frequently
restructure their operations.

 Controlling: A large percentage of a manager‘s time is spent controlling the

activities within the business to ensure that it‘s on track to achieve its goals.
When people or processes stray from the path, managers are often the first ones
to notice and take corrective action. The controlling function involves the monitoring and
evaluation of tasks. To evaluate tasks, managers should measure performance in comparison with the
standards and expectations they set. That is, the controlling function assesses whether the plans set
within the planning function are achieved. Standards can be applied to production volume and cost,
salesvolume, profits, and several other variables used to measure a firm‘s performance.

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  Leading: Managers serve as leaders for the organization, in practical as well as
symbolic ways. The manager may lead work teams or groups through a new
process or the development of a new product. The manager may also be seen as
the leader of the organization when it interacts with the community, customers, and
suppliers. The leading function is the process of influencing the habits of others to achieve a
common goal. It may include the communication of job assignments to employees and possibly the
methods of completing those assignments. It may also include serving as a role model for
employees. The leading function involves not only instructions on how to complete a task but also
incentives to complete it correctly and quickly. Someforms of leading may help motivate employees.
One method is to delegate authority by assigning employees more responsibility. Increased
responsibility can encourage employees to take more pride in their jobs and raise their self-esteem.
Managers who allow much employee feedback may prevent conflicts between management and
employees, or even conflictsamong employees. To the extent that the leading function can enhance the
performance of employees, it will enhance the performance of the firm.

Leadership Styles: Although all managers have their own leadership styles, styles can be classified
generally as autocratic, free-rein, or participative.
 Managers who use an autocratic leadership style retain full authority for decision making;
employees have little or no input. Autocratic managers may believe that employees cannot offer
input that would contribute to a given decision. Employees are instructed to carry out tasks as
ordered by autocratic leaders and are discouraged from being creative. In general, employees who
desire responsibility are likely to become dissatisfied with such a management style.
 Managers who use a free-rein (also called ―laissez-faire‖) management style delegate much
authority to employees. This style is the opposite extreme from the autocratic style. Free-rein
managers communicate goals to employees but allow the employees to choose how to complete the
objectives. Employees working under a free-rein management style are expected to manage and
motivatethemselves daily.
 In the participative (also called democratic) leadership style, the leaders accept some employee
input but usually use their authority to make decisions. This style requires frequent communication
between managers and employees. Managers who use a participative management style allow
employees to express their opinions but do not pressure employees tomake major decisions.
5.2- Management skills : To perform well, managers rely on four types of skills:
 Conceptual skills
 Interpersonal skills
 Technical skills
 Decision-making skills
5.2.1- Conceptual Skills: Managers with conceptual skills (also referred to as analytical skills) have the
ability to understand the relationships among the various tasks of a firm. Managers need conceptual skills to

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make adjustments when problems occur. Managers with good conceptual skills have backup strategies when
problems in the production process occur.

5.2.2- Interpersonal Skills: Virtually all managers perform tasks that require good interpersonal
skills (also referred to as communication skills), which are the skills necessary to communicate with
customers and employees.

 Communication with Customers: Many managers must communicate with customers to ensure
satisfaction. Theylisten to customer complaints and attempt to respond in an acceptablemanner.
They may also bring other complaints to the attention of top management. Managers lacking
good interpersonal skills may ignore customer complaints. Consequently, problems go unnoticed
until a large number of dissatisfied customers stop buying the firm‘s products. By that time, it may betoo
late for the firm to regain customers‘ trust. One of the most important interpersonal skills is the ability to
ask goodquestions. Without this, the real story behind customer or employee dissatisfaction may not
be uncovered.

 Communication with Employees: Managers need good interpersonal skills when

communicating with employees. They must be able to clearly communicate assignments to
employees and must communicate with employees who have made mistakes on the job so that they
can be corrected. In addition, managers must listen to complaints from employees and attempt to
resolve their problems. Middle- and top-level managers who use good interpersonal skills in
communicating with lower management will be better informed about problems within the firm.
Interpersonal skills are often used by top and middle managers when they must make decisions
based on informationprovided by other managers.
5.2.3-Technical Skills: Managers need technical skills to understand the types of tasks that they manage.
Managers who are closer to the actual production process use their technical skills more frequently than
high-level managers. For example, first-line managers of an assembly line of a computer manufacturer must be
aware of how computer components are assembled. A technical understanding is important for all managers
who evaluate new productideas or are involved in solving problems.

5.2.4- Decision-Making Skills: Managers need decision-making skills so that they can use existing
information to determine how the firm‘s resources should be allocated. These decisions affect either the
revenue or the operating expenses of the firm and therefore affect its earnings. Managers who make proper
decisions can improve the firm‘s earnings and thereby increase its value.

5.3 -Evolution and Development of Management Theory

Before now human beings were leaving on their own, the history of barter is still fresh in your
memory. People were operating in groups; this came as a result of the extension of family and
tribes. As the society develops, and things become more complex, there is need for managers.
Technological development leads to rapid industrial revolution, this lead to:

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- Specialization

- Division of labour

- Systematic approved to managers

Business and organization become the order of the day, factories were growing, the question was
how to manage human and natural resources. How to manage responsibilities. This in fact led to
theories of management.

5.3.1 Classical Theories of Management: These theories include Specialization and the
division of labour. A professor of mathematics known as Charles Babbage (1792-1971), who
invented the first mechanical calculator which lead to today computer, believe that application
of scientific method of production could head to increase in output and reduction in cost. He
therefore advocated for division of labour. He believes that workers could specialize on a
specific job, by so doing, he may require less training. This thinking has led to today modern
assembly line method of production.

5.3.1.1- Scientific management: Fredrick Taylor, whose study on how to improve productivity
of workers was carried out in Midvale Steel Company in Philadelphia and Simonds Rolling
Machines and Bethelen Steel. He rose to a management position in a rolling mill at age 31. His
study brought about the following:

- Improving productivity of workers;

- Importance of selection and training procedures;

- Need for proper cooperation and communication between workers and management.
Henry Ganth (1961-1919) worked with Taylor; he developed idea on incentive scheme:

- Instituted a reward for workers

- Reward from supervisors of training employee

- Ganth chart for producing scheduling

Frank Gilbreth (1869-1924) and Lillian Gilbreth (1879-1972) – Their study is popularly known
as time and motion studies, it involve fatigue involve in a variety of jobs, resulted in a number of
new techniques. Their study recalls that:

- It will raise the moral of workers;

- Their position plan- teaching, doing and learning;

- Scientific selection of workers ;

- Stress the importance of training some of the problem with this finding;

- They see managers as born and not made; and

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- It stresses materials gains and income psychological and social needs.
5.3.1.2- Organisation theory: This theory is attributed to Henry Fayol (1841-1925), who sees
his success as a mining engineer with a French coal and Iron company because of his application
of management principle, rather than personal qualities. The five functions include:

- planning ;
- organizing ;
- commanding ;
- coordinating ; and
- controlling.
Fayol expanded his principles into fourteen (14):

 Division of work ;
 Authority and responsibility: the right to command others;
 Discipline: firm but fair;
 Unity of command: an employee received order from one superior only;
 Unit of declaration: everyone pulls the same way;
 Subordination of individual interest to general interest;
 Remuneration: the pay must be fair;
 Centralization: the extent to which authority is delegated through departments;
 Chain of authority: ranging from ultimate authority to lower levels;
 Order: there must be a place for every employee;
 Equity: treating employees well, foster loyalty;
 Stability of tenure of staff: job security;
 Initiative: thinking out a plan and executing actions; and
 Espirit de corps: team work and harmony build up the strength of the
organization.
5.3.2- Behavioural Theories of Management
Hugo Mitsberg and Eltin Mayo undertook a study: having in mind that psychology and
sociology has developed rapidly and that it has effect in a worker than the environment as such
they could be used in selecting, training and motivating worker. Their experiment was basically
on lightening to measure the effect of worker productivity. It was revealed that the level of
productivity improves when and there was no lightening. It means therefore that there are other
factors that affect workers rather than the artificial condition. Some of the things that workers
care for include:

- Sympathetic supervision and care about their welfare;

- Group pressure at work ; and
- Relationship at home.

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5.3.3 Management Science: The statutory of management science can be traced back to after
the Second World War. Operational research teams were set up consisting of mathematicians,
physicists and other scientists, who pooled their knowledge together to solve problems. They try
to solve problem that could not be solved by conventional means with the development of
scientific means i.e. computers problem could be solved fast. Management science is more useful
in planning and control, i.e.
 Capital budgeting
 Production scheduling
 Control of stocks
 Scheduling of bus, transportation etc.
5.5.4 The System Approach
In an organization a systematic approach is a combination of interrelated parts, for a common
purpose under the same environment. There is at the end of the day a coordination which results
into a synergy. This system rely on :

 information and
 feed back

All these are to achieve the same goal.

5.4- Employee’s management

A firm has a strategic plan that identifies opportunity and indicates the future direction of the
firm‘s business. When the firm develops strategies to achieve the strategic plan, it relies on its
managers to utilise employees and other resources to make the strategies work.

5.4.1 – The value of motivation: Many businesses are successful not just because of their business ideas, but also
because of their employees. But employees need to be motivated as well as to have the proper skills to do
their jobs. Employees at some firms have adequate skills for their jobs, but they lack the motivation to perform
well. Consequently, these employees offer only limited help in the production process. Some firms
believe that if they can hire people who are naturally motivated, the employees will perform well in
the workplace, but this will not always happen. Although some people naturally make more of an effort to
perform well, they will still need a work environment that motivates them.

5.4.1.1 – Theories on Motivation: The motivation of employees is influenced by job satisfaction, or

the degree to which employees are satisfied with their jobs. Since employees who are satisfied with their jobs
are more motivated, managers can motivate employees by ensuring job satisfaction.
5.4.1.1.1- Maslow’s Hierarchy of Needs: In 1943, Abraham Maslow, a psychologist, developed the
hierarchy of needs theory. This theory suggests that people rank their needs into five general categories.
Once they achieve a given category of needs, they become motivated to reach the next category.

 Physiological needs are the basic requirements for survival, such as food and shelter. Most jobs
can help achieve these needs.

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  Once these needs are fulfilled, safety needs (such as job security and safe working conditions)
become the most immediate goal. Some jobs satisfy these needs.
 People also strive to achieve social needs, or the need to be part of a group. Some firms attempt to
help employees achieve their social needs, either by grouping workers in teams or by organizing
socialevents after work hours.
 People may also become motivated to achieve esteem needs, such as respect, prestige, and
recognition. Some workers may achieve these needs by being promoted within their firms or by
receiving special recognition for their work.
 The final category of needs is self-actualization, which represents the need to fully reach one‘s
potential.For example, people may achieve self-actualization by starting and successfully running
a specific business that fits their main interests.

The hierarchy of needs theory can be useful for motivating employees because it suggests that different
employees may be at different places inthe hierarchy. Therefore, their most immediate needs may differ. If
managers can identify employees‘ needs, they will be better able to offer rewards that motivate
employees.
5.4.1.1.2- Herzberg’s Job Satisfaction Study

In the late 1950s, Frederick Herzberg surveyed 200 accountants and engineers about job satisfaction. Herzberg
attempted to investigate the factors that made them feel dissatisfied with their jobs at a given point in time. He
also attempted to identify the factors that made them feel satisfied with their jobs. His study found the
following:

Common factors identified Common factors identified by

by dissatisfied workers satisfied workers

Working conditions Achievement

Supervision Responsibility
Salary Recognition
Job security Advancement
Status Growth
Employees become dissatisfied when they perceive work-related factors in the left column (called hygiene
factors) as inadequate. Employees are commonly satisfied when the work-related factors in the right column

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(called motivational factors) are offered. Herzberg‘s results suggest that factors such as working conditions
and salary must be adequate to prevent workers from being dissatisfied. Yet,better than adequate working
conditions and salary will not necessarilylead to a high degree of satisfaction. Instead, a high degree of worker
satisfaction is most easily achieved by offering additional benefits, such as responsibility. Thus, if managers
assign workers more responsibility, theymay increase worker satisfaction and motivate the workers to be more
productive.
5.4.1.1.3- McGregor’s Theory X and Theory Y

Another major contribution to motivation was provided by Douglas Mc- Gregor, who developed Theory X
and Theory Y. Each of these theories represents supervisors‘ possible perception of workers. The views of
Theories X and Y are summarized as follows:
Theory X Theory Y

Employees dislike work Employees are willing

and job responsibilities to work and prefer
and will avoid work if more responsibility.
possible.
The way supervisors view employees can influence the way they treat the employees. Supervisors who
believe in Theory X will likely use tight control over workers, with little or no delegation of authority. In
addition, employees will be closely monitored to ensure that they perform their tasks. Conversely,
supervisors who believe in Theory Y will delegate more authority because they perceive workers as
responsible. These supervisors will also allow employees more opportunities to use their creativity. This
management approach fulfills employees‘ needs to be responsible and to achieve respect and recognition.
Consequently, these employees are likely to have a higher level of job satisfaction and therefore to be more
motivated.
5.4.1.1.4- Theory Z

In the 1980s, a new theory on job satisfaction was developed. This theory, called Theory Z, was partially
based on the Japanese style of allowing all employees to participate in decision making. Participation can
increase job satisfactionbecause it gives employees responsibility. Job descriptions tendto be less specialized, so
employees develop varied skills and have a moreflexible career path.
5.4.1.1.5-Expectancy Theory

Expectancy theory suggests that an employee‘s efforts are influenced by the expected outcome (reward)
for those efforts. Therefore, employees will be more motivated to achieve goals if they are achievable and
offer some reward: - range from an oral compliment to a promotion or large bonus. Employees may react
differently to various forms of positive reinforcement. The more they appreciate the form of reinforcement,
the more they will be motivated to continue high performance.
5.5 - How firms can enhance job satisfaction and thereby enhance motivations
Many of the theories on motivation suggest that firms can motivate employees to perform well by ensuring

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job satisfaction. In general, the key characteristics that affect job satisfaction are money, security, work
schedule, and involvement at work. To motivate employees, firms provide job enrichment programs, or
programs designed to increase the job satisfaction of employees. The following are some of the more
popular job enrichment programs:
Adequate compensation program
Job security
Flexible work schedule
Employee involvement programs
5.5.1- Adequate Compensation Program: Firms can attempt to satisfy employees by offering adequate
compensation for the work involved. Therefore, firms may attempt to ensure that those employees with the
highest performance eachyear receive the highest percentage raises.

 A merit system allocates raises according to performance (merit). Forexample, a firm may decide
to give its employees an average raise of 5 percent, but poorly performing employees may receive
0 percent while the highest performing employees receive 10 percent. This system provides
positive reinforcement for employees who have performed well and punishment for those who
have performed poorly. A merit system is normallymore effective than the alternative across-the-
board system, in which all employees receive a similar raise. The across-the-board system provides
no motivation because the raise is unrelated to employee performance.
 Incentive plans provide employees with various forms of compensation if they meet specific
performance goals. Forexample, a firm may offer a weekly or monthly bonus based on the number
of components an employee produced or the franc value of all products an employee sold to
customers.

5.6 – Human resource planning: Human resource planning involves planning to satisfy a firm‘s
needs for employees. It consists of three tasks:

 Forecasting needs of personnel or staff

 Job analysis
 Recruiting

5.6.1- Forecasting needs of personnel or staff: If staffing needs can be anticipated in advance, the firm
has more time to satisfy those needs. Some needs for human resources occur as workers retire or take jobs with
other firms. Retirement can be forecasted with somedegree of accuracy, but forecasting when an employee will
take a job with another firm is difficult. Additional needs for employees result from expansion. These needs may
be determined by assessing the firm‘s growth trends.

5.6.2- Job Analysis: Before a firm hires a new employee to fill an existing job position, it mustdecide what
tasks and responsibilities will be performed by that position and what credentials (education, experience,
and so on) are needed to qualify for that position. The analysis used to determine the tasks and the necessary
credentials for a particular position is referred to as job analysis. The job analysis allows the supervisor of the

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job position to develop a job specification and job description. The job specification states the credentials
necessary to qualify for the job position. The job description states the tasks and responsibilities of the job
position.

5.6.3 – Recruiting: Firms use various forms of recruiting methods to ensure an adequate supply of
qualified candidates. Some firms have a human resource manager (sometimes called the ―personnel
manager‖) who helps each specific department recruit candidates for its open positions. To identify potential
candidates for the position, the human resource manager may check files of recent applicants who applied
before the position was even open. These files are usually created as people submit their applications to the
firm over time. In addition, the manager may place an advert in local newspapers. This increases the pool of
applicants, as some people are unwilling to submit an application unless they know that a firm has an open
position. Increasingly, companies are also listing positions on their websites.

 Internal versus External Recruiting method: Recruiting can occur internally or externally.
Internal recruiting seeks to fill open positions with persons already employed by the firm.
Numerous firms post job openings so that existing employees can be informed. Some employees
may desire the open positions more than their existing positions. Internal recruiting can be
beneficial because existing employees have already been proven. Their personalities are known,
and their potential capabilities and limitations can be thoroughly assessed. Internal recruiting also
allows existing workers to receive a promotion (an assignment of a higher-level job with more
responsibility and compensation) or to switchto more desirable tasks. This potential for advancement
can motivate employees to perform well. Such potential also reduces job turnover and therefore
reduces the costs of hiring and training new employees.
 External recruiting is an effort to fill positions with applicants from outside the firm. Some
firms may recruit more qualified candidates when using external recruiting, especially for some
specialized job positions. Although external recruiting allows the firm to evaluate applicants‘ potential
capabilities and limitations, human resource managers do not have asmuch information as they do
for internal applicants. The applicant‘s résumé lists previously performed functions and describes
the responsibilities of those positions, but it does not indicate how the applicant responds to orders or
interacts with other employees. This type of information ismore critical for some jobs than others.
 Screening Applicants: The recruiting process used to screen job applicants involves several steps.
 The first step is to assess each application to screen out unqualified applicants. Although the
information provided on an application is limited, it is usually sufficient to determine whether
the applicanthas the minimum background, education, and experience necessary to qualify for
the position.
 The second step in screening applicants is the interview process. The human resource manager
uses the personal interview to assess thepersonality of an applicant, as well as to obtain additional
information that was not included on the application. Specifically, an interview can indicate an
applicant‘s punctuality, communication skills, and attitude. Furthermore, an interview allows
the firm to obtain more detailed informationabout the applicant‘s past experience.
 A third step in screening applicants is to contact the applicant‘s references. This screening method

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 offers limited benefits, however, because applicants normally list only those references who are
likely to provide strongrecommendations.
 Another possible step in the screening process is an employment test, which is a test of the
candidate‘s abilities. Some tests are designed to assess intuition or willingness to work with others.
Other tests are designed to assess specific skills, such as computer skills.
 Make the Hiring Decision: By the time the steps for screening applicants are completed, the
application list should have been reduced to a small number of qualified candidates. Some firms take
their hiring process very seriously because they recognise that their future performance is highly
dependent on the employees that they select. Once the screening is completed, the top candidate
can be selected from this list and offered the job; the remaining qualified applicants can be
considered if the top candidate does not accept the job offer.

5.7 – Compensation packages that firms offer

Firms attempt to reward their employees by providing adequate compensation. A compensation package
consists of the total monetary compensationand benefits offered to employees. Some employees think of
their compensation only in terms of their salary, but the benefits that some firms offer may be more
valuable than the salary. The typical elements of a compensation package are salary, stock options,
commissions, bonuses, profitsharing, benefits, and perquisites.
5.7.1- Salary: Salary (or wages) is the franc paid for a job over a specific period. The salary can be
expressed per hour, per pay period, or per year and is fixedover a particular time period.

5.10.2- Stock Options: Is a form of compensation that allows employees to purchase shares of their
employer‘s stock at a specific price. Thus, these employees are motivated to perform well becausethey benefit
directly when the firm performs well. As part-owners of the firm, they share in its profits. Many firms
provide stock options to their high-level managers, such as the CEO, vice-presidents, and other managers. Some
firms, however, such as Starbucks and Microsoft, provide stock options to all of their employees. This can
motivate all employees to perform well.

5.7.3- Commissions: Commissions normally represent compensation for meeting specific sales
objectives. For example, salespeople at many firms receive a base salary,plus a percentage of their total sales
volume as monetary compensation.

5.7.4- Bonuses: A bonus is an extra onetime payment at the end of a period in which performance was
measured. Bonuses are usually paid less frequently than commissions (such as once a year). A bonus may be
paid for efforts to increase revenue, reduce expenses, or improve customer satisfaction.

5.7.5 - Profit Sharing: Some firms, such as Continental Airlines and General Motors, offer employees
profit sharing, in which a portion of the firm‘s profits is paid to employees. Boeing, J.P. Morgan Chase, and
many other firms also offer profit sharing to some of their employees. This motivates employees to performin
a manner that improves profitability.

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 5.7.6- Employee Benefits: Employees may also receive employee benefits, which are additional
privileges beyond compensation payments, such as paid vacation time;health, life, or dental insurance; and
pension programs. Typically, theseemployee benefits are not taxed. Many firms provide substantial employee
benefits to their employees.

5.7.6- Perquisites: Some firms offer perquisites (or ―perks‖) to high-level employees; these are
additional privileges beyond compensation payments and employeebenefits. Common perquisites include
free parking, a company car, clubmemberships, telephone credit cards, and an expense account.

5.8- Developing skills of employees: Firms that hire employees provide training to develop various
employee skills. Motorola has established its own university where each employee receives at least one week of
training per year. A study by the management consulting firm Ernst & Young found that firms that invest in
training programs are more profitable.
5.8.1- Technical skills: Employees must be trained to perform the various tasks they engage in daily. Ace
Hardware offers courses to train its employees in the use of the products that it sells. As factories owned by
firms such as General Motors and Boeing incorporate more advanced technology, employees receive more
training. These firms spend millions of dollars every year on training. With new development in computer
technology, employees of travel agencies, mail-order clothing firms, retail stores, and large corporations must
receive more training on using computers. In addition, employees who are assigned to new jobs will require
extra training. Firms recognize that expenses may be incurred each year to continually develop each
employee‘sskills.

5.8.2- Decision-Making Skills: Firms can benefit from providing their employees with some guidelines to
consider when making decisions and generating ideas. For example, Xeroxtrains all of its employees to follow
a six-step process when generatingideas and making decisions. Kodak employees who recently created new
products are asked to share their knowledge with other employees who are attempting to develop new
products. Motorola trains its employees to apply new technology to develop new products. Ace Hardware
offerscourses on management skills for its managers.

5.11.3- Customer Service Skills: Employees who frequently deal with customers ought to have
customerservice skills. Many employees in tourism industries such as airlines and hotels are trained to satisfy
customers. The hotel chain Marriott International provides training on serving customers, with refresher
sessions afterthe first and second months. The training is intended not only to ensurecustomer satisfaction but
also to provide employees with an orientation that makes them more comfortable (and increases employee
satisfaction).Ace Hardware offers courses for its managers to develop customer serviceskills. Customer service
skills are also necessary for employees hired by firms to sell products or deal with customer complaints.

5.7.5- Safety Skills: Firms also educate employees about safety within the work environment.This includes
training employees on how to use machinery and equipment in factories. United Parcel Service (UPS)
implements training programs for its employees on handling hazardous materials. Training programs not only
reassure employees but also reduce health-care and legal expenses that could be incurred as a result of work-
related injuries.

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5.7.6- Human relations skills: Some training seminars may be necessary for supervisors who lack skills in
managing other employees. In general, this type of training helps supervisors recognize that their employees not
only deserve to be treated properly but also will perform better if they are treated well. Firms commonly
provide seminars on diversity to help employees ofdifferent races, genders, and religions become more sensitive
to other views. Denny‘s offers employee training on diversity to prevent racial discrimination. Diversity
training may enable a firm to create an environment inwhich people work together more effectively, thereby
improving the firm‘s performance. It may also prevent friction between employees and thus can possibly prevent
discrimination or harassment lawsuits against the firm. Training seminars are also designed to improve
relationships amongemployees across various divisions so that employees can work together inteams.

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