zimbabwe open university · zimbabwe open university (zou) by open and distance learning, we need...

Bachelor of Management

Business Management

Module MGT102

bp ZIMBABWE OPEN UNIVERSITY

Published by: The Zimbabwe Open University

P.O. Box MP1119

Mount Pleasant

Harare, ZIMBABWE

The Zimbabwe Open University is a distance teaching and openlearning institution.

Year: 2004,2008

Cover design: B. Pillay

Layout : S. Mushore

ISBN: 1-77938-141-7

Typeset in Times New Roman, 12 point on auto leading

© Zimbabwe Open University. All rights reserved. No part of thispublication may be reproduced, stored in a retrieval system, ortransmitted, in any form or by any means, electronic, mechanical,photocopying, recording or otherwise, without the prior permission ofthe Zimbabwe Open University.

Authors: I. KwesuMSc Econ (UZ)BSc Econ (UZ)

E.N. ChikwavaBSc Agric. Economics (London University)M.B.L. (UNISA)

Content Reviewer: A.E. IsiborMBABSc (Hons)HND

Editor: C.K.T. VengesayiB.A. (London)Graduate Certificate in Education (Rhodesia)Master of Education – Psychology (Zimbabwe)Certificate in Examination Administration(Cambridge – UK)

The demand for skills and knowledgeand the requirement to adjust andchange with changing technology,places on us a need to learncontinually throughout life. As allpeople need an education of one formor another, it has been found thatconventional education institutionscannot cope with the demand foreducation of this magnitude. It has,however, been discovered that distanceeducation and open learning, now alsoexploiting e-learning technology, itselfan offshoot of e-commerce, hasbecome the most effective way oftransmitting these appropriate skillsand knowledge required for nationaland international development.

Since attainment of independence in1980, the Zimbabwe Government hasspearheaded the development ofdistance education and open learningat tertiary level, resulting in theestablishment of the Zimbabwe OpenUniversity (ZOU) on 1 March, 1999.

ZOU is the first, leading, and currentlythe only university in Zimbabweentirely dedicated to teaching bydistance education and open learning.We are determined to maintain ourleading position by both satisfying ourclients and maintaining highacademic standards. To achieve theleading position, we have adopted thecourse team approach to producingthe varied learning materials that willholistically shape you, the learner tobe an all-round performer in the fieldof your own choice. Our course teamscomprise academics, technologists and

administrators of varied backgrounds,training, skills, experiences andpersonal interests. The combinationof all these qualities inevitablyfacilitates the production of learningmaterials that teach successfully anystudent, anywhere and far removedfrom the tutor in space and time. Weemphasize that our learning materialsshould enable you to solve both work-related problems and other lifechallenges.

To avoid stereotyping and professionalnarrowness, our teams of learningmaterials producers come fromdifferent universities in and outsideZimbabwe, and from Commerce andIndustry. This openness enables ZOUto produce materials that have a longshelf life and are sufficientlycomprehensive to cater for the needsof all of you, our learners in differentwalks of life. You, the learner, have alarge number of optional courses tochoose from so that the knowledge andskills developed suit the career paththat you choose. Thus, we strive totailor-make the learning materials sothat they can suit your personal andprofessional needs. In developing theZOU learning materials, we are guidedby the desire to provide you, the learner,with all the knowledge and skill thatwill make you a better performer allround, be this at certificate, diploma,undergraduate

To the student

or postgraduate level. We aim for productsthat will settle comfortably in the global villageand competing successfully with anyone. Ourtarget is, therefore, to satisfy your quest forknowledge and skills through distanceeducation and open learning

Any course or programme launched by ZOUis conceived from the cross-pollination of ideasfrom consumers of the product, chief amongwhom are you, the students and youremployers. We consult you and listen to yourcritical analysis of the concepts and how theyare presented. We also consult other academicsfrom universities the world over and otherinternational bodies whose reputation indistance education and open learning is of avery high calibre. We carry out pilot studiesof the course outlines, the content and theprogramme component. We are only too gladto subject our learning materials to academicand professional criticism with the hope ofimproving them all the time. We aredetermined to continue improving bychanging the learning materials to suit theidiosyncratic needs of our learners, theiremployers, research, economic circumstances,technological development, changing timesand geographic location, in order to maintainour leading position. We aim at giving you aneducation that will work for you at any timeanywhere and in varying circumstances andthat your performance should be second tonone.

As a progressive university that is forwardlooking and determined to be a successful partof the twenty-first century, ZOU has startedto introduce e-learning materials that willenable you, our students, to access any sourceof information, anywhere in the worldthrough internet and to communicate,converse, discuss and collaboratesynchronously and asynchronously, with peers

and tutors whom you may never meet in life.It is our intention to bring the computer,email, internet chat-rooms, whiteboards andother modern methods of delivering learningto all the doorsteps of our learners, whereverthey may be. For all these developments andfor the latest information on what is takingplace at ZOU, visit the ZOU website atwww.zou.ac.co.zw

Having worked as best we can to prepare yourlearning path, hopefully like John the Baptistprepared for the coming of Jesus Christ, it ismy hope as your Vice Chancellor that all ofyou, will experience unimpeded success in youreducational endeavours. We, on our part, shallcontinually strive to improve the learningmaterials through evaluation, transformationof delivery methodologies, adjustments andsometimes complete overhauls of both thematerials and organizational structures andculture that are central to providing you withthe high quality education that you deserve.Note that your needs, the learner ‘s needs,occupy a central position within ZOU’s coreactivities.

Best wishes and success in your studies.

_____________________Dr. Primrose KurashaVice Chancellor

As you embark on your studies with theZimbabwe Open University (ZOU) by open

and distance learning, we need to advise you sothat you can make the best use of the learningmaterials, your time and the tutors who are basedat your regional office.

The most important point that you need to note isthat in distance education and open learning, thereare no lectures like those found in conventionaluniversities. Instead, you have learning packagesthat may comprise written modules, tapes, CDs,DVDs and other referral materials for extra reading.All these including radio, television, telephone, faxand email can be used to deliver learning to you.As such, at the ZOU, we do not expect the tutorto lecture you when you meet him/her. We believethat that task is accomplished by the learningpackage that you receive at registration. Whatthen is the purpose of the six hour tutorial for eachcourse on offer?

At the ZOU, as at any other distance and openlearning university, you the student are at the centreof learning. After you receive the learning package,you study the tutorial letter and other guidingdocuments before using the learning materials.During the study, it is obvious that you will comeacross concepts/ideas that may not be that easyto understand or that are not so clearly explained.You may also come across issues that you do notagree with, that actually conflict with the practicethat you are familiar with. In your discussiongroups, your friends can bring ideas that are totallydifferent from yours and arguments may begin. Youmay also find that an idea is not clearly explainedand you remain with more questions than answers.You need someone to help you in such matters.

This is where the six hour tutorial comes in. Forit to work, you need to know that:· There is insufficient time for the tutor

to lecture you· Any ideas that you discuss in the

tutorial, originate from your experienceas you work on the materials. All theissues raised above are a good sourceof topics (as they pertain to yourlearning) for discussion during thetutorial

· The answers come from you while thetutor’s task is to confirm, spur furtherdiscussion, clarify, explain, giveadditional information, guide thediscussion and help you put togetherfull answers for each question that youbring

· You must prepare for the tutorial bybringing all the questions and answersthat you have found out on the topicsto the discussion

· For the tutor to help you effectively, givehim/her the topics beforehand so thatin cases where information has to begathered, there is sufficient time to doso. If the questions can get to the tutorat least two weeks before the tutorial,that will create enough time forthorough preparation.

In the tutorial, you are expected and required totake part all the time through contributing inevery way possible. You can give your views,even if they are wrong, (many students may holdthe same wrong views and the discussion willhelp correct the errors), they still help you learnthe correct thing as much as the correct ideas.

The Six Hour Tutorial Session AtThe Zimbabwe Open University

You also need to be open-minded, frank, inquisitiveand should leave no stone unturned as you analyzeideas and seek clarification on any issues. It hasbeen found that those who take part in tutorialsactively, do better in assignments and examinationsbecause their ideas are streamlined. Taking partproperly means that you prepare for the tutorialbeforehand by putting together relevant questionsand their possible answers and those areas thatcause you confusion.

Only in cases where the information beingdiscussed is not found in the learning package canthe tutor provide extra learning materials, but thisshould not be the dominant feature of the six hourtutorial. As stated, it should be rare because theinformation needed for the course is found in the

learning package together with the sources towhich you are referred. Fully-fledged lecturescan, therefore, be misleading as the tutor maydwell on matters irrelevant to the ZOU course.

Distance education, by its nature, keeps the tutorand student separate. By introducing the six hourtutorial, ZOU hopes to help you come in touchwith the physical being, who marks yourassignments, assesses them, guides you onpreparing for writing examinations andassignments and who runs your general academicaffairs. This helps you to settle down in yourcourse having been advised on how to go aboutyour learning. Personal human contact is,therefore, upheld by the ZOU.

Session I (Two Hours)Session I should be held at the beginning of the semester. Themain aim of this session is to guide you, the student, on howyou are going to approach the course. During the session, youwill be given the overview of the course, how to tackle theassignments, how to organize the logistics of the course andformation of study groups that you will belong to. It is also duringthis session that you will be advised on how to use your learningmaterials effectively.

The six hour tutorials should be so structured that thetasks for each session are very clear. Work for eachsession, as much as possible, follows the structure givenbelow.

The Six Hour Tutorial Session At The Zimbabwe Open University

Session II (Two Hours)This session comes in the middle of the semester to respondto the challenges, queries, experiences, uncertainties, andideas that you are facing as you go through the course. In thissession, difficult areas in the module are explained through thecombined effort of the students and the tutor. It should also givedirection and feedback where you have not done well in thefirst assignment as well as reinforce those areas whereperformance in the first assignment is good.

Session III (Two Hours)The final session, Session III, comes towards the end of thesemester. In this session, you polish up any areas that you stillneed clarification on. Your tutor gives you feedback on theassignments so that you can use the experience for preparationfor the end of semester examination.

ConclusionIn conclusion, we should be very clear that sixhours is too little for lectures and it is notnecessary, in view of the provision of fully self-contained learning materials in the package, toturn the little time into lectures. We, therefore,urge you not only to attend the six hour tutorials

for this course, but also to prepare yourself tocontribute in the best way possible so that youcan maximally benefit from it. We also urgeyou to avoid forcing the tutor to lecture you.

BEST WISHES IN YOUR STUDIES.

ZOU

Note that in all the three sessions, you identify the areasthat your tutor should give help. You also take a veryimportant part in finding answers to the problems posed.You are the most important part of the solutions to yourlearning challenges.

The Six Hour Tutorial Session At The Zimbabwe Open University

Overview

Zimbabwe Open University 1

Course Overview

Success in business makes demands that constantly test and apply executive’s thinking skills. Business Management module is a rich

interactive learning package designed to give students the basic intellectualtools and aptitudes they need to meet today’s business challenges. The moduleis part of training of a good and effective manager who is required and expectedto meet today’s challenges in a changing global economy. Hence this moduleis designed to help professionals develop expertise and competency in thecritical functions of business, the “blocking and tackling” that is so necessaryfor personal success in business. The module develops skills in management,marketing, communications, business accounting, finance, business policy, andbusiness strategy. Through the use of case studies, exercises and projects,the module emphasizes professional development and skill building in planning,forecasting, decision-making, and implementation.

Business Management Module MGT102

2 Zimbabwe Open University

On completion of this module you should be able to:r Analyse the management process, with particular attention to getting

work done through people in organizations.

r Identify and learn how to make major marketing decisions to satisfytarget customer needs and achieve organizational goals and objectives.

r Learn how to effectively communicate in organizations, including writtenand oral presentation skills.

r Interpret financial statements and compute key financial ratios fromdata in balance sheets, income statements, cash flow, and otherstatements that help control the business.

r Make decisions based on the time value of money, investment options,and capitalization.

r Analyse business problems to better formulate strategy, tactics, plans,and policies.

r Apply a multi-disciplinary approach to the task of researchingorganizational problems, issues, and opportunities.

r Analyse information, solve problems, and make decisions across abroad range of management positions from a holistic, global orientation.

r Effectively compare different strategies and operations for businesses,not-for-profit, and governmental organizations in determining the bestalternative from a number of possibilities.

r Analyse global competition and competitive strategies; detectingimportant trends in international ventures; marketing, financing, andmanaging human resources; and integrating the emerging onlinemarketplace into overall organizational strategies.

r Determine the benefits of a multicultural, multinational organization,including the increased talent pool of a fully integrated organization; thegreater insight gained from considering international political customsand protocols, communicating across cultures, developing relationshipswith key government departments and officials, and working with nationaland international laws and regulations; and the increased organizationalsynergies of intimate business and organizational relationships, alliances,joint ventures, and partnerships.

Business Organisations

Unit One

1.0 Introduction

All economic endeavours undertaken are some form of organisation. Inthis unit, we introduce you to the whole concept of organisations, what

they are and how they operate in the different economic sectors. We explorethe different objectives of organisations. We go further to analyse theorganisation in its environment.



1.1 Unit ObjectivesAfter studying this unit you should be able to:

* define an organisation;* describe different organisational forms in the private sector,

public sector and Non- Governmental Organisations (NGOs);* identify different organisational objectives/aims;* describe the business task and general environment.

1.2 Definition of OrganisationMost activities in our lives are undertaken through some form of organisation.In other words, for us to accomplish something whether in a church, a cornerstore, a small or medium size business or a business conglomerate, we needto do this within an organisation.

Let’s take a school as a simple organisation, which we are all familiar with.The reason why that school was built was to provide education to the offspringof the society around it. For the school to operate properly, we require ahead who is assisted by a deputy head, senior teachers and teachers. Even atthis stage, the school as an organisation is incomplete without the pupils.

An organisation according to Tamangani (2000: 4) may, therefore, be definedas an entity that has a distinct purpose that is implemented by people whoundertake operational and managerial work within a defined structure.Northcraft and Neale (1990) cite Mooney who defined an organisation asthe form of every human association for the attainment of a common purpose.It is a framework of every group moving toward a common objective. Itrefers to the complete body with all its correlated functions. Mooneyemphasised that organisations are “pure processes” not buildings or machinesor anything tangible. He stresses that organisations are practices, proceduresand relationships entered into to coordinate human talents and efforts towardscommon goals. The last definition of an organisation given above agrees withthe one given by Robbins (2000). Robbins defines an organisation as aconsciously coordinated social unit, composed of two or more people thatfunction on a relatively continuous basis to achieve a common goal or set ofgoals.

Unit 1 Business Organisations


Management, therefore, becomes the art of coordinating all organisationalactivities in order to accomplish the organisational purpose or objectives. It isabout how in precise terms all these activities are done which constitutes theessence of this module. However, before we begin discussing the individualbusiness functions, we have to know how business organisations relate toeach other within an economy.

Activity 1.1* Relate the organisation components, purpose and people

discussed in this section, to those in your own organisation.Are all of them identical? Explain your observation.

1.3 Classification of Organisations

General categories under which organisations can be classified are as shownin the diagram below :-

Organisation

Private Sector Public Sector Non-governmental(productive) (government or state controlled) (NGOs)

sole traders central government Red Crosspartnerships local authorities Christian Careco-operatives parastatals Trade Unions

private companies Zimrights public companies

Fig. 1.1: Organisations in the different sectors

?



1.3.1 The Private SectorPrivate sector organisations are owned and operated by or on behalf of privateindividuals. Private sector organisations constitute the productive sector whichcan be divided into manufacturing organisations or industries, trading orcommercial organisations and financial organisations concentrating in insuranceand banking.

1.3.2 The Public SectorBusiness organisations in the public sector of the economy are those partswhich are owned and/or controlled by the state. The state related activitiesmay be taken through government departments, parastatal bodies, and localauthority bodies. There are a number of arguments for and against government’sparticipation in the productive sector. Recent trends, however, have indicateda determined shift towards privatization, sometimes called commercializationof parastatal bodies and local authority productive activities. Government isbeing urged to concentrate on providing a conducive macro environment forindividual initiative.

1.3.3 Non-Governmental Organisations (NGOs)NGOs consists of charitable and voluntary organisations. In Zimbabwe theyare registered under the Ministry of Social Welfare as welfare organisations.They are set up to raise funds and support other people or a worth cause.Examples of NGOs are Zimrights , Oxfarm, Plan International, U.N.I.C.E.Fetc. These organisations control business activity ranging from grassrootsmicro-projects to national entities like dam, bridge, large developmentprogrammes etc. Most of their activities are undertaken on private sectorlines of responsibility and accountability.

From the above, it is apparent that society now generally prefers the privatesector approach to organisational forms. In the rest of the module, therefore,we treat the aspect of business management from the private sector’s point ofview.



Activity 1.2Describe the ownership forms of the following organisations:

* Sole proprietor* Private limited company* Public limited company* Partnerships.

What are some of the arguments for and against government’sparticipation in the productive sector?

Describe NGO business related activities you are familiar with. In whichways are the activities conducted on private sector lines?

1.4 Aims of the OrganisationsOnce an organisation has been established, it has to perpetuate itself as anentity. There are a variety of aims it can pursue in its quest to survive, the mostcommon being related to:

r making profitr gaining market sharer achieving a reasonable return on capital employedr ensuring sales increasesr attaining business growth.

A company can also pursue any combination of the above aims.

1.4.1 Making ProfitsProfits are the surplus a business achieves after covering its costs of operation.Earning profit is often stated as the economic reason for establishing businesses.Thus profits enable an organization to be a business. These profits can bemaximized at the point where the difference between costs and revenue is atits highest. Most businesses, however, do not only pursue the aim of profitmaximization for there are other aims which help a business to survive as willbe explained below.

?



1.4.2 Increasing Market Share

Market share is measured in relative terms. This is captured by the expression

Market share of the company

Market share of the nearest competitor

A relative market share of greater than one would indicate an advantageousposition. The target here is a continuum where an organisation aims at merelyimproving its share of the market over time, or aim at attaining the highestposition of being the market leader by out-selling all other competitors in aparticular brand or combined products. Companies enjoying a bigger marketshare compared to rivals are poised to perform better, due to cost advantages.

Example firm A constitutes 30% of the total market demand of a product. Itsnearest rival, firm B has a market share of 10%. The relative market share forfirm A. is 30% 10%

From this result, firm A has a relative advantage over firm B.

1.4.3 Increasing SalesSales increases over time are an overriding aim of most organisations. Therising trend in sales is often associated with improved performance incomparison with the previous period. When the sales increase in real terms,the cost for making such additional sales will often fall.

For example, if firm A doubles its sales and its total cost less than doubles itimplies that its real cost per each unit sold is decreasing.

1.4.4 Return On Capital Employed (ROCE)ROCE is a key business performance indicator. It measures the return onmoney invested in a business venture. The aim is, therefore, to ensure that thecapital invested yields the highest ROCE in a particular business, otherwise

Relative market share =

= 3



the resources could be better utilized elsewhere. This is the principle ofopportunity cost. For example, a firm that is operating below its capacity canimprove its ROCE if it increases its production to full capacity. This is sobecause fixed cost capital will remain the same regardless the level ofproduction, thus the profit per each unit will increase.

1.4.5 Attaining Business GrowthGrowth may be achieved through internal expansion, joint ventures, takeoversand mergers. Businesses aiming for growth are often associated with high risktaking. Some big businesses like Kingdom Holdings Ltd. and Econet Wirelesswere only started a few years ago. Both organisations are expanding at homeand establishing new ventures abroad. The danger associated with fast growthis over-trading. Overtrading occurs when a business expands too quicklywithout adequate capital to support the expansion. In order to meet theexpansion, stocks are built up; as sales increase so do book value of debts.Because of the increase in stock, creditors also increase. The liquidity of thebusiness is inadequate to meet the situation. The cash operating cycle is tooextended and there is insufficient cash in the system. When the creditors pressfor payment the business defaults on payment and may collapse.

Activity 1.31. Identify the aims being pursued by your organisation or one

you are familiar with.2. In what way would the pursuing of profit maximization

contradict any of the other objectives?3. How does the notion of commanding a bigger market share

lead to cost advantage?4. What do you understand about sales increasing in real terms?5. How can a company end up over-trading while pursuing

growth?

1.4.6 The Business In Its EnvironmentThe environment for the business is the sum total of the variables or factorsthat may influence its continued existence. Under the systems approach, abusiness relies on the environment for inputs utilized during the production/conversion processes and then has to rely on the same environment for the

?



consumption or utilization of the output. The survival of organisations dependson their ability to identify, evaluate and exploit opportunities in the environment.This is particularly important because not all environments are the same: Theydiffer by their degree of environmental uncertainty which in turn depends ondegree of change and degree of complexity. Environmental change can eitherbe stable or dynamic, while environmental complexity is measured in terms ofthe number of components in the environment and the extent of theorganisations’ knowledge about its environmental components. Thecomponents comprise the specific or task environment and the general ormacro environment. The issue to be aware of is that the external environmenthas a pervasive influence on the management of organisations.

Factors constituting the specific or task environment are consumers, suppliers,other producers (competitors), government (local and central) and pressuregroups.

All these variables face the organisation from outside and management whichhave no control over them, can only try to influence through strategy.Customers, suppliers etc should not be ignored during the planning process.Most successful companies seek to make these extensions of their organisationsby closely understanding their needs and cooperating with them all the way.

The other environment the organisation has to deal with is referred to as thegeneral environment characterized by political, economic, social, technological,and global factors. A manager should be aware of the complexity anduncertainty of the particular environment facing his organisation, the inter-relatedness of the factors and their increasing instability.

Since an organisation is an open system that is a sub-system of its environment,management should, therefore, be aware of the constraints imposed by theenvironmental uncertainty on the achievements of organisational goals. Anexample is motor vehicle emissions. The state of California in the US, bowingto social concern about vehicle pollution, has instituted a requirement that acertain proportion of vehicles sold should be free of emissions. This encouragestechnological change in motor manufacturing companies. In this case,technology is driven by politics, itself driven by society.



Activity 1.41. Explain the manner in which your own organisation or one

that you are familiar with is affected by the following variablesin the task environment:

* Trade unions* Customers* Competitors* Suppliers.

2. Explain the major environment variables affecting organisationsin the following sectors* Banking* Textiles* Agriculture.

1.4.7 ConclusionIn this unit we have defined the concept organisation, noting that it is composedof people, and has a deliberate structure and a distinct purpose. We havethen proceeded to describe the different organisational forms in the privatesector, public sector and non- governmental organisations (NGOs) stressingon the manner that undertake their activities. The different objectives/aims oforganisations were identified. The last section identified the task (specific)and the general (macro) environment and their respective components. Theinter-relatedness of these environments generates potential instability,uncertainty and complexity that can impose constraints on managerial practice.

?



1.5 References Chidakwa, A. M. (2000) Business and it’s Environment.

Harare: ZOU. Coles, M. et al. (2002) Business for Higher Awards, Second

Edition. New York, Heinemann Educational Publishers. Needham, D. and Dransfield, R (1997) Advanced Business,

(Second Edition) New York: Heinemann EducationalPublishers.

Needham, D. and Dransfield, R. (1990) Business Studies.UK: Hill-Hill International.

Robbins, S. and Coulter, M. (1999) Management (SixthEdition). Prentice Hall International Editions.

Tamangani, Z. F. (2000) Management and OrganisationalBehavior. Harare: ZOU.

Business Systems

Unit Two

Most managers fail to be effective in accomplishing business activitieslargely because of failure to organise themselves and the business in a

sound and coherent manner. To do this, one has to utilise the right tools for thejob. This leads us into the area of business systems which constitutes thecontents of this unit. The first section deals with information processing, followedby administrative systems and lastly, communication systems in a businessorganisation.

2.0 Introduction



2.1 Unit objectivesBy the end of this unit, you should be able to:

* define business systems;* explain information processing;* develop an information system;* explain administrative systems;* develop an administrative system;* explain communication processes in the organisational

setting.

2.2 Information processingAn organisation, as was described earlier, consists of people undertakingvarious activities to achieve a common goal. Information processing, accordingto Needham and Dransfield (1997: 184) involves gathering data from businessfunction areas like marketing, purchasing etc and then processing it to producethe information the user requires. Since we consider the business as a system(see unit 3), information, therefore, constitutes a sub-system made up of thepeople, machines, ideas and activities that are concerned with gathering andprocessing data in order to meet the formal information requirements of anorganisation. This includes the way in which information is collected, stored,handled, used, communicated and utilised for accounting purposes, monitoringstocks, or a wide range of other interrelated functions.

Information processing takes place within a system where there is a group ofdevices called hardware, which are operated by a series of programmes calledsoftware. The various parts of the system where such activities take placeare:

r Input devices – receive information and convert it into a formacceptable for storage.

r Storage devices – store programmes so that they can be used again.Stored information may include data, numbers, text, pictures and sound.

r Using information – the central processing unit (CPU) is the part of thesystem, which controls computer operations. Its receives data and

Business Systems


Unit 2

then manipulates it to perform specific tasks such as accounting orsecretarial functions

r Communicating information – output devices communicate informationto end users in the forms they require.

Information technology is developing very fast. A lot of well-placedorganisations are able to utilize this phenomenon to gain comparativeadvantage.

Activity 2.1* You have been asked to make a presentation to your

community on how to set up an information system for asmall grocery shop. Prepare a presentation that particularlyidentifies the:

a) inputsb) processing, andc) output.

2.3 Administrative systemsThe purpose of an administrative system is to ensure that events function asplanned. Administration, according to the Institute of AdministrativeManagement is that branch of management which is concerned with the servicesof obtaining, recording and analysing information of planning and ofcommunicating, by means which the management of a business safeguards itsassets, promotes its affairs and achieves its objectives. Administrative systemsare, therefore, at the centre of organisations, providing vital services to allother departments.

Administrative procedures within an organisation may include:

r Assisting functional departmental managers with clerical activities andprovision of suitable equipment

r Setting up a series of clerical procedures and methods for all parts ofthe organisation

?



r Providing services for other parts of the organisation such as purchasing,stationary and information technology

r Setting up work procedures, schedules and output controls

r Dealing with information - for example sorting, distributing, filing

r Communicating both within and outside the organisation

r Controlling and protecting the organisation

r Planning

r Ongoing analysis of the above.

Much of the administrative work utilises a number of gadgets such as electronicmail faxes, telephones, computers, and computer programmes.

Activity 2.21. Make an outline of what you consider to be the duties of an

administrator for the Zimbabwe National Soccer Team, orfor any other organisation of your choice.

2. Why are the problems of the organisation blamed on pooradministration?

2.4 CommunicationCommunication is defined by Needham and Dransfield (1997: 162) as thetransmission of common understanding through the use of symbols. Symbolscan be verbal or non-verbal (facial expression, gestures etc). This is critical inan organisational setup where activities and accomplishments by various peoplemust lead to a common goal. Everyone should talk the same language as itwere. To achieve this oneness, communication should be through anappropriate form. Forms of communication include oral, electronic, written,and non-verbal e.g. gestures. The idea is to ensure that one is correctlyunderstood.

?

Business Systems


Unit 2

Within the organisation, communication may be downwards from top levelmanagement to subordinates, upwards from low level to top level management,lateral communication and diagonal communication. It is the sensitivity/consideration with which the information is communicated that brings aboutthe desired results. This is largely because there are many barriers (noise) tocommunication as the list below bears testimony.

r Keeping information to one's selfr Differing frames of referencer Selective perceptionr Poor listening skillsr Value judgementsr Mode of transmissionr Source credibilityr Semantic problemsr Filtering: common in upward communication in an organisation. This

amounts to manipulating information so the receiver perceives it aspositive

r Time pressures: this can lead to short-circuiting. For example, someoneleft out of a formal channel of communication, e.g. the head of theorganisation consults with the clerk, leaving out all the middlemanagement who report to him

r Communication overloadr Outward appearance, for example in appropriate dressing.

These barriers to communication can, however, be overcome through:

r Utilising feedbackr Following upr Regulating information flowr Empathy:- the ability to put one's self in another person's role and

assume view points and emotions of that personr Simplifying languager Effective listeningr Utilising grapevine - this informal communication channel will always

exist. Managers should strive to ensure its accuracyr Improving appearance.

As we noted above, active listening skills are paramount to improvingcommunication. To achieve this:

r Do not stop flow of talk even if speaker is off the point



r Do not question or deny statements until the speaker is finishedr If you need elaboration of a statement, rephrase it as a question rather

than ask for proofr Do your best to understand the emotional as well as factual content of

what is being saidr Listen to what is not said.

Activity 2.31. In what ways would poor communication most likely lead to

poor organisational performance?2. Discuss the factors taken into consideration in choosing

a form of communication.3. Explain what is meant by lateral and diagonal communication.4. Write a few notes on the following barriers to communication:

a) Differing frames of reference,b) Selective perception,c) Communication overload,d) Value judgement,e) Semantics, andf) Filtering.

5. Explain briefly the following terms used in improving communication:

a) Utilising feedbackb) Following upc) Regulating information flowd) Effective listening.

6. Discuss the essence of non-verbal communication.

2.5 ConclusionIn this unit, we have defined what business systems are and the role they playin co-ordinating business activity. We have explained the concept informationprocessing, including the critical steps for developing an information systemand the manner it is revolutionising the management function. The administrativeand communication systems have also been analysed, stressing the manner inwhich they impact on business management.

?

Business Systems


Unit 2

2.6 References

Chidakwa, A. M. (2000) Business and it’s Environment.Harare: ZOU.

Coles, M. et al. (2002) Business for Higher Awards,(Second Edition) New York: Heinemann EducationalPublishers.

Needham, D. and Dransfield, R (1997) Advanced Business,(Second Edition) New York: Heinemann EducationalPublishers.

Needham, D. and Dransfield, R. (1990) Business Studies.London, Hill-Hill International.

Robbins, S. and Coulter, M. (1999) Management (SixthEdition) Prentice Hall International Editions.

Tamangani, Z.F. (2000) Management and OrganisationalBehavior. Harare: ZOU.

Principles of BusinessManagement

Unit Three

3.0 Introduction

Although evidence of managerial activity can be traced to early civilisations,it wasn’t until the 19th century that comprehensive theories on

management began to emerge. From this era to date, managerial philosophyhas moved from a period when organisations used to be dominated and strictlycontrolled by managers at the top and employees merely taking orders fromabove, to a completely participatory approach where the power of the manageris now greatly reduced.

To find out how it all started and the subsequent changes that occurred, webegin by looking at scientific management and then work through to contingentmanagement.



3.1 Unit Objectives

By the end of this unit, you should be able to:

* define management;* explain the development of management thought;* discuss the pertinent issues on which the different

management approaches are based.

3.2 Evolution Of ManagementRobbins and Coulter (1996: 32) explain that organised endeavours directedby people responsible for planning , organising , leading and controlling activitieshave existed for thousands of years. Early examples would include theconstruction of both the Egyptian pyramids and the Great Wall of China.Projects of tremendous scope, employing thousands of people, wereundertaken well before modern times. Nearer home is the construction of theGreat Zimbabwe from the 15th to the 16th century.

Modern managerial thought was influenced largely by the writings of AdamSmith in 1778 when he published the Wealth Of Nations. In this book, hedemonstrated the economic advantage organisations can gain through thedivision of labour. Then, in the 19th century came the Industrial Revolution inGreat Britain which substituted machine power for human power. This led tothe creation of factories which needed to be managed. It wasn’t howeveruntil the 19th century that the development of management theories began.These were characterized by differing beliefs about what managers do andhow they should do it. Otherwise, all the theories are describing the samething. We start with scientific management.

3.3 Scientific ManagementThe father of scientific management is F.W. Taylor (1856-1915). His beliefwas that people were alike, interchangeable and completely programmable.Together with others, he developed a systematic discipline of work-study,piece rate schemes and time and motion studies. He divided work intospecialized areas in which he advised through scientific methods, the one best

Unit 3 Principles of Business Management


way to undertake the task. This one best way was the most efficient way thatminimised wastage through what he termed soldiering – organised attemptsby groups of employees to work no harder than was absolutely necessary.He sought to cut out ‘systematic soldiering’ by establishing work practicesthat made this impossible. He saw that the power of employees to restrictoutput rested in the fact that they usually had a greater understanding of thetool they worked with and working practices than their employers. To reversethis trend, Taylor established four principles of management, viz:

r Develop a science for each element of an individual’s work, which willreplace the old rule-of-thumb method

r Scientifically select and then train, teach and develop the workerr Heartily co-operate with workers so as to ensure that all work is done

in accordance with the principles of the science that have been developedr Divide work and responsibility almost equally between management

and workers.

To motivate workers, Taylor favoured incentive wage plans. Overally, heachieved consistent improvements in productivity in the range of 200% ormore. He affirmed the role of managers to plan and control and that of workersto perform as they are instructed.

Scientific management according to Needham et al (1999: 193) can, therefore,be summarised as having the following characteristics:

r Authority is implemented through a hierarchy system of command andcontrol

r Structure is created through a highly formalised pattern of organisation.The major element of structure will be a top-down line organisation,which will be supported by a service staff organisation structure

r Specialisation - an organisation which uses extensive specialisation oflabour, machinery and offices

r Coordination of activities is required by specialisation of activities soas to create an integrated and linked structure which is formulated anddictated by management with the purpose of maximising production.



Activity 3.11. Are there organisations in Zimbabwe today that still utilise the

principles of scientific management?2. Discuss the positive and negative aspects of the Scientific

Management approach.

3.4 Classical AdministrationHenri Fayol, who wrote at the same time as FW. Taylor, is most associatedwith administrative theories of management. Whereas Taylor was concernedwith management at the top level, Fayol’s attention was directed at the activitiesof all managers. He described the practice of management as distinct fromaccounting, finance, production, distribution and other typical businessfunctions. He argued that management was an activity common to all humanendeavours in business, government and even in the home. He then proceededto state fourteen principles of management fundamentals or universal truthsthat could be taught in schools and universities. These principles are:

r Division of labour - specialization increases output by making employeesmore efficient

r Authority - managers have authority and responsibility

r Discipline - employees must obey and respect the rules that govern theOrganisation

r Unity of Command - every employee should receive orders from onlyone superior

r Unity of direction - each group of activities that have the same objectiveshould be directed by one manager

r Subordination of individual interests to the general interests

r Remuneration workers must be paid a fair wage for their services

r Centralisation find an optimum degree of centralisation to each situation

r Scalar chain wherever possible, organisations should follow this chain

?



r Order – people and materials should be in the right place at the righttime

r Equity managers should be kind and fair to their subordinates

r Stability of tenure or personnel – high employee turnover is inefficient

r Initiative – employees who are allowed to originate and carry out planswill exert high levels of effort

r Espirit de corps – promoting team spirit will build harmony and unitywithin the organisation.

Activity 3.21. Rank Taylor’s fourteen principles of management starting with

top five in order of application today.2. Compare and contrast scientific management and

administrative management approaches.

3.5 BureaucracyMax Weber (1846-1920) set out an ideal bureaucratic model containing:

r Division of labour – jobs are broken down into simple, routine andwell-defined tasks

r Authority hierarchy – offices or positions are organised in a hierarchy,each lower one being controlled and supervised by a higher one

r Formal selection – all organisational members are to be selected on thebasis of technical qualifications demonstrated by training, education andformal examinations

r Formal rules and regulations – managers must depend heavily on formalrules and regulations of the organisation to ensure uniformity

r Impersonality – rules and controls are applied uniformly avoidinginvolvement with personalities

?



r Career orientation – managers are professional officials rather thanowners of the units they manage.

The model was developed at a time when large organisations were becomingincreasingly important in industrial society. Today various forms of bureaucracyare important way of running political and economic systems in advancedindustrial societies.

Activity 3.31. What would you say are the major advantages and

disadvantages of bureaucratic organisations?2. What are the differences and similarities of classical

administration and a bureaucracy?3. Which organizations in Zimbabwe use administrative

approaches that closely resemble Max Weber’s bureaucracy?Explain.

3.6 The Human Relations ApproachFor a considerable period, management emphasis on production did producethe desired results. However, around the 1930s evidence was beginning toaccumulate that spectacular increases in productivity could be achieved bymotivational methods. These methods, emphasizing the human factor to anorganisation’s success were not only different from those advocated byTaylor, but in many respects fundamentally opposed.

Early advocates like Robert Owen campaigned against child labour andproposed an idealised workplace with regulated working hours and meals atwork. He postulated that money spent on labour was one of the bestinvestments an organisation can make. Furthermore, he observed that showingconcern to employees was highly profitable.

Mary Follet recognised that we can view organizations from the perspectiveof individual and group behaviour. She favoured group ethic rather thanindividualism for she believed groups were more productive. She advocatedfor a situation where managers and workers should view each other as partnersrather than adversaries.

?



Chester Barnard took the whole argument further believing that organisationsare made up of people with interacting social relationships. The organisationwas, therefore, a social system that requires human co-operation. Themanager’s job in this regard, is to communicate and stimulate subordinates tohigh levels of effort. Barnard in 1913 was one of the earliest writers toobserve that organisations are open systems and their success depends onmaintaining good relations with external groups and institutions with whomthe organisation regularly interacts.

The human relations approach to management then developed into the humanresources management. No longer is human resources management seen asbeing solely the responsibility of the human resources (or personnel)department. Today, this role is increasingly being seen as one for all managersacross the organisation who are being given responsibility for planning, selecting, motivating, developing and evaluating employees. Perhaps more importantly,the emphasis has shifted from seeing employees as cost to seeing them asassets. There is an increasing recognition that employees are the most importantresource in an organisation, particularly in creating a competitive edge.

3.7 The Systems ApproachSystems theory is a helpful way of thinking about organisational structures. Asystem is a complex whole made from a set of interconnecting parts orsubsystems. If you start with the organisation itself going upwards, systemstheory tells us that it is a subsystem of the appropriate industry which in turn isa sub-system of the whole economy. Moving the other way, accountingsystems, marketing efforts, production entities etc are all sub-systems of theorganisation. Utilising the systems theory in the management of organisations,therefore, provides a holistic view of all the issues involved.

A system begins from the environment where it obtains inputs, processesthem, and obtains outputs that are fed back into the environment forconsumption. In an organisation, inputs include inter alia:

r Raw materialsr Informationr Labour inputr Financial resources.



These inputs are processed utilising, among others:

r Technology/know-howr Machinery and equipmentr Skills.

After processing, we produce outputs such as:

r Consumer goodsr Servicesr Company results.

These are then fed back to the environment. See figure below.

Fig 3.2 The systems approach

Some of the qualities of the system are that all the sub-systems are inter-dependent, which means that a change of state of any of the sub-systems willaffect all other systems. Thus, if marketing fails to perform optimally, lessgoods and services will be sold, stock piling and production have to be cutback, income falls and employment falls.

Under this scenario, a manager's job is, therefore, to ably co-ordinate all thesub-systems to ensure maximum output synergistically.

ENVIRONMENT

INPUTS PROCESS OUTPUTS

FEEDBACK



Activity 3.4* Differentiate between the human relations approach and

systems approach.

3.8 The Contingency ApproachThe scientific management school more or less discounted the human side ofan organisation. In contrast, the human relations school placed an emphasison people. The systems approach was concerned with the way in which thesystem transforms inputs into outputs within its environment.

Each of the above approaches was based on the assumption that there was asingle best way to manage an organisation. In contrast, contingency theoristsdo not support the view that there is a single best way to design an organisation.Structures and methods of operation depend on the circumstances and asituation in which the organisation is operating. For example, a mechanisticorganisation can easily thrive instable environment, while a dynamic environmentwould fit an organic structure. The manager's role in an organisation is, therefore,to try and create the best ‘fit’ between people, tasks and the environment.

Activity 3.51. Consider the human relations approach, the systems approach,

and the contingency approach. Which one would you say ismost appropriate to today’s conditions in Zimbabwe’sindustry? Justify your answer.

2. Which of the above management approaches is widely usedby Zimbabwean organisations? Explain giving examples.

3.9 ConclusionIn this unit, we have traced the development of management thought from itsbeginning to the present. We have moved from mechanistic forms ofmanagement as represented by the classical thinkers to the current dynamicsituations. This has prepared us to move to the management of the actualorganisational functions in the next unit.

?

?



3.10 ReferencesChidakwa, A. M. (2000) Business and it’s Environment.

Harare: ZOU. Coles, M. et al. (2002) Business for Higher Awards


Needham, D. and Dransfield, R (1997) Advanced Business,(Second Edition) New York: Heinemann EducationalPublishers.

Needham, D. and Dransfield, R. (1990) Business Studies.UK: Hill-Hill International.



Unit 4 Starting and Running a Business


new list of customers or clients. This reduces the possibility of failure atthe beginning of the life of the business because of lack of income.Accounts and other records are the history of business and give aportrayal of its past performance. They say nothing about the futuredevelopments that will affect the success or failure of the business. Thepurchaser should, therefore, undertake further research.

2. Management buyouts are also known as management leverage buy-out. These usually occur when a conglomerate decides to rationalize itsoperations and concentrate resources on a narrower range of products.The unwanted products may be successful on the market, but no longerfit the overall plan of the business. The resources allocated to theseproducts are offered for sale. If the managers wish to buy them andcontinue producing, they can negotiate loans from financial institutions(hence the term leverage buy-out) under normal commercial conditions.The major advantage of acquiring a business in this way are:

r The existing experience and expertise of the managers. These peopleknow the product and its market, as well as the capabilities of theproduction unit and the personal skill of the workforce. The bigdisadvantage is the cost of servicing the loans (interest payments), whichmade the buy out possible.

r When investing in a franchise, its developer (the franchisor) shares thesuccessful business idea. The idea is sold or ‘rented’ to other peopleknown as franchisees. Under a franchise agreement the franchisees willbe required to pay royalties to the franchisor for the use of an idea.They may have to agree to decorate the premises in a particular way orconduct the business according to a specific code of behavior. Theseregulations are linked to the reasons why the original business was asuccess. In return, the franchisor might provide:

r Loans to help in the start up of a business

r Training in the conduct of the business

r Any special products that are needed

r The finance for advertising campaign



r A guarantee of a geographical area as the sole market for each franchise

r Starting a new business carries with it the greatest degree of risk. Thereare no previous records to act as a guide and the entrepreneur lacksthe support offered by franchising. On the other hand, it may be possibleto start on a very small scale, perhaps working from home all part-time, without the risk of investing too much capital. There is theadvantage of freedom. The start up business is not limited by thedecisions made by other people in the past (buying a business) or theconstraints imposed by a franchise agreement.

Whatever the reasons of starting business, there are feelings of conviction,determination and optimism on the part of the entrepreneur. You, theentrepreneur, must be careful to find the answers to the following questions inorder for the business to survive:

r Do you have the skills, experience and determination to run the business?The owner of the business is the resource of the business and will beoffering production and management skills to the small business. Theanswer to this question lies within the functions of human resourcesmanagement. It is important that the new owner does not underestimatethe sheer hard work and commitment needed if the business is tosucceed.

r What goods and services will you provide? The answer to this questiongoes further than a simple statement about the product. Decisions haveto be made about design and quality, among other things, before theentrepreneur arrives at a comprehensive definition of the product.

r Who will buy the product? Unless the entrepreneur has a clear imageof the type of customer the product will attract, then it will be unlikelythat the right marketing decision will be made, such as how to get theproduct to the customers at the right time, in the right quantity and atright price.

r Can you supply the product at the right time, in the required quantities,the desired quality and at right price? These questions relate to theproduction management of the business.

r Do you have the money to buy or lease the necessary premises,machinery or equipment? Can I afford the materials I will need? Theseother questions relate to the function of finance.



r How do you combine the different functions listed above so that theywill work together to have the maximum output from minimum input?

The term used to describe this concept is efficiency. The answer lies in themanagement of the business.

The most important elements in the successful business are a realisticappreciation of the environment in which the business will be operating, anunderstanding of the strength, weaknesses, opportunities and threats of thebusiness within this environment, and careful planning to minimize the problemsand maximize the advantages.

Activity 4.11. Define efficiency. How can it contribute to maximum profit

for a business?2. Give two reasons why a person might want to become self-

employed.3. Why is a start up a more risky enterprise than buying an existing

business?4. Explain with simple numerical examples why a leveraged buy-

out could have problems.

4.2 The Business Plan

4.2.1 What is a business plan?It may be months or even years between the birth of an idea for a businessand the actual start of the business venture. During this time, the prospectiveentrepreneur should be developing and refining the business plan. This is adetailed statement for the long, short and medium term objectives of thebusiness, together with an analysis of the resources needed to achieve themand the steps that will be taken to ensure that the objectives are reached.

There are three main reasons for a business plan, viz:

?



1. The thorough investigation into costs, markets and available financepresented clearly and formally will help in the identification of areas ofweaknesses in the original idea and allow them to be eradicated beforethey cost money and/or lead to failure.

2. The discipline of drawing a business plan will direct attention to theareas that the entrepreneur lacks experience in, and suggest trainingneeds.

3. A good business plan will be necessary as part of a proposal for a loan.It will show the ability of the business to service the loan and repay theprincipal, that is the sum of the borrowing.

Once drawn up, a business plan should be updated on a yearly basis. Thediscipline imposed by this exercise helps the owner:

r Check objectives and the extent to which they have been achievedr Identify reasons for success/failure in achieving the stated goalsr Identify the objectives for the forthcoming yearr Identify additional needs e.g. training and finance.

4.2.2 Principles of planningProper planning is guided by accurate information and flexibility on the part ofthe plan.

r Plans should be based on accurate and factual information. Whendetailed information is not available the planner will have to rely onexperience and judgement. This should not be dismissed as mereguesswork.

r The plan should suit the times the business is supposed to operate in.The environment in which a business operates is constantly changing.The plan drawn up for business will therefore vary according the periodof time for which it is intended. A short time scale demands a detailedbusiness plan. For a longer period the plan will be less detailed.

r A plan should be constantly changed as circumstance change and moreinformation becomes available. This is the degree of flexibility expectedof a business plan.

r The existence of a plan does not ensure success. Its progress must beconstantly checked if it is to be implemented properly. Control relieson accurate information.



4.2.3 Individual Action Planning‘Action planning is a way of helping your son or daughter to start thinkingabout important decisions affecting his or her future. Action planning coversschoolwork, examinations, further education and careers. It also looks atpersonal goals, giving young people the chance to define – perhaps for theyoung person to face his or her future and to start taking individual responsibilityfor shaping it.

The transitional action plan (Year 2) contains special characteristics such as:

r Personal details such as name, and address of the entrepreneur

r Overall career aims

r The general/national vocational qualifications or order qualification/examinations needed to achieve those aims

r Any additional training/educational requirements

r The route along which those aims can achieved – for example, sixthform, college or employment.

4.2.4 Project proposalA project proposal should have the following subheadings:

1. Introduction. A short statement (less than 200 words) defining thescope of the project. In this instance, it was the hospitality industry.Therefore the introduction listed the catering, travel, tourism,entertainment and fast food industries as having the common stand inhospitality – the friendly and generous reception and entertainment ofguests or strangers. It then took it one stage further to include healthservices and education.

2. Background. An itemised account of national conferences attended,local meetings organised, the result of initial decisions, market researchin schools and industry undertaken to test the feasibility of the idea.

3. Rationale. The reasons for undertaking the project are spelt out withcareful reference to the relevant objectives of an organisation.

4. Aim. An aim is a succinct statement of the aims of the project.



5. Objectives. The aim is broken down into a number of statements. Allproject activities can be tested against these and, therefore, they act asa control mechanism.

6. Methodology. The methodology how the project will be undertaken.

7. Monitoring and evaluation. We must ensure that the project meetsits objectives by constantly monitoring and evaluating all its stages ofdevelopment. This will help measure its success.

8. Expected outcomes. In business terms, expected outcomes can beseen as the product of the project.

9. Finance and budget. The amount of money required for the projectand how this money will be spent.

4.2.5 Contents of a Business PlanThe exact contents of a business plan depend on the size of the business, howlong it has been trading, the legal organization and the purpose for which theplan is designed.

4.2.5.1 Objectives

The questions which relate to the business objectives are:

r What will your business do?r What does your business intend to achieve?r How do you expect your business to be operating in the forthcoming

periods?

A brief description of the business will include the goods and /or services itintends to offer to its customers, an indication of its market and its sources ofsupply. For a small, one-person start-up a hundred words might suffice. Amore complex organisation will need a more detailed and, therefore, longerdescription. This part of the business plan is very important if it is to be usedto support a request for external investment. Many organisations offering capitalto new business specialise in certain types of business or have their ownobjectives to meet. For example, an investment trust designed in an area of



high unemployment will fund a business that shows potential for increasing thenumber employed in the short term. If the organisation is going to reject theapplication, then it is in the interest of the entrepreneur that they do so quicklyso that more sympathetic sources of capital investment can be found.

4.2.5.2 Personal detailsInformation relating to the personal experience of the entrepreneur will indicatetheir chances of success to the bank manager or anyone being approachedfor capital. It can also draw the attention of the entrepreneur to personaltraining needs and the needs of any people who will be employed.

4.2.5.3 Product and marketA detailed description of the product would include production costs and theproposed selling price. It should also try to isolate what sets this productapart from all other products on the market. Is the technology more advanced?The closer the product is in type to one already on the market the harder itwould be for the new business to attract customers, and the more difficult itwould be to persuade people to lend money to the business. The businessplan should also include a description of the market at which the product isdirected. This will include the geographical area over which it is to be sold,the number of customers and competitors and the special points that will setbusiness apart from other competitors. The results of any market researchundertaken and the methods used should be included, and the potential forgrowth in the market should be outlined.

4.2.5.4 Premises, equipment and vehiclesThe location chosen for the business should be stated and explained. Theexplanation might include details of premises and site chosen, in terms ofcosts and in relation to the market.

4.2.5.5 MoneyThe methods of production and marketing chosen should be described andjustified with clear relationship to costs. The business plan should include theamount of funding that will be required. If the plan is intended to persuadepeople to invest in the business, it should also state the return the investorscan expect. For an existing business, financial statements over the severalyears should accompany this statement. A new business should includeprojected financial statements.



4.3 Running a businessA good business plan will highlight areas in a business if it used properly.Where can business get help in solving these problems? The small or mediumsized business will not be able to employ specialists on a full time basis and itis unlikely that such business will be able to afford the services of specialistagencies in the areas such as advertising. Fortunately, the importance of start-ups and the problems of the new business owner are recognised and a varietyof organisations offer services to help them.

1. Government support. The financial and institutional support thegovernment gives to business varies from year to year.

2. Business courses. Universities, colleges and other educationalinstitutions offer courses designed to help people judge the feasibility oftheir business idea. Other courses set out to improve specific skills inaccountancy and marketing.

3. Solicitors. Accountants and the advisers employed by the bank arethe examples of help that is available to a business, but at a cost. All areuseful but an increase in profit or a decrease in tax must pay up the costof their fees. The benefits of these services could be the knowledgethat the business was within the law of tax and legal requirements.

Activity 4.21. Describe the basic principles of planning process.2. Explain briefly the importance of the business plan in ensuring

the success of an enterprise.3. A business submits a plan in support for loan request of

$2000000. Why is information on the market important inthis situation?

4. State and explain the similarities between the individual actionplan and a business plan.

?



4.6 ConclusionWays of starting business include buying an already existing business,management buyouts, investing in franchise and starting a new business. It isimportant to have a business plan to ensure smooth and effective running ofbusiness operations using the set guides. A business plan must containobjectives, personal details, product and market, resources and money. Torun a business an entrepreneur can get assistance from the government,educational institutions and professional advisors such as solicitors.

4.6 ReferencesChidakwa, A.M. (2000) Business and it’s Environment.

Harare: ZOU.Coles, M. et al. (2002) Business for Higher Awards, Second

Edition. New York: Heinemann Educational Publishers. Needham, D. and Dransfield, R (1997) Advanced Business.

(Second Edition) New York, Heinemann EducationalPublishers.



Tamangani, Z. F. (2000) Management and OrganisationalBehaviour. Harare: ZOU.

Capital Investment Decisions

Unit Five

5.0 Introduction

Most finance and investment decisions involve budgeting and undertakingof projects that generate cash flows for more than one year. These

projects are capital in nature and they require large sums of initial capitaloutlay for their implementation. The analysis and evaluation of such projectsis called capital budgeting. In this unit we introduce you to the analysis ofthese projects from the stage of the feasibility study to the implementationand post audits of a project. We also give the methods of analyzing the projects.



5.1 Unit ObjectivesBy the end of the unit you must be able to:

* calculate project cash flow;* determine stages in project analysis;* evaluate projects using different methods of investment

appraisal.

5.2 Need and Form of Capital ProjectsAll expenditure within an organization is made with a view to deriving somebenefit for that organisation. Some forms of expenditure are made in theexpectation of short-term benefit, knowing that the benefit is often short-lived.

In this unit, we discuss capital expenditure, where the proposal is to spendfunds now in the expectation of securing a stream of benefits, which may takesome time to start flowing. The amount of the proposed expenditure and theamount of the expected benefits may both be very substantial.

Examples of capital expenditure within commercial organizations include:

r the purchase of plant and machineryr the purchase of landr the erection of buildings.

Note that all of these examples involve the purchase of an asset that willappear on the balance sheet.

Examples of capital expenditure within public sector organizations includethe:* building of new roads* building of new hospitals, or extensions to existing hospitals* building of new schools, or extensions to existing schools* purchase of medical or teaching equipment for hospitals or schools.

Normally, the benefits will be financial, but this is not always so. The “publicsector” examples given above will involve some non-financial benefit, as willexamples such as the provision of a canteen within a factory in a commercialorganisation. Benefits financial and non-financial, need to be considered inassessing the viability of a capital expenditure proposal.

Unit 5 Capital Investment Decisions


5.3 Objectives of capital expenditure appraisalThe objectives of capital expenditure appraisal can be summarised thus:

r whether a particular capital expenditure proposal is justified in terms ofthe expected benefits

r if there are alternative proposals, which should be chosen

r if there is a shortage of funds, which proposals should be chosen.

5.4 Methods of capital investment appraisalThere are many methods of capital investment appraisal. In this unit, we discussfour of these methods.

This financial management assumes that the capital investment decision is beingtaken in an environment that is fairly free of risk and uncertainty.

The four capital investment appraisal methods discussed here are:

1. Accounting Rate of Return (ARR)2. Payback Period3. Net Present Value (NPV)4. Internal Rate of Return (IRR).

It is often convenient to group these four methods under two headings:

r Traditional Methods - ARR and Payback Periodr Discounted Methods - NPV and IRR .

Discussion of the two “Discounted Methods” requires an understanding ofthe concept of “The Time Value of Money. (This part will be covered in theNPV method of evaluation)

The end goal is for an organization to make an informed decision as to whetheror not to accept a proposal for capital expenditure. An organisation will baseits decision on the techniques, but there will be other considerations as well.



5.5 Simple Payback PeriodSimple payback period is the expected number of years required to cover theinitial cash investment. It gives a rough indication of the liquidity risk of theproject. Payback period is one of the two methods of capital investmentappraisal, which can conveniently be grouped together as the traditionalmethods.

Essentially, the payback period method tells you how long it would take torecover an investment from the returns attributable to that investment.

DecisionAccept a project if payback period is less than or equal to maximumacceptable number of years for payback.

Consider a capital expenditure proposal, with an expected lifetime of sevenyears, which has an initial cost of $ 250,000.

The expected returns from the proposal follow the pattern below:

Year Expected Returns ($)

1 38,000

2 42,000

3 57,000

4 65,000

5 79,000

6 85,000

7 95,000

Note that the cumulative returns achieved by the end of year 4 of the projectwould be $ 202,000 and the cumulative returns achieved by the end of year5 of the project would be $281,000.

Payback period measures the point at which an investor has received his/hermoney back – i.e. no profit and no loss. This is the point at which the investoris no longer at risk. Thus, clearly, in the above example, the payback pointlies during the fifth year. Assuming that the returns in the fifth year are evenly



spread, the exact point will be 48 ths of the way through the fifth year. This is

4.61 years or 4 years 7.3 months.

5.5.1 Advantages of Payback PeriodThere are two advantages of payback period as a method of appraising capitalexpenditure proposals:

r Payback period makes some recognition of the “Time Value of Money”

r Payback period is useful in the appraisal of risky investmentopportunities.

Payback period is a helpful technique when appraising risky investmentopportunities. In this context, “risky investments” are those where there isdoubt about the lifetime of the investment (perhaps investments in fashion ortrendy products), or where the investment proposed is in a risky place (e.g. apolitically unstable country).

5.5.2 Disadvantages of Payback PeriodThere are two major disadvantages of payback period as a method ofappraising capital expenditure proposals:

r Payback period fails to recognize receipts or expenditure after thepayback point.

r Payback period fails to recognize the pattern of receipts during thepayback period.

Income expected after the payback point has been reached is not recognizedby the payback period technique. Any such income could be substantial andlong-term or could be minimal and short-term. Payback period will notdistinguish, because the income is expected after the payback point. Equally,any expenditure made after the payback point is reached will be ignored. So,potentially, substantial dismantling costs or shutdown costs expected at theend of an investment’s useful life would be ignored purely because they aremade after the payback point has been reached.

The pattern of receipts expected during the payback period is ignored by thepayback period technique. There may be two projects, each promising apayback period of 3 years. One promises a large return in year 1, with

79



smaller returns in years 2 and 3. The other promises a small return in years 1and 2, with a larger return in year 3. Clearly, the pattern of returns with thefirst investment is more desirable, but this will not be recognized by the PaybackTime Value of Money.

5.6 Net present valueNet present value is one of the two methods of capital investment appraisal,which can conveniently be grouped together as the “discounted methods”.

The technique is a three-stage process that involves:

r calculating the present value of each element of cash expenditure in aproposal and, then, to add these individual present values together toprovide a total present value of the expenditures.

r similarly calculating the present value of each element of cash income ina proposal and, then, to add these individual present values together toprovide a total present value of the incomes.

r deducting the total present value of the expenditures from the total presentvalue of the incomes, to determine the Net Present Value (NPV).

5.6.2 DecisionIf the NPV is positive, this signals that you must accept the proposal. If,however, the NPV is negative, the signal is to reject the proposal.

Note that only cash expenditures and incomes are considered – non-cashitems (e.g. depreciation) are ignored.

5.6.3 Advantages of Net Present ValueThe advantages of NPV as a capital expenditure appraisal technique. Theseare as follows:

r It accurately recognizes the “Time Value of Money” for all expendituresor receipts - irrespective of the exact time at which they are made orreceived.

r It enables alternative proposals to be “ranked” in order of attractiveness.



r It recognizes the “time value of money” by converting future expendituresand receipts to their corresponding present value on investment criteria,taking into account the exact date on which they are expected to bemade or received.

r Alternative proposals can be ranked in order of attractiveness. This isimportant when considering either “mutually exclusive” proposals or“capital rationing”.

5.6.4 Disadvantages of Net Present ValueThere are two major disadvantages of NPV as a method of appraising capitalexpenditure proposals:

r the net present value requires the organisation to calculate an interestrate to use for appraising capital investment proposals

r the net present value calculation is only valid for the interest rate thathas been used.

The interest rate that is used is usually the organisation’s weighted averagecost of capital (WACC). But this WACC can change and can be subject todisagreement.

Net Present Value - Worked Example

This worked example considers a capital expenditure proposal with thefollowing data:

Original Cost $ 20,000

Expected Lifetime 5 years

Sidual Value Nil

Interest Rate 10 % p.a.

Returns

Year 1 $ 2,000

Year 2 $ 4,000

Year 3 $ 6,000

Year 4 $ 8,000

Year 5 $ 10,000



5.6.5 Calculation of net present valueNote that the “discount factors” are taken from discount tables and are thediscount factors appropriate to an interest rate of 10 % p.a. These discountfactors are normally given as an appendix to any textbook dealing with thisarea. Here we assume the discount factor also known interest rate factor arealready given. If not given, they are determined using the formula:

(1 + r ) n

Where r is the discount or interest rate popularly known as cost of capital andn is the age of the project, that is the number of periods up to termination ofthe projects.

Using the figures above, let us calculate the NVP using the formulaD.F= (1+ r) -n = 1/ (1+ r) n

Thus the discount factor for year 1 is 1/(1+0.1)1 = 0.9091

For year 2 it is 1/(1 + 0.102 = 0.8264

For year 3 it is 1/(1+ 0.1)3 = 0.7513

Etc

The above process is called discounting. The purpose of discount is toincorporate time value of money in the capital budgeting process using thesimple understanding that a dollar today is likely to have more value than thesame dollar to be received in the future.

Year Future Value Discount Factor Present Value

Incomes: ($) ($)

Year 1 2,000 0.9091 1,818

Year 2 4,000 0.8264 3,306

Year 3 6,000 0.7513 4,508

Year 4 8,000 0.6830 5,464

Year 5 10,000 0.6209 6,209

TOTAL 21,305

1Discount factor = (1 + r ) -n =



Expenditures:

Year 0 20,000 1.0000 20,000

Net Present + 1,305

Value

Interpretation of calculation

Note that:

r This proposal has an NPV of $ 1,305r The NPV is positive.

The positive NPV is a signal to accept the proposal.A negative NPV would be a signal to reject this proposal.

5.7 Internal Rate of Return (IRR)The discount rate which forces the PV of a project’s expected cash inflows isequal to the PV of the project’s initial cash outflow, i.e. when NPV = 0.

IRR measures a project’s profitability in a rate of return after adjusting for thetime value of money.

5.7.1 Calculation of IRRIRR can easily be determined using a scientific calculator. In examinations itcan be estimated using trial and error method (try all discount rates until youget one which give zero NPV) or interpolation. Interpolation method is givenby:

IRR = p +

Where p is the discount rate that results into positive net present value NPVPand n is the discount rate that gives negative net present value NPVn.

NPVP

NPVP + NPVn

x (n - p)



5.7.3 DecisionAccept project if its IRR is greater than or equal to the specified required rateof return.

5.8 Accounting Rate of Return (ARR)

——————————————

5.8.1 Decision If ARR of a project is greater than or equal to the required ARR, the projectis accepted.

N.B ARR ignores the time value of money.

This profitability ratio is for management references only. It is not a measureof the economic desirability of the project.

5.9 Post event auditsCapital investment decisions are made on the basis of estimates – estimatesof expenditure, estimates of income, estimates of timing, etc. But how accurateare these estimates?

Well managed organizations will always keep approved capital investmentprojects under continuous review. As part of this review, they will periodicallycarry out a detailed study of what actually happened. Perhaps one year afterthe start of a capital investment, the organisation should answer questionssuch as:

r What was the actual expenditure?r On what date was the expenditure actually made?r Are estimates of future expenditure (amounts and dates) still valid?r What was the actual income?

Average annual after-tax profits x 100%

Average investment Accounting rate of return (%) =



r On what date was the income actually received?r Are estimates of future income (amounts and dates) still valid?r Have the promised non-financial benefits actually materialized?

The effect of differences between the amounts of estimated expenditure andincome and actual expenditure and income is obvious, but do not forget thattiming differences will affect present values, even if the amounts actually paidor received (i.e. the future values) are in line with estimates.

For large investments, it may be appropriate to repeat this detailed analysis ata later point in time.

It could be argued that, once an organisation has made a capital expendituredecision, it is committed – it often can’t reverse that decision. This may be so,but the organisation can learn from experience! All organisations make somemistakes, but the well managed, learning organisation tries not to repeat them!

Activity 5.21. What is capital budgeting? How do capital expenditures relate

to the capital budgeting process? Do all capital expendituresinvolve fixed assets? Explain.

2. Why is it important to evaluate the capital budgeting projects onthe basis of incremental after-tax cash flows? How can anexpansion decision be treated as a replacement decision? Explain.

3. Determine whether this project can be accepted using NPV,payback or IRR method. The project requires initial investment of$2m and will generate cash flows for 3 years as follows:Year 1 $900 000Year 2 $ 800 000Year 3 $700 000

At the end of year 3 the project will have zero residual value. Therequired return on alternative investment is 20%. The firm can onlytolerate projects that have payback not exceeding 2 years.

?



5.10 ConclusionCapital budgeting (investment appraisal) decisions involve analysis andevaluation of capital projects. These projects generate cash flows for morethan one period and require large sums of money in order to be undertaken.Methods that can be used to evaluate projects include payback period, netpresent value, and internal rate of return and accounting rate of return. Youmay also want to indicate the effectiveness of the method and when eachmethod can be applied to maximum advantage.

5.11 References McLaney E. J. (2000) Business Finance: Theory and Practice (5th

Edition) Prentice Hall: New York. Chidakwa, A.M. (2000) Business and it’s Environment. Harare:

ZOU. Coles, M. et al. (2002) Business for Higher Awards (Second

Edition) New York, Heinemann Educational Publishers. Needham, D. and Dransfield, R: (1997) Advanced Business (Second

Edition) New York: Heinemann Educational Publishers. Needham, D. and Dransfield, R. (1990) Business Studies. London:

Hill-Hill International.Robbins, S. and Coulter, M. (1999) Management (Sixth Edition)

Prentice Hall International Editions.Tamangani, Z. F. (2000) Management and Organisational Behavior.

Harare: ZOU.

Organisation Structure andDesign

Unit Six

6.0 Introduction

Structure and design issues are part of the organising function of management. In the first part of the unit we define the above terms while

the second section we explain aspects surrounding organisation design. Thelast section deals with the application of organisation design.




* define organisation structure and design;* outline key elements used in organisation design;* explain the application of organisation design;* discuss factors affecting the design of an organisation.

6.2 Structure and Organisation DesignStructure and organisation design constitute much of the business organising,which is the process of integrating activities of the separate units/departmentsof an organisation in order to pursue organisational goals. In other words,organising is the process of coming up with an organisation structure.

A structure is defined by Robbins and Culter (1996: 300) as the formalframework by which tasks are divided, grouped and coordinated. The extentof co-ordination depends on the extent of interdependence of the people inthe various units.

The other element involved in organising is that of organisation design. It is aprocess by which managers make specific organising choices that result in theconstruction of a particular organisational structure. It is an ongoing processinfluenced by changes in strategies and the environment.

When managers develop or change an organisation’s structure, they areengaged in organisation design. During the design process, decisions are takenon six key elements or building blocks of the organisation’s structure, viz:

r Division of work into tasks that can logically and comfortably beperformed by individual groups. This determines the degree ofspecialisation.

r Departmentalization – the basis on which jobs are grouped in order toaccomplish organisational goals.

r Chain of command – the unbroken line of authority from the top levelto the lowest. It classifies who reports to who.

Unit 6 Organisation Structure and Design


r Span of control – the number of subordinates a superior can controleffectively and efficiently.

r Centralization and decentralization – the degree to which decisionsare concentrated in the upper levels and lower levels of the organisation.

r Formalization – the degree to which jobs are standardized and theextent to which employee behaviour is guided by rules and procedures.

These building blocks have rich traditions in the history of management,particularly during the time of the Industrial Revolution.

Activity 6.11. The following are vertical dimensions of organisations:

a) Chain of commandb) Unity of commandc) Staff authorityd) Span of controle) Centralisationf) Decentralisation.

2. What do you understand about vertical dimensions?3. Explain the essence of each of the dimensions with reference

to an organisation you are familiar with.

6.3 Applications Of Organisation Design

6.3.1 Simple StructureMost organisations start as entrepreneurial ventures with a simple structureconsisting of the owner and employees. Simple structure means that theorganisation:

r is low in complexityr has little formalisation andr has authority centralised in a single person.

?



Simple structures have only two or three vertical levels, an informalarrangement of employees, and one individual in whom decision-makingauthority is centralised. Simple structure is most widely used in small businessesin which the owner and manager are one and the same.

6.3.2 Strengths of the Simple StructureThey are:r Flexibler Fastr Inexpensive to maintainr Accountability is clear.

6.3.3 Weaknesses of the Simple Structure

The simple structure has the following characteristics:r is effective only in small organisations

r becomes increasingly inadequate as an organisation grows biggerbecause of low formalisation and high centralisation result in informationoverload from the top

r as the organisation increases in size, decision making becomes slowerand can eventually come to a standstill as the single executive tries tocontinue making all the decisions

r is risky

r everything depends on one person. If anything happens to that person,the organisation, information and decision making centre is lost.

6.4 The Functional StructureThe functional structure is an organization design that groups similar or relatedoccupational specialties together.

6.4.1 Strength of a Functional Structure

r Its strength lies in the cost-saving advantages that accrue fromspecialisation.



r Putting similar specialists together results in economies of scale,minimises duplication of people and equipment and makes employeesmore comfortable.

6.4.2 Weaknesses Of Functional Structurer An organisation can lose sight of its best overall interest in pursuit of

functional goals.

r No one function is totally responsible for end results, so functionalspecialists become insulted and have little understanding of what peoplein other functions are doing.

6.4.3 The Divisional StructureThe divisional structure is an organisation structure made up of autonomous,self-contained units or divisions. Each unit or division is generally autonomous,with a division manager responsible for performance and holding completestrategic operational decision making authority over his/her unit. A centralheadquarters provides support such as financial and legal services to thevarious units. The central headquarters also acts as an external overseer tocoordinate and control the various divisions which means that divisions areautonomous within given parameters.

6.4.4 StrengthsThe divisional structure:r Focuses on results.

r Division executives have full responsibilities over what happens to theirproducts and services.

6.4.5 Weaknessesr There is the duplication of activities and resources between divisional

heads and sometimes with centre

r Since each division has its own financial departments , such as marketing,research and development, and production, the duplication of functionsincreases the organisation’s cost and reduces efficiency

r Many contemporary organisations are finding that the traditionalhierarchical designs including functional and divisional structures are



not appropriate for the increasingly dynamic and complex environmentsthey face

r In response to market demands new concepts in organisations designhave been developed.

6.4.6 Team Based StructuresIn a team-based structure, the entire organisation is made up of work groupsor teams that perform the organisation’s work. In a team-based structure,employee empowerment is crucial, because there is no rigid line of managerialauthority flowing from top to bottom. Employee teams are free to designwork in the way they think best. However, the teams are also held responsiblefor all work activity and performance results in their respective areas.

6.4.7 The Boundary less OrganisationThe boundary less organisation whose design is not defined, limited, orimposed by a predefined structure. It is flexible–unstructured – has no rigid orpre-defined structure. The boundary less organisations streamlines its workactivities so that it can respond quickly to the tumultuous and fast movingmarket place.

Activity 6.21. Compare and contrast departmental and divisional structures.2. What are the differences between a mechanistic and an organic

structure?3. If team based structures and boundaryless organisations are recent

applications of organisation design, what are the major issues thestructures are trying to address?

6.5 ConclusionIn this unit we defined the organisation, the structure and organisation design.We have gone on to outline key elements used in organisation design and howthese lead to mechanistic or dynamic structures. We have given the descriptionof the various structures, their advantages and disadvantages in terms ofattaining organisation goals.

?



6.6 References Chidakwa, A.M. (2000) Business and it’s Environment.

Harare. ZOU.Coles, M. et al (2002) Business for Higher Awards (Second

Edition) New York: Heinemann Educational Publishers.McLaney E. J. (2000) Business Finance; Theory and

Practice (5th Edition) Prentice Hall: New York.Needham, D. and Dransfield, R. (1997) Advanced Business





Human Resource Management

Unit Seven

7.0 Introduction

The structure presented in unit 6 above represents just the skeleton of theorganisation. It is the human resources, which provide the flesh. For, if

an organisation does not take its human resources management responsibilitiesseriously, work performance and goal accomplishment may suffer. In this unitwe cover in some detail, the human resources management processes andhow they contribute to the effectiveness of the organisation.



7.1 Unit ObjectivesWhen you have studied this unit, you should be able to:

* define human resources management;* describe the human resources management process;* discuss issues related to the human resources

management process.

7.2 Human Resource Management ProcessesRobbins and Coultar (1996: 338) define human resources management (HMR)as a group of activities that are focused on staffing the organisation with theright calibre people and sustaining high employee performance. These activitiescompose the human resource management process, which is made up ofhuman resource planning, recruitment/decruitment, selection, orientation,induction, training, career, development, compensation and benefitsmanagement.

In executing these duties, however, managers have to deal with environmentalconstraints in general and in particular labour unions and government statutoryrequirements referred to later in the module. It is basically how well the aboveprocess are executed that will enable the human resource management functionto add value to the organisation and to be considered a key strategic partnerin the business operations. We shall now briefly discuss each of above HRMactivities.

7.3 Human Resource PlanningHuman resource planning is a process for determining and assuring that theorganisation will have an adequate number of properly qualified persons,available at the appropriate time and are willing and prepared to performtasks that will help the organisation to achieve its goals. Successful humanresource planning involves assessing the future human resource needs anddeveloping programmes to meet the assessed future needs. The HR managerthen proceeds to conduct job analysis, which defines the job in that organisationand the behaviours that are necessary to perform those jobs. On the basis ofdetailed analysis, the manager can then compile detailed job descriptions which

Unit 7 Human Resources Management


stipulate what the incumbents are supposed to do, why, and how they shoulddo it : as well as the job specifications.

The job specification spells out the requisite skills, knowledge and abilitiesnecessary for one to be able to do the job. Both the job description and thejob specification become essential reference tools when the manager beginsrecruitment and selection.

In assessing the future human resource needs, the manager focuses on theorganisation's objectives and strategies and balances those out with themanpower requirements needed to achieve them. Based on the twoassessments of the current and the future needs, the manager can then developa human resources programme of how those needs are to be met.

Because HR planning is an essential component of strategic planning, it hasgreatly contributed towards why HRM’s strategic importance. Through HRplanning, the organisation is able to adapt to changes in competitive forces,markets, technology, products and government regulations, to have propersuccession plans and to be able to recruit high-talented staff. In this environmentof competition, it is essential that the organisation has the right calibre peoplecompetent enough to perform the organisations’ functions and have developedstrategies for survival.

Activity 7.11. Depict, diagrammatically, the HRM process from HR planning

and back to HR planning.2. Discuss the HR planning process with reference to live

examples.3. Explain the following concepts

a) job specificationb) job analysis.

7.4 Recruitment and SelectionRecruitment and selection are the other major element of HRM. This occurswhen the HRM reveals the need for additional staff. Recruitment is the processof locating, identifying and attracting the right calibre people and selectioninvolves predicting the candidates likely to perform well, based on the criteriathe organisation will have set.

?



HRM involves identifying potentially good resources of manpower supplyand then making efforts to attract the best possible candidates. The majorsources of potential job candidates are internal search, advertisement,employee referrals, public and private employment agencies and schoolplacements. The type and level of position at least influences the recruitmentmethods to be used. The selection programme should be professionally designedand comply with statutory regulations, e.g. regulations on equal employmentopportunities and affirmative action requirements. A number of selection toolsmight be used. These include interviews or application forms, written tests,physical examination , assessment centres and reference checks. Again thetype of job influences the selected tools to be used and, in most cases,managers use combinations of two or more devices. For a tool to be effective,it must be valid i.e. it should measure exactly what it is supposed to measure,and that it should be consistent. Recruitment and selection have continued tobe strategically vital because all managers know that HR and not capital orincome, nor material resources-constitute the ultimate basis for the wealthiestnations. It is also very crucial to manage the diversity of the workforce incontemporary organisations and this is only possible through proper recruitmentand selection.

7.5 Induction or OrientationThis is a process whereby a new employee is introduced into his/her job andthe organisation in order to reduce anxiety, familiarise the new employee withthe job, work unit and to facilitate the outsider-insider transition. Throughorientation, management creates favourable attitudes towards the company,its policies and the people. New employees are informed of the organisations’objectives, history, philosophy and rules. Although orientation can be veryformal following a specific documented programme or may be informal, thebenefits remain the same, that is there should be a smooth settling on the partof the new employee, that the likelihood of any new surprises is reduced.

The importance of proper induction cannot be over-emphasised and it is onearea where the HR function plays such a key role that unless proper inductionis done, surprise resignations, poor performances and crisis of expectationscannot be avoided. Such importance correlates positively with the strategicimportance HRM function.



Activity 7.11. In your own experience, how has the induction process

helped or adversely affected you?2. Are there many organisations in Zimbabwe who actually

follow the induction process outlined above?3. Describe the induction process by one organisation of

your choice. Explain the induction process of thiscompany.

7.6 TrainingTraining is a key HRM element in any organisation prevalent at all levels.Training is directed at maintaining and improving current job performance andto update skills and technical knowledge in line with the changes andimprovements in job demands. As the organisation continuously responds tothe political, economic, social, technological and global changes impacting onit, there is also need to modify the employee's technical, interpersonal andproblem solving skills. It is the role of the HR practitioner to determine trainingneeds in co-operation with the line management. Training needs can bedetermined through performance appraisal i.e. measuring each employee’sperformance against set targets and identifying performance gaps, analysis ofjob requirements, analysis of organisational goals and manpower surveys.Once the needs have been identified, then the HRM’s role is to initiate andorganise the appropriate training tailor-made to address the identified needs.Some of the training approaches that can be used are on-the-job training, jobrotation, simulation exercises, internship, classroom instructions, developmentprogrammes and apprenticeship. Many organisations spend huge budgets ontraining because they realise that employees whose skills are not continuouslyimproved are overtaken by the business developments and they become aliability. That’s how strategically important the training element of HRM is.

?



Activity 7.2Briefly describe each of the following approaches given below:

1. apprenticeship,2. job rotation,3. on-the-job training,4. simulation exercises,5. internship,6. classroom instructions, and7. development programmes.

7.7 Career DevelopmentCareer development is one element whose focus has changed over the yearsfrom the notion of organisations developing employees for future jobs to onewhere the employees themselves take ownership of their career progressionto develop themselves. The role of HRM is to counsel, guide and supportindividuals along their chosen career paths. This role is equally critical becauselack of proper advise might cause frustrations on employees, demotivationand lack of focus which result in poor performance, all of which the organisationcannot afford to experience.

Activity 7.3* Discuss how the issue of employee career paths undertaken

in your organisation are being handled. How useful are theapproaches for future development of the employee andorganisation?

7.8 Performance AppraisalsAlthough this role is crucial to the success of any organisation, it is one, whichmost managers admit have difficulties handling. It, therefore, becomes a crucialelement for HR Management to train, coach and advise line managers onhow best they can go about this continuous process of giving feedback tosubordinates on how they are performing vis-a-vis the set objectives andwhat they can do to either keep up the good work or improve their performance.

?

?



Activity 7.41. How is performance appraisal undertaken in an organisation

you are familiar with?2. What problems are associated with the appraisal system?

7.8.1 Movement of EmployeesAlthough the line manager makes the decision on whom to promote, demote,transfer or dismiss, HR plays a crucial consultative, facilitative or co-ordinationrole. For example, when employees are transferred to a new department orrole, HR ascertains that they possess the requisite quallities for that new role.Layoffs and or dismissals are typically processed by the HR department toensure that the process is accurately followed through.

Activity 7.51. What procedures are taken when internally promoting an

employee in an organisation you are familiar with?2. Discuss the grievance handling procedures in place in an

organisation you are familiar with.

7.9 Compensation and Benefits AdministrationAlthough the decision to adopt a particular pay and benefits structure lies withtop management, HR management plays a very crucial role in recommendingsalary and benefits structures that are appropriate and competitive enough toenable the organisation to attract and retain competent and talented individuals.Human Resources Management also leads management in analysing jobs,evaluating their dollar worth using the adopted job evaluation system,conducting periodic salary surveys and actual payment of employees everymonth.

?

?



Activity 7.61. Discuss the job evaluation system used in your organisation.2. Compare and contrast the job evaluation system discussed

above with any other competing system you are aware of.

7.10 ConclusionIn this unit we have been largely concerned with demonstrating the fact thathuman resources is vital in the organisation and that if well-handled, it canprovide a competitive edge. The handling of this managerial function was fullyexplained by going through the Human Resources Management process.


Harare: ZOU.Coles, M. et al (2002) Business for Higher Awards (Second

Edition) New York: Heinemann Educational Publishers.Needham, D. and Dransfield, R (1997) Advanced Business,




Tamangani, Z.F. (2000) Management and OrganisationalBehavior. Harare: ZOU.

?

Motivating employees

Unit Eight

8.0 Introduction

Management, as was described earlier, developed from the Scientific(mechanistic) Approach of the 19th century to the dynamic approach

it is today. The major variable in the shift has been the way the human elementhas been perceived in an organisation. In this unit we deal with the motivationaspects of the workforce by describing the early content theories and closingwith the process theories.



8.1 Objectives

When you have studied this unit, you should be able to:

* define motivation;* describe the motivation process;* apply the motivation theories;* motivate your workforce.

8.2 The Motivation ProcessRobbins and Coulter (1996: 484) defines motivation as the willingness toexert high levels of effort to reach organisational goals, conditioned by theeffort’s ability to satisfy some individual need. The motivation process is treatedas a need-satisfying process where the need is some internal state that makescertain outcomes appear attractive as illustrated in the diagram below.

Tension Drives Search Satisfied Reduction

Behaviour Need of Tension

Fig 3.1: The motivation process

Unsatisf ied N

eed

Unit 8 Motivating employees


An unsatisfied need creates tension that stimulates drives within an individual.These drives generate search behaviour to find particular goals that if attained,will satisfy the need and reduce tension. This would, therefore, imply thatindividuals may not be satisfied by the same thing since needs differ.

8.3 Early Theories Of MotivationThe earliest attempts at explaining motivation focused on pinpointing whatmotivated individuals. These theories are generally referred to as contenttheories and include Maslow’s hierarchy of needs and McGregor’s TheoriesX and Y.

8.3.1 Maslow’s Hierarchy of Needs TheoryMaslow’s theory proposed that in every human being there is a set of fiveneeds namely:

r Physiological needs,r Safety needs,r Social Needs,r Self - esteem,r Self-actualisation needs.

It is assumed that as each lower order need is substantially satisfied the nextneed becomes dominant. Thus physiological needs are satisfied first, followedby safety, social, self- esteem an finally self-actualisation needs. If a lowerorder is not fulfilled, a higher order one cannot be fulfilled.

Activity 8.11. Explain each of Maslow’s five hierarchy of needs?2. Discuss any employee motivation polices at your work place

which you feel are related or consistent with Maslow’stheories?

8.3.2 McGregor’s Theories X and YTheory X presents an essentially negative view of people while Theory Yoffers a positive view. The assumptions for the two theories are summarisedbelow:-

?



Theory X Theory Y

Employees inherently dislike work and will Employees view work as being as natural as rest or play.attempt avoid it whenever possible.

Employees must be coerced, controlled, or Employees will exercise self-directions and self- controlto be threatened to achieve desired goals. if they are committed to the objectives.

Employees will share responsibilities and The ability to make good decision is widely dispersedseek formal direction whenever possible. and is not necessarily the ability solely of managers.

Most workers place security above all otherfactors associated with work and will displaylittle ambition.

Activity 8.21. Which of the two theories X or Y would you say closely

explains what goes on in your organisation?2. Basing on your experiences, which of the two theories

would closely explain employee behaviour in Zimbabwetoday?

3. Which theory explains the situation of:a) Soldiers at the battle front?b) University lecturers?

8.3.2 Herzberg’s Two Factor/Motivation-Hygiene TheoryThe theory talks about intrinsic and extrinsic factors where the former arerelated to job satisfaction (motivators) and the later are associated with jobdissatisfaction (hygiene factors) as illustrated in the table below.

?



Motivators Hygiene Factors

* Achievement

* Recognition

* Work itself

* Responsibility

* Advancement

* Growth

* Extremely satisfied Neutral * Extremely dissatisfied

Activity 8.31. Identify some polices or facilities at your work place consistent

with Herzberg’s theory of motivation.2. Briefly discuss what you would term hygiene factors prevalent

in your organisation.

8.3.4 Three Needs TheoryAlthough not part of the old theories, David McClelland and others proposedthe Three Needs Theory as another content theory. It identifies:

Need for Achievement,

Need for Power,

Need for Affiliation.

These are the three major motives or needs in work stations. Employeesendowed with any of the needs would show some predictable behaviour,which could be utilised to match with corresponding jobs.

* Supervision

* Company policy

* Relationship with supervisor

* Working conditions

* Relationship with peers

* Personal life

* Relationship with subordinates

* Status

* Security

?



Activity 8.41. Write brief notes explaining each of the following: Need for

Achievement, Need for Power and Need for Affiliation.2. Identify the types of jobs employees with each of the above

needs would be most suitable for.

8.4 Process TheoriesProcess theories are supposed to establish how employees are motivated atthe work place as opposed to what motivates them. The process theoriesinclude the Goal setting Theory, Reinforcement Theory, Equity Theory andExpectancy Theory.

8.4.1 Goal Setting TheoryThe process of setting goals is one of the most important motivational forcesoperating on people in organisations as it causes people to compare theirpresent capacity to perform with that required to succeed at the goal.

According to Locke and Latham’s goal - setting model, assigned goals influencebeliefs about performing a task (self -efficiency expectations ) and encouragesthe acceptance of those goals. Both of the factors, in turn, influenceperformance. Specific higher hard goals produce a higher level of output thandoes the generalised goal of “do your best”. Difficult goals will lead to higherperformance only if they are accepted. The three factors in the model are,therefore, goal commitment, Self-efficiency and national culture.

Activity 8.51. Explain each of the three goal setting theory factors of Goal

commitment, Self - efficiency and National culture.2. Describe the best management approach used to set up higher

and higher goals.3. Explain the role of national culture in the goal setting theory

model.

?

?



8.4.2 Reinforcement TheoryThis theory argues that behaviour is externally caused. What controls behaviourare the reinforcers, and consequences that, when immediately applied followinga response, increase the probability that the behaviour will be repeated. Peoplewill most likely engage in desired behaviour if they are rewarded or punishedfor doing so.

Activity 8.61. Explain the practicability of the reinforcement theory in a work

situation in an organisation.2. Would you say this theory is widely used in many organisations

in Zimbabwe today?3. How successful would you rate this theory in motivating

workers in an organisation?

8.4.3 Equity TheoryThe theory that an employee compares his job’s inputs-outcomes ratios withthat of relevant others and then corrects any inequity as follows:-

Perceived Ratio Comparison Employees Assessment

Outcomes A Outcomes B____________ _________________ Inequity (Under reward)Input A Input B

Outcomes A Outcomes B____________ ____________ EquityInput A Input B

Outcomes A Outcomes B___________ Inequity (over rewarded)Input A Input B

?



Activity 8.71. Explain, in your own words, the essence of the equity theory.2. Discuss the probable reasons for inequitable situations

prevalent in many Zimbabwean organisations today.3. What are the likely options that an employee takes when

he/she perceives inequity at the work place?

8.4.4 Expectancy TheoryThis is the theory that explains that an individual tends to act in a certain waybased on the expectation that the act will be followed by given outcome andon the attractiveness of that outcome to the individual.

The Theory Includes Three Variables

A B C

A= Effort - performance linkage.

The probability perceived by the individual that exerting a given amount ofeffort would lead to a certain level of performance.

B = Performance - reward linkage

The degree to which the individual believes that performing at a particularlevel is instrumental in leading to the attainment of a desired outcome valenceor

C = Valence or Attractiveness of reward

This is the importance that the individual places on the potential outcome orreward that can be achieved on the job. Valence considers both the goals andneeds of the individual.

?

IndividualEffort

IndividualPerformance

OrganisationalPerformance

IndividualGoals



Activity 8.81. Sight and explain some work situations where this theory will

be most applicable.2. Describe how you would go about operational sing this theory

in your organisation.

8.5 ConclusionAccording to Robbins and Coulter motivation is stressing the aspect of thewillingness to exert high levels of effort to reach organisational goals,conditioned by the effort’s ability to satisfy some individual need. Four contenttheories of motivation were reviewed together with an equal number of processtheories. The following would be suggestions from the theories for motivatingemployees:

i. recognising individual differencesii. matching people to jobsiii. ensuring that goals are perceived as attainableiv. individualising rewardsv. linking rewards to performancevi. checking the system for equityvii. not ignoring money.

?




Harare: ZOU. Coles, M. et al. (2002) Business for Higher Awards (Second

Edition) New York: Heinemann EducationalPublishers.

Needham, D. and Dransfield, R (1997) Advanced Business(Second Edition) New York: Heinemann EducationalPublishers.




Leadership

Unit Nine

9.0 Introduction

The major factor, which distinguishes successful organisations from theirless successful counterparts, is the presence of dynamic and effective

leadership. According to Robbins and Coulter, (1996: 520) leadership maybe defined as the ability to influence others or a group towards the achievementof set goals or desired objectives. Central to the idea of leadership is theexistence of an influence system. A number of researchers set out to establishhow this influence system can be described and came up with leadershiptheories, which can be separated into three main groups. These are thosethat:

* focus on the personal characteristics and process of leadership* concentrate on the leader-follower situations* attempt to relate leadership style to the overall organisation and climate.These theories constitute the material covered in this unit.




* define leadership;* discuss the different theories of leadership;* determine the qualities that a successful leader should have.

9.2 Leadership Theories

9.2.1 The Trait TheoryEarly investigations into leadership tended to concentrate on such factors aspersonal qualities or personality traits. This is also called the trait model basedon the view that leaders are born and not made. Leaders are perceived tohave certain physical, emotional and social traits.

However, due to the difficulty of relating leadership traits and behavioureffectiveness, many writers look at the situations in which leaders are perceivedto be effective.

Activity 9.11. Give examples of the physical, social and emotional traits

associated with leadership under the trait theory.2. Provide some external examples of successful leaders who

would not qualify under the trait theory.

9.2.2 Behavioural Approach to LeadershipThis approach focuses on the examination of the interaction between leadersand followers, and how leaders influence individuals and groups to pursue theachievement of given goals. It addresses the issue of what leaders do ratherthan what they are. Fleishman (1953; 1969) identified what he termedconsideration and initiation structure as two separate classes of behaviourimportant in determining effective leadership. These concern themselves withtwo sets of group functions: achieving the set goal and satisfying some groupgoals, respectively.

?

Unit 9 Leadership


The University of Michigan studies distinguished between production-centeredand employee-centered leaders. It was found that the most productive workgroups tended to have leaders who were employee-centered than production-centered. Effective leaders were found to be those who had supportiverelationships with their subordinates, tended to depend upon group ratherthan individual decision making and encouraged subordinates to set and achievehigh performance goals.

Perhaps the best known and most influential of these “universal theories “ isthe Blake and Mouton’s (1969) Managerial Grid which had two criticaldimensions: concern for people - similar to consideration, and concern forproduction – similar to initiating structure. By examining how these twodimensions interact, in both their strong and weak states, Black and Moutonidentified four different styles of management:

a) Team Management (9.9)b) Country Club Management (1.9)c) Task Management (9.1)d) Impoverished Management (1.1)e) Middle Of The Management (5.5)

For both Blake and Mouton the most effective is team management whereleaders are both task and people oriented, the so-called ‘high-high’ leader.

Likert, in his research on effective group performance, found that traditionalauthoritarian managers were less effective in motivating their subordinate’sfeelings of self-worth and importance. He then came up with four leadershipstyles – system 1 through to system 4 graduating from very low levels ofconfidence and trust in subordinates by the leader to complete trust andconfidence. He argues that system 4 is the best in motivating subordinates.



Activity 9.21. Explain what is meant by the terms consideration and initiation

structure in the Fleishman leadership behaviour model.2. Black and Mouton identified four different styles of

management:a) Team Management (9.9)b) Country Club Management (1.9)c) Task Management (9.1)d) Impoverished Management (1.1)e) Middle Of The Management (5.5)Describe each of the above leadership styles as presented onthe Management Grid.

3. Describe each of the four leadership styles - system 1, system2, system 3, and system 4 as explained by Likert in his researchin leadership behaviour.

9.2.3 The Leader - Follower Situation ApproachThe leader – follower situation approach is also called the contingency model.It has a framework, which includes three situational variables or contingencies,namely Subordinate Considerations, Superior Considerations, and TaskConsiderations. The most influential situational theory of leadership has beenFiedler’s (1967) least preferred Co-worker (LPC) model. This postulatesthat leadership traits or behavior and effectiveness are moderated by thesituation in which they are deployed. He argued that effectiveness is related tothe level of influence the leader exercises over his or her subordinates. Matchingthe manager to the situation or changing the situation to fit the manager canachieve effective group performance.

Fiedler identified 3 leadership situations that help determine which leadershipstyle will be more effective - The Leader-Follower Relationship, Task structureand The leaders formal positional Power. Fielder argued that the situation inwhich leaders are most effective is where leader-follower relations are good,the task is well-defined and highly structured, and the leader has a high levelof formal authority.

?

Unit 9 Leadership


Activity 9.31. Describe the three situational variables or contingencies, namely

Subordinate Considerations, Superior Considerations, andTask Considerations.

2. Describe Fiedler’s (1967) Least preferred Co-worker (LPC)model.

3. Fielder identified 3 leadership situations that help determinewhich leadership style will be most effective – The Leader-Follower Relationship, Task structure and The leaders formalPositional Power. Give details of what is involved in eachsituation.

9.2.4 The Contextual Approach to LeadershipOne of the weaknesses of the leadership literature is, as the above threeapproaches demonstrate, that it tends to concentrate on the traits of individualmanagers and their relations with subordinates. The assumption, both explicitand implicit, is that effectiveness is an attribute of the individual manager,moderated by the leader subordinate situation. A good manager in oneorganisation will be a good manager in all organisations. A manager’seffectiveness may be determined as much by the nature of the organisationwhich he or she operates as by the qualities of the individual manager.

This approach is variant of the situational approach to leadership. However,instead of concentrating on leadership behaviour it focuses on leadership style,and instead of the narrow leader-follower situation, it focuses on the overallorganisation context and climate. In addition, it is the only one of the threeapproaches to leadership which incorporate change as a variable.

Transactional and transformational leadership, while in essence theycomplement each other, are considered appropriate for stable and dynamicenvironments respectively. Charismatic and visionary leadership which arenecessary components of transformational leadership, are also part of theattribution leadership theory which proposes that leadership is merely anattribution that people make about other individuals. The attributes such asintelligence and strong verbal skills are associated with effective leadership.

?



Activity 9.41. Write a few notes on charismatic and visionary leadershipgiving practical examples.2. In which way is charismatic and visionary leadership part of

the attribution theory?3. Compare and contrast transactional and transformational

leadership.

9.3 ConclusionsBasically, the issues that characterise leadership are twofold. These are thetraits and behavioral aspects of a leader in a given situational environment andclimate. All the theories and approaches highlighted above only serve tocontribute to the overall understanding and appreciation of the subject matter.They serve to reinforce the notion that there is no one best way to thephenomenon of leadership.

Leadership is the connecting fundamental force, the influence system thatdetermines the degree of objective accomplishment. Leadership is aboutestablishing a sense of direction by developing a vision of the distant future.



Edition) New York: Heinemann Educational Publishers.Needham, D. and Dransfield, R. (1997) Advanced Business





?

Unit 9 Leadership


Financial Planning in theEnterprise

Unit Ten

10.0 Introduction

Many factors determine the extent of the need for the various types ofcapital in an enterprise. The amount of capital needed, as well as

when and for how long, are issues that need to be addressed. The followingquestions require answers:* What form of financing should be used?* From what source should the funds be obtained?* What should the debt-equity ratio be?



In this unit we will focus on answering these questions. First, we will considerthe capital needs of enterprises: how operating capital and fixed capitalconstitute the capital needs of an enterprise, and which sources are to beused to finance the various types of capital. We will also look at how anenterprise can use debt to increase the total owners’ equity, as well as theinfluence of income tax on financing decisions. It is also important to examinecash management so that the liquidity of the enterprise may be guaranteed.


* explain the difference between fixed and variable capitalneeds;

* describe the capital needs of an enterprise;* discuss the elements of floating capital;* explain the tools used to quantify the capital needs of an

enterprise;* discuss the various forms and sources of financing;* describe the financial leverage effect;* explain how the operational leverage functions and

that the financial leverage and operational leveragetogether comprise the total leverage (risk) of the enterprise.

10.2 The capital needs of an enterprise

The term capital relates to the total funds (own and borrowed) invested intotal assets. The capital needs are thus equal to the total investment in theassets. The capital is invested in fixed and current assets. One of the majorconcerns of an enterprise is to determine which assets should be financedwith long-term capital, and which should be financed with short-term capital.Before we can deal with this issue, the nature of the assets must be examined.

Fixed assetsCertain types of assets are acquired because they are necessary for the runningof the business. These assets are not purchased for resale purposes in thenormal course of business, but are used in the appropriation of earnings.

Unit 10 Financial Planning in the Enterprise


Because these assets are relatively fixed in nature, they are known as fixedassets.

Fixed assets are usually divided into tangible and intangible fixed assets.Tangible fixed assets includes land, buildings and equipment. Intangible fixedassets have no visible physical characteristics, for example, patents andgoodwill.

Control over the acquisition of a fixed asset begins when the purchase of theasset is considered. Because the decision as to whether or not to purchase anew asset will have a long-term effect on the adaptability and earning powerof an enterprise, such decisions must be taken only after carefully weighing upthe potential income derived from an investment in that asset against theassociated costs. These types of decisions are known as capital budgetdecisions, and will be dealt with in the following unit.

Fixed assets are usually financed with medium-or long-term capital.

Current assetsCurrent assets consist of cash and all other assets which can be realised forcash within the normal operating cycle of the enterprise (or at least within oneyear), or to be sold or consumed. They are thus the assets which:

r circulate in the operating cycle, in other words, cash is converted intotrading stock, or the stock is purchased on credit and creditors arise;

r merchandise is sold for cash or on credit, thus creating debtors whowill later repay their debts;

r the enterprise will then use this money to pay their creditors, and so thecycle is completed.

The current assets are usually financed by current liabilities (creditors, billspayable, bank overdraft) and operating capital. (Remember that operatingcapital is equal to the total current assets minus the total current liabilities.)The current liabilities involve short-term financing, whereas the operating capitalis financed by long-term funds.

Activity 10.1* Give examples of fixed and current assets. Are these assets

differentiated in terms of time period??



Operating capital strategyOne of the most important decisions regarding current assets and currentliabilities are about how to use the current liabilities to finance the currentassets. The sum of the current liabilities available is limited by:

r the dollar value of purchases in the case of creditors;

r the dollar value of outstanding creditors in the case of amounts in arrears;

r the sum of seasonal loans in the form of bills payable.

Financiers grant short-term loans (for example, bank overdrafts) to financeseasonal needs for increased debt and stock, but this does not normally meanthat long-term needs can be financed with short-term loans.

There are two basic financing strategies, the aggressive strategy and theconservative strategy, in terms of which the appropriate mix of short-andlong-term financing is formulated.

Financing needs of an enterpriseAn enterprise’s financing needs can be divided into permanent and seasonalneeds. The permanent needs consist of the fixed assets plus the permanentportion of the current assets, and remain unchanged throughout the currentyear. The seasonal needs consist of the temporary current assets that fluctuateduring the year.

Aggressive financing strategyWith an aggressive financing strategy, the enterprise finances its seasonal needfor funds with short-term financing and its permanent need for funds withlong-term financing.

With an aggressive strategy, the short-term financing period is planned tomeet the period of seasonal needs exactly. Thus, the financing period matchesthe period for which seasonal funds are needed.

Cost considerations in the aggressive financing strategyKnowledge Ltd. required $1 950 in short-term funds and $13 800 in long-term funds. If the annual cost of short-term financing is 3%, and that of long-term financing is 11%, the total cost of the financing method will be as follows:



Cost of short-term financing = 3% x $1 950 = $ 58,50

Cost of long-term financing = 11% x $13 800 = 1 518,00

Total Cost = $ 1 576,50

The cost of this strategy will become more meaningful when it is comparedwith the cost of the conservative financing strategy.

Risk considerations in the aggressive financing strategyThe aggressive financing strategy uses the minimum net operating capitalbecause only the permanent portion of the need for funds is financed withlong-term funds. This means that the enterprise must rely heavily on its short-term source of funds in order to cope with the seasonal funding. If a problemwere to arise in the functioning of the operating cycle the enterprise mightexperience cash flow problems because the supply of short-term funds wouldbe limited (e.g. bank overdraft) and long-term funds take time to organise.

Conservative financing strategyWith a conservative financing strategy, the enterprise finances all its needs forfunds with long-term financing, and only uses the short-term financing foremergencies and unexpected cash outflow.

Activity 10.21. Which method of financing strategy can be used if the

firm is risk averse?2. Which one will be proper in cases where money markets

are highly liquid?

It is difficult to imagine how this method will work since it is almost impossibleto avoid spontaneous short-term credit completely.

Risk factor in the conservative financing strategyBecause all the funds are financed in the long term, and the enterprise is notexpected to use any of its short-term financing sources, there is much less riskof technical bankruptcy than in the case of aggressive financing strategy. Thisis a position where there is no money to settle debts, but where the totalassets still exceed the total liabilities.

?



Aggressive strategy versus conservative strategyUnlike the aggressive strategy, interest must be paid on unused funds in thecase of the conservative strategy. The lower cost of the aggressive strategythus makes it a more profitable strategy, but it also carries a higher risk.

Therefore, for an acceptable strategy, most enterprises will opt for a happymedium between the extremes outlined in the examples.

10.3 Sources of financingSources of financing are divided into long-term, medium-term and short-termsources.

10.3.1 Long-term financing

Characteristic Long-term financing may be defined as financing that extends for 10 years ormore.

Sources Owner’s equity

Owner’s equity is the first source of capital for the enterprise. It isobtained either by the sole proprietor and partners putting up capital,or by the taking up of shares, in the case of a company. Thecharacteristics of equity are that:

r It is not subject to a fixed-interest obligation.r It is not repayable, in other words, it remains in the enterprise

permanently.r It is related to control of the enterprise through the right to vote.

The suppliers of capital receive remuneration in the form of profit. In the caseof a one-man business or a partnership, remuneration takes the form ofwithdrawals from the enterprise, and in the case of a company, through thepayment of dividends. If the owners do not withdraw the profit from theenterprise, it remains in the enterprise as part of the equity and serves as animportant source of funds. (Shares will not be discussed in this course).

r Long-term loans must be regarded as loan capital. It is borrowed inthe sense that it is not supplied by the owners themselves, but by thirdparties. The general characteristics of long-term loans are that:



r They carry a fixed-interest obligationr They are repaid at a specific point in time and in a particular mannerr The lender is a creditor, and not an owner of the enterprise.

The most important types of long-term loans are:r Pure loans, with or without securityr Debentures (bonds), with or without securityr Mortgage loans (the land and buildings of the enterprise are usually

used as security).

10.3.2 Medium-term sources of financing

CharacteristicsIt is sometimes difficult to distinguish between medium-and long-term financing.In general, a medium term refers to a period of approximately 5 years. Thetypes and characteristics of medium term loans are the same as for long-termloans, although leasing may be considered more readily than medium-termloans.

On the balance sheet, medium-term financing is for the following:

EmploymentEnterprises require medium-term financing for:

r Financing of assetsr Additional operating capitalr Financing of bank overdraft (if the limit has been exceeded and needs

to be worked off), bridging finance.

Sourcesr Terms loansr Financial leasingr Hire-purchasing transactions

10.3.3 Short-term financingCharacteristicsShort-term financing is available for one year or less. However, this is not ahard and fast rule. In the case of bank overdrafts, for example, the term maybe indefinite.



Employmentr Financing a portion of the operating capitalr Seasonal fluctuationsr Bridging financer Purchase of smaller fixed assets.

Sourcesr Bank overdrafts are an important source of short-term financing, mainly

because they are available relatively sooner and more easily than anyother short-term loan. The client with a current bank account appliesat the bank for overdraft facilities. Depending on the circumstances,the bank may require the client to furnish security to cover the loan.Overdraft facilities may be granted for a particular amount and period,in which case the loan must be repaid within that period. However,bank overdrafts may also be granted for an indefinite period. There isa limit on the amount by which the account may be overdrawn. Bankoverdrafts are very flexible and one of the cheapest sources of finance,since only the amount required is overdrawn, and interest is calculatedon the daily amount outstanding. The interest is usually market-orientedand is added to the bank balance at the end of every month.

A disadvantage of bank overdrafts is that the interest rate can increasewithout prior notice. Another disadvantage is that the overdraft facilitymay be called up at any time.

r Short-term loans are available from banks and other financial institutions.With short-term loans, the term of the loan is fixed. The loan may onlybe suspended if the borrower breaches a term in the agreement. Thisis the advantage of short-term loans over bank overdrafts. The periodand amount of the loan, as well as the interest rate thereon, are specifiedin the loan agreement. The interest rate may be fixed or variable. Whena fixed interest rate is quoted, the actual interest impact must becalculated. The effective interest rate may be as high as double thefixed interest rate. On repayment, the installment usually comprisespartly of interest and partly of the principal redemption. Because of theway in which interest is calculated on loans, and the additional formalitiesinvolved in obtaining a loan, borrowers tend to prefer bank overdrafts.

r The creditor draws a bill on the debtor who must accept it before itbecomes binding. The advantage of this system is that the enterprisecan discount the accepted bill at any time, thus having cash readily



available. The discounting may be done at a bank or a discount house.The costs involved in this type of financing consist of acceptancecommission, a discounting fee and a stamp duty (which varies accordingto the cash value of the bill). The total costs are approximately thesame as the interest on bank overdrafts.

Bills are not really used locally. The reason for their unpopularity is theserious consequences that arise if a debtor is unable to pay when thebill matures. In international trade, however, the use of bills is fairlycommon.

r Bank acceptance credit finance is granted by merchant banks, especiallyto financially sound enterprises. The banks guarantees payment of billsif they are not honoured on maturity. For this reason, banks will onlybe prepared to grant this type of facility to prime clients.

r Buyer’s credit is granted by the buyer to the seller. Entrepreneursoften require a large amount of operating capital to finance the productionprocess, for example, in the building of a house. At the outset of thebuilding operations, the buyer will put up a portion of the purchaseprice and the rest will follow in the form of installments, as required.

r Supplier credit is granted to the buyer by the seller in that goods aredelivered long before payment is made. With ordinary open accounts,the terms of payment are an important issue. These terms are specifiedon the invoice, the most important being:

r Net period without cash discount

r Net period with a cash discount

r Combination of short-term financing.

The combination of short-term financing is an important aspect for anyenterprise. The most suitable combination will depend on factors such as:

r cost,

r availability of financing,

r the period for which financing is required, adaptability.



r the extent to which the assets of the enterprise are encumbered.

r The period for which the financing is required and the cost of the varioussources are taken as the point of departure. The cost of the varioussources is not necessarily fixed for the entire term of the loan. Just asmoney market conditions may change, so may the interest rates. Thisis why the period of the loan affects the choice of a source of finance.

r The provision of financing also plays a role. If, for example, an enterpriseis unable to use supplier credit because of a poor credit record, it willbe obliged to find another source.

r The adaptability of the financing is equally important in the choice of asource. Adaptability refers to the enterprise’s ability to increase, reduce,renew or redeem the financing without too much difficulty. The cost ofthis type of financing is thus reduced by the fact that a bank overdraftmay be redeemed as soon as funds become available.

r The extent to which the assets of the enterprise are encumbered playsan important role in the negotiation for additional financing at a laterstage.

All these factors need to be considered when selecting the sources of financing.However, the cost of financing is the most important factor and must be offsetby all the others. A practical approach is to list the cost of the various sources,and then to compare the other factors with the cost of each source. Thesources of financing may then be listed in order of expediency.

Activity 10.3 * Differentiate between short term, medium term and

long-term sources of finance. Give examples of each.

10.4 The capital structureThe capital structure of an enterprise is the ratio of long-term debt to equitymaintained by the enterprise.

?



Capital comprises the long-term funds of the enterprise and is listed undercapital employed in the balance sheet.

The composition of the capital structure is one of the most difficult financialdecisions. In order to achieve the enterprise’s objective of wealth maximization,the financial manager must be able to evaluate the capital structure of theenterprise and understand the relationship between risk, return and value.

The total risk for the owners of an enterprise comprises the operating risk andthe financial risk. When planning the capital structure of the enterprise, boththese risks must be taken into account in order to formulate the capital structurewith the lowest cost in capital.

Operating risk and operational gearingThe operating leverage reflects the extent to which fixed costs andvariable costs are applied in an enterprise.

The ratio of fixed costs to variable costs, the price per unit, the productand the number of units produced must be taken into considerationwhen the operating leverage is analysed. The presence of fixed costsover a broad range of output tends to magnify the profitability of thefirm at higher levels of operational activity. Specifically, the further awayfrom the break-even point the firm operates the larger the margin ofprofits or losses associated with each level of production. It is customaryto review operating leverage and its effect on profitability for levels ofactivity higher than the break-even point. We can thus say that as thefixed costs are fully recovered at some level of output, additional activitybrings in a faster proportionate rise in profits than the rate of increase insales. Thus, if an increase by 20% results in 80% improvement ofearnings and, in this case, we can say that the firm is highly geared.Similarly, if a small increase in sales is followed by a slightly larger increasein profits, we say that the firm has a small degree of operating leverage(DOL). Needless to say, the favourable conditions are reversed whensales decrease, and the degree of operating leverage (DOL) areresponsible for magnifying decreases in earnings and eventual losses.

The operating profit of an enterprise is not affected by the capital structureof the enterprise, though it is affected by changes in overall economicconditions, technology, competition and consumer preference. All ofthese can affect the demand for the enterprise’s products, and thus itssales. These factors are usually beyond the control of the enterprise.



The possible reduction in operating profit, as a result of the above factors,is known as the operating risk.

(OG/T) T (P-V)T (P-V) - F

Where (OG/T) = the operational gearing, given the return T, or on conditionthat the return is T.

T = number of units

P = price per unit

V = variable cost per unit

F = fixed cost

Example

Assume that the price (P) of the return per unit is $10, and the variable cost(V) per unit of return is 4; the fixed cost (F) is $30 000, and the return (T) is8 000 units. The PBIT for the return is $18 000.

If the values are inserted into the equation:

(OG/T) = 8 000 (10 - 4)

8 000 (10 - 4) - 30 000

= 2,67

The characteristics of the operational gearing determine its use as a financialaid. The characteristics are best explained by means of the operating break-even point and the PBIT.

Interpretation of the operational gearingThe coefficient of the operational gearing is the percentage change inthe PBIT as a result of a one per cent change in the return.

Financial risk and the financial gearingWe have seen that the operating leverage is caused by investing in assets

=



with a fixed cost. The financial leverage is obtained by financing fundswith a fixed-cost component.

Financial risk and financial gearing become an issue when the enterpriseincludes fixed interest-bearing loan capital for financial purposes in itscapital structure. The presence and extent of the financial risk in anenterprise is the result of the enterprise’s financing decision, and is thuswithin the control of the enterprise.

The financial risk is reflected in the variability or changeability of theprofit after interest and taxation.

The main sources of fixed-cost financing are loans, preference sharesand lease transactions. The fixed-cost component of finance influencethe enterprise’s earnings per share. The more an enterprise uses fixed-cost financing, the greater the financial leverage effect of the enterprise.

The extent of the financial leverage effect is defined as the percentagechange in the earnings per share divided by the percentage change inearnings before interest and taxation (EBIT).

10.5 Financial gearingFinancial gearing involves the use of borrowed capital, for which a fixed priceis paid in the hope that the return on equity will increase. The financial gearingcan have a positive or negative effect. A positive effect will occur where theaverage return on ownership interest is higher than the interest rate onborrowed capital. Negative gearing will arise if the interest on the borrowedcapital is higher than the rate of return on equity.

The effect of financial gearing can best be explained by means of the followingexample:



Example

Suppose a project costs $100 000 and generates a net operatingincome (NO1) of $12 000 per annum. (The NOI is initially expectedto remain constant indefinitely). The project may be financed in two ways:

* Financing option A: the entire project to be financed with equity.* Financing option B: financing 25% of the project with equity and

75% with borrowed capital at 10% interest per annum.

The question now arises as to which financing option is more favourable to the owners of the enterprise.

To answer this question, the return on equity must be calculated.Naturally, the financing option with the highest return on equity is morebeneficial, and should thus be chosen in favour of the other option.

Financing option A

Return on equity (ROE = NOI

= $12 000 x 100

$100 000

= 12%

Financing option B

Costs are involved in the financing of debt. In this case, $75 000 is borrowedat 10% interest per annum. The cost is thus 10% x $75 000 = $7 500(initially, we exclude income tax from the calculation). The interest must nowbe deducted from the NOI, that is $12 000 - $7 500 = $4 500. The owner’scapital contribution now also changes to $25 000.

Return on equity = NOI

Equity

= $4 500 x 100

$25 000 1

= 18%

Equity



Financing option B is more beneficial because it produces a higherreturn on equity.

Debt financing influences the return on equity in three ways: positively, negativelyor not at all. Positive gearing effect is the term used to describe debt financingthat increases the return on equity. Neutral-gearing effect occurs when debtfinancing does not affect the general return on equity, and negative gearingeffect occurs when the return on equity is decreased because of the use ofdebt financing. Refer to the following example:

Use the same data as in the example above, but change the interest to14% per annum. (14%) ($75 000) = $10 500. This changes the netoperating income to $1 500 ($12 000 - $10 500).

Return on equity = NO1

= $1 500 x 100

$25 000

= 6%

In this case, the debt financing reduces the return on equity from 12% to6%, and should, therefore, not be used.

10.6 Combined gearingCombined gearing is not a unique type of gearing, but rather a combination ofoperational and financial gearing. Combined gearing measures the relationshipbetween the return on the earnings from equity. High financial gearing andhigh operational gearing result in the total gearing being high. The opposite isalso true. The total gearing (TG) is equal to the financial gearing (FG) multipliedby the operational gearing (OG).

TG = FG x OG

The operational and financial risk involved in planning the enterprise’sideal capital structure.

Enterprises in industrial sectors where there is a constant demand for products,and thus little fluctuation in sales, and which, in addition, have a low fixed-cost

Equity



ratio, can accept a relatively high degree of debt financing, financial risk, andthus financial gearing.

Enterprises in capital-intensive sectors, in particular, which are characterisedby a high fixed-cost ratio and fluctuation in sales, are exposed to a high degreeof operating risk. As a result of the potentially negative effect of the financialgearing, a financing policy that makes minimal or moderate use of long-termdebts, and is based on careful forecasting and sound financial planning, wouldbe more acceptable.

Activity 10.4* Define the firm’s operating leverage. How do you differentiatesa firm’s leverage and its financial gearing?

10.7 Financial marketsThe purpose of financial markets is to allocate savings efficiently to ultimateusers. This is called financial intermediation. Financial intermediaries includeinstitution such as commercial banks, merchant banks and pension funds.Financial intermediaries provide funds according to the requirements ofborrowers. There are many savers and many borrowers who need to bebrought together through financial intermediation.

10.7.1 Importance of financial intermediariesFinancial intermediaries are important because they provide services such as:

r Transaction costs. Intermediaries bring together the savers andborrowers and as a result, intermediation reduces transaction costs.

r Information. Intermediaries provide information to savers andborrowers and provide confidentiality on borrowers.

r Divisibility and flexibility. There are many savers and borrowerswith different requirements. The intermediation pools the savings ofmany savers and channels them to different borrowers in varying sizes.

?



r Diversification of risk. By pooling resources from different saversand lending to approved borrowers, the intermediary reduces the levelof risk.

r Maturity. The intermediary is able to provide finance of differentmaturities.

r Expertise and convenience. The intermediary is an expert in sourcingfunds and analysing the credit worthiness of loan applicants.

10.7.2 Classification of Financial MarketsThere are two key financial markets:r money marketr capital market.

10.7.3 The Money marketThe money market is used for raising short-term finance. Financial instrumentsof less than a year are used. The money market is not situated in one physicallocation. Trading is largely through a network of telephones. Dealers buy andsell money market instruments such as treasury Bills and NCDs.

10.7.4 The Capital MarketCapital market transacts in long-term finance. This is a market for instrumentssuch as debentures, bonds and shares.

The financial markets can further be divided into primary and secondarymarkets.

10.7.5 Primary MarketsThis is the financial market in which corporations or governments issue newsecurities for the first time.

In this market a company sells securities to raise funds for its operations whilea corporation engages in two types of primary market sales of debt or equity.

10.7.6 Secondary marketsThe secondary market is also a financial market. In this market, outstanding



or existing securities are traded. It involves one owner or lender selling toanother through brokers. There are two types of such markets. These are thesection markets and the over-the-counter market.

10.7.7 Auction marketsExisting shares are bought or sold through an auction with bidding for thesecurities while others offer to buy. The Zimbabwe Stock Exchange (ZSE) isan example of an auction market. One can bid for Barclays shares at ZSE.

10.7.8 Over the counter (OTC)The OTC is not an organisation, but an intangible market for securities notlisted on the stock exchange. Dealers are connected electronically. Deals aredone literally over the counter. Dealers can negotiate a deal. Some securitiesare traded OTC before listing on ZSE.

10.7.9 Public OfferingA public offering involves selling securities to the public (Initial Public Offer).During the first half of the year 2001, we witnessed three IPOs, that is, theCentury Holdings Limited, Zimnat Limited and First Banking CorporationLimited public offers being registered with the securities exchange.

Advantages of going public are that:r It is easy for the corporation to raise external funds. Investors find

publicly held companies’ shares more attractive than stock in privatecompanies because the shares are liquid. An investor can resell them atany time in the market place.

r Publicly held stock automatically carries a market valuation whereasthe valuation of privately held companies is dependent on independentappraisals and other subjective valuation methods.

r Current owners often want to take their capital investment out of thecompany and/or diversify their holding into other companies. Goingpublic enables them to achieve this.

Disadvantages of going publicr Management’s flexibility in running the company is reduced. Managers

must carry out their responsibilities to shareholders.

r There is a large increase in disclosure requirements.



10.8 Private offeringA private placement is a negotiated sale involving specific buyers. Last year,Century Holdings raised funds through a private placement involving thecompany’s major shareholders. Such transactions are not registered with thesecurities exchange. A private placement is faster and less costly than a publicoffering as filing with the ZSE, marketing and other listing activities can beavoided.

Activity 10.11. Discuss the functions of financial intermediaries.2. Why is a financial intermediary important in raising funds?3. Differentiate between the capital and money markets.4. Imagine that you are the financial manager of a company

intending to raise funds for working capital and for capitalexpansion projects. Advise the Managing Director on theoptions available to the Company.

5. How would you distinguish between OTC and auctionmarkets?

6. Why are IPOs considered more risky than seasoned offerings?

10.9 Leasing as a source of finance

A lease is a contract that provides the right to use assets, legally owned by thelessor, in exchange for a specified rental to be paid by the lessee.

Lessor: a person or firm entering into a lease agreement promising to supplyassets for use by the lessee in return for rental payments.

Lessee: a person or firm entering into a lease agreement promising to makelease payments in return for the use of assets.

There are basically two types of leases, viz the operating lease and the financiallease.

r Operating leaseLease periods are normally shorter than the useful life of the asset. Itprovides use of assets without a provision to buy the asset. The lessor

?



will repossess the asset at the end of the lease period. The leases havea cancellation option.

r Financial leaseThe lease is structured in a way similar to installment credit agreements.The lease consists of the cost of the asset plus interest, thereby providingthe lessor with a reimbursement for the asset plus interest. The lesseehas the option to buy the asset. The lessee has the responsibility tomaintain the asset.

10.10 Venture capitalVenture capital is the name given to equity finance provided to young, unquotedbusinesses to help them to expand. The traditional structure of venture capitalfunds has been a 10-year partnership (of investors such as pension funds)but, in recent years, there have been moves to create more flexible forms, e.g.rolling one-year funds, a guarantee to return funds on request or, potentiallyfunds, with unlimited life. There has also been a move towards a market inportfolios with a view to off-loading unsatisfactory performers, seekingeconomies of scale, etc.

The managers are rewarded by means of an annual fee (typically 2 percent ofthe funds invested, but tending to taper off as funds get bigger) and part of thecapital gain when the investments are realised. Venture capital has been indecline in recent years, for a number of reasons.

r Investors have been disappointed with the results achieved so far andare reluctant to commit further funds. The economic recession and theconsequent difficulties for small businesses have been a factor, but thelevel of management fees has also caused concern. The valuation offunds is not easy, and this militates against reliable measurement ofperformance, assessment of potential and hence monitoring of theprogress.

r Investee companies have been concerned at the short-termism displayedby the venture capitalists – in terms of requiring early reported profits.At the time of writing, with base rates well down into single figures,funds are telling prospective investees that they are looking for constantcompound internal rates of return in excess of 30 per cent per annum.In the jargon of the industry, plums have to pay for lemons and an earlyexit by way of flotation, a trade sale of refinancing on a more permanentbasis.



The two problems interact, of course, with the moment of exist being the onlytime when a comprehensive measure of performance is possible. The fundstend to seek a definitive long-range plan, and rely on accounting numbers.Indeed, most funds are run by accountants and financiers (rather thanexperienced industrialists) and tend, therefore, to be risk averse. This mayexplain their apparent lack of interest in start-up finance schemes which arerelatively more time consuming, higher risk and take longer to produce results.Rather, they have tended to concentrate on later stage development andchanges of ownership: management buy-outs, buy-ins and the hybrid ‘bimbos’(involving both existing and new managers). Some tend to favour particulargeographical areas, while others specialise in particular industries. Styles varyfrom hands on (most common where funds concentrate on particular industriesor markets) through close monitoring to hands off.

Equity funds provide a basis for the company to raise further bank finance.Dividends can be delayed until the company is making profits.

10.11 ConclusionIn this unit we have discussed various sources of finance including the varioustypes of equity, debt and leasing. Most corporations use a combination ofvarious types of finance so that they are able to maximise returns to the ownersof the firm.

Activity 10.21. You are the financial manager of a big company seeking to

raise funds in Zimbabwe. What would you recommend?2. There are two main sources of finance, debt and equity. Explain

their distinguishing characteristics.3. Compare and contrast an operating lease and a financial lease.4. What are the main features of a debenture?5. Both shareholders and lenders have a claim to the operating

income of the company. In which way do they differ? Whichis preferable from the company's point of view?

?



10.12 References Chidakwa, A.M. (2000) Business and it’s Environment.

Harare: ZOU.Coles, M. et al. (2002) Business for Higher Awards (Second

Edition) New York: Heinemann Educational Publishers.Needham, D. and Dransfield, R (1997) Advanced Business


Needham, D. and Dransfield, R. (1990) Business StudiesLondon, Hill-Hill International.


Tamangani, Z .F. (2000) Management and OrganisationalBehavior. Harare: ZOU.

Production Managemant andInventory Control

Unit Eleven

11.0 Introduction

In discussing production management and inventory control, we explore typesof conversions (production) and show the stages of production from

production planning to control. The second sub section is about inventorymanagement and control. In that part we explain how firms can minimiseinventory costs using economic order quantity model or just in time (JIT)system.



11.1 Unit ObjectivesBy the end of the unit you should be able to:

* define production and production management;* differentiate types of production;* qualify inspection and statistics of standards;* demonstrate the value production engineering.

11.2 Definition of ProductionProduction is the creation or addition of value. It is the transformation orconversion of inputs (land, labour, capital and enterprise) into output or finishedgoods. The inputs of production differ from one organisation to another. Theoutput of one organisation can be inputs of another.

Production can be classified as primary, secondary or tertiary.

Primary production is concerned with the extraction of the gifts of nature.For example, mining and agriculture are classified as primaryproduction.

Secondary production involves the conversion of gifts of nature intoother products e.g. manufacture of rubber tyres from latex which is ajuice extracted from rubber plants.

Tertiary production is the provision of services to facilitate primary andsecondary production or to enable the goods to reach the ultimateconsumer, e.g. finance distribution and promotion.

Quasi or pseudo production. Sometimes it is difficult to classifyproduction as primary or secondary. This occurs when a product’s lifecycle passes through many interrelated production stages, e.g. bread.The initial primary production to come up with bread is farmer’s wheat.The wheat has to be converted into flour by millers. In this case, themillers are manufactures of flour. The baker will convert flour into bread;i.e. manufacturer of bread. Thus, using the above example millers arepseudo manufacturers.

Unit 11 Production Management and Inventory Control


Inputs Output

The inputs of production, therefore, include both goods and services. Inpractice, however, production is usually identified with goods. An importantpoint to note is that the process of production increases the value of a product.

11.3 Relationship between production and marketing

Once market needs and marketing strategy are identified, it is the production’sresponsibility to ensure that these are fulfilled. It can be said that the purposeof production is also to satisfy wants – from the supply side. Marketingsatisfies wants from the demand side.

It is, therefore, important that production and marketing policies should agree.For example, if a firm is adopting a low-priced strategy, production must notemphasize quality to the extent of increasing costs unnecessarily. If managementaims to increase market share, then the production policy must include plansto increase capacity to cope with increased demand.

11.4 Types of productionThe production process can be classified as:1. jobbing production2. continuous production3. batch production.

11.5 Jobbing ProductionJobbing production is the production of goods to individual customers’specifications. It is also called job-order or custom production. Each order is

Transformationprocess(Value added)



one-off and unlikely to be repeated. The size of the orders is also small soproduct cost is high. Job-order production requires a high proportion of skilledlabour. Due to the differing nature of the products, general-purpose equipmentis used for production and it is arranged according to the workflow of eachjob. Capital investment is, therefore, small, so is the scale operations. Productionschedules are made only when orders are received and stocks are kept at aminimum level. Production planning is thus flexible and for the short term.Example of job production is installation of double-glazing or central heatingin a house.

11.6 Continuous ProductionContinuous production is the uninterrupted flow of production, from rawmaterials to finished goods, through highly integrated facilities that are largelyautomated. The products have standard, interchangeable parts andstandardisation has made possible the division of labour or specialisation.Work is repetitive, labour unskilled and single-purpose equipment used andproduction runs are very long. This is why continuous production is also calledflow, process, standard or mass production.

Mass production factories are very large-scale operations. As a result of highcapital investment, there is need for great deal of organization to ensure a highand steady level of activity. Production scheduling and other planning decisions,e.g. stock purchase are made for the long term and are thus inflexible tochanges. Unit cost of the product is low because the overheads are spreadover large volume. Examples of continuous production include oil refining,manufacture of chemicals and health service.

11.7 Batch ProductionBatch production is between jobbing and continuous production. Standardparts or components are made for use in different products and a batch orquantity is produced at a time, but production is not continuous. The ability toachieve an economic size is thus very important in the management of thistype of production.

Batch production poses the most difficult problems for planning and controlbecause it is dual nature. It uses general-purpose equipment but requires aflexible organization as well as skills to workout the best way to do a job and



maximise the use of the equipment. This type of production is typical in manyindustries. Examples of batch production include making doors and windowframes to the specification of a builder who is building a new house.

11.8 Production ManagementProduction management is concerned with acquiring the necessary inputs andallocating and utilising them in such away to maximise output. The activities ofproduction management include planning, organising, control, research anddevelopment.

11.9 Production PlanningProduction planning is concerned with the determination, acquisition andscheduling of all facilities necessary for the future production of goods andservices, to satisfy demand. In other words, production planning translatesthe company’s marketing planning into action for production.

The objectives of production planning are to:

relate sales orders to capacities available or to provide capacity foranticipated future demand;

ensure that materials, components, tools and labour are available whereand when required;

balance the various production processes so as to avoid “bottlenecks”;

decide on the best sequence of operations for processing work ordersi.e. to decide on routing;

establish the production time tables to meet agreed delivery dates i.e.scheduling;

issue instructions to the works department in the form of work ordersto carry out production according to planned routines;

perform clerical routes so that supervisors can concentrate onsupervision;



provide information to management so that it can identify problems orpossible delays and take corrective action before they become serious.

11.9.1 Stages of Production PlanningProduction planning can be divided into stages, depending on the time frameof the plans.

Long term planning involves projecting the sales orders, production, capacityand stock requirements of the firm in the long term. The period can be fromthree to ten years. Longterm plans examine broad categories of products andare reviewed annually.

Short term planning is usually for a period of three to five years. Shorttermplans are made to accomplish a specific sale or production objective and soare reviewed quarterly or as often required. They also examine broadcategories of products but provide more detailed information.

Current planning is for the current year’s production. The current plan isvery detailed and should be reviewed monthly.

Direct planning involves day-to-day operational plans.

Activity 11.1* What is production planning? Explain the stages of production

planning (using periods).

11.10 Production EngineeringProduction engineering is also called process engineering or industrialengineering. A process can be defined as a method of producing a good or aservice and is broken down into operations performed by machines orworkers. Process engineering involves analysing production processes to:

decide and specify how work is to be done, obtain or design the jigs, tools and equipment, measure the amount of work involved in operations, investigate and report on areas of excess cost.

?



The purpose of process engineering, therefore, is to establish the most effectiveand economical ways of performing the production process. It eliminatesunnecessary operations and, by setting proper standards, minimises operatorfatigue.

11.11 Production ControlProduction control is necessary to ensure that production decisions andprogrammes are carried out and these proceed as planned. It is concernedwith recording results, identifying deviations from standards, and measuringand correcting these deviations.

The principal forms of control are:

The control of variation from production plans. This requires closecoordination between production, planning and control. Withoutcoordination there is a danger of duplication in the records of the twosections and plans may be changed without the knowledge of theplanners.

The control of material excess cost and labour. When actual amountsof materials used are compared with standards, the deviation makesup the scrap. The control function aims to minimise scrap by not allowingunauthorised staff to dispose of such scrap till it is valued. Excess labourcost results from ‘waiting time’ (when workers are paid when they arenot able to work on jobs, e.g. during machine breakdowns). This excesscost is recorded and brought to the attention of supervisors for controlpurposes.

The control of machine utilisation. Machine down times and their causesare recorded at source.

The control of quality.

11.12 Inventory ManagementInventory investment constitutes a major chunk (40% to 60%) of a firm’scurrent assets holding. The importance of inventory is only next to that ofdebtors. Efficient inventory management is vital to get best mileage out ofevery dollar invested in working capital. Inventories consist of:



a) raw materials and componentsb) work in progressc) finished goodsd) stores and spares.

11.13 Basic functions of inventoryThe inventory performs the basic functions in an organisation and these arediscussed below:

a) It decouples production and marketing. Hence sales can be made fromfinished stock for standard products. Adequate stocking also helps thecompany to meet peak season sales.

b) In case of fluctuating sales, inventory build up helps to meet sudden orunexpected increase in demand.

c) Production-inventory-sales are considered the three corner points of atriangle. Inventory acts as a buffer between production and sales.

d) Higher finished goods inventory ensures better level of customer service.Hence, marketing department insists on high finished goods inventoryto avoid loss of sale and gain of customer good will. This loss can bequantified as equivalent of profit lost on sales and is termed as stockout cost.

e) Work in progress inventory permits efficient production scheduling andutilisation of shop floor resources. The level of process inventory is atechnical function of the production process or production cycle.

f) Raw material inventory provides flexibility in purchasing, and avoidshand to mouth situations. It builds up sometimes due to the bulkpurchasing done to avail quantity discounts.

g) Spare parts and tools inventory is necessary to ensure against longspells of production hold ups for want of any important spare part ortool that cannot be procured immediately. Hence, these are calledinsurance spares.



We can summarise the advantages accruing from inventories as:

economies of production economies in purchasing quick delivery to customers flexibility.

The disadvantages are:

inventory investments, i.e. inventory represents the opportunity foregoneto invest or reinvest funds

inventory- related costs. When acquiring inventory, firms incur costssuch as ordering and carrying costs.

The amount of materials that a firm holds depends on factors such as:

frequency of use sources of supply lead time physical characteristics cost technical considerations.

11.14 Inventory relevant costInventory problem is one of balancing various costs so that total costs areminimised. The relevant costs are:

a. ordering and acquisition costb. carrying costsc. cost of under-stocking or stock-outs.

Ordering and acquisition cost and carrying costs help to optimise the numberof orders and the quantity of inventory to be ordered. These are real costs.

(a) Helps to determine the service level that has to be maintained by theinventory. This is considered as an opportunity cost.



11.15 Ordering acquisition costCost of procurement of the items consist of stationery, follow-ups andcommunication charges. Typically these costs include:

1. advertising.2. stationery, typing, dispatching of orders and reminders.3. travel, telephone, telegram costs for follow-ups.4. costs incurred by goods receiving bay, inspection and handling.5. rent and depreciation of space and equipment utilised by concerned

purchasing personnel.6. salary and statutory payment for purchasing personnel.7. cost of source development.8. quantity discounts taken or lost.

11.15.1 Carrying costComponents of carrying costs are:

Cost of capital on money invested. Inventory is largely financed bybank finance at a cost (interest rate). If a company’s internal funds areused, then the opportunity cost criterion can be applied.

Cost of storage such as rent and depreciation of space (warehouses).

Cost due to deterioration or spillage in storage, e.g. volatile items suchas petrol loss due to evaporation.

Salary and benefits to stores personnel.

Obsolescence cost due to scrapping of obsolete stores.

Insurance cost to protect against fire or related risks.

11.15.2 Under stocking costsThese are stock out costs, which arise due to non-stocking of inventory. Stockout cost is the profit lost due to loss of production or sales and is usuallymeasured in terms of opportunity cost. In addition, other intangibles are alsothere. These include;

Loss of goodwill or impact on future sales. Loss of morale of work force.

Stock out costs are used to measure or estimate safety stock levels.



11.15.3 Overstocking costsThis cost is the opportunity lost due to investment in inventory for longerperiods than necessary. For items that will be ultimately used, this cost can beequated to carrying cost. For items, which cannot be used after a certainperiod, this cost is the difference between the cost of the items and theirsalvage value. To this amount the cost of ordering it and carrying it till it wassalvaged must be added.

11.16 Economic order quantityThe economic order quantity is a model that is used to determine the optimalorder quantity that will minimise ordering and carrying costs. The basiceconomic order quantity model is based on the following assumptions:

The annual for the stock item is known with certainty and is constantover the period.

The lead-time that it takes to receive an order is known and constant.

The cost of holding one unit of stock per period is constant.

There are no quantity discounts.

The receipt of inventory is instantaneous and arrives in one batch.

The only variable costs are ordering and carrying costs. These costsare constant per purchase item.

There is no stockout or shortages.

The economic order quantity is determined using the formula:

E = 20D H

Where O = fixed cost per unitD = quantity used in units per period (annum)E = quantity of units per order (economic order quantity)H= annual cost of carrying one unit in stock for one year.

√



EOQ = 2 x 100000 x 50 10

Example

Annual demand = 100000 units

Ordering cost per order = $50

Average annual carrying cost = $10 per unit per year

Economic order quantity = 1000 units

This means that the firm should order in batches of 1000 units in order tominimise inventory cost.

11.17 Just-in-time (JIT) productionJIT is a management philosophy that strives to eliminate sources ofmanufacturing waste by producing the right part in the right place at the righttime. Waste results from any activity that adds cost without adding value,such as moving and storing. JIT (also known as lean production or stocklessproduction) should improve profits and return on investment by:

reducing inventory levels (increasing the inventory turnover rate) improving product quality, reducing production and delivery lead times, reducing other costs (such as those associated with machine setup and

equipment breakdown).

In a JIT system, under-utilised (excess) capacity is used instead of bufferinventories to hedge against problems that may arise. JIT applies primarily torepetitive manufacturing processes in which the same products andcomponents are produced over and over again. The general idea is to establishflow processes (even when the facility uses a jobbing or batch process layout)by linking work centres so that there is an even, balanced flow of materialsthroughout the entire production process, similar to that found in an assemblyline. To accomplish this, an attempt is made to reach the goals of driving allqueues toward zero and achieving the ideal lot size of one unit.

√



11.17.1 Keys to Successful JIT ImplementationThese include the following:

Stabilise and level the manufacturing and purchase set up (MPS) withuniform plant loading: Create a uniform load on all work centres throughconstant daily production (establish freeze windows to prevent changesin the production plan for some period of time) and mixed modelassembly (produce roughly the same mix of products each day, using arepeating sequence if several products are produced on the same line).Meet demand fluctuations through end-item inventory rather than throughfluctuations in production level.

Reduce or eliminate set-up times: aim for single digit set-up times (lessthan 10 minutes) or “one-touch” set-up — this can be done throughbetter planning, process redesign, and product redesign.

Reduce lot sizes (manufacturing and purchase): reducing setup timesallows economical production of smaller lots; close cooperation withsuppliers is necessary to achieve reductions in order lot sizes forpurchased items, since this will require more frequent deliveries.

Reduce lead times (production and delivery): production lead timescan be reduced by moving work stations closer together, applying grouptechnology and cellular manufacturing concepts, reducing queue length(reducing the number of jobs waiting to be processed at a given machine),and improving the coordination and cooperation between successiveprocesses. Delivery lead times can be reduced through closecooperation with suppliers, possibly by inducing suppliers to locatecloser to the factory.

Preventive maintenance: use machine and worker idle time to maintainequipment and prevent breakdowns.

Flexible work force: workers should be trained to operate severalmachines, to perform maintenance tasks, and to perform qualityinspections. In general, the attitude of respect for people leads to givingworkers more responsibility for their own work.

Require supplier quality assurance and implement a zero defects qualityprogram: errors leading to defective items must be eliminated, sincethere are no buffers of excess parts. A quality at the source programmust be implemented to give workers the personal responsibility for



the quality of the work they do, and the authority to stop productionwhen something goes wrong. Techniques such as “JIT lights” (to indicateline slowdowns or stoppages) and “tally boards” (to record and analysecauses of production stoppages and slowdowns to facilitate correctingthem later) may be used.

Small-lot (single unit) conveyance: use a control system such as a kanban(card) system to convey parts between workstations in small quantities(ideally, one unit at a time). In its largest sense, JIT is not the same thingas a kanban system, and a kanban system is not required to implementJIT (some companies have instituted a JIT program along with a MRPsystem), although JIT is required to implement a kanban system andthe two concepts are frequently equated with one another.

11.18 Kanban Production Control SystemA kanban is a card that is attached to a storage and transport container. Itidentifies the part number and container capacity, along with other information.There are two main types of kanban (some other variations are also used):

Production Kanban (P-kanban): signals the need to produce more parts.

Conveyance Kanban (C-kanban): signals the need to deliver more parts tothe next work center (also called a “move kanban” or a “withdrawal kanban”).

Kanban system is a pull-system, in which the kanban is used to pull parts tothe next production stage when they are needed; an MRP system (or anyschedule-based system) is a push system, in which a detailed productionschedule for each part is used to push parts to the next production stage whenscheduled. The weakness of a push system (MRP) is that customer demandmust be forecast and production lead times must be estimated. Bad guesses(forecasts or estimates) result in excess inventory, and the longer the lead-time, the more room for error. The weakness of a pull system (kanban) is thatfollowing the JIT production philosophy is essential, especially concerning theelements of short setup times and small lot sizes.

11.19 Dual-card Kanban Rules No parts should be made unless P-kanban authorises production



Exactly one P-kanban and one C-kanban for each container (the numberof containers per part number is a management decision) only standardcontainers are used, and they are always filled with the prescribed (small)quantity.

11.19.1 Productivity Improvement With Kanban Deliberately remove buffer inventory (and/or workers) by removing

kanban from the system.

Observe and record problems (accidents, machine breakdowns,defective products or materials, production process out of control).

Take corrective action to eliminate the cause of the problems.

Activity 11.11. Define the term production and explain the stages involved in

the management of production.2. What is the link between production and other functions in a firm?3. Differentiate jobbing, continuous and batch production.4. What is the essence of production engineering and quality control

in a production process?5. Define and explain inventory relevant costs.6. What are the basic assumptions on which the economic order

quantity model is based?

11.20 ConclusionProduction is the conversion of inputs to output. It can be classified as primary,secondary or tertiary production. Production systems can be classified eitheras jobbing, continuous or batch. Effective production management is the onethat minimises production costs and wastage whilst at the same time aiming atmaximising sales or profitability of firm. In this way, production becomes afunction in a firm related to marketing and finance. One of the ways to reduceproduction cost is inventory minimisation cost. Relevant inventory costs to beminimised include ordering, holding cost and overstocking or understockingcost. A model that can be used to minimise inventory cost is called economicorder quantity.

?







Kotler, P (1994) Principles of marketing (Sixth Edition)New Jersey: Prentice Hall Inc.



Marketing Management

Unit Twelve

12.0 Introduction

In this unit we start by defining marketing and explaining the marketingconcept. The rest of the unit dwells on the practical aspects of marking by

developing the concept of the marketing mix based on the various combinationsof the 4P variables of price, product, place and promotion.



12.1 Unit ObjectivesBy the end of this unit, you should be able to:

* define marketing;* explain the marketing concept;* explain the marketing mix;* use the 4Ps to discuss the marketing strategies.

12.2 Definition of MarketingAccording to the British Institute Of Marketing, “Marketing is the managementfunction which organises and directs all those business activities involved inassessing and converting consumer purchasing power into effective demandfor a specific product or service and in moving the product, or service to thefinal consumer or user, so as to achieve the profit target or other objectivesset by a Company”. The definition takes adequate care of the profound shiftin the subject from production orientation to marketing orientation as explainedbelow.

Activity 12.1 * Identify the main components of the above definition of

marketing and develop your own definition of the subject.

12.3 The Marketing ConceptIn a typical company, production thinks mainly about getting the product out.Accountants are only interested in getting their books balanced. Financialpeople are absorbed in the company’s cash position. Salesmen are mainlyconcerned with getting orders. No one is particularly concerned with whetherthe whole system makes sense. As long the company makes profit, eachdepartment goes merrily on its way, doing its own thing.

The marketing concept however calls for re-orienting the firm’s ways of doingthings. Instead of trying to get the customers to buy what the firm has produced,a market-oriented firm would try and sell what the customers want. The

?

Unit 12 Marketing Management


underlying principle of the marketing concept is that the firm should seek tomeet the needs of customers, at a profit, rather than placing its main emphasison its own internal activities and utilisation of resources.

Activity 12.2 1. What factors would force an organisation to move from

production orientation to the marketing concept?2. Identify the main components of the marketing concept.3. List the changes an organisation has to make in order to

successfully implement the marketing concept.

12.4 The Marketing MixThe marketing function largely revolves around the four Ps - place, product,price and promotion. It is around these 4Ps that marketing strategies/mixesevolve leading them to being referred to as the four main ingredients, orvariables of the marketing mix. The mix is that which will give the best resultsand achieve the objectives of a company at a given time. We will now proceedto discuss each of the 4Ps and their contribution to the marketing effort.

12.4.1 Place/MarketA market/place can be defined as people with needs to satisfy, the money tospend, and the willingness to spend it. The problem for managers is that sucha place can be anywhere and anyone making it impossible to manage. Tomake them manageable, markets need to be segmented. This is the processof taking the total heterogeneous market for a product or service and dividingit into several sub-markets or segments, each of which tends to behomogeneous in all significant aspects. By tailoring marketing programs topinpoint market segments management can do a better marketing job andmake more efficient use of marketing resources.

Market segmentation can be achieved through:

Geographical area or territory e.g. southern region or Zimbabweanflowers targeted for Holland.

By sex, age group etc e.g. ladies dresses or children’s toys.

?



By type of goods e.g. consumer goods which are all products that are“destined for use by ultimate consumers or households and in suchform that they can be used without (further) processing”. Or industrialgoods which are “destined to be sold primarily for use in producingother goods or rendering services as contrasted with goods destined tobe sold primarily to the ultimate consumer”.

Activity 12.31. Explain the segments of organisations products, which

you are familiar with.2. Discuss the advantages and disadvantages, defining in

detail the market of one product.3. Describe the merits and demerits of servicing the industrial

market visa-a-vis the consumer market segment.

12.4.2 The ProductA product is a set of tangible and intangible attributes, including packaging,colour, price, which the buyer may accept as offering satisfaction of wants orneeds. The most important issue to note is that the product goes through aproduct life cycle which is generally divided into five stages: -

1. Introduction stage:During the first stage of a product life cycle, it is launched into themarket in a full-scale production and marketing programme. Thepromotional strategy is to inform and educate the potential customers.Tell them that the products exist, how it may be used, and what wantsatisfying benefits it provides. Normally, heavy emphasis must be placedon personal selling in attracting middlemen to handle a new product.

2. Growth stage:Here customers are aware of product benefits. The product is sellingwell and middlemen want to handle it. Here, the promotional strategyis to increase the emphasis on advertising. Usually, middlemen sharemore of the promotional burden.

3. Maturity/Saturation Stage:Here competition intensifies and sales level off. Advertising is used as

?



a tool of persuasion rather than only for information. Intense competitionforces sellers to devote larger sums to advertising, heavy wheeling anddealing and these contribute to the declining profits experienced in thesestages.

4. The Decline Stage:Sales and profits are declining. New and better products are cominginto the market. All promotional effort should be cut back. At thisstage, the marketing manager could decide to rejuvenate or revitalizethe product by improved packaging, new name, improved formula orraw material and then with a brand new advertising campaigning returnit into the product life cycle.

5. The Abandonment Stage:Here a loss is registered because sales have reached a minimum leveland there are certain items involved, e.g. stock, distribution andadministration costs.

Sales Volume Curve And Profit Margin Curve In Relation To A Product'sLife

Introduction growth maturity saturation decline abandonment

Sales Volume

Profit Margin



Life Cycle Stages

Profit margin usually starts to decline while a product’s sales volumes are stillincreasing.

Activity 12.4

1. Explain why personal selling would be ideal at the introductorystage of the product’s life circle.

2. Why should an organisation place more emphasis onadvertising a product, which is enjoying high sales at the growthstage?

3. Establish the stage of the life cycle the product or serviceprovided by your organisation is at and describe the marketingstrategies associated with it.

4. Explain the factors, which lead a product to reach maturity stage.5. Discuss a product on the market, which could have reached the

decline stage and then was rejuvenated.6. Discuss any products within or outside your company, which were

abandoned illustrating the circumstances.

12.4.3 PricePricing is considered to be the key activity within the capitalistic system offree enterprise. The market price of product influences the price paid for thefactors of production - labour, land, capital and entrepreneurship. In this way,price becomes a basic regulator of the entire economic system because itinfluences the allocation of these resources. High wages attract labour; highinterest rates attract capital, and so on. A number of pricing strategies is opento the manager and these include penetration pricing, breakeven analysis,cost plus method, leader pricing, bait pricing and odd even pricing.

Penetration PricingIn this strategy, a low initial price is set in order to reach the mass marketimmediately. This strategy can also be employed at a later stage in the product'slife cycle.

?



Break-Even AnalysisA break-even analysis involves developing tables or charts, which will help acompany, determine at what level of output the revenues will equal the cost,assuming a certain selling price. Sales at levels above the break-even pointwill result in a profit per each unit. The further above the break-even pointthat a firm goes , the higher will be the total in each unit profit. Output at anystage below the break-even point will result in a loss to the seller.

Break-even analysis example:

Break-even point in units : = total fixed costscontribution per unit

e.g. total fixed costs = $30,000

Variable cost per unit = $0,80

F.C contribution = $0,40

Selling price = $1.20

In this case, breakeven quantity is 30000/0.4 = 75000 units

Cost-Plus-MethodIn the cost-plus method we simply add a reasonable mark-up to the cost perunit.

Leader PricingLoss leaders. To get people into the shop. Priced low but just above thecosts.

Bait PricingBait pricing is found in the furniture trade. One cheap item is offered, butwhen the customer is in the store the disadvantages are pointed out and thesalesman then switches over to the more expensive lines.

Odd-Even Pricing$5.95 instead of $6.00.

The amount of freedom management has in making pricing decisions varieswith the stages in the product life cycle. During market pioneering the innovatorenjoys wide discretion ranging from setting the initial price very high to skimthe cream, to setting very low prices to achieve market penetration quickly.Later in the cycle, competitors see opportunities to widen the market and



price reductions become key factors in securing further market expansion.Then the market approaches saturation and price reductions no longer expandsales. At this point, emphasis shifts from selling to new users, or productdifferentiation is introduced. Finally, during market decline, sporadic pricereductions occur as different companies clear out stocks and discontinue theproduct.

Activity 12.51. What pricing strategy is used in marketing products /

services in your organisation?2. Identify likely pitfalls of applying penetration pricing

strategy at the introductory stage of the product life cycle.3. Determine the ideal stage of employing the break-even pricing

strategy in the product life cycle.4. Using the break-even price analysis given above show clearly

how the unit price of $1,40 is arrived at.5. Discuss the problems associated with cost-plus pricing method

in today’s highly competitive environment.6. Identify organisations / sectors in which price leadership pricing

strategies have been applied.7. Explain your experiences with bait pricing and odd-even

pricing strategies.

12.4.4 The PromotionWe want to take a look at the promotional mix, that is the most strategiccombination of advertising, personal selling, and sales promotion. Manypeople consider “selling” and “marketing” as synonymous terms, but actuallyselling is only one of the many components of marketing. It should also benoted that “promotion” and “sales promotion” are different things. Promotionis the all-inclusive term representing the broad field under discussion and “salespromotion” is only one part of it.

A company should treat all its promotional efforts as a complete sub-systemwithin the total marketing system. This means that coordinating sales forceactivities, advertising programmes, and other promotional efforts.Unfortunately, in many firms, these activities are still fragmented andmanagement in the advertising and sales-force areas often in conflict with oneanother.

?



Management has to determine what combinations of advertising, personalselling, and other promotional tools will make the most effective promotionalprogramme for a company. This is a tough job, because the executives simplydo not know the extent to which advertising or any other promotional tool willhelp achieve the goals of the sales programme. They do not know how muchshould be spent on each promotional activity, nor do they know what toexpect from the expenditure.

Activity 12.61. Explain the promotional strategy utilised in your organisation.2. Identify advertising media commonly used by Zimbabwean

organisations.3. Identify the factors taken into consideration when selecting an

advertising media.4. Discuss some of the reasons why personal selling is often regarded

lowly.5. What is the difference between selling and marketing?6. What is the difference between promotion and sales promotion?7. Explain why management in the advertising and sales-force areas

of an organisation are often in conflict with one another.8. Explain why it is difficult for organisations to determine the impact

of promotional campaigns before hand.

12.5 ConclusionWe have discussed and defined marketing together with the marketing concept.A new approach to running organisations emerged showing how inadequatewas to be production-oriented. The assumption of the marketing mix utilisingthe 4Ps concept of price, promotion, place and product has shown that thismodern approach can yield better results than the methods used earlier.

?




Harare: ZOU.Coles, M. et al (2002) Business for Higher Awards ( Second



Kotler, P. (1994) Principles of marketing (Sixth Edition)New Jersey: Prentice Hall Inc.



Contemporary Issues inManagement

Unit Thirteen

13.0 Introduction

Throughout this module, we have tried to put in place plans, structure andother definitive ways of running organisations. These prescriptions are,

however, only helpful when there is some semblance of stability and let aloneorder in the societies in which these organisations operate. However, this hasnot been so. Organisations are having to operate in highly dynamicenvironments, with profound and almost persistent changes taking place. Insome situations, organisations are having to operate at the brink of chaos.This unit, therefore, looks at some current approaches to business managementto ensure organisational survival under the dynamic environment.




* discuss restructuring of operations;* identify contemporary issues in motivation, human

resources and leadership;* discuss implications of the various situations brought

about due to change and the various ways organisations canrespond to these to ensure survival.

13.2 Management of restructuring and reorganization of operations

In response to the ever-changing dynamic environment, businesses have tobe continuously on the lookout for new opportunities and challenges byrepositioning the organisation. This can be undertaken through restructuringand reorganisation of operations through mergers and acquisitions.

Valuation of businesses is very often a key part of mergers and acquisitions -the first question asked (often wrongly) in a takeover tends to be, ‘What willit cost to buy the company?’

13.2.1 Merger or Takeover?The term ‘merger’ is usually used to describe the fusing together of two ormore companies, whether the fusion is voluntary or enforced. Strictly, if onecompany acquires a majority shareholding in another, the second is said tohave been ‘taken over’ by the first. If the two firms join together to submergetheir separate identities into a new company, the process is described as amerger.

In fact, the term ‘merger’ is often used even when a takeover has actuallyoccurred, because of the cultural impact on the acquired company - no onelikes to be ‘taken over’!

i) Motives for mergers and acquisitionsPrimarily companies should merge in order to maximise shareholderwealth. This suggests that a merger would take place only if the valueof the combined entity is more than the value of the individual firms. Ifthis were not the case, both companies would remain independent.

Unit 13 Contemporary Issues in Management


ii) Horizontal and vertical integrationAcquisitions can be classified to reflect the nature of the enlarged group.

a) Horizontal integration results when two firms in the same line of businesscombine. The current trend in bank and building society mergers is agood example of this type of integration.

b) Vertical integration results from the acquisition of one company byanother which is at a different level in the ‘chain of supply’. As anexample, breweries have moved heavily into the distribution of theirproduct via public houses. Note, however, that the Monopolies andMergers Commission acted to limit such activity when they felt thesituation was not in the public interest.

c) A conglomerate results when two companies in unrelated businessescombine. Delta Corporation is a conglomerate since its operations arediversified from manufacturing, retailing, mining.

d) Synergy - where NPVab> NPVa + NPVb (or 2 + 2=5!) Companiesmerge where the net present value of the combined enterprise is deemedto be greater than the net present value of the individual firms. Synergyis a situation where increase in number of operations will result ineconomies of scale.

iii) Motives to merge - and create synergy

a) Increased market share - power. In a market with limited productdifferentiation, price may be the main competitive weapon. In such acase, large market share may enable a company to drive prices up. Forexample, reducing prices in the short term to eliminate competitionbefore increasing prices later. Such a move may create problems withthe Monopolies and Mergers Commission. Managers should watchout for ‘empire building’.

b) Economies of scale. These result when expansion of the scale of theproductive capacity of a firm (or industry) causes total production coststo increase less than proportionately with output. It is clear that a mergerwhich results in horizontal or vertical integration can give such economiessince, at the very least, duplication would be avoided. But how coulda conglomerate merger give economies? Possibly through centralfacilities such as offices, accounting departments and computer



departments being rationalized. (Indeed, both sets of management areunlikely to be needed in their entirety). There may be lack of engineeringand sales organisations necessary to produce and market it on a largescale. A natural course of action would be to merge with a largercompany. Both companies gain something - the small firm gets ‘instant’engineering and marketing departments, and the large firm gains therevenue and other benefits which a unique product can bring. Also if,as is likely, the resources which each firm requires are complementary,the merger may well produce further opportunities that neither wouldface in isolation.

c) Improving efficiency. A classic takeover target would be a firm operatingin a potentially lucrative market.

d) A lack of profitable investment opportunities - surplus cash. A businessmay be generating a substantial volume of cash, but sees few profitableinvestment opportunities. If it does not wish to simply pay out thesurplus cash as dividends (because of its long-term dividend policy,perhaps), it could use it to acquire other companies. A reason fordoing so is that firms with excess cash are usually regarded as idealtargets for acquisition - a case of buy or be bought.

e) Tax relief. A company may be unable to claim tax relief because itdoes not generate sufficient profits. It may, therefore, wish to mergewith another firm that does generate such profits.

iv) Motives not to merge

a) Diversification, to reduce risk. While acquiring a company in a differentline of activity may diversify away risk for the companies involved, thisis surely irrelevant to the shareholders. The shareholders haveperformed exactly the same diversification simply by holding shares inboth companies. The only real diversification produced is in the riskattaching to the managers’ and employees’ jobs, and this is likely tomake them more complacent than before, to the detriment ofshareholder’s future returns. This is better understood after studyingportfolio theory.

b) Shares of the target company are undervalued. This may well be thecase, although it would conflict with the efficient markets theory.However, the shareholders of the company planning the takeover would



derive as much benefit (at a lower administrative cost) from buyingsuch undervalued shares themselves. This also presupposes that theacquirer company’s management are better at valuing shares thanprofessional investors in the market place.

13.2.2 Defenses Against Takeover

Before the bidAny quoted company needs to be aware of the possibility of a bid at all times.There are a number of ongoing points a board could follow to protect thecompany. These are:

Communicating effectively with shareholders. This includes having apublic relations officer specialising in financial matters liasing constantlywith the company stockbrokers, keeping analysts fully informed, andspeaking to journalists. This will ensure that the company is fully valued.

Poison pills. Shareholders are issued rights to buy loan stock orpreference shares which, in the event of a takeover, they have the rightto convert into the acquiring firm’s equity shares or to enforce repurchaseby the acquirer.

Staggered board. The board is classified into, say, three groups. Onlyone group is elected each year. The bidding company cannot, therefore,control the composition of the board of directors for some time afteracquisition.

Shark repellent - supermajority. The Articles of association are changedto require a very high percentage of shares to approve an acquisition ormerger - say 80%.

High asset values. Fixed assets are revalued to current values to ensureshareholders are aware of asset value per share.

Defense document. This would be based on the company’s usualmanagement information.

The right shareholders. Managing the shareholder base to ensure thatthe ‘right’ shareholders are on board.



13.2.3 Reasons why mergers and acquisitions fail1. The fit/lack of fit syndrome. There may be a good fit of products or

services, but a serious lack of fit in terms of management styles orcorporate structure.

2. Lack of industrial or commercial fit. Failure can result from a horizontalor vertical takeover where the biddee may not have the product rangeor industrial position that the acquirer anticipated. Usually, in the casewhere a customer or supplier is acquired, the acquirer knows a lotabout the biddee; even so, there may be aspects of the biddee’soperations which may cause unexpected problems for the acquirer,such that, even in these cases, a prospective acquisition should beplanned very carefully and not be based solely on experience gainedfrom a direct relationship with the biddee.

3. Lack of goal congruence. This may apply not only to the biddee but,more dangerously, to the acquirer, whereby disputes over the treatmentof the biddee might well take away the benefits of an otherwise excellentacquisition.

4. ‘Cheap’ purchases. The ‘turn around’ costs of an acquisition purchasedat what seems to be a bargain price may well turn out to be a highmultiple of that price. In these situations, the amount of resources interms of cash and management time could well also damage the bidder’score business. In preparing a bid, a would-be acquirer should alwaystake into account the likely total cost of an acquisition, including theinput of its own resources, before deciding on making an offer or settingan offer price.

5. Paying too much. The fact that a high premium is paid for an acquisitiondoes not necessarily mean that it will fail. Failure would result only ifthe price paid is beyond that which the acquirer considers acceptableto increase satisfactorily the long-term wealth of its shareholders.

6. Failure to integrate effectively. An acquirer needs to have a workableand clear plan of the extent to which the biddee is to be integrated, andthe amount of autonomy to be granted. At best, the plan should benegotiated with the biddee’s management and staff, but its essentialrequirements should be fairly, but firmly carried out. The plan mustaddress such problems as differences in management styles,incompatibilities in data information systems, and continued opposition



to the acquisition by some of the biddee’s staff. Failure to plan can -and often does - lead to failure of an acquisition, as it leads to drift anddemotivation, not only within the biddee’s organization, but also withinthe acquirer itself.

7. Inability to manage change. Several of the above points stress theneed for an acquirer to plan effectively before and after an acquisition iffailure is to be avoided. But, this in itself calls for the ability to acceptchange, perhaps even radical change - from established routines andpractices. Indeed, many acquisitions fail mainly because the acquirer isunable - or unwilling - reasonably to adjust its own activities to helpensure a smooth takeover. One such situation is where the biddee hasa demonstrably better data information system that the acquirer, whichit might be greatly in the acquirer’s interest to adopt.

13.3 Human Resources PerspectiveContemporary/ current issues in the human resources include gender balance,sexual harassment, prevalence of minorities and the disabled, regionalism,nepotism and the HIV/AIDS menace. Organisations have to be continuouslydevising ways and means of minimising or maximising the effect of these forcesto ensure organisational effectiveness.

13.4 Flexible Structures for Flexible ManagersThe existing dynamic business environments need flexible and adaptiveorganisational structures. Organisations need to seek change and be quickto respond. For this to be possible, the organisation must have a flexiblestructure that can be adjusted rapidly to meet the changing circumstances.Furthermore, this type of organisation needs employees who are highlymotivated, capable of making decisions and solving problems, determined,and keen to accept new challenges.

13.5 Contemporary Issues In LeadershipA number of issues will impact on the leadership process in the new century.These include the concept of power and its implementation, the notion of



empowerment, gender, styles and cultural diversity. Power is the capacity ofa leader to influence work actions or decisions and it’s sources include :-

1. Legitimate power2. Coercive power3. Reward power4. Expert power5. Referent power.

Other contemporary issues in leadership include the notion of empowerment,gender and cultural diversity.

13.6 Current Issues in MotivationCurrent studies of employee motivation are influenced by several significantworkplace issues appropriate to motivate the diverse workforce. Managersneed to think in terms of:

1) Compressed week2) Flexible work hours3) Job sharing4) Telecommunication5) Pay for performance6) Open-Book Management7) Employee’s stock ownership plans (ESOPs).

13.7 Chaos Theory to ManagementThe key concept in Chaos theory is that tiny changes in input can result inoverwhelming differences in output, a phenomenon described as “sensitivedependence on initial conditions”. In the study of the weather, this is knownas “the butterfly effect”, because it is supposed that the butterfly flapping itswings over Beijing can in theory, cause a storm over New York a week later.

In business theory, there has also been increasing emphasis in preparing forturbulence than for static conditions. Modern organisations should, therefore,emphasise thriving under chaos.

Business life today is characterised by open-ended change resulting frominternal systems as well as shock and changes in the external environment.Chaos is concerned with how patterns change over time. For in chaos, there



are patterns of order which managers should observe and timeously act uponin order to survive. Thus, managers should be aware that the traditionalmanagerial model of setting objectives, planning and monitoring feed back,may not be adequate in a dynamic field of operation - they may have to beplanning and controlling as things unfold.

Activity 13.31. Explain why firms decide to restructure and reorganize

their activities.2. List and explain forms and types of restructuring.3. Differentiate between horizontal and vertical integration.4. Discuss, with arguments, why managers might go against

restructuring exercise.5. Discuss your own interpretation of the chaos theory.6. Discuss each of the human resources contemporary issues

with regard to an organisation you are familiar with.7. Write brief notes explaining the issues surrounding each of the

sources of power.8. Write brief notes on each of the contemporary issues on

leadership, motivation suggested above.


Harare: ZOU.Coles, M. et al. (2002) Business for Higher Awards (Second Edition)

New York: Heinemann Educational Publishers. Needham, D. and Dransfield, R (1997) Advanced Business (Second

Edition) New York: Heinemann Educational Publishers. Kotler P, (1994) Principles of marketing (Sixth Edition)

New Jersey, Prentice Hall Inc. Needham, D. and Dransfield, R. (1990) Business Studies.

London, Hill-Hill International. Robbins, S. and Coulter, M. (1999) Management (Sixth Edition)

Prentice Hall International Editions.

?

zimbabwe open university · zimbabwe open university (zou) by open and distance learning, we need...

Documents